UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
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
BH/RE, L.L.C.
(Exact Name of Registrant as Specified in its Charter)
NEVADA | | 84-1622334 |
(State or Other Jurisdiction
of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
3667 Las Vegas Boulevard South
Las Vegas, Nevada | | 89109 |
(Address of Principal Executive Offices) | | (Zip Code) |
(702) 785-5555
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
VOTING MEMBERSHIP INTERESTS
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of June 30, 2006, the aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the Registrant was $0. As of April 2, 2007, each of Robert Earl and Douglas P. Teitelbaum held 50% of the Registrant’s voting membership interests, each of BH Casino and Hospitality LLC I and OCS Consultants, Inc. held 40.75% of the Registrant’s equity membership, and BH Casino and Hospitality LLC II held the remaining 18.50% of the Registrant’s equity membership interests.
PART I
ITEM 1. BUSINESS
Unless the context indicates otherwise, all references to “BH/RE”, the “Company”, “we”, “us”, “our” and “ours” refer to BH/RE, L.L.C. and its consolidated subsidiaries.
Forward-looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report and elsewhere by management from time to time, the words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “may”, “seek”, “will”, and similar expressions are intended to identify forward-looking statements with respect to our financial condition, results of operations and our business including our planned and possible expansion plans, legal proceedings and employee matters. Certain important factors, including but not limited to, competition from other gaming operations, factors affecting our ability to complete acquisitions and dispositions of gaming properties, leverage, construction risks, the inherent uncertainty and costs associated with litigation and governmental and regulatory investigations, and licensing and other regulatory risks, could cause our actual results to differ materially from those expressed in or implied by our forward-looking statements. Further information on potential factors which could affect our financial condition, results of operations and business including, without limitation, the expansion, development and acquisition projects, legal proceedings and employee matters are included in “Item 1A—Risk Factors” of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.
Organization
BH/RE is a holding company that owns 85% of EquityCo, L.L.C. (“EquityCo”). The remaining 15% of EquityCo is owned indirectly by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a wholly-owned subsidiary of EquityCo and each of OpBiz, LLC (“OpBiz”) and PH Mezz II LLC (“PH Mezz II”) is a wholly owned subsidiary of MezzCo. PH Mezz I LLC (“PH Mezz I”) is a wholly owned subsidiary of PH Mezz II. PH Fee Owner LLC (“PH Fee Owner”) is a wholly-owned subsidiary of PH Mezz I. TSP Owner LLC (“TSP Owner”) is a wholly-owned subsidiary of PH Fee Owner. PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner are Delaware limited liability companies structured as bankruptcy remote special purpose entities which, together with OpBiz, own and operate the Aladdin Resort and Casino which is currently being transformed into the Planet Hollywood Resort and Casino (the “PH Resort”). OpBiz is the licensed owner and operator of the gaming assets and leases the casino space and hotel space together with all hotel assets from PH Fee Owner. TSP Owner is the owner of the parcel of land (the “Timeshare Parcel”) that is currently subject to a Timeshare Purchase Agreement, dated December 10, 2004, between OpBiz and Westgate Resorts, LLP, a Florida limited partnership (“Westgate”), as more fully described below. As of April 2, 2007, each of Robert Earl and Douglas P. Teitelbaum held 50% of BH/RE’s voting membership interests. BH/RE’s equity membership interests were held 40.75% by BH Casino and Hospitality LLC I (“BHCH I”), 18.50% by BH Casino and Hospitality LLC II (“BHCH II” and, together with BHCH I, “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).
BH/RE and its subsidiaries were formed to acquire, operate and renovate the Aladdin Resort and Casino (the “Aladdin”) located in Las Vegas, Nevada. OpBiz completed the acquisition of the Aladdin on September 1, 2004 and has begun a renovation project to transform the Aladdin into the PH Resort. In connection with the renovation of the Aladdin, OpBiz has entered into an agreement with Planet
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Hollywood International, Inc. (“Planet Hollywood”) and certain of its subsidiaries to, among other things, license Planet 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 hotel management, marketing and reservation services for the hotel that comprises a portion of the PH Resort.
BH/RE is a Nevada limited liability company and was organized on March 31, 2003. BH/RE was formed by BHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum, a managing principal of Bay Harbour Management, L.C., an investment management firm (“Bay Harbour Management”). BHCH was formed by Mr. Teitelbaum to allow funds managed by Bay Harbour Management to hold investments in BH/RE. OCS is wholly-owned and controlled by Robert Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood. Mr. Earl, a trust for the benefit of Mr. Earl’s children and certain affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood owned by the trust.
Acquisition of the Aladdin
Aladdin Gaming, L.L.C. (“Aladdin Gaming”), which was a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code, commenced its bankruptcy case in the United States Bankruptcy Court for the District of Nevada, Southern Division on September 28, 2001. On April 23, 2003, OpBiz and Aladdin Gaming entered into a purchase agreement pursuant to which OpBiz agreed to acquire the Aladdin. Under the purchase agreement and pursuant to an order of the Bankruptcy Court, Aladdin Gaming conducted an auction to sell the Aladdin. On June 20, 2003, the Bankruptcy Court declared OpBiz the winner of that auction and, on August 29, 2003, the Bankruptcy Court entered an order confirming Aladdin Gaming’s plan of reorganization and authorizing Aladdin Gaming to complete the sale of the Aladdin to OpBiz under the purchase agreement. On September 1, 2004, OpBiz acquired substantially all of the real and personal property owned or used by Aladdin Gaming to operate the Aladdin, and received $15 million of working capital from Aladdin Gaming, including $25.7 million of cash. The acquisition was accounted for as a purchase and, accordingly, the purchase price and working capital adjustments were allocated to the underlying acquired assets and assumed liabilities. The working capital adjustment was determined based on the closing balance sheet on August 31, 2004.
OpBiz paid the purchase price for the Aladdin using the proceeds from the issuance of certain secured notes to Aladdin Gaming’s secured creditors, as described below. OpBiz assumed various contracts and leases entered into by Aladdin Gaming in connection with its operation of the Aladdin and certain of Aladdin Gaming’s liabilities, including Aladdin Gaming’s energy service obligation to the third party owner of the central utility plant that supplies hot and cold water and emergency power to the Aladdin. At the time of purchase, the energy service obligation was equal to $34 million. Upon the completion of the Aladdin acquisition, OpBiz issued $510 million of new secured notes to Aladdin Gaming’s secured creditors under an Amended and Restated Loan and Facilities Agreement (the “Credit Agreement”) with a group of lenders and The Bank of New York, Asset Solutions Division, as administrative and collateral agent.
Simultaneously with the execution of the Credit Agreement, OpBiz made a $14 million cash payment to the secured creditors thereunder, which reduced the principal amount of the notes to $496 million, and obtained a release of a lien on the Timeshare Parcel. On December 10, 2004, OpBiz entered into a Timeshare Purchase Agreement with Westgate, pursuant to which OpBiz agreed to sell the Timeshare Parcel to Westgate, and Westgate agreed to develop, market, manage and sell timeshare units on such Timeshare Parcel.
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The Credit Agreement also required that OpBiz provide either cash or a letter of credit in the aggregate amount of $90 million to fund the costs of the planned renovations to the Aladdin. In August 2004, MezzCo issued $87 million of senior secured notes to a group of purchasers. The net proceeds of this financing were used to make the $14 million payment described above, to pay certain costs and expenses of BH/RE and its subsidiaries and affiliates related to the acquisition of the Aladdin, and to provide OpBiz with a portion of the funds necessary to meet its obligations regarding the planned renovations to the Aladdin.
The purchase agreement also provided that OpBiz assume substantially all of Aladdin Gaming’s pre-petition contracts and leases and any post-petition contracts or leases to which OpBiz does not object. In addition, the purchase agreement provided that OpBiz offer employment to all of Aladdin Gaming’s employees, other than executive management, on terms and conditions substantially similar to their previous employment terms and conditions.
2006 Refinancing
On November 30, 2006, OpBiz and PH Fee Owner (collectively the “Borrower”) entered into a Loan Agreement (the “Loan Agreement”) with Column Financial, Inc. for a mortgage loan in the principal amount of up to $820 million (the “Loan”). The Loan Agreement provides for an initial disbursement in the amount of $759.7 million and a future funding (the “Future Funding”) in the amount of up to $60.3 million. The Loan is secured by a deed of trust on the PH Resort, a deed of trust on the Timeshare Parcel, and a pledge, subject to approval by the Nevada gaming authorities by MezzCo of its membership interest in OpBiz.
Using the proceeds from the Loan, we have repaid in full all amounts outstanding under the Credit Agreement. Pursuant to the terms of the Credit Agreement, upon repayment of all amounts due, the warrants to purchase 2.5% of the equity in EquityCo issued to the Lenders at the closing of the Credit Agreement became exercisable. The warrants can either be settled in cash or in other membership interests upon exercise. On March 14, 2007, the Company entered into a letter agreement with the Lenders to compensate the holders of any unexercised warrants upon the expiration of the exercise period (but in any event no later than March 30, 2007) at a cost of $1.61 per warrant. The exercise period expired on March 21, 2007 with no warrant holders electing to exercise. Accordingly, the Company has recorded the value of the warrants as $1.61 million in the accompanying consolidated statements of financial position.
In addition, in order to permit the Lender to foreclose on the Hotel and Casino separately and to 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 the Hotel 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 agreed to continue to operate the Hotel in the manner it had been and to pay monthly rent of approximately $916,000. OpBiz and PH Fee Owner also entered into a lease pursuant to which OpBiz agreed to continue to operate the Casino in the manner 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 Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (as described below). In exchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”) executing the Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 per year. The fee is accrued and only payable once OpBiz hits certain debt service coverage ratios defined in the Loan Agreement.
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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 losses related to certain prohibited actions of the Borrower and guarantied full repayment of the Loan in the case of a voluntary or collusive bankruptcy of the Borrower, a transfer of the Property or interests in the Borrower in violation of the Loan Agreement and if the Borrower fails to maintain its status as a bankruptcy remote entity and as a result sees its assets consolidated with those of an affiliate in a bankruptcy. The liability of the Guarantors is capped at $15,000,000 per entity and $30,000,000 in the aggregate, however this cap does not apply to (i) liability arising from events, acts or circumstances actually committed or brought about by the willful acts of any of the Guarantors and (ii) the extent of any benefit received by any of the Guarantors as a result of the acts giving rise to the liability under the Guaranty. Each of Douglas Teitelbaum and Robert Earl executed and delivered guaranties substantially the same as that delivered by the Guarantors, however the liability of each of them was limited to (i) liability arising from events, acts or circumstances actually committed or brought about by willful acts by him and (ii) the extent of any benefit received by him as a result of 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 severally guarantied the completion of the renovation of the Property and payment of all costs associated therewith. The liability under the Completion Guaranty is capped at the greater of (a) $35,000,000 and (b) only in the case that cost overruns for the renovation exceed $15,000,000, 24% of the then unpaid costs of the completion of the renovation.
Additionally, in connection with the Loan Agreement, we effected a refinancing of the Securities Purchase Agreement, dated August 9, 2004 (the “Securities Purchase Agreement”), among MezzCo and the investors named therein (the “Investors”), pursuant to which MezzCo issued to the Investors (i) 16% senior subordinated secured notes (the “Notes”) in the original aggregate principal amount of $87 million, and (ii) warrants (the “Warrants”) for the purchase (subject to certain adjustments as provided for therein) of membership interests of MezzCo, representing 17.5% of its fully diluted equity. The proceeds from the Loan were used to redeem the Notes in full.
In connection with the refinancing of the Securities Purchase Agreement and redemption of the Notes, MezzCo, OpBiz, EquityCo, Post Advisory Group, L.L.C. (the “Collateral Agent”), and the Investors (collectively, the “Restructuring Parties”), entered into a Restructuring Agreement, dated November 30, 2006 (the “Restructuring Agreement”), pursuant to which the Restructuring Parties terminated in full the Securities Purchase Agreement, terminated and amended certain other existing agreements, and entered into certain other ancillary agreements, as more fully described below under “Description of Certain Indebtedness”.
The Aladdin Resort and Casino
The Aladdin is located at 3667 Las Vegas Boulevard South in Las Vegas, Nevada, in the area commonly referred to as the Las Vegas Strip. The Aladdin is part of a resort, casino and entertainment complex (the “Complex”) that occupies a 35-acre site located on the northeast corner of Las Vegas Boulevard (the “Strip”) and Harmon Avenue in Las Vegas, Nevada.
The Aladdin includes a 2,567-room hotel (the “Hotel”), which offers deluxe guestrooms, resort guestrooms, suites, luxury rooms and mega suites. In addition, the hotel has an outdoor pool area and an approximately 32,000-square foot spa that is leased to a third party.
Aladdin’s 116,000-square foot casino (the “Casino”) is currently under renovation and when completed as the PH Resort, will offer approximately 1,610 slot machines, 80 table games, a poker room and a race-and sports-book facility on its main floor. The Casino will also include gaming on the mezzanine
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level with a total of 172 slots, 83 of which will be high denomination and together with 12 high denomination table games, will make up the high limit luxury gaming area.
We anticipate the PH Resort will have nine restaurants. Seven of those restaurants will operate pursuant to leases with third parties and include a Chinese restaurant leased to P.F. Chang’s, a 24-hour casual dining facility, an Italian restaurant, a Japanese restaurant, a steak house, a Mexican restaurant and a casual sandwich shop. We intend to continue to operate the remaining two restaurants which are the buffet and a poolside snack bar, as well as room service and banquet services in the convention space. We also operate a Starbucks Coffee franchise under an agreement with Starbucks Corporation. Additionally, we anticipate the PH Resort will have two nightclubs operated by third parties as well as gift and merchandise shops operated by the Marshall Retail Group.
The Aladdin also has over 75,000 square feet of convention, trade show and meeting facilities, including a 37,000-square foot main ballroom, 10,000 square feet of pre-function space and 16,000 square feet of breakout space in 18 separate rooms.
The 7,500-seat Theater for the Performing Arts (the “TPA”) is part of the Complex described below, but is not directly connected to the Hotel and the Casino. Hotel and Casino customers and the general public can enter the TPA through the adjacent shopping mall, which is currently known as the Desert Passage, as described below, or through entrances leading directly into the TPA. The TPA is used for award shows, live music events and theatrical performances. The Aladdin also had unfinished space for an approximately 1,300-seat theater on a mezzanine level above the Casino (the “Showroom”). Effective December 16, 2004, OpBiz entered into a long-term lease agreement with CC Entertainment Theatrical-LV, LLC, successor-in-interest to SFX Entertainment, Inc. pursuant to an assignment dated September 26, 2005 (“CCE”), pursuant to which CCE will be renovating and leasing the TPA and Showroom and related areas. The renovation projects on both the TPA and the Showroom are expected to be completed and operating during the second quarter of 2007. CCE will have the exclusive right to use, reconfigure, adapt, change and operate the leased premises.
In conjunction with the purchase of the Aladdin, we acquired a four-acre parcel of vacant land from Aladdin Gaming. This parcel is adjacent to the Desert Passage. For further discussion about our plans for this vacant land, see below under “Business Strategy—Develop Vacant Property.”
In addition to the Hotel, Casino and TPA, the Complex includes the Desert Passage, which is a themed entertainment shopping mall with approximately 435,000 square feet of retail space, and an approximately 4,800-space parking facility jointly used by the Aladdin and the Desert Passage. The Desert Passage is currently being re-themed, re-designed and re-named for consistency with the planned renovations to the Aladdin.
The Desert Passage and the parking facility are owned by Boulevard Invest, LLC (“Boulevard Invest”), an unaffiliated third party. The Desert Passage, which is directly connected to the Casino, contains an array of stores, boutiques, restaurants, cafes and other entertainment offerings. We are a party to reciprocal use easements and agreements governing the operation and maintenance of the Hotel, the Casino, the TPA, the Desert Passage, the Timeshare Parcel and the parking facility.
The central utility plant, which provides hot and cold water and emergency power to the Complex, is owned by Northwind Aladdin (“Northwind”), an unaffiliated third party. We lease the land on which the central utility plant is located to Northwind for a nominal yearly rent.
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Business Strategy
Our strategy is to improve profitability by:
· renovating the Aladdin;
· implementing a new marketing program to capitalize on the Planet Hollywood and Starwood brand names;
· upgrading and expanding gaming and non-gaming attractions; and
· entering into agreements with third parties for operation of the restaurant, entertainment and retail shops.
Renovate the Aladdin
We have created a design and construction plan with an estimated cost of $176 million to renovate the Aladdin into the PH Resort. In addition, we have entered into an agreement with CCE to fund, develop and operate the TPA and Showroom, and have entered into additional agreements with other third parties to develop and/or operate additional restaurants, retail outlets, lounges and nightclubs at the PH Resort, thereby increasing the number of amenities at the PH Resort without increasing renovation costs. Construction on the renovation project began in October 2005, and we currently expect to complete the interior renovation of the Aladdin into the PH Resort in April 2007 with the exterior façade being completed by the end of third quarter 2007.
The key elements of our plan to renovate the Aladdin are:
Redesign entrance and traffic flow. We intend to construct a new main entrance to the PH Resort that will improve access to the Casino from Las Vegas Boulevard by creating a large main entrance and several well-identified secondary entrances including joint common entries with the Desert Passage shopping mall. We also plan to level the current plaza, which we expect will improve pedestrian traffic into the Casino from Las Vegas Boulevard and to make improvements to the Casino that will direct those customers across the Casino floor to reach our restaurants, shops and entertainment attractions. In addition, we will redesign the façade of the building and create an attraction with that façade, as well as add a large marquee to the front of the PH Resort. We anticipate that these improvements will result in more walk-in visitors to the Casino and our other planned attractions and amenities.
Renovate and expand Casino. We intend to renovate the Casino and, subject to approval of applicable Nevada gaming authorities, expand the Casino into a portion of the Desert Passage that we are currently leasing. In addition, we intend to remove or modify existing structures on the Casino floor so that the Casino will appear larger and more inviting, to redesign the Casino floor to better use the available space for gaming and to add new gaming equipment.
Implement a New Marketing Program
We intend to focus our marketing efforts on attracting middle market gaming customers and establishing celebrity marketing agreements. We believe the general quality of the Hotel rooms is very competitive for the middle market segment. The new marketing program will feature:
· the entry of the Planet Hollywood brand name into the Las Vegas casino market; and
· Starwood’s reservation system and marketing and loyalty programs.
Planet Hollywood Brand Name. We believe the Planet Hollywood brand name is well-known and internationally recognized. As a result, we expect that we will be able to spend more of our advertising budget on direct customer marketing rather than brand awareness. In addition, we believe that the PH
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Resort may host movie premieres, live television productions and similar entertainment industry events, with the goal of attracting Las Vegas tourists, including customers of other properties on the Las Vegas Strip, to the PH Resort.
Relationship with Starwood and Sheraton. We believe that our relationship with Starwood and Sheraton presents a number of advantages for the PH Resort. We believe that including the PH Resort in the Starwood reservation system and marketing and loyalty programs may result in higher average daily room rates at the Hotel. We also estimate that Starwood’s convention bookings database will generate more profitable convention and meeting business for the PH Resort, improving both mid-week occupancy levels and average daily room rates. The Starwood preferred guest program has approximately 4.7 million active members and approximately 10 million total members. We anticipate Starwood preferred guest program members to utilize the PH Resort as an award-redeeming destination.
Upgrade and Expand Gaming and Non-Gaming Attractions
Improve Mix and Layout of Casino Slot Machines. We intend to improve our gaming operations by expanding the Casino and by continuing to provide our customers with newer and more attractive slot machine options. Our slot floor is currently 100% equipped with the ticket-in/ticket-out technology. We also intend to reduce the number of participatory slot machines as a percentage of our total slot machines. Participatory slot machines are slot machines that require the casino operator to pay a percentage of its winnings to the manufacturer.
Expand Race-and Sports-Book Facility and Poker Parlor. We intend to expand and remodel the Aladdin’s race-and sports-book facility and the poker parlor to keep more of our Hotel guests in the Casino and to attract more non-Hotel customers to the Casino. We believe that a race-and sports-book facility is important because it serves as a gathering and relaxation point for Hotel and other customers. Virtually all of our major competitors have larger race-and sports-book facilities than we currently offer. In addition, because of the popularity of poker, we intend to expand and relocate the poker parlor.
Expand Amenities. When we complete the planned renovations to the Aladdin, we anticipate the PH Resort will offer a variety of non-gaming amenities that we believe are unique among Las Vegas Strip properties. Our plans include entering into third party agreements to fund, develop and operate nightclubs, lounges and entertainment facilities. Effective December 16, 2004, we entered into a long-term lease agreement whereby CCE will be renovating and leasing the TPA and Showroom. CCE will have the exclusive right to use, reconfigure and operate the leased premises. We will also be able to use the TPA and Showroom for casino and convention needs during certain periods. CCE’s renovation of the Showroom is currently underway. We believe that increasing the number, variety and desirability of non-gaming amenities at the PH Resort will attract more customers and, as a result, increase revenues and profits, including those from our gaming operations.
Upgrade and Expand Restaurant Choices. Although the Aladdin operated two upscale restaurants and a large buffet with a wide variety of food choices, none of the dining options at the Aladdin were affiliated with a well-known restaurant or chef from a major U.S. metropolitan area. We believe that most Las Vegas Strip properties currently include these types of dining options and that having one or more of these dining options presents opportunities to attract customers to the Casino and to other non-gaming attractions and amenities at the PH Resort. We have entered into agreements with well-known restaurant operators to offer customers of the PH Resort more dining options.
Develop Vacant Property
On December 10, 2004, OpBiz entered into a Timeshare Purchase Agreement with Westgate, whereby OpBiz agreed to sell the Timeshare Parcel to Westgate, to develop, market, manage and sell timeshare units on such Timeshare Parcel. Under the Timeshare Purchase Agreement, OpBiz will receive
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fees each year based on sales of timeshare units until the timeshare units are one hundred percent sold out. We expect that development of the vacant property will also benefit us by providing additional revenues by increasing the number of potential customers for the PH Resort, as the new towers will have limited amenities so those guests will be directed to our Complex for gaming, entertainment and food and beverage facilities.
Markets
We believe that Las Vegas is one of the fastest growing leisure, hotel and entertainment markets in the country. Las Vegas hotel occupancy rates are among the highest of any major market in the United States. According to the Las Vegas Convention and Visitors Authority, the number of visitors increased from approximately 30.5 million in the year ended December 31, 1997 to approximately 38.9 million visitors in the year ended December 31, 2006, and is expected to reach 43.0 million visitors by 2009. There is no guarantee that Las Vegas will have this many visitors by 2009, or that the number of visitors will increase at all.
According to the American Gaming Association, Las Vegas has the highest casino gaming revenues in the United States. A number of major hotel casinos have opened in the past ten years on the Las Vegas Strip, including Bellagio, Mandalay Bay Resort & Casino, New York-New York Hotel and Casino, Paris Las Vegas, The Venetian Casino Resort and Wynn Resort Las Vegas. In addition, a number of existing properties on the Las Vegas Strip have expanded during this period, including MGM Grand Hotel and Casino, Luxor Hotel and Casino, Circus Circus Hotel, Casino and Theme Park, Bellagio and Caesars Palace. Despite this significant increase in the supply of rooms in Las Vegas, hotel total occupancy rates exceeded on average 90.6% for the years 1990 to 1999, averaged 92.5% in 2000, 88.9% in 2001, 88.8% in 2002, 85.0% in 2003, 88.6% in 2004, 89.2% in 2005 and 89.7% in 2006. There is no guarantee that these occupancy rates will remain high or will not decrease in the future.
According to the Las Vegas Convention and Visitors Authority, gross gaming revenues for properties on the Las Vegas Strip have increased from approximately $3.8 billion in the year ended December 31, 1997 to approximately $6.7 billion in the year ended December 31, 2006. As a result of the increased popularity of gaming, Las Vegas has sought to increase its popularity as an overall vacation resort destination. There is no guarantee that Las Vegas will continue to grow in popularity. The number of hotel rooms in Las Vegas has increased from 105,347 at December 31, 1997 to 132,605 at December 31, 2006.
The Las Vegas market continues to evolve from its historical gaming focus to broader entertainment and leisure offerings, such as retail, fine dining, sporting activities and major concerts. This diversification has contributed to the growth of the market and broadened the universe of individuals who would consider Las Vegas as a vacation destination. The more diversified entertainment and leisure offerings present significant growth opportunities. In particular, the newer, large theme-destination resorts have been designed to capitalize on this development by providing better quality hotel rooms at higher rates and by providing expanded shopping, dining and entertainment opportunities to their patrons, in addition to gaming.
Competition
The hotel casino industry is highly competitive. The Aladdin competes, and the PH Resort will compete, on the basis of overall atmosphere, range of amenities, level of service, price, location, entertainment offered, theme and size. The Aladdin competes, and the PH Resort will compete, with other high-quality resorts and hotel casinos on the Las Vegas Strip and in downtown Las Vegas, as well as a large number of hotels in and near Las Vegas.
Many competing properties, such as Bellagio, Caesars Palace, Luxor Hotel and Casino, Mandalay Bay Resort & Casino, the MGM Grand Hotel and Casino, The Mirage, Monte Carlo Hotel and Casino, New
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York-New York Hotel and Casino, Paris Las Vegas, Rio All-Suite Hotel & Casino, Treasure Island at The Mirage, The Venetian Casino Resort, the Hard Rock Hotel and Casino and Wynn Las Vegas, have themes and attractions which draw a significant number of visitors and compete with the Aladdin, and will compete with the PH Resort, for hotel and gaming customers and conventions and trade shows. Some of these properties are operated by companies that have more than one location and may have greater name recognition and financial and marketing resources than we have and will target the same demographic group as the Aladdin and the PH Resort. We will seek to differentiate the PH Resort from other major Las Vegas hotel casino resorts by concentrating on the design, atmosphere, personal service and amenities that we will provide and the added value of our arrangements with Planet Hollywood, Starwood and Sheraton.
A number of properties in the Las Vegas market have recently expanded or are expanding their facilities. MGM Mirage has constructed a 928-room “spa tower” addition to Bellagio, as well as an expansion of Bellagio’s spa and salon, meeting space and retail space. Wynn Las Vegas opened in April 2005, on the 192-acre site of the former Desert Inn Resort & Casino on the Las Vegas Strip. Harrah’s (formerly Caesars Entertainment) has completed construction of a 949-room hotel tower and additional convention and meeting facilities at Caesars Palace, which includes additional retail space and restaurant facilities. The Venetian Casino Resort is constructing a new all-suites hotel tower with approximately 3,000-rooms that is expected to open in the summer of 2007. The Cosmopolitan Resort & Casino, which will be located directly across Las Vegas Boulevard from the PH Resort, will have approximately 2,200 rooms comprised of condo hotel units and hotel rooms and is expected to be completed in late 2007 or early 2008. MGM Mirage is building a 66-acre development currently called Project City Center, which will also be located across Las Vegas Boulevard from the PH Resort. The initial phase of the project is expected to be completed in 2010 and includes a 4,000-room hotel and casino, as well as three 400-room boutique hotels. According to the Las Vegas Convention and Visitors Authority, the number of hotel rooms in Las Vegas is expected to increase by 2,769 in 2006, 8,284 in 2007, 17,136 in 2008 and 6,450 in 2009.
Las Vegas casinos also compete with other hotel casino facilities elsewhere in Nevada and in Atlantic City, riverboat and Native American gaming facilities in other states, hotel casino facilities elsewhere in the world, Internet gaming and other forms of gaming. In addition, certain states recently have legalized, and others may legalize, casino gaming in specific areas. Passage of the Tribal Government Gaming and Economic Self-Sufficiency Act in 1988 has led to rapid increases in Native American gaming operations. In March 2000, California voters approved an amendment to the California Constitution allowing federally recognized Native American tribes to conduct and operate slot machines, lottery games and banked and percentage card games on Native American land in California. As a result, casino-style gaming on Native American land is growing and has become a significant competitive force. The proliferation of Native American gaming in California and gaming activities in other areas could have a negative impact on our operations. In particular, the legalization of casino gaming in or near metropolitan areas, such as New York, Los Angeles, San Francisco and Boston, from which we intend to attract customers, could have a substantial negative effect on our business. In addition, new or renovated casinos in Asia could reduce the number of Asian customers who would otherwise visit Las Vegas. We also compete with other forms of gaming on both a local and national level, including state lotteries, on-and off-track wagering and card parlors. The expansion of legalized gaming into new jurisdictions throughout the United States will also increase competition.
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Intellectual Property
We have entered into agreements with Planet Hollywood and Sheraton which, among other things, grant us the right to use certain of their respective intellectual property in connection with the operation of the PH Resort. These licensing arrangements are described below under “Item 13. Certain Relationships and Related Transactions, and Director Independence—Transactions with Planet Hollywood.”
We own several registered trademarks utilizing “Aladdin” for use in connection with casinos and casino entertainment services and hotel and restaurant services and will use the Aladdin trademarks until we commence operations as the PH Resort. We do not consider the Aladdin trademarks to be material to our business once we complete the renovation of the Aladdin into the PH Resort.
Regulation and Licensing
Nevada Gaming Regulations
Introduction
The ownership and operation of casino gaming facilities in Clark County, Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the “Nevada Act”); and (ii) various local ordinances and regulations. Our operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (“Nevada Commission”), the Nevada State Gaming Control Board (“Nevada Board”) and the Clark County Liquor and Gaming License Board (collectively, the “Nevada Gaming Authorities”).
Policy Concerns of Gaming Laws
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy. These public policy concerns include, among other things:
· preventing unsavory or unsuitable persons from being directly or indirectly involved with gaming at any time or in any capacity;
· establishing and maintaining responsible accounting practices and procedures;
· maintaining effective controls over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs, and safeguarding assets and revenues, providing reliable recordkeeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;
· preventing cheating and fraudulent practices; and
· providing a source of state and local revenues through taxation and licensing fees.
Changes in these laws, regulations and procedures could have significant negative effects on our gaming operations and our financial condition and results of operations.
Owner and Operator Licensing Requirements
As the owner and operator of the Aladdin, OpBiz, as a registered company, is required to be licensed by the Nevada Gaming Authorities as a limited liability company licensee, referred to as a company licensee. This gaming license requires us to pay periodic fees and taxes and is not transferable. We are required periodically to submit detailed financial and operating reports to the Nevada Commission and the Nevada Board and furnish any other information, which the Nevada Commission or the Nevada Board may require. No person may become a stockholder or holder of an interest of, or receive any percentage of profits from the Aladdin or PH Resort without first obtaining licenses and approvals from the Nevada
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Gaming Authorities. We have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses required in order to engage in gaming activities in Nevada.
Individual Licensing Requirements
The Nevada Gaming Authorities may investigate any individual who has a material relationship to or material involvement with OpBiz to determine whether the individual is suitable or should be licensed as a business associate of a gaming licensee. The officers, directors and certain key employees of OpBiz, MezzCo, EquityCo and BH/RE are required to file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or an applicant for a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada Gaming Authorities have the jurisdiction to disapprove a change in a corporate position. Messrs. Teitelbaum and Earl, along with Michael V. Mecca, President and Chief Executive Officer of BH/RE and OpBiz, Donna Lehmann, Chief Financial Officer of OpBiz and Treasurer of BH/RE, Mark S. Helm, General Counsel and Secretary of OpBiz, Theodore W. Darnall, manager of EquityCo and OpBiz and Michael Belletire, manager of OpBiz have been licensed by the Nevada Gaming Authorities. Applications for Thomas M. Smith, manager of EquityCo and OpBiz, and Eugene I. Davis, manager of OpBiz, are pending approval by the Nevada Gaming Authorities.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with OpBiz, OpBiz would have to terminate all relationships with that person. In addition, the Nevada Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Nevada Commission and provide any other information that the Nevada Commission may require. Substantially all of the material loans, leases, sales of securities and similar financing transactions of OpBiz, MezzCo, EquityCo and BH/RE must be reported to, or approved by, the Nevada Commission and/or the Nevada Board.
Consequences of Being Found Unsuitable
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or by the chairman of the Nevada Board, or who refuses or fails to pay the investigative costs incurred by the Nevada Gaming Authorities in connection with the investigation of its application, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of any voting security or debt security of a registered company beyond the period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest or to have any other relationship with, we:
· pay that person any dividend or interest upon any voting or debt securities;
· allow that person to exercise, directly or indirectly, any voting right held by that person relating to BH/RE, EquityCo, MezzCo or OpBiz;
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· pay remuneration in any form to that person for services rendered or otherwise; or
· fail to pursue all lawful efforts to require the unsuitable person to relinquish such person’s voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.
Consequences of Violating Gaming Laws
If the Nevada Commission decides that we have violated the Nevada Act or any of its regulations, it could limit, condition, suspend or revoke our registrations and gaming license. In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act, or of the regulations of the Nevada Commission, at the discretion of the Nevada Commission. Further, the Nevada Commission could appoint a supervisor to operate the Aladdin (or the PH Resort) and, under specified circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of the premises) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any of our gaming licenses and the appointment of a supervisor could, and revocation of any gaming license would, have a significant negative effect on our gaming operations.
Requirements for Beneficial Securities Holders
Regardless of the number of shares held, any beneficial holder of BH/RE’s voting securities may be required to file an application, be investigated and have that person’s suitability as a beneficial holder of voting securities determined if the Nevada Commission has reason to believe that the ownership would otherwise be inconsistent with the policies of the State of Nevada. If the beneficial holder of the voting securities of BH/RE who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information including a list of its beneficial owners. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation.
The Nevada Act requires any person who acquires more than 5% of the voting securities of a registered company to report the acquisition to the Nevada Commission. The Nevada Act requires beneficial owners of more than 10% of a registered company’s voting securities to apply to the Nevada Commission for a finding of suitability within 30 days after the chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the registered company’s voting securities may apply to the Nevada Commission for a waiver of a finding of suitability if the institutional investor holds the voting securities for investment purposes only. In certain circumstances, an institutional investor that has obtained a waiver can hold up to 19% of a registered company’s voting securities for a limited period of time and maintain the waiver. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered company, a change in the corporate charter, bylaws, management, policies or operations of the registered company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the registered company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
· voting on all matters voted on by stockholders or interest holders;
· making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and
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· other activities that the Nevada Commission may determine to be consistent with such investment intent.
The articles of organization of BH/RE include provisions intended to help it implement the above restrictions.
Gaming Laws Relating to Securities Ownership
The Nevada Commission may, in its discretion, require the holder of any debt or similar securities of a registered company to file applications, be investigated and be found suitable to own the debt or other security of the registered company if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the Nevada Commission decides that a person is unsuitable to own the security, then under the Nevada Act, the registered company can be sanctioned, including the loss of its approvals if, without the prior approval of the Nevada Commission, it:
· pays to the unsuitable person any dividend, interest or any distribution whatsoever;
· recognizes any voting right by the unsuitable person in connection with the securities;
· pays the unsuitable person remuneration in any form; or
· makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.
BH/RE is required to maintain a current ownership ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make the disclosure may be grounds for finding the record holder unsuitable. We will be required to render maximum assistance in determining the identity of the beneficial owner of any of BH/RE’s voting securities. The Nevada Commission has the power to require the certificates representing equity interests of any registered company to bear a legend indicating that the securities are subject to the Nevada Act. We do not know whether this requirement will be imposed on us. However, the certificates representing BH/RE’s membership interests note that the membership interests are subject to a right of redemption and other restrictions set forth in BH/RE’s articles of organization and bylaws and that the membership interests are, or may become, subject to restrictions imposed by applicable gaming laws.
Approval of Public Offerings
Neither BH/RE nor any of its affiliates may make a public offering of its debt or equity securities without the prior approval of the Nevada Commission if the proceeds from the offering are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or for similar transactions, unless, upon a written request for a ruling, the chairman of the Nevada Board has ruled that it is not necessary to submit an application for approval. Any approval that we might receive in the future relating to future offerings will not constitute a finding, recommendation or approval by any of the Nevada Gaming Authorities as to the accuracy or adequacy of the offering memorandum or the investment merits of the securities. Any representation to the contrary is unlawful.
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Approval of Changes in Control
As a registered company, BH/RE must obtain prior approval of the Nevada Commission with respect to a change in control through:
· merger;
· consolidation;
· stock or asset acquisitions;
· management or consulting agreements; or
· any act or conduct by a person by which the person obtains control of us.
Entities seeking to acquire control of a registered company must satisfy the Nevada Board and Nevada Commission with respect to a variety of stringent standards before assuming control of the registered company. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.
Approval of Defensive Tactics
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licenses or affecting registered companies that are affiliated with the operations permitted by Nevada gaming licenses may be harmful to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to reduce the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:
· assure the financial stability of corporate gaming operators and their affiliates;
· preserve the beneficial aspects of conducting business in the corporate form; and
· promote a neutral environment for the orderly governance of corporate affairs.
We may be required to obtain approval from the Nevada Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by a registered company’s board of directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control.
Fees and Taxes
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the licensed operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon:
· a percentage of the gross revenues received;
· the number of gaming devices operated; or
· the number of table games operated.
A live entertainment tax is also paid by casino operators where entertainment is furnished in connection with an admission charge or the selling or serving of food or refreshments or the selling of merchandise.
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License for Conduct of Gaming and Sale of Alcoholic Beverages
The conduct of gaming activities and the service and sale of alcoholic beverages at the Aladdin and the PH Resort are subject to licensing, control and regulation by the Clark County Liquor and Gaming License Board. In addition to approving OpBiz, the Clark County Liquor and Gaming License Board has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. All licenses are revocable and are not transferable. The county agency has full power to limit, condition, suspend or revoke any license. Any disciplinary action could, and revocation would, have a substantial negative impact upon our operations.
Employees
OpBiz currently has approximately 2,740 employees. Aladdin Gaming had entered into a collective bargaining agreement that covers less than 20 employees who work on the Aladdin loading docks. OpBiz has assumed this agreement in connection with the Aladdin acquisition. Negotiations with the Culinary Workers’ Union Local 226, Las Vegas, related to a collective bargaining agreement were completed on October 1, 2005. Approximately 1,200 employees (52%) are now covered by this agreement which expires on May 31, 2007.
ITEM 1A. RISK FACTORS
Our plans and business are subject to the following risks:
Risks Related to the Aladdin Renovation
Our renovation budget is only an estimate and actual costs may exceed the budget.
We currently estimate that renovation costs will be about $176 million. While we believe that the budget is reasonable, the costs are an estimate and actual costs may be higher than expected. Construction projects like the proposed renovations to the Aladdin entail significant risks, including:
· unanticipated cost increases;
· unforeseen engineering, environmental and/or geographical problems;
· shortages of materials or skilled labor;
· work stoppages; and
· weather interference.
Construction, equipment or staffing problems or difficulties in obtaining any of the requisite licenses, permits and authorizations from regulatory authorities could increase the total cost of the renovations, delay or prevent the renovations or otherwise affect the design and features of the PH Resort. We cannot assure you that the actual renovation costs will not exceed the budgeted amounts. Failure to complete the renovations within our budget may negatively affect our financial condition and results of operations.
Renovations to the Aladdin may disrupt our operations.
We have operated and will continue to operate the Hotel and Casino under the Aladdin name during renovations. We have conducted the renovations in phases and will continue to attempt to reduce disruption to our business to the extent practicable. However, we cannot assure you that the renovation process will not result in a decrease in business levels which would have a negative impact on our results of operations.
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The Planet Hollywood brand has not historically been associated with hotels or casinos.
Planet Hollywood is a franchisor of themed restaurants and related retail shops. In the past, the Planet Hollywood brand has not been associated with hotels or casinos. We cannot assure you that customers will be attracted to a Planet Hollywood-themed resort such as the PH Resort. In addition, Planet Hollywood filed for Chapter 11 bankruptcy protection in October 1999 and emerged in May 2000. Planet Hollywood subsequently filed for Chapter 11 bankruptcy protection in October 2001 and emerged in March 2003. We do not believe that Planet Hollywood’s bankruptcy proceedings have a negative impact on the general perception of the Planet Hollywood brand or will have a negative impact to the PH Resort, but we can provide no assurances in that regard.
OpBiz may need limited approvals from Boulevard Invest to carry out certain of the planned renovations.
Boulevard Invest has agreed to allow OpBiz to change the name of the Aladdin to the PH Resort, to re-theme the Aladdin from its current Arabian-based theme to a Planet Hollywood theme and to develop the vacant property adjacent to the Desert Passage. Boulevard Invest has also agreed to amend the reciprocal use agreements governing the operation and maintenance of the Hotel, Casino, TPA, Showroom, Desert Passage, Timeshare Parcel and parking facility accordingly. Boulevard Invest may, however, have limited approval rights to portions of the renovation plans that involve changes to the physical structure of the Desert Passage, changes to the physical structure of the Hotel, Casino, TPA or Timeshare Parcel that could affect the Desert Passage and other changes that could adversely affect the Desert Passage. We cannot assure you that Boulevard Invest will approve of such portions of our final plans and specifications, if any. Failure of Boulevard Invest to give any required approvals might cause us to delay or modify our planned renovations.
Risks Related to Our Substantial Indebtedness
Our substantial indebtedness could adversely affect our financial results.
We have $759.7 million of indebtedness under the Loan Agreement and approximately $30.9 million of indebtedness under the Energy Service Agreement described below at the end of Item 7.—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The indebtedness under the Loan Agreement is secured by a deed of trust on the PH Resort, a deed of trust on the Timeshare Parcel, and a pledge, subject to approval by the Nevada gaming authorities by MezzCo of its membership interest in OpBiz.
The Loan Agreement requires that we establish and maintain certain reserves including a reserve for completion of the renovation project as currently budgeted, a reserve for payment of property taxes and insurance and a reserve for on-going furniture, fixture and equipment purchases or property improvements. The Loan Agreement also requires that the we maintain an interest reserve and restricts our ability to spend excess cash flow until certain debt service coverage ratios are met. Pursuant to the terms of the Loan Agreement, the Lenders have approval rights over our annual operating budget and restrictions over our operating cash (excluding certain requirements to maintain minimum operating cash under Nevada gaming regulations). Therefore, we will have limited cash flow available for unplanned working capital needs and other general corporate activities and to make distributions to our owners until certain debt service coverage ratios are met. Our substantial indebtedness could also have the following additional consequences:
· limit our ability to obtain additional financing in the future;
· increase our vulnerability to general adverse economic and industry conditions;
· limit flexibility in planning for, or reacting to, changes in our business and industry; and
· place us at a disadvantage compared to less leveraged competitors.
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The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations or prospects.
Our future cash flows may not be sufficient to meet our debt obligations.
Our ability to make payments on our indebtedness depends on our ability to generate sufficient cash flow in the future. Our ability to generate cash flow will depend upon many factors, some of which are beyond our control, including:
· demand for our services;
· economic conditions generally, as well as in Nevada and within the casino industry;
· competition in the hotel and casino industries;
· legislative and regulatory factors affecting our operations and business; and
· our ability to hire and retain employees at a reasonable cost.
We cannot assure you that we will generate cash flow from operations in an amount sufficient to make payments on our indebtedness or to fund other liquidity needs. Our inability to generate sufficient cash flow would have a material adverse effect on our financial condition and results of operations. In addition, if we are not able to generate sufficient cash flow to service our indebtedness, we may need to refinance or restructure our indebtedness, sell assets, reduce or delay capital investment, or seek to raise additional capital. If we cannot implement one or more of these alternatives, we may not be able to meet our payment obligations under our indebtedness.
The Loan Agreement imposes restrictions on our operations.
The Loan Agreement imposes operating and financial restrictions on us. These restrictions include, among other things, limitations on our ability to:
· incur operating expenses in excess of our annual operating budget unless prior approval is obtained;
· incur additional debt or refinance existing debt;
· create liens or other encumbrances;
· make distributions with respect to our, or our subsidiaries’, equity (other than distributions for tax obligations) or make other restricted payments;
· make investments, capital expenditures, loans or other guarantees; and
· merge or consolidate with another entity.
Risks Related to Our Business
We have a limited operating history.
We were formed to acquire, operate and renovate the Aladdin. While the Aladdin has a history of operations, we have only operated the Hotel and Casino since September 2004. Consequently, we cannot assure you that our planned renovations to the Aladdin and transformation of the Aladdin into the PH Resort will attract the number and type of Hotel and Casino customers and other visitors we desire or whether we will be able to achieve our objective to improve the profitability of the Aladdin.
We will be subject to the significant business, economic, regulatory and competitive uncertainties and contingencies frequently encountered by new businesses in competitive environments, many of which are beyond our control. Because we have a limited operating history, it may be more difficult for us to prepare
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for and respond to these types of risks, and the other risks described in this Annual Report on Form 10-K, as compared to a company with an established business. If we are not able to manage these risks successfully, our results of operations could be negatively affected.
We are dependent upon Planet Hollywood’s entertainment industry relationships and the efforts and skills of the senior management of OpBiz.
Our ability to maintain our competitive position will be dependent to a large degree on our ability to leverage Planet Hollywood’s celebrity and entertainment industry relationships and to hire and retain experienced senior management, including marketing and operating personnel. Whether the PH Resort becomes a venue for entertainment industry events will be highly dependent on Planet Hollywood’s entertainment industry relationships and the efforts and skill of our marketing personnel in brand management and their ability to attract celebrities and entertainment industry personalities to the PH Resort. If we are unable to leverage Planet Hollywood’s relationships within the entertainment industry or to hire and retain experienced senior management, our business may be significantly impaired.
We may not be able to retain qualified senior management.
We believe that the pool of experienced gaming and other personnel is limited and competition to recruit and retain gaming and other personnel is intense. We cannot assure you that we will be able to retain a sufficient number of qualified senior managers for our planned operations.
Our managers, officers and key employees may not obtain applicable gaming licenses.
Our managers, officers and certain key employees are required to file applications with the Nevada Gaming Authorities and may be required to be approved by the Nevada Gaming Authorities. If the Nevada Gaming Authorities were to find an officer, manager or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. Furthermore, the Nevada Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Either result could adversely affect our gaming operations.
We will face intense competition from other hotel casino resorts in Las Vegas.
There is intense competition in the gaming industry. Competition in the Las Vegas area has increased over the last several years as the result of significant increases in hotel rooms, casino size and convention, trade show and meeting facilities. Moreover, this growth is presently continuing and is expected to continue.
Resorts located on or near the Las Vegas Strip compete with other Las Vegas Strip hotels and with other hotel casinos in Las Vegas on the basis of overall atmosphere, range of amenities, level of service, price, location, entertainment offered, theme and size. We compete with a large number of other hotels and motels located in and near Las Vegas, as well as other resort destinations. Many of our competitors have established gaming operations and may have greater financial and other resources than we do.
We cannot assure you that the Las Vegas market will continue to grow or that hotel casino resorts will continue to be popular. A decline or leveling off of the growth or popularity of hotel casino resorts or the appeal of the features offered by the Aladdin, and to be offered by the PH Resort, could impair our financial condition and results of operations. Further, the design and amenities of the PH Resort may not appeal to customers. Customer preferences and trends can change, often without warning, and we may not be able to predict or respond to changes in customer preferences in time to adapt the attractions and amenities offered at the PH Resort to address these new trends.
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We face competition from gaming operations outside Las Vegas.
We compete with other hotel casino facilities elsewhere in Nevada and in Atlantic City, riverboat gaming facilities in other states, hotel casino facilities elsewhere in the world, Internet gaming, state lotteries and other forms of gaming. Certain states recently have legalized, and others may legalize, casino gaming in specific areas, and casino-style gaming on Native American tribal lands is growing and could become a significant competitive force. In particular, the expansion of Native American gaming in California could have a negative impact on our results of operations.
Expansion of gaming activities in other areas could significantly harm our business. In particular, the legalization of casino gaming in or near areas from which we intend to attract customers could have a substantial negative effect on our business. In addition, new or renovated casinos in Asia could reduce the number of Asian customers who would otherwise visit Las Vegas.
We are entirely dependent upon OpBiz for all of our cash flow.
We do not currently expect to have material assets or operations other than our investment in OpBiz. OpBiz conducts substantially all of our operations. Consequently, our cash flow depends on the cash flow of OpBiz and the payment of funds to us by OpBiz in the form of loans, distributions or otherwise, which payments are either restricted or prohibited without the consent of OpBiz’s lenders. Given that our operations only focus on one property in Las Vegas, we are subject to greater degrees of risk than a gaming company with multiple operating properties. Material risks include:
· a decrease in gaming and non-gaming activities at the PH Resort;
· a decline in the number of visitors to Las Vegas;
· local economic and competitive conditions;
· an increase in the cost of electrical power as a result of, among other things, power shortages in California or other western states with which Nevada shares a single regional power grid;
· changes in local and state governmental laws and regulations, including gaming laws and regulations; and
· natural and other disasters.
Any of the factors outlined above could negatively affect our ability to generate sufficient cash flow to make payments on our indebtedness and to make distributions to our owners.
The gaming industry is highly regulated and we are required to adhere to various regulations and maintain our licenses to continue operations.
The operation of the PH Resort is contingent upon the receipt and maintenance of various regulatory licenses, permits, approvals, registrations, findings of suitability, orders and authorizations. The laws, regulations and ordinances requiring these licenses, permits and other approvals generally relate to the responsibility, financial stability and character of the owners and managers of gaming operations, as well as persons financially interested or involved in gaming operations. The scope of the approvals required to acquire and operate a facility is extensive. Failure to obtain or maintain the necessary approvals could prevent or delay all or part of the renovations to the Aladdin or otherwise affect the design and features of the PH Resort.
Nevada regulatory authorities have broad powers to request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or related approval and to approve changes in the operations of the Aladdin or the PH Resort. Substantial fines or forfeiture of assets for violations of gaming laws or regulations may be levied. The suspension or revocation of any license which
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may be granted to us or the levy of substantial fines or forfeiture of assets could significantly harm our business, financial condition and results of operations. Furthermore, compliance costs associated with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations.
Our employees have joined unions.
A collective bargaining agreement between the management of OpBiz and the culinary union was completed effective October 1, 2005 and expires on May 31, 2007. We do not believe that the collective bargaining agreement has or that the renewal of the collective bargaining agreement will have a material impact on OpBiz’s results of operations or financial position.
Because we own real property, we are subject to environmental regulation.
We may incur costs and expend funds to comply with environmental requirements, such as those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. Under these and other environmental requirements, OpBiz, as the owner of the property on which the PH Resort will be situated, may be required to investigate and clean up hazardous or toxic substances or chemical releases at that property. As an owner or operator, OpBiz could also be held responsible to a governmental entity or third parties for property damage, personal injury and investigation and cleanup costs incurred by them in connection with any contamination.
These laws typically impose cleanup responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. The liability under those laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of the responsibility. The costs of investigation, remediation or removal of those substances may be substantial, and the presence of those substances, or the failure to remediate a property properly, may impair our ability to use the property.
Energy price increases could adversely affect our costs of operations and our revenues.
We use significant amounts of electricity, natural gas and other forms of energy. While Las Vegas Strip properties have not recently experienced significant energy shortages, substantial increases in the cost of electricity in the western United States would negatively affect our operating results. The extent of the impact is subject to the magnitude and duration of any energy price increase, but this impact could be material. In addition, higher energy and gasoline prices may result in reduced visits to Las Vegas.
Acts of terrorism, as well as other factors affecting discretionary consumer spending, have impacted our industry and may harm our operating results and our ability to insure against certain risks.
The terrorist attacks of September 11, 2001 had an immediate negative impact on travel and leisure expenditures, including lodging, gaming and tourism, and ongoing terrorist and war activities have occasionally had a negative effect on our industry. As a destination whose primary customers arrive by air, Las Vegas is vulnerable to consumer concerns about travel in general, and particularly flying. We cannot predict the extent to which ongoing terrorist and war activities may affect us. These events, the potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties which could adversely affect our business and results of operations. Future acts of terror in the United States or an outbreak of hostilities
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involving the United States may reduce a willingness on the part of the general public to travel with the result that our operations will suffer.
In addition to fears of war and future acts of terrorism, other factors affecting discretionary consumer spending, including general economic conditions, disposable consumer income, fears of recession and consumer confidence in the economy, may negatively impact our business. Adverse changes in factors affecting discretionary spending could reduce customer demand for the gaming, dining and entertainment activities we will offer, thus imposing practical limits on pricing and harming our operations.
Partly as a consequence of the events of September 11, 2001 and the threat of similar events in the future, premiums for a variety of insurance products have increased sharply, and some types of insurance coverage are no longer available. Although we will endeavor to obtain and maintain insurance covering extraordinary events that could affect our operations, conditions in the marketplace have made it prohibitive for us to maintain insurance against losses and interruptions caused by terrorist acts and acts of war. If any such event were to affect the Aladdin, or following our planned renovations, the PH Resort, we would likely suffer a substantial loss.
A downturn in general economic conditions may adversely affect our results of operations.
Our business operations will be affected by international, national and local economic conditions. A recession or downturn in the general economy, or in a region constituting a significant source of our customers, could result in fewer customers visiting the Aladdin or, following our planned renovations, the PH Resort, which would adversely affect our revenues.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Substantially all of our assets have been pledged as collateral for our Loan Agreement. The outstanding balance under the Loan Agreement was approximately $759.7 million at December 31, 2006. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Certain Indebtedness”.
The Complex occupies a 35-acre site located on the northeast corner of the Strip and Harmon Avenue in Las Vegas, Nevada. We own approximately 21.8 acres, which consists of the Aladdin, the TPA, the Showroom, Hotel, Casino, various restaurants and bars and the central utility plant. Approximately 0.62 acres are leased to the owner and operator of the central utility plant. The Complex is described in greater detail above under Item 1. “Business—The Aladdin Resort and Casino.”
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2006, neither BH/RE nor any of its subsidiaries is a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 2006.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for BH/RE’s membership interests and we do not presently expect that a trading market in BH/RE’s membership interests will develop. There are no outstanding options or warrants to purchase, or securities convertible into, any of BH/RE’s membership interests.
As of December 31, 2006, there were two holders of record of BH/RE’s voting membership interests and three holders of record of BH/RE’s equity membership interests.
BH/RE does not pay, and does not anticipate paying, any distributions to the holders of its membership interests, other than distributions in respect of income taxes payable by such members resulting from their ownership of membership interests.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements, the notes thereto and other financial and statistical information included elsewhere in this Annual Report on Form 10-K.
| | For the years ended December 31, | |
| | | | | | | | | | Predecessor Information | |
| | 2006 | | 2005 | | 2004(a) | | 2003(b) | | 2004(c) | | 2003 | | 2002 | |
| | (in thousands) | |
Operating Results: | | | | | | | | | | | | | | | |
Net revenues | | $ | 267,112 | | $ | 306,258 | | $ | 96,141 | | $ | — | | $ | 190,889 | | $ | 266,540 | | $ | 236,384 | |
Operating costs and expenses, excluding the following items | | 256,259 | | 284,602 | | 85,465 | | — | | 146,791 | | 255,111 | | 263,052 | |
Pre-opening expenses(d) | | — | | — | | 1,684 | | 1,283 | | — | | — | | — | |
Impairment of long-lived assets(e) | | — | | — | | — | | — | | 1,732 | | 29,478 | | — | |
Loss on disposition of assets | | — | | 1,787 | | — | | — | | — | | — | | — | |
Operating income (loss) | | 10,853 | | 19,869 | | 8,992 | | (1,283 | ) | 42,366 | | (18,049 | ) | (26,668 | ) |
Other income (expense), net | | (106,529 | ) | (49,730 | ) | (15,648 | ) | 52 | | (2,541 | ) | (9,953 | ) | (11,883 | ) |
Income (loss) before income taxes, cumulative effect of change in accounting principal and reorganization items | | (95,676 | ) | (29,861 | ) | (6,656 | ) | (1,231 | ) | 39,825 | | (28,002 | ) | (38,551 | ) |
Income tax provision | | — | | (15 | ) | — | | — | | — | | — | | — | |
Reorganization items | | — | | — | | — | | — | | (6,647 | ) | (12,103 | ) | (10,604 | ) |
Net income (loss) | | $ | (95,676 | ) | $ | (29,876 | ) | $ | (6,656 | ) | $ | (1,231 | ) | $ | 33,178 | | $ | (40,105 | ) | $ | (49,155 | ) |
Balance Sheet Data: | | | | | | | | | | | | | | | |
Total assets | | $ | 737,194 | | $ | 654,495 | | $ | 663,383 | | $ | 13 | | $ | 548,634 | | $ | 564,198 | | $ | 621,057 | |
Long-term debt | | 788,985 | | 604,877 | | 584,814 | | — | | 33,958 | | 34,690 | | 35,664 | |
Member’s equity (deficit) | | (111,939 | ) | (16,263 | ) | 13,613 | | (1,231 | ) | (20,194 | ) | (53,372 | ) | (13,267 | ) |
(a) Includes the operations of BH/RE and its subsidiaries for the twelve months ended December 31, 2004, which includes the operations of the Aladdin for four months beginning on September 1, 2004.
(b) Including the operations of BH/RE and its subsidiaries from the date of formation (March 31, 2003) through December 31, 2003.
(c) Includes the operations of the Aladdin by Aladdin Gaming for the eight months ended August 31, 2004.
(d) Pre-opening expenses for the year ended December 31, 2004 were approximately $1.7 million, which included costs incurred prior to the acquisition of the Aladdin by BH/RE on September 1, 2004. Pre-opening expenses for the year ended December 31, 2003 were approximately $1.3 million.
(e) On August 31, 2004, Aladdin Gaming recorded an impairment loss of approximately $1.7 million based on the purchase price of assets sold to OpBiz on September 1, 2004. On August 29, 2003, the Bankruptcy Court confirmed Aladdin Gaming’s plan of reorganization and approved the Purchase Agreement with OpBiz. As a result, Aladdin Gaming classified substantially all of its assets as “assets held for sale” and performed an impairment review in accordance with SFAS 144. An impairment loss of approximately $29.5 million was recognized based on a discounted cash flow analysis and allocated to the individual assets based on their relative fair values for the year ended December 31, 2003.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations
Set forth below is a discussion of the financial condition and results of operations of BH/RE and our subsidiaries for the periods covered in the report. The discussion of operations herein focuses on events and the revenues and expenses during the year ended December 31, 2006 as compared to the year ended December 31, 2005, and the year ended December 31, 2005 as compared to the year ended December 31, 2004, as if there was no change in ownership of the Aladdin.
The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and the financial statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with U.S generally accepted accounting principles. Certain policies, including the determination of bad debt reserves, the estimated useful lives assigned to assets, asset impairment, insurance reserves and the calculation of liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their 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 from other outside sources. There can be no assurance that actual results will not differ from our estimates. To provide an understanding of the methodology we apply, our significant accounting policies and basis of presentation are discussed below, as well as where appropriate in the notes to the consolidated financial statements.
Property and Equipment
Property and equipment are stated at cost. Recurring repairs and maintenance costs, including items that are replaced routinely in the casino, hotel and food and beverage departments which do not meet the Company’s capitalization policy of $10,000, are expensed as incurred. The Company has established its capital expense policy to be reflective of its individual ongoing repairs and maintenance programs. Gains or losses on dispositions of property and equipment are included in the determination of income. Property and equipment are generally depreciated over the 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 equipment and other long-lived assets are evaluated for impairment in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” For assets to be disposed of, the asset to be sold is recognized at the lower of carrying value or fair value less costs of disposal. Fair value for assets to be disposed of is estimated based on comparable asset sales, solicited offers or a discounted cash flow model.
Property and equipment are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the estimated future cash flows of the asset, on an undiscounted basis, are compared to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no
26
impairment is indicated. 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.
The property and equipment and other long-lived assets that BH/RE obtained in the acquisition of the Aladdin were appraised by an independent third party. Property and equipment and the related accumulated depreciation amounts, as well as certain intangible assets recorded in the Company’s consolidated balance sheet as of December 31, 2006, are based on the independent third party appraisal.
Derivative Instruments and Hedging Activities
In connection with the repayment of all obligations under the Credit Agreement, the warrants issued by BH/RE to purchase 2.5% of the equity in EquityCo became excercisable. The warrants can either be settled in cash or in other membership interests upon exercise. On March 14, 2007, the Company entered into a letter agreement with the Lenders to compensate the holders of any unexercised warrants upon the expiration of the exercise period (but in any event no later than March 30, 2007) at a cost of $1.61 per warrant. The exercise period expired on March 21, 2007 with no warrant holders electing to exercise. BH/RE accounts for the outstanding warrants in EquityCo as embedded derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133”) and SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133.” (“SFAS No. 138”)
Pursuant to the refinancing of the Securities Purchase Agreement and the terms of the Restructuring Agreement, the Restructuring Parties agreed to amend the warrants issued by MezzCo to purchase 17.5% of the fully diluted equity in MezzCo. The warrants contain a net cash settlement, and therefore are accounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Both SFAS No. 133 and EITF 00-19 require that the warrants be recognized as liabilities, with changes in fair value affecting net income. See “Note 7. Long-Term Debt—Mezzanine Financing.”
The terms of the Loan Agreement required the Company to enter into an interest rate cap agreement, which expires on November 30, 2008, to manage interest rate risk. The Company did not apply cash flow hedge accounting to this instrument. Although this derivative was not afforded cash flow hedge accounting, the Company retained the instrument as protection against the interest rate risk associated with its long-term borrowings. The Company accounts for its derivative activity in accordance with SFAS No. 133 and accordingly, recognizes all derivatives on the balance sheet at fair value with any in change in fair value being recorded in interest income or expense in the accompanying consolidated statements of operations.
Revenues and Promotional Allowances
Casino revenues are recognized as the net win from gaming activities, which is the difference between gaming wins and losses. All other revenues are recognized as the service is provided. Revenues include the retail value of food, beverage, rooms, entertainment, and merchandise provided on a complimentary basis to customers. Such complimentary amounts are then deducted from revenues as promotional allowances on our consolidated statements of operations. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses.
Hotel and Food and Beverage Revenues
Hotel revenue recognition criteria are generally met at the time of occupancy. Food and beverage revenue recognition criteria are generally met at the time of service. Deposits for future hotel occupancy or food and beverage services are recorded as deferred income until revenue recognition criteria are met.
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Cancellation fees for hotel and food and beverage services are recognized upon cancellation by the customer as defined by a written contract entered into with the customer.
Players’ Club Program
Players’ club members earn points based on gaming activity, which can be redeemed for cash. We accrue expense related to this program as the points are earned based on historical redemption percentages.
Allowance for Doubtful Accounts Reserves
Our receivables balances relate primarily to our hotel and casino operations. We reserve an estimated amount for receivables that may not be collected. We estimate the allowance for doubtful accounts by applying standard reserve percentages to aged account balances under a specific dollar amount and specifically analyzing the collectibility of each account with a balance over the specified dollar amount, based on the age of the account, the customers’ financial condition, collection history and any other known information.
Marker play decreased in 2006 commensurate with the decrease in business levels and number of gaming devices on the floor during the renovation. The allowance for doubtful accounts as a percentage of receivables at December 31, 2006 increased when compared to December 31, 2005 primarily due to the aging of accounts. We maintain strict controls over the issuance of markers and aggressively pursue collection from those customers who fail to pay their markers timely. Markers are generally legally enforceable instruments in the United States and at December 31, 2006, all of our casino receivables were owed by customers in the United States.
The following table summarizes our receivable balances (in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Casino | | $ | 9,972 | | $ | 12,173 | |
Hotel | | 8,014 | | 8,470 | |
Other | | 1,487 | | 3,593 | |
| | 19,473 | | 24,236 | |
Allowance for doubtful accounts | | (6,556 | ) | (4,443 | ) |
Receivables, net | | $ | 12,917 | | $ | 19,793 | |
Self-Insurance Accruals
We are self-insured, up to certain limits, for costs associated with employee medical coverage. We accrue for the estimated expense of known claims, as well as estimates for claims incurred but not yet reported.
Income Taxes
The consolidated financial statements include the operations of BH/RE and its majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies and are taxed as partnerships for federal income tax purposes. However, MezzCo has elected to be taxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, will be treated as a divisions of MezzCo for federal income tax purposes, and accordingly, will also be subject to federal income taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz I and TSP Owner, a wholly owned subsidiary of PH Fee Owner will also be subject to federal income taxes.
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MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS 109 requires the recognition of deferred income tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.
Preopening Costs
We account for costs incurred during the preopening and start-up phases of operations in accordance with Statement of Position 98-5, “Reporting on the Costs of Start-up Activities”. Preopening and start-up costs include, but are not limited to, salary related expenses for new employees, travel and entertainment expenses. Preopening costs are expensed as incurred.
Membership Interests
As of December 31, 2006, our membership interests had not been unitized and our members do not presently intend to unitize these membership interests. Accordingly, we have excluded earnings per membership unit data required pursuant to SFAS No. 128, “Earnings Per Share,” because we believe that such disclosures would not be meaningful to the financial statement presentation.
The Company has entered into various employment agreements, as amended, with several executives. The employment agreements have initial terms of two to five years. The employment agreements provide that the executives will receive a base salary with either mandatory increases or annual adjustments and annual bonus payments. In addition, depending on the terms of the employment agreements, these executives are entitled to options to purchase between 0.2% and 3% of the equity of MezzCo. The options were granted with an exercise price equal to or greater than the fair value at the date of grant.
Sheraton Hotel Management Contract
OpBiz and Sheraton have entered into a management contract pursuant to which Sheraton provides hotel management services to the Hotel, assists OpBiz in the management, operation and promotion of the Hotel and permits OpBiz to use the Sheraton brand and trademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of 4% 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 contract has a 20-year term that commenced on the completion of the Aladdin acquisition and is subject to certain termination provisions by either OpBiz or Sheraton. Sheraton is a wholly owned subsidiary of Starwood, which has a 15% equity interest in EquityCo and has the right to appoint two members to the EquityCo board of managers.
Recently Issued Accounting Standards
SFAS No. 123(R)
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and amends SFAS No. 95, “Statement of Cash Flows.” Among other items, SFAS No. 123(R) requires the recognition of compensation expense in an amount equal to the fair value of share-based payments, including employee stock options and restricted stock, granted to employees.
The Company adopted SFAS No. 123(R) on January 1, 2006 using the “modified prospective” method, in which compensation cost is recognized beginning with the effective date (a) based on the
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requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduced net operating cash flows and increased net financing cash flows for the year ended December 31, 2006.
FASB Interpretation No. 48
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes—an interpretation of FASB No. 109”, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact of the adoption of this interpretation on the Company’s results of operations and financial condition.
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on its financial position, cash flows, and results of operations.
SFAS No. 154
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which eliminates the requirement of APB Opinion No. 20, “Accounting Changes,” to include the cumulative effect adjustment resulting from a change in an accounting principle in the income statement in the period of change. SFAS No. 154 requires that a change in an accounting principle or reporting entity be retrospectively applied. Retrospective application requires that the cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. Each period presented is adjusted to reflect the period-specific effects of applying the change. Changes in accounting estimate and corrections of errors continue to be accounted for in the same manner as prior to the issuance of SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made beginning January 1, 2006. The Company’s adoption of the provisions of SFAS No. 154 did not have any effect on its consolidated financial statements.
SAB No. 108
In September 2006, the SEC issued SAB No. 108 which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance-sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. Upon initial adoption, if the effect of the misstatement is determined to be material, SAB No. 108 allows companies to record that effect as a cumulative-effect adjustment to beginning of year retained earnings. SAB No. 108 is effective for the first fiscal year ending after November 15, 2006. The Company adopted the provisions of SAB No. 108 as of
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December 31, 2006. The Company’s adoption of SAB No. 108 as of December 31, 2006 did not have a material impact on its consolidated financial statements.
Results of Operations
The following table highlights the results of operations of the Aladdin. The amounts for the year ended December 31, 2004 include the eight months of operations by Aladdin Gaming and the four months of operations by OpBiz.
| | Year Ended December 31, | |
| | 2006 | | Percent
Change | | 2005 | | Percent
Change | | 2004 | |
| | (In thousands) | |
Net revenues | | $ | 267,112 | | (12.8 | )% | $ | 306,258 | | 6.7 | % | $ | 287,030 | |
Operating expenses: | | | | | | | | | | | |
Casino | | 67,893 | | (9.5 | )% | 75,016 | | 7.8 | % | 69,590 | |
Hotel | | 40,651 | | (9.9 | )% | 45,123 | | 37.8 | % | 32,751 | |
Food and beverage | | 46,145 | | (10.2 | )% | 51,373 | | 14.4 | % | 44,896 | |
Other | | 4,442 | | (56.2 | )% | 10,146 | | (16.2 | )% | 12,110 | |
Selling, general and administrative | | 74,619 | | (6.0 | )% | 79,352 | | 21.9 | % | 65,095 | |
Depreciation and amortization | | 22,509 | | (4.6 | )% | 23,592 | | 201.9 | % | 7,814 | |
Preopening expenses | | — | | — | | — | | (100.0 | )% | 1,684 | |
Impairment of long-lived assets | | — | | — | | — | | (100.0 | )% | 1,732 | |
Loss on disposition of assets | | — | | (100.0 | )% | 1,787 | | 100.0 | % | — | |
Operating income (loss) | | $ | 10,853 | | (45.4 | )% | $ | 19,869 | | (61.3 | )% | $ | 51,358 | |
Net revenues for the year ended December 31, 2006, declined over those of the year ended December 31, 2005. The decline is mainly the result of declines in gaming, entertainment and food and beverage revenues resulting from the renovation. Operating expense declines were commensurate with the revenue declines in each area.
Net revenues for the year ended December 31, 2005, improved over that of the year ended December 31, 2004. We experienced improvement consistent with the Las Vegas Strip market with increases in both gaming and non-gaming revenues. The decrease in operating income was primarily due to increased SG&A expenses including management bonuses and legal and professional fees, which were included as re-organizational costs and not SG&A by Aladdin Gaming in 2004, as well as the increase in depreciation which was not recorded during the first eight months of 2004 while Aladdin Gaming was undergoing bankruptcy proceedings and assets were classified as “held for sale”. Management fees paid to Starwood under the Sheraton Hotel Management Contract and repair and maintenance expense in the hotel division also significantly contributed to the decline in operating income.
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The following table highlights the various sources of our revenues and expenses as compared to the prior years. The amounts for the year ended December 31, 2004 include both the eight months of operations by Aladdin Gaming and the four months of operations by OpBiz.
| | Year Ended December 31, | |
| | 2006 | | Percent
Change | | 2005 | | Percent
Change | | 2004 | |
| | (In thousands) | |
Casino revenues | | $ | 104,841 | | | (19.4 | )% | | $ | 130,083 | | | 9.5 | % | | $ | 118,842 | |
Casino expenses | | 67,893 | | | (9.5 | )% | | 75,016 | | | 7.8 | % | | 69,590 | |
Margin | | 35.2 | % | | | | | 42.3 | % | | | | | 41.4 | % |
Hotel revenues | | $ | 111,040 | | | 0.5 | % | | $ | 110,443 | | | 4.1 | % | | $ | 106,112 | |
Hotel expenses | | 40,651 | | | (9.9 | )% | | 45,123 | | | 37.8 | % | | 32,751 | |
Margin | | 63.4 | % | | | | | 59.1 | % | | | | | 69.1 | % |
Food and beverage revenues | | $ | 59,716 | | | (19.9 | )% | | $ | 74,594 | | | 2.9 | % | | $ | 72,473 | |
Food and beverage expenses | | 46,145 | | | (10.2 | )% | | 51,373 | | | 14.4 | % | | 44,896 | |
Margin | | 22.7 | % | | | | | 31.1 | % | | | | | 38.1 | % |
Other revenues | | $ | 12,733 | | | (27.3 | )% | | $ | 17,511 | | | 4.4 | % | | $ | 16,775 | |
Other expenses | | 4,442 | | | (56.2 | )% | | 10,146 | | | (16.2 | )% | | 12,110 | |
Selling, general and administrative expenses | | $ | 74,619 | | | (6.0 | )% | | $ | 79,352 | | | 21.9 | % | | $ | 65,095 | |
Percent of net revenues | | 27.9 | % | | | | | 25.9 | % | | | | | 22.7 | % |
Casino
Casino revenue is derived primarily from patrons wagering on slot machines, table games and other gaming activities. Table games generally include Blackjack or Twenty One, Craps, Baccarat and Roulette. Other gaming activities include the Race and Sports Books, Poker and Keno. Casino revenue is defined as the win from gaming activities, computed as the difference between gaming wins and losses.
Casino revenues vary from time-to-time due to general economic conditions, competition, popularity of entertainment offerings, table game hold, slot machine hold and occupancy percentages in the hotel. Casino revenues also vary depending upon the amount of gaming activity, as well as variations in the odds for different games of chance. Casino revenue is recognized at the end of each gaming day.
2006 compared with 2005
Casino revenues decreased 19.4% to $104.8 million for the year ended December 31, 2006 as compared to $130.1 million for the year ended December 31, 2005. Table games revenue for the year ended December 31, 2006, decreased by approximately $13.8 million or 26.4% as compared to the year ended December 31, 2005. The number of operational table units decreased 22% in connection with the renovation project with a resulting decrease in table drop of 25%. Overall win percentage of 17.8% was down slightly compared to 18.1% for the year ended December 31, 2005. Slot revenue for the year ended December 31, 2006 decreased by approximately $12.5 million or 14.2% as compared to the year ended December 31, 2005. The number of slot units on the floor decreased 16.9% with a resulting decrease in slot handle of 18.6%. Combined revenues from other gaming activities decreased by $1.8 million or 33.2% for the year ended December 31, 2006 as compared to the year ended December 31, 2005 primarily due to business level declines related to the renovation. The race and sports book and poker were both temporarily relocated due to the renovation.
Casino expenses decreased 9.5% to $67.9 million for the year ended December 31, 2006 as compared to $75.0 million for the year ended December 31, 2005. The casino profit margin decreased 7.1 percentage
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points over the same twelve-month periods. The revenue reductions in the Casino are the direct result of the renovation and are expected to be short term. Although variable expenses have been decreased in reaction to the revenue declines, certain fixed expenses could not be eliminated resulting in the lower margins.
2005 compared with 2004
Casino revenues increased 9.5% to $130.1 million for the year ended December 31, 2005 as compared to $118.8 million for the year ended December 31, 2004. Table games revenue for the year ended December 31, 2005, increased by approximately $8.1 million or 18.4% as compared to the year ended December 31, 2004. The increase in table games revenue was due to an increase in table drop of $23.3 million, as well as an increase in win percentage to 18.1% in 2005 from 16.6% in 2004. Slot revenue for the year ended December 31, 2005, decreased by approximately $1.5 million or 1.7% as compared to the year ended December 31, 2004. The decrease in slot revenue was the result of a decrease in slot handle of approximately $20.2 million, which resulted from the elimination of several marketing initiatives that were in place in 2004, including promotional play offers that were included in slot handle. The elimination of promotional and other expenses associated with these initiatives assisted in the improved casino operating margin. Combined revenues from other gaming activities increased by $3.2 million or 156.1% for the year ended December 31, 2005 as compared to the year ended December 31, 2004 primarily due to the addition of poker in October 2004 and Keno in April 2005, as well as improved results in the race and sports book.
Casino expenses increased 7.8% to $75.0 million for the year ended December 31, 2005 as compared to $69.6 million for the year ended December 31, 2004. The casino profit margin increased 0.9 percentage points over the same twelve-month periods. The increase in casino expenses was mainly due to the addition of certain promotional expenses related to marketing initiatives that have been put in place to maintain casino revenue levels throughout the renovation period, as well as increases in payroll and the casino allowance for doubtful accounts over the prior year.
Hotel
Hotel revenue is derived from rooms and suites rented to guests. “Average daily rate” is an industry specific term used to define the average amount of revenue per occupied room per day. “Occupancy percentage” defines the total percentage of rooms occupied and is computed by dividing 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.
2006 compared with 2005
Hotel revenues increased 0.5% to $111.0 million for the year ended December 31, 2006 as compared to $110.4 million for the year ended December 31, 2005. Hotel occupancy percentages for the year ended December 31, 2006, remained consistent with the year ended December 31, 2005 at 97%. Average daily room rates remained relatively consistent when comparing the two periods at $122 for the twelve months ended December 31, 2006 compared to $121 for the twelve month period ended December 31, 2005. Hotel occupancy and room rates exceeded our expectations during this renovation period.
Hotel expenses decreased 9.9% to $40.7 million for the year ended December 31, 2006 as compared to $45.1 million for the year ended December 31, 2005. The Hotel profit margin increased 4.3 percentage points over the same twelve-month period. During the year ended December 31, 2005, we incurred certain repair and maintenance expenses related to upgrades and amenities in the Hotel rooms. We did not incur similar expenses in 2006 which accounted for most of the profit margin increase year over year.
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2005 compared with 2004
Hotel revenues increased 4.1% to $110.4 million for the year ended December 31, 2005 as compared to $106.1 million for the year ended December 31, 2004. Hotel occupancy percentages for the year ended December 31, 2005, remained consistent with the year ended December 31, 2004 at 97%. Average daily room rates increased to $121 as compared to $117 for the same twelve-month periods, resulting in increased Hotel revenues. The increase in Hotel revenues and average daily room rates are primarily due to an improvement in general economic conditions during 2005, a higher demand for rooms in Las Vegas in general and the improved channels of marketing through Starwood.
Hotel expenses increased 37.8% to $45.1 million for the year ended December 31, 2005 as compared to $32.8 million for the year ended December 31, 2004. The Hotel profit margin decreased 10.0 percentage points over the same twelve-month period. The decrease in Hotel profit margin was primarily due to repairs and maintenance expenses related to upgrades and amenities in the Hotel rooms, management fees paid to Starwood under the management contract beginning in September 2004 and an increase in payroll and related benefits resulting from the collective bargaining agreement with the culinary union which became effective October 1, 2005. The payroll and related benefit increases incurred as a result of the union agreement and the management fees under the Starwood management contract will be on-going. We do not expect the magnitude of the on-going repair and maintenance expense to be as large as the current year, which accounted for 13% of the operating expense increase.
Food and Beverage
Food and beverage revenues are derived from food and beverage sales in the restaurants, bars, room service, banquets and entertainment outlets. Food and beverage revenue is recognized at the time the food and/or beverage are provided to the guest.
2006 compared with 2005
Combined food and beverage revenues decreased 19.9% to $59.7 million for the year ended December 31, 2006 as compared to $74.6 million for the year ended December 31, 2005. Food revenues decreased $7.8 million or 13.1% over the same twelve-month period, while beverage revenues declined $7.1 million or 34.8% over the same twelve-month period. The decreases in food and beverage revenues were driven by the outlet closures required for the renovation. The high end restaurants and 24-hour café have been permanently closed and will be reopened in 2007 as outlets leased to third parties. Casino bars were temporarily closed and relocated throughout the course of the renovation in 2006.
Combined food and beverage expenses decreased 10.2% to $46.1 million for the year ended December 31, 2006 as compared to $51.4 million for the year ended December 31, 2005. Food and beverage profit margin decreased 8.4 percentage points over the same twelve-month period. The increase in food and beverage expenses and the resulting decrease in food and beverage operating margins were primarily due to our inability to eliminate certain fixed expenses while the outlets were closed as well as increases in payroll and related benefits resulting from the collective bargaining agreement with the culinary union which became effective October 1, 2005.
2005 compared with 2004
Combined food and beverage revenues increased 2.9% to $74.6 million for the year ended December 31, 2005 as compared to $72.5 million for the year ended December 31, 2004. Food revenues increased $2.2 million or 3.9% over the same twelve-month period, while beverage revenues remained consistent with the prior year. The increase in food revenues was primarily due to the addition of the new menus in the café and high-end restaurants in 2005.
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Combined food and beverage expenses increased 14.4% to $51.4 million for the year ended December 31, 2005 as compared to $44.9 million for the year ended December 31, 2004. Food and beverage profit margin decreased 7.0 percentage points over the same twelve-month period. The increase in food and beverage expenses and the resulting decrease in food and beverage margins were primarily due to management fees paid to Starwood under the management contract beginning in September 2004 and an increase in payroll and related benefits resulting from the collective bargaining agreement with the culinary union which became effective October 1, 2005. As the management fees under the Starwood agreement and the payroll and benefit increases related to the union are permanent additions to the expense structure, we expect the decline in profit margin for owned food and beverage outlets to be on-going.
Other
Other revenue includes entertainment sales, retail sales, telephone and other miscellaneous income and is recognized at the time the goods or services are provided to the guest.
2006 compared with 2005
Other revenues decreased 27.3% to $12.7 million for the year ended December 31, 2006 as compared to $17.5 million for the year ended December 31, 2005. The decrease in other revenues is primarily the result of elimination of entertainment revenues in the TPA which is now leased to a third party operator.
Other expenses decreased 56.2% to $4.4 million for the year ended December 31, 2006 as compared to $10.1 million for the year ended December 31, 2005. The decrease in other expenses was directly related to the closing of the TPA and elimination of entertainment expense.
2005 compared with 2004
Other revenues increased 4.4% to $17.5 million for the year ended December 31, 2005 as compared to $16.8 million for the year ended December 31, 2004. The increase in other revenues is primarily due to the restructuring of shared telephone revenue from a 15% revenue share to the Aladdin to 100% beginning in January 2005 and a 24.7% increase in rental income. The increase in other revenue was partially offset by a decrease in entertainment revenue resulting from the closing of the Steve Wyrick showroom in April 2005 for remodeling under the Clear Channel agreement.
Other expenses decreased 16.2% to $10.1 million for the year ended December 31, 2005 as compared to $12.1 million for the year ended December 31, 2004. The decrease in other expenses was directly related to the closing of the Showroom for remodel in April 2005.
Selling, General and Administrative (“SG&A”)
SG&A expenses decreased 6.0% to $74.6 million for the year ended December 31, 2006 as compared to $79.4 million for the year ended December 31, 2005. SG&A expenses as a percentage of net revenues increased 2.0 percentage points in comparing the same twelve-month periods. The decrease in SG&A expenses was primarily due to reductions in repair and maintenance expenses that were incurred in 2005 but were not incurred in 2006.
SG&A expenses increased 21.9% to $79.4 million for the year ended December 31, 2005 as compared to $65.1 million for the year ended December 31, 2004. SG&A expenses as a percentage of net revenues increased 3.2 percentage points in comparing the same twelve-month periods. The increase in SG&A expenses was primarily due to repair and maintenance expenses incurred in the fourth quarter and included painting the building and additional administrative office space. The addition of management bonuses and legal and professional fees, which were included in reorganization costs reported below the
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operating income line and not in SG&A by Aladdin Gaming in 2004, also contributed to the increase in SG&A expenses when compared to prior year.
Depreciation and Amortization
Depreciation expense for the year ended December 31, 2006 was approximately $22.5 million compared to $23.6 million for year ended December 31, 2005. There were no significant additions to depreciable assets during the year as the most of the additions related to the renovation will be placed in service during 2007 as the areas are completed.
Aladdin Gaming did not record depreciation expense during 2004, as the assets were classified as “held for sale”. As a result, depreciation expense for the year ended December 31, 2005, was significantly greater than the same period in the prior year. Depreciation and amortization expense was approximately $23.6 million for the year ended December 31, 2005 as compared to $7.8 million for the year ended December 31, 2004.
Net Interest Expense
Net interest expense increased to $61.7 million for the year ended December 31, 2006 as compared to $55.0 million for the year ended December 31, 2005. For the year ended December 31, 2005, the interest expense under the Credit Agreement was calculated using the minimum spread of LIBOR plus 125 basis points which increased to LIBOR plus 325 basis points for the year ended December 31, 2006. Additionally, the paid-in-kind interest on the Mezzanine Financing increased as the outstanding principal balance increased. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Certain Indebtedness” below.
Net interest expense increased 188.0% to $55.0 million for the year ended December 31, 2005 as compared to $19.1 million for the year ended December 31, 2004. The increase in net interest expense is directly related to the addition of the Credit Agreement we entered into upon the completion of the acquisition of the Aladdin on September 1, 2004.
Loss on Early Extinguishment of Debt
In connection with the repayment of all amounts due under the Credit Agreement and the Notes issued under the Securities Purchase Agreement with the proceeds of the Loan Agreement effective November 30, 2006, the Company recorded a loss on early extinguishment of debt of $60.2 million which is comprised of the unamortized balance of the original issue discount recorded in connection with the Credit Agreement of $20.6 million, an exit fee payable to the lenders under the Credit Agreement of $3.7 million, a call premium on the Notes of $26.8 million and the write-off of previously deferred debt issuance costs and warrant amortization of $9.1 million.
Liquidity and Capital Resources
During the year ended December 31, 2006, the Aladdin utilized cash flows from operating activities of approximately $22.9 million and had a balance of $25.6 million in cash and cash equivalents as of December 31, 2006. We also had current restricted cash and cash equivalents of approximately $18.3 million and long-term restricted cash and cash equivalents of approximately $128.0 million at December 31, 2006. The current restricted cash and cash equivalents are primarily reserve accounts that have been established under the Loan Agreement to guarantee payment of property taxes, insurance and furniture, fixtures and equipment replacement. Current restricted cash also includes the balance in the cash management account. Under the terms of the Loan Agreement, all cash receipts are deposited into a cash management account under Lender control which is used to fund reserves and operating expenses. The long-term cash and cash equivalents include funds designated for the remaining costs associated with
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the renovation of the Aladdin to the PH Resort and the interest reserve account balance which will be released once certain debt service coverage rations are achieved. See “Description of Certain Indebtedness” below.
Our primary cash requirements for 2007 are expected to include (i) up to approximately $117.0 million in capital expenditures related to the renovation project, (ii) approximately $13.0 million for maintenance capital expenditures or replacement furniture, fixtures and equipment and (iii) up to approximately $67.5 million in interest payments on our debt.
We believe that cash generated from operations, cash held in reserve by the lenders under the Loan Agreement and available future financing under the Loan Agreement will be adequate to meet the anticipated working capital, capital expenditure, renovation and debt service obligations of OpBiz.
There can be no assurance that we have accurately estimated our liquidity needs, or that we will not experience unforeseen events that may materially increase our need for liquidity to fund our operations or capital expenditure programs or decrease the amount of cash generated from our operations. We expect to experience a reduction in cash generated by our operations during our planned renovations to the Aladdin and have negotiated the terms of the Loan Agreement to address those anticipated reductions. We believe that future funding under the Loan Agreement will adequately cover interest shortfalls and any operating shortfalls experienced during the renovation period but we can not assure you that we have accurately estimated those needs.
Off Balance Sheet Arrangements
As of December 31, 2006, we did not have any off balance sheet arrangements. We have not entered into any transactions with special purposes entities, nor have we engaged in any derivative transactions other than the warrants attached to the Senior Notes and Mezzanine Financing and the interest rate cap agreement described above (see “Critical Accounting Policies and Estimates—Derivative Instruments and Hedging Activities”).
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Commitments and Contractual Obligations
The following table summarizes our scheduled commitments and contractual obligations as of December 31, 2006:
| | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | |
| | (In thousands) | |
Long-term debt(a) | | $ | 1,592 | | $ | 761,455 | | $ | 2,001 | | $ | 2,243 | | $ | 2,515 | | $ | 20,771 | |
Sheraton hotel management contract(b) | | 10,906 | | 12,792 | | 13,696 | | 13,926 | | 14,951 | | 278,072 | |
Planet Hollywood licensing agreement(c) | | 2,585 | | 4,034 | | 4,281 | | 4,345 | | 4,666 | | 109,252 | |
Energy service consumption charges | | 1,140 | | 1,140 | | 1,140 | | 1,140 | | 1,140 | | 9,120 | |
Operating leases(d) | | 2,103 | | 1,867 | | 193 | | 147 | | 4 | | — | |
Employment agreements | | 4,435 | | 2,854 | | 428 | | 62 | | — | | — | |
Common Parking Area Use agreement(e) | | 5,120 | | 5,120 | | 5,120 | | 5,376 | | 5,376 | | 720,803 | |
Total | | $ | 27,881 | | $ | 789,262 | | $ | 26,859 | | $ | 27,239 | | $ | 28,652 | | $ | 1,138,018 | |
(a) See Note 7 to the Consolidated Financial Statements in this Annual Report on Form 10-K.
(b) We pay management fees to Sheraton under the hotel management contract. These management fees are generally based on various percentages of our non-gaming revenues. See Note 9 to the Consolidated Financial Statements in this Annual Report on Form 10-K. We also pay Sheraton a centralized service fee, a portion of which is fixed, and other de minimis charges which are included in the table above. Amounts are based on internal projections made by management.
(c) Fees under the Planet Hollywood licensing agreement generally commence when we begin operating as the PH Resort and are based on a percentage of our non-gaming revenues. See “Item 1. Business—Material Agreements—Planet Hollywood Licensing Agreement.” Amounts are based on internal projections made by management.
(d) Consists of leases for certain office and casino equipment.
(e) Includes amounts paid for parking charges, as well as common area maintenance charges, which are estimates made by management based on current year expenses. The base fee is subject to a maximum 5% increase every five years.
Description of Certain Indebtedness
Loan Agreement
On November 30, 2006, OpBiz and PH Fee Owner entered into the Loan Agreement with Column Financial, Inc. for a Loan in the principal amount of up to $820 million. The Loan Agreement provides for an initial disbursement in the amount of $759.7 million and a Future Funding in the amount of up to $60.3 million. The Loan is secured by a deed of trust on the PH Resort, a deed of trust on the Timeshare Parcel, and a pledge, subject to approval by the Nevada gaming authorities by MezzCo of its membership interest in OpBiz (as described below).
The term of the Loan is twenty four months with three one year extension options subject to payment of a fee and the Borrower’s compliance with the requirements for of an extension outlined in the Loan Agreement. Interest on the Loan is payable monthly and accrues at a rate of LIBOR plus 3.25% with a .25% ticking fee on available but un-advanced Future Funding. The Loan Agreement does not require amortization during the initial term or, provided certain EBITDA thresholds are met, during the extension periods. The Loan Agreement requires that the Borrower establish and maintain certain reserves including a reserve for completion of the renovation project as currently budgeted, a reserve for projected interest shortfalls, a reserve for payment of property taxes and insurance and a reserve for on-going furniture,
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fixture and equipment purchases or property improvements. The Loan Agreement restricts the Borrower’s ability to spend excess cash flow until certain debt service coverage ratios are met.
In connection with the Loan Agreement, we have, using the proceeds from the Loan, repaid in full all amounts outstanding under the Credit Agreement, dated August 31, 2004, among OpBiz, the lenders named therein (the “Lenders”) and The Bank of New York, Asset Solution Division (the “Senior Agent”). Pursuant to the terms of the Credit Agreement, upon repayment of all amounts due, the warrant to purchase 2.5% of the equity in EquityCo issued to the Lenders at the closing of the Credit Agreement became exercisable. The number of outstanding warrants has been imputed as one million using the equity value on the date the warrants were issued. On March 14, 2007, the Company entered into a letter agreement with the Lenders to compensate the holders of any unexercised warrants upon the expiration of the exercise period but in any event, no later than March 30, 2007 at a cost of $1.61 per warrant. The exercise period expired on March 21, 2007 with no warrant holders electing to exercise. Accordingly, the Company has recorded the value of the warrants as $1.6 million in the accompanying consolidated balance sheets.
In addition, in order to permit the Lender to foreclose on the Hotel and Casino separately and to 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 the Hotel 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 agreed to continue to operate the Hotel in the manner it had been and to pay monthly rent of approximately $916,000. OpBiz and PH Fee Owner also entered into a lease pursuant to which OpBiz agreed to continue to operate the Casino in the manner 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 Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (as described below). In exchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”) executing the Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 per year. The fee is accrued and only payable once OpBiz hits certain debt service coverage ratios defined in the Loan Agreement.
In connection with the Loan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the “Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lender against losses related to certain prohibited actions of the Borrower and guarantied full repayment of the Loan in the case of a voluntary or collusive bankruptcy of the Borrower, a transfer of the Property or interests in the Borrower in violation of the Loan Agreement and if the Borrower fails to maintain its status as a bankruptcy remote entity and as a result sees its assets consolidated with those of an affiliate in a bankruptcy. The liability of the Guarantors is capped at $15,000,000 per entity and $30,000,000 in the aggregate, however this cap does not apply to (i) liability arising from events, acts or circumstances actually committed or brought about by the willful acts of any of the Guarantors and (ii) the extent of any benefit received by any of the Guarantors as a result of the acts giving rise to the liability under the Guaranty. Each of Douglas Teitelbaum and Robert Earl executed and delivered guaranties substantially the same as that delivered by the Guarantors, however the liability of each of them was limited to (i) liability arising from events, acts or circumstances actually committed or brought about by willful acts by him and (ii) the extent of any benefit received by him as a result of 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 severally guarantied the completion of the renovation of the Property and payment of all costs associated therewith. The liability under the Completion Guaranty is capped at the greater of (a) $35,000,000 and (b) only in the case that
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cost overruns for the renovation exceed $15,000,000, 24% of the then unpaid costs of the completion of the renovation.
In addition, in connection with the Loan Agreement, we effected a refinancing of the Securities Purchase Agreement, dated August 9, 2004, among MezzCo and the Investors, pursuant to which MezzCo issued to the Investors (i) 16% senior subordinated secured Notes in the original aggregate principal amount of $87 million, and (ii) Warrants for the purchase (subject to certain adjustments as provided for therein) of membership interests of MezzCo, representing 17.5% of its fully diluted equity. Loan proceeds were used to redeem in full the Notes.
In connection with the refinancing of the Securities Purchase Agreement and redemption of the Notes, the Restructuring Parties entered into the Restructuring Agreement, pursuant to which the Restructuring Parties terminated in full the Securities Purchase Agreement, the Subordination Agreement, dated as of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and the Investors, the Pledge Agreement, dated August 9, 2006, among MezzCo and the Collateral Agent, and the Guaranty, dated August 9, 2004, made by OpBiz to the Investors, and amended certain other existing agreements, as described below.
In accordance with the terms of the Restructuring Agreement, the Investors and EquityCo, MezzCo and OpBiz entered into a Release, Consent and Waiver Agreement, pursuant to which the Investors (i) released OpBiz from its guaranteed obligations, under that certain Guaranty Agreement, dated as of August 9, 2004 and executed by OpBiz in favor of the Investors and the collateral agent; (ii) released MezzCo from its pledge of the collateral, under that certain Pledge Agreement, dated as of August 9, 2004, and executed by MezzCo in favor of the collateral Agent, the Investors released their security interest, as defined in that certain Security Agreement, as amended by that certain Amendment to Security Agreement, in each case dated as of August 9, 2004 and executed by the Company in favor of the collateral agent; (iii) released and terminated the Deed of Trust, dated as of August 9, 2004 and executed by MezzCo in favor of the Trustee (as defined therein) for the benefit of the collateral agent; (iv) released and terminated the Investors’ security interest in the securities account, provided for that certain Securities Account Control Agreement, dated as of August 9, 2004 and executed by the Company, the collateral agent and Wells Fargo Bank, N.A.
Additionally, MezzCo, EquityCo, and the Investors entered into an Amended and Restated Investor Rights Agreement, dated November 30, 2006 (the “A&R Investor Rights Agreement”), to amend and restate the original Investor Rights Agreements among the parties thereto, dated August 9, 2004.
Pursuant to the Restructuring Agreement, the Restructuring Parties agreed to amend the Warrants by issuing Amended and Restated Warrants to Purchase Membership Interests of MezzCo (the “A&R Warrants”) to the Investors upon approval by the Nevada gaming authorities. The A&R Warrants will be exercisable at any time, subject to the approval of the Nevada gaming authorities, at a purchase price of $0.01 per unit. Subject to the approval of the Nevada gaming authorities, the warrants may be exercised to purchase either voting or non-voting membership interests of MezzCo or a combination thereof through the expiration date of December 9, 2012. In addition to customary anti-dilution protections, the number of units representing MezzCo membership interests issuable upon exercise of the A&R Warrants may be increased from time to time upon the occurrence of certain events as described in the A&R Warrants. Holders of the A&R Warrants and any securities issued upon exercise 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&R Warrants. These rights expire upon completion of a public offering by MezzCo or OpBiz.
In connection with the Restructuring Agreement, EquityCo entered into a Guaranty Agreement, dated November 30, 2006 (the “Guaranty Agreement”), in favor of the Investors and the Collateral Agent, pursuant to which EquityCo has guaranteed the obligation of MezzCo to pay the redemption price under
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the A&R Warrants prior to expiration and any indebtedness arising under the Put Note (as defined in the A&R Warrants).
EquityCo and the Collateral Agent also entered into a Pledge Agreement, dated November 30, 2006 (the “Pledge Agreement”), pursuant to which EquityCo has, subject to approval of the Nevada gaming authorities, pledged and granted a first priority security interest to the Collateral Agent for the ratable benefit of the Investors in the membership interests of EquityCo in MezzCo. The Pledge Agreement, once approved, will secure 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 to which we agreed to indemnify the Investors for any losses caused by (i) lack of gaming approvals for the issuance of the A&R Warrants, (ii) lack of gaming approval for the granting of a lien by EquityCo in the equity interests in MezzCo, as described in the Pledge Agreement, and (iii) the inability of the Investors to exercise the Warrants until July 1, 2007.
The foregoing descriptions of the various agreements described above do not purport to be complete and are qualified in their entirety by reference to the agreements, which are filed herewith as Exhibits, and are incorporated herein by reference.
Energy Services Agreement
Northwind, a third party, owns and operates a central utility plant on land leased from us. The plant supplies hot and cold water and emergency power to the Aladdin under a contract between Aladdin Gaming and Northwind. We have assumed the energy service agreement, which expires in 2018. Under the agreement, we are required to pay Northwind a monthly consumption charge, a monthly operational charge, a monthly debt service payment and a monthly return on equity payment. Payments under the Northwind agreement total approximately $0.4 million per month.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our long-term debt. We pay interest on the amount outstanding under the Loan Agreement 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 to the variable rate debt outstanding at December 31, 2006 would increase the annual interest cost by approximately $8.2 million.
The following table provides information about our long-term debt at December 31, 2006 (see also “Description of Certain Indebtedness” above):
| | Maturity
Date | | Face
Amount | | Carrying
Value | | Estimated
Fair Value | |
| | (In thousands) | |
Loan Agreement | | November 2008 | | $ | 759,670 | | $ | 759,670 | | $ | 759,670 | |
Energy Services Agreement | | March 2018 | | 30,907 | | 30,907 | | 30,907 | |
Total long-term debt | | | | $ | 790,577 | | $ | 790,577 | | $ | 790,577 | |
We have entered into an interest rate cap agreement to manage interest rate risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Board of Managers of BH/RE, L.L.C.
We have audited the accompanying consolidated balance sheets of BH/RE, L.L.C. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, members’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. Our audit also included the financial statement schedule in the Index of Item 15 (a)(2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BH/RE, L.L.C. and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.
| | /s/ ERNST & YOUNG LLP |
Las Vegas, Nevada | | |
March 29, 2007 | | |
Report of Independent Registered Public Accounting Firm
To Reorganized Aladdin Gaming, LLC
We have audited the accompanying consolidated statements of operations and cash flows of Aladdin Gaming, LLC (a Nevada limited liability company) and subsidiaries (the “Predecessor”) for the eight months ended August 31, 2004. These financial statements are the responsibility of the Predecessor’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Aladdin Gaming, LLC and subsidiaries for the eight months ended August 31, 2004, in conformity with U.S. generally accepted accounting principles.
| | /s/ ERNST & YOUNG LLP |
Las Vegas, Nevada | | |
January 31, 2005 | | |
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BH/RE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
| | December 31, | | December 31, | |
| | 2006 | | 2005 | |
ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | | $ | 25,640 | | | | $ | 41,419 | | |
Receivables, net | | | 12,917 | | | | 19,793 | | |
Inventories | | | 1,656 | | | | 2,165 | | |
Prepaid expenses | | | 8,111 | | | | 4,913 | | |
Deposits and other current assets | | | 1,564 | | | | 3,058 | | |
Restricted cash and cash equivalents | | | 18,341 | | | | — | | |
Total current assets | | | 68,229 | | | | 71,348 | | |
Property and equipment, net | | | 524,054 | | | | 485,746 | | |
Restricted cash and cash equivalents | | | 128,049 | | | | 87,787 | | |
Other assets, net | | | 16,862 | | | | 9,614 | | |
Total assets | | | $ | 737,194 | | | | $ | 654,495 | | |
LIABILITIES AND MEMBERS’ DEFICIT | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Current portion of long-term debt | | | $ | 1,592 | | | | $ | 2,671 | | |
Accounts payable | | | 15,349 | | | | 3,359 | | |
Accrued payroll and related | | | 12,573 | | | | 13,373 | | |
Accrued interest payable | | | 6,059 | | | | 6,896 | | |
Accrued taxes | | | 2,526 | | | | 2,994 | | |
Accrued expenses | | | 6,270 | | | | 6,183 | | |
Deposits | | | 5,752 | | | | 4,563 | | |
Other current liabilities | | | 7,519 | | | | 6,159 | | |
Due to affiliates | | | 1,425 | | | | 1,591 | | |
Total current liabilities | | | 59,065 | | | | 47,789 | | |
Long-term debt, less current portion | | | 788,985 | | | | 604,877 | | |
Other long-term liabilities | | | 4,117 | | | | 4,229 | | |
Total liabilities | | | 852,167 | | | | 656,895 | | |
Commitments and contingencies (Note 11) | | | | | | | | | |
Minority interest | | | (3,034 | ) | | | 13,863 | | |
Members’ deficit: | | | | | | | | | |
Member’s equity | | | 21,500 | | | | 21,500 | | |
Accumulated deficit | | | (133,439 | ) | | | (37,763 | ) | |
Total members’ deficit | | | (111,939 | ) | | | (16,263 | ) | |
Total liabilities and members’ deficit | | | $ | 737,194 | | | | $ | 654,495 | | |
The accompanying notes are an integral part of these consolidated financial statements.
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BH/RE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
| | | | | | | | Predecessor
Information | |
| | Years Ended | | Eight Months
Ended | |
| | 2006 | | 2005 | | 2004 | | August 31, 2004 | |
Operating revenues: | | | | | | | | | | | |
Casino | | $ | 104,841 | | $ | 130,083 | | $ | 41,068 | | | $ | 77,774 | | |
Hotel | | 111,040 | | 110,443 | | 34,407 | | | 71,705 | | |
Food and beverage | | 59,716 | | 74,594 | | 23,242 | | | 49,231 | | |
Other | | 12,733 | | 17,511 | | 5,813 | | | 10,962 | | |
Gross revenues | | 288,330 | | 332,631 | | 104,530 | | | 209,672 | | |
Promotional allowances | | (21,218 | ) | (26,373 | ) | (8,389 | ) | | (18,783 | ) | |
Net revenues | | 267,112 | | 306,258 | | 96,141 | | | 190,889 | | |
Operating costs and expenses: | | | | | | | | | | | |
Casino | | 67,893 | | 75,016 | | 22,333 | | | 47,257 | | |
Hotel | | 40,651 | | 45,123 | | 11,741 | | | 21,010 | | |
Food and beverage | | 46,145 | | 51,373 | | 16,433 | | | 28,463 | | |
Other | | 4,442 | | 10,146 | | 2,982 | | | 9,128 | | |
Selling, general and administrative | | 74,619 | | 79,352 | | 24,162 | | | 40,933 | | |
Depreciation and amortization | | 22,509 | | 23,592 | | 7,814 | | | — | | |
Preopening expenses | | — | | — | | 1,684 | | | — | | |
Impairment of long-lived assets | | — | | — | | — | | | 1,732 | | |
Loss on disposition of assets | | | | 1,787 | | — | | | — | | |
| | 256,259 | | 286,389 | | 87,149 | | | 148,523 | | |
Operating income | | 10,853 | | 19,869 | | 8,992 | | | 42,366 | | |
Other income (expense): | | | | | | | | | | | |
Interest expense, net | | (61,702 | ) | (54,964 | ) | (16,525 | ) | | (2,541 | ) | |
Loss on early extinguishment of debt | | (60,225 | ) | | | | | | | | |
Minority interest | | 16,897 | | 5,269 | | 877 | | | — | | |
Loss on warrant valuation | | (1,499 | ) | (35 | ) | — | | | — | | |
Reorganization costs | | — | | — | | — | | | (6,647 | ) | |
| | (106,529 | ) | (49,730 | ) | (15,648 | ) | | (9,188 | ) | |
Pre-tax (loss) income | | (95,676 | ) | (29,861 | ) | (6,656 | ) | | 33,178 | | |
Income tax provision | | — | | (15 | ) | — | | | — | | |
Net (loss) income | | $ | (95,676 | ) | $ | (29,876 | ) | $ | (6,656 | ) | | $ | 33,178 | | |
The accompanying notes are an integral part of these consolidated financial statements.
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BH/RE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY (DEFICIT)
(amounts in thousands)
| | Equity
Contributions | | Accumulated
Deficit | | Total
Members’
Equity
(Deficit) | |
Balances, December 31, 2003 | | | $ | — | | | | $ | (1,231 | ) | | $ | (1,231 | ) |
Member contributions | | | 21,500 | | | | — | | | 21,500 | |
Net loss | | | — | | | | (6,656 | ) | | (6,656 | ) |
Balances, December 31, 2004 | | | 21,500 | | | | (7,887 | ) | | 13,613 | |
Net loss | | | — | | | | (29,876 | ) | | (29,876 | ) |
Balances, December 31, 2005 | | | 21,500 | | | | (37,763 | ) | | (16,263 | ) |
Net loss | | | — | | | | (95,676 | ) | | (95,676 | ) |
Balances, December 31, 2006 | | | $ | 21,500 | | | | $ | (133,439 | ) | | $ | (111,939 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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BH/RE, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| | | | | | | | Predecessor Information | |
| | Year Ended December 31, | | Eight Months Ended | |
| | 2006 | | 2005 | | 2004 | | August 31, 2004 | |
Cash flows from operating activities: | | | | | | | | | | | |
Net (loss) income | | $ | (95,676 | ) | $ | (29,876 | ) | $ | (6,656 | ) | | $ | 33,178 | | |
Adjustments to reconcile net (loss) income to net cash used in operating activities: | | | | | | | | | | | |
Depreciation and amortization | | 22,509 | | 23,592 | | 7,814 | | | — | | |
Amortization of debt discount and issuance costs | | 7,040 | | 7,038 | | 503 | | | — | | |
Loss on early extinguishment of debt | | 60,225 | | — | | — | | | — | | |
Minority interest | | (16,897 | ) | (5,269 | ) | 17,623 | | | — | | |
Change in value of warrants | | 1,987 | | 159 | | — | | | — | | |
Impairment of long-lived assets | | — | | — | | — | | | 1,732 | | |
Loss on disposition of assets | | — | | 1,787 | | — | | | — | | |
Reorganization items: | | | | | | | | | | | |
Professional fees | | — | | — | | — | | | 2,433 | | |
Management retention expense | | — | | — | | — | | | 2,139 | | |
Interest earned on accumulated cash during Chapter 11 proceedings | | — | | — | | — | | | (111 | ) | |
Changes in assets and liabilities: | | | | | | | | | | | |
Restricted cash and cash equivalents | | (18,341 | ) | — | | — | | | — | | |
Receivables, net | | 6,876 | | (7,167 | ) | (12,626 | ) | | 2,216 | | |
Inventories and prepaid expenses | | (2,689 | ) | 664 | | (7,742 | ) | | 2,686 | | |
Deposits and other current assets | | 1,484 | | (493 | ) | (6,928 | ) | | 951 | | |
Accounts payable | | 11,990 | | 1,264 | | 2,095 | | | (3,729 | ) | |
Accrued expenses and other current liabilities | | (1,442 | ) | 3,673 | | 38,086 | | | (5,830 | ) | |
Net cash (used in) provided by operating activities before cash payments for reorganization items | | (22,934 | ) | (4,628 | ) | 32,169 | | | 35,665 | | |
Cash payments for reorganization items: | | | | | | | | | | | |
Professional fees paid | | — | | — | | — | | | (4,572 | ) | |
Interest earned on accumulated cash during Chapter 11 proceedings | | — | | — | | — | | | 111 | | |
Cash payments for reorganization items | | — | | — | | — | | | (4,461 | ) | |
Net cash (used in) provided by operating activities | | (22,934 | ) | (4,628 | ) | 32,169 | | | 31,204 | | |
Cash flows from investing activities: | | | | | | | | | | | |
Acquisition of Aladdin Resort and Casino, net of cash acquired | | — | | — | | (466,409 | ) | | — | | |
Capital expenditures | | (60,039 | ) | (15,060 | ) | (1,787 | ) | | (988 | ) | |
Proceeds from sale of assets | | — | | 49 | | — | | | — | | |
Restricted cash and cash equivalents | | (40,261 | ) | 8,412 | | (86,138 | ) | | 76 | | |
Net cash used in investing activities | | (100,300 | ) | (6,599 | ) | (554,334 | ) | | (912 | ) | |
Cash flows from financing activities: | | | | | | | | | | | |
Borrowings under bank facility | | 759,670 | | — | | 561,576 | | | — | | |
Payable-in-kind interest added to debt principal | | 10,593 | | 16,886 | | 4,936 | | | — | | |
Repayment of bank facility | | (497,971 | ) | — | | (14,000 | ) | | (732 | ) | |
Repayment of mezzanine financing | | (117,444 | ) | — | | — | | | — | | |
Early extinguishment of debt | | (30,485 | ) | — | | — | | | — | | |
Payments on CUP financing | | (1,407 | ) | (1,256 | ) | (388 | ) | | — | | |
Member contributions | | — | | — | | 21,500 | | | — | | |
Advances from affiliates | | — | | — | | (13,008 | ) | | — | | |
Issuance of warrants | | — | | — | | 4,375 | | | — | | |
Adequate protection payments—secured lenders | | — | | — | | — | | | (33,450 | ) | |
Adequate protection payments—GECC | | — | | — | | — | | | (5,000 | ) | |
Deferred acquisition costs | | — | | — | | 3,225 | | | — | | |
Financing fees | | (15,501 | ) | — | | (9,035 | ) | | — | | |
Net cash provided by (used in) financing activities | | 107,455 | | 15,630 | | 559,181 | | | (39,182 | ) | |
Cash and cash equivalents: | | | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | | (15,779 | ) | 4,403 | | 37,016 | | | (8,890 | ) | |
Balance, beginning of period | | 41,419 | | 37,016 | | — | | | 38,240 | | |
Balance, end of period | | $ | 25,640 | | $ | 41,419 | | $ | 37,016 | | | $ | 29,350 | | |
Supplemental cash flow disclosures: | | | | | | | | | | | |
Cash paid for interest, net of capitalized interest | | $ | 64,052 | | $ | 32,189 | | $ | 2,914 | | | $ | 2,573 | | |
Assumption of Central Utility Plant Obligation | | $ | — | | $ | — | | $ | 33,958 | | | $ | — | | |
The accompanying notes are an integral part of these consolidated financial statements.
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BH/RE, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
BH/RE is a holding company that owns 85% of EquityCo, L.L.C. (“EquityCo”). The remaining 15% of EquityCo is owned indirectly by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a wholly-owned subsidiary of EquityCo and each of OpBiz, LLC (“OpBiz”) and PH Mezz II LLC (“PH Mezz II”) is a wholly owned subsidiary of MezzCo. PH Mezz I LLC (“PH Mezz I”), is a wholly owned subsidiary of PH Mezz II. PH Fee Owner LLC (“PH Fee Owner”) is a wholly owned subsidiary of PH Mezz I. TSP Owner LLC (“TSP Owner”) is a wholly owned subsidiary of PH Fee Owner. PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner are newly formed Delaware limited liability companies structured as bankruptcy remote special purpose entities which, together with OpBiz, own and operate the Aladdin Resort and Casino which is currently being transformed into the Planet Hollywood Resort and Casino (the “PH Resort”). OpBiz is the licensed owner and operator of the gaming assets and leases the casino space and hotel space together with all hotel assets from PH Fee Owner. TSP Owner is the owner of the parcel of land (the “Timeshare Parcel”) that is currently subject to the Timeshare Purchase Agreement between OpBiz and Westgate Resorts, LLC (“Westgate”) whereby Westgate plans to develop, market, manage and sell timeshare units on the land adjacent to the PH Resort. 50% of BH/RE’s voting membership interests are held by each of Robert Earl and Douglas P. Teitelbaum, and BH/RE’s equity membership interests are held 40.75% by BH Casino and Hospitality LLC I (“BHCH I”), 18.50% by BH Casino and Hospitality LLC II (“BHCH II”) (together, “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).
BH/RE and its subsidiaries were formed to acquire, operate and renovate the Aladdin Resort and Casino (the “Aladdin”) located in Las Vegas, Nevada. OpBiz, an indirect subsidiary of BH/RE, completed the acquisition of the Aladdin on September 1, 2004 and has begun a renovation project which, when complete, will transform the Aladdin into the Planet Hollywood Resort and Casino (the “PH Resort”). In connection with the renovation of the Aladdin, OpBiz has entered into an agreement with Planet Hollywood International, Inc. (“Planet Hollywood”) and certain of its subsidiaries to, among other things, license Planet 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 provides hotel management, marketing and reservation services for the hotel (the “Hotel”) that comprises a portion of the PH Resort.
BH/RE is a Nevada limited liability company and was organized on March 31, 2003. BH/RE was formed by BHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum, a managing principal of Bay Harbour Management, L.C. (“Bay Harbour Management”). BHCH was formed by Mr. Teitelbaum for the purpose of holding investments in BH/RE by funds managed by Bay Harbour Management. Bay Harbour Management is an investment management firm. OCS is wholly owned and controlled by Robert Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood owned by the trust.
Acquisition of the Aladdin
Aladdin Gaming, L.L.C. (“Aladdin Gaming”), which was a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code, commenced its bankruptcy case in the United States Bankruptcy
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Court for the District of Nevada, Southern Division on September 28, 2001. On April 23, 2003, OpBiz and Aladdin Gaming entered into a purchase agreement pursuant to which OpBiz agreed to acquire the Aladdin. Under the purchase agreement and pursuant to an order of the Bankruptcy Court, Aladdin Gaming conducted an auction to sell the Aladdin. On June 20, 2003, the Bankruptcy Court declared OpBiz the winner of that auction and, on August 29, 2003, the Bankruptcy Court entered an order confirming Aladdin Gaming’s plan of reorganization and authorizing Aladdin Gaming to complete the sale of the Aladdin to OpBiz under the purchase agreement. On September 1, 2004, OpBiz acquired substantially all of the real and personal property owned or used by Aladdin Gaming to operate the Aladdin, and received $15 million of working capital from Aladdin Gaming, including $25.7 million of cash. The acquisition was accounted for as a purchase and, accordingly, the purchase price and working capital adjustments have been allocated to the underlying assets acquired and liabilities assumed. The working capital adjustment was determined based on the closing balance sheet on August 31, 2004. OpBiz paid the purchase price for the Aladdin by issuing new secured notes to Aladdin Gaming’s secured creditors and assumed various contracts and leases entered into by Aladdin Gaming in connection with its operation of the Aladdin and certain of Aladdin Gaming’s liabilities, including Aladdin Gaming’s energy service obligation to the third party owner of the central utility plant that supplies hot and cold water and emergency power to the Aladdin. At the time of purchase, the energy service obligation was $34.0 million. Upon the completion of the Aladdin acquisition, OpBiz issued $510 million of new secured notes to Aladdin Gaming’s secured creditors under an Amended and Restated Loan and Facilities Agreement (the “Credit Agreement”) with a group of lenders and The Bank of New York, Asset Solutions Division, as administrative and collateral agent. OpBiz also simultaneously made a $14 million cash payment to those secured creditors, which reduced the principal amount of the notes to $496 million and obtained a release of the lien on a four-acre parcel of undeveloped property that OpBiz also acquired from Aladdin Gaming (the “Timeshare Parcel”). On December 10, 2004, OpBiz entered into a Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”), whereby OpBiz agreed to sell approximately four acres of the Timeshare Land to Westgate, who plans to develop, market, manage and sell timeshare units on the land. The Credit Agreement also requires that OpBiz provide either cash or a letter of credit in the aggregate amount of $90 million to fund the costs of the planned renovations to the Aladdin. In August 2004, MezzCo issued $87 million of senior secured notes to a group of purchasers. The net proceeds of this financing were used to make the $14 million payment described above, to pay certain costs and expenses of BH/RE and its subsidiaries and affiliates related to the acquisition of the Aladdin, and to provide OpBiz with a portion of the funds necessary to meet its obligations regarding the planned renovations to the Aladdin.
The purchase agreement also provided that OpBiz assume substantially all of Aladdin Gaming’s pre-petition contracts and leases and any post-petition contracts or leases to which OpBiz does not object. In addition, the purchase agreement provided that OpBiz offer employment to all of Aladdin Gaming’s employees, other than executive management, on terms and conditions substantially similar to their previous employment terms and conditions.
The following is a summary of the total consideration in the Aladdin acquisition (amounts in thousands):
Issuance of long-term debt, net of discount | | $ | 477,000 | |
Assumption of energy service obligation | | 33,958 | |
Transaction costs | | 7,396 | |
Total purchase consideration | | $ | 518,354 | |
In order to assist us in assigning values of assets acquired and liabilities assumed in the transaction, we obtained a third party valuation of significant identifiable intangible assets acquired, as well as other assets acquired and liabilities assumed.
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The following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of September 1, 2004 (amounts in thousands):
Current assets | | $ | 41,015 | |
Property and equipment | | 499,686 | |
Intangible assets | | 3,670 | |
Other assets | | 743 | |
Total assets acquired | | 545,114 | |
Current liabilities | | 26,760 | |
Purchase price | | $ | 518,354 | |
The total intangible assets of $3.7 million are being amortized over their respective remaining useful lives and include a customer list valued at $2.7 million with a useful life at September 1, 2004 of approximately 4 years and a trade name valued at approximately $1.0 million with a useful life at September 1, 2004 of 1.5 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with United States generally accepted accounting principles. Certain policies, including the determination of bad debt reserves, the estimated useful lives assigned to assets, asset impairment, insurance reserves and the calculation of liabilities, require that management apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Management’s judgments are based on historical experience, terms of existing contracts, observance of trends in the gaming industry and information available from other outside sources. There can be no assurance that actual results will not differ from our estimates. To provide an understanding of the methodology management applies, BH/RE’s significant accounting policies and basis of presentation are discussed below.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, as well as short-term investments with original maturities not in excess of 90 days.
Restricted Cash and Cash Equivalents
The balance in current restricted cash and cash equivalents at December 31, 2006 and 2005 was approximately $18.3 million and $0, respectively which consists of reserves required under the Loan Agreement including a reserve for payment of property taxes and insurance and a reserve for on-going furniture, fixture and equipment purchases or property improvements. Long-term restricted cash and cash equivalents consist of approximately $128.0 million and $87.8 million at December 31, 2006 and 2005, respectively, which represents the remaining cash commitments for the planned renovations to the Aladdin and includes a reserve for interest shortfalls and a contingency required by the Loan Agreement which will be released, in accordance with the terms of the Loan Agreement, if the cost of the renovation does not exceed the current budget.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable, including casino and hotel receivables, are typically non-interest bearing and are initially recorded at cost. An estimated allowance for doubtful accounts is maintained to reduce the
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receivables to their carrying amount, which approximates fair value. BH/RE estimates the allowance for doubtful accounts by applying standard reserve percentages to aged account balances under a specific dollar amount and specifically analyzes the collectibility of each account with a balance over the specified dollar amount, based on the age of the account, the customer’s financial condition, collection history and any other known information. The allowance for doubtful accounts totaled approximately $6.6 million and $4.4 million as of December 31, 2006 and 2005, respectively.
Inventories
Inventories consist of food and beverage, retail merchandise and operating supplies, and are stated at the lower of cost or market. Cost is determined by the first-in, first-out and specific identification methods.
Property and Equipment
Property and equipment are stated at cost. Recurring repairs and maintenance costs, including items that are replaced routinely in the casino, hotel and food and beverage departments which do not meet the Company’s capitalization policy of $10,000, are expensed as incurred. The Company has established its capital expense policy to be reflective of its individual ongoing repairs and maintenance programs. Gains or losses on dispositions of property and equipment are included in the determination of income. Property and equipment are generally depreciated over the 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 equipment and other long-lived assets are evaluated for impairment in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” For assets to be disposed of, the asset to be sold is recognized at the lower of carrying value or fair value less costs of disposal. Fair value for assets to be disposed of is estimated based on comparable asset sales, solicited offers or a discounted cash flows model.
Property and equipment are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the estimated future cash flows of the asset, on an undiscounted basis, are compared to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flows model.
The property and equipment and other long-lived assets that BH/RE obtained in the acquisition of the Aladdin were appraised by an independent third party. Property and equipment and the related accumulated depreciation amounts, as well as certain intangible assets recorded in the Company’s consolidated balance sheets as of December 31, 2006 and 2005, are based on the independent third party appraisal.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the expected terms of the related debt agreements using the straight-line method, which approximates the effective interest method, and are included in other assets on BH/RE’s consolidated balance sheets. Debt issuance costs, net of the related amortization totaled approximately $14.8 million and $7.0 million as of December 31, 2006 and 2005, respectively.
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Intangible Assets
In connection with the purchase of the Aladdin and as a result of an independent appraisal of the assets purchased, BH/RE recorded intangible assets, which consist of a customer list and trade name, on its consolidated balance sheets at December 31, 2006 and 2005. The customer list was valued at approximately $2.7 million at the time of purchase and at December 31, 2006 and 2005, had a net book value of approximately $1.1 million and $1.8 million, respectively. The trade name was valued at approximately $1.0 million at the time of purchase and was fully amortized at December 31, 2006. At December 31, 2006, the customer list had a net book value of approximately $0.1 million. The customer list and trade name are being amortized using the straight-line method over a useful life of 4 years and 1.5 years, respectively. The amortization expense related to the customer list and trade name for the years ended December 31, 2006 and 2005, totaled approximately $0.8 million and $1.3 million, respectively.
Derivative Instruments and Hedging Activities
In connection with the repayment of all obligations under the Credit Agreement, the warrants issued by BH/RE to purchase 2.5% of the equity in EquityCo became excercisable. The warrants can either be settled in cash or in other membership interests upon exercise. The Company has entered into an agreement with the Lenders to compensate the holders of any unexercised warrants upon the expiration of the exercise period at a cost of $1.61 per warrant. The exercise period expired with no warrant holders electing to exercise. Accordingly, the Company has recorded the value of the warrants as $1.6 million in the accompanying consolidated balance sheets.
BH/RE accounts for the outstanding warrants in EquityCo as embedded derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133”) and SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133.” (“SFAS No. 138”)
Pursuant to the refinancing of the Securities Purchase Agreement and the terms of the Restructuring Agreement, the Restructuring Parties agreed to amend the warrants issued by MezzCo to purchase 17.5% of the fully diluted equity in MezzCo. The warrants contain a net cash settlement, and therefore are accounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Both SFAS No. 133 and EITF 00-19 require that the warrants be recognized as liabilities, with changes in fair value affecting net income. See “Note 7. Long-Term Debt—Mezzanine Financing.”
The terms of the Loan Agreement required the Company to enter into an interest rate cap agreement, which expires on November 30, 2008, to manage interest rate risk. The Company did not apply cash flow hedge accounting to this instrument. Although this derivative was not afforded cash flow hedge accounting, the Company retained the instrument as protection against the interest rate risk associated with its long-term borrowings. The Company accounts for its derivative activity in accordance with SFAS No. 133 and accordingly, recognizes all derivatives on the balance sheet at fair value with any in change in fair value being recorded in interest income or expense in the accompanying consolidated statements of operations.
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Revenue Recognition and Promotional Allowances
Casino revenues are recognized as the net win from gaming activities, which is the difference between gaming wins and losses. Hotel revenue recognition criteria are generally met at the time of occupancy. Food and beverage revenue recognition criteria are generally met at the time of service. Deposits for future hotel occupancy or food and beverage services are recorded as deferred income until revenue recognition criteria are met. Cancellation fees for hotel and food and beverage services are recognized upon cancellation by the customer as defined by a written contract entered into with the customer. All other revenues are recognized as the service is provided. Revenues include the retail value of food, beverage, rooms, entertainment, and merchandise provided on a complimentary basis to customers. Such complimentary amounts are then deducted from revenues as promotional allowances on BH/RE’s consolidated statements of operations. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses and are listed in the table below. The year ended December 31, 2004 for BH/RE includes the four months of operating results since the Aladdin acquisition by OpBiz on August 31, 2004 and should be read in conjunction with the predecessor information for the eight-month performance ended August 31, 2004:
| | | | | | | | Predecessor Information | |
| | | | | | | | Eight months | |
| | Year ended | | Ended | |
| | December 31, | | August 31, | |
| | 2006 | | 2005 | | 2004 | | 2004 | |
Rooms | | $ | 3,661 | | $ | 3,779 | | $ | 1,151 | | | $ | 2,208 | | |
Food and beverage | | 9,152 | | 10,610 | | 3,447 | | | 10,251 | | |
Other | | 764 | | 1,370 | | 440 | | | 579 | | |
Total cost of promotional allowances | | $ | 13,577 | | $ | 15,759 | | $ | 5,038 | | | $ | 13,038 | | |
Players’ Club Program
Players’ club members earn points based on gaming activity, which can be redeemed for cash. OpBiz accrues expense related to this program as the points are earned based on historical redemption percentages. The total accrued liability related to the players’ club was $1.6 million at December 31, 2006, compared to $1.7 million at December 31, 2005.
Self-Insurance Accruals
BH/RE is self-insured, up to certain limits, for costs associated with employee medical coverage. The Company accrues for the estimated expense of known claims, as well as estimates for claims incurred but not yet reported which totaled approximately $2.4 million and $2.7 million as of December 31, 2006 and 2005, respectively.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative costs and expenses. Advertising costs totaled approximately $4.1 million, $4.9 million and $1.2 million for the years ended December 31, 2006 and 2005 and the period from September 1, 2004 (Date of OpBiz acquisition) through December 31, 2004, respectively.
Income Taxes
The consolidated financial statements include the operations of BH/RE and its majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies and are taxed as partnerships for federal income tax
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purposes. However, MezzCo has elected to be taxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, will be treated as a divisions of MezzCo for federal income tax purposes, and accordingly, will also be subject to federal income taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz I and TSP Owner, a wholly owned subsidiary of PH Fee Owner will also be subject to federal income taxes.
MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owneraccount for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS 109 requires the recognition of deferred income tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.
Preopening Costs
BH/RE accounts for costs incurred during the preopening and start-up phases of operations in accordance with Statement of Position 98-5, “Reporting on the Costs of Start-up Activities”. Preopening and start-up costs include, but are not limited to, salary related expenses for new employees, travel and entertainment expenses. Preopening costs are expensed as incurred.
Membership Interests
As of December 31, 2006, BH/RE’s membership interests had not been unitized and BH/RE’s members do not presently intend to unitize these membership interests. Accordingly, management of BH/RE has excluded earnings per share data required pursuant to SFAS No. 128 “Earnings Per Share” because management believes that such disclosures would not be meaningful to the financial statement presentation.
The Company has entered into various employment agreements, as amended, with several executives. The employment agreements have initial terms of two to five years. The employment agreements provide that the executives will receive a base salary with either mandatory increases or annual adjustments and annual bonus payments. In addition, depending on the terms of the employment agreements, these executives are entitled to options to purchase between 0.2% and 3% of the equity of MezzCo.
Recently Issued Accounting Standards
SFAS No. 123(R)
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and amends SFAS No. 95, “Statement of Cash Flows.” Among other items, SFAS No. 123(R) requires the recognition of compensation expense in an amount equal to the fair value of share-based payments, including employee stock options and restricted stock, granted to employees.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) requiring that compensation cost relating to share-based payment transactions be recognized in the operating expenses. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s estimated requisite service period (generally the vesting period of the equity award) on a straight-line basis. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with APB No. 25, and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123 as
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amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company adopted SFAS No. 123(R) using the modified prospective method and, accordingly, financial statement amounts for prior periods presented in this Form 10-K have not been restated to reflect the fair value method of recognizing compensation cost relating to non-qualified stock options.
There was $0.4 million of compensation cost, which approximated fair value, related to non-qualified stock options recognized in operating results (included in selling, general and administrative expenses) for the year ended December 31, 2006.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. Expected volatility is based on historical volatility trends as well as implied future volatility observations as determined by independent third parties. In determining the expected life of the option grants, the Company used historical data to estimate option exercise and employee termination behavior. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The following table sets forth the assumptions used to determine compensation cost for the Company’s non-qualified stock options consistent with the requirements of SFAS No. 123(R).
| | Year Ended
December 31, 2006 | |
Weighted-average assumptions: | | | | | |
Expected stock price volatility | | | 36 | % | |
Risk-free interest rate | | | 3.76 | % | |
Expected option life (years) | | | 7 | | |
Expected annual dividend yield | | | — | % | |
Under APB No. 25 there was no compensation cost recognized for the Company’s non-qualified stock options awarded in the years ended December 31, 2005 and 2004 as these non-qualified stock options had an exercise price equal to the market value of the underlying stock at the grant date. The following table sets forth pro forma information as if compensation cost had been determined consistent with the requirements of SFAS No. 123:
| | Year Ended December 31, 2005 | | Year Ended December 31, 2004 | |
| | (Amounts in thousands) | |
Net loss: | | | | | | | | | |
As reported | | | $ | (29,876 | ) | | | $ | (6,656 | ) | |
Deduct: compensation expense under fair value-based method (net of tax) | | | (234 | ) | | | (134 | ) | |
Pro forma | | | $ | (30,110 | ) | | | $ | (6,790 | ) | |
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The following sets forth fair value per share information, including related assumptions, used to determine compensation cost consistent with the requirements of SFAS No. 123:
| | Year Ended December 31, 2005 | | Year Ended December 31, 2004 | |
Weighted-average fair value per share of options granted during the period (estimated on grant date using Black-Scholes-Merton option-pricing model) | | | $ | 235.28 | | | | $ | 235.28 | | |
Weighted-average assumptions: | | | | | | | | | |
Expected stock price volatility | | | 36 | % | | | 36 | % | |
Risk-free interest rate | | | 3.76 | % | | | 3.76 | % | |
Expected option life (years) | | | 7 | | | | 7 | | |
Expected annual dividend yield | | | — | % | | | — | % | |
FASB Interpretation No. 48
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes—an interpretation of FASB No. 109”, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact of the adoption of this interpretation on the Company’s results of operations and financial condition.
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on its financial position, cash flows, and results of operations.
SFAS No. 154
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which eliminates the requirement of APB Opinion No. 20, “Accounting Changes,” to include the cumulative effect adjustment resulting from a change in an accounting principle in the income statement in the period of change. SFAS No. 154 requires that a change in an accounting principle or reporting entity be retrospectively applied. Retrospective application requires that the cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. Each period presented is adjusted to reflect the period-specific effects of applying the change. Changes in accounting estimate and corrections of errors continue to be accounted for in the same manner as prior to the issuance of SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made beginning January 1, 2006. The Company’s adoption of the provisions of SFAS No. 154 did not have any effect on its consolidated financial statements.
SAB No. 108
In September 2006, the SEC issued SAB No. 108 which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance-sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. Upon initial adoption, if the effect of the
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misstatement is determined to be material, SAB No. 108 allows companies to record that effect as a cumulative-effect adjustment to beginning of year retained earnings. SAB No. 108 is effective for the first fiscal year ending after November 15, 2006. The Company adopted the provisions of SAB No. 108 as of December 31, 2006. The Company’s adoption of SAB No. 108 as of December 31, 2006 did not have a material impact on its consolidated financial statements.
Reclassifications
Certain amounts in the December 31, 2005 and 2004 consolidated financial statements have been reclassified to conform to the December 31, 2006 presentation. These reclassifications had no effect on the previously reported net income.
3. RECEIVABLES
Accounts receivable consist of the following (in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Casino | | $ | 9,972 | | $ | 12,173 | |
Hotel | | 8,014 | | 8,470 | |
Other | | 1,487 | | 3,593 | |
| | 19,473 | | 24,236 | |
Allowance for doubtful accounts | | (6,556 | ) | (4,443 | ) |
Receivables, net | | $ | 12,917 | | $ | 19,793 | |
4. PROPERTY AND EQUIPMENT
Property and equipment and the related accumulated depreciation consist of the following (in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Land | | $ | 97,979 | | $ | 97,979 | |
Building and improvements | | 367,663 | | 367,234 | |
Furniture, fixtures and equipment | | 36,444 | | 34,194 | |
Construction in progress | | 72,044 | | 14,685 | |
| | 574,130 | | 514,092 | |
Accumulated depreciation | | (50,076 | ) | (28,346 | ) |
Property and equipment, net | | $ | 524,054 | | $ | 485,746 | |
Of the $98.0 million in land value, $29.5 million has been allocated to the Timeshare Parcel.
Depreciation expense was approximately $21.7 million, $22.3 million and $7.4 million for the years ended December 31, 2006 and 2005 and the period from September 1, 2004 (Date of OpBiz acquisition) through December 31, 2004, respectively.
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5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Accrued slot club points | | $ | 1,608 | | $ | 1,688 | |
Accrued accounts payable | | 667 | | 1,314 | |
Accrued progressive reserve | | 903 | | 731 | |
Accrued utilities | | 513 | | 477 | |
Accrued legal fees | | 571 | | 462 | |
Accrued slot participation fees | | 314 | | 440 | |
Accrued commissions | | 275 | | 289 | |
Accrued Central Utility Plant charges | | 286 | | 271 | |
Accrued advertising | | 125 | | 226 | |
Accrued CIP payable | | — | | — | |
Other accrued expenses | | 1,008 | | 285 | |
Accrued expenses | | $ | 6,2707,519 | | $ | 6,183 | |
6. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Outstanding chips | | $ | 1,714 | | $ | 1,981 | |
Advance ticket sales | | — | | 1,439 | |
Gaming and related | | 919 | | 1,276 | |
Advance commissions | | 1,063 | | 880 | |
Advances—sale of timeshare land | | 1,575 | | — | |
Warrant redemption | | 1,610 | | — | |
Other | | 638 | | 583 | |
Other current liabilities | | $7,519 | | $ | 6,159 | |
| | | | | | | |
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
$820 million Loan Agreement | | $ | 759,670 | | $ | — | |
Term Loan A—$500 million senior notes, net of unamortized discount of $25,632 at December 31, 2005 | | — | | 460,293 | |
Term Loan B—$10 million senior notes | | — | | 10,985 | |
Mezzanine senior secured subordinated notes, net of unamortized discount of $3,880 at December 31, 2005 | | — | | 103,956 | |
Northwind Aladdin obligation under capital lease | | 30,907 | | 32,314 | |
Total long-term debt | | 790,577 | | 607,548 | |
Current portion of long-term debt | | (1,592 | ) | (2,671 | ) |
Total long-term debt, net | | $ | 788,985 | | $ | 604,877 | |
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Loan Agreement
On November 30, 2006, OpBiz and PH Fee Owner entered into the Loan Agreement (the “Loan Agreement”) with Column Financial, Inc. for a mortgage Loan in the principal amount of up to $820 million. The Loan Agreement provides for an initial disbursement in the amount of $759.7 million and a Future Funding in the amount of up to $60.3 million. The Loan Agreement is secured by a deed of trust on the PH Resort, a deed of trust on the Timeshare Parcel, and a pledge, subject to approval by the Nevada gaming authorities by MezzCo of its membership interest in OpBiz (as described below).
The term of the Loan is twenty four months with three one year extension options subject to payment of a fee and the Borrower’s compliance with the requirements for an extension outlined in the Loan Agreement. Interest on the Loan is payable monthly and accrues at a rate of LIBOR plus 3.25% (8.60% at December 31, 2006) with a .25% ticking fee on available but un-advanced Future Funding. The Loan Agreement does not require amortization during the initial term or, provided certain EBITDA thresholds are met, during the extension periods. The Loan Agreement requires that the Borrower establish and maintain certain reserves including a reserve for completion of the renovation project as currently budgeted, a reserve for projected interest shortfalls, a reserve for payment of property taxes and insurance and a reserve for on-going furniture, fixture and equipment purchases or property improvements. The Loan Agreement restricts the Borrower’s ability to spend excess cash flow until certain debt service coverage ratios are met.
In connection with the Loan Agreement, we have, using the proceeds from the Loan, repaid in full all amounts outstanding under the Credit Agreement, dated August 31, 2004, among OpBiz, the lenders named therein (the “Lenders”) and The Bank of New York, Asset Solution Division (the “Senior Agent”). Pursuant to the terms of the Credit Agreement, upon repayment of all amounts due, the warrant to purchase 2.5% of the equity in EquityCo issued to the Lenders at the closing of the Credit Agreement became exercisable. The number of outstanding warrants has been imputed as one million using the equity value on the date the warrants were issued. The Company has entered into an agreement with the Lenders to compensate the holders of any unexercised warrants upon the expiration of the exercise period at a cost of $1.61 per warrant. The exercise period expired with no warrant holders electing to exercise. Accordingly, the Company has recorded the value of the warrants as $1.6 million in the accompanying consolidated balance sheets.
In addition, in order to permit the Lender to foreclose on the Hotel and Casino separately and to 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 the Hotel 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 agreed to continue to operate the Hotel in the manner it had been and to pay monthly rent of approximately $916,000. OpBiz and PH Fee Owner also entered into a lease pursuant to which OpBiz agreed to continue to operate the Casino in the manner 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 Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (as described below). In exchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”) executing the Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 per year. The fee is accrued and only payable once OpBiz hits certain debt service coverage ratios defined in the Loan Agreement.
In connection with the Loan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the “Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lender against losses related to certain prohibited actions of the Borrower and guarantied full repayment of the Loan in the case of a
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voluntary or collusive bankruptcy of the Borrower, a transfer of the Property or interests in the Borrower in violation of the Loan Agreement and if the Borrower fails to maintain its status as a bankruptcy remote entity and as a result sees its assets consolidated with those of an affiliate in a bankruptcy. The liability of the Guarantors is capped at $15,000,000 per entity and $30,000,000 in the aggregate, however this cap does not apply to (i) liability arising from events, acts or circumstances actually committed or brought about by the willful acts of any of the Guarantors and (ii) the extent of any benefit received by any of the Guarantors as a result of the acts giving rise to the liability under the Guaranty. Each of Douglas Teitelbaum and Robert Earl executed and delivered guaranties substantially the same as that delivered by the Guarantors, however the liability of each of them was limited to (i) liability arising from events, acts or circumstances actually committed or brought about by willful acts by him and (ii) the extent of any benefit received by him as a result of 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 severally guarantied the completion of the renovation of the Property and payment of all costs associated therewith. The liability under the Completion Guaranty is capped at the greater of (a) $35,000,000 and (b) only in the case that cost overruns for the renovation exceed $15,000,000, 24% of the then unpaid costs of the completion of the renovation.
In addition, in connection with the Loan Agreement, we effected a refinancing of the Securities Purchase Agreement, dated August 9, 2004, among MezzCo and the Investors, pursuant to which MezzCo issued to the Investors (i) 16% senior subordinated secured Notes in the original aggregate principal amount of $87 million, and (ii) Warrants for the purchase (subject to certain adjustments as provided for therein) of membership interests of MezzCo, representing 17.5% of its fully diluted equity. Loan proceeds were used to redeem in full the Notes.
In connection with the refinancing 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 the Securities Purchase Agreement, the Subordination Agreement, dated as of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and the Investors, the Pledge Agreement, dated August 9, 2006, among MezzCo and the Collateral Agent, and the Guaranty, dated August 9, 2004, made by OpBiz to the Investors, and amended certain other existing agreements, as described below.
In accordance with the terms of the Restructuring Agreement, the Investors and EquityCo, MezzCo and OpBiz entered into a Release, Consent and Waiver Agreement, pursuant to which the Investors (i) released OpBiz from its guaranteed obligations, under that certain Guaranty Agreement, dated as of August 9, 2004 and executed by OpBiz in favor of the Investors and the collateral agent; (ii) released MezzCo from its pledge of the collateral, under that certain Pledge Agreement, dated as of August 9, 2004, and executed by MezzCo in favor of the collateral agent, the Investors released their security interest, as defined in that certain Security Agreement, as amended by that certain Amendment to Security Agreement, in each case dated as of August 9, 2004 and executed by the Company in favor of the collateral agent; (iii) released and terminated the Deed of Trust, dated as of August 9, 2004 and executed by MezzCo in favor of the Trustee (as defined therein) for the benefit of the collateral agent; (iv) released and terminated the Investors’ security interest in the securities account, provided for that certain Securities Account Control Agreement, dated as of August 9, 2004 and executed by the Company, the collateral agent and Wells Fargo Bank, N.A.
Additionally, MezzCo, EquityCo, and the Investors entered into an Amended and Restated Investor Rights Agreement, dated November 30, 2006 (the “A&R Investor Rights Agreement”), to amend and restate the original Investor Rights Agreements among the parties thereto, dated August 9, 2004.
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Pursuant to the Restructuring Agreement, the Restructuring Parties agreed to amend the Warrants by issuing Amended and Restated Warrants to Purchase Membership Interests of MezzCo (the “A&R Warrants”) to the Investors upon approval by the Nevada gaming authorities. The A&R Warrants will be exercisable at any time, subject to the approval of the Nevada gaming authorities, at a purchase price of $0.01 per unit. Subject to the approval of the Nevada gaming authorities, the warrants may be exercised to purchase either voting or non-voting membership interests of MezzCo or a combination thereof through the expiration date of December 9, 2012. In addition to customary anti-dilution protections, the number of units representing MezzCo membership interests issuable upon exercise of the A&R Warrants may be increased from time to time upon the occurrence of certain events as described in the A&R Warrants. Holders of the A&R Warrants and any securities issued upon exercise 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&R Warrants. These rights expire upon completion of a public offering by MezzCo or OpBiz.
In connection with the Restructuring Agreement, EquityCo entered into a Guaranty Agreement, dated November 30, 2006 (the “Guaranty Agreement”), in favor of the Investors and the Collateral Agent, pursuant to which EquityCo has guaranteed the obligation of MezzCo to pay the redemption price under the A&R Warrants prior to expiration and any indebtedness arising under the Put Note (as defined in the A&R Warrants).
EquityCo and the Collateral Agent also entered into a Pledge Agreement, dated November 30, 2006 (the “Pledge Agreement”), pursuant to which EquityCo has, subject to approval of the Nevada gaming authorities, pledged and granted a first priority security interest to the Collateral Agent for the ratable benefit of the Investors in the membership interests of EquityCo in MezzCo. The Pledge Agreement, once approved, will secure 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 to which we agreed to indemnify the Investors for any losses caused by (i) lack of gaming approvals for the issuance of the A&R Warrants, (ii) lack of gaming approval for the granting of a lien by EquityCo in the equity interests in MezzCo, as described in the Pledge Agreement, and (iii) the inability of the Investors to exercise the Warrants until July 1, 2007.
Energy Services Agreement
Northwind Aladdin (“Northwind”), a third party, owns and operates a central utility plant on land leased from OpBiz. The plant supplies hot and cold water and emergency power to the Aladdin under a contract between Aladdin Gaming and Northwind. OpBiz has assumed the energy service agreement, which expires in 2018. Under the agreement, OpBiz is required to pay Northwind a monthly consumption charge, a monthly operational charge, a monthly debt service payment and a monthly return on equity payment. Payments under the Northwind agreement total approximately $0.4 million per month.
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Scheduled Maturities of Long-Term Debt
Scheduled maturities of BH/RE’s long-term debt are as follows (in thousands):
Years ending December 31, | | | |
2007 | | $ | 1,592 | |
2008 | | 761,455 | |
2009 | | 2,001 | |
2010 | | 2,243 | |
2011 | | 2,515 | |
Thereafter | | 20,771 | |
Total | | $ | 790,577 | |
Fair Value of Long-Term Debt
The estimated fair value of BH/RE’s long-term debt at December 31, 2006 approximates the carrying value of $790.6 million. The estimated fair value of BH/RE’s long-term debt at December 31, 2005 was approximately $632.2 million, compared to the carrying value of approximately $607.5 million, based on the quoted market price of the Term Loan A notes.
Loss on Early Extinguishment of Debt
In connection with the repayment of all amounts due under the Credit Agreement and the Notes issued under the Securities Purchase Agreement with the proceeds of the Loan Agreement effective November 30, 2006, the Company recorded a loss on early extinguishment of debt of $60.2 million which is comprised of the unamortized balance of the original issue discount recorded in connection with the Credit Agreement of $20.6 million, an exit fee payable to the lenders under the Credit Agreement of $3.7 million, a call premium on the Notes of $26.8 million and the write-off of previously deferred debt issuance costs and warrant amortization of $9.1 million.
8. MEMBERSHIP INTERESTS
The non-voting interests in BH/RE are owned 40.75% by BHCH I, 18.50% by BHCH II and 40.75% by OCS and the voting interests are owned 50% by Douglas P. Teitelbaum and 50% by Robert Earl. BHCH is controlled by Mr. Teitelbaum, managing principal of Bay Harbour Management, an investment management firm. BHCH was formed by Mr. Teitelbaum for the purpose of holding investments in BH/RE by funds managed by Bay Harbour Management. OCS is wholly-owned and controlled by Mr. Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood.
BH/RE owns 85% of the membership interests in EquityCo and Starwood owns 15%. OpBiz is a wholly owned subsidiary of EquityCo. BH/RE and Starwood made total equity contributions of $20 million each in EquityCo to fund the costs of the planned renovations to the Aladdin. Starwood’s equity interest in EquityCo is reflected as minority interest in the accompanying consolidated financial statements.
BH/RE has the option to purchase all of Starwood’s membership interests in EquityCo if OpBiz is entitled to terminate the hotel management contract between OpBiz and Sheraton (see Note 9) as a result of a breach by Sheraton. Starwood can require EquityCo to purchase all of its membership interests in EquityCo if the hotel management contract is terminated for any reason other than in accordance with its terms or as the result of a breach by Sheraton. In addition, BH/RE and Starwood entered into a registration rights agreement with respect to their membership interests in EquityCo.
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9. RELATED PARTY TRANSACTIONS
Due to Affiliates
Since its formation, certain members or affiliates of BH/RE have paid expenses totaling approximately $20.0 million related to the Aladdin acquisition and funded deposits under the purchase agreement on behalf of BH/RE and its subsidiaries. On September 1, 2004, $4.25 million of advances from each of BHCH and OCS, which were used to fund the deposit required under the purchase agreement, were contributed to BH/RE as capital. Additionally, on September 1, 2004, the advances made by BHCH and Planet Hollywood to pay transaction fees and deposits were repaid.
Mr. Jess Ravich
Jess Ravich, a former manager of OpBiz, is CEO and indirect controlling shareholder of Libra Securities, LLC, an investment banking firm (“Libra Securities”). Libra Securities acted as placement agent for MezzCo, L.L.C. in the placement of the Mezzanine Financing and was paid a placement fee of $4,350,000.
Mr. Ravich holds a note convertible into 25% of the equity in PDS Gaming, a leasing and finance company specializing in gaming equipment. Conversion of the note is subject to approval of appropriate gaming regulators in the jurisdictions in which PDS Gaming does business. PDS Gaming entered into a gaming equipment lease with OpBiz on December 22, 2004, for a 48 month term with payments of approximately $159,200 per month. Libra Securities raised financing for PDS Gaming to allow it to purchase the equipment underlying the lease and received a placement fee for its services.
Planet Hollywood Licensing Agreement
OpBiz, Planet Hollywood and certain of Planet Hollywood’s subsidiaries have entered into a licensing agreement pursuant to which OpBiz received a non-exclusive, irrevocable license to use various “Planet Hollywood” trademarks and service marks. Under the licensing agreement, OpBiz also has the right, but not the obligation, to open a Planet Hollywood restaurant and one or more Planet Hollywood retail shops under a separate restaurant agreement with Planet Hollywood. OpBiz will pay Planet Hollywood a quarterly licensing fee of 1.75% of OpBiz’s non-casino revenues. If OpBiz opens an attraction with paid admission using the Planet Hollywood marks or memorabilia prior to beginning operations as the PH Resort, it will pay Planet Hollywood a quarterly licensing fee of 1.75% of the revenues of the attraction until OpBiz begins operating as the PH Resort. The initial term of the licensing agreement will expire in 2028. OpBiz can renew the licensing agreement for three successive 10-year terms. As of December 31, 2006, no licensing fees have been paid to Planet Hollywood for the use of its trademarks and service marks.
In addition to being a manager of BH/RE, Mr. Earl is the chief executive officer and chairman of the board of directors of Planet Hollywood. Similarly, Mr. Teitelbaum is a manager of BH/RE and a director of Planet Hollywood. Together, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood owned by the trust.
Sheraton Hotel Management Contract
OpBiz and Sheraton have entered into a management contract pursuant to which Sheraton provides hotel management services to OpBiz, assists OpBiz in the management, operation and promotion of the Hotel and permits OpBiz to use the Sheraton brand and trademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of 4% 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 contract has a 20-year term commencing on the completion of the Aladdin acquisition and is subject to certain termination provisions
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by either OpBiz or Sheraton. Sheraton is a wholly owned subsidiary of Starwood, which has a 15% equity interest in EquityCo and has the right to appoint two members to the EquityCo board of managers. Management fees paid to Starwood totaled approximately $9.9 million, $10.8 million and $2.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. No such fees were incurred prior to 2004.
Planet Hollywood (LV) LLC Lease Agreement
OpBiz and Planet Hollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreement pursuant to which Planet Hollywood LV, as tenant, will operate a new concept it has developed for an upscale 24-hour diner named “Planet Dailies” within approximately 11,500 square feet of space located on the premises owned by OpBiz. Planet Hollywood LV will pay OpBiz base rent in the amount of $500,000 per year (subject to annual increase adjustments), in addition to percentage rent of up to 12% based on annual gross sales (to the extent such percentage rent exceeds base rent), following commencement of its business operations in the leased space. The initial term of the lease agreement will expire in 2017. Planet Hollywood LV can renew the lease agreement for two successive 5-year terms. As of December 31, 2006, no rent has been paid to OpBiz because Planet Hollywood LV has not yet commenced its business operations in the leased space. The Company believes that the provisions of this lease agreement reflect arm’s length market terms and that it is comparable to other lease agreements OpBiz has entered into with third-party restaurant operators.
Planet Hollywood LV is wholly owned by, and a subsidiary of, Planet Hollywood International, Inc. Together, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood International, Inc. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood International Inc. owned by the trust.
Earl of Sandwich (Las Vegas), LLC Lease Agreement
OpBiz and Earl of Sandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a lease agreement pursuant to which Earl of Sandwich, as tenant, will operate a restaurant named “Earl of Sandwich” within approximately 3,030 square feet of space located on the premises owned by OpBiz. Earl of Sandwich will pay OpBiz base rent in the amount of $161,600 per year (subject to annual increase adjustments), in addition to percentage rent of up to 12% based on annual gross sales (to the extent such percentage rent exceeds base rent), following commencement of its business operations in the leased space. The initial term of the lease agreement will expire in 2017. Earl of Sandwich can renew the lease agreement for two successive 5-year terms. As of December 31, 2006, no rent has been paid to OpBiz because Earl of Sandwich has not yet commenced its business operations in the leased space. The Company believes that the provisions of this lease agreement reflect arm’s length market terms and that it is comparable to other lease agreements OpBiz has entered into with third-party restaurant operators.
Earl of Sandwich is wholly and indirectly owned by a trust for the benefit of Mr. Earl’s children. Mr. Earl disclaims beneficial ownership of any equity of Earl of Sandwich owned by the trust.
Guaranty Agreement
In connection with the Loan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (see Note 7.—Long-Term Debt). In exchange for executing the Guaranty, 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 is accrued and only payable once OpBiz hits certain debt service coverage ratios defined in the Loan Agreement.
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10. INCOME TAXES
The consolidated financial statements include the operations of BH/RE and its majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies and are taxed as partnerships for federal income tax purposes. However, MezzCo has elected to be taxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, will be treated as a divisions of MezzCo for federal income tax purposes, and accordingly, will also be subject to federal income taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz I and TSP Owner, a wholly owned subsidiary of PH Fee Owner will also be treated as divisions of MezzCo for federal income tax purposes and, accordingly, will also be subject to federal income taxes.
MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner(collectively referred to as MezzCo hereafter) account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS 109 requires the recognition of deferred income tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.
Management believes it is more likely than not that its net deferred tax asset will not be realized and has therefore recorded a valuation allowance against this net deferred tax asset.
The payable in-kind interest associated with the Mezzanine Financing is subject to the provisions of Internal Revenue Code Section 163(e)(5) as a high yield debt obligation with disqualified OID. As a result, a portion of the interest expense associated with the Mezzanine Financing is permanently non-deductible for tax purposes and the balance of the interest expense is only deductible when paid in cash. The deferred tax asset associated with the Mezzanine Financing was realized as a deduction in 2006. However, because the Company remains in a net operating loss position, the realization of the deduction merely increased the deferred tax asset for net operating loss carryforward.
The income tax provision from continuing operations consists of the following (amounts in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Current | | | $ | — | | | $ | 149 | |
Deferred | | | | | | (134 | ) |
Total income tax provision | | | $ | — | | | $ | 15 | |
The income tax provision differs from that computed at the federal statutory corporate tax rate as follows (amounts in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
| | Amount | | Percent | | Amount | | Percent | |
Pre-tax loss at U.S. statutory rate | | $ | (33,487 | ) | | 35.0 | % | | $ | (10,451 | ) | | 35.0 | % | |
Tax attributable to pass-through entities | | (5,914 | ) | | 6.2 | | | 1,844 | | | (6.2 | ) | |
Non-deductible interest expense | | (26 | ) | | 0.0 | | | 2,388 | | | (8.0 | ) | |
Tax credits, net of current addback | | (454 | ) | | 0.5 | | | (340 | ) | | 1.1 | | |
Other | | (743 | ) | | 0.7 | | | 103 | | | (0.1 | ) | |
Valuation allowance | | 40,624 | | | (42.4 | ) | | 6,471 | | | (21.9 | ) | |
Effective tax rate | | $ | — | | | (0.0 | )% | | $ | 15 | | | (0.1 | )% | |
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The tax effects of significant temporary differences representing net deferred tax assets and liabilities are as follows (amounts in thousands):
| | December 31, | |
| | 2006 | | 2005 | |
Deferred tax assets: | | | | | |
NOL carryforward | | $ | 51,570 | | $ | 5,322 | |
Mezzanine interest OID | | — | | 4,376 | |
Accruals | | 2,025 | | 1,953 | |
Construction Retention | | 1,228 | | 1,953 | |
Reserves for doubtful accounts | | 2,431 | | 1,555 | |
Amortization | | 1,160 | | 1,175 | |
Tax credits | | 1,051 | | 835 | |
Other | | 1,255 | | 1,851 | |
Depreciation | | — | | — | |
Total deferred tax assets | | $ | 60,720 | | $ | 17,067 | |
Deferred tax liabilities: | | | | | |
Depreciation | | $ | 8,691 | | $ | 6,646 | |
Prepaid expenses | | 2,839 | | 1,720 | |
Total deferred tax liabilities | | $ | 11,530 | | $ | 8,366 | |
Valuation allowance | | (49,190 | ) | (8,567 | ) |
Net deferred tax assets and liabilities | | $ | — | | $ | 134 | |
MezzCo has a valuation allowance at December 31, 2006 and 2005 recorded against tax benefits that are more likely than not unrealizable. As of December 31, 2006, MezzCo has federal net operating losses of $147,180,060 which begin to expire after 2024. MezzCo has general business credit carryforwards at December 31, 2006 of $1,036,000 which begin to expire after 2024 and a minimum tax credit carryforward of $15,000. The net deferred tax asset of $134,000 at December 31, 2005 represents recoverable taxes paid in a carryback period.
11. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, BH/RE is subject to various litigation, claims and assessments. The Company is not currently a party to any material litigation and, it is not aware of any action, suit or proceedings against it that has been threatened by any person.
Employment Agreements
The Company has entered into various employment agreements, as amended, with several executives. The employment agreements have initial terms of two to five years. The employment agreements provide that the executives will receive a base salary with either mandatory increases or annual adjustments and annual bonus payments. In addition, depending on the terms of the employment agreements, these executives are entitled to options to purchase between 0.2% and 3% of the equity of MezzCo (see Note 2).
Leases
OpBiz leases certain real property, furniture and equipment. The leases are accounted for as operating or capital leases in accordance with SFAS No. 13, “Accounting for Leases.”
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At December 31, 2006, aggregate minimum rental commitments under noncancelable operating leases and capital leases with initial or remaining terms of one year or more consisted of the following (in thousands):
| | Operating
Leases | | Capital
Leases | |
Years ending December 31, | | | | | | | |
2007 | | | $ | 2,103 | | | $ | 4,973 | |
2008 | | | 1,867 | | | 4,962 | |
2009 | | | 193 | | | 4,964 | |
2010 | | | 147 | | | 4,965 | |
2011 | | | 4 | | | 4,966 | |
Thereafter | | | — | | | 28,575 | |
Total minimum lease payments | | | $ | 4,314 | | | $ | 53,405 | |
Less: Amounts representing interest | | | | | | (22,498 | ) |
Total obligations under capital leases | | | | | | 30,907 | |
Less: Amounts due within one year | | | | | | (1,592 | ) |
Amounts due after one year | | | | | | $ | 29,315 | |
The current and long-term obligations under capital leases are included in “Current portion of long-term debt” and “Long-term debt, less current portion,” respectively, in the accompanying consolidated balance sheets. Rental expense amounted to approximately $2.8 million, $3.4 million and $0.4 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Timeshare Purchase Agreement
On December 10, 2004, OpBiz entered into a Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”), a Florida limited partnership, whereby OpBiz has agreed to sell approximately 4 acres of land adjacent to the Aladdin to Westgate, who plans to develop, market, manage and sell timeshare units on the land. The land value recorded by OpBiz in its financial statements of $29.5 million was based on an independent appraisal. The purchase price for the land will be paid by Westgate in the form of fees based on annual sales of timeshare units. The Timeshare Purchase Agreement remains in effect but the deed to the land has not been transferred as requisite conditions to consummate the sale have not been completed by Westgate. To complete the deed transfer, Westgate must obtain financing and obtain all required approvals from regulatory agencies. Accordingly, no gain or loss on the sale of the land has been recorded in the Company’s financial statements. Advances received by Westgate against the purchase price of the land have been recorded as advances in the current liabilities in the accompanying financial statements until such time as the transfer is complete and the sale is finalized.
Theater Lease
On December 16, 2004, OpBiz entered into a long-term lease agreement whereby CC Entertainment Theatrical-LV, LLC, successor-in-interest to SFX Entertainment, Inc. pursuant to an assignment dated September 26, 2005 (“CCE”) will be renovating and leasing certain theaters and related areas located at the Aladdin. CCE will have the exclusive right to use, reconfigure, adapt, change and operate the leased premises.
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12. EMPLOYEE BENEFIT PLANS
401K Plan
OpBiz has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its employees, which it assumed from Aladdin Gaming on September 1, 2004. The plan allows employees to defer, within prescribed limits, up to 15% of their income on a pre-tax basis through contributions to the plan. OpBiz currently matches, within prescribed limits, 50% of all employees’ contributions up to 6% of their individual earnings on an annual basis. The amount of the company match paid to the eligible plan participants was approximately $0.9 million for the year ended December 31, 2006 and $1.1 million for each of the years ended December 31, 2005 and 2004.
Health Insurance Plan and Self-Funded Employee Health Care Insurance Program
OpBiz maintains a qualified employee health insurance plan covering all employees who work in a full-time capacity. The plan, which is self-funded by OpBiz with respect to claims below a certain maximum amount, requires contributions from eligible employees and their dependents.
OpBiz’s employee health care benefits program is self-funded up to a maximum amount per claim. Claims in excess of this maximum amount are fully insured through a stop-loss insurance policy. Accruals are based on claims filed and estimates of claims incurred but not reported.
At December 31, 2006 and 2005, OpBiz’s estimated liabilities for all unpaid and incurred but not reported claims totaled approximately $2.4 million and $2.7 million respectively.
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| | Net
revenues | | Operating
income (loss) | | Pre-tax
income (loss) | | Net
income (loss) | |
| | (In thousands) | |
Year ended December 31, 2006: | | | | | | | | | | | | | | | |
First Quarter | | $ | 73,481 | | | $ | 8,213 | | | | $ | (5,458 | ) | | | $ | (5,458 | ) | |
Second Quarter | | 68,503 | | | 2,743 | | | | (8,953 | ) | | | (8,953 | ) | |
Third Quarter | | 63,931 | | | (633 | ) | | | (12,570 | ) | | | (12,570 | ) | |
Fourth Quarter | | 61,197 | | | 530 | | | | (68,695 | ) | | | (68,695 | ) | |
Year ended December 31, 2005: | | | | | | | | | | | | | | | |
First Quarter | | $ | 79,219 | | | $ | 14,054 | | | | $ | 356 | | | | $ | 356 | | |
Second Quarter | | 75,373 | | | 6,448 | | | | (6,139 | ) | | | (7,105 | ) | |
Third Quarter | | 74,373 | | | 4,978 | | | | (7,971 | ) | | | (7,053 | ) | |
Fourth Quarter | | 77,293 | | | (3,824 | ) | | | (16,107 | ) | | | (16,074 | ) | |
14. SUBSEQUENT EVENT (UNAUDITED)
Upon repayment of all amounts due under the Credit Agreement with the proceeds of the Loan, the warrant to purchase 2.5% of the equity in EquityCo issued to the Lenders at the closing of the Credit Agreement became exercisable. The number of outstanding warrants has been imputed as one million using the equity value on the date the warrants were issued. On March 14, 2007, the Company entered into a letter agreement with the Lenders to compensate the holders of any unexercised warrants upon the expiration of the exercise period but in any event, no later than March 30, 2007 at a cost of $1.61 per warrant. The exercise period expired on March 21, 2007 with no warrant holders electing to exercise and the Company made the payment to the Lenders on March 30, 2007. Accordingly, the Company has recorded the value of the warrants as $1.6 million which is included in other current liabilities in the accompanying consolidated balance sheets.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
BH/RE’s management evaluated, with the participation of BH/RE’s principal executive and principal financial officers, the effectiveness of BH/RE’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2006. Based on their evaluation, BH/RE’s principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2006.
There has been no change in BH/RE’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during BH/RE’s fiscal quarter ended December 31, 2006, that has materially affected, or is reasonably likely to materially affect, BH/RE’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The members of the board of managers and executive officers of BH/RE and its subsidiaries are as follows:
Name | | | | Age | | Position | |
Robert Earl | | | 55 | | | Manager of BH/RE and EquityCo, Co-Chairman of OpBiz | |
Douglas P. Teitelbaum | | | 41 | | | Manager of BH/RE and EquityCo, Co-Chairman of OpBiz | |
Michael V. Mecca | | | 58 | | | President and Chief Executive Officer of BH/RE and OpBiz | |
Donna Lehmann | | | 37 | | | Chief Financial Officer of OpBiz and Treasurer of BH/RE | |
Mark S. Helm | | | 36 | | | Senior Vice President, General Counsel and Secretary of OpBiz | |
Darby Davies | | | 56 | | | Senior Vice President of Casino Marketing of OpBiz | |
William Feather | | | 45 | | | Executive Vice President of Hotel and Food and Beverage of OpBiz | |
Michael A. Belletire | | | 60 | | | Manager of OpBiz | |
Eugene I. Davis | | | 52 | | | Manager of OpBiz | |
Thomas M. Smith | | | 54 | | | Manager of EquityCo and OpBiz | |
Robert Earl. Mr. Earl has been a manager of BH/RE since its formation in March 2003. Mr. Earl has over 30 years experience in the restaurant industry. Mr. Earl is the founder of Planet Hollywood and has been the chief executive officer and a member of the board of directors of Planet Hollywood and its predecessors since 1991. In November 1998, Mr. Earl was elected chairman of the board of directors of Planet Hollywood. Planet Hollywood filed voluntary petitions for relief under the Bankruptcy Code in October 1999 and October 2001.
Douglas P. Teitelbaum. Mr. Teitelbaum has been a manager of BH/RE since its formation in March 2003. Mr. Teitelbaum is the co-owner and a managing principal of Bay Harbour Management, an SEC-registered investment management firm focusing on investments in distressed securities, as well as acquiring and restructuring distressed companies. Mr. Teitelbaum joined Bay Harbour Management in 1996 as a principal and co-portfolio manager. Prior to joining Bay Harbour Management, Mr. Teitelbaum was a managing director at Bear, Stearns & Co. Inc. in the high yield and distressed securities department. Mr. Teitelbaum currently serves on the board of directors of Planet Hollywood, Telcove and the American Jewish Congress.
Michael V. Mecca. Mr. Mecca was appointed president and chief executive officer of BH/RE on March 6, 2006 and has been president and chief executive officer of OpBiz since May 2003. Mr. Mecca has over 30 years of experience in the hotel and gaming industries, including 13 years in various management positions with the predecessor to Caesars Entertainment, Inc. From April 2001 to April 2003, he was the vice president and general manager of Green Valley Ranch Resort Casino in Henderson, Nevada. From February 1999 to April 2001, Mr. Mecca served as the chief operating officer of Greektown Casino in Detroit, Michigan. From December 1997 to January 1999, Mr. Mecca held the positions of chief operating officer of Ramparts International and vice president and general manager of Mandalay Bay Resort & Casino in Las Vegas, Nevada. From March 1994 to December 1997, Mr. Mecca managed the development of the Crown Casino in Melbourne, Australia, one of the largest casinos in the world.
Donna Lehmann. Ms. Lehmann has been the chief financial officer of OpBiz and treasurer of BH/RE since the purchase of the Aladdin on September 1, 2004. She was the vice president of finance for Aladdin Gaming, LLC from July 2001 until August 31, 2004. Prior to joining the Aladdin, Ms. Lehmann held several progressive positions ending with Controller at Showboat Operating Company from November 1993 through January 1998 and was Controller for Ethel M. Chocolates (a subsidiary of M&M Mars, Inc.) from June 2000 until July 2001. She was a senior auditor with Arthur Andersen LLP from January 1998 to June 2000 and is a Certified Public Accountant in Nevada.
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Mark S. Helm. Mr. Helm has been the senior vice president, general counsel and secretary of OpBiz since November 2004. Prior to joining OpBiz, Mr. Helm was in-house counsel for Planet Hollywood and its subsidiaries from 1995 until October of 2004 and served as vice president, general counsel and secretary of Planet Hollywood from January 2000 until October of 2004. Mr. Helm is a member of the Florida Bar and maintains an In-House Counsel designation with the Nevada Bar.
Darby Davies. Ms. Davies has served as senior vice president, casino marketing of OpBiz since January 2, 2006. Ms. Davies has over 32 years of experience in the gaming industry. Prior to joining OpBiz, Ms. Davies was vice president of casino marketing at Mandalay Bay Resort & Casino, Las Vegas, Nevada from November of 1998 to April of 2005. From June of 1995 to October of 1998, she was director of player development at Bally’s Hotel & Casino in Las Vegas, Nevada. From March, 1993 to November 1994 she was vice president of casino marketing at the Desert Inn Hotel & Casino in Las Vegas, Nevada. Prior to 1993, Ms. Davies was employed at Caesars Tahoe for 15 years in various positions including associate vice president of Caesars World Branch Office Marketing (CWBOM).
William Feather. Mr. Feather has served as Executive Vice President of Hotel Operations and Food and Beverage since September of 2004. Mr. Feather has over 23 years of senior level management experience in hotel operations. Mr. Feather has served in several key positions for Starwood Hotels and Resorts Worldwide including regional hotel responsibility for Starwood in Dallas and Boston. Mr. Feather’s last position with Starwood prior to coming to Las Vegas was the General Manager of the Westin Mission Hills in Rancho Mirage, California where his scope of responsibility included managing the addition of Starwood Vacation Ownership Villas. Mr. Feather has been employed by Starwood since 1997.
Michael A. Belletire. Mr. Belletire has served as manager of OpBiz since October 2004. Mr. Belletire owns and operates his own management services firm, BMA Consulting, where he served as gaming regulatory and financial advisor to the secured Senior Lender Group to Aladdin Gaming until September 2004. From 1995 through 1999, he was the chief executive/staff director of the Illinois Gaming Board. Prior to 1995, Mr. Belletire served in several executive management positions with the State of Illinois.
Eugene I. Davis. Mr. Davis was appointed as a manager of OpBiz in November 2006. Mr. Davis is the Chairman and Chief Executive Officer of Pirinate Consulting Group, LLC, a privately-held consulting firm specializing in turn-around management, merger and acquisition consulting, hostile and friendly takeovers, proxy contests and strategic planning advisory services for domestic and international public and private business entities. Since forming PIRINATE in 1997, Mr. Davis has advised, managed, sold, liquidated and/or acted as a Chief Executive Officer, Chief Restructuring Officer, Director, Committee Chairman and/or Chairman of the Board of a number of businesses, including companies operating in the telecommunications, automotive, manufacturing, high-technology, medical technologies, metals, energy, financial services, consumer products and services, import-export, mining and transportation and logistics sectors. Prior to forming PIRINATE, Mr. Davis served as President, Vice-Chairman and Director of Emerson Radio Corp, and CEO and Vice-Chairman of Sport Supply Group, Inc. Mr. Davis began his career as an attorney and international negotiator with Exxon Corp. and Standard Oil Company (Indiana) and as a partner in two Texas-based law firms where he specialized in corporate/securities law, international transactions and restructuring advisory. Mr. Davis holds a BA from Columbia College, a Masters of International Affairs (MIA) in International Law and Organization from the School of International Affairs of Columbia University and a JD from the Columbia University School of Law.
Thomas M. Smith. Mr. Smith was appointed as a manager of EquityCo and OpBiz in March 2005. Mr. Smith has more than twenty-five years of senior level management experience in hotel real estate investment and operations. He is a senior vice president of Starwood Hotels and Resorts Worldwide (HOT) Real Estate Group. Prior to joining Starwood in 1998, Mr. Smith was a managing director with
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CIGNA Corporation’s Real Estate Investment Division, where he was responsible for hotel real estate investments for eleven years.
As OpBiz is our operating subsidiary, the information provided below discusses the board of managers of OpBiz (the “Board”).
Meetings of the Board of Managers
The Board met four times between January 1, 2006 and December 31, 2006. The Board has a standing Audit Committee, Compensation Committee, Compliance/Credit Committee, Executive Committee and a Renovation Committee. During 2006, none of the members of the Board attended less than 75% of the meetings held by the Board, or the total number of meetings held by all committees of the Board on which various members served. The current members of each of the Board’s standing committees are listed below.
The Audit Committee
The Board has a separately designated standing Audit Committee, whose current members are Eugene I. Davis and Michael A. Belletire. Mr. Belletire serves as Chairman of the Audit Committee. The Board has considered the independence of our Audit Committee members and determined that all members of the Audit Committee are independent for purposes of serving on the Audit Committee.
The Audit Committee meets periodically with BH/RE’s independent auditors, management, internal auditors and legal counsel to discuss accounting principles, financial and accounting controls, the scope of the annual audit, internal controls, regulatory compliance and other matters. The Audit Committee also advises the Board on matters related to accounting and auditing and selects the independent auditors. The independent auditors and internal auditors have complete access to the Audit Committee without management present to discuss results of their audit and their opinions on adequacy of internal controls, quality of financial reporting and other accounting and auditing matters. The Audit Committee operates under a formal charter, which is filed as an exhibit to this Annual Report on Form 10-K.
The Board has determined that all Audit Committee members are financially literate and has also determined that both Michael A. Belletire and Eugene I. Davis qualify as audit committee financial experts as such term is defined in Item 407(d)(5) of Regulation S-K. The Board has further determined that both audit committee members are independent as such term is defined in Rule 4200 of the NASDAQ Marketplace Rules and in the rules and regulations of the Securities and Exchange Commission.
The Compensation Committee
The current members of the Compensation Committee are Douglas P. Teitelbaum, Robert Earl and Thomas M. Smith. Each member of the Compensation Committee is a non-employee director. Mr. Teitelbaum serves as Chairman of the Compensation Committee.
The Compensation Committee reviews and takes action regarding terms of compensation, employment contracts and pension matters that concern officers and key employees. The responsibilities of the Compensation Committee are outlined in a written charter, which is filed as an exhibit to this Annual Report on Form 10-K.
The Compliance/Credit Committee
The current members of the Compliance/Credit Committee are Douglas P. Teitelbaum and Robert Earl. The Compliance/Credit Committee has the responsibility and authority to set policies for the establishment of the Gaming Compliance Program and the Credit Extension Program. The Gaming
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Compliance Program establishes policies and procedures to ensure that OpBiz remains in compliance with any and all gaming regulations. The Credit Extension Program establishes policies and procedures for extending credit to OpBiz’s gaming customers.
The Executive Committee
The current members of the Executive Committee are Douglas P. Teitelbaum and Robert Earl. The Executive Committee has the full power and authority to act for the Board between meetings in all matters on which the Board is authorized to act and where specific actions shall not have previously been taken by the Board unless (i) the Board has taken action restricting the authority of the Executive Committee to act; (ii) the action is the final approval of BH/RE’s annual budget or (iii) such action would require the consent of Starwood Nevada Holdings, LLC (as defined in the Second Amended and Restated Operating Agreement of EquityCo, LLC).
The Renovation Committee
The current members of the Renovation Committee are Douglas P. Teitelbaum and Robert Earl. The Renovation Committee has the authority to develop and implement the renovation capital expenditure budget for presentation and approval by the Board and, upon such approval, shall be further authorized to enter into and monitor any and all contracts, agreements or arrangements and payments made in connection with the renovation of the Aladdin.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Exchange Act requires our managers, executive officers and certain beneficial owners (collectively, “Section 16 Persons”) to file reports of beneficial ownership on Form 3 and reports of changes in ownership on Form 4 or 5 with the Securities and Exchange Commission. Copies of all such reports are required to be furnished to us. To our knowledge, based solely on a review of the copies of Section 16(a) reports furnished to us for fiscal year 2006, and other information, all filing requirements for the Section 16 Persons have been complied with during or with respect to fiscal year 2006, except Initial Statements of Beneficial Ownership on Form 3 were filed late on behalf of Mr. Feather and Mr. Davis.
Code of Ethics
BH/RE’s Code of Ethics, which is filed as an exhibit to this Annual Report on Form 10-K, has been approved by its Board and applies to all of its managers and executive officers, including its principal executive officer, principal financial officer and principal accounting officer. BH/RE’s Code of Ethics covers all areas of professional conduct including, but not limited to, conflicts of interests, disclosure obligations, insider trading, confidential information, as well as compliance with all laws and rules and regulations applicable to its business.
BH/RE undertakes to provide without charge to any person, upon request, a copy of this Code of Ethics. Requests should be directed in writing to BH/RE, L.L.C., Attention: General Counsel, 3667 Las Vegas Boulevard South, Las Vegas, Nevada 89109.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Objectives of Compensation Program
The Aladdin operates in a highly competitive and rapidly changing hotel casino industry. The Aladdin competes, and the PH Resort will compete, with other high-quality resorts and hotel casinos on the Las Vegas Strip and in downtown Las Vegas, as well as a large number of hotels in and near Las Vegas. In order to be and remain competitive with other companies in the hotel casino industry, one of the primary objectives of our compensation program is to attract, motivate and retain talented, qualified executives to manage and lead our Company. Our objective is to provide an executive compensation structure and system that is both competitive in the marketplace and also internally equitable based upon the weight and level of responsibilities in the respective executive positions. A further objective of our compensation program is to align the executive officers’ compensation with our membership interest holders, which will lead to the long-term enhancement of membership interest value. Our compensation program provides incentives and rewards for each executive officer for their contribution to the Company and for the achievement of the Company’s annual and long-term performance goals. We also endeavor to ensure that our compensation program reinforces business strategies and objectives consistent with the Company’s goals and that it is administered in a fair and equitable manner consistent with established policies and guidelines.
Executive compensation programs impact all employees by setting general levels of compensation and helping to create an environment of goals, rewards and expectations. Because we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation and incentive programs on all of our employees. Our compensation program is designed to reward teamwork and each team member’s contribution to the Company.
To enable us to achieve our objectives, we must maintain a flexible compensation structure to appropriately recognize and reward our existing and future executive officers. The ability to reward superior performance is essential if we want to provide superior services to our customers and remain competitive in the hotel casino industry. The Compensation Committee relies on its own judgment in setting each executive officer’s compensation and not on any rigid guidelines or formula. Key factors affecting the Committee’s compensation judgments include: (i) the nature and scope of an executive’s responsibilities; (ii) an executive officer’s performance (including contribution to the Company’s financial results); and (iii) market compensation for similar responsibilities.
Elements of Compensation Program and Why We Chose Each (How It Relates to Objectives)
To accomplish these objectives, our executive officers’ compensation encompasses a mix of base salary, annual discretionary cash bonuses, annual non-equity incentive based awards, membership interest, severance benefits, a small number of perquisites and a variety of other benefits that are generally available to all of our salaried employees, such as a 401(k) Plan and health and welfare benefits.
The Company chooses to pay each element of compensation in order to attract and retain the necessary executive talent, reward annual performance and provide incentive for their balanced focus on long-term and short-term strategic goals. The amount of each element of compensation is determined by or under the direction of our Compensation Committee, which uses the following factors to determine the amount of compensation and other benefits to pay each executive: (i) performance against corporate and individual objectives for the previous year; (ii) difficulty of achieving desired results in the coming year; (iii) value of their unique skills and capabilities to support long-term performance of the Company; (iv) performance of their general management responsibilities; and (v) contribution as a member of the
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executive management team. The elements of our compensation package are comparable to other hotel/casino operators in the Las Vegas market.
These elements fit into our overall compensation objectives by helping to secure the future potential of our operations, providing proper compliance and regulatory guidance, and helping to create a cohesive team. Our policy for allocating between long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our Company and our membership interest holders. For example, our annual non-equity incentive based bonus program is designed to reward executives for meeting short-term goals which include annual performance targets while our equity awards program rewards executives for long-term Company equity growth. Total compensation is comprised of cash compensation in the form of base salary to meet competitive salary norms and in the form of bonus payments to reward achievement of short-term goals on an annual basis and non-cash compensation in the form of options to purchase membership interests to retain talented, qualified executives and align their interests with that of our other membership interest holders. We believe that this allocation is competitive within the marketplace and appropriate to fulfill our stated policies.
Base Salaries
Generally, base salaries for executives are administered on a subjective, individual basis by the Compensation Committee using as a guideline a variety of factors, including the executive’s scope of responsibilities, an assessment of similar roles within the hotel/casino industry, and internal equity among executives. We have a significant level of competition for attracting and retaining talented, qualified executive officers in the hotel casino industry. Base salaries are set at levels that allow the Company to attract and retain superior leaders that will enable the Company to deliver on its business goals. Base compensation is targeted to recognize each executive officer’s unique value and historical contributions to our success in light of salary norms in our industries and the general marketplace. The criteria for measurement include data secured from a range of industry and general market sources.
Variation from salary norms occurs when the value of the individual’s expertise, performance, specific skill set, experience and level of contribution relative to others in the organization justifies variation. Base salary recognizes an employee’s role, responsibilities, skills, experience and sustained performance. We also recognize that it is necessary to provide executives with a portion of total compensation that is delivered each month and provides a balance to other pay elements that are more at risk, such as annual discretionary or incentive based bonuses.
The Company is a party to employment agreements, as amended, with all of the current named executive officers except Mr. William Feather. Mr. Feather is an employee of Starwood and we reimburse Starwood for Mr. Feather’s payroll expense as outlined in the management agreement with Starwood. See Item 13. “Certain Relationships and Related Transactions, and Director Independence—Transactions with Starwood.” Base salary is reviewed annually by the Compensation Committee and may be increased based on individual performance during the prior calendar year and cost of living adjustments, as appropriate. Pursuant to these employment agreements, however, a decrease in base salary is prohibited.
Bonuses
Our practice is to award annual cash bonuses based upon performance objectives. Executive bonuses are used to focus our management on achieving key corporate financial objectives, to motivate certain desired individual behaviors and to reward substantial achievement of these Company financial objectives and individual goals. Executive officers have the opportunity to earn a bonus of up to a maximum of 50% of their base salary (or, in the case of the Chief Executive Officer, up to a maximum of 100% of his base salary). Bonuses are determined based on a combination of qualitative and quantitative measures, the
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details of which are established annually for each executive as performance goals. The quantitative and qualitative performance goals used to determine executive bonuses include the achievement of the Company’s EBITDA goals for the year (such EBITDA goals as are determined by the Board of Managers or Compensation Committee, as applicable) and also include goals that vary for each executive based on his/her responsibilities, which may include: discreet measures, benchmarks and standards of operation such as departmental EBITDA goals being achieved (for revenue generating departments), departmental productivity, cost containment, customer services and such other measures, benchmarks and standards as are established for such executives officers’ respective department. When determining the bonuses for executive officers, the Compensation Committee makes a final determination based on the performance of the executive and the division or group that he/she leads relative to the performance-based goals. However, the Company’s overall performance and achievement of annual, targeted EBITDA goals is at least a 25% factor in all performance goals. In this regard, we use full cash bonuses to reward performance achievements by our executive officers generally only as to years in which we are substantially profitable; we use salary as a base amount necessary to match our competitors for executive talent. Bonuses, if any, are determined and paid on an annual basis after completion of the bonus year.
Notwithstanding the foregoing, and pursuant to the Company’s employment agreement with Darby Davies, Darby Davies receives guaranteed minimum, annual bonuses as follows: (i) a minimum bonus of at least $50,000 on January 2, 2007; (ii) a minimum bonus of at least $75,000 on January 2, 2008; and (iii) a minimum bonus of at least $100,000 on December 31, 2008.
Membership Interests; Long-Term Equity Incentives
We consider the granting of options to purchase membership interests to be an extremely effective form of compensation for executive officers because it provides long-term incentives for superior performance, leading to enhanced membership interest value, and aligning executive compensation with the interests of the other membership interest holders. We believe that granting options to purchase membership interests is a great method of motivating the executive officers to manage our Company in a manner that is consistent with the interests of our Company and the membership interest holders. Also, it is a key retention tool because the options to purchase membership interests vest over a period of years. Although there is no set formula for the granting of these options to individual executives, generally the size of an executive’s option award is based on the executive’s level and role within the Company assessed against long-term compensation data for competitive positions.
The Company is a party to employment agreements, as amended, with all of the current named executive officers except Mr. William Feather. As stated above, Mr. Feather is an employee of Starwood. The employment agreements have initial terms of two to five years. The employment agreements provide, depending on the terms thereof, that these executives are entitled to options to purchase between 0.2% and 3% of the equity in MezzCo. The options were granted with an exercise price equal to or greater than the fair value at the date of grant. The options are “time based” and portions thereof vest annually in equal increments throughout the terms of the respective employment agreements. The executive must remain employed by the Company at each year’s end to receive the option’s vested amount attributable to that year.
Severance Benefits
We believe that companies should provide reasonable severance benefits to their executive officers. These severance benefits should reflect the fact that it may be difficult for the executives to find comparable employment within a short period of time. They also should disentangle the company from the executive as soon as practicable. For instance, while it is possible to provide salary continuation to an executive during the job search process, which in some cases may be less expensive than a lump-sum
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severance payment, we prefer to pay a lump-sum severance payment in order to most cleanly sever the relationship as soon as practicable.
The Company is a party to employment agreements, as amended, with all of the current named executive officers except Mr. William Feather. As stated above, Mr. Feather is an employee of Starwood. The employment agreements each contain severance provisions as detailed in the discussion of individual employment agreements below.
Perquisites
We limit the perquisites that we make available to our executive officers, and we annually review the perquisites that executive officers receive. Other than Mr. Mecca, our executive officers are not entitled to benefits that are not otherwise available to all our employees and do not receive perquisites. Mr. Mecca receives perquisites that are commensurate with industry norms. In this regard it should be noted that we do not provide pension arrangements, post-retirement health coverage, or similar benefits for our executives or employees.
401(k) Plan and Other Benefits
Our executive officers are eligible for the same level and offering of benefits made available to other employees, including the Company’s 401(k) Plan and health and welfare benefit programs.
OpBiz has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its employees, which it assumed from Aladdin Gaming on September 1, 2004. The plan allows employees to defer, within prescribed limits, up to 15% of their income on a pre-tax basis through contributions to the plan. OpBiz currently matches, within prescribed limits, 50% of all employees’ contributions up to 6% of their individual earnings on an annual basis. The amount of the company match paid to the eligible plan participants was approximately $0.9 million for the year ended December 31, 2006 and $1.1 million for the years ended December 31, 2005 and 2004, respectively. All of our named executive officers participated in our 401(k) plan and received matching funds.
We also maintain other executive benefits that we consider necessary in order to offer fully competitive opportunities to our executive officers. Executive officers are eligible to participate in all of our employee health and welfare benefit plans, such as medical, dental, group life, disability, and accidental death and dismemberment insurance, in each case on the same basis as other employees.
How the Company Chose Amounts and/or Formulas for Each Element
Each executive’s current and prior compensation is considered in setting future compensation. To some extent, our compensation plan is based on the market and the companies we compete against for executives. We believe that the elements of our plan (e.g., base salary, bonus and membership interest options) are similar to the elements used by many comparable companies in the hotel casino industry. The exact compensation and benefits are chosen in an attempt to balance our competing objectives of attracting, retaining and motivating executives, fairness to all membership interest holders, and internal equitability for respective executive positions.
In addition, as of the end of fiscal year 2006, there has been no leadership turnover in the Company by our executive officers. We believe this is a good indication that our leadership compensation package is reasonable.
Accounting and Tax Treatment
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) requiring that compensation cost relating to share-based payment transactions be recognized in the operating expenses.
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The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s estimated requisite service period (generally the vesting period of the equity award) on a straight-line basis. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with APB No. 25, and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company adopted SFAS No. 123(R) using the modified prospective method and, accordingly, financial statement amounts for prior periods presented in this Form 10-K have not been restated to reflect the fair value method of recognizing compensation cost relating to non-qualified stock options.
The accounting treatment of compensation generally has not been a factor in determining the amounts of compensation for our executive officers. However, the Company considers the accounting impact of various program designs to balance the potential costs to the Company with the benefit/value to the executive. The Company considers the tax impact of long-term incentive compensation awards, and therefore to the extent practical, strives to deliver pay that qualifies under IRS section 162(m) as performance-based to obtain a corporate tax deduction. Under 162(m), the Company may not deduct compensation expense for the named executives if that expense is over $1,000,000, except that performance-based pay is excluded from the total pay applying to 162(m).
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2006 Summary Compensation Table
The following table sets forth the compensation paid our accrued for our principal executive officer, our principal financial officer and other executive officers for the year ended December 31, 2006.
2006 SUMMARY COMPENSATION TABLE
| | Annual Compensation | | | | | |
Name and Principal Position | | | | Year | | Salary
($) | | Bonus
($) | | Option
Awards
($)(2) | | Non-Equity
Incentive Plan
Compensation
($) (3) | | All Other
Compensation
($) | | Total ($) | |
Michael V. Mecca | | 2006 | | 565,477 | | — | | 235,280 | | | — | | | | — | | | 800,757 | |
President and Chief Executive | | | | | | | | | | | | | | | | | | | |
Officer of BH/RE and OpBiz(1) | | | | | | | | | | | | | | | | | | | |
Donna Lehmann | | 2006 | | 283,821 | | 100,000 | | 23,528 | | | 37,813 | | | | — | | | 445,162 | |
Treasurer of BH/RE and | | | | | | | | | | | | | | | | | | | |
Chief Financial Officer of OpBiz | | | | | | | | | | | | | | | | | | | |
Mark S. Helm | | 2006 | | 243,562 | | 200,000 | | 15,685 | | | 32,450 | | | | — | | | 491,697 | |
Senior Vice President, General | | | | | | | | | | | | | | | | | | | |
Counsel and Secretary of OpBiz | | | | | | | | | | | | | | | | | | | |
Darby Davies | | 2006 | | 245,887 | | — | | 23,528 | | | 50,000 | | | | — | | | 319,415 | |
Senior Vice President of Casino | | | | | | | | | | | | | | | | | | | |
Marketing of OpBiz | | | | | | | | | | | | | | | | | | | |
William Feather | | 2006 | | 300,527 | | — | | 15,685 | | | 117,266 | | | | — | | | 433,478 | |
Executive Vice President of Hotel | | | | | | | | | | | | | | | | | | | |
and Food and Beverage of OpBiz(4) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(1) Mr. Mecca’s annual compensation includes an automobile allowance of $32,927.
(2) The annual compensation for options vested during 2006 has been computed in accordance with the provisions of SFAS 123 (R) as discussed in Note 2, “ Summary of Significant Accounting Policies” to our financial statements.
(3) Ms. Lehmann and Messrs. Helm and Feather earned compensation in accordance with the Company’s annual bonus program for achieving certain short-term goals as described above. Ms. Davies received a bonus payment in accordance with the terms of her employment agreement.
(4) Mr. Feather is an employee of Starwood. Salary presented here represents all amounts paid to Starwood for reimbursement of Mr. Feather’s compensation expense under the terms of the management agreement. See Item 13. “Certain Relationships and Related Transactions, and Director Independence—Transactions with Starwood.”
Michael V. Mecca Employment Agreement
Mr. Mecca serves as president and chief executive officer of BH/RE and OpBiz under an employment agreement that expires in May 2008. The employment agreement automatically renews for successive five-year terms unless either party elects not to renew at least 90 days prior to the end of a term. OpBiz paid Mr. Mecca a base salary of $544,500 in 2006, which is subject to annual upward adjustments. OpBiz pays Mr. Mecca a performance bonus determined by OpBiz’s board of managers based on OpBiz’s financial performance and certain other factors. The agreement provides Mr. Mecca with an option to purchase up to 3% of the equity of MezzCo at an exercise price based on a current subscription valuation, vesting one-third annually beginning on April 11, 2004. Mr. Mecca has granted OpBiz a right of first refusal with
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respect to any proposed sales of his equity interests in MezzCo. The option is subject to adoption by the Company of an option plan which plan may be subject to the approval of the Nevada Gaming Commission.
OpBiz may terminate Mr. Mecca’s employment immediately at any time for cause. If OpBiz terminates Mr. Mecca’s employment for cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) base salary earned but unpaid through the date of termination; (ii) nonreimbursed business expenses; (iii) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (iv) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “cause” is not specifically defined in Mr. Mecca’s employment agreement. Based on the foregoing, in the event that OpBiz had terminated Mr. Mecca’s employment for cause on December 31, 2006, OpBiz would have been obligated to pay Mr. Mecca $20,942 which represents accrued but unpaid base salary.
OpBiz may terminate Mr. Mecca’s employment immediately at any time without cause. If OpBiz terminates Mr. Mecca’s employment without cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) severance in the amount of twelve (12) months of his then annual base salary; (ii) base salary earned but unpaid through the date of termination; (iii) all accrued but unpaid bonus up to the date of termination, as determined by OpBiz’s Board of Managers utilizing EBITDA targets established pursuant to the employment agreement against year to date budgets (adjusted for budgeting seasonality); (iv) nonreimbursed business expenses; (v) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (vi) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). Based on the foregoing, in the event that OpBiz had terminated Mr. Mecca’s employment without cause on December 31, 2006, OpBiz would have been obligated to pay Mr. Mecca further compensation in the approximate total amount of $544,500.
Donna Lehmann Employment Agreement
Ms. Lehmann serves as the treasurer of BH/RE and chief financial officer of OpBiz under an employment agreement that expires on September 1, 2007. OpBiz paid Ms. Lehmann a base salary of $302,500 in 2006, which is subject to annual upward adjustments at a minimum of 5% per annum. Ms. Lehmann was paid a one-time transition bonus of $75,000 in 2004 for her transition from vice president of finance for Aladdin Gaming to her current position with OpBiz. She will receive an annual discretionary bonus of up to 50% of her annual compensation determined by OpBiz’s board of managers based on OpBiz’s financial performance and certain other factors. The agreement provides that Ms. Lehmann is eligible to receive an option to purchase up to 0.3% of the equity of MezzCo at an exercise price based on a $100 million equity value, vesting one-third annually beginning on September 1, 2005.
OpBiz may terminate Ms. Lehmann’s employment immediately at any time for cause. If OpBiz terminates Ms. Lehmann’s employment for cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) base salary earned but unpaid through the date of termination; (ii) nonreimbursed business expenses; (iii) benefits under benefit plans and programs that are earned and vested by the date of termination; and (iv) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “cause” is defined in Ms. Lehmann’s employment agreement as follows: (i) failure to abide by the Company’s policies and procedures; (ii) misconduct, insubordination, or inattention to the Company’s business; (iii) failure to perform the duties required of her up to the standards established by the Board of Managers, or other material breach of the employment agreement (other than as a result of a disability); or (iv) failure or inability to obtain or maintain a license required of her by any regulatory authority having jurisdiction over
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the Company. Based on the foregoing, in the event that OpBiz had terminated Ms. Lehmann’s employment for cause on December 31, 2006, OpBiz would have been obligated to pay Ms. Lehmann $11,635 which represents accrued but unpaid base salary.
OpBiz may terminate Ms. Lehmann’s employment at any time without cause upon fifteen (15) days written notice to Ms. Lehmann of its intent to terminate the employment agreement, or, in OpBiz’s sole discretion, the equivalent of two (2) weeks of her then annual base salary in lieu of notice. If OpBiz terminates Ms. Lehmann’s employment without cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) severance in the amount of twelve (12) months of her then annual base salary; provided that severance benefits shall not exceed an amount equivalent to her base salary from the date of termination to the date the employment agreement would otherwise expire but for earlier termination (ii) base salary earned but unpaid through the date of termination; (iii) accrued paid time off earned through the date of termination; (iv) nonreimbursed business expenses; (v) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (vi) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). Based on the foregoing, in the event that OpBiz had terminated Ms. Lehmann’s employment without cause on December 31, 2006, OpBiz would have been obligated to pay Ms. Lehmann further compensation in the approximate total amount of $201,667.
Upon Ms. Lehmann’s death or disability, her employment agreement terminates immediately. If Ms. Lehmann’s employment is terminated due to her death or disability, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than (to Ms. Lehmann, or her estate or legal representative, as applicable): (i) base salary earned but unpaid through the date of termination; (ii) bonus earned but unpaid through the date of termination; (iii) nonreimbursed business expenses; (iv) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (v) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “disability” is defined in Ms. Lehmann’s employment agreement as her incapacity, certified by a licensed physician selected by the Company, which precludes her from performing the essential functions of her duties under the employment agreement for sixty (60) days or more. In the event that she disagrees with the conclusions of the Company’s physician, she (or her representative) shall designate a physician, and both physicians shall jointly select a third physician, who shall make the determination which determination shall be final and binding on the parties. Based on the foregoing, in the event that Ms. Lehmann’s employment was terminated for death or disability on December 31, 2006, OpBiz would have been obligated to pay Ms. Lehmann $11,635 which represents accrued but unpaid base salary.
Mark S. Helm Employment Agreement
Mr. Helm serves as senior vice president, general counsel and secretary of OpBiz under an employment agreement that expires on November 2, 2007. If Mr. Helm remains employed by OpBiz after his employment agreement expires, any such employment will be on an at-will basis unless he and OpBiz agree in writing to extend the terms of his agreement. OpBiz paid Mr. Helm a base salary of $259,600 in 2006, which is subject to annual upward adjustments. He will receive an annual discretionary bonus of up to 50% of his annual compensation determined by OpBiz’s board of managers based on OpBiz’s financial performance and certain other factors. The agreement provides that Mr. Helm is eligible to receive an option to purchase up to 0.2% of the equity of MezzCo at an exercise price based on a $100 million equity value, vesting one-third annually beginning on November 2, 2005.
OpBiz may terminate Mr. Helm’s employment immediately at any time for cause. If OpBiz terminates Mr. Helm’s employment for cause, our obligation to pay any further compensation or other amounts
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payable under the agreement terminates on the date of termination, other than: (i) base salary earned but unpaid through the date of termination; (ii) nonreimbursed business expenses; (iii) benefits under benefit plans and programs that are earned and vested by the date of termination; and (iv) options to purchase membership interests in MezzCo that have vested by the date of termination. The term “cause” is defined in Mr. Helm’s employment agreement as follows: (i) failure to abide by the Company’s policies and procedures; (ii) misconduct, insubordination, or inattention to the Company’s business; (iii) failure to perform the duties required of her up to the standards established by the Board of Managers, or other material breach of the employment agreement (other than as a result of a disability); or (iv) failure or inability to obtain or maintain a license required of him by any regulatory authority having jurisdiction over the Company. Prior to a termination for cause, OpBiz must provide a written letter of deficiency to Mr. Helm that details his deficient conduct and thereafter provides him thirty (30) days to cure such deficiency. If, after thirty (30) days, OpBiz continues to believe cause exists to terminate him, then OpBiz shall send a second letter to Mr. Helm terminating him that memorializes his failure to cure the asserted deficiency. Based on the foregoing, in the event that OpBiz had terminated Mr. Helm’s employment for cause on December 31, 2006, OpBiz would have been obligated to pay Mr. Helm $9,985 which represents accrued but unpaid base salary.
OpBiz may terminate Mr. Helm’s employment at any time without cause upon fifteen (15) days written notice to Mr. Helm of its intent to terminate the employment agreement, or, in OpBiz’s sole discretion, the equivalent of two (2) weeks of his then annual base salary in lieu of notice. If OpBiz terminates Mr. Helm’s employment without cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) severance in the amount of twelve (12) months of his then annual base salary; provided that severance benefits shall not exceed an amount equivalent to her base salary from the date of termination to the date the employment agreement would otherwise expire but for earlier termination (ii) base salary earned but unpaid through the date of termination; (iii) bonus earned but unpaid through the date of termination; (iv) nonreimbursed business expenses; (v) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (vi) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). Based on the foregoing, in the event that OpBiz had terminated Mr. Helm’s employment without cause on December 31, 2006, OpBiz would have been obligated to pay Mr. Helm further compensation in the approximate total amount of $173,067.
In the event that there is a change in control of OpBiz, other than through a public offering, Mr. Helm may terminate his employment upon thirty (30) days written notice to OpBiz. If Mr. Helm terminates his employment for a change in control, other than through a public offering, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) severance in the amount of twelve (12) months of his then annual base salary; provided that severance benefits shall not exceed an amount equivalent to her base salary from the date of termination to the date the employment agreement would otherwise expire but for earlier termination; (ii) base salary earned but unpaid through the date of termination; (iii) bonus earned but unpaid through the date of termination; (iv) nonreimbursed business expenses; (v) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (vi) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “change in control” is not specifically defined in Mr. Helm’s employment agreement. Based on the foregoing, in the event that there was a change in control of OpBiz, other than through a public offering, and Mr. Helm terminated his employment on December 31, 2006, OpBiz would have been obligated to pay Mr. Helm further compensation in the approximate total amount of $173,067.
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Upon Mr. Helm’s death or disability, his employment agreement terminates immediately. If Mr. Helm’s employment is terminated due to his death or disability, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than (to Mr. Helm, or his estate or legal representative, as applicable): (i) base salary earned but unpaid through the date of termination; (ii) bonus earned but unpaid through the date of termination; (iii) nonreimbursed business expenses; (iv) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (v) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “disability” is defined in Mr. Helm’s employment agreement as his incapacity, certified by a licensed physician selected by the Company, which precludes him from performing the essential functions of his duties under the employment agreement for sixty (60) days or more. In the event that he disagrees with the conclusions of the Company’s physician, he (or his representative) shall designate a physician, and both physicians shall jointly select a third physician, who shall make the determination which determination shall be final and binding on the parties. Based on the foregoing, in the event that Mr. Helm’s employment was terminated for death or disability on December 31, 2006, OpBiz would have been obligated to pay Mr. Helm $9,985 which represents accrued but unpaid base salary.
Darby Davies Employment Agreement
Ms. Davies serves as senior vice president of casino marketing of OpBiz under an employment agreement effective as of January 2, 2006. The term of the agreement is for three (3) years, terminating on December 31, 2008. OpBiz paid Ms. Davies a base salary of $250,000 in 2006, which is subject to annual upward adjustments, and she is eligible to participate in OpBiz’s bonus program. She will receive a minimum bonus of $50,000 on January 2, 2007, $75,000 on January 2, 2008 and $100,000 on December 31, 2008. The agreement also provides Ms. Davies with an option to purchase up to 0.25% of the equity of MezzCo at an exercise price based on a $100 million equity value, vesting 40% on January 2, 2007, 40% on January 2, 2008 and 20% on December 31, 2008.
OpBiz may terminate Ms. Davies’ employment immediately upon written notice for cause. If OpBiz terminates Ms. Davies’ employment for cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) base salary earned but unpaid through the date of termination; (ii) nonreimbursed business expenses; (iii) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (iv) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “cause” is defined in Ms. Davies’ employment agreement as the following: (i) commission of any act of material fraud or gross negligence by her in the course of her employment thereunder which, in the case of gross negligence, has a materially adverse affect on the goodwill, business or financial condition of the Company; (ii) engagement by her in any conduct or commission by her of any act which is materially injurious or detrimental to the substantial interests of the Company; (iii) engagement by her in any act, whether with respect to her employment or otherwise, which is in violation of the criminal laws of the United States or any state thereof, involving acts of moral turpitude; or (iv) a failure to secure or maintain a license required of her by any regulatory authority having jurisdiction over the Company. Prior to a termination for cause, OpBiz must provide a written letter of deficiency to Ms. Davies which details her deficient conduct and thereafter provides her thirty (30) days to cure such deficiency if capable of being cured. If such activity is incapable of being cured or if, after thirty (30) days, Ms. Davies fails to cure the deficient conduct, OpBiz may terminate Ms. Davies’ employment agreement for cause. If OpBiz elects to terminate Ms. Davies’ employment agreement, it shall send a second letter to Ms. Davies terminating her that memorializes her failure to cure the asserted deficiency. Based on the foregoing, in the event that
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OpBiz had terminated Ms. Davies’ employment for cause on December 31, 2006, OpBiz would have been obligated to pay Ms. Davies $9,615 which represents accrued but unpaid base salary.
OpBiz may terminate Ms. Davies’ employment at any time without cause upon fifteen (15) days written notice to Ms. Davies of its intent to terminate the employment agreement. If OpBiz terminates Ms. Davies’ employment without cause, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than: (i) severance in the amount of eighteen (18) months, but not to exceed the balance of the term of her employment agreement, of her annual base salary to which she would have been entitled had the employment agreement not been terminated; (ii) base salary earned but unpaid through the date of termination; (iii) bonus earned but unpaid through the date of termination; (iv) nonreimbursed business expenses; (v) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (vi) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). Based on the foregoing, in the event that OpBiz had terminated Ms. Davies’ employment without cause on December 31, 2006, OpBiz would have been obligated to pay Ms. Davies further compensation in the approximate total amount of $375,000.
Upon Ms. Davies’ death or disability, her employment agreement terminates immediately. If Ms. Davies’ employment is terminated due to her death or disability, our obligation to pay any further compensation or other amounts payable under the agreement terminates on the date of termination, other than (to Ms. Davies, or her estate or legal representative, as applicable): (i) base salary earned but unpaid through the date of termination; (ii) bonus earned but unpaid through the date of termination; (iii) nonreimbursed business expenses; (iv) benefits under benefit plans and programs that have been earned and vested by the date of termination; and (v) options to purchase membership interests in MezzCo that have vested by the date of termination (provided that any vested options are exercised within ninety (90) days of such termination). The term “disability” is defined in Ms. Davies’ employment agreement as her incapacity, certified by a licensed physician selected by her and approved by the Company, which precludes her from performing the essential functions of her duties under the employment agreement for forty-five (45) days or more. Based on the foregoing, in the event that Ms. Davies’ employment was terminated for death or disability on December 31, 2006, OpBiz would have been obligated to pay Ms. Davies $9,615 which represents accrued but unpaid base salary.
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GRANTS OF PLAN BASED AWARDS FOR 2006
| | Estimated Future
Payouts Under
Non-Equity
Incentive Plan
Awards ($)(1) | |
Name | | | | Target | |
Michael V. Mecca | | | 545,000 | | |
Donna Lehmann | | | 151,250 | | |
Mark S. Helm | | | 129,800 | | |
Darby Davies | | | 125,000 | | |
William Feather(2) | | | 130,295 | | |
| | | | | | | |
(1) The target estimated future payouts under non-equity incentive plan awards represents the maximum amount payable under the Company’s bonus plan. The target will be met if all short-term goals detailed in the underlying plan are met.
(2) As stated above, Mr. Feather is an employee of Starwood. Mr. Feather participates in the Company’s bonus plan in the same manner as other Company officers.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
| | Options Awards | |
Name | | | | Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)(1) | | Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)(1) | | Option Exercise
Price ($)(1) | | Option
Expiration
Date(2) | |
Michael V. Mecca | | | 3,000 | | | | — | | | | 1,000.00 | | | | |
Donna Lehmann | | | 233 | | | | 67 | | | | 1,000.00 | | | | |
Mark S. Helm | | | 156 | | | | 44 | | | | 1,000.00 | | | | |
Darby Davies | | | 83 | | | | 167 | | | | 1,000.00 | | | | |
William Feather | | | 156 | | | | 44 | | | | 1,000.00 | | | | |
| | | | | | | | | | | | | | | | | |
(1) MezzCo membership interests have not been unitized. The implied number of units and equity value has been computed based on the MezzCo equity contribution on the grant date. The option exercise price is based on a $100 million equity value. The options are not exercisable until a triggering event occurs. The options vest in accordance with the underlying employment agreements. Mr. Mecca’s options vest one-third annually beginning on April 11, 2004. Ms. Lehmann and Mr. Feather’s options vest one-third annually beginning September 1, 2005. Mr. Helm’s options vest one-third annually beginning on November 2, 2005. Ms. Davies options vest 40% on January 2, 2007, 40% on January 2, 2008 and 20% on December 31, 2008.
(2) Participants have 90 days after an event occurs to exercise options.
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2006 DIRECTOR COMPENSATION
Name | | | | Fees Earned
or Paid in
Cash ($)(1) | | Total
($)(1) | |
Robert Earl | | | — | | | — | |
Douglas P. Teitelbaum | | | — | | | — | |
Michael A. Belletire | | | 75,000 | | | 75,000 | |
Eugene I. Davis | | | 75,000 | | | 75,000 | |
Thomas M. Smith | | | — | | | — | |
(1) All managers are reimbursed for expenses connected with attendance at meetings of the Board.
COMPENSATION COMMITTEE REPORT
Our Compensation Committee reviewed and discussed with our management the “Compensation Discussion and Analysis” contained in this Form 10-K. Based on that review and discussions, our Compensation Committee recommended to our Board of Managers that the “Compensation Discussion and Analysis” be included in this Form 10-K.
Compensation Committee
Douglas P. Teitelbaum
Robert Earl
Thomas M. Smith
Compensation Committee Interlocks and Insider Participation
During the 2006 fiscal year, Douglas P. Teitelbaum, Robert Earl and Theodore W. Darnall (a former member of the Board) served as members of the Board’s Compensation Committee. For additional information concerning related-party transactions involving Messrs. Teitelbaum and Earl or other members of the Board, see Item 13. “Certain Relationships and Related Transactions, and Director Independence.”
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The table below sets forth the beneficial ownership of BH/RE’s voting and equity membership interests and OpBiz’s membership interests as of April 2, 2007 by:
· each member of the board of managers of BH/RE;
· Starwood Nevada Holdings, LLC; and
· BH/RE’s board of managers and executive officers as a group.
In addition, the table below sets forth, as of April 2, 2007, the beneficial ownership of each person known by BH/RE to be the beneficial owner of more than five percent of its voting membership interests, which is the only class of voting securities of BH/RE.
Unless otherwise indicated, each person listed in the table below has sole voting and investment power over the percentage of voting and equity membership interests listed opposite such person’s name. Except as indicated below, none of the Company’s executive officers or managers own any equity of BH/RE.
| | BH/RE | | OpBiz | |
Name | | | | Percent of
Voting
Membership
Interests | | Percent of
Equity
Membership
Interests | | Percent of
Economic
Membership
Interests(2) | |
Douglas P. Teitelbaum(1),(2) | | | 50.00 | % | | | — | | | | — | | |
Robert Earl(2),(3) | | | 50.00 | % | | | — | | | | — | | |
Starwood Nevada Holdings, LLC(2),(4) | | | — | | | | — | | | | 15.00 | % | |
BH Casino and Hospitality LLC I(1) | | | — | | | | 40.75 | % | | | 34.64 | % | |
BH Casino and Hospitality LLC II(1) | | | — | | | | 18.50 | % | | | 15.72 | % | |
OCS Consultants, Inc(3) | | | — | | | | 40.75 | % | | | 34.64 | % | |
All members of the board of managers and executive officers as a group (10 persons) | | | 100.00 | % | | | 100.00 | % | | | 85.00 | % | |
| | | | | | | | | | | | | | | |
(1) The address for Mr. Teitelbaum, BH Casino and Hospitality LLC I and BH Casino and Hospitality LLC II is 885 Third Avenue, 34th Floor, New York, New York 10022. Mr. Teitelbaum beneficially owns all of the equity membership interests beneficially owned by BH Casino and Hospitality I and II because Mr. Teitelbaum is the sole manager of BH Casino and Hospitality I and II. Mr. Teitelbaum disclaims beneficial ownership of such equity membership interests, except to the extent of his pecuniary interest therein.
(2) All of the outstanding membership interests of OpBiz are held by MezzCo and, in turn, all of the outstanding membership interests of MezzCo are held by EquityCo. EquityCo is owned 85% by BH/RE and 15% by Starwood. Because OpBiz and MezzCo are both single member limited liability companies and their respective operating agreements provide that the sole member of each entity has full, exclusive and complete discretion in the management and control of the entity, the board of managers of EquityCo directly or indirectly controls the management and affairs of MezzCo and OpBiz. Under its operating agreement, EquityCo is managed by a three-member board of managers, which includes two BH/RE appointees, Mr. Teitelbaum and Mr. Earl, and one Starwood appointee, Mr. Darnall. Because all actions of the EquityCo board of managers must be approved by majority vote, except certain actions which require unanimous approval, BH/RE can direct the voting and disposition of the membership interests of MezzCo owned by EquityCo and, in turn, the membership interests of OpBiz owned by MezzCo. Mr. Teitelbaum and Mr. Earl, individually and through their respective affiliates, own 100% of BH/RE. All actions of BH/RE require the approval of both
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Mr. Teitelbaum and Mr. Earl. Consequently, Mr. Teitelbaum and Mr. Earl share voting and investment power over the membership interests of MezzCo owned by EquityCo and, in turn, the membership interests of OpBiz owned by MezzCo, and therefore are deemed to beneficially own such membership interests. Mr. Teitelbaum and Mr. Earl both disclaim beneficial ownership of the membership interests of EquityCo owned by Starwood.
(3) The address for Mr. Earl is 7598 West Sand Lake Road, Orlando, Florida 32819. Mr. Earl beneficially owns all of the equity membership interests beneficially owned by OCS because OCS is wholly owned and controlled by Mr. Earl.
(4) The address for Starwood Nevada Holdings, LLC is c/o Starwood Hotels & Resorts Worldwide, Inc., 1111 Westchester Avenue, White Plains, New York 10604.
Equity Compensation Plan Information
Plan Category | | | | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights | | Weighted-average exercise
price of outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column(a)) | |
| | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders | | | 4,850 | | | | $ | 1,000.00 | | | | — | | |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | |
Total | | | 4,850 | | | | $ | 1,000.00 | | | | — | | |
(a) MezzCo membership units have not been unitized. The implied number of units has been computed based on the MezzCo equity contribution on the grant date. The total number of membership units outstanding has been computed as 100,000. The number of securities to be issued represents 4.85% of the total units based on the percentage of equity each option holder has been granted.
(b) The exercise price is based on a $100 million equity value. Exercise price is computed using the total number of units divided by the stated equity value.
(c) The Board of Managers of BH/RE is currently considering a plan but has not yet adopted one. Once a plan is adopted, the number of securities remaining available for future issuance will be 1,150 based on an approved grant of 6% of total equity.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
Review, Approval and Ratification of Related Party Transactions
The Audit Committee is responsible, pursuant to its written charter, for reviewing and discussing with management any transaction with a related party which the Company would be required to disclose pursuant to Item 404 of Regulation S-K. Each such transaction must be approved by a majority of the Company’s disinterested managers.
Related Party Transactions
Due to Affiliates
Since its formation, certain members or affiliates of BH/RE have paid expenses totaling approximately $20.0 million related to the Aladdin acquisition and funded deposits under the purchase agreement on behalf of BH/RE and its subsidiaries. On September 1, 2004, $4.25 million of advances from each of BHCH and OCS, which were used to fund the deposit required under the purchase agreement, were contributed to BH/RE as capital. Additionally, on September 1, 2004, the advances made by BHCH and Planet Hollywood to pay transaction fees and deposits were repaid.
Mr. Jess Ravich
Jess Ravich, a former manager of OpBiz, is CEO and indirect controlling shareholder of Libra Securities, LLC, an investment banking firm (“Libra Securities”). Libra Securities acted as placement agent for MezzCo, L.L.C. in the placement of the Mezzanine Financing and was paid a placement fee of $4,350,000.
Mr. Ravich holds a note convertible into 25% of the equity in PDS Gaming, a leasing and finance company specializing in gaming equipment. Conversion of the note is subject to approval of appropriate gaming regulators in the jurisdictions in which PDS Gaming does business. PDS Gaming entered into a gaming equipment lease with OpBiz on December 22, 2004, for a 48 month term with payments of approximately $159,200 per month. Libra Securities raised financing for PDS Gaming to allow it to purchase the equipment underlying the lease and received a placement fee for its services.
Transactions with Planet Hollywood
OpBiz, Planet Hollywood and certain of Planet Hollywood’s subsidiaries have entered into a licensing agreement pursuant to which OpBiz received a non-exclusive, irrevocable license to use various “Planet Hollywood” trademarks and service marks. Under the licensing agreement, OpBiz also has the right, but not the obligation, to open a Planet Hollywood restaurant and one or more Planet Hollywood retail shops under a separate restaurant agreement with Planet Hollywood. OpBiz will pay Planet Hollywood a quarterly licensing fee of 1.75% of OpBiz’s non-casino revenues. If OpBiz opens an attraction with paid admission using the Planet Hollywood marks or memorabilia prior to beginning operations as the PH Resort, it will pay Planet Hollywood a quarterly licensing fee of 1.75% of the revenues of the attraction until OpBiz begins operating as the PH Resort. The initial term of the licensing agreement will expire in 2028. OpBiz can renew the licensing agreement for three successive 10-year terms.
In addition to being a manager of BH/RE, Mr. Earl is the chief executive officer and chairman of the board of directors of Planet Hollywood. Similarly, Mr. Teitelbaum is a manager of BH/RE and a director of Planet Hollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood owned by the trust.
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Transactions with Starwood
OpBiz and Sheraton have entered into a management contract pursuant to which Sheraton provides hotel management services to OpBiz, assists OpBiz in the management, operation and promotion of the Hotel and permits OpBiz to use the Sheraton brand and trademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of 4% 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 contract has a 20-year term commencing on the completion of the Aladdin acquisition and is subject to certain termination provisions by either OpBiz or Sheraton. Sheraton is a wholly owned subsidiary of Starwood, which has a 15% equity interest in EquityCo and has the right to appoint two members to the EquityCo board of managers. Thomas M. Smith, who is member of the OpBiz board of managers and the EquityCo board of managers, is an officer of Starwood and was appointed to the board of managers pursuant to the Company’s agreement with Starwood.
Planet Hollywood (LV) LLC Lease Agreement
OpBiz and Planet Hollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreement pursuant to which Planet Hollywood LV, as tenant, will operate a new concept it has developed for an upscale 24-hour diner named “Planet Dailies” within approximately 11,500 square feet of space located on the premises owned by OpBiz. Planet Hollywood LV will pay OpBiz base rent in the amount of $500,000 per year (subject to annual increase adjustments), in addition to percentage rent of up to 12% based on annual gross sales (to the extent such percentage rent exceeds base rent), following commencement of its business operations in the leased space. The initial term of the lease agreement will expire in 2017. Planet Hollywood LV can renew the lease agreement for two successive 5-year terms. As of December 31, 2006, no rent has been paid to OpBiz because Planet Hollywood LV has not yet commenced its business operations in the leased space. The Company believes that the provisions of this lease agreement reflect arm’s length market terms and that it is comparable to other lease agreements OpBiz has entered into with third-party restaurant operators.
Planet Hollywood LV is wholly owned by, and a subsidiary of, Planet Hollywood International, Inc. Together, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood International, Inc. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood International Inc. owned by the trust.
Earl of Sandwich (Las Vegas), LLC Lease Agreement
OpBiz and Earl of Sandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a lease agreement pursuant to which Earl of Sandwich, as tenant, will operate a restaurant named “Earl of Sandwich” within approximately 3,030 square feet of space located on the premises owned by OpBiz. Earl of Sandwich will pay OpBiz base rent in the amount of $161,600 per year (subject to annual increase adjustments), in addition to percentage rent of up to 12% based on annual gross sales (to the extent such percentage rent exceeds base rent), following commencement of its business operations in the leased space. The initial term of the lease agreement will expire in 2017. Earl of Sandwich can renew the lease agreement for two successive 5-year terms. As of December 31, 2006, no rent has been paid to OpBiz because Earl of Sandwich has not yet commenced its business operations in the leased space. The Company believes that the provisions of this lease agreement reflect arm’s length market terms and that it is comparable to other lease agreements OpBiz has entered into with third-party restaurant operators.
Earl of Sandwich is wholly and indirectly owned by a trust for the benefit of Mr. Earl’s children. Mr. Earl disclaims beneficial ownership of any equity of Earl of Sandwich owned by the trust.
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Guaranty Agreement
In connection with the Loan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (see Note 7.—Long-Term Debt). In exchange for executing the Guaranty, 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 is accrued and only payable once OpBiz hits certain debt service coverage ratios defined in the Loan Agreement.
Director Independence
The Company is not a listed issuer. Using Rule 4200 of the NASDAQ Marketplace Rules (the “NASDAQ Rule”), the board of managers has determined that Michael A. Belletire and Eugene I. Davis are “independent directors” because (i) each is not an executive officer or employee of the Company; and (ii) in the opinion of the board of managers, each is not an individual having a relationship which will interfere with the exercise of independent judgment in carrying out the responsibilities of such manager. The board of managers has determined that Michael A. Belletire and Eugene I. Davis are also “independent” as that term is defined in the Securities Exchange Act of 1934 and the rules thereunder.
Robert Earl and Douglas P. Teitelbaum, who are members of the compensation committee, are not “independent directors” under the NASDAQ Rule. The Company does not have a nominating committee. Of the members of the full board of managers, Robert Earl, Douglas P. Teitelbaum and Thomas M. Smith are not “independent directors” under the NASDAQ Rule for purposes of membership on a nominating committee.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees paid or payable to Ernst & Young LLP, our principal independent auditors, for audit and non-audit services:
| | December 31, | |
| | 2006 | | 2005 | |
Audit Fees Current | | $ | 203,647 | | $ | 223,132 | |
Audit-Related Fees | | 53,000 | | 61,330 | |
Tax Fees | | 54,655 | | 48,000 | |
All Other Fees | | — | | — | |
Total | | $ | 311,302 | | $ | 332,462 | |
“Audit Fees” include fees incurred for the annual audits and the reviews of our Quarterly Reports on Form 10-Q. “Audit-Related Fees” include fees paid for costs related to the acquisition of the Aladdin and review of gaming regulations and controls. “Tax Fees” include fees incurred for the preparation of the income tax returns for BH/RE and its consolidated subsidiaries.
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax and other services performed by the independent auditor. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. The Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it. If the pre-approval authority is delegated to one or more members of the Audit Committee, such pre-approval must be presented to the Audit Committee at its next scheduled meeting for ratification. All audit, audit-related, tax and other services performed by the independent registered public accounting firm were approved by the Audit Committee in accordance with the policy described above for fiscal year 2006.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) | | Financial statements (including related notes to Consolidated Financial Statements) filed as Item 8 in Part II of this report are listed below: |
| | Report of Independent Registered Public Accounting Firm |
| | Report of Independent Registered Public Accounting Firm |
| | Consolidated Balance Sheets as of December 31, 2006 and 2005 |
| | Years ended December 31, 2006, 2005, and 2004— |
| | Consolidated Statements of Operations |
| | Consolidated Statements of Members’ Equity (Deficit) |
| | Consolidated Statements of Cash Flows |
| | Notes to Consolidated Financial Statements |
(a)(2) | | |
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| | | | Additions | | Deductions | | | |
Description | | | | Balance at
beginning
of period | | Charge to
costs and
expense | | Accounts
written off
(recovered) | | Balance at
end of
period | |
Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | |
Year ended December 31,: | | | | | | | | | | | | | | | | | |
2004 | | | $ | — | | | | $ | (3,575 | ) | | | $ | 1,321 | | | | $ | (2,254 | ) | |
2005 | | | $ | (2,254 | ) | | | $ | (3,207 | ) | | | $ | 1,018 | | | | $ | (4,443 | ) | |
2006 | | | $ | (4,443 | ) | | | $ | (2,398 | ) | | | $ | 285 | | | | $ | (6,556 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | |
We have omitted schedules other than the ones listed above because they are not required or not applicable or the required information is shown in the consolidated financial statements or the notes to the consolidated financial statements.
(a)(3) Exhibits
Exhibit Number | | Description |
2.1 | | Purchase and Sale Agreement dated April 23, 2003, by and between OpBiz, L.L.C. and Aladdin Gaming, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
2.2 | | First Amendment to Purchase and Sale Agreement dated August 31, 2004, by and between OpBiz, L.L.C. and Aladdin Gaming, LLC (Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on September 7, 2004) |
3.1 | | Articles of Organization of BH/RE, L.L.C., as amended (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
3.2 | | Amended and Restated Operating Agreement of BH/RE, L.L.C. dated March 26, 2004 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
3.3 | | Amendment to Amended and Restated Operating Agreement of BH/RE, L.L.C. dated August 9, 2004 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004, attached to exhibit number 3.1 thereto) |
3.4 | | Amended and Restated Operating Agreement of EquityCo, L.L.C. dated April 23, 2003 (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
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3.5 | | Second Amended and Restated Operating Agreement of EquityCo, L.L.C. dated August, 31, 2004 (Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on September 7, 2004) |
4.1 | | Form of Amended and Restated Loan and Facilities Agreement by and among OpBiz, L.L.C., the lenders party thereto and BNY Asset Solutions LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
4.2 | | Amended and Restated Loan Facilities Agreement dated August 31, 2004, by and among OpBiz, L.L.C., the lenders party thereto and The Bank of New York, Asset Solutions Division (Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on September 7, 2004) |
4.3 | | Form of Senior Secured Promissory Note (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
4.4 | | Form of Warrant to Purchase Membership Interests of MezzCo, L.L.C. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
4.5 | | Waiver and Amendment No. 1 Agreement, dated October 23, 2006, to the Amended and Restated Loan and Facilities Agreement, dated August 31, 2004, by and among OpBiz, L.L.C., the lenders party thereto and The Bank of New York, as administrative agent and collateral agent (Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on November 1, 2006) |
10.1 | | Planet Hollywood Hotel & Casino Licensing Agreement dated May 3, 2003, by and among Planet Hollywood International, Inc., Planet Hollywood (Region IV), Inc., Planet Hollywood Memorabilia, Inc. and OpBiz, L.L.C. (Incorporated by reference to the Company’s Form 10/A filed on June 15, 2004) |
10.2 | | Amended and Restated Planet Hollywood Hotel & Casino Licensing Agreement dated August 9, 2004, by and among Planet Hollywood International, Inc., Planet Hollywood (Region IV), Inc., Planet Hollywood Memorabilia, Inc. and OpBiz, L.L.C. (Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on September 7, 2004) |
10.3 | | Management Contract dated April 23, 2003, by and between Sheraton Operating Corporation and OpBiz, L.L.C. (Incorporated by reference to the Company’s Form 10/A filed on June 15, 2004) |
10.4 | | Agreement by and between Starwood Nevada Holding LLC, Sheraton Operating Corporation, BH/RE, L.L.C., EquityCo, L.L.C. and OpBiz, L.L.C. dated August 9, 2004 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
10.5 | | Securities Purchase Agreement among MezzCo, L.L.C. and the Purchasers named therein, dated August 9, 2004 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
10.6 | | Investor Rights Agreement by and among MezzCo, L.L.C., The Mezzanine Investors named therein and the other signatories thereto, dated August 9, 2004 (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
10.7 | | Order Granting Motion to Approve Settlement Agreement with Aladdin Bazaar, LLC, filed August 6, 2003 (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.8 | | Construction, Operation and Reciprocal Easement Agreement, dated February 26, 1998, by and among Aladdin Gaming, LLC, Aladdin Bazaar, LLC and Aladdin Music Holdings, LLC; (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
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10.9 | | Amendment and Ratification of Construction, Operation and Reciprocal Easement Agreement, dated November 20, 2000, by and between Aladdin Gaming, LLC and Aladdin Bazaar, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004; attached to exhibit number 99.2 thereto) |
10.10 | | Second Amendment of Construction, Operation and Reciprocal Easement Agreement, effective March 31, 2003, by and between Aladdin Gaming, LLC and Aladdin Bazaar, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004; attached to exhibit number 99.2 thereto) |
10.11 | | Memorandum of Amendment and Ratification of REA, dated November 20, 2000, by and between Aladdin Gaming, LLC and Aladdin Bazaar, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004; attached to exhibit number 99.2 thereto) |
10.12 | | Findings of Fact and Conclusions of Law Re: Aladdin Bazaar, LLC’s Motion for Payment of Administrative Expense, or in the Alternative, for an Order Setting a Deadline for Debtor to Assume or Reject Common Area Parking Agreement, filed October 8, 2002 (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.13 | | Common Parking Area Use Agreement, dated February 26, 1998, by and between Aladdin Gaming, LLC and Aladdin Bazaar, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.14 | | Traffic Control Improvements Cost Participation Agreement Commercial Development, dated June 7, 2000, by and between Aladdin Gaming, LLC and Clark County, Nevada (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.15 | | Order Granting Motion to (i) Approve Settlement Agreement and Releases Respecting Central Utility Plant Litigation and (ii) Assume Certain Agreements Respecting the Central Utility Plant, filed December 10, 2002 (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.16 | | Energy Service Agreement, dated September 24, 1998, between Aladdin Gaming, LLC and Northwind Aladdin, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.17 | | Amendment and Agreement, dated September 25, 1998, between Northwind Aladdin, LLC and Aladdin Gaming, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004; attached to exhibit 99.8 thereto) |
10.18 | | Second Amendment and Agreement, dated May 28, 1999, between Northwind Aladdin, LLC and Aladdin Gaming, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004; attached to exhibit 99.8 thereto) |
10.19 | | Third Amendment and Agreement, dated May 28, 1999, between Northwind Aladdin, LLC and Aladdin Gaming, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004; attached to exhibit 99.8 thereto) |
10.20 | | Energy Services Coordination Agreement, dated May 28, 1999, by and among Aladdin Gaming, LLC and Aladdin Bazaar, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.21 | | Timeshare Purchase Agreement, dated December 10, 2004, between Westgate Resorts, Ltd. and OpBiz, L.L.C. (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 15, 2005) |
10.22 | | Subordination, Non-Disturbance and Attornment Agreement and Consent, dated as of June 7, 1999, by and among The Bank of Nova Scotia, Northwind Aladdin, LLC, Aladdin Gaming, LLC, State Street Bank and Trust Company, Aladdin Music, LLC and Aladdin Music Holdings, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
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10.23 | | Lease, dated December 3, 1997, by and between Aladdin Gaming, LLC and Northwind Aladdin, LLC (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.24 | | Employment Agreement dated April 11, 2003, by and among OpBiz, L.L.C., Michael Mecca, Robert Earl and Doug Teitelbaum (Incorporated by reference to the Company’s Form 10 filed on April 16, 2004) |
10.25 | | Letter Agreement dated July 13, 2004, by and among MezzCo. L.L.C., OpBiz, L.L.C. and Michael V. Mecca (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2004) |
10.26 | | Employment Agreement dated September 1, 2004, by and between OpBiz, L.L.C. and Donna Lehmann (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 15, 2005) |
10.27 | | Amendment to Employment Agreement dated September 1, 2005, by and between OpBiz, L.L.C. and Donna Lehmann (Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 31, 2005) |
10.28 | | Employment Agreement dated November 2, 2004, by and between OpBiz, L.L.C. and Mark S. Helm (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 15, 2005) |
10.29 | | Employment Agreement dated August 9, 2004, by and between OpBiz, L.L.C. and Bruce B. Himelfarb (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 15, 2005) |
10.30 | | Employment Agreement dated November 1, 2005, by and between OpBiz, L.L.C. and Darby Davies (Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 9, 2006) |
10.31 | | Loan Agreement, dated November 30, 2006, by and between OpBiz, PH Fee Owner and Column Financial, Inc. |
10.32 | | Deed of Trust, Assignment of Leases and Rents, Financing Statement and Fixture Filing, dated November 30, 2006, by PH Fee Owner and OpBiz to the Trustee named therein for the benefit of Column Financial, Inc. |
10.33 | | Deed of Trust, Assignment of Leases and Rents, Financing Statement and Fixture Filing, dated November 30, 2006, by TSP Owner to the Trustee named therein for the benefit of Column Financial, Inc. |
10.34 | | Promissory Note by OpBiz and PH Fee Owner in favor of Column Financial, Inc., dated November 30, 2006 |
10.35 | | Assignment of Leases and Rents made by OpBiz and PH Fee Owner in favor of Column Financial, Inc., dated November 30, 2006 |
10.36 | | Assignment of Contracts, Operating Permits and Construction Permits, dated November 30, 2006, by OpBiz and PH Fee Owner in favor of Column Financial, Inc. |
10.37 | | Environmental Indemnity Agreement, dated November 30, 2006, by OpBiz and PH Fee Owner in favor of Column Financial, Inc. |
10.38 | | Collateral Assignment of Timeshare Project Proceeds, dated November 30, 2006, made by TSP Owner in favor of Column Financial, Inc. |
10.39 | | Collateral Assignment of Interest Rate Cap Agreement, dated November 30, 2006, by OpBiz and PH Fee Owner in favor of Column Financial, Inc. |
10.40 | | Pledge and Security Agreement, dated November 30, 2006, by MezzCo in favor of Column Financial, Inc. |
10.41 | | Acknowledgement of Pledge by OpBiz, dated November 30, 2006. |
10.42 | | Pledge and Security Agreement, dated November 30, 2006, by PH Fee Owner in favor of Column Financial, Inc. |
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10.43 | | Acknowledgement of Pledge by TSP Owner, dated November 30, 2006. |
10.44 | | Security Agreement (Copyrights) by OpBiz in favor of Column Financial, Inc., dated November 30, 2006. |
10.45 | | Security Agreement (Trademarks) by OpBiz in favor of Column Financial, Inc., dated November 30, 2006. |
10.46 | | Operations and Maintenance Agreement, dated November 30, 2006, between OpBiz and PH Fee Owner and Column Financial, Inc. |
10.47 | | Restructuring Agreement, dated November 30, 2006, among Mezzco, EquityCo and the Investors named therein. |
10.48 | | Amended and Restated Investor Rights Agreement, dated as of November 30, 2006, among MezzCo, EquityCo, and the Investors specified or referred to therein. |
10.49 | | Form of Amended and Restated Warrants. |
10.50 | | Guaranty Agreement, dated as of November 30, 2006, made by EquityCo in favor of the Collateral Agent and the Investors. |
10.51 | | Pledge Agreement, dated as of November 30, 2006, between EquityCo, the Collateral Agent for the benefit of the Investors, acknowledged and agreed to by MezzCo. |
10.52 | | Release, Waiver and Consent Agreement, dated as of November 30, 2006, among the Company, EquityCo, OpBiz, and the Investors specified or referred to therein. |
10.53 | | Amended and Restated Planet Hollywood Resort and Casino License Agreement, dated as of November 30, 2006, among Planet Hollywood International, Inc. and Planet Hollywood (Region IV), Inc., Planet Hollywood Memorabilia, Inc. and OpBiz. |
10.54 | | Amended and Restated License Subordination Agreement, dated as of November 30, 2006, among the Investors, PHII, PHM and OpBiz. |
10.55 | | Indemnification Agreement, dated as of November 30, 2006, between BH/RE and the Investors. |
10.56 | | Guaranty Fee Agreement, dated as of November 30, 2006, among Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd., and Bay Harbour Master, Ltd. and PH Fee Owner. |
10.57 | | Lease Agreement, dated as of November 30, 2006, by and between PH Fee Owner and OpBiz for Casino space. |
10.58 | | Lease Agreement, dated as of November 30, 2006, by and between PH Fee Owner and OpBiz for Hotel space. |
10.59 | | Guaranty Agreement, dated as of November 30, 2006, among Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd., and Bay Harbour Master, Ltd. and PH Fee Owner. |
10.60 | | Guaranty Agreement, dated as of November 30, 2006, made by Douglas Teitelbaum for the benefit of Column Financial, Inc. |
10.61 | | Guaranty Agreement, dated as of November 30, 2006, made by Robert Earl for the benefit of Column Financial, Inc. |
10.62 | | Completion Guaranty, dated as of November 30, 2006, among Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd., and Bay Harbour Master, Ltd. and Robert Earl for the benefit of Column Financial, Inc. |
10.63 | | Environmental Indemnity Agreement, dated as of November 30, 2006, made by PH Fee Owner and OpBiz in favor of Column Financial, Inc. |
21.1 | | List of Subsidiaries of BH/RE, L.L.C. |
31.1 | | Certification pursuant to §302 of the Sarbanes-Oxley Act of 2002, Michael V. Mecca |
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, Michael V. Mecca |
32.2 | | Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002, Donna Lehmann |
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99.1 | | OpBiz, L.L.C. Compensation Committee Charter (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 15, 2005) |
99.2 | | OpBiz, L.L.C. Audit Committee Charter (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 31, 2006) |
99.3 | | BH/RE, L.L.C. Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 31, 2006) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BH/RE, L.L.C. |
April 2, 2007 | By: | /s/ DONNA LEHMANN |
| Donna Lehmann |
| Treasurer (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | | | Title | | | | Date | |
/s/ ROBERT EARL | | Manager of BH/RE and EquityCo | | April 2, 2007 |
Robert Earl | | and Co-Chairman of OpBiz | | |
/s/ DOUGLAS P. TEITELBAUM | | Manager of BH/RE and EquityCo | | April 2, 2007 |
Douglas P. Teitelbaum | | and Co-Chairman of OpBiz | | |
/s/ MICHAEL V. MECCA | | President and Chief Executive Officer | | April 2, 2007 |
Michael V. Mecca | | of BH/RE and OpBiz (Principal Executive Officer) | | |
/s/ DONNA LEHMANN | | Treasurer of BH/RE and Chief | | April 2, 2007 |
Donna Lehmann | | Financial Officer of OpBiz (Principal Financial and Accounting Officer) | | |
/s/ MICHAEL A. BELLETIRE | | Manager of OpBiz | | April 2, 2007 |
Michael A. Belletire | | | | |
/s/ EUGENE I. DAVIS | | Manager of OpBiz | | April 2, 2007 |
Eugene I. Davis | | | | |
| | Manager of EquityCo and OpBiz | | |
Thomas M. Smith | | | | |
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