**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

**ý****       ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2004**

 

**OR**

 

**o****       ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                 to                 **

 

**CommissionFile Number 000-50689**

 

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

(Exact Name ofRegistrant as Specified in its Charter)

 

| **NEVADA**                                                       | **84-1622334**                           |
|------------------------------------------------------------------|------------------------------------------|
| (State or Other  Jurisdiction  of Incorporation or Organization) | (I.R.S. Employer  Identification Number) |
|                                                             |                                     |
| **885  Third Avenue  34th Floor  New York, New York**            | **10022**                                |
| (Address of  Principal Executive Offices)                        | (Zip Code)                               |

 

**(212)371-2211**

(Registrant’sTelephone Number, Including Area Code)

 

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Indicateby check mark whether the Registrant (1) has filed all reports required bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.    Yes  ý    No  o

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Securities Exchange Act of1934).    Yes  o    No  ý

 

 

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BH/RE, L.L.C. ANDSUBSIDIARIES

Table of Contents

 
| PART I— FINANCIAL INFORMATION |                                                                                        |
|------------------------------------|---------------------------------------------------------------------------------------------|
|                               |                                                                                        |
| ITEM 1.                            | FINANCIAL STATEMENTS                                                                        |   |
|                               |                                                                                        |
|                               | BH/RE, L.L.C. And Subsidiaries                                                              |   |
|                               |                                                                                        |
|                               | Condensed Consolidated Balance Sheets  (Unaudited)                                          |   |
|                               |                                                                                        |
|                               | Condensed Consolidated Statements Of  Operations (Unaudited)                                |   |
|                               |                                                                                        |
|                               | Condensed Consolidated Statements Of Cash  Flows (Unaudited)                                |   |
|                               |                                                                                        |
|                               | Notes To Condensed Consolidated Financial  Statements (Unaudited)                           |   |
|                               |                                                                                        |
| ITEM 2.                            | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|                               |                                                                                        |
| ITEM 3.                            | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |   |
|                               |                                                                                        |
| ITEM 4.                            | CONTROLS  AND PROCEDURES                                                                    |   |
|                               |                                                                                        |
| PART II  — OTHER INFORMATION  |                                                                                        |
|                               |                                                                                        |
| ITEM 1.                            | LEGAL  PROCEEDINGS                                                                          |   |
|                               |                                                                                        |
| ITEM 2.                            | CHANGES  IN SECURITIES AND USE OF PROCEEDS                                                  |   |
|                               |                                                                                        |
| ITEM  3.                           | DEFAULTS  UPON SENIOR SECURITIES                                                            |   |
|                               |                                                                                        |
| ITEM 4.                            | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                        |   |
|                               |                                                                                        |
| ITEM 5.                            | OTHER  INFORMATION                                                                          |   |
|                               |                                                                                        |
| ITEM 6.                            | EXHIBITS  AND REPORTS ON FORM 8-K                                                           |   |
|                               |                                                                                        |
| SIGNATURES                         |                                                                                        |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(amounts in thousands)**

 

 
| ** **                                      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| ASSETS                                          |       |                    |       |                   |       |
|                                            |       |                    |       |                   |       |
| Current assets:                                 |       |                    |       |                   |       |
| Cash and cash  equivalents                      |       | $                       | 27,407     |                   | $          | — |   |
| Receivables, net                                |       | 13,026                  |       | —                 |       |
| Inventories                                     |       | 2,182                   |       | —                 |       |
| Prepaid expenses  and other current assets      |       | 6,688                   |       | —                 |       |
| Total current  assets                           |       | 49,303                  |       | —                 |       |
|                                            |       |                    |       |                   |       |
| Property and  equipment, net                    |       | 501,645                 |       | —                 |       |
| Restricted cash  and cash equivalents           |       | 96,688                  |       | 10,061                 |       |
| Deferred  acquisition costs                     |       | —                  |       | 3,225                  |       |
| Other assets,  net                              |       | 9,244                   |       | —                 |       |
| Total assets                                    |       | $                       | 656,880    |                   | $          | 13,286 |   |
|                                            |       |                    |       |                   |       |
| LIABILITIES AND MEMBERS’ EQUITY            |       |                    |       |                   |       |
|                                            |       |                    |       |                   |       |
| Current liabilities:                            |       |                    |       |                   |       |
| Current portion  of long-term debt              |       | $                       | 1,232      |                   | $          | — |   |
| Accounts payable                                |       | 2,034                   |       | —                 |       |
| Accrued expenses  and other current liabilities |       | 32,715                  |       | —                 |       |
| Due to  affiliates                              |       | —                  |       | 13,008                 |       |
| Total current  liabilities                      |       | 35,981                  |       | 13,008                 |       |
|                                            |       |                    |       |                   |       |
| Long-term debt,  less current portion           |       | 579,943                 |       | —                 |       |
| Other long-term  liabilities                    |       | 4,375                   |       | —                 |       |
| Total  liabilities                              |       | 620,299                 |       | 13,008                 |       |
|                                            |       |                    |       |                   |       |
| Commitments and  contingencies                  |       |                    |       |                   |       |
|                                            |       |                    |       |                   |       |
| Minority  interests                             |       | —                  |       | 1,509                  |       |
|                                            |       |                    |       |                   |       |
| Members’ equity:                           |       |                    |       |                   |       |
| Member’s equity                            |       | 41,500                  |       | —                 |       |
| Accumulated  deficit                            |       | (4,919                  | )          | (1,231                 | )          |
| Total members’  equity                     |       | 36,581                  |       | (1,231                 | )          |
| Total  liabilities and members’ equity     |       | $                       | 656,880    |                   | $          | 13,286 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                            | ** ** | ** **                            | ** ** | **Predecessor Information**      | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **Three months ended  September 30,** | ** ** | **Two months ended  August, 31** | ** ** | **Three months ended  September 30,** | ** ** |
| ** **                            | ** ** | **2004**                              | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Operating  revenues:                  |       |                                  |       |                             |       |   |   |
| Casino                                |       | $                                     | 10,094     |                             | $          | 19,081 |   | $ | 26,371 |   |
| Hotel                                 |       | 8,393                                 |       | 16,264                           |       | 22,537 |   |
| Food and  beverage                    |       | 5,585                                 |       | 12,330                           |       | 17,096 |   |
| Other                                 |       | 1,332                                 |       | 2,660                            |       | 4,959 |   |
| Gross revenues                        |       | 25,404                                |       | 50,335                           |       | 70,963 |   |
| Promotional  allowances               |       | (2,195                                | )          | (4,315                           | )          | (6,333 | ) |
| Net revenues                          |       | 23,209                                |       | 46,020                           |       | 64,630 |   |
|                                  |       |                                  |       |                             |       |   |   |
| Operating costs  and expenses:        |       |                                  |       |                             |       |   |   |
| Casino                                |       | 5,875                                 |       | 12,126                           |       | 15,723 |   |
| Hotel                                 |       | 2,852                                 |       | 5,738                            |       | 7,652 |   |
| Food and  beverage                    |       | 3,683                                 |       | 7,755                            |       | 10,587 |   |
| Other                                 |       | 877                                   |       | 2,292                            |       | 4,081 |   |
| Selling, general  and administrative  |       | 5,701                                 |       | 11,157                           |       | 15,644 |   |
| Depreciation and  amortization        |       | 2,275                                 |       | —                           |       | 16,258 |   |
| Preopening  expenses                  |       | 731                                   |       | —                           |       | — |   |
|                                  |       | 21,994                                |       | 39,068                           |       | 69,945 |   |
|                                  |       |                                  |       |                             |       |   |   |
| Operating income  (loss)              |       | 1,215                                 |       | 6,952                            |       | (5,315 | ) |
|                                  |       |                                  |       |                             |       |   |   |
| Other income  (expense):              |       |                                  |       |                             |       |   |   |
| Interest  expense, net                |       | (3,960                                | )          | (628                             | )          | (976 | ) |
| Minority  interest                    |       | 302                                   |       | —                           |       | — |   |
| Reorganization  costs                 |       | —                                |       | (2,475                           | )          | (3,127 | ) |
|                                  |       | (3,658                                | )          | (3,103                           | )          | (4,103 | ) |
|                                  |       |                                  |       |                             |       |   |   |
| Pre-tax income (loss)                 |       | (2,443                                | )          | 3,849                            |       | (9,418 | ) |
| Provision  (benefit) for income taxes |       | —                                |       | —                           |       | — |   |
| Net income  (loss)                    |       | $                                     | (2,443     | )                                | $          | 3,849 |   | $ | (9,418 | ) |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

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

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                            | ** ** | ** **                           | ** ** | **Predecessor Information**        | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Nine months ended  September 30,** | ** ** | **Eight months ended  August 31,** | ** ** | **Nine months ended  September 30,** | ** ** |
| ** **                            | ** ** | **2004**                             | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Operating  revenues:                  |       |                                 |       |                               |       |   |   |
| Casino                                |       | $                                    | 10,094     |                               | $          | 77,774 |   | $ | 81,055 |   |
| Hotel                                 |       | 8,393                                |       | 71,705                             |       | 71,653 |   |
| Food and  beverage                    |       | 5,585                                |       | 49,231                             |       | 51,017 |   |
| Other                                 |       | 1,332                                |       | 10,713                             |       | 13,483 |   |
| Gross revenues                        |       | 25,404                               |       | 209,423                            |       | 217,208 |   |
| Promotional  allowances               |       | (2,195                               | )          | (18,783                            | )          | (19,355 | ) |
| Net revenues                          |       | 23,209                               |       | 190,640                            |       | 197,853 |   |
|                                  |       |                                 |       |                               |       |   |   |
| Operating costs  and expenses:        |       |                                 |       |                               |       |   |   |
| Casino                                |       | 5,875                                |       | 47,257                             |       | 48,173 |   |
| Hotel                                 |       | 2,852                                |       | 21,010                             |       | 21,799 |   |
| Food and  beverage                    |       | 3,683                                |       | 28,463                             |       | 29,667 |   |
| Other                                 |       | 877                                  |       | 9,128                              |       | 10,828 |   |
| Selling, general  and administrative  |       | 5,701                                |       | 40,957                             |       | 45,745 |   |
| Depreciation and  amortization        |       | 2,275                                |       | —                             |       | 48,709 |   |
| Preopening  expenses                  |       | 1,684                                |       | —                             |       | — |   |
|                                  |       | 22,947                               |       | 146,815                            |       | 204,921 |   |
|                                  |       |                                 |       |                               |       |   |   |
| Operating income  (loss)              |       | 262                                  |       | 43,825                             |       | (7,068 | ) |
|                                  |       |                                 |       |                               |       |   |   |
| Other income  (expense):              |       |                                 |       |                               |       |   |   |
| Interest  expense, net                |       | (3,959                               | )          | (2,541                             | )          | (2,985 | ) |
| Minority  interest                    |       | 302                                  |       | —                             |       | — |   |
| Reorganization  costs                 |       | —                               |       | (6,648                             | )          | (10,374 | ) |
|                                  |       | (3,657                               | )          | (9,189                             | )          | (13,359 | ) |
|                                  |       |                                 |       |                               |       |   |   |
| Pre-tax income (loss)                 |       | (3,395                               | )          | 34,636                             |       | (20,427 | ) |
| Provision  (benefit) for income taxes |       | —                               |       | —                             |       | — |   |
| Net income  (loss)                    |       | $                                    | (3,395     | )                                  | $          | 34,636 |   | $ | (20,427 | ) |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

5

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | ** **                                 | ** ** | **Predecessor Information**              | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                | ** ** | **Nine Months Ended  September 30,  2004** | ** ** | **Eight Months Ended  August 31,  2004** | ** ** | **Nine Months Ended  September 30,  2003** | ** ** |
|                                                                                      |       |                                       |       |                                     |       |   |   |
| Cash flows from  operating activities:                                                    |       |                                       |       |                                     |       |   |   |
| Net income  (loss)                                                                        |       | $                                          | (3,395     | )                                        | $          | 34,636 |   | $ | (20,427 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                       |       |                                     |       |   |   |
| Depreciation and  amortization                                                            |       | 2,275                                      |       | —                                   |       | 48,597 |   |
| Amortization of  debt issuance costs                                                      |       | 124                                        |       | —                                   |       | 112 |   |
| Minority interest                                                                         |       | (1,524                                     | )          | —                                   |       | — |   |
| Changes in assets  and liabilities:                                                       |       |                                       |       |                                     |       |   |   |
| Receivables, net                                                                          |       | (13,026                                    | )          | 2,439                                    |       | 3,401 |   |
| Inventories and  prepaid expenses                                                         |       | (3,822                                     | )          | 2,866                                    |       | 253 |   |
| Other current  assets                                                                     |       | (5,048                                     | )          | 651                                      |       | (674 | ) |
| Accounts payable                                                                          |       | 2,033                                      |       | (3,729                                   | )          | 444 |   |
| Accrued expenses  and other current liabilities                                           |       | 32,715                                     |       | (7,521                                   | )          | (5,041 | ) |
| Total  adjustments                                                                        |       | 13,727                                     |       | (5,294                                   | )          | 47,092 |   |
| Net cash  provided by operating activities                                                |       | 10,332                                     |       | 29,342                                   |       | 26,665 |   |
| Cash flows from  investing activities:                                                    |       |                                       |       |                                     |       |   |   |
| Acquisition of  Aladdin Resort and Casino, net of cash acquired                           |       | (480,118                                   | )          | (986                                     | )          | (3,129 | ) |
| Notes receivable                                                                          |       | (333                                       | )          | —                                   |       | — |   |
| Restricted cash  and cash equivalents                                                     |       | (86,627                                    | )          | 76                                       |       | 1,225 |   |
| Net cash used in  investing activities                                                    |       | (567,078                                   | )          | (910                                     | )          | (1,904 | ) |
| Cash flows from  financing activities:                                                    |       |                                       |       |                                     |       |   |   |
| Member  contributions                                                                     |       | 41,500                                     |       | —                                   |       | — |   |
| Borrowings under  bank facilities, net                                                    |       | 527,451                                    |       | —                                   |       | — |   |
| Payments under  bank facility                                                             |       | (14,000                                    | )          | (731                                     | )          | (7,839 | ) |
| Borrowings under  CUP financing                                                           |       | 33,862                                     |       | —                                   |       | — |   |
| Issuance of warrants                                                                      |       | 4,375                                      |       | —                                   |       | — |   |
| Debt issuance  costs                                                                      |       | (9,035                                     | )          | —                                   |       | — |   |
| Adequate  protection payments - secured lenders                                           |       | —                                     |       | (32,250                                  | )          | (3,600 | ) |
| Adequate  protection payments - GECC                                                      |       | —                                     |       | (4,375                                   | )          | — |   |
| Net cash  provided by (used in) financing activities                                      |       | 584,153                                    |       | (37,356                                  | )          | (11,439 | ) |
| Cash and cash  equivalents:                                                               |       |                                       |       |                                     |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                         |       | 27,407                                     |       | (8,924                                   | )          | 13,322 |   |
| Balance,  beginning of period                                                             |       | —                                     |       | 38,240                                   |       | 22,431 |   |
| Balance, end of  period                                                                   |       | $                                          | 27,407     |                                     | $          | 29,316 |   | $ | 35,753 |   |
| Supplemental cash flow disclosures:                                                       |       |                                       |       |                                     |       |   |   |   |   |   |
| Cash paid for  interest                                                                   |       | $                                          | 1,580      |                                     | $          | 2,885 |   | $ | 3,008 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

6

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

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

 

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

##### ** **

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

###### *** ***

BH/RE, L.L.C. (“BH/RE”) is aholding company that owns 85% of EquityCo, L.L.C. (“EquityCo”). The remaining15% of EquityCo is owned by a subsidiary of Starwood Hotels and ResortsWorldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a wholly ownedsubsidiary of EquityCo, and OpBiz, L.L.C. (“OpBiz”) is a wholly ownedsubsidiary of MezzCo. As of November 1, 2004, 50% of BH/RE’s votingmembership interests were held by each of Robert Earl and Douglas P.Teitelbaum, and BH/RE’sequity 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”)(collectively “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).

 

BH/RE and its subsidiaries wereformed 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 will begin arenovation project which, when complete, will transform the Aladdin into thePlanet Hollywood Resort and Casino (the “PH Resort”). In connection with therenovation of the Aladdin, OpBiz has entered into an agreement with PlanetHollywood International, Inc. (“Planet Hollywood”) and certain of itssubsidiaries to, among other things, license Planet Hollywood’s trademarks,memorabilia and other intellectual property. OpBiz has also entered into anagreement with Sheraton Operating Corporation (“Sheraton”), a subsidiary ofStarwood, pursuant to which Sheraton will provide hotel management, marketingand reservation services for the hotel that will comprise a portion of the PHResort.

 

BH/RE is a Nevada limited-liabilitycompany 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 BayHarbour Management, L.C. (“Bay Harbour Management”). Bay Harbour Management is aninvestment management firm. BHCH was formed by Mr. Teitelbaum for the purposeof holding investments in BH/RE by funds managed by Bay Harbour Management. OCSis wholly owned and controlled by Robert Earl and holds Mr. Earl’s investmentin BH/RE. Mr. Earl is the founder, chairman and chief executive officer ofPlanet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood.Together, Mr. Earl, a trust for the benefit of Mr. Earl’s children andaffiliates of Bay Harbour Management own substantially all of the equity of PlanetHollywood. Mr. Earl disclaims beneficial ownership of any equity of PlanetHollywood owned by the trust.

 

***Acquisition of theAladdin***

*** ***

AladdinGaming, L.L.C. (“Aladdin Gaming”), which was a debtor-in-possession underChapter 11 of the United States Bankruptcy Code, commenced its bankruptcy casein the United States Bankruptcy Court for the District of Nevada, SouthernDivision on September 28, 2001. On April 23, 2003, OpBiz and Aladdin Gamingentered into a purchase agreement pursuant to which OpBiz agreed to acquire theAladdin. Under the purchase agreement and pursuant to an order of theBankruptcy Court, Aladdin Gaming conducted an auction to sell the Aladdin. OnJune 20, 2003, the Bankruptcy Court declared OpBiz the winner of that auctionand, on August 29, 2003, the Bankruptcy Court entered an order confirmingAladdin Gaming’s plan of reorganization and authorizing Aladdin Gaming tocomplete the sale of the Aladdin to OpBiz under the purchase agreement. OnSeptember 1, 2004, OpBiz acquired substantially all of the real and personalproperty owned or used by Aladdin Gaming to operate the Aladdin, and received$15 million of working capital from Aladdin Gaming, including $27.6 million ofcash.  The acquisition was accounted foras a purchase and, accordingly, the purchase price and working capitaladjustments have been preliminarily allocated to the underlying assets acquiredand liabilities assumed.  The workingcapital adjustment was determined based on the preliminary closing balancesheet on August 31, 2004. The final working capital adjustment will bedetermined based on a final evaluation of the August 31, 2004 closing balancesheet, which should be completed during the fourth quarter of this year. OpBizpaid the purchase price for the Aladdin by issuing new secured notes to AladdinGaming’s secured creditors and assumed various contracts and leases enteredinto by Aladdin Gaming in connection with its operation of the Aladdin andcertain of Aladdin Gaming’s liabilities,

 

7

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includingAladdin Gaming’s energy service obligation to the third party owner of thecentral utility plant that supplies hot and cold water and emergency power tothe Aladdin. At the time of purchase, the energy service obligation was $34.0million. Upon the completion of the Aladdin acquisition, OpBiz issued $510million of new secured notes to Aladdin Gaming’s secured creditors under anAmended and Restated Loan and Facilities Agreement (the “Credit Agreement”)with a group of lenders and The Bank of New York, Asset Solutions Division, asadministrative and collateral agent. OpBiz also simultaneously made a $14million cash payment to those secured creditors, which reduced the principalamount of the notes to $496 million and obtained a release of the lien on afour-acre parcel of undeveloped property that OpBiz also acquired from AladdinGaming (“Timeshare Land”). OpBiz presently intends to develop this propertyinto a vacation resort ownership or similar project. The Credit Agreement alsorequires that OpBiz provide either cash or a letter of credit in the aggregateamount of $90 million to fund the costs of the planned renovations to theAladdin. In August 2004, MezzCo issued $87 million of senior secured notes to agroup 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/REand its subsidiaries and affiliates related to the acquisition of the Aladdin,and to provide OpBiz with a portion of the funds necessary to meet itsobligations regarding the planned renovations to the Aladdin.

 

Thepurchase agreement also provided that OpBiz assume substantially all of AladdinGaming’s pre-petition contracts and leases and any post-petition contracts orleases to which OpBiz does not object. In addition, the purchase agreementprovided that OpBiz offer employment to all of Aladdin Gaming’s employees,other than executive management, on terms and conditions substantially similarto their previous employment terms and conditions.

 

Thefollowing unaudited proforma financial information for BH/RE has been preparedassuming the acquisition had occurred on the first day of the nine-month periodended September 30, 2004 (amounts in thousands):

 
| Net revenues     |   | $ | 213,849 |   |
|------------------|--------|---|---------|--------|
| Operating income |   | $ | 44,087  |   |
| Net income       |   | $ | 31,241  |   |

 

###### ***Plan of Operations***

###### *** ***

OpBiz is currently conducting arenovation project which, when complete, will transform the Aladdin into the PHResort. In connection with the proposed renovation of the Aladdin, OpBiz hasentered into an agreement with Planet Hollywood and certain of its subsidiariesto, among other things, license Planet Hollywood’s trademarks, memorabilia andother intellectual property. OpBiz has also entered into an agreement with Sheraton,a subsidiary of Starwood, pursuant to which Sheraton will provide hotelmanagement, marketing and reservation services for the hotel that will comprisea portion of the PH Resort.

 

###### ***Interim Financial Statements***

###### *** ***

Theaccompanying condensed consolidated financial statements included herein havebeen prepared by the management of BH/RE, without audit, pursuant to the rulesand regulations of the Securities and Exchange Commission. Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with U.S. generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. BH/RE believesthat the disclosures are adequate to make the information presented not misleading.In the opinion of management, all adjustments (which include normal recurringadjustments) necessary for a fair presentation of the results for the interimperiods have been made. The results for the three and nine months endedSeptember 30, 2004 are not indicative of results to be expected for the fullfiscal year. These unaudited financial statements should be read in conjunctionwith the audited financial statements and notes thereto for the period from March31, 2003 (date of formation) through December 31, 2003, included in BH/RE’sRegistration Statement on Form 10 (File No. 000-50689) filed with theSecurities and Exchange Commission on

 

8

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April16, 2004. Pursuant to Rule 302 of Regulation S-X, the registrant has includedcondensed statements of operations and cash flows of the predecessor for thenine-month periods ended September 30, 2003 and 2004.

 

9

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

##### ** **

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

###### *** ***

The condensed consolidatedfinancial statements are prepared in conformity with U.S. generally acceptedaccounting principles. Certain policies, including the determination of baddebt reserves, the estimated useful lives assigned to assets, asset impairment,insurance reserves and the calculation of liabilities, require that managementapply significant judgment in defining the appropriate assumptions forcalculating financial estimates. By their nature, these judgments are subjectto an inherent degree of uncertainty. Management’s judgments are based onhistorical experience, terms of existing contracts, observance of trends in thegaming industry and information available from other outside sources. There canbe no assurance that actual results will not differ from our estimates. Toprovide an understanding of the methodology management applies, BH/RE’ssignificant accounting policies and basis of presentation are discussed below,as well as where appropriate in the notes to the condensed consolidatedfinancial statements and management’s discussion and analysis.

 

###### ***Cash andCash Equivalents***

###### *** ***

Cash and cash equivalents includecash on hand, as well as short-term investments with original maturities not inexcess of 90 days.

 

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

###### *** ***

Restricted cash and cashequivalents consists of an escrow deposit of approximately $96.7 million, whichwill be applied toward the remaining cash commitments for the plannedrenovations to the Aladdin.

 

###### ***AccountsReceivable, Net***

###### *** ***

Accounts receivable, includingcasino and hotel receivables, are typically non-interest bearing and areinitially recorded at cost. An estimated allowance for doubtful accounts ismaintained to reduce the receivables to their carrying amount, whichapproximates fair value. BH/RE estimates the allowance for doubtful accounts byapplying standard reserve percentages to aged account balances under a specificdollar amount and specifically analyzes the collectibility of each account witha balance over the specified dollar amount, based on the age of the account,the customer’s financial condition, collection history and any other knowninformation.

 

###### ***Inventories***

###### *** ***

Inventories consist of food andbeverage, retail merchandise and operating supplies, and are stated at thelower of cost or market. Cost is determined by the first-in, first-out andspecific identification methods.

 

###### ***Property and Equipment***

###### *** ***

Propertyand equipment are stated at cost. Gains or losses on dispositions of propertyand equipment are included in the determination of income. Property andequipment are generally depreciated over the following estimated useful liveson a straight-line basis:

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

 

10

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Propertyand equipment and other long-lived assets are evaluated for impairment inaccordance with the Financial Accounting Standards Board’s (“FASB”) Statementof Financial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” For assets to be disposed of, the asset to besold is recognized at the lower of carrying value or fair value less costs ofdisposal. Fair value for assets to be disposed of is estimated based oncomparable asset sales, solicited offers or a discounted cash flow model.

 

Fixedassets are reviewed for impairment whenever indicators of impairment exist. Ifan indicator of impairment exists, the estimated future cash flows of theasset, on an undiscounted basis, are compared to the carrying value of theasset. If the undiscounted cash flows exceed the carrying value, no impairmentis indicated. If the undiscounted cash flows do not exceed the carrying value,then an impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model.

 

Theproperty and equipment and other long-lived assets that BH/RE obtained in theacquisition of the Aladdin are currently undergoing an appraisal by anindependent third party, which should be completed sometime during the fourthquarter of 2004. Property and equipment and the related accumulateddepreciation amounts recorded in the Company’s condensed consolidated balancesheets as of September 30, 2004 are estimates made by management and aresubject to change based on the independent third party appraisal.

 

###### ***Promotional Allowances***

###### *** ***

Casinorevenues are recognized as the net win from gaming activities, which is thedifference between gaming wins and losses. All other revenues are recognized as the service is provided. Revenuesinclude the retail value of food, beverage, rooms, entertainment, andmerchandise provided on a complimentary basis to customers. Such complimentary amountsare then deducted from revenues as promotional allowances on BH/RE’s condensedconsolidated statements of operations. The estimated departmental costs ofproviding such promotional allowances are included in casino costs andexpenses.

 

###### ***Hotel and Food and Beverage Revenues***

###### *** ***

Hotelrevenue recognition criteria are generally met at the time of occupancy. Foodand beverage revenue recognition criteria are generally met at the time ofservice. Deposits for future hotel occupancy or food and beverage services arerecorded as deferred income until revenue recognition criteria are met.Cancellation fees for hotel and food and beverage services are recognized uponcancellation by the customer as defined by a written contract entered into withthe customer.

 

###### ***Slot Club Program***

###### *** ***

Slotclub members earn points based on gaming activity, which can be redeemed forcash. A liability is recorded for the estimated cost of the outstanding pointsaccrued under the slot club program.

 

***Income Taxes***

 

Theconsolidated financial statements include the operations of BH/RE and itscontrolled subsidiaries:  EquityCo,MezzCo, and OpBiz.  BH/RE and EquityCoare limited liability companies and are taxed as partnerships for federalincome tax purposes.  However, MezzCo haselected to be taxed as a corporation for federal income tax purposes.  OpBiz, a wholly-owned subsidiary of MezzCo,will be treated as a division of MezzCo for federal income tax purposes, andaccordingly, will also be subject to federal income taxes.

 

MezzCoand OpBiz account for income taxes in accordance with Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”).  SFAS 109 requires the recognition of deferredincome tax assets, net of applicable reserves, related to net operating losscarryforwards and certain temporary differences.  The standard requires recognition of a futuretax benefit to the extent that realization of such benefit is more likely thannot.  Otherwise, a valuation allowance isapplied.

 

 

11

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###### ***Preopening Costs***

###### *** ***

BH/RE accounts for costs incurred during thepreopening and start-up phases of operations in accordance with Statement ofPosition 98-5, “Reporting on the Costsof Start-up Activities”. Preopening and start-up costs include, but arenot limited to, salary related expenses for new employees, travel andentertainment expenses. Preopening costs are expensed as incurred.

 

###### ***Membership Interests***

###### *** ***

As of September 30, 2004, BH/RE’smembership interests had not been unitized and BH/RE’s members do not presentlyintend to unitize these membership interests. Accordingly, management of BH/REhas excluded earnings per share data required pursuant to Statement ofFinancial Accounting Standard No. 128 “Earnings Per Share” becausemanagement believes that such disclosures would not be meaningful to thefinancial statement presentation.

 

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

##### ** **

Accounts receivable consist of thefollowing at September 30, 2004 (in thousands, unaudited):

 
| Casino                          |   | $      | 4,584  |   |
|---------------------------------|--------|--------|--------|--------|
| Hotel                           |   | 7,878  |   |
| Other                           |   | 2,674  |   |
|                            |   | 15,136 |   |
| Allowance for doubtful accounts |   | (2,110 | )      |
| Receivables, net                |   | $      | 13,026 |   |

 

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

##### ** **

Theassets that BH/RE obtained in the acquisition of the Aladdin are currentlyundergoing an appraisal by an independent third party. Property and equipmentand the related accumulated depreciation amounts listed below are estimatesmade by management and consist of the following at September 30, 2004 (inthousands, unaudited):

 
| Land                               |   | $       | 79,812  |   |
|------------------------------------|--------|---------|---------|--------|
| Building and  improvements         |   | 334,586 |    |
| Furniture,  fixtures and equipment |   | 88,625  |    |
| Construction in  progress          |   | 897     |    |
|                               |   | 503,920 |    |
| Accumulated  depreciation          |   | (2,275  | )       |
| Property and  equipment, net       |   | $       | 501,645 |   |

 

##### **5.**             ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

##### ** **

Accruedexpenses and other current liabilities consist of the following at September,30, 2004 (in thousands, unaudited):

 
| Accrued payroll  and related                    |   | $      | 10,308 |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Advance deposits                                |   | 3,864  |   |
| Accrued taxes                                   |   | 2,619  |   |
| Accrued interest  payable                       |   | 2,256  |   |
| Other current  liabilities                      |   | 13,668 |   |
| Accrued expenses  and other current liabilities |   | $      | 32,715 |   |

 

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

##### ** **

Long-termdebt consists of the following at September 30, 2004 (in thousands, unaudited):

 
| Term Loan A — $500  million senior notes |   | $       | 486,000 |   |
|-----------------------------------------------|--------|---------|---------|--------|
| Term Loan B — $10  million senior notes  |   | 10,048  |    |
| Mezzanine senior  secured subordinated notes  |   | 88,160  |    |
| Northwind  Aladdin                            |   | 33,862  |    |
| Total long-term  debt                         |   | 618,070 |    |
| Term A debt  discount, net                    |   | (32,548 | )       |
| MezzCo warrants,  net                         |   | (4,347  | )       |
| Current portion  of long-term debt            |   | (1,232  | )       |
| Total long-term  debt, net                    |   | $       | 579,943 |   |

 

***Credit Agreement***

 

TheAladdin acquisition and the planned renovations were funded by the issuance byOpBiz of $510 million of secured notes to Aladdin Gaming’s secured creditorspursuant to the Credit Agreement. OpBiz’s obligations under the CreditAgreement are secured by liens on all of its assets, including a mortgage onOpBiz’s real property, the Hotel, the Casino and the Theater for the PerformingArts (“TPA”), and security interests in OpBiz’s accounts receivable, inventory,equipment and intangible assets, excluding the Timeshare Land. The CreditAgreement will be guaranteed by MezzCo and MezzCo will secure its guarantee bypledging its membership interests in OpBiz to the lenders. The Credit Agreementmatures on August 31, 2010.

 

The loans under the Credit Agreement are evidenced by$500 million of Term Loan A notes and $10 million of Term Loan B notes. OpBizsimultaneously made a $14 million cash payment to the holders of the Term LoanA notes to reduce the principal amount of the Term Loan A notes to $486 millionand obtained a release of their lien on the Timeshare Land that OpBiz plans todevelop.

 

Scheduled principal payments on the Term Loan A notesare as follows:

 

•    $1.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2006 and ending on August 31, 2007;

 

•    $3.75million on the first day of each fiscal quarter during the period beginning onAugust 31, 2007 and ending on August 31, 2008;

 

•    $5.0million on the first day of each fiscal quarter during the period beginning onAugust 31, 2008 and ending on August 31, 2009;

 

•    $6.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2009 and ending on August 31, 2010;

 

•    thethen unpaid balance amount of Term Loan A notes on August 31, 2010.

 

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OpBiz pays interest on the outstanding Term Loan Anotes quarterly, in cash, at the London Inter-Bank Offered Rate, or LIBOR, plusan applicable margin that increases over time. Until the third anniversary ofthe completion of the Aladdin acquisition, the margin is subject to certainminimum and maximum amounts, so that as long as the minimum amount is met,OpBiz’s interest payment will not exceed its quarterly earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”), less quarterlymaintenance capital expenditures. Interest on the Term Loan B notes will accrue at a rate of LIBOR plus 4%and will be added quarterly to the outstanding principal amount of the TermLoan B notes and will be paid when OpBiz pays off the Term Loan B notes uponmaturity on August 31, 2010. OpBiz will also be required to pay an annualadministrative fee and certain other fees and expenses of the lender under theCredit Agreement.

 

OpBiz is required to prepay amounts outstanding underthe Credit Agreement:

 

•    withexcess cash flow (as defined in the Credit Agreement) after certain permittedcash reserves are accumulated;

 

•    inscheduled quarterly amounts beginning after August, 31, 2006;

 

•    withany amounts received by OpBiz in connection with the development of theTimeshare Land adjacent to the Desert Passage;

 

•    withany portion of the $90 million in capital commitments that OpBiz does not useto renovate the Aladdin within 36 months after August 31, 2004, although thatperiod may be extended for up to 12 months if the renovations are delayed forcertain reasons specified in the Credit Agreement; and

 

•    withthe proceeds of certain asset sales.

 

In particular, after OpBiz accumulates certainpermitted cash reserves, it is required to pay 100% of its excess cash flow (asdefined in the Credit Agreement) from operations to the lenders under theCredit Agreement. That percentage decreases to 75%, then 50%, if OpBiz meetscertain targeted ratios of total debt to EBITDA, or Leverage Ratios, for anytwo consecutive fiscal quarters.

 

The Credit Agreement includes covenants that, amongother things, restrict OpBiz’s ability to sell assets, make distributions toits owners, other than distributions for taxes, incur or prepay additionalindebtedness, enter into transactions with affiliates, incur liens, makeinvestments, make capital expenditures,****developthe Timeshare Land adjacent to the Desert Passage and enter into materialcontracts. In addition, OpBiz is required to maintain certain levels of EBITDAthat increase over time and, beginning August 31, 2007, maintain certain ratiosof EBITDA to interest expense that increase over time and maintain certainLeverage Ratios that decrease over time.

 

The Credit Agreement contains customary events ofdefault, including a change of control of OpBiz, the occurrence of a defaultunder the terms of any indebtedness of MezzCo, a default by OpBiz under thehotel management contract or termination of Sheraton as the manager of theHotel (unless OpBiz replaces Sheraton with another approved manager within 30days of such termination), a default or termination of the Planet Hollywoodlicense agreement and certain defaults under the agreements with BoulevardInvest or Northwind Aladdin.

 

BH/RE has agreed to issue warrants to purchase 2.94%of its ownership interest in EquityCo to the lenders under the CreditAgreement.

 

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***Mezzanine Financing***

 

In August 2004, MezzCo entered into a mezzaninefinancing transaction (“Mezzanine Financing”) with a group of purchasers.Pursuant to the Mezzanine Financing, MezzCo issued $87 million of 16% SeniorSecured Subordinated Notes and warrants to purchase 17,500 of its unitsrepresenting membership interests, equal to 17.5% of the fully diluted equityof MezzCo. The gross offering proceeds of the Mezzanine Financing weredeposited into an escrow account and, in conjunction with the closing of theAladdin acquisition, were used to (i) pay up to $13 million of fees andexpenses related to the Mezzanine Financing and the acquisition of the Aladdin,(ii) fund the $14 million lien release payment required under the CreditAgreement and (iii) fund a portion of the planned renovations to the Aladdin.The notes mature in August 2011 and accrue interest at 16% per annum. Intereston the notes is payable in kind or, at the option of MezzCo, in cash. Thewarrants are exercisable at any time, subject to the approval of the Nevadagaming authorities, at a purchase price of $0.01 per unit. Subject to theapproval of the Nevada gaming authorities, the warrants may be exercised topurchase either voting or non-voting membership interests of MezzCo or acombination thereof. Currently all of MezzCo’s voting membership interests arerepresented by units owned by EquityCo. In addition to customary anti-dilutionprotections, the number of units representing MezzCo membership interestsissuable upon exercise of the warrants may be increased from time to time uponthe occurrence of certain events as described in the warrants. The maximumaggregate increase is 28%, following which the warrants would represent rightsto purchase 45.5% of the units representing membership interests of MezzCo, ona fully-diluted basis. Holders of the warrants and any securities issued uponexercise of the warrants may require MezzCo to redeem such securitiescommencing in August 2011 at a redemption price based upon a formula set forthin the warrants. The holders of warrants, and securities issued upon exercisethereof, have the right, starting in August 2008, to assume control of MezzCoand OpBiz and conduct a sale of the equity of, or all or substantially all ofthe assets of, either MezzCo or OpBiz. These rights are subject to (i)repayment in full of all indebtedness that is senior to the notes (includingall indebtedness of OpBiz under the Credit Agreement), (ii) the failure ofOpBiz to achieve certain targeted levels of EBITDA and (iii) the prior approvalof the Nevada gaming authorities. These rights expire upon completion of apublic offering by MezzCo or OpBiz. In connection with the Mezzanine Financing,OpBiz’s obligation to make expenditures on renovations to the Aladdin wasincreased from $90 million, as required under the Credit Agreement, to $100million.

 

As of September 30, 2004, the MezzCo financing isrecorded net of the unamortized balance of the put warrants of approximately$4.3 million. The estimated fair value of the warrants of approximately $4.4million is recorded in other long-term liabilities in BH/RE’s condensedconsolidated balance sheets.

 

***Energy Services Agreement***

 

NorthwindAladdin (“Northwind”), a third party, owns and operates a central utility planton land leased from the owners of the Aladdin. The plant supplies hot and coldwater and emergency power to the Aladdin under a contract between AladdinGaming and Northwind. OpBiz has assumed the energy service agreement, whichexpires in 2018. Under the agreement, OpBiz is required to pay Northwind amonthly consumption charge, a monthly operational charge, a monthly debtservice payment and a monthly return on equity payment. Payments under theNorthwind agreement total approximately $418,000 per month.

 

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

##### ** **

The non-voting interests in BH/RE are owned 40.75% byBHCH I, 18.50% by BHCH II and 40.75% by OCS and the voting interests are owned50% by Douglas P. Teitelbaum and 50% by Robert Earl. BHCH is controlled by Mr.Teitelbaum, managing principal of Bay Harbour Management, an investmentmanagement firm. BHCH was formed by Mr. Teitelbaum for the purpose of holdinginvestments in BH/RE by funds managed by Bay Harbour Management. OCS iswholly-owned and controlled by Mr. Earl and holds Mr. Earl’s investment inBH/RE. Mr. Earl is the founder, chairman and chief executive officer of PlanetHollywood and Mr. Teitelbaum is a director of Planet Hollywood. Together, Mr.Earl, a trust for the benefit of Mr. Earl’s children and affiliates of BayHarbour Management own substantially all of the equity of Planet Hollywood.

 

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BH/RE owns 85% of the membership interests in EquityCoand Starwood owns 15%. OpBiz is a wholly owned subsidiary of EquityCo. BH/REand Starwood made total equity contributions of $20 million each in EquityCo tofund the costs of the planned renovations to the Aladdin. Starwood’s equityinterest in EquityCo is reflected as minority interest in the accompanying condensedconsolidated financial statements. BH/RE recorded minority interest related tothe Starwood interests of approximately $302,000 for the three and nine monthsended September 30, 2004.

 

BH/RE has the option to purchase all of Starwood’s membershipinterests in EquityCo if OpBiz is entitled to terminate the hotel managementcontract between OpBiz and Sheraton (see Note 8) as a result of a breach bySheraton. Starwood can require EquityCo to purchase all of its membershipinterests in EquityCo if the hotel management contract is terminated for anyreason other than in accordance with its terms or as the result of a breach bySheraton. In addition, BH/RE and Starwood entered into a registration rightsagreement with respect to their membership interests in EquityCo.

 

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

##### ** **

###### ***Due toAffiliates***

###### *** ***

Since its formation, certainmembers or affiliates of BH/RE have paid expenses totaling approximately $20.0million related to the Aladdin acquisition and funded deposits under the purchaseagreement on behalf of BH/RE and its subsidiaries. On September 1, 2004, $4.25million of advances from each of BHCH and OCS, which were used to fund thedeposit required under the purchase agreement, were contributed to BH/RE ascapital. Additionally, on September 1, 2004, the advances made by BHCH andPlanet Hollywood to pay transaction fees and deposits were repaid.

 

***Planet HollywoodLicensing Agreement***

 

OpBiz, Planet Hollywood and certain of PlanetHollywood’s subsidiaries have entered into a licensing agreement pursuant towhich OpBiz received a non-exclusive, irrevocable license to use various “PlanetHollywood” trademarks and service marks. Under the licensing agreement, OpBizalso has the right, but not the obligation, to open a Planet Hollywoodrestaurant and one or more Planet Hollywood retail shops under a separaterestaurant agreement with Planet Hollywood. OpBiz will pay Planet Hollywood aquarterly licensing fee of 1.75% of OpBiz’s non-casino revenues. If OpBiz opensan attraction with paid admission using the Planet Hollywood marks ormemorabilia prior to beginning operations as the PH Resort, it will pay PlanetHollywood a quarterly licensing fee of 1.75% of the revenues of the attractionuntil OpBiz begins operating as the PH Resort. The initial term of thelicensing agreement will expire in 2028. OpBiz can renew the licensingagreement for three successive 10-year terms.

 

***Sheraton HotelManagement Contract***

 

OpBiz and Sheraton have entered into a managementcontract pursuant to which Sheraton will provide hotel management services toOpBiz, assist OpBiz in the management, operation and promotion of the hotel andpermit OpBiz to use the Sheraton brand and trademarks in the promotion of thehotel. OpBiz will pay Sheraton a monthly fee of 4% of gross hotel and hotelrelated operating revenues and 2% of rental income from third-party leases inthe hotel. The management contract has a 20-year term commencing on thecompletion of the Aladdin acquisition and is subject to certain termination provisionsby either OpBiz or Sheraton.

 

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

##### ** **

At September 30, 2004, MezzCo and OpBiz generated acombined net operating loss of approximately $720,000.  A valuation allowance was recorded to offsetthe deferred tax asset associated with the net operating loss becausemanagement believes that the recognition of the tax benefit could not beassured.

 

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

##### ** **

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

###### *** ***

BH/RE is not currently a party toany legal proceedings.

 

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## **ITEM 2**.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS

## ** **

***Introduction and CorporateOrganization***

 

BH/RE,L.L.C. (“BH/RE”) is a holding company that owns 85% of EquityCo, L.L.C. (“EquityCo”).The remaining 15% of EquityCo is owned by a subsidiary of Starwood Hotels andResorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a whollyowned subsidiary of EquityCo, and OpBiz, L.L.C. (“OpBiz”) is a wholly ownedsubsidiary of MezzCo. As of November 1, 2004, 50% of the BH/RE’s votingmembership interests were held by each of Robert Earl and Douglas P.Teitelbaum, and BH/RE’s equity membership interests were held 40.75% by BHCasino and Hospitality LLC I (“BHCH I”), 18.50% by BH Casino and HospitalityLLC II (“BHCH II”) (collectively “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).In this report, the terms “BH/RE”, “we” and “our” refer to BH/RE and itssubsidiaries.

 

BH/RE wasformed to acquire, operate and renovate the Aladdin Resort and Casino (the “Aladdin”)located in Las Vegas, Nevada. OpBiz, an indirect subsidiary of BH/RE, completedthe acquisition of the Aladdin on September 1, 2004 and will begin a renovationproject which, when complete, will transform the Aladdin into the PlanetHollywood Resort and Casino (the “PH Resort”). In connection with therenovation of the Aladdin, OpBiz has entered into an agreement with PlanetHollywood International, Inc. (“Planet Hollywood”) and certain of itssubsidiaries to, among other things, license Planet Hollywood’s trademarks,memorabilia and other intellectual property. OpBiz has also entered into anagreement with Sheraton Operating Corporation (“Sheraton”), a subsidiary ofStarwood, pursuant to which Sheraton will provide hotel management, marketingand reservation services for the hotel that will comprise a portion of the PHResort.

 

BH/RE is a Nevada limited-liabilitycompany and was organized on March 31, 2003. BH/RE was formed by BHCHand OCS. BHCH is controlled by Douglas P. Teitelbaum, a managing principal of BayHarbour Management, L.C. (“Bay Harbour Management”). Bay Harbour Management isan investment management firm. BHCH was formed by Mr. Teitelbaum for thepurpose of holding investments in BH/RE by funds managed by Bay HarbourManagement. 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 chiefexecutive officer of Planet Hollywood and Mr. Teitelbaum is a director ofPlanet Hollywood. Together, Mr. Earl, a trust for the benefit of Mr. Earl’schildren and affiliates of Bay Harbour Management own substantially all of theequity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of anyequity of Planet Hollywood owned by the trust.

 

***Acquisition of theAladdin***

*** ***

AladdinGaming, L.L.C. (“Aladdin Gaming”), which was a debtor-in-possession underChapter 11 of the United States Bankruptcy Code, commenced its bankruptcy casein the United States Bankruptcy Court for the District of Nevada, SouthernDivision on September 28, 2001. On April 23, 2003, we entered into a purchaseagreement with Aladdin Gaming pursuant to which we agreed to acquire theAladdin. Under the purchase agreement and pursuant to an order of theBankruptcy Court, Aladdin Gaming conducted an auction to sell the Aladdin. OnJune 20, 2003, the Bankruptcy Court declared us the winner of that auction and,on August 29, 2003, the Bankruptcy Court entered an order confirming AladdinGaming’s plan of reorganization and authorizing Aladdin Gaming to complete thesale of the Aladdin to us under the purchase agreement. On September 1, 2004,we acquired substantially all of the real and personal property owned or usedby Aladdin Gaming to operate the Aladdin, and received $15 million of workingcapital from Aladdin Gaming, including $27.6 million of cash. The workingcapital adjustment was determined based on the preliminary closing balancesheet on August 31, 2004. The final working capital adjustment will bedetermined based on the final August 31, 2004 closing balance sheet, whichshould be completed during the fourth quarter of this year. We paid thepurchase price for the Aladdin by issuing new secured notes to Aladdin Gaming’ssecured creditors and assumed various contracts and leases entered into byAladdin Gaming in connection with its operation of the Aladdin and certain ofAladdin Gaming’s liabilities, including Aladdin Gaming’s energy serviceobligation to the third party owner of the central utility plant that supplieshot and

 

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coldwater and emergency power to the Aladdin. At the time of purchase, the energyservice obligation was $34.0 million. Upon the completion of the Aladdinacquisition, we issued $510 million of new secured notes to Aladdin Gaming’ssecured 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. We alsosimultaneously made a $14 million cash payment to those secured creditors,which reduced the principal amount of the notes to $496 million and obtained arelease of the lien on a four-acre parcel of undeveloped property that we alsoacquired from Aladdin Gaming (“Timeshare Land”). We presently intend to developthis property into a vacation resort ownership or similar project. The CreditAgreement also requires that we provide either cash or a letter of credit inthe aggregate amount of $90 million to fund the costs of the planned renovationsto the Aladdin. In August 2004, MezzCo issued $87 million of senior securednotes to a group of purchasers. The net proceeds of this financing were used tomake the $14 million payment described above, to pay certain costs and expensesof BH/RE and its subsidiaries and affiliates related to the acquisition of theAladdin, and to provide us with a portion of the funds necessary to meet itsobligations regarding the planned renovations to the Aladdin.

 

Thepurchase agreement required us to assume substantially all of Aladdin Gaming’spre-petition contracts and leases and any post-petition contracts or leases towhich we do not object. In addition, the purchase agreement required us tooffer employment to all of Aladdin Gaming’s employees, other than executivemanagement, on terms and conditions substantially similar to their previousemployment terms and conditions.

 

Thefollowing unaudited proforma financial information for BH/RE has been preparedassuming the acquisition had occurred on the first day of the nine-month periodended September 30, 2004 (amounts in thousands):

 
| Net revenues     |   | $ |  213,849 |   |
|------------------|--------|---|---------------|--------|
| Operating income |   | $ | 44,087        |   |
| Net income       |   | $ | 31,241        |   |

 

###### ***Overview of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

###### *** ***

Setforth below is a discussion of the financial condition and results ofoperations of BH/RE and our subsidiaries for the periods covered in the report.The discussion of operations herein focuses on events and the revenues andexpenses during the three and nine months ended September 30, 2004 as comparedto the three and nine months ended September 30, 2003, as if there was nochange in ownership of the Aladdin.

 

Thefollowing management’s discussion and analysis of financial condition andresults of operations should be read in conjunction with the consolidatedfinancial statements and the related notes to consolidated financial statementsof BH/RE and Aladdin Gaming, respectively and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in BH/RE’sForm 10 Registration Statement (File No. 000-50689) filed with the Securitiesand Exchange Commission on April 16, 2004 and the unaudited condensed consolidatedfinancial statements and notes thereto included in Part I, Item 1 of thisreport.

 

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

###### *** ***

Thefollowing discussion presents an analysis of the results of operations of theAladdin and OpBiz and for the three and nine months ended September 30, 2004and 2003.

 

The following tablehighlights the various sources of our revenues and expenses as compared to theprior periods (dollars in thousands, unaudited):

 
| ** **                                    | ** ** | **Three months ended  September 30,** | ** ** | **Percent** | ** ** | **Nine months ended  September 30,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **2004**                              | ** ** | **2003**    | ** ** | **Change**                           | ** ** | **2004**    | ** ** | **2003** | ** ** | **Change** | ** ** |
|                                          |       |                                  |       |        |       |                                 |       |        |       |   |   |   |   |
| Casino revenues                               |       | $                                     | 29,175     |        | $          | 26,371                               |       | 10.6        | %          | $ | 87,868 |   | $ | 81,055 |   | 8.4 | % |
| Casino expenses                               |       | 18,001                                |       | 15,723      |       | 14.5                                 | %          | 53,132      |       | 48,173 |   | 10.3 | % |
| *Margin*                                      | * *   | *38.3*                                | *%*        | *40.4*      | *%*        | * *                             | * *   | *39.5*      | *%*        | *40.6* | % |   |   |
|                                          |       |                                  |       |        |       |                                 |       |        |       |   |   |   |   |
| Hotel revenues                                |       | $                                     | 24,657     |        | $          | 22,537                               |       | 9.4         | %          | $ | 80,098 |   | $ | 71,653 |   | 11.8 | % |
| Hotel expenses                                |       | 8,590                                 |       | 7,652       |       | 12.3                                 | %          | 23,862      |       | 21,799 |   | 9.5 | % |
| *Margin*                                      | * *   | *65.2*                                | *%*        | *66.0*      | *%*        | * *                             | * *   | *70.2*      | *%*        | *69.6* | % |   |   |
|                                          |       |                                  |       |        |       |                                 |       |        |       |   |   |   |   |
| Food and  beverage revenues                   |       | $                                     | 17,915     |        | $          | 17,096                               |       | 4.8         | %          | $ | 54,816 |   | $ | 51,017 |   | 7.4 | % |
| Food and  beverage expenses                   |       | 11,438                                |       | 10,587      |       | 8.0                                  | %          | $           | 32,146     |   | $ | 29,667 |   | 8.4 | % |
| *Margin*                                      | * *   | *36.2*                                | *%*        | *38.1*      | *%*        | * *                             | * *   | *41.4*      | *%*        | *41.8* | % |   |   |
|                                          |       |                                  |       |        |       |                                 |       |        |       |   |   |   |   |
| Other revenues                                |       | $                                     | 3,992      |        | $          | 4,959                                |       | (19.5       | )%         | $ | 12,045 |   | $ | 13,483 |   | (10.7 | )% |
| Other expenses                                |       | 3,169                                 |       | 4,081       |       | (22.3                                | )%         | 10,005      |       | 10,828 |   | (7.6 | )% |
|                                          |       |                                  |       |        |       |                                 |       |        |       |   |   |   |   |
| Selling, general  and administrative expenses |       | $                                     | 16,858     |        | $          | 15,644                               |       | 7.8         | %          | $ | 46,658 |   | $ | 45,745 |   | 2.0 | % |
| *Percent  of net revenues*                    | * *   | *24.4*                                | *%*        | *24.2*      | *%*        | * *                             | * *   | *21.8*      | *%*        | *23.1* | % |   |   |

 

Casino

 

Casinorevenue is derived primarily from patrons wagering on slot machines, tablegames and other gaming activities. Table games generally include Blackjack orTwenty One, Craps, Baccarat and Roulette. Other gaming activities include theRace and Sports Books. Casino revenue is defined as the win from gamingactivities, computed as the difference between gaming wins and losses.

 

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

 

Casino revenues increased10.6% to $29.2 million for the three months ended September 30, 2004 ascompared to $26.4 million for the three months ended September 30, 2003. Casinorevenues increased 8.4% to $87.9 million for the nine months ended September30, 2004 as compared to $81.1 million for the nine months ended September 30,2003. The increase in casino revenues is primarily due to the addition of newand more popular gaming devices and the conversion of a significant amount ofour gaming devices to “ticket-in, ticket-out” technology.

 

Casino expenses increased14.5% to $18.0 million for the three months ended September 30, 2004 ascompared to $15.7 million for the three months ended September 30, 2003. Casinoexpenses increased 10.3% to

 

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$53.1 million for the nine months ended September 30, 2003 as comparedto $48.2 million for the nine months ended September 30, 2003. Casino marginsdecreased 2.1 and 1.1 percentage points over the same three- and nine-monthperiods, respectively. The decrease in casino margins was mainly the result ofincreased employee benefit expenses, as well as an increase in the base gamingtax rate in August 2003.

 

Hotel

 

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

 

Hotel revenues increased9.4% to $24.7 million for the three months ended September 30, 2004 as comparedto $22.5 million for the three months ended September 30, 2003. Hotel revenuesincreased 11.8% to $80.1 million for the nine months ended September 30,2004 as compared to $71.7 million for the nine months ended September 30, 2003.Hotel occupancy percentages remained consistent at 99% for the three and ninemonths ended September 30, 2004 and 2003. Average daily room rates increased to$106 and $116 for the three and nine months ended September 30, 2004,respectively, as compared to $97 and $105 for the three and nine months ended September30, 2003, respectively, resulting in the increase in hotel revenues. Theincrease in hotel revenues and average daily room rates is primarily due to animprovement in general economic conditions throughout 2004 and a higher demandfor rooms in Las Vegas in general.

 

Hotel expenses increased12.3% to $8.6 million for the three months ended September 30, 2004 as comparedto $7.7 million for the three months ended September 30, 2003. Casino expensesincreased 9.5% to $23.9 million for the nine months ended September 30, 2003 ascompared to $21.8 million for the nine months ended September 30, 2003. Hotelmargins decreased 0.8 percentage points over the same three-month periods andincreased 0.6 percentage points over the same nine-month periods. The decreasein hotel margins over the three month periods was primarily due to increasedemployee benefit expenses and the addition of management fees paid to Starwoodunder the management contract.

 

Foodand Beverage

 

Foodand beverage revenues are derived from food and beverage sales in therestaurants, bars, room service, banquets and entertainment outlets. Food andbeverage revenue is recognized at the time the food and/or beverage areprovided to the guest.

 

Food and beveragerevenues increased 4.8% to $17.9 million for the three months ended September30, 2004 as compared to $17.1 million for the three months ended September 30,2003. Food and beverage revenues increased 7.4% to $54.8 million for the ninemonths ended September 30, 2004 as compared to $51.0 million for the ninemonths ended September 30, 2003. The average guest check increased 12.9% and11.2% for the three and nine months ended September 30, 2004 as compared to thethree and nine months ended September 30, 2003, respectively, which resulted inthe increase in food and beverage revenues. The increase in the average guestcheck was primarily due to selected price increases, particularly in thebuffet.

 

Food and beverageexpenses increased 8.0% to $11.4 million for the three months ended September30, 2004 as compared to $10.6 million for the three months ended September 30,2003. Food and beverage expenses increased 8.4% to $32.1 million for the ninemonths ended September 30, 2003 as compared to $29.7 million for the ninemonths ended September 30, 2003. Food and beverage margins decreased 1.9 and0.4 percentage points over the same three- and nine-month periods,respectively. The increase in food and beverage expenses was due to increasedemployee benefit expenses, as well as increases in selected food cost items.

 

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Other

 

Otherrevenue includes entertainment sales, retail sales, telephone and othermiscellaneous income and is recognized at the time the goods or services areprovided to the guest.

 

Other revenues decreased19.5% to $4.0 million for the three months ended September 30, 2004 as comparedto $5.0 million for the three months ended September 30, 2003. Other revenuesdecreased 10.7% to $12.0 million for the nine months ended September 30,2004 as compared to $13.5 million for the nine months ended September 30, 2003.The decrease in other revenues is primarily due to a decrease in entertainmentrevenue, which was the result of fewer performances in the Theater for thePerforming Arts during 2004.

 

Other expenses decreased22.3% to $3.2 million for the three months ended September 30, 2004 as comparedto $4.1 million for the three months ended September 30, 2003. Other expensesdecreased 7.6% to $10.0 million for the nine months ended September 30,2004 as compared to $10.8 million for the nine months ended September 30, 2003.

 

Selling, Generaland Administrative (“SG&A”)

 

SG&A expensesincreased 7.8% to $16.9 million for the three months ended September 30, 2004as compared to $15.6 million for the three months ended September 30, 2003.SG&A expenses increased 2.0% to $46.7 million for the nine months endedSeptember 30, 2004 as compared to $45.7 million for the nine months endedSeptember 30, 2003. SG&A expenses as a percentage of net revenues increased0.2 percentage points over the same three-month periods. SG&A expenses as apercentage of net revenues decreased 1.3 percentage points over the samenine-month periods. The increase in SG&A expenses was primarily due to anincrease in payroll and related expenses as well as management and centralizedservices fees incurred under the Starwood Management Agreement beginning inSeptember 2004. A large portion of these costs are fixed and, as a result, asrevenues increased the percentage of SG&A expenses to net revenuesdecreased.

 

Depreciation andAmortization

 

Aladdin Gaming was notrecording depreciation expense during 2004, as the assets were classified as “heldfor sale”. As a result, the depreciation expense for the three- and nine-monthperiods ended September 30, 2004 are significantly less than the sameperiods in the prior year. Depreciation and amortization expense decreased 85.2%to $2.4 million for the three months ended September 30, 2004 as compared to$16.3 million for the three months ended September 30, 2003. Depreciation andamortization expense decreased 95.1% to $2.4 million for the nine months endedSeptember 30, 2004 as compared to $48.7 million for the nine months endedSeptember 30, 2003.

 

Interest Expense,Net

 

Interest expense, netincreased 357.4% to $4.5 million for the three months ended September 30, 2004as compared to $1.0 million for the three months ended September 30, 2003.Interest expense, net increased 113.6% to $6.4 million for the nine monthsended September 30, 2004 as compared to $3.0 million for the nine months endedSeptember 30, 2003. The increase in interest expense, net is directly relatedto the addition of the Credit Agreement we entered into upon the completion ofthe acquisition of the Aladdin on September 1, 2004.

 

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

###### *** ***

The following liquidityand capital resources discussion contains certain forward-looking statementswith respect to our business, financial condition, results of operations,dispositions, acquisitions, expansion projects and our subsidiaries, whichinvolve risks and uncertainties that cannot be predicted or quantified, andconsequently, actual results may differ materially from those expressed orimplied herein. Such risks and uncertainties include, but are not limited to,financial market risks, the ability to maintain existing management,integration of acquisitions, competition within the gaming industry, thecyclical nature of the hotel business and gaming business, economic conditions,regulatory matters and litigation and other risks described in our filings withthe Securities and Exchange Commission. All forward-looking statements arebased on our current expectations and projections about future events.

 

During the nine monthsended September 30, 2004, the Aladdin generated cash flows from operatingactivities of approximately $39.7 million. We also had restricted cash and cashequivalents of approximately $96.7 million, which is designated to be used forcosts associated with the renovation of the Aladdin to the PH Resort.

 

Our primary cashrequirements for the remainder of 2004 and 2005 are expected to include (i) upto approximately $100 million in capital expenditures related to the renovationproject, (ii) approximately $9.0 million for maintenance capital expendituresand (iii) up to approximately $37.3 million in interest payments on our debt.

 

Webelieve that cash generated from operations, the capital invested in OpBiz atthe closing and the working capital, including the cash, we acquired fromAladdin Gaming under the purchase agreement will be adequate to meet theanticipated working capital, capital expenditure, renovation and debt serviceobligations of OpBiz for the first 12 months after the Aladdinacquisition. We may have other liquidity needs, such as tax distributions tothe members of EquityCo and BH/RE. The Credit Agreement provides that OpBizwill be permitted to make tax distributions.

 

Therecan be no assurance that we have accurately estimated our liquidity needs, orthat we will not experience unforeseen events that may materially increase ourneed for liquidity to fund our operations or capital expenditure programs ordecrease the amount of cash generated from our operations. We expect toexperience a reduction in cash generated by our operations during our plannedrenovations to the Aladdin and have negotiated the terms of the CreditAgreement to address those anticipated reductions. For example, the covenant inthe Credit Agreement requiring OpBiz to achieve specified levels of earningsbefore interest, taxes, depreciation and amortization (“EBITDA”), during thefirst two years of the Credit Agreement is significantly below the Aladdin’scurrent EBITDA levels. Also, the interest rate during the first three years ofthe Credit Agreement is lower than the interest rate in the last three years.

 

***Description of Certain Indebtedness***

 

CreditAgreement

 

TheAladdin acquisition and the planned renovations were funded by the issuance of $510million of secured notes to Aladdin Gaming’s secured creditors pursuant to aCredit Agreement. Our obligations under the Credit Agreement are secured byliens on all of our assets, including a mortgage on our real property, theHotel, the Casino and the Theater for the Performing Arts (“TPA”), and securityinterests in our accounts receivable, inventory, equipment and intangibleassets, excluding the Timeshare Land. The Credit Agreement will be guaranteedby MezzCo and MezzCo will secure its guarantee by pledging its membershipinterests in OpBiz to the lenders. The Credit Agreement matures on August 31,2010.

 

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The loans under the Credit Agreement are evidenced by$500 million of Term Loan A notes and $10 million of Term Loan B notes. Wesimultaneously made a $14 million cash payment to the holders of the Term LoanA notes to reduce the principal amount of the Term Loan A notes to $486 millionand obtained a release of their lien on the Timeshare Land that we plan todevelop.

 

Scheduled principal payments on the Term Loan A notesare as follows:

 

•    $1.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2006 and ending on August 31, 2007;

 

•    $3.75million on the first day of each fiscal quarter during the period beginning onAugust 31, 2007 and ending on August 31, 2008;

 

•    $5.0million on the first day of each fiscal quarter during the period beginning onAugust 31, 2008 and ending on August 31, 2009;

 

•    $6.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2009 and ending on August 31, 2010;

 

•    thethen unpaid balance amount of Term Loan A notes on August 31, 2010.

 

We pay interest on the outstanding Term Loan A notesquarterly, in cash, at the London Inter-Bank Offered Rate, or LIBOR, plus anapplicable margin that increases over time. Until the third anniversary of thecompletion of the Aladdin acquisition, the margin is subject to certain minimumand maximum amounts, so that as long as the minimum amount is met, our interestpayment will not exceed our quarterly EBITDA, less quarterly maintenancecapital expenditures. Interest on the Term Loan B notes will accrue at a rateof LIBOR plus 4% and will be added quarterly to the outstanding principalamount of the Term Loan B notes and will be paid when we pay off the Term LoanB notes. We will also be required to pay an annual administrative fee andcertain other fees and expenses of the lender under the Credit Agreement.

 

We are required to prepay amounts outstanding underthe Credit Agreement:

 

•    withexcess cash flow (as defined in the Credit Agreement) after certain permittedcash reserves are accumulated;

 

•    inscheduled quarterly amounts beginning after August, 31, 2006;

 

•    withany amounts received in connection with the development of the Timeshare Landadjacent to the Desert Passage;

 

•    withany portion of the $90 million in capital commitments that we do not use torenovate the Aladdin within 36 months after August 31, 2004, although thatperiod may be extended for up to 12 months if the renovations are delayed forcertain reasons specified in the Credit Agreement; and

 

•    withthe proceeds of certain asset sales.

 

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In particular, after we accumulate certain permittedcash reserves, we are required to pay 100% of our excess cash flow (as definedin the Credit Agreement) from operations to the lenders under the CreditAgreement. That percentage decreases to 75%, then 50%, if we meet certaintargeted ratios of total debt to EBITDA, or Leverage Ratios, for any twoconsecutive fiscal quarters.

 

The Credit Agreement includes covenants that, amongother things, restrict our ability to sell assets, make distributions to ourowners, other than distributions for taxes, incur or prepay additionalindebtedness, enter into transactions with affiliates, incur liens, makeinvestments, make capital expenditures,****developthe Timeshare Land adjacent to the Desert Passage and enter into materialcontracts. In addition, we are required to maintain certain levels of EBITDAthat increase over time and, beginning August 31, 2007, maintain certain ratiosof EBITDA to interest expense that increase over time and maintain certainLeverage Ratios that decrease over time.

 

The Credit Agreement contains customary events ofdefault, including a change of control of OpBiz, the occurrence of a defaultunder the terms of any indebtedness of MezzCo, a default by us under the hotelmanagement contract or termination of Sheraton as the manager of the Hotel(unless we replace Sheraton with another approved manager within 30 days ofsuch termination), a default or termination of the Planet Hollywood licenseagreement and certain defaults under the agreements with Boulevard Invest orNorthwind Aladdin.

 

BH/RE has agreed to issue warrants to purchase 2.94%of its ownership interest in EquityCo to the lenders under the CreditAgreement.

 

MezzanineFinancing

 

In August 2004, MezzCo entered into a mezzaninefinancing transaction (“Mezzanine Financing”) with a group of purchasers.Pursuant to the Mezzanine Financing, MezzCo issued $87 million of 16% SeniorSecured Subordinated Notes and warrants to purchase 17,500 of its unitsrepresenting membership interests, equal to 17.5% of the fully diluted equityof MezzCo. The gross offering proceeds of the Mezzanine Financing weredeposited into an escrow account and, in conjunction with the closing of theAladdin acquisition, were used to (i) pay up to $13 million of fees and expensesrelated to the Mezzanine Financing and the acquisition of the Aladdin, (ii)fund the $14 million lien release payment required under the Credit Agreement,and (iii) fund a portion of the planned renovations to the Aladdin. The notesmature in August 2011 and accrue interest at 16% per annum. Interest on thenotes is payable in kind or, at the option of MezzCo, in cash. The warrants areexercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereof.Currently all of MezzCo’s voting membership interests are represented by unitsowned by EquityCo. In addition to customary anti-dilution protections, thenumber of units representing MezzCo membership interests issuable upon exerciseof the warrants may be increased from time to time upon the occurrence ofcertain events as described in the warrants. The maximum aggregate increase is28%, following which the warrants would represent rights to purchase 45.5% ofthe units representing membership interests of MezzCo, on a fully-dilutedbasis. Holders of the warrants and any securities issued upon exercise of thewarrants may require MezzCo to redeem such securities commencing in August 2011at a redemption price based upon a formula set forth in the warrants. Theholders of warrants, and securities issued upon exercise thereof, have theright, starting in August 2008, to assume control of MezzCo and OpBiz andconduct a sale of the equity of, or all or substantially all of the assets of,either MezzCo or OpBiz. These rights are subject to (i) repayment in full ofall indebtedness that is senior to the notes (including all indebtedness ofOpBiz under the Credit Agreement), (ii) the failure of OpBiz to achieve certaintargeted levels of EBITDA and (iii) the prior approval of the Nevada gamingauthorities. These rights expire upon completion of a public offering by MezzCoor OpBiz. In connection with the Mezzanine Financing, our obligation to makeexpenditures on renovations to the Aladdin was increased from $90 million, asrequired under the Credit Agreement, to $100 million.

 

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As of September 30, 2004, the MezzCo financing isrecorded net of the unamortized balance of the put warrants of approximately$4.3 million. The estimated fair value of the warrants of approximately $4.4million is recorded in other long-term liabilities in our condensedconsolidated balance sheets.

 

EnergyServices Agreement

 

NorthwindAladdin (“Northwind”), a third party, owns and operates a central utility planton land leased from us. The plant supplies hot and cold water and emergencypower to the Aladdin under a contract between Aladdin Gaming and Northwind. Wehave assumed the energy service agreement, which expires in 2018. Under theagreement, we are required to pay Northwind a monthly consumption charge, amonthly operational charge, a monthly debt service payment and a monthly returnon equity payment. Payments under the Northwind agreement total approximately $418,000per month.

 

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

###### *** ***

###### ***Significant AccountingPolicies and Estimates***

###### *** ***

Our condensed consolidatedfinancial statements are prepared in conformity with U.S generally acceptedaccounting principles. Certain policies, including the determination of baddebt reserves, the estimated useful lives assigned to assets, asset impairment,insurance reserves and the calculation of liabilities, require that we applysignificant judgment in defining the appropriate assumptions for calculatingfinancial estimates. By their nature, these judgments are subject to an inherentdegree of uncertainty. Our judgments are based on historical experience, termsof existing contracts, observance of trends in the gaming industry andinformation available from other outside sources. There can be no assurancethat actual results will not differ from our estimates. To provide anunderstanding of the methodology we apply, our significant accounting policiesand basis of presentation are discussed below, as well as where appropriate inthe notes to the condensed consolidated financial statements and management’sdiscussion and analysis.

 

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

###### *** ***

Cash and cash equivalents includecash on hand, as well as short-term investments with original maturities not inexcess of 90 days.

 

###### ***Restricted Cash andCash Equivalents***

###### *** ***

Restricted cash and cashequivalents consists of an escrow deposit of approximately $96.7 million, whichwill be applied toward the remaining cash commitments for the plannedrenovations to the Aladdin.

 

###### ***Accounts Receivable,Net***

###### *** ***

Accounts receivable, including casinoand hotel receivables, are typically non-interest bearing and are initiallyrecorded at cost. An estimated allowance for doubtful accounts is maintained toreduce the receivables to their carrying amount, which approximates fair value.We estimate the allowance for doubtful accounts by applying standard reservepercentages to aged account balances under a specific dollar amount andspecifically analyze the collectibility of each account with a balance over thespecified dollar amount, based on the age of the account, the customer’sfinancial condition, collection history and any other known information.

 

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###### ***Inventories***

###### *** ***

Inventories consist of food andbeverage, retail merchandise and operating supplies, and are stated at thelower of cost or market. Cost is determined by the first-in, first-out andspecific identification methods.

 

###### ***Property and Equipment***

###### *** ***

Propertyand equipment are stated at cost. Gains or losses on dispositions of propertyand equipment are included in the determination of income. Property andequipment are generally depreciated over the following estimated useful liveson a straight-line basis:

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

 

Propertyand equipment and other long-lived assets are evaluated for impairment inaccordance with the Financial Accounting Standards Board’s (“FASB”) Statementof Financial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” For assets to be disposed of, the asset to besold is recognized at the lower of carrying value or fair value less costs ofdisposal. Fair value for assets to be disposed of is estimated based oncomparable asset sales, solicited offers or a discounted cash flow model.

 

Fixedassets are reviewed for impairment whenever indicators of impairment exist. Ifan indicator of impairment exists, the estimated future cash flows of theasset, on an undiscounted basis, are compared to the carrying value of theasset. If the undiscounted cash flows exceed the carrying value, no impairmentis indicated. If the undiscounted cash flows do not exceed the carrying value,then an impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model.

 

Theproperty and equipment and other long-lived assets that we obtained in theacquisition of the Aladdin are currently undergoing an appraisal by anindependent third party, which should be completed sometime during the fourthquarter of 2004. Property and equipment and the related accumulateddepreciation amounts recorded in the condensed consolidated balance sheets asof September 30, 2004 are estimates made by management and are subject tochange based on the independent third party appraisal.

 

###### ***Promotional Allowances***

###### *** ***

Casinorevenues are recognized as the net win from gaming activities, which is thedifference between gaming wins and losses. All other revenues are recognized asthe service is provided. Revenues include the retail value of food, beverage,rooms, entertainment, and merchandise provided on a complimentary basis tocustomers. Such complimentary amounts are then deducted from revenues aspromotional allowances on our condensed consolidated statements of operations.The estimated departmental costs of providing such promotional allowances areincluded in casino costs and expenses.

 

###### ***Hotel and Food and Beverage Revenues***

###### *** ***

Hotelrevenue recognition criteria are generally met at the time of occupancy. Foodand beverage revenue recognition criteria are generally met at the time ofservice. Deposits for future hotel occupancy or food and beverage services arerecorded as deferred income until revenue recognition criteria are met. Cancellationfees for hotel and food and beverage services are recognized upon cancellationby the customer as defined by a written contract entered into with thecustomer.

 

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###### ***Slot Club Program***

###### *** ***

Slotclub members earn points based on gaming activity, which can be redeemed forcash. A liability is recorded for the estimated cost of the outstanding pointsaccrued under the slot club program.

 

Income Taxes

 

Theconsolidated financial statements include the operations of BH/RE and itscontrolled subsidiaries:  EquityCo,MezzCo, and OpBiz.  BH/RE and EquityCoare limited liability companies and are taxed as partnerships for federal incometax purposes.  However, MezzCo haselected to be taxed as a corporation for federal income tax purposes.  OpBiz, a wholly-owned subsidiary of MezzCo,will be treated as a division of MezzCo for federal income tax purposes, andaccordingly, will also be subject to federal income taxes.

 

MezzCoand OpBiz account for income taxes in accordance with Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”).  SFAS 109 requires the recognition of deferredincome tax assets, net of applicable reserves, related to net operating losscarryforwards and certain temporary differences.  The standard requires recognition of a futuretax benefit to the extent that realization of such benefit is more likely thannot.  Otherwise, a valuation allowance isapplied.

 

###### ***Preopening Costs***

###### *** ***

We account for costs incurred during the preopeningand start-up phases of operations in accordance with Statement of Position98-5, “Reporting on the Costs ofStart-up Activities”. Preopening and start-up costs include, but are notlimited to, salary related expenses for new employees, travel and entertainmentexpenses. Preopening costs are expensed as incurred.

 

###### ***Membership Interests***

###### *** ***

As of September 30, 2004, ourmembership interests had not been unitized and our members do not presentlyintend to unitize these membership interests. Accordingly, we have excludedearnings per share data required pursuant to Statement of Financial AccountingStandard No. 128 “Earnings Per Share” because we believe that suchdisclosures would not be meaningful to the financial statement presentation.

 

***Forward Looking Statements***

 

When used in this report and elsewhere by managementfrom time to time, the words “believes”, “anticipates” and “expects” andsimilar expressions are intended to identify forward-looking statements withrespect to our financial condition, results of operations and our businessincluding our expansion, legal proceedings and employee matters. Certainimportant factors, including but not limited to, competition from other gamingoperations, factors affecting our ability to complete acquisitions anddispositions of gaming properties, leverage, construction risks, the inherentuncertainty and costs associated with litigation and governmental andregulatory investigations, and licensing and other regulatory risks, couldcause our actual results to differ materially from those expressed in ourforward-looking statements. Further information on potential factors whichcould affect our financial condition, results of operations and businessincluding, without limitation, the expansion, development and acquisitionprojects, legal proceedings and employee matters are included in our filingswith the Securities and Exchange Commission. Readers are cautioned not to placeundue reliance on any forward-looking statements, which speak only as of the datethereof. We undertake no obligation to publicly release any revisions to suchforward-looking statements to reflect events or circumstances after the datehereof.

 

Ouracquisition of the Aladdin and planned operations are subject to a number ofrisks.  Please refer to the discussion of“Risk Factors” in “Item 1. Business – Risk Factors” of the RegistrationStatement on Form 10 (File No. 000-50689), filed by BH/RE with theSecurities and Exchange Commission on April 16, 2004.

 

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## **ITEM 3**.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## ** **

Marketrisk is the risk of loss arising from adverse changes in market rates andprices, such as interest rates, foreign currency exchange rates and commodityprices. We have market risk associated with funds that were borrowed under theCredit Agreement to finance the acquisition of the Aladdin and to pay therelated fees and expenses. The term loans under the Credit Agreement aresubject to interest rate risk and the interest payments associated with theterm loans will increase if LIBOR increases.

 

## **ITEM 4**.CONTROLS AND PROCEDURES

## ** **

Priorto the end of the period covered by this report, we were a development stagecompany and as such, our management, under the supervision and with theparticipation of our Chief Executive Officer and our Chief Financial Officer,were developing a system of disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)and performed an evaluation of the effectiveness of the design and operation ofour disclosure controls and procedures implemented at such time. Since theclosing of the acquisition of the Aladdin, a system of disclosure controls andprocedures has been put in place that our management, including our ChiefExecutive Officer and Chief Financial Officer, believe include disclosurecontrols and procedures that are effective to ensure that information requiredto be disclosed in reports that we file or submit under the Exchange Act arerecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

Therehave been no changes in our internal control over financial reporting since theclosing of the acquisition of the Aladdin or in the period covered in thisreport that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

# **PART II**  — OTHER INFORMATION

# ** **

## **ITEM 1.  LEGAL PROCEEDINGS –**None

## ** **

**ITEM 2.  CHANGES IN SECURITIES ANDUSE OF PROCEEDS –**None

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES –**None

 

**ITEM 4.  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS -**None

 

## **ITEM 5.  OTHER INFORMATION –**None

 

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## **ITEM 6**. EXHIBITS AND REPORTS ON FORM 8-K

## ** **

(a)           Exhibits:

 

31.1         Certificationpursuant to §302 of the Sarbanes-Oxley Act of 2002, Donna Lehmann.

 

31.2         Certificationpursuant to §302 of the Sarbanes-Oxley Act of 2002, Robert Earl.

 

31.3         Certificationpursuant to §302 of the Sarbanes-Oxley Act of 2002, Douglas P. Teitelbaum.

 

32.1         Certificationpursuant to §906 of the Sarbanes-Oxley Act of 2002, Donna Lehmann.

 

32.2         Certificationpursuant to §906 of the Sarbanes-Oxley Act of 2002, Robert Earl.

 

32.3         Certificationpursuant to §906 of the Sarbanes-Oxley Act of 2002, Douglas P. Teitelbaum.

 

(b)           Reportson Form 8-K:

 

On September 7,2004, BH/RE filed a Current Report on Form 8-K dated August 31, 2004, reportingitems listed under Items 1.01, 2.01, 2.03 and 9.01.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|               | BH/RE,  L.L.C.           |
|--------------------|--------------------------|
|               |                     |
|               |                     |
| November  15, 2004 | By:                      | /S/  Donna Lehmann |   |
|               | Donna  Lehmann           |
|               | Chief  Financial Officer |

 

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