**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

**(MarkOne)**

 
| x          | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **For the  quarterly period ended March 31, 2008**                                                 |
|       |       |                                                                                                    |
| ** ** | ** ** | **OR**                                                                                                  |
|       |       |                                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from             to             **

 

**Commission File Number 000-50689**

 

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

(Exact Name of Registrant as Specified in itsCharter)

 

| **NEVADA**                         | ** ** | **84-1622334**          |
|------------------------------------|------------|-------------------------|
| (State or Other  Jurisdiction      |       | (I.R.S. Employer        |
| of Incorporation  or Organization) |       | Identification  Number) |

 

| **3667 Las Vegas Boulevard South   Las Vegas, Nevada** | ** ** | **89109**  |
|--------------------------------------------------------|------------|------------|
| (Address of  Principal Executive Offices)              |       | (Zip Code) |

 

**(702) 785-5555**

(Registrant’s Telephone Number, IncludingArea Code)

 

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

 

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

 

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

 

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

 

 

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

Index

 
| PART I— FINANCIAL INFORMATION |
|-----------------------------------------|
|                                    |
|                                    | ITEM 1. | FINANCIAL  STATEMENTS: |
|                                    |   |   |
|                                    |   | Condensed  Consolidated Balance Sheets (Unaudited) |
|                                    |   |   |
|                                    |   | Condensed  Consolidated Statements Of Operations (Unaudited) |
|                                    |   |   |
|                                    |   | Condensed  Consolidated Statements Of Cash Flows (Unaudited) |
|                                    |   |   |
|                                    |   | Notes To  Condensed Consolidated Financial Statements (Unaudited) |
|                                    |   |   |
|                                    | ITEM 2. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|                                    |   |   |
|                                    | ITEM 3. | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|                                    |   |   |
|                                    | ITEM 4. | CONTROLS AND  PROCEDURES |
|                                    |   |   |
| PART II — OTHER  INFORMATION: |
|                                    |   |
|                                    | ITEM  6. | EXHIBITS |
|                                    |   |   |
|                                    | SIGNATURES |

 

2

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands)**

 
| ** **                                           | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| ASSETS                                               |       |                     |       |                        |       |
| Current assets:                                      |       |                     |       |                        |       |
| Cash and cash equivalents                            |       | $                        | 23,029     |                        | $          | 21,468 |   |
| Receivables, net                                     |       | 25,576                   |       | 26,920                      |       |
| Inventories                                          |       | 1,417                    |       | 1,729                       |       |
| Prepaid expenses                                     |       | 9,118                    |       | 7,487                       |       |
| Deposits and other current assets                    |       | 164                      |       | 216                         |       |
| Restricted cash and cash equivalents                 |       | 25,524                   |       | 32,008                      |       |
| Total current assets                                 |       | 84,828                   |       | 89,828                      |       |
|                                                 |       |                     |       |                        |       |
| Property and equipment, net                          |       | 590,411                  |       | 602,098                     |       |
| Restricted cash and cash equivalents                 |       | 28,894                   |       | 45,613                      |       |
| Land receivable                                      |       | 19,081                   |       | 19,728                      |       |
| Deferred income tax                                  |       | 172                      |       | 172                         |       |
| Other assets, net                                    |       | 7,372                    |       | 9,629                       |       |
| Total assets                                         |       | $                        | 730,758    |                        | $          | 767,068 |   |
|                                                 |       |                     |       |                        |       |
| LIABILITIES AND MEMBERS’  EQUITY (DEFICIT)      |       |                     |       |                        |       |
|                                                 |       |                     |       |                        |       |
| Current liabilities:                                 |       |                     |       |                        |       |
| Current portion of long-term debt                    |       | $                        | 1,836      |                        | $          | 1,785 |   |
| Accounts payable                                     |       | 6,405                    |       | 29,273                      |       |
| Accrued payroll and related                          |       | 12,093                   |       | 11,817                      |       |
| Accrued interest payable                             |       | 6,909                    |       | 8,182                       |       |
| Accrued taxes                                        |       | 3,638                    |       | 3,338                       |       |
| Accrued expenses                                     |       | 8,489                    |       | 9,422                       |       |
| Deposits                                             |       | 7,020                    |       | 6,476                       |       |
| Other current liabilities                            |       | 5,736                    |       | 6,493                       |       |
| Due to affiliates                                    |       | 2,496                    |       | 1,661                       |       |
| Total current liabilities                            |       | 54,622                   |       | 78,447                      |       |
|                                                 |       |                     |       |                        |       |
| Long-term debt, less current portion                 |       | 887,070                  |       | 887,545                     |       |
| Deferred income tax                                  |       | 172                      |       | 172                         |       |
| Other long-term liabilities                          |       | 4,117                    |       | 4,117                       |       |
| Total liabilities                                    |       | 945,981                  |       | 970,281                     |       |
|                                                 |       |                     |       |                        |       |
| Commitments and contingencies (Note 9)               |       |                     |       |                        |       |
|                                                 |       |                     |       |                        |       |
| Minority interest                                    |       | (18,074                  | )          | (16,272                     | )          |
|                                                 |       |                     |       |                        |       |
| Members’ equity (deficit):                      |       |                     |       |                        |       |
| Members’ equity                                 |       | 21,500                   |       | 21,500                      |       |
| Accumulated deficit                                  |       | (218,649                 | )          | (208,441                    | )          |
| Total members’ equity (deficit)                 |       | (197,149                 | )          | (186,941                    | )          |
| Total liabilities and members’ equity (deficit) |       | $                        | 730,758    |                        | $          | 767,068 |   |

 

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

 

3

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

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(amounts in thousands)**

 
| ** **                          | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31, 2007** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                          | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                        | ** ** |
|                                |       |                                                   |       |                                                   |       |
| Operating revenues:                 |       |                                                   |       |                                                   |       |
| Casino                              |       | $                                                      | 32,347     |                                                   | $          | 23,857 |   |
| Hotel                               |       | 30,953                                                 |       | 30,857                                                 |       |
| Food and beverage                   |       | 14,257                                                 |       | 12,039                                                 |       |
| Other                               |       | 3,782                                                  |       | 1,698                                                  |       |
| Gross revenues                      |       | 81,339                                                 |       | 68,451                                                 |       |
| Promotional allowances              |       | (7,345                                                 | )          | (4,864                                                 | )          |
| Net revenues                        |       | 73,994                                                 |       | 63,587                                                 |       |
|                                |       |                                                   |       |                                                   |       |
| Operating costs and expenses:       |       |                                                   |       |                                                   |       |
| Casino                              |       | 20,420                                                 |       | 15,421                                                 |       |
| Hotel                               |       | 10,566                                                 |       | 11,000                                                 |       |
| Food and beverage                   |       | 9,068                                                  |       | 9,262                                                  |       |
| Other                               |       | 284                                                    |       | 273                                                    |       |
| Selling, general and administrative |       | 18,974                                                 |       | 19,333                                                 |       |
| Depreciation and amortization       |       | 8,801                                                  |       | 8,384                                                  |       |
|                                |       | 68,113                                                 |       | 63,673                                                 |       |
|                                |       |                                                   |       |                                                   |       |
| Operating income (loss)             |       | 5,881                                                  |       | (86                                                    | )          |
|                                |       |                                                   |       |                                                   |       |
| Other income (expense):             |       |                                                   |       |                                                   |       |
| Interest expense, net               |       | (17,891                                                | )          | (17,749                                                | )          |
| Minority interest                   |       | 1,802                                                  |       | 2,678                                                  |       |
|                                |       | (16,089                                                | )          | (15,071                                                | )          |
|                                |       |                                                   |       |                                                   |       |
| Pre-tax loss                        |       | (10,208                                                | )          | (15,157                                                | )          |
| Provision for income taxes          |       | —                                                 |       | —                                                 |       |
| Net loss                            |       | $                                                      | (10,208    | )                                                      | $          | (15,157 | ) |

 

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

 

4

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 
| ** **                                                                                 | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                        | ** ** |
|                                                                                       |       |                                                   |       |                                                   |       |
| Cash flows from operating activities:                                                      |       |                                                   |       |                                                   |       |
| Net loss                                                                                   |       | $                                                      | (10,208    | )                                                      | $          | (15,157 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities: |       |                                                   |       |                                                   |       |
| Depreciation and amortization                                                              |       | 8,801                                                  |       | 8,384                                                  |       |
| Amortization of debt discount and issuance costs                                           |       | 2,090                                                  |       | 1,960                                                  |       |
| Minority interest                                                                          |       | (1,802                                                 | )          | (2,678                                                 | )          |
| Changes in assets and liabilities:                                                         |       |                                                   |       |                                                   |       |
| Restricted cash and cash equivalents                                                       |       | 6,484                                                  |       | (6,467                                                 | )          |
| Receivables, net                                                                           |       | 1,344                                                  |       | (208                                                   | )          |
| Inventories and prepaid expenses                                                           |       | (1,319                                                 | )     | 1,303                                                  |       |
| Deposits and other current assets                                                          |       | 52                                                     |       | —                                                 |       |
| Due to affiliates                                                                          |       | 835                                                    |       | 594                                                    |       |
| Accounts payable                                                                           |       | (2,063                                                 | )          | (1,984                                                 | )          |
| Accrued payroll and related                                                                |       | 276                                                    |       | (44                                                    | )          |
| Accrued expenses                                                                           |       | (633                                                   | )          | 667                                                    |       |
| Deposits and other current liabilities                                                     |       | (213                                                   | )          | (1,588                                                 | )          |
| Accrued interest                                                                           |       | (1,273                                                 | )          | 438                                                    |       |
| Long term deposits and other assets                                                        |       | 647                                                    |       | 429                                                    |       |
| Net cash provided by (used in) operating activities                                        |       | 3,018                                                  |       | (14,351                                                | )          |
| Cash flows from investing activities:                                                      |       |                                                   |       |                                                   |       |
| Purchases of property and equipment                                                        |       | (17,752                                                | )          | (30,129                                                | )          |
| Restricted cash and cash equivalents                                                       |       | 16,719                                                 |       | 30,134                                                 |       |
| Net cash provided by (used in) investing activities                                        |       | (1,033                                                 | )          | 5                                                      |       |
| Cash flows from financing activities:                                                      |       |                                                   |       |                                                   |       |
| Borrowings under Loan Agreement                                                            |       | —                                                 |       | 13,072                                                 |       |
| Payments under CUP financing                                                               |       | (424                                                   | )          | (378                                                   | )          |
| Net cash (used in) provided by financing activities                                        |       | (424                                                   | )          | 12,694                                                 |       |
| Cash and cash equivalents:                                                                 |       |                                                   |       |                                                   |       |
| Increase (decrease) in cash and cash equivalents                                           |       | 1,561                                                  |       | (1,652                                                 | )          |
| Balance, beginning of period                                                               |       | 21,468                                                 |       | 25,640                                                 |       |
| Balance, end of period                                                                     |       | $                                                      | 23,029     |                                                   | $          | 23,988 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| Supplemental cash flow disclosures:                                                        |       |                                                   |       |                                                   |       |
| Cash paid for interest, net of capitalized interest                                        |       | $                                                      | 17,341     |                                                   | $          | 17,259 |   |

 

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

 

5

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

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

** **

##### **1.****                                      ORGANIZATION ANDBASIS OF PRESENTATION**

#####  

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

######  

BH/RE, L.L.C. (“BH/RE” or the “Company”)  is a holding company that owns 85% ofEquityCo, L.L.C. (“EquityCo”). The remaining 15% of EquityCo is ownedindirectly by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”).MezzCo, L.L.C. (“MezzCo”) is a wholly-owned subsidiary of EquityCo and each ofOpBiz, LLC (“OpBiz”) and PH Mezz II LLC (“PH Mezz II”) is a wholly ownedsubsidiary of MezzCo. PH Mezz I LLC (“PH Mezz I”), is a wholly owned subsidiaryof PH Mezz II. PH Fee Owner LLC (“PH Fee Owner”) is a wholly owned subsidiaryof PH Mezz I. TSP Owner LLC (“TSP Owner”) is a wholly owned subsidiary of PHFee Owner. PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner are Delawarelimited liability companies structured as bankruptcy remote special purposeentities which, together with OpBiz, own and operate the Planet HollywoodResort and Casino (the “PH Resort”). OpBiz is the licensed owner and operatorof the gaming assets and leases the casino space and hotel space together withall hotel assets from PH Fee Owner. TSP Owner was formed to hold the parcel ofland (the “Timeshare Parcel”) that was sold to Westgate Resorts, LLP, a Floridalimited partnership (“Westgate”) subject to the Timeshare Purchase Agreementbetween OpBiz and Westgate, dated December 10, 2004. 50% of BH/RE’s votingmembership interests are held by each of Robert Earl and Douglas P. Teitelbaum,and BH/RE’s equity membership interests are held 40.75% by BH Casino andHospitality LLC I (“BHCH I”), 18.50% by BH Casino and Hospitality LLC II (“BHCHII”) (together, “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).

 

BH/RE and its subsidiaries were formed to acquire, operateand renovate the Aladdin Resort and Casino (the “Aladdin”) located in LasVegas, Nevada. OpBiz, an indirect subsidiary of BH/RE, completed theacquisition of the Aladdin on September 1, 2004 and completed a renovationproject which transformed the Aladdin into the PH Resort at the end of 2007.Inconnection with the operation of the PH Resort, OpBiz has entered into anagreement with Planet Hollywood International, Inc. (“Planet Hollywood”)and certain of its subsidiaries to, among other things, license PlanetHollywood’s trademarks, memorabilia and other intellectual property. OpBiz hasalso entered into an agreement with Sheraton Operating Corporation (“Sheraton”),a subsidiary of Starwood, pursuant to which Sheraton provides hotel management,marketing and reservation services for the hotel (the “Hotel”) that comprises aportion of the PH Resort.

 

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

 

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

######  

The accompanyingcondensed consolidated financial statements included herein have been preparedby the management of BH/RE, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with U.S. generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. BH/RE believesthat the disclosures are adequate to make the information presented notmisleading. In the opinion of management, all adjustments (which include normalrecurring adjustments) necessary for a fair presentation of the results for theinterim periods have been made. The results for the three months ended March 31,2008, are not indicative of results to be expected for the full fiscal year.These unaudited financial statements should be read in conjunction with theaudited financial statements and notes thereto for the year ended December 31,2007, included in BH/RE’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 28, 2008.

 

6

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##### **2.****                                      SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

#####  

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

######  

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

 

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

 

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

######  

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

 

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

######  

The balance in current restricted cash and cash equivalentsat March 31, 2008 and December 31, 2007 was approximately $25.5million and $32.0 million, respectively, which consists of reserves requiredunder the Loan Agreement (as defined in Note 5 to the CondensedConsolidated Financial Statements) including a reserve for payment ofproperty taxes and insurance and a reserve for on-going furniture, fixture andequipment purchases or property improvements. Long-term restricted cash andcash equivalents consistof approximately $28.9 million and $45.6 million at March 31, 2008 and December 31,2007, respectively, which includes a reserve for the remaining cash commitmentsfor the renovations to the PH Resort and a reserve for interest shortfalls. Therestricted cash related to the renovation includes a contingency required bythe Loan Agreement which will be released, in accordance with the terms of theLoan Agreement, upon completion of project funding.

 

###### *Accounts Receivable*

######  

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

 

7

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###### *Inventories*

######  

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

 

###### *Propertyand Equipment*

######  

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

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

 

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

 

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

 

*Debt Issuance Costs*

 

Debt issuance costsincurred in connection with the issuance of long-term debt are capitalized andamortized to interest expense over the expected terms of the related debtagreements using the straight-line method, which approximates the effectiveinterest method, and are included in other assets on BH/RE’s consolidatedbalance sheets. Debt issuance costs, net of the related amortization,approximated $5.6 million and $7.7 million as of March 31, 2008 and December 31,2007, respectively.

 

*Intangible Assets*

 

In connection with thepurchase of the Aladdin and as a result of an independent appraisal of theassets purchased, BH/RE recorded intangible assets, which consist of a customerlist and trade name. The customer list was valued at approximately $2.7 millionat the time of purchase and at March 31, 2008, had a net book value ofapproximately $300,000. The trade name was valued at approximately $1.0 millionat the time of purchase and was fully amortized at March 31, 2008. Thecustomer list is being amortized using the straight-line method over a usefullife of 4 years. Amortization expense for the three months ended March 31, 2008and 2007 was approximately $200,000 for each of the three month periods.

 

8

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*Derivative Instruments and Hedging Activities*

 

Pursuant to therefinancing of the Securities Purchase Agreement and the terms of theRestructuring Agreement, the Restructuring Parties (each as defined inNote 5 to the Condensed Consolidated Financial Statements), agreed toamend the warrants issued by MezzCo to purchase 17.5% of the fully dilutedequity in MezzCo. The warrants contain a net cash settlement, and therefore areaccounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock*”. Both SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*and EITF 00-19 require that the warrants be recognized as liabilities,with changes in fair value affecting net income. See “Note 5. Long-TermDebt.”

 

The terms of the LoanAgreement required the Company to enter into an interest rate cap agreement,which expires on November 30, 2008, to manage interest rate risk. TheCompany did not apply cash flow hedge accounting to this instrument. Althoughthis derivative was not afforded cash flow hedge accounting, the Companyretained the instrument as protection against the interest rate risk associatedwith its long-term borrowings. The Company accounts for its derivative activityin accordance with SFAS No. 133 and accordingly, recognizes allderivatives on the balance sheet at fair value with any change in fair valuebeing recorded in interest income or expense in the accompanying consolidatedstatements of operations.

 

###### *RevenueRecognition and Promotional Allowances*

######  

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

 
| ** **                           | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(unaudited)**                              | ** ** | **(unaudited)** | ** ** |
| Rooms                                |       | $                                            | 1,567      |   | $ | 955 |   |
| Food and beverage                    |       | 2,429                                        |       | 1,961 |   |
| Other                                |       | 8                                            |       | 6 |   |
| Total cost of promotional allowances |       | $                                            | 4,004      |   | $ | 2,922 |   |

 

###### *Slot ClubProgram*

######  

The PH Resort’s slot clubmembers earn points based on gaming activity, which can be redeemed for cash. Aliability is recorded for the estimated cost of the outstanding points accruedunder the slot club program. The accrued slot club point liability wasapproximately $1.8 million and $1.7 million as of March 31, 2008 and December 31,2007, respectively.

 

*Advertising Costs*

 

Advertisingcosts are expensed as incurred and included in selling, general andadministrative costs and expenses. Advertising costs totaled approximately $2.4million and $1.1 million for the three months ended March 31, 2008 and2007, respectively.

 

*IncomeTaxes*

 

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

 

9

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as divisions of MezzCo for federal income taxpurposes, and accordingly, are also subject to federal income taxes.Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner,a wholly owned subsidiary of PH Mezz I, and TSP Owner, a wholly owned subsidiaryof PH Fee Owner, are also subject to federal income taxes.

 

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

 

In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”) *“Accountingfor Uncertainty in Income Taxes – an interpretation of FASB No. 109”*,to clarify certain aspects of accounting for uncertain tax positions, includingissues related to the recognition and measurement of those tax positions.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15,2006.  The Company adopted the provisionsof FIN 48 on January 1, 2007 as required. Further discussion regarding the adoption of FIN 48 can be found inNote 8 to the Condensed Consolidated Financial Statements.

 

###### *MembershipInterests*

######  

As of March 31, 2008, BH/RE’s membership interests hadnot been unitized and BH/RE’s members do not presently intend to unitize thesemembership interests. Accordingly, management of BH/RE has excluded earningsper share data required pursuant to SFAS No. 128, “*Earnings PerShare,*” because management believes that such disclosures would notbe meaningful to the financial statement presentation.

 

10

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*RecentlyIssued Accounting Pronouncements*

 

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*”, which clarifies the definition offair value, establishes guidelines for measuring fair value, and expandsdisclosures regarding fair value measurements. SFAS 157 does not requireany new fair value measurements and eliminates inconsistencies in guidancefound in various prior accounting pronouncements. SFAS 157 was effectivefor the Company on January 1, 2008. The adoption of SFAS 157 will nothave a material effect on the Company’s financial position, results ofoperation or cash flow.

 

In February 2007, the FASB issued SFAS No. 159, *“The Fair Value Option for Financial Assets and FinancialLiabilities-including an amendment of SFAS No. 115,”* whichpermits an entity to measure certain financial assets and financial liabilitiesat fair value. Entities that elect the fair value option will report unrealizedgains and losses in earnings at each subsequent reporting date. SFAS No. 159is effective as of the first fiscal year beginning after November 15,2007. The adoption of SFAS 159 will not have a material effect on theCompany’s financial position, results of operation or cash flow.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), *“Business Combinations.”* SFAS No. 141 (revised)establishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and noncontrolling interest in the acquiree and the goodwillacquired. The revision is intended to simplify existing guidance and convergerulemaking under U.S. GAAP with international accounting rules. This statementapplies prospectively to business combinations where the acquisition date is onor after the beginning of the first annual reporting period beginning on orafter December 15, 2008. The adoption of SFAS No. 141 (revised) isnot expected to have a material impact on the Company’s financial position,results of operations or cash flows.

 

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

 

In March 2008, the FASB issued SFAS No. 161, *“DisclosuresAbout Derivative Instruments and Hedging Activities, an amendment of SFASNo. 133”.* SFAS No. 161 is intended to improve financialreporting about derivative instruments and hedging activities by requiringenhanced disclosures to enable investors to better understand their effects onan entity’s financial position, financial performance, and cash flows. Thisstatement is effective for fiscal years beginning after November 15, 2008.SFAS No. 161 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

**3.****                                      RECEIVABLES**

 

Receivables consist of the following (in thousands):

 
| ** **                                 | ** ** | **March 31  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Casino                                     |       | $                       | 18,550     |                        | $          | 18,322 |   |
| Hotel                                      |       | 9,367                   |       | 6,811                       |       |
| Land sale receivable                       |       | 24,115                  |       | 25,373                      |       |
| Other                                      |       | 3,011                   |       | 3,248                       |       |
|                                       |       | 55,043                  |       | 53,754                      |       |
| Long-term portion of land  sale receivable |       | (19,081                 | )          | (19,728                     | )          |
| Allowance for doubtful  accounts           |       | (10,386                 | )          | (7,106                      | )          |
| Receivables, net                           |       | $                       | 25,576     |                        | $          | 26,920 |   |

 

**4.****                                      PROPERTYAND EQUIPMENT**

 

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

 
| ** **                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Land                              |       | $                        | 68,479     |                        | $          | 68,479 |   |
| Building and improvements         |       | 499,837                  |       | 502,584                     |       |
| Furniture, fixtures and equipment |       | 114,078                  |       | 115,003                     |       |
| Construction in progress          |       | 635                      |       | 17                          |       |
|                              |       | 683,029                  |       | 686,083                     |       |
| Accumulated depreciation          |       | (92,618                  | )          | (83,985                     | )          |
| Property and equipment, net       |       | $                        | 590,411    |                        | $          | 602,098 |   |

 

Depreciation expense wasapproximately $8.6 million and $8.2 million for the three months ended March 31,2008 and 2007, respectively.

 

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**5.****                                      LONG-TERMDEBT**

 

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

 
| ** **                                       | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| $820 million Loan Agreement                      |       | $                        | 860,000    |                        | $          | 860,000 |   |
| Northwind Aladdin obligation under capital lease |       | 28,906                   |       | 29,330                      |       |
|                                             |       | 888,906                  |       | 889,330                     |       |
| Current portion of long-term debt                |       | (1,836                   | )          | (1,785                      | )          |
| Total long-term debt, net                        |       | $                        | 887,070    |                        | $          | 887,545 |   |

 

***LoanAgreement***

* *

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

 

The Loan matures in November 2008 and has three one year extensionoptions subject to payment of a fee and the Borrower’s compliance with therequirements for an extension outlined in the Loan Agreement. As the Companyintends and has the ability to extend the maturity of the Loan, it isclassified as a non-current liability as of the latest balance sheet date.Interest on the Loan is payable monthly and accrues at a rate of LIBOR plus 3.25%with a .25% ticking fee on available but un-advanced future funding. Intereston Future Funding Tranche B is payable monthly and accrues at a rate ofLIBOR plus 7.50% with a 1.50% ticking fee on available but un-advanced funds.The Loan does not require amortization during the initial term or, providedcertain EBITDA thresholds are met, during the extension periods. The Loanrequires that the Borrower establish and maintain certain reserves including areserve for completion of the renovation project, a reserve for projectedinterest shortfalls, a reserve for payment of property taxes and insurance anda reserve for on-going furniture, fixture and equipment purchases or propertyimprovements. The Loan restricts the Borrower’s ability to spend excess cash flowuntil certain debt service coverage ratios are met.

 

Using the proceeds from the Loan, all amounts outstanding under theCredit Agreement, dated August 31, 2004, among OpBiz, the lenders namedtherein (the “Lenders”) and The Bank of New York, Asset Solution Division (the “SeniorAgent”) were paid in full. Pursuant to the terms of the Credit Agreement, uponrepayment of all amounts due, the warrant to purchase 2.5% of the equity inEquityCo issued to the Lenders at the closing of the Credit Agreement becameexercisable. The Company compensated the holders of all unexercised warrants inaccordance with the terms of a letter agreement between the parties and thewarrants were canceled.

 

In order to permit the Lender to foreclose on the Hotel and Casino separatelyand to allow OpBiz to continue to operate the Casino after such a foreclosure(should the Lender choose to do so), title to the real property comprising theHotel and Casino (the “Property”) was transferred from OpBiz to PH Fee Owner.OpBiz and PH Fee Owner then entered into a lease pursuant to which OpBiz agreedto continue to operate the Hotel in the manner it had been and to pay monthlyrent of approximately $916,000. OpBiz and PH Fee Owner also entered into alease pursuant to which OpBiz agreed to continue to operate the Casino in themanner it had been and to pay monthly rent of approximately $1,160,000.

 

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

 

12

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

 

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

 

In addition, in connection with the Loan Agreement, MezzCo effected arefinancing of the Securities Purchase Agreement, dated August 9, 2004,among MezzCo and the Investors (the “Restructuring Parties”), pursuant to whichMezzCo issued to the Investors (i) 16% senior subordinated secured Notesin the original aggregate principal amount of $87 million, and (ii) Warrantsfor the purchase (subject to certain adjustments as provided for therein) ofmembership interests of MezzCo, representing 17.5% of its fully diluted equity.Loan proceeds were used to redeem in full the Notes.

 

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

 

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

 

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

 

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

 

13

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redemptionprice based upon a formula set forth in the A&R Warrants. These rightsexpire upon completion of a public offering by MezzCo or OpBiz.

 

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

 

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

 

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

 

***Energy ServicesAgreement***

*** ***

Northwind Aladdin (“Northwind”),a third party, owns and operates a central utility plant on land leased fromOpBiz. The plant supplies hot and cold water and emergency power to the PHResort under a contract which expires in 2018. Under the agreement, OpBiz isrequired to pay Northwind a monthly consumption charge, a monthly operationalcharge, a monthly debt service payment and a monthly return on equity payment.Payments under the Northwind agreement total approximately $400,000 per month.

 

**6.****                                      MEMBERSHIPINTERESTS**

 

Thenon-voting interests in BH/RE are owned 40.75% by BHCH I, 18.50% by BHCH II and40.75% by OCS and the voting interests are owned 50% by Douglas P. Teitelbaumand 50% by Robert Earl. BHCH is controlled by Mr. Teitelbaum, managingprincipal of Bay Harbour Management, an investment management firm. BHCH wasformed by Mr. Teitelbaum for the purpose of holding investments in BH/REby funds managed by Bay Harbour Management. OCS is wholly-owned and controlledby Mr. Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earlis the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaumis a director of Planet Hollywood. Collectively, Mr. Earl, a trust for thebenefit of Mr. Earl’s children and affiliates of Bay Harbour Management,own substantially all of the equity of Planet Hollywood.

 

BH/REowns 85% of the membership interests in EquityCo and Starwood owns 15%. MezzCois a wholly owned subsidiary of EquityCo, and OpBiz is a wholly ownedsubsidiary of MezzCo. BH/RE and Starwood made total equity contributions of $20million each in EquityCo to fund the costs of the renovations to the property.Starwood’s equity interest in EquityCo is reflected as minority interest in theaccompanying condensed consolidated financial statements. BH/RE recordedminority interest income related to the Starwood interests of approximately$1.8 million and $2.7 million for the three months ended March 31, 2008and 2007, respectively.

 

BH/REhas the option to purchase all of Starwood’s membership interests in EquityCoif OpBiz is entitled to terminate the hotel management contract between OpBizand Sheraton as a result of a breach by Sheraton. Starwood can require EquityCoto purchase all of its membership interests in EquityCo if the hotel managementcontract is terminated for any reason other than in accordance with its termsor as the result of a breach by Sheraton. In addition, BH/RE and Starwoodentered into a registration rights agreement with respect to their membershipinterests in EquityCo.

 

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

 

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

 

There is $3,000 and $41,000 of compensation cost,which approximated fair value, related to non-qualified stock optionsrecognized in operating results (included in selling, general andadministrative expenses) for the three months ended March 31, 2008 and2007, respectively.

 

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The fair value of each option award is estimated onthe date of grant using the Black-Scholes-Merton option pricing model. Expectedvolatility is based on historical volatility trends as well as implied futurevolatility observations as determined by independent third parties. Indetermining the expected life of the option grants, the Company used historicaldata to estimate option exercise and employee termination behavior. Theexpected term represents an estimate of the time options are expected to remainoutstanding. The risk-free interest rate for periods within the contractuallife of the option is based on the U.S. treasury yield curve in effect at thetime of grant. The following table sets forth the assumptions used to determinecompensation cost for the Company’s non-qualified stock options consistent withthe requirements of SFAS No. 123(R).

 
| ** **                                                                                                                                             | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(unaudited)**                                        | ** ** | **(unaudited)**                                        | ** ** |
| Weighted-average fair value per share of options granted during the  period (estimated on grant date using Black-Scholes-Merton option-pricing  model) |       | $                                                      | 235.28     |                                                   | $          | 235.28 |   |
| Weighted-average assumptions:                                                                                                                          |       |                                                   |       |                                                   |       |
| Expected stock price volatility                                                                                                                        |       | 36                                                     | %          | 36                                                     | %          |
| Risk-free interest rate                                                                                                                                |       | 3.76                                                   | %          | 3.76                                                   | %          |
| Expected option life (years)                                                                                                                           |       | 7                                                      |       | 7                                                      |       |
| Expected annual dividend yield                                                                                                                         |       | —                                                 | %          | —                                                 | %          |
|                                                                                                                                                        |            |                                                        |            |                                                        |            |  |  |

 

**7.****                                      RELATEDPARTY TRANSACTIONS**

 

***Planet HollywoodLicensing Agreement***

*** ***

OpBiz, Planet Hollywoodand certain of Planet Hollywood’s subsidiaries have entered into a licensingagreement pursuant to which OpBiz received a non-exclusive, irrevocable licenseto use various “Planet Hollywood” trademarks and service marks. Under thelicensing agreement, OpBiz also has the right, but not the obligation, to opena Planet Hollywood restaurant and one or more Planet Hollywood retail shopsunder a separate restaurant agreement with Planet Hollywood. OpBiz pays PlanetHollywood a quarterly licensing fee of 1.75% of OpBiz’s non-casino revenues.The initial term of the licensing agreement will expire in 2028. OpBiz canrenew the licensing agreement for three successive 10-year terms. The property officiallybegan operation as the PH Resort on April 17, 2007 and began paying feespursuant to the licensing agreement as of that date. Licensing fees paid toPlanet Hollywood totaled approximately $800,000 for the three months ended March 31,2008.

 

In addition to being amanager of BH/RE, Mr. Earl is the chief executive officer and chairman ofthe board of directors of Planet Hollywood. Similarly, Mr. Teitelbaum is amanager of BH/RE and a director of Planet Hollywood. Together, Mr. Earl, atrust for the benefit of Mr. Earl’s children and affiliates of Bay HarbourManagement, own substantially all of the equity of Planet Hollywood. Mr. Earldisclaims beneficial ownership of any equity of Planet Hollywood owned by thetrust.

 

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***Sheraton HotelManagement Contract***

*** ***

OpBiz and Sheraton haveentered into a management contract pursuant to which Sheraton provides hotelmanagement services to OpBiz, assists OpBiz in the management, operation andpromotion of the Hotel and permits OpBiz to use the Sheraton brand andtrademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of4% of gross hotel revenue and certain food and beverage outlet revenues and 2%of rental income from third-party leases in the hotel. The management contracthas a 20-year term commencing on the completion of the Aladdin acquisition andis subject to certain termination provisions by either OpBiz or Sheraton.Sheraton is a wholly owned subsidiary of Starwood, which has a 15% equityinterest in EquityCo and has the right to appoint two members to the EquityCoboard of managers. Management fees paid to Starwood totaled approximately $2.6million for the three months ended March 31, 2008 and 2007, respectively.

 

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

*** ***

OpBiz and PlanetHollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreementpursuant to which Planet Hollywood LV, as tenant, operates a new concept it hasdeveloped for an upscale 24-hour diner named “Planet Dailies” withinapproximately 11,500 square feet of space located on the premises owned byOpBiz. Planet Hollywood LV pays OpBiz base rent in the amount of $500,000 peryear (subject to annual increase adjustments), in addition to percentage rentof up to 12% based on annual gross sales (to the extent such percentage rentexceeds base rent).  The initial term ofthe lease agreement will expire in 2017. Planet Hollywood LV can renew thelease agreement for two successive 5-year terms.  The Company believes that the provisions ofthis lease agreement reflect arm’s length market terms and that it iscomparable to other lease agreements OpBiz has entered into with third-partyrestaurant operators. Planet Dailies began operation on April 1, 2007 andbegan paying rent pursuant to the lease agreement as of that date. Rentreceived from Planet Dailies totaled approximately $100,000 for the threemonths ended March 31, 2008.

 

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

 

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

*** ***

OpBiz and Earl ofSandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a leaseagreement pursuant to which Earl of Sandwich, as tenant, operates a restaurantnamed “Earl of Sandwich” within approximately 3,030 square feet of spacelocated on the premises owned by OpBiz. Earl of Sandwich pays OpBiz base rentin the amount of $161,600 per year (subject to annual increase adjustments), inaddition to percentage rent of up to 12% based on annual gross sales (to theextent such percentage rent exceeds base rent). The initial term of the leaseagreement will expire in 2017. Earl of Sandwich can renew the lease agreementfor two successive 5-year terms. Earl of Sandwich began operation in September 2007and began paying rent pursuant to the lease agreement as of that date. Rentreceived from Earl of Sandwich totaled approximately $100,000 for the threemonths ended March 31, 2008. The Company believes that the provisions ofthis lease agreement reflect arm’s length market terms and that it iscomparable to other lease agreements OpBiz has entered into with third-partyrestaurant operators.

 

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

 

***Guaranty Agreement***

*** ***

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

 

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***Aircraft Charter Arrangements***

 

In the ordinary course from time to time the Companyutilizes the services of private aircrafts for charter.  The Company currently utilizes severaldifferent third party aircraft management/charter vendors for the provision ofcharter flights depending upon aircraft size, availability and location.  One or more affiliates of BH/RE has placed anowned aircraft in service with one such vendor. From time to time the Company may utilize the services of this vendorwhich may involve the affiliates owned aircraft; provided that the rate chargedfor that aircraft shall be at arms length and fair market for similar aircraft.

 

**8.****                                      INCOMETAXES**

 

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

 

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

 

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

 

As of December 31,2007, MezzCo has federal net operating losses of $232.7 million which begin toexpire after 2024. MezzCo has general business credit carryforwards at December 31,2007 of $1.6 million which begin to expire after 2024 and a minimum tax creditcarryforward of $7,000.

 

As discussed in Note 2 tothe Condensed Consolidated Financial Statements, the Company adopted theprovisions of FIN 48 effective January 1, 2007.  Upon the adoption of FIN 48, the Companyreclassified the uncertain tax benefits as required and reclassified a portionof the existing allowance. Accordingly, there has been no adjustment toretained earnings recorded as a result of the FIN 48 reclassifications.The Company had uncertain tax benefits of $2.6 million and $1.8 million as ofMarch 31, 2008 and December 31, 2007, respectively.   The Company recognizes penalties andinterest as a component of income tax expense.  We do not expect any penalty assessmentassociated with our adoption of FIN 48. We are no longer subject to U.S. federal tax examinations by taxauthorities for tax years before 2004.

 

**9.****                                      COMMITMENTSAND CONTINGENCIES**

 

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

######  

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

 

***Employment Agreements***

*** ***

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

 

18

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

## *** ***

###### ***Overview of Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

###### ** **

Set forth below is a discussion of the financial condition and resultsof operations of BH/RE and its subsidiaries for the periods covered in thisreport. The discussion of operations herein focuses on events and the revenuesand expenses during the three months ended March 31, 2008, as compared tothe three months ended March 31, 2007.

 

The following management’s discussion and analysis of financialcondition and results of operations should be read in conjunction with theconsolidated financial statements and the related notes to the consolidatedfinancial statements of BH/RE included in BH/RE’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 28, 2008, andthe unaudited condensed consolidated financial statements and notes heretoincluded in Part I, Item 1 of this report.

 

###### ***Critical Accounting Policies andEstimates***

###### ** **

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

###### ** **

Our unauditedcondensed consolidated financial statements are prepared in conformity withU.S. generally accepted accounting principles. Certain policies, including thedetermination of bad debt reserves, the estimated useful lives assigned toassets, asset impairment, insurance reserves and the calculation ofliabilities, require that we apply significant judgment in defining theappropriate assumptions for calculating financial estimates. By their nature,these judgments are subject to an inherent degree of uncertainty. Our judgmentsare based on historical experience, terms of existing contracts, observance oftrends in the gaming industry and information available from other outsidesources. There can be no assurance that actual results will not differ from ourestimates. To provide an understanding of the methodology we apply, oursignificant accounting policies and basis of presentation are discussed below,as well as, where appropriate, in the notes to the unaudited condensedconsolidated financial statements.

 

###### ***Propertyand Equipment***

###### ** **

Property and equipment are stated at cost. Recurring repairs andmaintenance costs, including items that are replaced routinely in the casino,hotel and food and beverage departments which do not meet our capitalizationpolicy of $10,000, are expensed as incurred. We have established our capitalexpense policy to be reflective of our individual ongoing repairs andmaintenance programs. Gains or losses on dispositions of property and equipmentare included in the determination of income. Property and equipment aregenerally depreciated over the following estimated useful lives on astraight-line basis:

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

 

Property and equipment and other long-lived assets are evaluated forimpairment in accordance with the Financial Accounting Standards Board’s (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 144, “*Accounting for the Impairment or Disposal of Long-Lived Assets*.”For assets to be disposed of, the asset to be sold is recognized at the lowerof carrying value or fair value less costs of disposal. Fair value for assetsto be disposed of is estimated based on comparable asset sales, solicitedoffers or a discounted cash flow model.

 

Property and equipment are reviewed for impairment whenever indicatorsof impairment exist. If an indicator of impairment exists, the estimated futurecash flows of the asset, on an undiscounted basis, are compared to the carryingvalue of the asset. If the undiscounted cash flows exceed the carrying value,no impairment is indicated. If the undiscounted cash flows do not exceed thecarrying value, then impairment is measured based on fair value compared tocarrying value, with fair value typically based on a discounted cash flowmodel.

 

19

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*Derivative Instruments and Hedging Activities*

 

Pursuant to therefinancing of the Securities Purchase Agreement and the terms of theRestructuring Agreement (each as defined in Note 5 to the CondensedConsolidated Financial Statements), the Restructuring Parties agreed to amendthe warrants issued by MezzCo to purchase 17.5% of the fully diluted equity inMezzCo. The warrants contain a net cash settlement, and therefore are accountedfor in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFAS No. 133*“Accounting for Derivative Instruments and HedgingActivities”* and EITF 00-19 require that the warrants berecognized as liabilities, with changes in fair value affecting net income.

 

The terms of the Loan Agreement required the Company to enter into aninterest rate cap agreement, which expires on November 30, 2008, to manageinterest rate risk. The Company did not apply cash flow hedge accounting tothis instrument. Although this derivative was not afforded cash flow hedgeaccounting, the Company retained the instrument as protection against theinterest rate risk associated with its long-term borrowings. The Companyaccounts for its derivative activity in accordance with SFAS No. 133 andaccordingly, recognizes all derivatives on the balance sheet at fair value withany change in fair value being recorded in interest income or expense in theaccompanying consolidated statements of operations.

 

###### ***RevenueRecognition and Promotional Allowances***

###### ** **

Casino revenues are recognized as the net win from gaming activities,which is the difference between gaming wins and losses. All other revenues arerecognized as the service is provided. Revenues include the retail value offood, beverage, rooms, entertainment and merchandise provided on acomplimentary basis to customers. Such complimentary amounts are then deductedfrom revenues as promotional allowances on our condensed consolidatedstatements of operations. The estimated departmental costs of providing suchpromotional allowances are included in casino costs and expenses.

 

Hotel revenue recognition criteria are generally met at the time ofoccupancy. Food and beverage revenue recognition criteria are generally met atthe time of service. Deposits for future hotel occupancy or food and beverageservices are recorded as deferred income until revenue recognition criteria aremet. Cancellation fees for hotel and food and beverage services are recognizedupon cancellation by the customer as defined by a written contract entered intowith the customer.

 

*Income Taxes*

 

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

 

MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owneraccount for income taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*”. SFAS 109 requires therecognition of deferred income tax assets, net of applicable reserves, relatedto net operating loss carryforwards and certain temporary differences. Thestandard requires recognition of a future tax benefit to the extent thatrealization of such benefit is more likely than not. Otherwise, a valuationallowance is applied.

 

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN48”) *“Accounting for Uncertainty in Income Taxes — aninterpretation of FASB No. 109”,* to clarify certain aspects ofaccounting for uncertain tax positions, including issues related to therecognition and measurement of those tax positions.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15,2006.  The Company adopted the provisionsof FIN 48 on January 1, 2007.

 

20

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###### ***MembershipInterests***

###### ** **

As of March 31,2008, our membership interests had not been unitized and our members do notpresently intend to unitize these membership interests. Accordingly, we haveexcluded earnings per membership unit data required pursuant to SFAS No. 128,“*Earnings Per Share,*” because we believethat such disclosures would not be meaningful to the financial statementpresentation.

 

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

 

Effective January 1, 2006, the Companyadopted the provisions of SFAS No. 123(R) requiring that compensationcost relating to share-based payment transactions be recognized in theoperating expenses. The cost is measured at the grant date, based on thecalculated fair value of the award, and is recognized as an expense over theemployee’s estimated requisite service period (generally the vesting period ofthe equity award) on a straight-line basis. Estimates are revised if subsequentinformation indicates that forfeitures will differ from previous estimates, andthe cumulative effect on compensation cost of a change in the estimatedforfeitures is recognized in the period of the change. Prior to January 1,2006, the Company accounted for share-based compensation to employees inaccordance with APB No. 25, and related interpretations. The Company alsofollowed the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure.”

 

###### ***Recently Issued Accounting Pronouncements***

###### ** **

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157 (“SFAS No. 157”), *“Fair ValueMeasurements”,* which clarifies the definition of fair value,establishes guidelines for measuring fair value, and expands disclosuresregarding fair value measurements. SFAS 157 does not require any new fairvalue measurements and eliminates inconsistencies in guidance found in variousprior accounting pronouncements. SFAS 157 was effective for the Company onJanuary 1, 2008. The adoption of SFAS 157 will not have a materialeffect on the Company’s financial position, results of operation or cash flow.

 

In February 2007, the FASB issued SFAS No. 159, *“The Fair Value Option for Financial Assets and FinancialLiabilities-including an amendment of SFAS No. 115,”* whichpermits an entity to measure certain financial assets and financial liabilitiesat fair value. Entities that elect the fair value option will report unrealizedgains and losses in earnings at each subsequent reporting date. SFAS No. 159is effective as of the first fiscal year beginning after November 15,2007. The adoption of SFAS 159 will not have a material effect on theCompany’s financial position, results of operation or cash flow.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *“Business Combinations.”* SFAS No. 141 (revised)establishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and noncontrolling interest in the acquiree and thegoodwill acquired. The revision is intended to simplify existing guidance andconverge rulemaking under U.S. GAAP with international accounting rules. Thisstatement applies prospectively to business combinations where the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. The adoption of SFAS No. 141(revised) is not expected to have a material impact on the Company’s financialposition, results of operations or cash flows.

InDecember 2007, the FASB issued SFAS No. 160, *“NoncontrollingInterest in Consolidated Financial Statements, an amendment of ARBNo. 51.”* This statement establishes accounting and reportingstandards for ownership interest in subsidiaries held by parties other than theparent and for the deconsolidation of a subsidiary. It also clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. SFAS No. 160 changes the way the consolidated incomestatement is presented by requiring consolidated net income to be reported atamounts that include the amount attributable to both the parent and thenoncontrolling interests. The statement also establishes reporting requirementsthat provide sufficient disclosure that clearly identify and distinguishbetween the interest of the parent and those of the noncontrolling owners. Thisstatement is effective for fiscal years beginning on or after December 15,2008. The adoption of SFAS No. 160 is not expected to have a materialimpact on the Company’s financial position, results of operations or cashflows.

In March 2008, the FASBissued SFAS No. 161, *“Disclosures AboutDerivative Instruments and Hedging Activities, an amendment of SFASNo. 133”.* SFAS No. 161 is intended to improve financialreporting about derivative instruments and hedging activities by requiringenhanced disclosures to enable investors to better understand their effects onan entity’s financial position, financial performance, and cash flows. Thisstatement is effective for fiscal years beginning after November 15, 2008.SFAS No. 161 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

21

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

###### ** **

The following table highlights the results of operations for the threemonths ended March 31, 2008 and 2007, respectively (dollars in thousands,unaudited).

 
| ** **                          | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2008**                                         | ** ** | **2007**    | ** ** | **Change** | ** ** |
|                                |       |                                             |       |        |       |   |   |
| Net revenues                        |       | $                                                | 73,994     |        | $          | 63,587 |   | 16.4 | % |
| Operating expenses:                 |       |                                             |       |        |       |   |   |
| Casino                              |       | 20,420                                           |       | 15,421      |       | 32.4 | % |
| Hotel                               |       | 10,566                                           |       | 11,000      |       | (3.9 | )% |
| Food and beverage                   |       | 9,068                                            |       | 9,262       |       | (2.1 | )% |
| Other                               |       | 284                                              |       | 273         |       | 4.0 | % |
| Selling, general and administrative |       | 18,974                                           |       | 19,333      |       | (1.9 | )% |
| Depreciation and amortization       |       | 8,801                                            |       | 8,384       |       | 5.0 | % |
| Operating income                    |       | $                                                | 5,881      |        | $          | (86 | ) | 6,937.2 | % |

 

Net revenues for the three months ended March 31, 2008 increasedwhen compared to the three months ended March 31, 2007. The renovationproject was completed late 2007 and all public areas and guest rooms were fullyoperational at the beginning of 2008. The property was under renovation during the three months ended March 31,2007 so when comparing the three month periods, revenues and operating incomehave increased in all divisions.

 

The following table highlights the varioussources of our revenues and expenses for the three months ended March 31,2008 and 2007, respectively (dollars in thousands, unaudited).

 
| ** **                                    | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **2008**                                         | ** ** | **2007**    | ** ** | **Change** | ** ** |
|                                          |       |                                             |       |        |       |   |   |
| Casino revenues                               |       | $                                                | 32,347     |        | $          | 23,857 |   | 35.6 | % |
| Casino expenses                               |       | 20,420                                           |       | 15,421      |       | 32.4 | % |
| *Margin*                                      | * *   | *36.9*                                           | *%*        | *35.4*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Hotel revenues                                |       | $                                                | 30,953     |        | $          | 30,857 |   | 0.3 | % |
| Hotel expenses                                |       | 10,566                                           |       | 11,000      |       | (3.9 | )% |
| *Margin*                                      | * *   | *65.9*                                           | *%*        | *64.4*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Food and beverage revenues                    |       | $                                                | 14,257     |        | $          | 12,039 |   | 18.4 | % |
| Food and beverage expenses                    |       | 9,068                                            |       | 9,262       |       | (2.1 | )% |
| *Margin*                                      | * *   | *36.4*                                           | *%*        | *23.1*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Other revenues                                |       | $                                                | 3,782      |        | $          | 1,698 |   | 122.7 | % |
| Other expenses                                |       | 284                                              |       | 273         |       | 4.0 | % |
| *Margin*                                      | * *   | *92.5*                                           | *%*        | *83.9*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Selling, general and administrative  expenses |       | $                                                | 18,974     |        | $          | 19,333 |   | (1.9 | )% |
| *Percent of net revenues*                     | * *   | *25.6*                                           | *%*        | *30.4*      | *%*        | * * | * * |

 

*Casino*

 

Casino revenue is derived primarily from patrons wagering on slotmachines, table games and other gaming activities. Table games generallyinclude blackjack or twenty one, craps, baccarat and roulette. Other gamingactivities include the race and sports books, poker and keno. Casino revenue isdefined as the win from gaming activities, computed as the difference betweengaming wins and losses.

 

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Casino revenues vary from time-to-time due togeneral economic conditions, competition, popularity of entertainmentofferings, table game hold, slot machine hold and occupancy percentages in theHotel. Casino revenues also vary depending upon the amount of gaming activity,as well as variations in the odds for different games of chance. Casino revenueis recognized at the end of each gaming day.

 

Casino revenues inceased 35.6% to $32.3million for the three months ended March 31, 2008, as compared to $23.9million for the three months ended March 31, 2007. Table games revenue forthe three months ended March 31, 2008, increased by approximately $4.0million as compared to the three months ended March 31, 2007. Drop for thethree months ended March 31, 2008 increased $28.9 million or 55.5% whencompared to the same three month period in prior year which is attributable tothe completion of the renovation project and addition of amenities to attractcasino customers.  Slot revenue for thethree months ended March 31, 2008 increased approximately $5.3 millionwhen compared to the same three month period in prior year. Slot handle for thethree months ended March 31, 2008 increased $75.5 million or 38.19% whencompared to the same three month period in prior year.  With the renovation project complete, we haveseen an increase in foot traffic from the Las Vegas Boulevard and mall entriesresulting in increased table drop and slot handle.  Combined revenues from the race and sportsbook and poker for the three months ended March 31, 2008 increasedslightly by 1.9% when compared to the three month period ended March 31,2007.   Although we have seen an increasein revenues in the race and sports book and poker room from the completion ofthe renovation, it was somewhat offset by losses in the sports book duringfootball season which were primarily driven by the Superbowl.

 

Casino expenses increased 32.4% to $20.4million for the three months ended March 31, 2008, as compared to $15.4million for the three months ended March 31, 2007. Operating marginincreased 1.5% when comparing the same three month periods. Expenses increasedcommensurate with the revenue increases in the casino while operating marginsimproved over prior year.

 

*Hotel*

 

Hotel revenue is derived from rooms and suites rented to guests. “averagedaily rate” is an industry specific term used to define the average amount ofrevenue per rented room per day. “Occupancy percentage” defines the totalpercentage of rooms occupied and is computed by dividing the number of roomsoccupied by the total number of rooms available. Hotel revenue is recognized atthe time the room is provided to the guest.

 

Hotel revenues of $30.9 million for the threemonths ended March 31, 2008 were 0.3% higher than the three months ended March 31,2007. Hotel occupancy decreased 3.2% to 94.5% when compared to the same threemonth period in the prior year. Average daily room rates increased to $144 forthe three months ended March 31, 2008 compared to $135 for the threemonths ended March 31, 2007.  Theslight occupancy decline with offsetting rate gain over prior year was theresult of market pressure and increased rate competition.

 

Hotel expenses decreased 3.9% to $10.6million for the three months ended March 31, 2008, as compared to $11.0million for the three months ended March 31, 2007. Operating marginincreased 1.5% for the three month period ended March 31, 2008 whencompared to the same three month period in the previous year.  We are carefully monitoring expenses andmaximizing operating margins in our first post-renovation year of operation.

 

*Food and Beverage*

 

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

 

Food and beverage revenues increased 18.4% to$14.3 million for the three months ended March 31, 2008, as compared to$12.0 million for the three months ended March 31, 2007. Food revenueincreased 3.0% when compared to the same three month period in the previousyear.  The PH Resort operates Starbucks,the buffet, room service, the pool café and banquets with all remaining foodoutlets leased to third party operators. Many of the owned outlets were temporarily closed during the renovationwhich occurred during the three months ended March 31, 2007.  Beverage revenue increased $1.7 million whencompared to the same three month period in the previous year due to the openingof new beverage outlets including the Playing Field (race and sports bar) andthe Extra Lounge as the renovation of these areas was completed.  The bar in the 

 

23

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center of the casino (Heart Bar) was open throughout the renovation butsaw business level declines while entryways were restricted.

 

Food and beverage expenses decreased 2.1% to$9.1 million for the three months ended March 31, 2008, as compared to$9.3 million for the three months ended March 31, 2007. Operating marginincreased 13.3% when compared to the same three month period in previous year.The decrease in operating expenses and increase in profit margin were primarilythe result of the transition to leased outlets during the year ended 2007 whichresulted in labor and other expense elimination.

 

*Other*

 

Other revenue includes rental income from tenants, telephone and othermiscellaneous income and is recognized at the time the goods or services areprovided to the guest.

 

Other revenues increased 122.7% to $3.8million for the three months ended March 31, 2008, as compared to $1.7million for the three months ended March 31, 2007. The increase in otherrevenue is primarily due to the increase in the amount received from Westgatebased on sales of timeshare units. Westgate pays OpBiz 9% of total timesharesales on a monthly basis with 50% of the proceeds recorded as tenant income andthe remaining 50% recorded against the land receivable.

 

Other expenses for the three months ended March 31,2008 remained consistent with the three months ended March 31, 2007 at $300,000for each of the three month periods.

 

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

 

SG&A expenses decreased 1.9% to $19.0million for the three months ended March 31, 2008, as compared to $19.3million for the three months ended March 31, 2007.  As a percentage of net revenue, SG&Aexpenses decreased to 25.6% for the three months ended March 31, 2008 ascompared to 30.4% for the three months ended March 31, 2007. The decreasein SG&A expenses as a percentage of net revenue was mainly due toreductions in payroll and fixed administrative expenses as we beganpost-renovation operations.

 

*Depreciation and Amortization*

 

Depreciation and amortization expense of $8.8million for the three months ended March 31, 2008 increased when comparedto $8.4 million in expense for the three months ended March 31, 2007. Theincrease in depreciation expense is a direct result of the additional assetsplaced in service once the renovation was complete.

 

*Net Interest Expense*

 

Net interest expense increased to $17.9million for the three months ended March 31, 2008, as compared to $17.7million for the three months ended March 31, 2007. The increase in netinterest expense is directly attributed to the increase in the outstanding loanbalance for the comparable three month periods. Capitalized interest expense approximated $1.3 million for thethree month period ended March 31, 2007 while the renovation wasunderway.  No interest was capitalizedduring the three months ended March 31, 2008.

 

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

###### ** **

During the three monthsended March 31, 2008, we generated cash flows from operating activities ofapproximately $3.0 million and had a balance of $23.0 million in cash and cashequivalents as of March 31, 2008. We also had current restricted cash andcash equivalents of approximately $25.5 million and long-term restrictedcash and cash equivalents of approximately $28.9 million at March 31,2008. The current restricted cash and cash equivalents are primarily reserveaccounts that have been established under the Loan Agreement to guaranteepayment of property taxes, insurance and furniture, fixtures and equipmentreplacement. Current restricted cash also includes the balance in the cashmanagement account. Under the terms of the Loan Agreement, all cash receiptsare deposited into a cash management account under Lender control which is usedto fund reserves and operating expenses. The long-term cash and cashequivalents include funds designated for the remaining payments associated withthe renovation of the Aladdin to the PH Resort and the interest reserve accountbalance which will be released once certain debt service coverage rations areachieved. See “Description of Certain Indebtedness” below.

 

Our primary remainingcash requirements for 2008 are expected to include (i) approximately $8.0million for maintenance capital expenditures or replacement furniture, fixturesand equipment and (ii) up to approximately $39.3 million in interestpayments on our debt.

 

We believe that cashgenerated from operations, cash held in reserve by the lenders under the LoanAgreement and available future financing under the Loan Agreement will beadequate to meet the anticipated working capital, capital expenditure,renovation and debt service obligations of OpBiz for at least the next twelvemonths of operations.

 

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

 

***Description of Certain Indebtedness***

 

*Loan Agreement*

* *

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

 

The Loan matures in November 2008 and has three one year extensionoptions subject to payment of a fee and the Borrower’s compliance with therequirements for an extension outlined in the Loan Agreement. As the Companyintends and has the ability to extend the maturity of the Loan, it isclassified as a non-current liability as of the latest balance sheet date.Interest on the Loan is payable monthly and accrues at a rate of LIBOR plus3.25% with a .25% ticking fee on available but un-advanced future funding.Interest on Future Funding Tranche B is payable monthly and accrues at arate of LIBOR plus 7.50% with a 1.50% ticking fee on available but un-advancedfunds. The Loan does not require amortization during the initial term or,provided certain EBITDA thresholds are met, during the extension periods. TheLoan requires that the Borrower establish and maintain certain reservesincluding a reserve for completion of the renovation project as currentlybudgeted, a reserve for projected interest shortfalls, a reserve for payment ofproperty taxes and insurance and a reserve for on-going furniture, fixture andequipment purchases or property improvements. The Loan restricts the Borrower’sability to spend excess cash flow until certain debt service coverage ratiosare met.

 

Using the proceeds from the Loan, all amounts outstanding under theCredit Agreement, dated August 31, 2004, among OpBiz, the lenders namedtherein (the “Lenders”) and The Bank of New York, Asset Solution Division (the “SeniorAgent”) were paid in full. Pursuant to the terms of the Credit Agreement, upon repaymentof all amounts due, the warrant to purchase 2.5% of the equity in EquityCoissued to the Lenders at the closing of the Credit Agreement becameexercisable. 

 

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The Company compensated the holders of all unexercised warrants inaccordance with the terms of a letter agreement between the parties and thewarrants were canceled.

 

In order to permit the Lender to foreclose on the Hotel and Casinoseparately and to allow OpBiz to continue to operate the Casino after such aforeclosure (should the Lender choose to do so), title to the real propertycomprising the Hotel and Casino (the “Property”) was transferred from OpBiz toPH Fee Owner. OpBiz and PH Fee Owner then entered into a lease pursuant towhich OpBiz agreed to continue to operate the Hotel in the manner it had beenand to pay monthly rent of approximately $916,000. OpBiz and PH Fee Owner alsoentered into a lease pursuant to which OpBiz agreed to continue to operate theCasino in the manner it had been and to pay monthly rent of approximately$1,160,000.

 

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

 

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

 

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

 

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

 

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

 

In accordance with the terms of the Restructuring Agreement, theInvestors and EquityCo, MezzCo and OpBiz entered into a Release, Consent andWaiver Agreement, pursuant to which the Investors (i) released OpBiz fromits guaranteed obligations, under that certain Guaranty Agreement, dated as of August 9,2004 and executed by OpBiz in favor of the Investors and the Collateral Agent; (ii) releasedMezzCo from its pledge of the collateral, under that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of theCollateral Agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executedby the Company in favor of the Collateral Agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee 

 

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(as defined therein) for the benefit of the collateral agent; (iv) releasedand terminated the Investors’ security interest in the securities account,provided for that certain Securities Account Control Agreement, dated as of August 9,2004 and executed by the Company, the Collateral Agent and Wells Fargo Bank,N.A.

 

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

 

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

 

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

 

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

 

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

 

*Energy Services Agreement*

 

Northwind owns and operates a central utility plant on land leased fromOpBiz. The plant supplies hot and cold water and emergency power to the PHResort under a contract which expires in 2018. Under the agreement, we arerequired to pay Northwind a monthly consumption charge, a monthly operationalcharge, a monthly debt service payment and a monthly return on equity payment.Payments under the Northwind agreement total approximately $400,000 per month.

 

***Forward Looking Statements***

 

This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. When used in this report and elsewhere bymanagement from time to time, the words “believe”, “anticipate”, “expect”, “intend”,“estimate”, “plan”, “may”, “seek”, “will”, and similar expressions are intendedto identify forward-looking statements with respect to our financial condition,results of operations and our business including our planned and possibleexpansion plans, legal proceedings and employee matters. Certain importantfactors, including but not limited to, competition from other gamingoperations, factors affecting our ability to complete acquisitions anddispositions of gaming properties, leverage, construction risks, the inherentuncertainty and costs associated with litigation and governmental andregulatory investigations, and licensing and other regulatory risks, couldcause our actual results to differ materially from those expressed in orimplied by our forward-looking statements. Further information on potentialfactors which could affect our financial condition, results of operations andbusiness including, without limitation, the expansion, development andacquisition projects, legal proceedings 

 

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and employee matters are included in “Item 1A—Risk Factors” of BH/RE’sAnnual Report on Form 10-K filed with the Securities and ExchangeCommission on March 30, 2008. Readers are cautioned not to place unduereliance 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.

 

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

## *** ***

Market risk is the riskof loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and commodity prices. Ourprimary exposure to market risk is interest rate risk associated with ourlong-term debt. We pay interest on the amount outstanding under the LoanAgreement monthly, in cash, at the London Inter-Bank Offered Rate, or LIBOR,plus 3.25% with a .25% ticking fee on available but un-advanced Future Funding.An increase of one percentage point in the average interest rate applicable tothe variable rate debt outstanding at March 31, 2008 would increase theannual interest cost by approximately $5.4 million.

 

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

## *** ***

Our management,with the participation of our principal executive and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)), as of March 31,2008. Based on their evaluation, our principal executive and principalfinancial officer concluded that our disclosure controls and procedures wereeffective as of March 31, 2008.

 

There has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15-d-15(f) under the Exchange Act) that occurred during our fiscal quarterended March 31, 2008, that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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# **PART II — OTHER INFORMATION**

# ** **

## ***ITEM6.***EXHIBITS

 
| 10.1   |   | Amended and Restated Employment Agreement, dated January 8,  2008, by and between MezzCo, L.L.C. and Michael V. Mecca (Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  January 14, 2008) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2   |   | Employment Agreement, dated March 19, 2008, by and between  OpBiz, L.L.C. and Dean DiLullo (Incorporated by reference to the Company’s  Current Report on Form 8-K filed on March 25, 2008)                               |
| 10.3   |   | Employment Agreement, dated February 7, 2008, by and between  OpBiz, L.L..C. and Joey Tallone (Incorporated by reference to the Company’s  Annual Report on Form 10-K filed on March 30, 2008)                            |
|   |   |                                                                                                                                                                                                                                          |
| 31.1   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Michael V. Mecca.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                          |
| 31.2   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                          |
| 32.1   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Michael V. Mecca.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                          |
| 32.2   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.                                                                                                                                                        |

 

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**SIGNATURES**

 

Pursuant tothe 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.                         |
|-------------------|---------------------------------------|
|              |                                  |
|              |                                  |
| May 15, 2008 | By:                                   | /S/ Donna Lehmann |
|              | Donna Lehmann                         |
|              | Treasurer and Chief Financial Officer |

 

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**EXHIBITINDEX**

 
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                               |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | Amended and Restated Employment Agreement, dated  January 8, 2008, by and between MezzCo, L.L.C. and Michael V. Mecca (Incorporated  by reference to the Company’s Current Report on Form 8-K filed on  January 14, 2008) |
|             |       |                                                                                                                                                                                                                                          |
| 10.2             |       | Employment Agreement, dated March 19, 2008, by  and between OpBiz, L.L.C. and Dean DiLullo (Incorporated by reference to the  Company’s Current Report on Form 8-K filed on March 25, 2008)                               |
|             |       |                                                                                                                                                                                                                                          |
| 10.3             |       | Employment Agreement, dated February 7, 2008,  by and between OpBiz, L.L..C. and Joey Tallone (Incorporated by reference to  the Company’s Annual Report on Form 10-K filed on March 30, 2008)                            |
|             |       |                                                                                                                                                                                                                                          |
| 31.1             |       | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Michael V. Mecca.                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                          |
| 31.2             |       | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                          |
| 32.1             |       | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Michael V. Mecca.                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                          |
| 32.2             |       | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.                                                                                                                                                        |

 

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