**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

| **(Mark One)**                                          |
|---------------------------------------------------------|
|                                                    |
| **x**                                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                              |   | ** ** |
| **For the  quarterly period ended March 31, 2007** |
|                                                    |   |   |
| **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 its Charter)

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

 

**(702)785-5555**

(Registrant’s Telephone Number, Including Area Code)

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Indicate by check markwhether the Registrant (1) has filed all reports required bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.   Yes ý   No o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the SecuritiesExchange Act of 1934).   (Check one):
|  | Large accelerated filer o | Accelerated filer o | Non-accelerated filer  x |
|--|---------------------------|---------------------|-------------------------------|

 

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

 

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BH/RE, L.L.C. ANDSUBSIDIARIES

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 inthousands)**
| ** **                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                            | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                |       |               |       |                  |       |
| Current assets:                                       |       |               |       |                  |       |
| Cash and cash  equivalents                            |       | $                  | 23,988     |                  | $          | 25,640 |   |
| Receivables, net                                      |       | 13,125             |       | 12,917                |       |
| Inventories                                           |       | 1,427              |       | 1,656                 |       |
| Prepaid expenses                                      |       | 7,038              |       | 8,111                 |       |
| Deposits and  other current assets                    |       | 1,564              |       | 1,564                 |       |
| Restricted cash  and cash equivalents                 |       | 24,808             |       | 18,341                |       |
| Total current assets                                  |       | 71,950             |       | 68,229                |       |
|                                                  |       |               |       |                  |       |
| Property and equipment,  net                          |       | 545,966            |       | 524,054               |       |
| Restricted cash and  cash equivalents                 |       | 97,915             |       | 128,049               |       |
| Other assets, net                                     |       | 14,305             |       | 16,862                |       |
| Total assets                                          |       | $                  | 730,136    |                  | $          | 737,194 |   |
|                                                  |       |               |       |                  |       |
| LIABILITIES AND  MEMBERS’ EQUITY (DEFICIT)       |       |               |       |                  |       |
|                                                  |       |               |       |                  |       |
| Current liabilities:                                  |       |               |       |                  |       |
| Current portion  of long-term debt                    |       | $                  | 1,638      |                  | $          | 1,592 |   |
| Accounts payable                                      |       | 13,365             |       | 15,349                |       |
| Accrued payroll  and related                          |       | 12,529             |       | 12,573                |       |
| Accrued interest  payable                             |       | 6,496              |       | 6,059                 |       |
| Accrued taxes                                         |       | 2,724              |       | 2,526                 |       |
| Accrued expenses                                      |       | 6,740              |       | 6,270                 |       |
| Deposits                                              |       | 5,345              |       | 5,752                 |       |
| Other current  liabilities                            |       | 6,338              |       | 7,519                 |       |
| Due to  affiliates                                    |       | 2,019              |       | 1,425                 |       |
| Total current  liabilities                            |       | 57,194             |       | 59,065                |       |
|                                                  |       |               |       |                  |       |
| Long-term debt, less  current portion                 |       | 801,633            |       | 788,985               |       |
| Other long-term liabilities                           |       | 4,117              |       | 4,117                 |       |
| Total  liabilities                                    |       | 862,944            |       | 852,167               |       |
|                                                  |       |               |       |                  |       |
| Commitments and  contingencies (Note 9)               |       |               |       |                  |       |
|                                                  |       |               |       |                  |       |
| Minority interest                                     |       | (5,712             | )          | (3,034                | )          |
|                                                  |       |               |       |                  |       |
| Members’ equity  (deficit):                      |       |               |       |                  |       |
| Members’ equity                                  |       | 21,500             |       | 21,500                |       |
| Accumulated  deficit                                  |       | (148,596           | )          | (133,439              | )          |
| Total members’  equity (deficit)                 |       | (127,096           | )          | (111,939              | )          |
| Total liabilities and  members’ equity (deficit) |       | $                  | 730,136    |                  | $          | 737,194 |   |

 

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

3

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

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(amounts in thousands)**
| ** **                          | ** ** | **Three Months**        | ** ** | **Three Months**        | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                          | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
| ** **                          | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
|                                |       |                         |       |                         |       |
| Operating  revenues:                |       |                         |       |                         |       |
| Casino                              |       | $                            | 23,857     |                         | $          | 29,825 |   |
| Hotel                               |       | 30,857                       |       | 29,194                       |       |
| Food and beverage                   |       | 12,039                       |       | 16,651                       |       |
| Other                               |       | 1,698                        |       | 4,144                        |       |
| Gross revenues                      |       | 68,451                       |       | 79,814                       |       |
| Promotional allowances              |       | (4,864                       | )          | (6,333                       | )          |
| Net revenues                        |       | 63,587                       |       | 73,481                       |       |
|                                |       |                         |       |                         |       |
| Operating costs  and expenses:      |       |                         |       |                         |       |
| Casino                              |       | 15,421                       |       | 17,887                       |       |
| Hotel                               |       | 11,000                       |       | 9,915                        |       |
| Food and beverage                   |       | 9,262                        |       | 11,806                       |       |
| Other                               |       | 273                          |       | 2,324                        |       |
| Selling, general and administrative |       | 19,333                       |       | 17,645                       |       |
| Depreciation and amortization       |       | 8,384                        |       | 5,691                        |       |
|                                |       | 63,673                       |       | 65,268                       |       |
|                                |       |                         |       |                         |       |
| Operating (loss)  income            |       | (86                          | )          | 8,213                        |       |
|                                |       |                         |       |                         |       |
| Other income  (expense):            |       |                         |       |                         |       |
| Interest expense, net               |       | (17,749                      | )          | (14,646                      | )          |
| Minority interest                   |       | 2,678                        |       | 971                          |       |
| Loss on warrant valuation           |       | —                       |       | 4                            |       |
|                                |       | (15,071                      | )          | (13,671                      | )          |
|                                |       |                         |       |                         |       |
| Pre-tax loss                        |       | (15,157                      | )          | (5,458                       | )          |
| Provision for  income taxes         |       | —                       |       | —                       |       |
| Net loss                            |       | $                            | (15,157    | )                            | $          | (5,458 | ) |

 

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

4

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**
| ** **                                                                                                | ** ** | **Three Months**        | ** ** | **Three Months**        | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                                                                                | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
| ** **                                                                                                | ** ** | **(unaudited)**              | ** ** | **(unaudited)**              | ** ** |
|                                                                                                      |       |                         |       |                         |       |
| Cash flows from  operating activities:                                                                    |       |                         |       |                         |       |
| Net loss                                                                                                  |       | $                            | (15,157    | )                            | $          | (5,458 | ) |
| Adjustments  to reconcile net income (loss) to net cash (used in) provided by  operating activities: |       |                         |       |                         |       |
| Depreciation and amortization                                                                             |       | 8,384                        |       | 5,691                        |       |
| Amortization of debt discount and issuance costs                                                          |       | 1,960                        |       | 1,695                        |       |
| Minority interest                                                                                         |       | (2,678                       | )          | (971                         | )          |
| Change in value of warrants                                                                               |       | —                       |       | 102                          |       |
| Changes in assets and liabilities:                                                                        |       |                         |       |                         |       |
| Receivables, net                                                                                          |       | (208                         | )          | 2,825                        |       |
| Inventories and prepaid expenses                                                                          |       | 1,303                        |       | 112                          |       |
| Restricted cash and cash equivalents                                                                      |       | (6,467                       | )          | —                       |       |
| Other assets                                                                                              |       | 429                          |       | 1,097                        |       |
| Accounts payable                                                                                          |       | (1,984                       | )          | (365                         | )          |
| Accrued expenses and other current liabilities                                                            |       | 67                           |       | (917                         | )          |
| Net cash (used in) provided by operating activities                                                       |       | (14,351                      | )          | 3,811                        |       |
| Cash flows from  investing activities:                                                                    |       |                         |       |                         |       |
| Purchases of property and equipment                                                                       |       | (30,129                      | )          | (7,213                       | )          |
| Restricted cash and cash equivalents                                                                      |       | 30,134                       |       | 6,105                        |       |
| Net cash provided by (used in) investing activities                                                       |       | 5                            |       | (1,108                       | )          |
| Cash flows from  financing activities:                                                                    |       |                         |       |                         |       |
| Borrowings under Loan Agreement                                                                           |       | 13,072                       |       | —                       |       |
| Payable-in-kind interest added to debt principal                                                          |       | —                       |       | 4,084                        |       |
| Payments under CUP financing                                                                              |       | (378                         | )          | (337                         | )          |
| Payments under bank facility                                                                              |       | —                       |       | (394                         | )          |
| Net cash provided by financing activities                                                                 |       | 12,694                       |       | 3,353                        |       |
| Cash and cash  equivalents:                                                                               |       |                         |       |                         |       |
| Increase in cash and cash equivalents                                                                     |       | (1,652                       | )          | 6,056                        |       |
| Balance, beginning of period                                                                              |       | 25,640                       |       | 41,419                       |       |
| Balance, end of period                                                                                    |       | $                            | 23,988     |                         | $          | 47,475 |   |
|                                                                                                      |       |                         |       |                         |       |
| Supplemental  cash flow disclosures:                                                                      |       |                         |       |                         |       |
| Cash paid for  interest, net of capitalized interest                                                      |       | $                            | 17,259     |                         | $          | 7,907 |   |

 

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

5

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

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

##### **1.****                                      ORGANIZATIONAND BASIS 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 subsidiary ofPH Mezz I. TSP Owner LLC (“TSP Owner”) is a wholly owned subsidiary of PH FeeOwner. PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner are newly formedDelaware limited liability companies structured as bankruptcy remote specialpurpose entities which, together with OpBiz, own and operate the PlanetHollywood Resort and Casino (the “PH Resort”). OpBiz is the licensed owner andoperator of the gaming assets and leases the casino space and hotel spacetogether with all hotel assets from PH Fee Owner. TSP Owner is the owner of theparcel of land  (the “Timeshare Parcel”)that is currently subject to the Timeshare Purchase Agreement between datedDecember 10, 2004, OpBiz and Westgate Resorts, LLC (“Westgate”) wherebyWestgate plans to develop, market, manage and sell timeshare units on the landadjacent to the PH Resort. 50% of BH/RE’s voting membership interests are heldby each of Robert Earl and Douglas P. Teitelbaum, and BH/RE’s equity membershipinterests are held 40.75% by BH Casino and Hospitality LLC I (“BHCH I”), 18.50%by BH Casino and Hospitality LLC II (“BHCH II”) (together, “BHCH”) and 40.75%by OCS Consultants, Inc. (“OCS”).

BH/RE and its subsidiaries were formed to acquire, 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 is currentlycompleting a renovation project on the property. On April 17, 2007, theproperty officially began operation as the PH Resort. In connection withthe acquisition of the resort, OpBiz has entered into an agreement with PlanetHollywood International, Inc. (“Planet Hollywood”) and certain of itssubsidiaries to, among other things, license Planet Hollywood’s trademarks,memorabilia and other intellectual property. OpBiz has also entered into anagreement with Sheraton Operating Corporation (“Sheraton”), a subsidiary ofStarwood, pursuant to which Sheraton provides hotel management, marketing andreservation services for the hotel (the “Hotel”) that comprises a portion ofthe 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 in accordancewith U.S. generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. BH/RE believes that thedisclosures are adequate to make the information presented not misleading. Inthe opinion of management, all adjustments (which include normal recurringadjustments) necessary for a fair presentation of the results for the interimperiods have been made. The results for the three months ended March 31, 2007,are not indicative of results to be expected for the full fiscal year. Theseunaudited financial statements should be read in conjunction with the auditedfinancial statements and notes thereto for the year ended December 31,2006, included in BH/RE’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on April 2, 2007.

##### **2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

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

The condensed consolidated financial statements areprepared in conformity with U.S. generally accepted accounting principles. Certainpolicies, including the determination of bad debt reserves, the estimateduseful lives assigned to assets, asset impairment, insurance reserves and thecalculation of liabilities, require that management apply significant judgmentin defining the appropriate assumptions for calculating financial estimates. Bytheir nature, these judgments are subject to an inherent degree of uncertainty.Management’s judgments are based on historical experience, terms of existingcontracts, observance of trends in the gaming industry and informationavailable from other outside sources. There can be no assurance that actualresults will not differ from management’s estimates. 

6

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To provide an understanding of the methodology managementapplies, BH/RE’s significant accounting policies and basis of presentation arediscussed 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 CashEquivalents*

The balance in current restricted cash and cash equivalentsat March 31, 2007 and December 31, 2006 was approximately $24.8 million and$18.3 million, respectively, which consists of reserves required under the LoanAgreement (as defined in Note 5 to the Condensed Consolidated FinancialStatements) including a reserve for payment of property taxes andinsurance and a reserve for on-going furniture, fixture and equipment purchasesor property improvements. Long-term restricted cash and cash equivalents consist of approximately$97.9 million and $128.0 million at March 31, 2007 and December 31, 2006,respectively, which represents the remaining cash commitments for the plannedrenovations to the Aladdin and includes a reserve for interest shortfalls and acontingency required by the Loan Agreement which will be released, inaccordance with the terms of the Loan Agreement,  if the cost of the renovation does not exceedthe current budget.

###### *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 to aged account balances under a specific dollar amount andspecifically analyzes the collectibility of each account with a balance over thespecified dollar amount, based on the age of the account, the customer’sfinancial condition, collection history and any other known information.

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.

###### *Property and Equipment*

Property andequipment are stated at cost. Recurring repairs and maintenance costs,including items that are replaced routinely in the casino, hotel and food andbeverage departments which do not meet the Company’s capitalization policy of$10,000, are expensed as incurred. The Company has established its capitalexpense policy to be reflective of its 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 andequipment and other long-lived assets are evaluated for impairment inaccordance with the Financial Accounting Standards Board’s (“FASB”) Statementof Financial Accounting 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 carrying valueor fair value less costs of disposal. Fair value for assets to be disposed ofis estimated based on comparable asset sales, solicited offers or a discountedcash flow model.

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

The property andequipment and other long-lived assets that BH/RE obtained in the acquisition ofthe Aladdin were appraised by an independent third party. Property andequipment and the related accumulated depreciation amounts, as well as certainintangible assets recorded in the Company’s condensed consolidated balancesheets as of March 31, 2007 and December 31, 2006, are based on the independentthird party appraisal.

*CapitalizedInterest*

The interest costassociated with the renovation project is capitalized and added to the cost ofthe project. Interest capitalization will cease once the project issubstantially complete. The Company capitalizes interest expense on amountsexpended on the project at the Company’s cost of borrowed money for the period.Capitalized interest approximated $4.5 million and $3.2 million as ofMarch 31, 2007 and December 31, 2006, respectively.

*Debt Issuance Costs*

Debt issuancecosts incurred in connection with the issuance of long-term debt arecapitalized and amortized to interest expense over the expected terms of the relateddebt agreements using the straight-line method, which approximates theeffective interest method, and are included in other assets on BH/RE’sconsolidated balance sheets. Debt issuance costs, net of the relatedamortization, approximated $12.9 million and $14.8 million as of March 31, 2007and December 31, 2006, respectively.

*IntangibleAssets*

In connection withthe purchase 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, 2007, had a net book value ofapproximately $1.0 million. The trade name was valued at approximately $1.0 millionat the time of purchase and was fully amortized at March 31, 2007. The customerlist is being amortized using the straight-line method over a useful life of 4years. Amortization expense was approximately $0.2 million and$0.3 million for the three months ended March 31, 2007 and 2006,respectively.

*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 Condensed ConsolidatedFinancial Statements), the restructuring parties agreed to amend the warrantsissued by MezzCo to purchase 17.5% of the fully diluted equity in MezzCo. Thewarrants contain a net cash settlement, and therefore are accounted for inaccordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFASNo. 133 and EITF 00-19 require that the warrants be recognizedas liabilities, with changes in fair value affecting net income. See “Note 5.Long-Term Debt.”

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 in change in fair valuebeing recorded in interest income or expense in the accompanying consolidatedstatements of operations. The interest rate cap is included in other assets inthe accompanying financial statements at a value of $0.1 million as ofMarch 31, 2007. As of December 31, 2006, the value of the interestrate cap was $0.2 million.

8

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###### *Revenue Recognition and Promotional Allowances*

Casino revenuesare recognized 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 of food,beverage, rooms, entertainment and merchandise provided on a complimentarybasis to customers. Such complimentary amounts are then deducted from revenuesas promotional allowances on BH/RE’s consolidated statements of operations. Theestimated departmental costs of providing such promotional allowances areincluded in casino costs and expenses and consist of the following (amounts inthousands).:
|                                       | ** ** | **Three Months  Ended  March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **(unaudited)**                              | ** ** | **(unaudited)** | ** ** |
| Rooms                                 |       | $                                            | 955        |   | $ | 982 |   |
| Food and  Beverage                    |       | 1,961                                        |       | 2,525 |   |
| Other                                 |       | 6                                            |       | 337 |   |
| Total cost of  promotional allowances |       | $                                            | 2,922      |   | $ | 3,844 |   |

 

###### *Slot Club Program*

The PH Resort’sslot club members earn points based on gaming activity, which can be redeemedfor cash. A liability is recorded for the estimated cost of the outstandingpoints accrued under the slot club program. The accrued slot club pointliability was approximately $1.7 million and $1.6 million as of March 31,2007 and December 31, 2006, respectively.

*Advertising Costs*

Advertising costs areexpensed as incurred and included in selling, general and administrative costsand expenses. Advertising costs totaled approximately $1.1 million and $1.2million for the three months ended March 31, 2007 and 2006, respectively.

*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 a divisions of MezzCo for federal income taxpurposes, and accordingly, will also be subject to federal income taxes.Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner,a wholly owned subsidiary of PH Mezz I, and TSP Owner, a wholly owned subsidiaryof PH Fee Owner, will also be 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, the FASBissued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty inIncome Taxes – an interpretation of FASB No. 109”, to clarify certain aspectsof accounting 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 as required, and did not recognize an impacton the Company’s financial statements. Further discussion regarding the adoption of FIN 48 can be found inNote 8 to the Condensed Consolidated Financial Statements.

###### *Membership Interests*

As of March 31, 2007, BH/RE’s membership interests had notbeen 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.

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*RecentlyIssued Accounting Pronouncements*

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “Fair Value Measurements”(“SFAS 157”), which defines fair value, establishes a framework formeasuring fair value, and expands disclosures above fair valuemeasurements.  SFAS 157 is effectivefor financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  Management does not believe the adoption ofSFAS 157 will have a material impact on the financial statements of theCompany.

In February 2007, the FASB issued Statement of FinancialAccounting Standards No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain warranty and insurance contracts at fair value on acontract-by-contract basis.  A businessentity is required to report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate.  SFAS 159 is effective forfinancial statements issues for fiscal years beginning after November 15,2007.  The Company has  not yet determined the effect on ourfinancial statements, if any, upon adoption of SFAS 159.

**3.****                                      RECEIVABLES**

Receivables consist of the following (in thousands):
|                                 | ** ** | **March 31   2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(unaudited)**               | ** ** | ** **                  | ** ** |
| Casino                          |       | $                             | 9,858      |                        | $          | 9,972 |   |
| Hotel                           |       | 9,113                         |       | 8,014                       |       |
| Other                           |       | 1,306                         |       | 1,487                       |       |
|                            |       | 20,277                        |       | 19,473                      |       |
| Allowance for doubtful accounts |       | (7,152                        | )          | (6,556                      | )          |
| Receivables, net                |       | $                             | 13,125     |                        | $          | 12,917 |   |

 

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

Property andequipment and the related accumulated depreciation consist of the following (inthousands):
|                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Land                               |       | $                        | 97,979     |                        | $          | 97,979 |   |
| Building and  improvements         |       | 431,515                  |       | 367,663                     |       |
| Furniture,  fixtures and equipment |       | 46,758                   |       | 36,444                      |       |
| Construction in  progress          |       | 28,007                   |       | 72,044                      |       |
|                               |       | 604,259                  |       | 574,130                     |       |
| Accumulated  depreciation          |       | (58,293                  | )          | (50,076                     | )          |
| Property and  equipment, net       |       | $                        | 545,966    |                        | $          | 524,054 |   |

 

The $98million land value includes $29.5 million allocated to the Timeshare Land.

Depreciationexpense was approximately $8.2 million and $5.7 million for the three monthsended March 31, 2007 and 2006, respectively.

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

Long-term debtconsists of the following (in thousands):
|                                                   | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| $820 million  Loan Agreement                      |       | $                        | 772,742    |                        | $          | 759,670 |   |
| Northwind  Aladdin obligation under capital lease |       | 30,529                   |       | 30,907                      |       |
| Total long-term debt                              |       | 803,271                  |       | 790,577                     |       |
| Current portion  of long-term debt                |       | (1,638                   | )          | (1,592                      | )          |
| Total long-term  debt, net                        |       | $                        | 801,633    |                        | $          | 788,985 |   |

 

***Loan Agreement***

On November 30,2006, OpBiz and PH Fee Owner (collectively the “Borrower”) entered into theLoan Agreement  (the “Loan Agreement”)with Column Financial, Inc. (the “Lender”) for a mortgage Loan in theprincipal amount of up to $820 million (the “Loan”). The Loan Agreementprovides for an initial disbursement in the amount of $759.7 million and a futurefunding in the amount of up to $60.3 million. The Loan Agreement is secured bya deed of trust on the PH Resort, a deed of trust on the Timeshare Parcel, anda pledge, subject to approval by the Nevada gaming authorities, by MezzCo ofits membership interest in OpBiz (as described below).

The term of the Loan istwenty four months with three one year extension options subject to payment ofa fee and the Borrower’s compliance with the requirements for an extensionoutlined in the Loan Agreement. Interest on the Loan is payable monthly andaccrues at a rate of LIBOR plus 3.25% (8.57% and 8.60% at March 31, 2007 andDecember 31, 2006, respectively) with a .25% ticking fee on available butun-advanced future funding. The Loan Agreement does not require amortizationduring the initial term or, provided certain EBITDA thresholds are met, duringthe extension periods. The Loan Agreement requires that the Borrower establishand maintain certain reserves including a reserve for completion of therenovation project as currently budgeted, a reserve for projected interestshortfalls, a reserve for payment of property taxes and insurance and a reservefor on-going furniture, fixture and equipment purchases or propertyimprovements. The Loan Agreement restricts the Borrower’s ability to spendexcess cash flow until certain debt service coverage ratios are met.

In connection with theLoan Agreement, using the proceeds from the Loan, all amounts outstanding underthe Credit Agreement, dated August 31, 2004, among OpBiz, the lendersnamed therein (the “Lenders”) and The Bank of New York, Asset Solution Division(the “Senior Agent”) were paid in full. Pursuant to the terms of the CreditAgreement, upon repayment of all amounts due, the warrant to purchase 2.5% ofthe equity in EquityCo issued to the Lenders at the closing of the CreditAgreement became exercisable. The Company compensated the holders of allunexercised warrants in accordance with the terms of a letter agreement betweenthe parties and the warrants were canceled.

In addition, in order topermit the Lender to foreclose on the hotel and casino separately and to allowOpBiz to continue to operate the casino after such a foreclosure (should theLender choose to do so), title to the real property comprising the hotel and casino(the “Property”) was transferred from OpBiz to PH Fee Owner. OpBiz and PH FeeOwner then entered into a lease pursuant to which OpBiz agreed to continue tooperate the hotel in the manner it had been and to pay monthly rent ofapproximately $916,000. OpBiz and PH Fee Owner also entered into a leasepursuant to which OpBiz agreed to continue to operate the casino in the mannerit had been and to pay monthly rent of approximately $1,160,000.

In connection with theLoan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1,Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay HarbourManagement, execute and deliver a certain Guaranty (as described below). Inexchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”)executing the Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy HunterInvestments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 peryear. The fee is accrued and only payable once OpBiz hits certain debt servicecoverage ratios defined in the Loan Agreement.

In connection with theLoan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the“Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lenderagainst losses related to certain prohibited actions of the Borrower andguarantied full repayment of the Loan in the case of a voluntary or collusivebankruptcy of the Borrower, a transfer of the Property or interests in theBorrower in violation of the Loan Agreement and if the Borrower fails tomaintain its status as a bankruptcy remote entity and as a result sees itsassets consolidated with those of an affiliate in a bankruptcy. The liabilityof the Guarantors is capped at $15,000,000 per entity and $30,000,000 in theaggregate, however this cap does not apply to (i) liability arising fromevents, acts or circumstances actually committed or brought about by thewillful acts of any of the Guarantors and (ii) the extent of any benefitreceived by any of the Guarantors as a result of the acts giving rise to theliability 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) liability arising from events, acts or circumstances actuallycommitted or brought about by willful acts by him and (ii) the extent ofany benefit received by him as a result of the acts giving rise to the liabilityunder the Guaranty.

In connection with theLoan, the Guarantors and Robert Earl executed and delivered a CompletionGuaranty, dated November 30, 2006, pursuant to which they jointly andseverally guarantied the completion of the renovation of the Property and paymentof all costs associated therewith. The liability under the Completion Guarantyis capped at the greater of (a) $35,000,000 and 

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(b) only in the casethat cost overruns for the renovation exceed $15,000,000, 24% of the thenunpaid costs of the completion of the renovation.

In addition, inconnection with the Loan Agreement, a refinancing of the Securities PurchaseAgreement, dated August 9, 2004, among MezzCo and the investors thereto(the “Investors”), pursuant to which MezzCo issued to the Investors(i) 16% senior subordinated secured Notes in the original aggregateprincipal amount of $87 million, and (ii) Warrants for the purchase(subject to certain adjustments as provided for therein) of membershipinterests of MezzCo, representing 17.5% of its fully diluted equity wascompleted. Loan proceeds were used to redeem in full the Notes.

In connection with therefinancing of the Securities Purchase Agreement and redemption of the Notes,the restructuring parties entered into the Restructuring Agreement, datedNovember 30, 2006, pursuant to which the restructuring parties terminatedin full the Securities Purchase Agreement, the Subordination Agreement, datedas of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and theInvestors, the Pledge Agreement, dated August 9, 2006, among MezzCo andthe Collateral Agent, and the Guaranty, dated August 9, 2004, made byOpBiz to the Investors, and amended certain other existing agreements, asdescribed below.

In accordance with theterms of the Restructuring Agreement, the Investors and EquityCo, MezzCo andOpBiz entered into a Release, Consent and Waiver Agreement, pursuant to whichthe Investors (i) released OpBiz from its guaranteed obligations, underthat certain Guaranty Agreement, dated as of August 9, 2004 and executedby 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 an Amended and Restated Investor RightsAgreement, dated November 30, 2006 (the “A&R Investor Rights Agreement”),to amend and restate the original Investor Rights Agreements among the partiesthereto, dated August 9, 2004.

Pursuant to theRestructuring Agreement, the Restructuring Parties agreed to amend the Warrantsby issuing Amended and Restated Warrants to Purchase Membership Interests ofMezzCo (the “A&R Warrants”) to the Investors upon approval by the Nevada gamingauthorities. The A&R Warrants will be exercisable at any time, subject tothe approval of the Nevada gaming authorities, at a purchase price of $0.01 perunit. Subject to the approval of the Nevada gaming authorities, the warrantsmay be exercised to purchase 17.5% of either voting or non-voting membershipinterests of MezzCo or a combination thereof through the expiration date ofDecember 9, 2012. In addition to customary anti-dilution protections, thenumber of units representing MezzCo membership interests issuable upon exerciseof the A&R Warrants may be increased from time to time upon the occurrenceof certain events as described in the A&R Warrants. Holders of the A&RWarrants  and any securities issued uponexercise thereof may require MezzCo to redeem such securities commencing onDecember 9, 2011 at a redemption price based upon a formula set forth inthe A&R Warrants. These rights expire upon completion of a public offeringby MezzCo or OpBiz.

In connection with theRestructuring Agreement, EquityCo entered into a Guaranty Agreement, datedNovember 30, 2006 (the “Guaranty Agreement”), in favor of the Investorsand the Collateral Agent, pursuant to which EquityCo has guaranteed theobligation of MezzCo to pay the redemption price under the A&R Warrantsprior to expiration and any indebtedness arising under the Put Note (as definedin the A&R Warrants).

EquityCo and theCollateral Agent also entered into a Pledge Agreement, dated November 30,2006 (the “Pledge Agreement”), pursuant to which EquityCo has, subject toapproval of the Nevada gaming authorities, pledged and granted a first prioritysecurity interest to the Collateral Agent for the ratable benefit of theInvestors in the membership interests of EquityCo in MezzCo. The PledgeAgreement, once approved, will secure the full payment of the Put Right (asdefined in the A&R Warrants), including any obligations under the Put Note.

On November 30,2006, BH/RE entered into an Indemnification Agreement with the Investors,pursuant to which we agreed to indemnify the Investors for any losses caused by(i) lack of gaming approvals for the issuance of the A&R Warrants,(ii) lack of gaming approval for the granting of a lien by EquityCo in theequity interests in MezzCo, as described in the Pledge Agreement, and(iii) the inability of the Investors to exercise the Warrants untilJuly 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 Aladdinunder a contract between Aladdin Gaming and Northwind. OpBiz has assumed theenergy service agreement, 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 $0.4 million permonth.

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**6.****                                      MEMBERSHIPINTERESTS**

The non-voting interestsin BH/RE are owned 40.75% by BHCH I, 18.50% by BHCH II and 40.75% by OCS andthe voting interests are owned 50% by Douglas P. Teitelbaum and 50% by RobertEarl. BHCH is controlled by Mr. Teitelbaum, managing principal of BayHarbour Management, an investment management firm. BHCH was formed byMr. Teitelbaum for the purpose of holding investments in BH/RE by fundsmanaged by Bay Harbour Management. OCS is wholly-owned and controlled byMr. Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earl isthe founder, chairman and chief executive officer of Planet Hollywood andMr. Teitelbaum is a director of Planet Hollywood. Collectively,Mr. Earl, a trust for the benefit of Mr. Earl’s children andaffiliates of Bay Harbour Management, own substantially all of the equity of PlanetHollywood.

BH/RE owns 85% of themembership interests in EquityCo and Starwood owns 15%. MezzCo is a whollyowned subsidiary of EquityCo, and OpBiz is a wholly owned subsidiary of MezzCo.BH/RE and Starwood made total equity contributions of $20 million each inEquityCo to fund the costs of the planned renovations to the Aladdin. Starwood’sequity 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 $2.7million and $1.0 million for the three months ended March 31, 2007 and 2006,respectively.

BH/RE has the option topurchase all of Starwood’s membership interests in EquityCo if OpBiz is entitledto terminate the hotel management contract between OpBiz and Sheraton as aresult of a breach by Sheraton. Starwood can require EquityCo to purchase allof its membership interests in EquityCo if the hotel management contract isterminated for any reason other than in accordance with its terms or as theresult of a breach by Sheraton. In addition, BH/RE and Starwood entered into aregistration rights agreement with respect to their membership interests inEquityCo.

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.

Effective January 1,2006, the Company adopted the provisions of SFAS No. 123(R) requiringthat compensation cost relating to share-based payment transactions berecognized in the operating expenses. The cost is measured at the grant date,based on the calculated fair value of the award, and is recognized as an expenseover the employee’s estimated requisite service period (generally the vestingperiod of the equity award) on a straight-line basis. Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation cost of a change in theestimated forfeitures is recognized in the period of the change. Prior toJanuary 1, 2006, the Company accounted for share-based compensation toemployees in accordance with APB No. 25, and related interpretations. TheCompany also followed the disclosure requirements of SFAS No. 123 asamended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.”

There is $0.1 million ofcompensation cost, which approximated fair value, related to non-qualifiedstock options recognized in operating results (included in selling, general andadministrative expenses) for the three months ended March 31, 2007 and 2006.

The fair value of eachoption award is estimated on the date of grant using the Black-Scholes-Mertonoption pricing model. Expected volatility is based on historical volatilitytrends as well as implied future volatility observations as determined byindependent third parties. In determining the expected life of the option grants,the Company used historical data to estimate option exercise and employeetermination behavior. The expected term represents an estimate of the timeoptions are expected to remain outstanding. The risk-free interest rate forperiods within the contractual life of the option is based on the U.S. treasuryyield curve in effect at the time of grant. The following table sets forth theassumptions used to determine compensation cost for the Company’s non-qualifiedstock options consistent with the requirements of SFAS No. 123(R).
|                                                                                                                                                        | ** ** | **Three Months  Ended  March 31, 2007** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(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                                                                                                                        |       | —                                                 | %          | —                                                 | %          |
|                                                                                                                                                        |            |                                                        |            |                                                        |            |  |  |

 

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

***Mr. Jess Ravich***

Jess Ravich, a former manager of OpBiz, is CEO and indirectcontrolling shareholder of Libra Securities, LLC, an investment banking firm (“LibraSecurities”). Libra Securities acted as placement agent for MezzCo, L.L.C. inthe placement of the Mezzanine Financing and was paid a placement fee of$4,350,000.

Mr. Ravich holds a note convertible into 25% of the equityin PDS Gaming, a leasing and finance company specializing in gaming equipment.Conversion of the note is subject to approval of appropriate gaming regulatorsin the jurisdictions in which PDS Gaming does business. PDS Gaming entered intoa gaming equipment lease with OpBiz on December 22, 2004, for a 48 monthterm with payments of approximately $159,200 per month. Libra Securities raisedfinancing for PDS Gaming to allow it to purchase the equipment underlying thelease and received a placement fee for its services.

***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 agreementwith Planet Hollywood. OpBiz will pay Planet Hollywood a quarterly licensingfee of 1.75% of OpBiz’s non-casino revenues. If OpBiz opens an attraction withpaid admission using the Planet Hollywood marks or memorabilia prior tobeginning operations as the PH Resort, it will pay Planet Hollywood a quarterlylicensing fee of 1.75% of the revenues of the attraction until OpBiz beginsoperating as the PH Resort. The initial term of the licensing agreement willexpire in 2028. OpBiz can renew the licensing agreement for three successive 10-yearterms. The property officially began operation as the PH Resort onApril 17, 2007 and will begin paying fees pursuant to the licensingagreement as of that date. As of March 31, 2007, no licensing fees have beenpaid to Planet Hollywood for the use of its trademarks and service marks.

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. Earl disclaims beneficial ownership of any equity of Planet Hollywoodowned by the trust.

***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 acquisitionand is 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, 2007 and 2006, 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, will operate a new concept ithas developed 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 will pay OpBiz base rent in the amount of $500,000per year (subject to annual increase adjustments), in addition to percentagerent of up to 12% based on annual gross sales (to the extent such percentagerent exceeds base rent), following commencement of its business operations inthe leased space. As of March 31, 2007, no rent has been paid to OpBiz becausePlanet Dailies had not yet commenced its business operations in the leasedspace.  The initial term of the leaseagreement will expire in 2017. Planet Hollywood LV can renew the leaseagreement 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 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, will operate arestaurant named “Earl of Sandwich” within approximately 3,030 square feet ofspace located on the premises owned by OpBiz. Earl of Sandwich will pay OpBizbase rent in the amount of $161,600 per year (subject to annual increaseadjustments), in addition to percentage rent of up to 12% based on annual grosssales (to the extent such percentage rent exceeds base rent), followingcommencement of its business operations in the leased space. The initial termof the lease agreement will expire in 2017. Earl of Sandwich can renew thelease agreement for two successive 5-year terms. As of March 31, 2007, norent has been paid to OpBiz because Earl of Sandwich has not yet commenced itsbusiness operations in the leased space. The Company 

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believes that theprovisions of this lease agreement reflect arm’s length market terms and thatit is comparable to other lease agreements OpBiz has entered into withthird-party restaurant operators.

Earlof Sandwich is wholly and indirectly owned by a trust for the benefit ofMr. Earl’s children. Mr. Earl disclaims beneficial ownership of anyequity of Earl of Sandwich owned by the trust.

***Guaranty Agreement***

Inconnection with the Loan, the Lender required that Trophy Hunter Investments,Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which areaffiliates of Bay Harbour Management, execute and deliver a certain Guaranty(see Note 5.—Long-Term Debt). In exchange for executing the Guaranty, OpBiz andPH Fee Owner agreed to pay Trophy Hunter Investments, Ltd. and Bay HarbourMaster Ltd. a fee equal to $1,500,000 per year. The fee is accrued and onlypayable once OpBiz achieves certain debt service coverage ratios defined in theLoan Agreement.

***Aircraft Charter Arrangements***

In theordinary course from time to time the Company utilizes the services of privateaircrafts for charter.  The Companycurrently utilizes several different third party aircraft management/chartervendors for the provision of charter flights depending upon aircraft size,availability and location.  One or more affiliatesof BH/RE has placed an owned aircraft in service with one such vendor.  From time to time the Company may utilize theservices of this vendor which may involve the affiliates owned aircraft;provided that the rate charged for that aircraft shall be at arms  length and fair market for similar aircraft.

**8.****                                      INCOMETAXES**

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

MezzCo,OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner account for incometaxes in accordance with SFAS No. 109, “*Accountingfor Income Taxes*”. SFAS 109 requires the recognition of deferredincome tax assets, net of applicable reserves, related to net operating losscarryforwards and certain temporary differences. The standard requiresrecognition of a future tax benefit to the extent that realization of such benefitis more likely than not. Otherwise, a valuation allowance is applied.

Managementbelieves it is more likely than not that its net deferred tax asset will not berealized and has therefore recorded a valuation allowance against this netdeferred tax asset.

As ofDecember 31, 2006, MezzCo has federal net operating losses of $147,180,060which begin to expire after 2024. MezzCo has general business creditcarryforwards at December 31, 2006 of $1,036,000 which begin to expireafter 2024 and a minimum tax credit carryforward of $15,000.

As discussed in Note 2 tothe Condensed Consolidated Financial Statements, the Company adopted theprovisions of FIN 48 effective January 1, 2007. No amounts are being presented as an uncertain tax position.   TheCompany recognizes penalties and interest as a component of income taxexpense.  We do not expect any penaltyassessment associated with our adoption of FIN 48 and do not expect anysignificant increases or decreases to amounts of unrecognized tax benefits forthe next twelve months.  We are no longersubject to U.S. federal tax examinations by tax authorities for tax yearsbefore 2003.

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

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

BH/RE is not currently a party to any material legalproceedings.

***EmploymentAgreements***

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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***TimesharePurchase Agreement***

On December 10, 2004, OpBizentered into a Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”),a Florida limited partnership, whereby OpBiz has agreed to sell approximately 4acres of land adjacent to the Aladdin to Westgate, who plans to develop,market, manage and sell timeshare units on the land. The land valuerecorded by OpBiz in its financial statements of $29.5 million was based on anindependent appraisal. The purchase price for the land will be paid by Westgatein the form of fees based on annual sales of timeshare units. The TimesharePurchase Agreement remains in effect but the deed to the land has not beentransferred as requisite conditions to consummate the sale have not beencompleted by Westgate. To complete the deed transfer, Westgate must obtainfinancing and obtain all required approvals from regulatory agencies.Accordingly, no gain or loss on the sale of the land has been recorded in theCompany’s financial statements. Advances received by Westgate against thepurchase price of the land have been recorded as advances in the currentliabilities in the accompanying financial statements until such time as the transferis complete and the sale is finalized.

***TheaterLease***

On December 16, 2004, OpBizentered into a long-term lease agreement whereby CC EntertainmentTheatrical-LV, LLC, successor-in-interest to SFX Entertainment, Inc. pursuantto an assignment dated September 26, 2005 (“CCE”) renovated and is operating ashowroom on the mezzanine level and the 7,500 seat theater located at the PHResort.  CCE has the exclusive right touse, reconfigure, adapt, change and operate the leased premises.

 

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## **ITEM 2.****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 isa discussion of the financial condition and results of operations of BH/RE andits subsidiaries for the periods covered in this report. The discussion ofoperations herein focuses on events and the revenues and expenses during thethree months ended March 31, 2007, as compared to the three months ended March31, 2006.

The followingmanagement’s discussion and analysis of financial condition and results ofoperations should be read in conjunction with the consolidated financialstatements and the related notes to the consolidated financial statements ofBH/RE included in BH/RE’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on April 2, 2007, and the unauditedcondensed consolidated financial statements and notes hereto included inPart I, Item 1 of this report.

###### ***Critical Accounting Policiesand Estimates***

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

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

###### *Propertyand Equipment*

Property andequipment are stated at cost. Recurring repairs and maintenance costs,including items that are replaced routinely in the casino, hotel and food andbeverage departments which do not meet our capitalization policy of $10,000,are expensed as incurred. We have established our capital expense policy to bereflective of our 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 andequipment and other long-lived assets are evaluated for impairment inaccordance with the Financial Accounting Standards Board’s (“FASB”) Statementof Financial Accounting 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 andequipment are reviewed for impairment whenever indicators of impairment exist.If an indicator of impairment exists, the estimated future cash flows of theasset, on an undiscounted basis, are compared to the carrying value of theasset. If the undiscounted cash flows exceed the carrying value, no impairmentis indicated. If the undiscounted cash flows do not exceed the carrying value,then impairment is measured based on fair value compared to carrying value,with fair value typically based on a discounted cash flow model.

*CapitalizedInterest*

The interest costassociated with the renovation project is capitalized and added to the cost ofthe project.  Interest capitalizationwill cease once the project is substantially complete.  The Company capitalizes interest expense onamounts expended on the project at the Company’s cost of borrowed money for theperiod.  Capitalized interestapproximated $4.5 million and $3.2 million as of March 31, 2007 and December31, 2006, respectively.

*Derivative Instruments and Hedging Activities*

Pursuant to therefinancing of the Securities Purchase Agreement and the terms of theRestructuring Agreement, the restructuring parties agreed to amend the warrantsissued by MezzCo to purchase 17.5% of the fully diluted equity in MezzCo. Thewarrants contain a net cash settlement, and therefore are accounted for inaccordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFASNo. 133 and EITF 00-19 require that the warrants be recognizedas liabilities, with changes in fair value affecting net income.

The terms of theLoan Agreement required the Company to enter into an interest rate capagreement, which expires on November 30, 2008, to manage interest raterisk. The Company did not apply cash flow hedge accounting to this instrument.Although this derivative was not afforded cash flow hedge accounting, theCompany retained the instrument as protection against the interest rate riskassociated with its long-term borrowings. The Company accounts for itsderivative activity in accordance with SFAS No. 133 and accordingly,recognizes all derivatives on the balance sheet at fair value with any inchange in fair value being recorded in interest income or expense in theaccompanying consolidated statements of operations.

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

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

Hotel revenuerecognition criteria are generally met at the time of occupancy. Food andbeverage revenue recognition criteria are generally met at the time of service.Deposits for future hotel occupancy or food and beverage services are recordedas deferred income until revenue recognition criteria are met. Cancellationfees for hotel and food and beverage services are recognized upon cancellationby the customer as defined by a written contract entered into with thecustomer.

*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 owned subsidiaryof PH Mezz I and TSP Owner, a wholly owned subsidiary of PH Fee Owner will alsobe subject to federal income taxes.

MezzCo, OpBiz, PHMezz II, 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”) “Accounting for Uncertaintyin Income Taxes – an interpretation of FASB No. 109”, to clarify certainaspects of accounting for uncertain tax positions, including issues related tothe 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, and did not recognize animpact on the Company’s financial statements.

###### *MembershipInterests*

As of March 31, 2007, our membership interests had not beenunitized and our members do not presently intend to unitize these membershipinterests. Accordingly, we have excluded earnings per membership unit datarequired pursuant to SFAS No. 128, “*Earnings Per Share,*”because we believe that such disclosures would not be meaningful to thefinancial statement presentation.

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. Inaddition, depending on the terms of the employment agreements, these executivesare entitled to options to purchase between 0.2% and 3% of the equity ofMezzCo.

Effective January 1,2006, the Company adopted the provisions of SFAS No. 123(R) requiringthat compensation cost relating to share-based payment transactions berecognized in the operating expenses. The cost is measured at the grant date,based on the calculated fair value of the award, and is recognized as anexpense over the employee’s estimated requisite service period (generally thevesting period of the equity award) on a straight-line basis. Estimates arerevised if subsequent information indicates that forfeitures will differ fromprevious estimates, and the cumulative effect on compensation cost of a changein the estimated forfeitures is recognized in the period of the change. Priorto January 1, 2006, the Company accounted for share-based compensation toemployees in accordance with APB No. 25, and related interpretations. TheCompany also followed the disclosure requirements of SFAS No. 123 asamended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.”

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###### *RecentlyIssued Accounting Pronouncements*

###### In September 2006, the FASB issued Statementof Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS157”), which defines fair value, establishes a framework for measuring fairvalue, and expands disclosures above fair value measurements.  SFAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years.  Managementdoes not believe the adoption of SFAS 157 will have a material impact on thefinancial statements of the Company.

###### In February 2007, the FASB issued Statementof Financial Accounting Standards No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain warranty and insurance contracts at fair value on acontract-by-contract basis.  A businessentity is required to report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate.  SFAS 159 is effective forfinancial statements issues for fiscal years beginning after November 15,2007.  The Company has  not yet determined the effect on ourfinancial statements, if any, upon adoption of SFAS 159.

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

The followingtable highlights the results of operations for the three months ended March 31,2007 and 2006, respectively (dollars in thousands, unaudited).
|                                     | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2007**                                         | ** ** | **2006**    | ** ** | **Change** | ** ** |
|                                |       |                                             |       |        |       |   |   |
| Net revenues                        |       | $                                                | 63,587     |        | $          | 73,481 |   | (13.5 | )% |
| Operating  expenses:                |       |                                             |       |        |       |   |   |
| Casino                              |       | 15,421                                           |       | 17,887      |       | (13.8 | )% |
| Hotel                               |       | 11,000                                           |       | 9,915       |       | 10.9 | % |
| Food and beverage                   |       | 9,262                                            |       | 11,806      |       | 21.5 | % |
| Other                               |       | 273                                              |       | 2,324       |       | (88.3 | )% |
| Selling, general and administrative |       | 19,333                                           |       | 17,645      |       | 9.6 | % |
| Depreciation and amortization       |       | 8,384                                            |       | 5,691       |       | 47.3 | % |
| Operating income                    |       | $                                                | (86        | )           | $          | 8,213 |   | (101.0 | )% |

 

Net revenues forthe three months ended March 31, 2007 declined when compared to the threemonths ended March 31, 2006. The on-going renovation project was the primaryreason for the decline in revenues throughout the property. Operating incomeand operating margin also declined as a result of the disruption which includelimited access to the property from the Las Vegas Boulevard and mall entriesand the lack of amenities as we complete the renovation of the property. OnApril 17, 2007, we officially began operation as the PH Resort withsubstantially all of the interior renovations complete with work on the exteriorfaçade and plaza expected to continue through the end of the third quarter2007.

Thefollowing table highlights the various sources of our revenues and expenses forthe three months ended March 31, 2007 and 2006, respectively (dollars inthousands, unaudited).

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|                                               | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006**    | ** ** | **Change** | ** ** |
|                                          |       |                                             |       |        |       |   |   |
| Casino revenues                               |       | $                                                | 23,857     |        | $          | 29,825 |   | (20.0 | )% |
| Casino expenses                               |       | 15,421                                           |       | 17,887      |       | (13.8 | )% |
| *Margin*                                      | * *   | *35.4*                                           | *%*        | *40.0*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Hotel revenues                                |       | $                                                | 30,857     |        | $          | 29,194 |   | 5.7 | % |
| Hotel expenses                                |       | 11,000                                           |       | 9,915       |       | 10.9 | % |
| *Margin*                                      | * *   | *64.4*                                           | *%*        | *66.0*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Food and  beverage revenues                   |       | $                                                | 12,039     |        | $          | 16,651 |   | (27.7 | )% |
| Food and  beverage expenses                   |       | 9,262                                            |       | 11,806      |       | (21.5 | )% |
| *Margin*                                      | * *   | *23.1*                                           | *%*        | *29.1*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Other revenues                                |       | $                                                | 1,698      |        | $          | 4,144 |   | (59.0 | )% |
| Other expenses                                |       | 273                                              |       | 2,324       |       | (88.3 | )% |
| *Margin*                                      | * *   | *83.9*                                           | *%*        | *43.9*      | *%*        | * * | * * |
|                                          |       |                                             |       |        |       |   |   |
| Selling, general  and administrative expenses |       | $                                                | 19,333     |        | $          | 17,645 |   | 9.6 | % |
| *Percent  of net revenues*                    | * *   | *30.4*                                           | *%*        | *24.0*      | *%*        | * * | * * |

 

*Casino*

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

Casinorevenues vary from time-to-time due to general economic conditions,competition, popularity of entertainment offerings, table game hold, slotmachine hold and occupancy percentages in the Hotel. Casino revenues also varydepending upon the amount of gaming activity, as well as variations in the oddsfor different games of chance. Casino revenue is recognized at the end of eachgaming day.

Casinorevenues decreased 20.0% to $23.9 million for the three months ended March 31,2007, as compared to $29.8 million for the three months ended March 31, 2006.Table games revenue for the three months ended March 31, 2007, decreased byapproximately $3.5 million as compared to the three months ended March 31,2006. Drop for the three months ended March 31, 2007 declined $18.8million or 26.8% when compared to the same three month period in prior yearmainly attributed to the decline in play while the renovation is underwayincluding the temporary lack of food and beverage and entertainment amenitieswhich affected our ability to attract customers.  Slot revenue for the three months ended March31, 2007 decreased approximately $3.9 million when compared to the same threemonth period in prior year. Slot handle for the three months endedMarch 31, 2007 declined $59.0 million or 22.9% when compared to the samethree month period in prior year attributable to the loss of foot traffic fromthe Las Vegas Boulevard and mall entries which have been intermittently closedduring the renovation of the façade. Combined revenues from the race and sports book, poker and keno for thethree months ended March 31, 2007 decreased by $0.1 million or 8.8% whencompared to the three month period ended March 31, 2006 primarily due to adecrease in race and sports book revenue driven by its move to a temporarylocation on the mezzanine level.

Casinoexpenses decreased 13.8% to $15.4 million for the three months ended March 31,2007, as compared to $17.9 million for the three months ended March 31, 2006.Operating margin declined 4.6% when comparing the same three month periods. Thedecline in operating margin was mainly attributable to the addition ofpromotional offers and events intended to maintain revenue during the renovationperiod.

*Hotel*

Hotel revenue isderived from rooms and suites rented to guests. “average daily rate” is anindustry specific term used to define the average amount of revenue per rentedroom per day. “Occupancy percentage” defines the total percentage of roomsoccupied and is computed by dividing the number of rooms occupied by the totalnumber of rooms available. Hotel revenue is recognized at the time the room isprovided to the guest.

Hotelrevenues of $30.9 million for the three months ended March 31, 2007 were 5.7%higher than the three months ended March 31, 2006. Hotel occupancy increased2.0% to 97.7% when compared to the same three month period in the prior year.Average daily room rates also increased to $135 for the three months endedMarch 31, 2007 compared to $131 for the three months ended March 31, 2006. Wewere able to maintain hotel revenues during the renovation period due tocontinued strong demand for rooms in the Las Vegas market and the improvedmarketing channels of Starwood.

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Hotelexpenses increased 10.9% to $11.0 million for the three months ended March 31,2007, as compared to $9.9 million for the three months ended March 31, 2006.Operating margin declined 1.6% for the three month period ended March 31, 2007when compared to the same three month period in the previous year. The increasein expenses and resulting decline in operating margin were mainly attributableto increased marketing and promotional expense to maintain the occupancy duringthe renovation period.

*Food andBeverage*

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

Foodand beverage revenues decreased 27.7% to $12.0 million for the three monthsended March 31, 2007, as compared to $16.7 million for the three months endedMarch 31, 2006. Food revenue declined $4.7 million when compared to the samethree month period in the previous year as a result of the closing of outletsfor turnover to tenants.  The PH Resortwill operate the buffet, room service and banquets with all remaining foodoutlets being leased to third party operators. Beverage revenue declined $0.5 million when compared to the same threemonth period in the previous year due to the temporary disruption andrelocation of bars during the renovation.

Foodand beverage expenses decreased 21.5% to $9.3 million for the three monthsended March 31, 2007, as compared to $11.8 million for the three months endedMarch 31, 2006. Operating margin declined 6% when compared to the same threemonth period in previous year. The decline in operating margin is mainlyattributed to the additional expense associated with the transition of theproperty to the PH Resort.

*Other*

Other revenueincludes entertainment sales, retail sales, telephone and other miscellaneousincome and is recognized at the time the goods or services are provided to theguest.

Otherrevenues decreased 59.0% to $1.7 million for the three months ended March 31,2007, as compared to $4.1 million for the three months ended March 31, 2006.The decline in other revenue is primarily due to the transition ofentertainment operations to a third party operator.  A third party operator is currently runningthe showroom and TPA operations.

Otherexpenses declined 88.3% to $0.3 million for the three months ended March 31,2007, as compared to $2.3 million for the three months ended March 31,2006.  The decline in other expenses isalso due to the elimination of entertainment expense as a result of thetransition of the operation to a third party.

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

SG&Aexpenses increased 9.6% to $19.3 million for the three months ended March 31,2007, as compared to $17.6 million for the three months ended March 31,2006.  As a percentage of net revenue,SG&A expenses increased to 30.4% for the three months ended March 31, 2007as compared to 24% for the three months ended March 31, 2006. The increase inSG&A expenses as a percentage of net revenue was mainly due to maintenanceof marketing and fixed administrative expenses as we complete the transition ofthe property into the PH Resort.

*Depreciationand Amortization*

Depreciationand amortization expense of $8.4 million for the three months ended March 31,2007 increased when compared to $5.7 million in expense for the three monthsended March 31, 2006. The increase in depreciation expense is a direct resultof the additional assets placed in service as the areas of renovation arecomplete.

*NetInterest Expense*

Netinterest expense increased to $17.7 million for the three months ended March31, 2007, as compared to $14.6 million for the three months ended March 31,2006. The increase in net interest expense is directly attributed to theincrease in LIBOR for the comparable three month periods, which is used tocalculate interest expense on the Loan Agreement. Capitalized interest expenseapproximated $1.3 million and $0.3 million for the three monthperiods ended March 31, 2007 and March 31, 2006, respectively.

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

During the three monthsended March 31, 2007, we utilized cash flows from operating activities ofapproximately $14.4 million and had a balance of $24.0 million in cash and cashequivalents as of March 31, 2007. We also had current restricted cash and cashequivalents of approximately $24.8 million and long-term restricted cashand cash equivalents of approximately $97.9 million at March 31, 2007. Thecurrent restricted cash and cash equivalents are primarily reserve accountsthat have been established under the Loan Agreement to guarantee payment ofproperty taxes, insurance and furniture, fixtures and equipment replacement.Current restricted cash also includes the balance in the cash managementaccount. Under the terms of the Loan Agreement, all cash receipts are depositedinto a cash management account under Lender control which is used to fundreserves and operating expenses. The long-term cash and cash equivalentsinclude funds designated for the remaining costs associated with the renovationof the Aladdin to the PH Resort and the interest reserve account balance whichwill be released once certain debt service coverage rations are achieved. See “Descriptionof Certain Indebtedness” below.

Our primary remainingcash requirements for 2007 are expected to include (i) up to approximately$76.6 million in capital expenditures related to the renovation project,(ii) approximately $8.7 million for maintenance capital expenditures orreplacement furniture, fixtures and equipment and (iii) up toapproximately $50.7 million in interest payments on our debt.

We believe that cashgenerated from operations, cash held in reserve by the lenders under the Loan Agreementand available future financing under the Loan Agreement will be adequate tomeet the anticipated working capital, capital expenditure, renovation and debtservice obligations of OpBiz for at least the next twelve months 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. We expect to experience areduction in cash generated by our operations during our planned renovations tothe Aladdin and have negotiated the terms of the Loan Agreement to addressthose anticipated reductions. We believe that future funding under the LoanAgreement will adequately cover interest shortfalls and any operatingshortfalls experienced during the renovation period but we can not assure youthat we have accurately estimated those needs.

***Descriptionof Certain Indebtedness***

*Loan Agreement*

On November 30,2006, OpBiz and PH Fee Owner entered into the Loan Agreement with ColumnFinancial, Inc. for a Loan in the principal amount of up to $820 million.The Loan Agreement provides for an initial disbursement in the amount of $759.7million and a Future Funding in the amount of up to $60.3 million. TheLoan is secured by a deed of trust on the PH Resort, a deed of trust on theTimeshare Parcel, and a pledge, subject to approval by the Nevada gamingauthorities by MezzCo of its membership interest in OpBiz (as described below).

The term of the Loan istwenty four months with three one year extension options subject to payment ofa fee and the Borrower’s compliance with the requirements for of an extensionoutlined in the Loan Agreement. Interest on the Loan is payable monthly andaccrues at a rate of LIBOR plus 3.25% with a .25% ticking fee on available butun-advanced Future Funding. The Loan Agreement does not require amortizationduring the initial term or, provided certain EBITDA thresholds are met, duringthe extension periods. The Loan Agreement requires that the Borrower establishand maintain certain reserves including a reserve for completion of therenovation project as currently budgeted, a reserve for projected interestshortfalls, a reserve for payment of property taxes and insurance and a reservefor on-going furniture, fixture and equipment purchases or propertyimprovements. The Loan Agreement restricts the Borrower’s ability to spendexcess cash flow until certain debt service coverage ratios are met.

In connection with theLoan Agreement, we have, using the proceeds from the Loan, repaid in full allamounts outstanding under the Credit Agreement, dated August 31, 2004,among OpBiz, the lenders named therein (the “Lenders”) and The Bank of NewYork, Asset Solution Division (the “Senior Agent”). Pursuant to the terms ofthe Credit Agreement, upon repayment of all amounts due, the warrant topurchase 2.5% of the equity in EquityCo issued to the Lenders at the closing ofthe Credit Agreement became exercisable. The Company compensated the holders ofall unexercised warrants in accordance with the terms of a letter agreementbetween the parties and the warrants were canceled.

In addition, in order topermit the Lender to foreclose on the hotel and casino separately and to allowOpBiz to continue to operate the casino after such a foreclosure (should theLender choose to do so), title to the real property comprising the hotel and casino(the “Property”) was transferred from OpBiz to PH Fee Owner. OpBiz and PH FeeOwner then entered into a lease pursuant to which OpBiz agreed to continue tooperate the hotel in the manner it had been and to pay monthly rent ofapproximately $916,000. OpBiz and PH Fee Owner also entered into a leasepursuant to which OpBiz agreed to continue to operate the casino in the mannerit had been and to pay monthly rent of approximately $1,160,000.

In connection with theLoan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1,Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay HarbourManagement, execute and deliver a certain Guaranty (as described below). Inexchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”)executing the Guaranty, OpBiz and 

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PH Fee Owner agreed topay to Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equalto $1,500,000 per year. The fee is accrued and only payable once OpBiz hitscertain debt service coverage ratios defined in the Loan Agreement.

In connection with theLoan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the“Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lenderagainst losses related to certain prohibited actions of the Borrower andguarantied full repayment of the Loan in the case of a voluntary or collusivebankruptcy of the Borrower, a transfer of the Property or interests in theBorrower in violation of the Loan Agreement and if the Borrower fails tomaintain its status as a bankruptcy remote entity and as a result sees itsassets consolidated with those of an affiliate in a bankruptcy. The liabilityof the Guarantors is capped at $15,000,000 per entity and $30,000,000 in theaggregate, however this cap does not apply to (i) liability arising fromevents, acts or circumstances actually committed or brought about by thewillful acts of any of the Guarantors and (ii) the extent of any benefitreceived by any of the Guarantors as a result of the acts giving rise to theliability 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) liability arising from events, acts or circumstances actuallycommitted or brought about by willful acts by him and (ii) the extent ofany benefit received by him as a result of the acts giving rise to theliability under the Guaranty.

In connection with theLoan, the Guarantors and Robert Earl executed and delivered a CompletionGuaranty, dated November 30, 2006, pursuant to which they jointly andseverally guarantied the completion of the renovation of the Property andpayment of all costs associated therewith. The liability under the CompletionGuaranty is capped at the greater of (a) $35,000,000 and (b) only inthe case that cost overruns for the renovation exceed $15,000,000, 24% of thethen unpaid costs of the completion of the renovation.

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

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

In accordance with theterms of the Restructuring Agreement, the Investors and EquityCo, MezzCo andOpBiz entered into a Release, Consent and Waiver Agreement, pursuant to whichthe Investors (i) released OpBiz from its guaranteed obligations, underthat certain Guaranty Agreement, dated as of August 9, 2004 and executedby 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 an Amended and Restated InvestorRights Agreement, dated November 30, 2006 (the “A&R Investor RightsAgreement”), to amend and restate the original Investor Rights Agreements amongthe parties thereto, dated August 9, 2004.

Pursuant to theRestructuring Agreement, the restructuring parties agreed to amend the Warrantsby issuing Amended and Restated Warrants to Purchase Membership Interests ofMezzCo (the “A&R Warrants”) to the Investors upon approval by the Nevadagaming authorities. The A&R Warrants will be exercisable at any time,subject to the approval of the Nevada gaming authorities, at a purchase priceof $0.01 per unit. Subject to the approval of the Nevada gaming authorities,the warrants may be exercised to purchase either voting or non-votingmembership interests of MezzCo or a combination thereof through the expirationdate of December 9, 2012. In addition to customary anti-dilutionprotections, the number of units representing MezzCo membership interestsissuable upon exercise of the A&R Warrants may be increased from time totime upon the occurrence of certain events as described in the A&R Warrants.Holders of the A&R Warrants and any securities issued upon exercise thereofmay require MezzCo to redeem such securities commencing on December 9,2011 at a redemption price based upon a formula set forth in the A&RWarrants. These rights expire upon completion of a public offering by MezzCo orOpBiz.

In connection with theRestructuring Agreement, EquityCo entered into a Guaranty Agreement, datedNovember 30, 2006 (the “Guaranty Agreement”), in favor of the Investorsand the Collateral Agent, pursuant to which EquityCo has guaranteed theobligation of MezzCo to pay the redemption price under the A&R Warrantsprior to expiration and any indebtedness arising under the Put Note (as definedin the A&R Warrants).

EquityCo and theCollateral Agent also entered into a Pledge Agreement, dated November 30,2006 (the “Pledge Agreement”), pursuant to which EquityCo has, subject toapproval of the Nevada gaming authorities, pledged and granted a first prioritysecurity 

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interest to theCollateral Agent for the ratable benefit of the Investors in the membershipinterests of EquityCo in MezzCo. The Pledge Agreement, once approved, willsecure the full payment of the Put Right (as defined in the A&R Warrants),including any obligations under the Put Note.

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

*EnergyServices Agreement*

Northwind owns andoperates a central utility plant on land leased from us. The plant supplies hotand cold water and emergency power to the Aladdin under a contract betweenAladdin Gaming and Northwind. We have assumed the energy service agreement,which expires in 2018. Under the agreement, we are required to pay Northwind amonthly consumption charge, a monthly operational charge, a monthly debtservice payment and a monthly return on equity payment. Payments under theNorthwind agreement total approximately $0.4 million per month.

***ForwardLooking Statements***

Thisquarterly report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. When used in this report and elsewhere by management from time totime, the words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”,“may”, “seek”, “will”, and similar expressions are intended to identifyforward-looking statements with respect to our financial condition, results ofoperations and our business including our planned and possible expansion plans,legal proceedings and employee matters. Certain important factors, includingbut not limited to, competition from other gaming operations, factors affectingour ability to complete acquisitions and dispositions of gaming properties,leverage, construction risks, the inherent uncertainty and costs associatedwith litigation and governmental and regulatory investigations, and licensingand other regulatory risks, could cause our actual results to differ materiallyfrom those expressed in or implied by our forward-looking statements. Furtherinformation on potential factors which could affect our financial condition,results of operations and business including, without limitation, theexpansion, development and acquisition projects, legal proceedings and employeematters are included in “Item 1A—Risk Factors” of BH/RE’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on April2, 2007. Readers are cautioned not to place undue reliance on anyforward-looking statements, which speak only as of the date thereof. Weundertake no obligation to publicly release any revisions to suchforward-looking statements to reflect events or circumstances after the datehereof.

## **ITEM 3.****QUANTITATIVE ANDQUALITATIVE 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, 2007 would increase the annualinterest cost by approximately $5.4 million.

## **ITEM 4.****CONTROLS ANDPROCEDURES**

Our management, with the participation of ourprincipal executive and chief financial officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)), as of March 31, 2007. Based on theirevaluation, our principal executive and principal financial officers concludedthat our disclosure controls and procedures were effective as of March 31,2007.

Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15-d-15(f) under the Exchange Act) thatoccurred during our fiscal quarter ended March 31, 2007, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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# **PART II —  OTHER INFORMATION**

## **ITEM 6.****EXHIBITS**

| 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 to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                    | BH/RE, L.L.C.                         |
|--------------------|---------------------------------------|
|               |                                  |
|               |                                  |
| May 15,  2007 | By:                                   | /S/ Donna Lehmann |   |
|               | Donna Lehmann                         |
|               | Treasurer and Chief Financial Officer |

 

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description**                                                                           |
|-------------|------------|-------------------------------------------------------------------------------------------|
| 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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