**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 
| **ý**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                              |
| **For the  quarterly period ended June 30, 2005** |
|                                                   |       |                                                                                                    |
| **OR**                                                 |
|                                                   |       |                                                                                                    |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from              to             **

 

**CommissionFile Number 000-50689**

 

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

(Exact Name ofRegistrant as Specified in its Charter)

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

 

**(212) 371-2211**

(Registrant’sTelephone Number, Including Area Code)

 

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Indicateby check mark whether the Registrant (1) has filed all reports required bySection 13 or 15(d) of the Securities Exchange Act of 1934 during 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 an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934).   Yes o   No ý

 

 

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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 in thousands)**

 
| ** **                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                      | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                          |       |              |       |                  |       |
| Current assets:                                 |       |              |       |                  |       |
| Cash and cash  equivalents                      |       | $                 | 52,672     |                  | $          | 37,016 |   |
| Receivables, net                                |       | 11,815            |       | 12,626                |       |
| Inventories                                     |       | 2,237             |       | 2,489                 |       |
| Prepaid expenses                                |       | 4,846             |       | 5,253                 |       |
| Deposits and  other current assets              |       | 5,489             |       | 3,258                 |       |
| Total current  assets                           |       | 77,059            |       | 60,642                |       |
|                                            |       |              |       |                  |       |
| Property and  equipment, net                    |       | 488,640           |       | 494,781               |       |
| Restricted cash  and cash equivalents           |       | 94,002            |       | 96,199                |       |
| Other assets,  net                              |       | 11,275            |       | 11,761                |       |
| Total assets                                    |       | $                 | 670,976    |                  | $          | 663,383 |   |
|                                            |       |              |       |                  |       |
| LIABILITIES AND MEMBERS’ EQUITY            |       |              |       |                  |       |
|                                            |       |              |       |                  |       |
| Current  liabilities:                           |       |              |       |                  |       |
| Current portion  of long-term debt              |       | $                 | 1,342      |                  | $          | 1,268 |   |
| Accounts payable                                |       | 2,421             |       | 2,095                 |       |
| Due to  affiliates                              |       | 2,538             |       | 1,887                 |       |
| Accrued expenses  and other current liabilities |       | 40,220            |       | 36,199                |       |
| Total current  liabilities                      |       | 46,521            |       | 41,449                |       |
|                                            |       |              |       |                  |       |
| Long-term debt,  less current portion           |       | 595,400           |       | 584,814               |       |
| Other long-term  liabilities                    |       | 4,210             |       | 4,375                 |       |
| Total  liabilities                              |       | 646,131           |       | 630,638               |       |
|                                            |       |              |       |                  |       |
| Commitments and  contingencies                  |       |              |       |                  |       |
|                                            |       |              |       |                  |       |
| Minority  interests                             |       | 17,981            |       | 19,132                |       |
|                                            |       |              |       |                  |       |
| Members’ equity:                           |       |              |       |                  |       |
| Member’s equity                            |       | 21,500            |       | 21,500                |       |
| Accumulated  deficit                            |       | (14,636           | )          | (7,887                | )          |
| Total members’  equity                     |       | 6,864             |       | 13,613                |       |
| Total  liabilities and members’ equity     |       | $                 | 670,976    |                  | $          | 663,383 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

3

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | **Information** | ** ** |
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                           | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **2004**        | ** ** |
|                                 |       |                                 |       |       |       |            |       |
| Operating  revenues:                 |       |                                 |       |       |       |            |       |
| Casino                               |       | $                                    | 31,327     |       | $          | —          |       | $ | 29,303 |   |
| Hotel                                |       | 28,727                               |       | —     |       | 26,929          |       |
| Food and  beverage                   |       | 18,061                               |       | —     |       | 17,998          |       |
| Other                                |       | 3,128                                |       | —     |       | 3,929           |       |
| Gross revenues                       |       | 81,243                               |       | —     |       | 78,159          |       |
| Promotional  allowances              |       | (5,870                               | )          | —     |       | (6,897          | )          |
| Net revenues                         |       | 75,373                               |       | —     |       | 71,262          |       |
|                                 |       |                                 |       |       |       |            |       |
| Operating costs  and expenses:       |       |                                 |       |       |       |            |       |
| Casino                               |       | 17,156                               |       | —     |       | 16,983          |       |
| Hotel                                |       | 12,485                               |       | —     |       | 7,749           |       |
| Food and beverage                    |       | 12,519                               |       | —     |       | 10,553          |       |
| Other                                |       | 1,501                                |       | —     |       | 3,400           |       |
| Selling, general  and administrative |       | 19,366                               |       | —     |       | 14,606          |       |
| Depreciation and  amortization       |       | 5,898                                |       | —     |       | —          |       |
| Preopening  expenses                 |       | —                               |       | 667        |       | —          |       |
|                                 |       | 68,925                               |       | 667        |       | 53,291          |       |
|                                 |       |                                 |       |       |       |            |       |
| Operating income  (loss)             |       | 6,448                                |       | (667       | )          | 17,971          |       |
|                                 |       |                                 |       |       |       |            |       |
| Other income  (expense):             |       |                                 |       |       |       |            |       |
| Interest income  (expense), net      |       | (13,783                              | )          | 25         |       | (945            | )          |
| Minority  interest                   |       | 1,213                                |       | (4         | )          | —          |       |
| Loss on warrant  valuation           |       | (17                                  | )          | —     |       | —          |       |
| Reorganization  costs                |       | —                               |       | —     |       | (2,624          | )          |
|                                 |       | (12,587                              | )          | 21         |       | (3,569          | )          |
|                                 |       |                                 |       |       |       |            |       |
| Pre-tax income  (loss)               |       | (6,139                               | )          | (646       | )          | 14,402          |       |
| Provision for  income taxes          |       | (966                                 | )          | —     |       | —          |       |
| Net income  (loss)                   |       | $                                    | (7,105     | )          | $          | (646            | )          | $ | 14,402 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | **Information** | ** ** |
| ** **                           | ** ** | **Six  Months Ended June 30,** | ** ** |
| ** **                           | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **2004**        |       |
|                                 |       |                                |       |       |       |            |       |
| Operating  revenues:                 |       |                                |       |       |       |            |       |
| Casino                               |       | $                                   | 64,240     |       | $          | —          |       | $ | 58,692 |   |
| Hotel                                |       | 57,964                              |       | —     |       | 55,441          |       |
| Food and  beverage                   |       | 37,380                              |       | —     |       | 36,901          |       |
| Other                                |       | 7,521                               |       | —     |       | 8,053           |       |
| Gross revenues                       |       | 167,105                             |       | —     |       | 159,087         |       |
| Promotional allowances               |       | (12,513                             | )          | —     |       | (14,468         | )          |
| Net revenues                         |       | 154,592                             |       | —     |       | 144,619         |       |
|                                 |       |                                |       |       |       |            |       |
| Operating costs  and expenses:       |       |                                |       |       |       |            |       |
| Casino                               |       | 34,614                              |       | —     |       | 35,131          |       |
| Hotel                                |       | 21,541                              |       | —     |       | 15,272          |       |
| Food and  beverage                   |       | 25,458                              |       | —     |       | 20,709          |       |
| Other                                |       | 3,843                               |       | —     |       | 6,836           |       |
| Selling, general  and administrative |       | 36,866                              |       | —     |       | 29,797          |       |
| Depreciation and  amortization       |       | 11,768                              |       | —     |       | —          |       |
|                                 |       |                                |       |       |       |            |       |
| Preopening  expenses                 |       | —                              |       | 954        |       | —          |       |
|                                 |       | 134,090                             |       | 954        |       | 107,745         |       |
|                                 |       |                                |       |       |       |            |       |
| Operating income  (loss)             |       | 20,502                              |       | (954       | )          | 36,874          |       |
|                                 |       |                                |       |       |       |            |       |
| Other income  (expense):             |       |                                |       |       |       |            |       |
| Interest income  (expense), net      |       | (27,418                             | )          | 50         |       | (1,912          | )          |
| Minority  interest                   |       | 1,150                               |       | (7         | )          | —          |       |
| Loss on warrant  valuation           |       | (17                                 | )          | —     |       | —          |       |
| Reorganization  costs                |       | —                              |       | —     |       | (4,173          | )          |
|                                 |       | (26,285                             | )          | 43         |       | (6,085          | )          |
|                                 |       |                                |       |       |       |            |       |
| Pre-tax income  (loss)               |       | (5,783                              | )          | (911       | )          | 30,789          |       |
| Provision for  income taxes          |       | (966                                | )          | —     |       | —          |       |
| Net income  (loss)                   |       | $                                   | (6,749     | )          | $          | (911            | )          | $ | 30,789 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

5

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | ** **                         | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                                                | ** ** | ** **                         | ** ** | ** ** | ** ** | **Information** | ** ** |
| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                                                                                | ** ** | **2005**                           | ** ** | **2004**   | ** ** | **2004**        | ** ** |
|                                                                                      |       |                               |       |       |       |            |       |
| Cash flows from  operating activities:                                                    |       |                               |       |       |       |            |       |
| Net income  (loss)                                                                        |       | $                                  | (6,749     | )          | $          | (911            | )          | $ | 30,789 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                               |       |       |       |            |       |
| Depreciation and  amortization                                                            |       | 11,768                             |       | —     |       | —          |       |
| Amortization of  debt discount and issuance costs                                         |       | 3,473                              |       | —     |       | —          |       |
| Minority  interest                                                                        |       | (1,150                             | )          | 8          |       | —          |       |
| Change in value  of warrants                                                              |       | (58                                | )          | —     |       | —          |       |
| Changes in  assets and liabilities:                                                       |       |                               |       |       |       |            |       |
| Receivables, net                                                                          |       | 811                                |       | —     |       | 2,178           |       |
| Inventories and  prepaid expenses                                                         |       | 659                                |       | —     |       | 1,783           |       |
| Deposits and  other current assets                                                        |       | (2,231                             | )          | —     |       | 535             |       |
| Deferred taxes                                                                            |       | (935                               | )          | —     |       | —          |       |
| Accounts payable                                                                          |       | 326                                |       | —     |       | (1,426          | )          |
| Accrued expenses  and other current liabilities                                           |       | 4,021                              |       | —     |       | (342            | )          |
| Net cash  provided by (used in) operating activities                                      |       | 9,935                              |       | (903       | )          | 33,517          |       |
| Cash flows from  investing activities:                                                    |       |                               |       |       |       |            |       |
| Capital  expenditures                                                                     |       | (4,953                             | )          | —     |       | (602            | )          |
| Restricted cash  and cash equivalents                                                     |       | 2,197                              |       | (50        | )          | (188            | )          |
| Advances from  affiliates converted to equity                                             |       | —                             |       | 4,402      |       | —          |       |
| Deferred  acquisition costs                                                               |       | —                             |       | (3,449     | )          | —          |       |
| Net cash (used  in) provided by investing activities                                      |       | (2,756                             | )          | 903        |       | (790            | )          |
| Cash flows from  financing activities:                                                    |       |                               |       |       |       |            |       |
| Payments under  bank facility                                                             |       | —                             |       | —     |       | (544            | )          |
| Payable-in-kind  interest added to debt principal                                         |       | 8,436                              |       | —     |       | —          |       |
| Payments on CUP  financing                                                                |       | (610                               | )          | —     |       | —          |       |
| Advances from  affiliates                                                                 |       | 651                                |       | —     |       | —          |       |
| Adequate  protection payments - secured lenders                                           |       | —                             |       | —     |       | (20,341         | )          |
| Adequate  protection payments - GECC                                                      |       | —                             |       | —     |       | (3,750          | )          |
| Net cash  provided by (used in) financing activities                                      |       | 8,477                              |       | —     |       | (24,635         | )          |
| Cash and cash  equivalents:                                                               |       |                               |       |       |       |            |       |
| Increase in cash  and cash equivalents                                                    |       | 15,656                             |       | —     |       | 8,092           |       |
| Balance,  beginning of period                                                             |       | 37,016                             |       | —     |       | 38,240          |       |
| Balance, end of  period                                                                   |       | $                                  | 52,672     |       | $          | —          |       | $ | 46,332 |   |
|                                                                                      |       |                               |       |       |       |            |       |
| Supplemental  cash flow disclosures:                                                      |       |                               |       |       |       |            |       |
| Cash paid for  interest                                                                   |       | $                                  | 14,907     |       | $          | —          |       | $ | — |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

6

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

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

** **

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

##### ** **

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

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

BH/RE,L.L.C. (“BH/RE”) is a holding company that owns 85% of EquityCo, L.L.C. (“EquityCo”).The remaining 15% of EquityCo is owned by a subsidiary of Starwood Hotels &Resorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is awholly owned subsidiary of EquityCo, and OpBiz, L.L.C. (“OpBiz”) is a whollyowned subsidiary of MezzCo. 50% of BH/RE’s voting membership interests are held by eachof Robert Earl and Douglas P. Teitelbaum, and BH/RE’s equity membership interests are held 40.75%by BH Casino and Hospitality LLC I (“BHCH I”), 18.50% by BH Casino andHospitality LLC II (“BHCH II”) (collectively “BHCH”) and 40.75% by OCSConsultants, Inc. (“OCS”).

 

BH/RE andits subsidiaries were formed to acquire, operate and renovate the AladdinResort and Casino (the “Aladdin”) located in Las Vegas, Nevada. OpBiz,an indirect subsidiary of BH/RE, completed the acquisition of the Aladdin on September 1,2004 and has begun a renovation project which, when complete, will transformthe Aladdin into the Planet Hollywood Resort and Casino (the “PH Resort”). Inconnection with the renovation of the Aladdin, OpBiz has entered into anagreement with Planet Hollywood International, Inc. (“Planet Hollywood”)and certain of its subsidiaries to, among other things, license PlanetHollywood’s trademarks, memorabilia and other intellectual property. OpBiz hasalso entered into an agreement with Sheraton Operating Corporation (“Sheraton”),a subsidiary of Starwood, pursuant to which Sheraton provides hotel management,marketing and reservation services for the hotel (the “Hotel”) that comprises aportion of the PH Resort.

 

BH/RE is aNevada limited liability company and was organized on March 31, 2003.BH/RE was formed by BHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum,a managing principal of Bay Harbour Management, L.C. (“Bay HarbourManagement”). BHCHwas formed by Mr. Teitelbaum for the purpose of holding investments inBH/RE by funds managed by Bay Harbour Management. Bay Harbour Management is aninvestment management firm. OCS is wholly owned and controlled by Robert Earland holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder,chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaumis a director of Planet Hollywood. Collectively, Mr. Earl, a trust for thebenefit of Mr. Earl’s children and affiliates of Bay Harbour Management,own substantially all of the equity of Planet Hollywood. Mr. Earldisclaims beneficial ownership of any equity of Planet Hollywood owned by thetrust.

 

***Acquisition of theAladdin***

*** ***

Aladdin Gaming, L.L.C. (“Aladdin Gaming”), which was adebtor-in-possession under Chapter 11 of the United States Bankruptcy Code,commenced its bankruptcy case in the United States Bankruptcy Court for theDistrict of Nevada, Southern Division on September 28, 2001. On April 23,2003, OpBiz and Aladdin Gaming entered into a purchase agreement pursuant towhich OpBiz agreed to acquire the Aladdin. Under the purchase agreement andpursuant to an order of the Bankruptcy Court, Aladdin Gaming conducted anauction to sell the Aladdin. On June 20, 2003, the Bankruptcy Courtdeclared OpBiz the winner of that auction and, on August 29, 2003, theBankruptcy Court entered an order confirming Aladdin Gaming’s plan ofreorganization and authorizing Aladdin Gaming to complete the sale of theAladdin to OpBiz under the purchase agreement. On September 1, 2004, OpBizacquired substantially all of the real and personal property owned or used byAladdin Gaming to operate the Aladdin, and received $15 million of workingcapital from Aladdin Gaming, including $25.7 million of cash. The acquisitionwas accounted for as a purchase and, accordingly, the purchase price andworking capital adjustments have been allocated to the underlying assetsacquired and liabilities assumed. The working capital adjustment was determinedbased on the closing balance sheet on August 31, 2004. OpBiz paid thepurchase price for the Aladdin by issuing new secured notes to Aladdin Gaming’ssecured creditors and assumed various contracts and leases entered into byAladdin Gaming in connection with its operation of the Aladdin and certain ofAladdin Gaming’s liabilities, including Aladdin Gaming’s energy serviceobligation to the third party owner of the central utility plant that supplieshot and cold

 

7

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water and emergency power to the Aladdin. At the timeof purchase, the energy service obligation was $34.0 million. Upon thecompletion of the Aladdin acquisition, OpBiz issued $510 million of new securednotes to Aladdin Gaming’s secured creditors under an Amended and Restated Loanand Facilities Agreement (the “Credit Agreement”) with a group of lenders andThe Bank of New York, Asset Solutions Division, as administrative andcollateral agent. OpBiz also simultaneously made a $14 million cash payment tothose secured creditors, which reduced the principal amount of the notes to$496 million and obtained a release of the lien on a four-acre parcel ofundeveloped property that OpBiz also acquired from Aladdin Gaming (the “TimeshareLand”). On December 10, 2004, OpBiz entered into a Timeshare PurchaseAgreement with Westgate Resorts, LTD. (“Westgate”), whereby OpBiz agreed tosell approximately four acres of the Timeshare Land to Westgate, who plans todevelop, market, manage and sell timeshare units on the land. The CreditAgreement also requires that OpBiz provide either cash or a letter of credit inthe aggregate amount of $90 million to fund the costs of the plannedrenovations to the Aladdin. In August 2004, MezzCo issued $87 million ofsenior secured notes to a group of purchasers. The net proceeds of thisfinancing were used to make the $14 million payment described above, to paycertain costs and expenses of BH/RE and its subsidiaries and affiliates relatedto the acquisition of the Aladdin, and to provide OpBiz with a portion of thefunds necessary to meet its obligations regarding the planned renovations tothe Aladdin.

 

The purchase agreement also provided that OpBiz assumesubstantially all of Aladdin Gaming’s pre-petition contracts and leases and anypost-petition contracts or leases to which OpBiz does not object. In addition,the purchase agreement provided that OpBiz offer employment to all of AladdinGaming’s employees, other than executive management, on terms and conditionssubstantially similar to their previous employment terms and conditions.

 

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

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

OpBiz iscurrently conducting a renovation project which, when complete, will transformthe Aladdin into the PH Resort. In connection with the renovation of theAladdin, OpBiz has entered into an agreement with Planet Hollywood and certainof its subsidiaries to, among other things, license Planet Hollywood’strademarks, memorabilia and other intellectual property. OpBiz has also enteredinto an agreement with Sheraton, a subsidiary of Starwood, pursuant to which Sheratonprovides hotel management, marketing and reservation services for the Hotelthat comprises a portion of the PH Resort.

 

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

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

The accompanying condensed consolidated financialstatements included herein have been prepared by the management of BH/RE,without audit, pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with U.S. generallyaccepted accounting principles have been condensed or omitted pursuant to such rules andregulations. BH/RE believes that the disclosures are adequate to make theinformation presented not misleading. In the opinion of management, alladjustments (which include normal recurring adjustments) necessary for a fairpresentation of the results for the interim periods have been made. The resultsfor the three and six months ended June 30, 2005, are not indicative ofresults to be expected for the full fiscal year. These unaudited financialstatements should be read in conjunction with the audited financial statementsand notes thereto for the year ended December 31, 2004, included in BH/RE’sAnnual Report on Form 10-K filed with the Securities and ExchangeCommission on April 15, 2005. Pursuant to Rule 302 of Regulation S-X,the registrant has included condensed statements of operations of thepredecessor for the three- and six- month periods ended June 30, 2004 and condensedstatement of cash flows of the predecessor for the six-month period ended June 30,2004.

 

8

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

##### ** **

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

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

Thecondensed consolidated financial statements are prepared in conformity withU.S. generally accepted accounting principles. Certain policies, including thedetermination of bad debt reserves, the estimated useful lives assigned toassets, asset impairment, insurance reserves and the calculation of liabilities,require that management apply significant judgment in defining the appropriateassumptions for calculating financial estimates. By their nature, thesejudgments are subject to an inherent degree of uncertainty. Management’sjudgments 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 methodologymanagement applies, BH/RE’s significant accounting policies and basis ofpresentation are discussed below, as well as in the management’s discussion andanalysis.

 

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

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

Cash andcash equivalents include cash on hand, as well as short-term investments withoriginal maturities not in excess of 90 days.

 

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

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

Restrictedcash and cash equivalents consist of approximately $94.0 million and $96.2million as of June 30, 2005 and December 31, 2004, respectively, themajority of which will be applied toward the remaining cash commitments for theplanned renovations to the Aladdin.

 

###### ***Accounts Receivable***

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

Accountsreceivable, including casino and hotel receivables, are typically non-interestbearing and are initially recorded at cost. An estimated allowance for doubtfulaccounts is maintained to reduce the receivables to their carrying amount,which approximates fair value. BH/RE estimates the allowance for doubtfulaccounts by applying standard reserve percentages to aged account balancesunder a specific dollar amount and specifically analyzes the collectibility ofeach account with a balance over the specified dollar amount, based on the ageof the account, the customer’s financial condition, collection history and anyother known information.

 

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

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

Inventoriesconsist of food and beverage, retail merchandise and operating supplies, andare stated at the lower of cost or market. Cost is determined by the first-in,first-out and specific identification methods.

 

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

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

Property and equipment are stated at cost. Recurringrepairs and maintenance costs, including items that are replaced routinely inthe casino, hotel and food and beverage departments which do not meet the Company’scapitalization policy of $10,000, are expensed as incurred. Gains or losses ondispositions of property and equipment are included in the determination ofincome. Property and equipment are generally depreciated over the followingestimated useful lives on a straight-line basis:

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

 

9

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Property and equipment and other long-lived assets areevaluated for impairment in accordance with the Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144,“*Accounting for the Impairment or Disposal ofLong-Lived Assets*.” For assets to be disposed of, the asset to besold is recognized at the lower of carrying value or fair value less costs ofdisposal. Fair value for assets to be disposed of is estimated based oncomparable asset sales, solicited offers or a discounted cash flow model.

 

Property and equipment are reviewed for impairmentwhenever indicators of impairment exist. If an indicator of impairment exists,the estimated future cash flows of the asset, on an undiscounted basis, arecompared to the carrying value of the asset. If the undiscounted cash flowsexceed the carrying value, no impairment is indicated. If the undiscounted cashflows do not exceed the carrying value, then impairment is measured based onfair value compared to carrying value, with fair value typically based on adiscounted cash flow model.

 

The property and equipment and other long-lived assetsthat BH/RE obtained in the acquisition of the Aladdin were appraised by anindependent third party. Property and equipment and the related accumulateddepreciation amounts, as well as certain intangible assets recorded in theCompany’s condensed consolidated balance sheets as of June 30, 2005, arebased on the independent third party appraisal.

 

*DebtIssuance Costs*

 

Debt issuance costs incurred in connection with theissuance of long-term debt are capitalized and amortized to interest expenseover the expected terms of the related debt agreements using the effectiveinterest method and are included in other assets on BH/RE’s consolidatedbalance sheets. Debt issuance costs, net totaled approximately $7.8 million and$8.5 million as of June 30, 2005 and December 31, 2004, respectively.

 

*Intangible Assets*

 

In connection with the purchase of the Aladdin and asa result of an independent appraisal of the assets purchased, BH/RE recordedintangible assets, which consist of a customer list and trade name, on its condensedconsolidated balance sheets at June 30, 2005. The customer list was valuedat approximately $2.7 million at the time of purchase and at June 30, 2005,had a net book value of approximately $2.1 million. The trade name was valuedat approximately $1.0 million at the time of purchase and at June 30, 2005,had a net book value of approximately $0.4 million. The customer list and tradename will be amortized using the straight-line method over a useful life of 4years and 1.5 years, respectively. The amortization expense related to thecustomer list and trade name for the three and six months ended June 30,2005, totaled approximately $0.3 million and $0.7 million, respectively.

 

*DerivativeInstruments and Hedging Activities*

 

BH/RE has issued warrantsto provide further consideration to the holders of the Senior Notes andMezzanine Financing. BH/RE accounts for the senior note warrants in EquityCo asembedded derivative instruments in accordance with SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities,*”and SFAS No. 138, “*Accounting for CertainDerivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133*”.The warrants issued in conjunction with the mezzanine financing transactionentered into by MezzCo contain a net cash settlement, and therefore areaccounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock*”. Both SFAS No. 133 and EITF00-19 require that the warrants be recognized as liabilities, with changes infair value affecting net income.

 

10

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###### ***Revenue Recognition and PromotionalAllowances***

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

Casino revenues are recognized as the net win fromgaming activities, which is the difference between gaming wins and losses.Hotel revenue recognition criteria are generally met at the time of occupancy.Food and beverage revenue recognition criteria are generally met at the time ofservice. Deposits for future hotel occupancy or food and beverage services arerecorded as deferred income until revenue recognition criteria are met.Cancellation fees for hotel and food and beverage services are recognized uponcancellation by the customer as defined by a written contract entered into withthe customer. All other revenues are recognized as the service is provided.Revenues include the retail value of food, beverage, rooms, entertainment andmerchandise provided on a complimentary basis to customers. Such complimentaryamounts are then deducted from revenues as promotional allowances on BH/RE’sconsolidated statements of operations. The estimated departmental costs ofproviding such promotional allowances are included in casino costs and expensesand consist of the following (amounts in thousands):

 
| ** **                            | ** ** | ** **                           | ** ** | ** **                         | ** ** | **Predecessor   Information** | ** ** | ** ** | ** ** | ** ** | ** ** | **Predecessor   Information** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|------------|------------|------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                            | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2004**                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2004**                      | ** ** |
| Rooms                                 |       | $                                    | 823        |                               | $          | —                        |       | $          | 903        |       | $          | 1,680                         |       | $ | — |   | $ | 1,818 |   |
| Food and  Beverage                    |       | 2,546                                |       | —                             |       | 2,648                         |       | 5,009      |       | —     |       | 5,460                         |       |
| Other                                 |       | 219                                  |       | —                             |       | 228                           |       | 405        |       | —     |       | 484                           |       |
| Total cost of  promotional allowances |       | $                                    | 3,588      |                               | $          | —                        |       | $          | 3,779      |       | $          | 7,094                         |       | $ | — |   | $ | 7,762 |   |
|                                       |            |                                      |            |                                    |            |                               |            |            |            |            |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

The Aladdin’s slot club members earn points based ongaming activity, which can be redeemed for cash. A liability is recorded forthe estimated cost of the outstanding points accrued under the slot clubprogram. The accrued slot club point liability was approximately $1.5 millionand $1.9 million as of June 30, 2005 and December 31, 2004,respectively.

 

*Advertising Costs*

 

Advertising costs are expensed as incurred andincluded in selling, general and administrative costs and expenses. Advertisingcosts totaled approximately $1.4 million and $2.4 for the three and six monthsended June 30, 2005, respectively for BH/RE.

 

*Income Taxes*

 

The condensed consolidated financial statementsinclude the operations of BH/RE and its controlled subsidiaries: EquityCo,MezzCo, and OpBiz. BH/RE and EquityCo are limited liability companies and aretaxed as partnerships for federal income tax purposes. MezzCo has elected to betaxed as a corporation for federal income tax purposes. OpBiz, a wholly ownedsubsidiary of MezzCo, will be treated as a division of MezzCo for federalincome tax purposes, and accordingly, will also be subject to federal incometaxes.

 

MezzCo and OpBiz 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 futuretax benefits to the extent that realization of such benefits are more likelythan not. Otherwise, a valuation allowance is applied.

 

MezzCo recorded a valuation allowance at June 30, 2005against the deferred tax asset established on the Mezzanine Financingpayable-in-kind interest. Since the Mezzanine Financing is subject to theprovisions of Internal Revenue Code Section 163(e)(5), a portion of thepayable-in-kind interest will be permanently, non-deductible for tax purposesand the balance of such interest will only be deductible when paid in cash. Asa result, Management believes it is more likely than not that this deferred taxasset will not be realized and has therefore recorded a full valuationallowance against this deferred tax asset. The income tax provision for thesecond quarter primarily relates to the establishment of this valuationallowance.

 

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

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

As of June 30,2005, BH/RE’s membership interests had not been unitized and BH/RE’s members donot presently intend to unitize these membership interests. Accordingly,management of BH/RE has excluded earnings per share data required pursuant toSFAS No. 128, “*Earnings Per Share,*”because management believes that such disclosures would not be meaningful tothe financial statement presentation.

 

*Variable Interest Entities*

 

In January 2003, the FASB issued FIN 46, “*Consolidation of Variable Interest Entities*.” The objectiveof FIN 46 is to improve financial reporting by companies involved with variableinterest entities. FIN 46 changes certain consolidation requirements byrequiring a variable interest entity to be consolidated by a company that issubject to a majority of the risk of loss from the variable interest entity’sactivities or receives a majority of the entity’s residual returns or both.BH/RE has adopted FIN 46 and has determined that all variable interest entitiesthat it has an interest in at June 30, 2005, do not require consolidationunder the provisions of FIN 46, as BH/RE is not subject to a majority ofthe risk of loss or entitled to receive a majority of the variable interestentity’s residual returns.

 

**3.****                                      RECEIVABLES**

 

Accountsreceivable consist of the following (in thousands):

 
| ** **                      | ** ** | **June 30,    2005** | ** ** | **December 31,    2004** | ** ** |
|---------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **(unaudited)**           | ** ** | ** **                    | ** ** |
| Casino                          |       | $                         | 5,612      |                          | $          | 5,712 |   |
| Hotel                           |       | 8,077                     |       | 7,735                         |       |
| Other                           |       | 543                       |       | 1,433                         |       |
|                            |       | 14,232                    |       | 14,880                        |       |
| Allowance for doubtful accounts |       | (2,417                    | )          | (2,254                        | )          |
| Receivables, net                |       | $                         | 11,815     |                          | $          | 12,626 |   |

 

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

 

Property and equipment and the related accumulateddepreciation consist of the following (in thousands):

 
| ** **                         | ** ** | **June 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(unaudited)**          | ** ** | ** **                   | ** ** |
| Land                               |       | $                        | 97,979     |                         | $          | 97,979 |   |
| Building and  improvements         |       | 367,234                  |       | 367,234                      |       |
| Furniture,  fixtures and equipment |       | 36,287                   |       | 35,172                       |       |
| Construction in  progress          |       | 5,625                    |       | 1,787                        |       |
|                               |       | 507,125                  |       | 502,172                      |       |
| Accumulated  depreciation          |       | (18,485                  | )          | (7,391                       | )          |
| Property and  equipment, net       |       | $                        | 488,640    |                         | $          | 494,781 |   |

 

Of the $98.0 million in land value, $29.5 million hasbeen allocated to the Timeshare Land.

 

Depreciation expense was approximately $11.1 millionand $7.4 million for the six months ended June 30, 2005, and the yearended December 31, 2004, respectively, for BH/RE.

 

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**5.****                                      ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expenses and other current liabilities consistof the following (in thousands):

 
| ** **                                      | ** ** | **June 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**          | ** ** | ** **                   | ** ** |
| Accrued payroll  and related                    |       | $                        | 11,405     |                         | $          | 10,652 |   |
| Accrued interest  payable                       |       | 7,799                    |       | 6,498                        |       |
| Accrued taxes                                   |       | 4,788                    |       | 2,500                        |       |
| Advance deposits                                |       | 3,845                    |       | 4,040                        |       |
| Accrued gaming  and related                     |       | 3,531                    |       | 4,395                        |       |
| Current deferred  tax liability                 |       | 1,689                    |       | —                       |       |
| Accrued and  advance commissions                |       | 1,498                    |       | 1,245                        |       |
| Accrued legal  fees                             |       | 682                      |       | 701                          |       |
| Accrued utilities                               |       | 643                      |       | 540                          |       |
| Accrued Central  Utility Plant charges          |       | 406                      |       | 1,287                        |       |
| Accrued  acquisition costs                      |       | 228                      |       | 796                          |       |
| Other accrued  expenses and current liabilities |       | 3,706                    |       | 3,545                        |       |
| Accrued expenses  and other current liabilities |       | $                        | 40,220     |                         | $          | 36,199 |   |

 

**6.****                                      LONG-TERMDEBT**

 

Long-term debt consists of the following (inthousands):

 
| ** **                                                                                     | ** ** | **June 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                     | ** ** | **(unaudited)**          | ** ** | ** **                   | ** ** |
| Term Loan A -  $500 million senior notes, net of unamortized discount of $28,434 and $31,162   |       | $                        | 457,490    |                         | $          | 454,838 |   |
| Term Loan B -  $10 million senior notes                                                        |       | 10,556                   |       | 10,202                       |       |
| Mezzanine senior  secured subordinated notes, net of unamortized discount of $4,079 and $4,262 |       | 95,736                   |       | 87,472                       |       |
| Northwind  Aladdin obligation under capital lease                                              |       | 32,960                   |       | 33,570                       |       |
| Total long-term  debt                                                                          |       | 596,742                  |       | 586,082                      |       |
| Current portion  of long-term debt                                                             |       | (1,342                   | )          | (1,268                       | )          |
| Total long-term  debt, net                                                                     |       | $                        | 595,400    |                         | $          | 584,814 |   |

 

***Credit Agreement***

 

The Aladdin acquisition and the planned renovationswere funded by the issuance of $510 million of secured notes to Aladdin Gaming’ssecured creditors pursuant to a Credit Agreement. OpBiz’s obligations under theCredit Agreement are secured by liens on all of its assets, including amortgage on its real property, the Hotel, the Casino and the Theater for thePerforming Arts (“TPA”), and security interests in its accounts receivable,inventory, equipment and intangible assets, excluding the Timeshare Land. TheCredit Agreement is guaranteed by MezzCo and MezzCo secured its guarantee bypledging its membership interests in OpBiz to the lenders. The Credit Agreementmatures on August 31, 2010.

 

The loans under theCredit Agreement are evidenced by $500 million of Term Loan A notes and $10million of Term Loan B notes. Upon issuance of the notes, BH/RE simultaneouslymade a $14 million cash payment to the holders of the Term Loan A notes toreduce the principal amount of the Term Loan A notes to $486 million andobtained a release of the lien on the Timeshare Land.

 

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The scheduled principalpayments on the Term Loan A notes are as follows:

 

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

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

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

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

•        the thenunpaid balance amount of Term Loan A notes on August 31, 2010.

 

OpBiz pays interest onthe outstanding Term Loan A notes quarterly, in cash, at the London Inter-BankOffered Rate, or LIBOR, plus an applicable margin that increases over time.Until the earlier of August 31, 2007 or OpBiz’s accumulation of certainpermitted cash reserves, OpBiz’s interest payment will not exceed its quarterlyearnings before interest, taxes, depreciation and amortization (“EBITDA”),reduced by certain permitted reductions (as defined in the Credit Agreement) ,divided by a factor of 1.20. Interest on the Term Loan B notes will accrue at arate of LIBOR plus 4% and will be added quarterly to the outstanding principalamount of the Term Loan B notes and will be paid when OpBiz pays off the TermLoan B notes. OpBiz is also required to pay an annual administrative fee andcertain other fees and expenses of the lender under the Credit Agreement.

 

OpBiz is required toprepay amounts outstanding under the Credit Agreement:

 

•        with excesscash flow (as defined in the Credit Agreement) after certain permitted cashreserves are accumulated;

•        in scheduledquarterly amounts beginning after August, 31, 2006;

•        with certainamounts received in connection with the development of the Timeshare Landadjacent to the Desert Passage (as defined in the underlying agreement);

•        with anamount equal to the difference between what should have been spent onrenovation capital expenditures and what was actually spent thereon if (i) anaggregate amount of $72.0 million is not spent on renovation capitalexpenditures by August 31, 2006, or (ii) an aggregate amount of $81.0million is not spent on renovation capital expenditures by February 28,2007 or (iii) an aggregate amount of $90.0 million is not spent onrenovation capital expenditures by August 31, 2007; and

•        with theproceeds of certain asset sales.

 

In particular, afterOpBiz accumulates certain permitted cash reserves, OpBiz is required to pay100% of its excess cash flow (as defined in the Credit Agreement) fromoperations to the lenders under the Credit Agreement. That percentage decreasesto 75%, then 50%, if OpBiz meets certain targeted ratios of total debt toEBITDA, or certain leverage ratios, for any two consecutive fiscal quarters.

 

The Credit Agreementincludes covenants that, among other things, restrict OpBiz’s ability to sellassets, make distributions to its owners, other than distributions for taxes,incur or prepay additional indebtedness, enter into transactions withaffiliates, incur liens, make investments, make capital expenditures,****develop the Timeshare Land adjacent to theDesert Passage and enter into material contracts. In addition, OpBiz isrequired to maintain certain levels of EBITDA that increase over time and,beginning August 31, 2007, maintain certain ratios of EBITDA to interestexpense that increase over time and maintain certain leverage ratios thatdecrease over time.

 

The Credit Agreementcontains customary events of default, including a change of control of OpBiz,the occurrence of a default under the terms of any indebtedness of MezzCo, adefault by OpBiz under the Hotel management contract or termination of Sheratonas the manager of the Hotel (unless OpBiz replaces Sheraton with anotherapproved manager within 30 days of such termination), a default or terminationof the Planet Hollywood license agreement and certain defaults under theagreements with Boulevard Invest or Northwind Aladdin.

 

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BH/REhas issued warrants to purchase 2.94% of its ownership interest in EquityCo tothe lenders under the Credit Agreement. The warrants can only be exercised uponthe occurrence of (i) a liquidity event or distribution (such as throughthe sale of the hotel/casino); (ii) a public sale of equity securities ofEquityCo, MezzCo or OpBiz; (iii) payment in full of the obligations underthe Credit Agreement. The warrants can either be settled in cash or in othermembership interests upon exercise. The estimated fair value of the warrants wasapproximately $0.1 million as of June 30, 2005.  These warrants are recorded separately fromthe related debt within other long-term liabilities.

 

***Mezzanine Financing***

 

In August 2004,MezzCo entered into a mezzanine financing transaction (the “Mezzanine Financing”)with a group of purchasers. Pursuant to the Mezzanine Financing, MezzCo issued$87 million of 16% Senior Secured Subordinated Notes and warrants to purchase17,500 of its units representing membership interests equal to 17.5% of thefully diluted equity of MezzCo. The gross offering proceeds of the MezzanineFinancing were deposited into an escrow account and, in conjunction with the closingof the Aladdin acquisition, were used to (i) pay approximately $16.1million of fees and expenses related to the acquisition of the Aladdin, (ii) fundthe $14 million lien release payment required under the Credit Agreement, and (iii) funda portion of the planned renovations to the Aladdin. The notes mature in August 2011and accrue interest at a rate of 16% per annum. Interest on the notes ispayable-in-kind or, at the option of MezzCo, in cash. The warrants areexercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereof.Currently, all of MezzCo’s voting membership interests are represented by unitsowned by EquityCo. In addition to customary anti-dilution protections, thenumber of units representing MezzCo membership interests issuable upon exerciseof the warrants may be increased from time to time upon the occurrence ofcertain events as described in the warrants. The maximum aggregate increase is24%, following which the warrants would represent rights to purchase 45.5% ofthe units representing membership interests of MezzCo, on a fully-dilutedbasis. Holders of the warrants and any securities issued upon exercise of thewarrants may require MezzCo to redeem such securities commencing in August 2011at a redemption price based upon a formula set forth in the warrants. Startingin August 2008, in the event the Company fails to achieve certain operationalthresholds, the holders of the MezzCo warrants, and securities issued uponexercise thereof, have the right to assume control of MezzCo and OpBiz andconduct a sale of the equity of, or all or substantially all of the assets of,either MezzCo or OpBiz provided that all Control Conditions (as defined in theInvestor Rights Agreement) are met. These rights are subject to (i) repaymentin full of all indebtedness that is senior to the notes (including allindebtedness of OpBiz under the Credit Agreement), (ii) certain covenantsrelated to OpBiz’s ability to achieve targeted levels of EBITDA and (iii) theprior approval of the Nevada gaming authorities. These rights expire uponcompletion of a public offering by MezzCo or OpBiz. In connection with theMezzanine Financing, OpBiz’s obligation to make expenditures on renovations tothe Aladdin was increased from $90 million, as required under the CreditAgreement, to $100 million.

 

As of June 30, 2005,the MezzCo financing was recorded net of the unamortized balance of the putwarrants of approximately $4.1 million. The estimated fair value of thewarrants was approximately $4.1 million at June 30, 2005 and December 31,2004, and is recorded within other long-term liabilities.

 

***Energy Services Agreement***

 

Northwind Aladdin (“Northwind”), a third party, ownsand operates a central utility plant on land leased from OpBiz. The plantsupplies hot and cold water and emergency power to the Aladdin under a contractbetween Aladdin Gaming and Northwind. OpBiz has assumed the energy serviceagreement, which expires in 2018. Under the agreement, OpBiz is required to payNorthwind a monthly consumption charge, a monthly operational charge, a monthlydebt service payment and a monthly return on equity payment. Payments under theNorthwind agreement total approximately $0.5 million per month.

 

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**7.****                                      MEMBERSHIPINTERESTS**

 

The non-voting interests in BH/RE are owned 40.75% byBHCH I, 18.50% by BHCH II (collectively “BHCH”) and 40.75% by OCS and thevoting interests are owned 50% by Douglas P. Teitelbaum and 50% by Robert Earl.BHCH is controlled by Mr. Teitelbaum, managing principal of Bay HarbourManagement, an investment management firm. BHCH was formed by Mr. Teitelbaumfor the purpose of holding investments in BH/RE by funds managed by Bay HarbourManagement. OCS is wholly-owned and controlled by Mr. Earl and holds Mr. Earl’sinvestment in BH/RE. Mr. Earl is the founder, chairman and chief executiveofficer of Planet Hollywood and Mr. Teitelbaum is a director of PlanetHollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’schildren and affiliates of Bay Harbour Management, own substantially all of theequity of Planet Hollywood.

 

BH/RE owns 85% of the membership interests in EquityCoand Starwood owns 15%. MezzCo is a wholly owned subsidiary of EquityCo, and OpBizis a wholly owned subsidiary of MezzCo. BH/RE and Starwood made total equitycontributions of $20 million each in EquityCo to fund the costs of the plannedrenovations to the Aladdin. Starwood’s equity interest in EquityCo is reflectedas minority interest in the accompanying condensed consolidated financial statements.BH/RE recorded minority interest income related to the Starwood interests ofapproximately $1.2 million and $1.2 million for the three and six months ended June 30,2005, respectively, and minority expense of approximately $4,000 and $7,000 forthe three and six months ended June 30, 2004, respectively.

 

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

 

**8.****                                      RELATEDPARTY TRANSACTIONS**

 

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

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

Since itsformation, certain members or affiliates of BH/RE have paid expenses totalingapproximately $20.0 million related to the Aladdin acquisition and fundeddeposits under the purchase agreement on behalf of BH/RE and its subsidiaries.On September 1, 2004, $4.25 million of advances from each of BHCH and OCS,which were used to fund the deposit required under the purchase agreement, werecontributed to BH/RE as capital. Additionally, on September 1, 2004, theadvances made by BHCH and Planet Hollywood to pay transaction fees and depositswere repaid.

 

***Planet HollywoodLicensing Agreement***

 

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

 

In addition to being a manager of BH/RE, Mr. Earlis the chief executive officer and chairman of the board of directors of PlanetHollywood. Similarly, Mr. Teitelbaum is a manager of BH/RE and a directorof 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.

 

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***Sheraton Hotel Management Contract***

 

OpBiz and Sheraton haveentered into a management contract pursuant to which Sheraton provides hotelmanagement services to the Hotel, assists OpBiz in the management, operationand promotion 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 that commenced 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. Starwood management fees totaled approximately $2.6 millionand $5.7 million for the three and six months ended June 30, 2005,respectively.

 

**9.****                                      INCOMETAXES**

 

The condensedconsolidated financial statements include the operations of BH/RE and itscontrolled subsidiaries: EquityCo, MezzCo, and OpBiz. BH/RE and EquityCo arelimited liability companies and are taxed as partnerships for federal incometax purposes. MezzCo has elected to be taxed as a corporation for federalincome tax purposes. OpBiz, a wholly owned subsidiary of MezzCo, will betreated as a division of MezzCo for federal income tax purposes, andaccordingly, will also be subject to federal income taxes.

 

MezzCo and OpBiz accountfor income taxes 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 future tax benefits to the extent that realization of suchbenefits are more likely than not. Otherwise, a valuation allowance is applied.

 

MezzCo recorded avaluation allowance at June 30, 2005 against the deferred tax asset establishedon the Mezzanine Financing payable-in-kind interest. Since the MezzanineFinancing is subject to the provisions of Internal Revenue Code Section163(e)(5), a portion of the payable-in-kind interest will be permanently,non-deductible for tax purposes and the balance of such interest will only bedeductible when paid in cash. As a result, Management believes it is morelikely than not that this deferred tax asset will not be realized and hastherefore recorded a full valuation allowance against this deferred tax asset.The income tax provision for the second quarter primarily relates to theestablishment of this valuation allowance.

 

**10.****                               COMMITMENTSAND CONTINGENCIES**

 

***CulinaryUnion Negotiations***

 

In December 2004, amajority of the employees of the Aladdin who could be represented by theculinary union, requested union representation. Negotiations between managementof OpBiz and the culinary union commenced on March 1, 2005 and arecontinuing as of June 30, 2005. Continued unionization efforts, pressureto unionize or other forms of collective bargaining could increase our laborcosts.

 

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

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

BH/RE isnot currently a party to any material legal proceedings.

 

17

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## **ITEM 2.**  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## ** **

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

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

Set forth below is a discussion of the financialcondition and results of operations of BH/RE and its subsidiaries for theperiods covered in this report. The discussion of operations herein focuses onevents and the revenues and expenses during the three and six months ended June 30,2005, as compared to the three and six months ended June 30, 2004, as ifthere were no change in ownership of the Aladdin.

 

The following management’s discussion and analysis offinancial condition and results of operations should be read in conjunctionwith the consolidated financial statements and the related notes to the consolidatedfinancial statements of BH/RE and Aladdin Gaming, respectively, the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in BH/RE’s Annual Report on Form 10-K filed with the Securitiesand Exchange Commission on April 15, 2005, and the unaudited condensed consolidatedfinancial statements and notes hereto included in Part I, Item 1 of thisreport.

 

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

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

###### ***Significant Accounting Policies andEstimates***

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

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

 

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

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

Property and equipment are stated at cost. Recurringrepairs and maintenance costs, including items that are replaced routinely inthe casino, hotel and food and beverage departments which do not meet our capitalizationpolicy of $10,000, are expensed as incurred. Gains or losses on dispositions ofproperty and equipment are included in the determination of income. Propertyand equipment are generally depreciated over the following estimated usefullives on a straight-line basis:

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

 

Property and equipment and other long-lived assets areevaluated for impairment in accordance with the Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144,“*Accounting for the Impairment or Disposal ofLong-Lived Assets*.” For assets to be disposed of, the asset to besold is recognized at the lower of carrying value or fair value less costs ofdisposal. Fair value for assets to be disposed of is estimated based oncomparable asset sales, solicited offers or a discounted cash flow model.

 

Property and equipment are reviewed for impairmentwhenever indicators of impairment exist. If an indicator of impairment exists,the estimated future cash flows of the asset, on an undiscounted basis, arecompared to the carrying value of the asset. If the undiscounted cash flowsexceed the carrying value, no impairment is indicated. If the undiscounted cashflows do not exceed the carrying value, then impairment is measured based onfair value compared to carrying value, with fair value typically based on adiscounted cash flow model.

 

18

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*DerivativeInstruments and Hedging Activities*

 

BH/RE has issued warrantsto provide further consideration to the holders of the Senior Notes andMezzanine Financing. BH/RE accounts for the senior note warrants in EquityCo asembedded derivative instruments in accordance with SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities,*”and SFAS No. 138, “*Accounting for CertainDerivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133*”.The warrants issued in conjunction with the Mezzanine Financing contain a netcash settlement, and therefore are accounted for in accordance with EmergingIssues Task Force (“EITF”) 00-19, “*Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*”. Both SFAS No. 133 and EITF 00-19 require that thewarrants be recognized as liabilities, with changes in fair value affecting netincome.

 

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

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

Casino revenues are recognized as the net win fromgaming activities, which is the difference between gaming wins and losses. Allother revenues are recognized as the service is provided. Revenues include theretail value of food, beverage, rooms, entertainment and merchandise providedon a complimentary basis to customers. Such complimentary amounts are thendeducted from revenues as promotional allowances on our condensed consolidatedstatements of operations. The estimated departmental costs of providing suchpromotional allowances are included in casino costs and expenses.

 

Hotel revenue recognition criteria are generally metat the time of occupancy. Food and beverage revenue recognition criteria aregenerally met at the time of service. Deposits for future hotel occupancy orfood and beverage services are recorded as deferred income until revenuerecognition criteria are met. Cancellation fees for hotel and food and beverageservices are recognized upon cancellation by the customer as defined by awritten contract entered into with the customer.

 

*IncomeTaxes*

 

The condensed consolidated financial statementsinclude the operations of BH/RE and its controlled subsidiaries: EquityCo,MezzCo, and OpBiz. BH/RE and EquityCo are limited liability companies and aretaxed as partnerships for federal income tax purposes. MezzCo has elected to betaxed as a corporation for federal income tax purposes. OpBiz, a wholly ownedsubsidiary of MezzCo, will be treated as a division of MezzCo for federalincome tax purposes, and accordingly, will also be subject to federal incometaxes.

 

MezzCo and OpBiz 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 futuretax benefits to the extent that realization of such benefits are more likelythan not. Otherwise, a valuation allowance is applied.

 

MezzCo recorded a valuation allowance at June 30, 2005against the deferred tax asset established on the Mezzanine Financingpayable-in-kind interest. Since the Mezzanine Financing is subject to theprovisions of Internal Revenue Code Section 163(e)(5), a portion of thepayable-in-kind interest will be permanently, non-deductible for tax purposesand the balance of such interest will only be deductible when paid in cash. Asa result, Management believes it is more likely than not that this deferred taxasset will not be realized and has therefore recorded a full valuationallowance against this deferred tax asset. The income tax provision for thesecond quarter primarily relates to the establishment of this valuationallowance.

 

19

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

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

As of June 30,2005, our membership interests had not been unitized and our members do notpresently intend to unitize these membership interests. Accordingly, we haveexcluded earnings per share data required pursuant to SFAS No. 128, “*Earnings Per Share,*” because we believe that suchdisclosures would not be meaningful to the financial statement presentation.

 

*SheratonHotel Management Contract*

 

OpBiz and Sheraton have entered into a managementcontract pursuant to which Sheraton provides hotel management services to theHotel, assists OpBiz in the management, operation and promotion of the Hoteland permits OpBiz to use the Sheraton brand and trademarks in the promotion ofthe Hotel. OpBiz pays Sheraton a monthly fee of 4% of gross Hotel revenue and certainfood and beverage outlet revenues and 2% of rental income from third-partyleases in the Hotel. The management contract has a 20-year term that commencedon the completion of the Aladdin acquisition and is subject to certaintermination provisions by either OpBiz or Sheraton. Sheraton is a wholly ownedsubsidiary of Starwood, which has a 15% equity interest in EquityCo and has theright to appoint two members to the EquityCo board of managers. Starwoodmanagement fees totaled approximately $2.6 million and $5.7 million for thethree and six months ended June 30, 2005, respectively.

 

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

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

The following table highlights the results ofoperations of the Aladdin for the three and six months ended June 30, 2005and 2004, respectively (dollars in thousands, unaudited). The amounts includedin the balances for the three and six months ended June 30, 2004 includethe results from both BH/RE and Aladdin Gaming.

 
| ** **                           | ** ** | **Three months ended   June 30,** | ** ** | **Percent** | ** ** | **Six months ended   June 30,** | ** ** | **Percent** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|-------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004**    | ** ** | **Change**                           | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                 |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Net revenues                         |       | $                                      | 75,373     |        | $          | 71,262                               |       | 5.8         | %          | $ | 154,592 |   | $ | 144,619 |   | 6.9 | % |
| Operating  expenses:                 |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Casino                               |       | 17,156                                 |       | 16,983      |       | 1.0                                  | %          | 34,614      |       | 35,131 |   | (1.5 | )% |
| Hotel                                |       | 12,485                                 |       | 7,749       |       | 61.1                                 | %          | 21,541      |       | 15,272 |   | 41.0 | % |
| Food and  beverage                   |       | 12,519                                 |       | 10,553      |       | 18.6                                 | %          | 25,458      |       | 20,709 |   | 22.9 | % |
| Other                                |       | 1,501                                  |       | 3,400       |       | (55.9                                | )%         | 3,843       |       | 6,836 |   | (43.8 | )% |
| Selling, general  and administrative |       | 19,366                                 |       | 14,606      |       | 32.6                                 | %          | 36,866      |       | 29,797 |   | 23.7 | % |
| Depreciation and  amortization       |       | 5,898                                  |       | —      |       | 100.0                                | %          | 11,768      |       | — |   | 100.0 | % |
| Preopening  expenses                 |       | —                                 |       | 667         |       | (100.0                               | )%         | —      |       | 954 |   | (100.0 | )% |
| Operating income                     |       | $                                      | 6,448      |        | $          | 17,304                               |       | (62.7       | )%         | $ | 20,502 |   | $ | 35,920 |   | (42.9 | )% |

 

Net revenues for the three and six months ended June 30,2005, improved over that of the three and six months ended June 30, 2004 dueto an improvement in general economic conditions during the first half of 2005.The decrease in operating income was primarily due to depreciation not beingrecorded during the first eight months of 2004 while Aladdin Gaming wasundergoing bankruptcy proceedings, as well as general repairs and maintenanceexpenses incurred in the second quarter of 2005 related to upgrades andamenities in the Hotel rooms.

 

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The following tablehighlights the various sources of our revenues and expenses for the three andsix months ended June 30, 2005 and 2004 (dollars in thousands, unaudited).The amounts included in the balances for the three and six months ended June 30,2004 include the results from both BH/RE and Aladdin Gaming.

 
| ** **                                    | ** ** | **Three months ended   June 30,** | ** ** | **Percent** | ** ** | **Six months ended   June 30,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|-------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **2005**                               | ** ** | **2004**    | ** ** | **Change**                           | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                          |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Casino revenues                               |       | $                                      | 31,327     |        | $          | 29,303                               |       | 6.9         | %          | $ | 64,240 |   | $ | 58,692 |   | 9.5 | % |
| Casino expenses                               |       | 17,156                                 |       | 16,983      |       | 1.0                                  | %          | 34,614      |       | 35,131 |   | (1.5 | )% |
| *Margin*                                      | * *   | *45.2*                                 | *%*        | *42.0*      | *%*        | * *                             | * *   | *46.1*      | *%*        | *40.1* | % |   |   |
|                                          |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Hotel revenues                                |       | $                                      | 28,727     |        | $          | 26,929                               |       | 6.7         | %          | $ | 57,964 |   | $ | 55,441 |   | 4.6 | % |
| Hotel expenses                                |       | 12,485                                 |       | 7,749       |       | 61.1                                 | %          | 21,541      |       | 15,272 |   | 41.0 | % |
| *Margin*                                      | * *   | *56.5*                                 | *%*        | *71.2*      | *%*        | * *                             | * *   | *62.8*      | *%*        | *72.5* | % |   |   |
|                                          |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Food and  beverage revenues                   |       | $                                      | 18,061     |        | $          | 17,998                               |       | 0.4         | %          | $ | 37,380 |   | $ | 36,901 |   | 1.3 | % |
| Food and  beverage expenses                   |       | 12,519                                 |       | 10,553      |       | 18.6                                 | %          | 25,458      |       | 20,709 |   | 22.9 | % |
| *Margin*                                      | * *   | *30.7*                                 | *%*        | *41.4*      | *%*        | * *                             | * *   | *31.9*      | *%*        | *43.9* | % |   |   |
|                                          |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Other revenues                                |       | $                                      | 3,128      |        | $          | 3,929                                |       | (20.4       | )%         | $ | 7,521 |   | $ | 8,053 |   | (6.6 | )% |
| Other expenses                                |       | 1,501                                  |       | 3,400       |       | (55.9                                | )%         | 3,843       |       | 6,836 |   | (43.8 | )% |
|                                          |       | *52.0*                                 | *%*        | *13.5*      | *%*        | * *                             | * *   | *48.9*      | *%*        | *15.1* | *%* | * * | * * |
|                                          |       |                                   |       |        |       |                                 |       |        |       |   |   |   |   |
| Selling, general  and administrative expenses |       | $                                      | 19,366     |        | $          | 14,606                               |       | 32.6        | %          | $ | 36,866 |   | $ | 29,797 |   | 23.7 | % |
| *Percent  of net revenues*                    | * *   | *25.7*                                 | *%*        | *20.5*      | *%*        | * *                             | * *   | *23.8*      | *%*        | *20.6* | % |   |   |

 

*Casino*

 

Casino revenue is derived primarily from patronswagering on slot machines, table games and other gaming activities. Table gamesgenerally include blackjack or twenty one, craps, baccarat and roulette. Othergaming activities include the race and sports books, poker and keno. Casinorevenue is defined as the win from gaming activities, computed as thedifference between gaming wins and losses.

 

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

 

Casino revenues increased6.9% to $31.3 million for the three months ended June 30, 2005, ascompared to $29.3 million for the three months ended June 30, 2004. Casinorevenues increased 9.5% to $64.2 million for the six months ended June 30,2005, as compared to $58.7 million for the six months ended June 30, 2004.Table games revenue for the three and six months ended June 30, 2005,increased by approximately $1.1 million and $3.1 million, respectively as comparedto the three and six months ended June 30, 2004. The increase in tablegames revenue was due to an increase in win percentage to 18.1% from 16.6% forthe three months ended June 30, 2005 and 2004, respectively and anincrease to 18.5% from 16.5% for the six months ended June 30, 2005 and2004, respectively. Slot revenue for the three and six months ended June 30,2005, decreased by approximately $0.2 million and $1.5 million, respectively,as compared to the three and six months ended June 30, 2004. The decreasein slot revenue was the result of a decrease in slot handle of approximately$30.3 million and $18.9 million over the same three- and six-month periods. Thedecrease in the slot handle was a result of the elimination of severalmarketing initiatives that were in place in 2004, which included promotionalplay offers that were included in slot handle. The elimination of thepromotional expenses associated with these initiatives, as well as otherrelated expenses, assisted in the improved casino operating margin. Combinedrevenues from the race and sports books, poker and keno increased by $0.8million and $2.3 million for the three and six months ended June 30, 2005,respectively as compared to the three and six months ended June 30, 2004. Theincrease in other gaming revenues was due to the addition of poker in October 2004and keno in April 2005.

 

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Casino expenses increased1.0% to $17.2 million for the three months ended June 30, 2005, ascompared to $17.0 million for the three months ended June 30, 2004. Casinoexpenses decreased 1.5% to $34.6 million for the six months ended June 30,2005, as compared to $35.1 million for the six months ended June 30, 2004.The casino margin increased 3.2 and 6.0 percentage points in comparing the samethree- and six-month periods. The increase in casino margin was mainly due to operatingefficiencies put in place by OpBiz as a result of the purchase of the Aladdin.The operating efficiencies resulted primarily from the elimination of certaincasino promotional events that were unprofitable or did not meet profitabilityguidelines.

 

*Hotel*

 

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

 

Hotel revenues increased6.7% to $28.7 million for the three months ended June 30, 2005, ascompared to $26.9 million for the three months ended June 30, 2004. Hoteloccupancy percentages increased 0.6 percentage points to 98.9% for the threemonths ended June 30, 2005, as compared to 98.3% for the three monthsended June 30, 2004. Average daily room rates increased to $123 for thethree months ended June 30, 2005, as compared to $117 for the three monthsended June 30, 2004, resulting in increased Hotel revenues. The increasein Hotel revenues and average daily room rates are primarily due to animprovement in general economic conditions during the second quarter of 2005and a higher demand for rooms in Las Vegas in general.

 

Hotel revenues increased4.6% to $58.0 million for the six months ended June 30, 2005, as comparedto $55.4 million for the six months ended June 30, 2004. Hotel occupancypercentages decreased 1.4 percentage points to 96.5% for the six months ended June 30,2005, as compared to 97.9% for the six months ended June 30, 2004. Averagedaily room rates increased to $128 for the six months ended June 30, 2005,as compared to $122 for the six months ended June 30, 2004, resulting inincreased Hotel revenues.

 

Hotel expenses increased 61.1%to $12.5 million for the three months ended June 30, 2005, as compared to$7.7 million for the three months ended June 30, 2004. Hotel expensesincreased 41.0% to $21.5 million for the six months ended June 30, 2005,as compared to $15.3 million for the six months ended June 30, 2004. Hotelmargins decreased 14.7 and 9.7 percentage points over the same three-and six-monthperiods. The decrease in Hotel margins was primarily due to repairs andmaintenance expenses incurred in the second quarter of 2005 related to upgradesand amenities in the Hotel rooms, and management fees paid to Starwood underthe management contract beginning in September 2004.

 

*Food and Beverage*

 

Food and beverage revenues are derived from food andbeverage sales in the restaurants, bars, room service, banquets andentertainment outlets. Food and beverage revenue is recognized at the time thefood and/or beverage is provided to the guest.

 

Food and beveragerevenues increased 0.4% to $18.1 million for the three months ended June 30,2005, as compared to $18.0 million for the three months ended June 30, 2004.Food and beverage revenues increased 1.3% to $37.4 million for the six monthsended June 30, 2005, as compared to $36.9 million for the six months endedJune 30, 2004. The increase in food and beverage revenues was primarilydue to the addition of the new menus in the café and high-end restaurants inthe second quarter of 2005.

 

Food and beverageexpenses increased 18.6% to $12.5 million for the three months ended June 30,2005, as compared to $10.6 million for the three months ended June 30, 2004.Food and beverage expenses increased 22.9% to $25.5 million for the six monthsended June 30, 2005, as compared to $20.7 million for the six months endedJune 30, 2004. Food and beverage margins decreased 10.7 and 12.0 percentagepoints in comparing the same three-and six-month periods. The increase in foodand beverage expenses and the resulting decrease in food and beverage margins wasprimarily due to management fees paid to Starwood under the management contractbeginning in September 2004.

 

22

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*Other*

 

Other revenue includes entertainment sales, retailsales, telephone and other miscellaneous income and is recognized at the timethe goods or services are provided to the guest.

 

Other revenues decreased 20.4%to $3.1 million for the three months ended June 30, 2005, as compared to $3.9million for the three months ended June 30, 2004. Other revenues decreased6.6% to $7.5 million for the six months ended June 30, 2005, as comparedto $8.1 million for the six months ended June 30, 2004. The decrease inother revenues is primarily due to a decrease in entertainment revenueresulting from the closing of the Steve Wyrick showroom in April 2005 forremodeling under the Clear Channel agreement.

 

Other expenses decreased 55.9%to $1.5 million for the three months ended June 30, 2005, as compared to $3.4million for the three months ended June 30, 2004. Other expenses decreased43.8% to $3.8 million for the six months ended June 30, 2005, as comparedto $6.8 million for the six months ended June 30, 2004. The decrease inother expenses is related to the elimination of expenses under the agreementwith Steve Wyrick, as well as the addition of more “four wall” events in the Theaterfor the Performing Arts where the majority of the expenses are borne by thepromoter, during the first half of 2005.

 

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

 

SG&A expensesincreased 32.6% to $19.4 million for the three months ended June 30, 2005,as compared to $14.6 million for the three months ended June 30, 2004. SG&Aexpenses increased 23.7% to $36.9 million for the six months ended June 30,2005, as compared to $29.8 million for the six months ended June 30, 2004.SG&A expenses as a percentage of net revenues increased 5.2 and 3.2 percentagepoints in comparing the same three-and six-month periods. The increase inSG&A expenses was primarily due to management bonuses and legal andprofessional fees, which were included in re-organizational costs and notSG&A by Aladdin Gaming in 2004.

 

*Depreciationand Amortization*

 

Aladdin Gaming did notrecord depreciation expense during 2004, as the assets were classified as “heldfor sale”. As a result, depreciation expense for the three and six months endedJune 30, 2005, was significantly greater than the same periods in theprior year. Depreciation and amortization expense was approximately $5.9million and $11.8 million for the three and six months ended June 30, 2005.

 

*Net InterestExpense*

 

Net interest expenseincreased to $13.8 million for the three months ended June 30, 2005, ascompared to $0.9 million for the three months ended June 30, 2004. Net interestexpense increased to $27.4 million for the six months ended June 30, 2005,as compared to $1.9 million for the six months ended June 30, 2004. Theincrease in net interest expense is directly related to the addition of theCredit Agreement we entered into upon the completion of the acquisition of theAladdin on September 1, 2004.

 

*Provisionfor Income Taxes*

 

 The payable-in-kind interest associated with the Mezzanine Financingqualifies under Internal Revenue Code Section 163 (e)(5) as a high yield debtobligation with disqualified OID, which will not be deductible until paid incash at maturity. As a result, a portion of the interest expense associatedwith the Mezzanine Financing is non-deductible for federal income tax purposes,which resulted in a provision for income taxes of approximately $1.0 millionfor the six months ended June 30, 2005. The majority of the income taxprovision was due to the valuation allowance recorded by MezzCo to fully offsetthe long-term deferred tax asset resulting from the disqualified OID. Theremaining amount is interest and penalties on the federal income taxes payablefor the four months ended December 31, 2004 and the six months ended June 30,2005.

 

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

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

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

 

During the six monthsended June 30, 2005, we generated cash flows from operating activities ofapproximately $9.9 million. We also had restricted cash and cash equivalents ofapproximately $94.0 million, which is designated to be used for costsassociated with the renovation and retheming of the Aladdin into the PH Resort.

 

Our primary cashrequirements for the remainder of 2005 are expected to include (i) up to approximately$94.0 million in capital expenditures related to the renovation project, (ii) approximately$7.2 million for maintenance capital expenditures and (iii) up to approximately$14.7 million in interest payments on our debt.

 

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We believe that cash generated from operations, thecapital invested in OpBiz in connection with our acquisition of the Aladdin andavailable working capital, including the cash that we acquired from AladdinGaming under the purchase agreement, will be adequate to meet the anticipatedworking capital, capital expenditure, renovation and debt service obligationsof OpBiz for at least the next 12 months of operations. We may have otherliquidity needs, such as tax distributions to the members of EquityCo and BH/RE,and we believe that we will have adequate cash to meet these needs if theyshould arise. The Credit Agreement allows OpBiz to make tax distributions.

 

There can be no assurance that we have accuratelyestimated our liquidity needs, or that we will not experience unforeseen eventsthat may materially increase our need for liquidity to fund our operations orcapital expenditure programs or decrease the amount of cash generated from ouroperations. We expect to experience a reduction in cash generated by ouroperations during our planned renovations to the Aladdin and have negotiatedthe terms of the Credit Agreement to address those anticipated reductions. Forexample, the covenant in the Credit Agreement requiring OpBiz to achievespecified levels of earnings before interest, taxes, depreciation andamortization (“EBITDA”) during the first two years of the Credit Agreement issignificantly below the Aladdin’s current EBITDA levels. Also, the interestrate during the first three years of the term of the Credit Agreement is lower thanthe interest rate in the last three years.

 

***Description of CertainIndebtedness***

 

*Credit Agreement*

 

The Aladdin acquisition and the planned renovationswere funded by the issuance of $510 million of secured notes to Aladdin Gaming’ssecured creditors pursuant to a Credit Agreement. OpBiz’s obligations under theCredit Agreement are secured by liens on all of its assets, including amortgage on its real property, the Hotel, the Casino and the TPA, and securityinterests in our accounts receivable, inventory, equipment and intangibleassets, excluding the Timeshare Land. The Credit Agreement is guaranteed byMezzCo and MezzCo secured its guarantee by pledging its membership interests inOpBiz to the lenders. The Credit Agreement matures on August 31, 2010.

 

The loans under theCredit Agreement are evidenced by $500 million of Term Loan A notes and $10million of Term Loan B notes. Upon issuance of the notes, BH/RE simultaneouslymade a $14 million cash payment to the holders of the Term Loan A notes to reducethe principal amount of the Term Loan A notes to $486 million and obtained arelease of their lien on the Timeshare Land.

 

The scheduled principalpayments on the Term Loan A notes are as follows:

 

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

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

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

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

•        the thenunpaid balance amount of Term Loan A notes on August 31, 2010.

 

OpBiz pays interest onthe outstanding Term Loan A notes quarterly, in cash, at the London Inter-BankOffered Rate, or LIBOR, plus an applicable margin that increases over time.Until the earlier of August 31, 2007 or OpBiz’s accumulation of certainpermitted cash reserves, OpBiz’s interest payment will not exceed its quarterlyEBITDA, reduced by certain permitted deductions (as defined in the CreditAgreement), divided by a factor of 1.20. Interest on the Term Loan B notes willaccrue at a rate of LIBOR plus 4% and will be added quarterly to theoutstanding principal amount of the Term Loan B notes and will be paid when OpBizpays off the Term Loan B notes. OpBiz is also required to pay an annualadministrative fee and certain other fees and expenses of the lender under theCredit Agreement.

 

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OpBiz is required toprepay amounts outstanding under the Credit Agreement:

 

•        with excesscash flow (as defined in the Credit Agreement) after certain permitted cashreserves are accumulated;

•        in scheduledquarterly amounts beginning after August, 31, 2006;

•        with certainamounts received in connection with the development of the Timeshare Landadjacent to the Desert Passage (as defined in the underlying agreement);

•        with anamount equal to the difference between what should have been spent onrenovation capital expenditures and what was actually spent thereon if (i) anaggregate amount of $72.0 million is not spent on renovation capitalexpenditures by August 31, 2006, or (ii) an aggregate amount of $81.0million is not spent on renovation capital expenditures by February 28,2007 or (iii) an aggregate amount of $90.0 million is not spent onrenovation capital expenditures by August 31, 2007; and

•        with theproceeds of certain asset sales.

 

In particular, after OpBizaccumulates certain permitted cash reserves, OpBiz is required to pay 100% of itsexcess cash flow (as defined in the Credit Agreement) from operations to thelenders under the Credit Agreement. That percentage decreases to 75%, then 50%,if OpBiz meets certain targeted ratios of total debt to EBITDA, or certain leverageratios, for any two consecutive fiscal quarters.

 

The Credit Agreementincludes covenants that, among other things, restrict OpBiz’s ability to sellassets, make distributions to its owners, other than distributions for taxes,incur or prepay additional indebtedness, enter into transactions withaffiliates, incur liens, make investments, make capital expenditures,****develop the Timeshare Land adjacent to theDesert Passage and enter into material contracts. In addition, OpBiz isrequired to maintain certain levels of EBITDA that increase over time and,beginning August 31, 2007, maintain certain ratios of EBITDA to interestexpense that increase over time and maintain certain leverage ratios thatdecrease over time.

 

The Credit Agreementcontains customary events of default, including a change of control of OpBiz,the occurrence of a default under the terms of any indebtedness of MezzCo, adefault by OpBiz under the Hotel management contract or termination of Sheratonas the manager of the Hotel (unless OpBiz replaces Sheraton with anotherapproved manager within 30 days of such termination), a default or terminationof the Planet Hollywood license agreement and certain defaults under theagreements with Boulevard Invest or Northwind Aladdin.

 

BH/REhas issued warrants to purchase 2.94% of its ownership interest in EquityCo tothe lenders under the Credit Agreement. The warrants can only be exercised uponthe occurrence of a (i) liquidity event or distribution (such as throughthe sale of the hotel/casino); (ii) a public sale of equity securities ofEquityCo, MezzCo or OpBiz; (iii) payment in full of the obligations underthe Credit Agreement. The warrants can either be settled in cash or in othermembership interests upon exercise. The estimated fair value of the warrants wasapproximately $0.1 million as of June 30, 2005. These warrants arerecorded separately from the related debt within other long-term liabilities.

 

*Mezzanine Financing*

 

In August 2004,MezzCo entered into the Mezzanine Financing with a group of purchasers.Pursuant to the Mezzanine Financing, MezzCo issued $87 million of 16% SeniorSecured Subordinated Notes and warrants to purchase 17,500 of its unitsrepresenting membership interests equal to 17.5% of the fully diluted equity ofMezzCo. The gross offering proceeds of the Mezzanine Financing were depositedinto an escrow account and, in conjunction with the closing of the Aladdinacquisition, were used to (i) pay approximately $16.1 million of fees andexpenses related to the acquisition of the Aladdin, (ii) fund the $14million lien release payment required under the Credit Agreement, and (iii) funda portion of the planned renovations to the Aladdin. The notes mature in August 2011and accrue interest at a rate of 16% per annum. Interest on the notes ispayable-in-kind or, at the option of MezzCo, in cash.

 

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The warrants areexercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereof.Currently, all of MezzCo’s voting membership interests are represented by unitsowned by EquityCo. In addition to customary anti-dilution protections, thenumber of units representing MezzCo membership interests issuable upon exerciseof the warrants may be increased from time-to-time upon the occurrence ofcertain events as described in the warrants. The maximum aggregate increase is24%, following which the warrants would represent rights to purchase 45.5% ofthe units representing membership interests of MezzCo, on a fully-dilutedbasis. Holders of the warrants and any securities issued upon exercise of thewarrants may require MezzCo to redeem such securities commencing in August 2011at a redemption price based upon a formula set forth in the warrants. Startingin August 2008, in the event the Company fails to achieve certain operationalthresholds, the holders of the MezzCo warrants, and securities issued upon exercisethereof, have the right to assume control of MezzCo and OpBiz and conduct asale of the equity of, or all or substantially all of the assets of, eitherMezzCo or OpBiz provided that all Control Conditions (as defined in theInvestor Rights Agreement) are met.. These rights are subject to (i) repaymentin full of all indebtedness that is senior to the notes (including allindebtedness of OpBiz under the Credit Agreement), (ii) certain covenantsrelated to OpBiz’s ability to achieve targeted levels of EBITDA and (iii) theprior approval of the Nevada gaming authorities. These rights expire uponcompletion of a public offering by MezzCo or OpBiz. In connection with theMezzanine Financing, our obligation to make expenditures on renovations to theAladdin was increased from $90 million, as required under the Credit Agreement,to $100 million.

 

As of June 30, 2005,the MezzCo financing was recorded net of the unamortized balance of the warrantsof approximately $4.1 million. The estimated fair value of the warrants wasapproximately $4.1 million at June 30, 2005 and December 31, 2004,and is recorded within other long-term liabilities.

 

*Energy Services Agreement*

 

Northwind owns and operates a central utility plant onland leased from us. The plant supplies hot and cold water and emergency powerto the Aladdin under a contract between Aladdin Gaming and Northwind. We haveassumed the energy service agreement, which expires in 2018. Under theagreement, we are required to pay Northwind a monthly consumption charge, amonthly operational charge, a monthly debt service payment and a monthly returnon equity payment. Payments under the Northwind agreement total approximately $0.5million per month.

 

***Forward Looking Statements***

 

When used in this reportand elsewhere by management from time-to-time, the words “believes”, “anticipates”and “expects” and similar expressions are intended to identify forward-lookingstatements with respect to our financial condition, results of operations andour business including our expansion, legal proceedings and employee matters.Certain important factors, including but not limited to, competition from othergaming operations, factors affecting our ability to complete acquisitions anddispositions of gaming properties, leverage, construction risks, the inherentuncertainty and costs associated with litigation and governmental andregulatory investigations, and licensing and other regulatory risks, couldcause our actual results to differ materially from those expressed in ourforward-looking statements. Further information on potential factors whichcould affect our financial condition, results of operations and businessincluding, without limitation, the expansion, development and acquisitionprojects, legal proceedings and employee matters are included in our filingswith the Securities and Exchange Commission. Readers are cautioned not to placeundue reliance on any forward-looking statements, which speak only as of thedate thereof. We undertake no obligation to update information contained inforward-looking statements.

 

Our acquisition of the Aladdin and planned operationsare subject to a number of risks. Please refer to the discussion of “RiskFactors” in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Result of Operations – Risk Factors” in the Annual Report on Form 10-K,filed by BH/RE with the Securities and Exchange Commission on April 15,2005.

 

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## **ITEM 3.**  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## ** **

Market risk is the riskof loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and commodity prices. Ourprimary exposure to market risk is interest rate risk associated with our long-termdebt. We pay interest on the outstanding Term Loan A notes quarterly, in cash,at the London Inter-Bank Offered Rate, or LIBOR, plus an applicable margin thatincreases over time. Interest on the Term Loan B notes will accrue at a rate ofLIBOR plus 4% and will be added quarterly to the outstanding principal amountof the Term Loan B notes and will be paid when we pay off the Term Loan Bnotes. An increase of one percentage point in the average interest rateapplicable to the variable rate debt outstanding at June 30, 2005, wouldincrease the annual interest cost by approximately $5.0 million. Interest costsincreased approximately $0.8 million during the second quarter of 2005 ascompared to the first quarter of 2005.

 

## **ITEM4.**  CONTROLS AND PROCEDURES

## ** **

Our management, with theparticipation of our principal executive and principal financial officers, hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)), as of June 30,2005. Based on their evaluation, our principal executive and principalfinancial officers concluded that our disclosure controls and procedures wereeffective as of June 30, 2005.

 

There has been no changein our internal control over financial reporting (as defined in Rules 13a-15(f) and15-d-15(f) under the Exchange Act) that occurred during our fiscal quarterended June 30, 2005, that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

# **PART II  —  OTHER INFORMATION**

# ** **

## **ITEM6.**  EXHIBITS

## ** **

| 31.1   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.         |
|--------|--------|------------------------------------------------------------------------------------------------|
|   |   |                                                                                           |
| 31.2   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Robert Earl.           |
|   |   |                                                                                           |
| 31.3   |   | Certification pursuant to §302 of the Sarbanes-Oxley  Act of 2002, Douglas P. Teitelbaum. |
|   |   |                                                                                           |
| 32.1   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Donna Lehmann.         |
|   |   |                                                                                           |
| 32.2   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Robert Earl.           |
|   |   |                                                                                           |
| 32.3   |   | Certification pursuant to §906 of the Sarbanes-Oxley  Act of 2002, Douglas P. Teitelbaum. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                  | BH/RE,  L.L.C.                         |
|-----------------------|----------------------------------------|
|                  |                                   |
|                  |                                   |
| August 15,  2005 | By:                                    | /S/  Donna Lehmann |   |
|                  | Donna  Lehmann                         |
|                  | Treasurer  and Chief Financial Officer |

 

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