**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

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

 

________________________

 

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

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Securities Exchange Act 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 1.    | LEGAL PROCEEDINGS |   |
|                               |       |   |   |
|                               | ITEM 2.    | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS |   |
|                               |       |   |   |
|                               | ITEM 3.    | DEFAULTS UPON SENIOR SECURITIES |   |
|                               |       |   |   |
|                               | ITEM 4.    | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS |   |
|                               |       |   |   |
|                               | ITEM 5.    | OTHER INFORMATION |   |
|                               |       |   |   |
|                               | ITEM 6.    | EXHIBITS AND REPORTS ON FORM 8-K |   |
|                               |       |   |   |
|                               | SIGNATURES |   |

 

2

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**PARTI - FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(amounts inthousands)**

 
| ** **                                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                            | ** ** | **(unaudited)**     | ** ** | ** **             | ** ** |
| ASSETS                                          | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                 |       |                |       |                   |       |
| Cash and cash  equivalents                      |       | $                   | 48,485     |                   | $          | 37,016 |   |
| Receivables, net                                |       | 14,239              |       | 12,626                 |       |
| Inventories                                     |       | 2,194               |       | 2,489                  |       |
| Prepaid expenses                                |       | 5,469               |       | 5,253                  |       |
| Deposits and  other current assets              |       | 3,432               |       | 3,258                  |       |
| Total current  assets                           |       | 73,819              |       | 60,642                 |       |
|                                            |       |                |       |                   |       |
| Property and  equipment, net                    |       | 491,269             |       | 494,781                |       |
| Restricted cash  and cash equivalents           |       | 94,542              |       | 96,199                 |       |
| Other assets, net                               |       | 11,044              |       | 11,761                 |       |
| Total assets                                    |       | $                   | 670,674    |                   | $          | 663,383 |   |
|                                            |       |                |       |                   |       |
| LIABILITIES AND MEMBERS’ EQUITY            |       |                |       |                   |       |
|                                            |       |                |       |                   |       |
| Current  liabilities:                           |       |                |       |                   |       |
| Current portion  of long-term debt              |       | $                   | 1,304      |                   | $          | 1,268 |   |
| Accounts payable                                |       | 2,283               |       | 2,095                  |       |
| Due to  affiliates                              |       | 3,352               |       | 1,887                  |       |
| Accrued expenses  and other current liabilities |       | 36,059              |       | 36,199                 |       |
| Total current  liabilities                      |       | 42,998              |       | 41,449                 |       |
|                                            |       |                |       |                   |       |
| Long-term debt,  less current portion           |       | 590,320             |       | 584,814                |       |
| Other long-term  liabilities                    |       | 4,193               |       | 4,375                  |       |
| Total liabilities                               |       | 637,511             |       | 630,638                |       |
|                                            |       |                |       |                   |       |
| Commitments and  contingencies                  |       |                |       |                   |       |
|                                            |       |                |       |                   |       |
| Minority  interests                             |       | 19,194              |       | 19,132                 |       |
|                                            |       |                |       |                   |       |
| Members’ equity:                           |       |                |       |                   |       |
| Member’s equity                            |       | 21,500              |       | 21,500                 |       |
| Accumulated  deficit                            |       | (7,531              | )          | (7,887                 | )          |
| Total members’  equity                     |       | 13,969              |       | 13,613                 |       |
| Total  liabilities and members’ equity     |       | $                   | 670,674    |                   | $          | 663,383 |   |

 

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

 

3

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | **Predecessor  Information** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **                           | ** ** | **2005**                         | ** ** | **2004**   | ** ** | **2004**                     | ** ** |
|                                 |       |                             |       |       |       |                         |       |
| Operating  revenues:                 |       |                             |       |       |       |                         |       |
| Casino                               |       | $                                | 32,913     |       | $          | —                       |       | $ | 29,389 |   |
| Hotel                                |       | 29,237                           |       | —     |       | 28,512                       |       |
| Food and  beverage                   |       | 19,319                           |       | —     |       | 18,903                       |       |
| Other                                |       | 4,393                            |       | —     |       | 4,124                        |       |
| Gross revenues                       |       | 85,862                           |       | —     |       | 80,928                       |       |
| Promotional  allowances              |       | (6,643                           | )          | —     |       | (7,572                       | )          |
| Net revenues                         |       | 79,219                           |       | —     |       | 73,356                       |       |
|                                 |       |                             |       |       |       |                         |       |
| Operating costs and  expenses:       |       |                             |       |       |       |                         |       |
| Casino                               |       | 17,458                           |       | —     |       | 16,877                       |       |
| Hotel                                |       | 9,056                            |       | —     |       | 7,512                        |       |
| Food and  beverage                   |       | 12,939                           |       | —     |       | 11,439                       |       |
| Other                                |       | 2,342                            |       | —     |       | 3,434                        |       |
| Selling, general  and administrative |       | 17,500                           |       | —     |       | 15,193                       |       |
| Depreciation and  amortization       |       | 5,870                            |       | —     |       | —                       |       |
| Preopening  expenses                 |       | —                           |       | 286        |       | —                       |       |
|                                 |       | 65,165                           |       | 286        |       | 54,455                       |       |
|                                 |       |                             |       |       |       |                         |       |
| Operating income  (loss)             |       | 14,054                           |       | (286       | )          | 18,901                       |       |
|                                 |       |                             |       |       |       |                         |       |
| Other income  (expense):             |       |                             |       |       |       |                         |       |
| Interest income  (expense), net      |       | (13,635                          | )          | 25         |       | (968                         | )          |
| Minority  interest                   |       | (63                              | )          | (4         | )          | —                       |       |
| Reorganization  costs                |       | —                           |       | —     |       | (1,549                       | )          |
|                                 |       | (13,698                          | )          | 21         |       | (2,517                       | )          |
|                                 |       |                             |       |       |       |                         |       |
| Pre-tax income  (loss)               |       | 356                              |       | (265       | )          | 16,384                       |       |
| Benefit from  income taxes           |       | —                           |       | —     |       | —                       |       |
| Net income  (loss)                   |       | $                                | 356        |       | $          | (265                         | )          | $ | 16,384 |   |

 

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

 

4

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | ** **                       | ** ** | ** ** | ** ** | **Predecessor  Information** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **                                                                                | ** ** | **2005**                         | ** ** | **2004**   | ** ** | **2004**                     | ** ** |
|                                                                                      |       |                             |       |       |       |                         |       |
| Cash flows from  operating activities:                                                    |       |                             |       |       |       |                         |       |
| Net income  (loss)                                                                        |       | $                                | 356        |       | $          | (265                         | )          | $ | 16,384 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                             |       |       |       |                         |       |
| Depreciation and  amortization                                                            |       | 5,870                            |       | —     |       | —                       |       |
| Amortization of  debt discount and issuance costs                                         |       | 1,727                            |       | —     |       | —                       |       |
| Minority  interest                                                                        |       | 63                               |       | 4          |       | —                       |       |
| Changes in  assets and liabilities:                                                       |       |                             |       |       |       |                         |       |
| Receivables, net                                                                          |       | (1,613                           | )          | —     |       | 1,304                        |       |
| Inventories and  prepaid expenses                                                         |       | 79                               |       | —     |       | 841                          |       |
| Other assets                                                                              |       | (174                             | )          | —     |       | 490                          |       |
| Accounts payable                                                                          |       | 188                              |       | —     |       | (1,534                       | )          |
| Accrued expenses  and other current liabilities                                           |       | 5,900                            |       | —     |       | (515                         | )          |
| Net cash  provided by (used in) operating activities                                      |       | 12,396                           |       | (261       | )          | 16,970                       |       |
| Cash flows from  investing activities:                                                    |       |                             |       |       |       |                         |       |
| Capital  expenditures                                                                     |       | (2,013                           | )          | —     |       | (514                         | )          |
| Restricted cash  and cash equivalents                                                     |       | 1,657                            |       | (25        | )          | (40                          | )          |
| Advances from  affiliates                                                                 |       | —                           |       | 1,557      |       | —                       |       |
| Deferred  acquisition costs                                                               |       | —                           |       | (1,271     | )          | —                       |       |
| Net cash (used  in) provided by investing activities                                      |       | (356                             | )          | 261        |       | (554                         | )          |
| Cash flows from  financing activities:                                                    |       |                             |       |       |       |                         |       |
| Payments under  bank facility                                                             |       | —                           |       | —     |       | (270                         | )          |
| Payments on CUP  financing                                                                |       | (403                             | )          | —     |       | —                       |       |
| Change in value  of warrants                                                              |       | (168                             | )          | —     |       | —                       |       |
| Adequate  protection payments - secured lenders                                           |       | —                           |       | —     |       | (6,029                       | )          |
| Adequate  protection payments - GECC                                                      |       | —                           |       | —     |       | (1,875                       | )          |
| Net cash  provided by (used in) financing activities                                      |       | (571                             | )          | —     |       | (8,174                       | )          |
| Cash and cash  equivalents:                                                               |       |                             |       |       |       |                         |       |
| Increase in cash  and cash equivalents                                                    |       | 11,469                           |       | —     |       | 8,242                        |       |
| Balance,  beginning of period                                                             |       | 37,016                           |       | —     |       | 38,240                       |       |
| Balance, end of  period                                                                   |       | $                                | 48,485     |       | $          | —                       |       | $ | 46,482 |   |
|                                                                                      |       |                             |       |       |       |                         |       |
| Supplemental  cash flow disclosures:                                                      |       |                             |       |       |       |                         |       |
| Cash paid for  interest                                                                   |       | $                                | 7,448      |       | $          | —                       |       | $ | — |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

5

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

**NOTESTO CONDENSED CONSOLIDATED 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 andResorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a whollyowned subsidiary of EquityCo, and OpBiz, L.L.C. (“OpBiz”) is a wholly ownedsubsidiary of MezzCo. As of November 1, 2004, 50% of BH/RE’s votingmembership interests were held by each of Robert Earl and Douglas P.Teitelbaum, and BH/RE’sequity membership interests were held 40.75% by BH Casino and Hospitality LLC I(“BHCH I”), 18.50% by BH Casino and Hospitality LLC II (“BHCH II”)(collectively “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).

 

BH/RE 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 onSeptember 1, 2004 and will begin a renovation project which, when complete,will transform the Aladdin into the Planet Hollywood Resort and Casino (the “PHResort”). In connection with the renovation of the Aladdin, OpBiz has enteredinto an agreement 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 that comprise a portion of thePH Resort.

 

BH/RE is aNevada limited-liability company and was organized on March 31, 2003. BH/RE wasformed by BHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum, a managingprincipal of Bay Harbour Management, L.C. (“Bay Harbour Management”). BHCH was formed by Mr.Teitelbaum for the purpose of holding investments in BH/RE by funds managed byBay Harbour Management. Bay Harbour Management is an investment managementfirm. OCS is wholly owned and controlled by Robert 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. Together, Mr. Earl, a trust for the benefit of Mr. Earl’s childrenand affiliates of Bay Harbour Management, own substantially all of the equityof Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of PlanetHollywood owned by the trust.

 

***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 to whichOpBiz agreed to acquire the Aladdin. Under the purchase agreement and pursuantto an order of the Bankruptcy Court, Aladdin Gaming conducted an auction tosell the Aladdin. On June 20, 2003, the Bankruptcy Court declared OpBiz thewinner of that auction and, on August 29, 2003, the Bankruptcy Court entered anorder confirming Aladdin Gaming’s plan of reorganization and authorizingAladdin Gaming to complete the sale of the Aladdin to OpBiz under the purchaseagreement. On September 1, 2004, OpBiz acquired substantially all of the realand personal property owned or used by Aladdin Gaming to operate the Aladdin,and received $15 million of working capital from Aladdin Gaming, including$25.7 million of cash. The acquisition was accounted for as a purchase and,accordingly, the purchase price and working capital adjustments have been allocatedto the underlying assets acquired and liabilities assumed. The working capitaladjustment was determined based on the closing balance sheet on August 31,2004. OpBiz paid the purchase price for the Aladdin by issuing new securednotes to Aladdin Gaming’s secured creditors and assumed various contracts andleases entered into by Aladdin Gaming in connection with its operation of theAladdin and certain of Aladdin Gaming’s liabilities, including Aladdin Gaming’senergy service obligation to the third party owner of the central utility plant

 

6

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thatsupplies hot and cold water and emergency power to the Aladdin. At the time ofpurchase, the energy service obligation was $34.0 million. Upon the completionof the Aladdin acquisition, OpBiz issued $510 million of new secured notes toAladdin Gaming’s secured creditors under an Amended and Restated Loan andFacilities Agreement (the “Credit Agreement”) with a group of lenders and TheBank of New York, Asset Solutions Division, as administrative and collateralagent. OpBiz also simultaneously made a $14 million cash payment to thosesecured creditors, which reduced the principal amount of the notes to $496million and obtained a release of the lien on a four-acre parcel of undevelopedproperty that OpBiz also acquired from Aladdin Gaming (“Timeshare Land”). OnDecember 10, 2004, OpBiz entered into a Timeshare Purchase Agreement withWestgate Resorts, LTD. (“Westgate”), whereby OpBiz has agreed to sellapproximately 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 of seniorsecured notes to a group of purchasers. The net proceeds of this financing wereused to make the $14 million payment described above, to pay certain costs andexpenses of BH/RE and its subsidiaries and affiliates related to theacquisition of the Aladdin, and to provide OpBiz with a portion of the fundsnecessary to meet its obligations regarding the planned renovations to theAladdin.

 

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 proposed renovation ofthe Aladdin, OpBiz has entered into an agreement with Planet Hollywood andcertain of 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 whichSheraton provides hotel management, marketing and reservation services for thehotel that comprise a portion of the pre-renovation PH Resort.

 

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

 

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 suchrules and regulations. BH/RE believes that the disclosures are adequate to makethe information 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 months ended March 31, 2005 are not indicative of results to beexpected for the full fiscal year. These unaudited financial statements shouldbe read in conjunction with the audited financial statements and notes theretofor the year ended December 31, 2004, included in BH/RE’s Annual Report on Form10-K filed with the Securities and Exchange Commission on April 15, 2005.Pursuant to Rule 302 of Regulation S-X, the registrant has included condensedstatements of operations and cash flows of the predecessor for the three-month periodended March 31, 2004.

 

7

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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 ofliabilities, require that management apply significant judgment in defining theappropriate assumptions for calculating financial estimates. By their nature,these judgments 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 $94.5 million and $96.2million as of March 31, 2005 and December 31, 2004, respectively, the majorityof which will be applied toward the remaining cash commitments for the plannedrenovations 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. Gains orlosses on dispositions of property and equipment are included in thedetermination of income. Property and equipment are generally depreciated overthe following estimated useful lives on a straight-line basis:

 
| Buildings                         |   | 39.5 years     |
|-----------------------------------|--------|----------------|
| Building improvements             |   | 15 to 40 years |
| Furniture, fixtures and equipment |   | 3 to 7 years   |

 

8

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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 of Long-Lived Assets*.”For assets to be disposed of, the asset to be sold is recognized at the lowerof carrying value or fair value less costs of disposal. Fair value for assetsto be disposed of is estimated based on comparable asset sales, solicitedoffers or a discounted cash flow model.

 

Property and equipment are reviewed for 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 March 31, 2005 are basedon 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 $8.2 million and$8.5 million as of March 31, 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 March 31, 2005. The customer list was valued atapproximately $2.7 million at the time of purchase and at March 31, 2005, had anet book value of approximately $2.3 million. The trade name was valued atapproximately $1.0 million at the time of purchase and at March 31, 2005, had anet book value of approximately $0.6 million. The customer list and trade namewill be amortized using the straight-line method over a useful life of 4 yearsand 1.5 years, respectively. The amortization expense related to the customerlist and trade name for the three months ended March 31, 2005, was approximately$0.2 million for each of the intangible assets.

 

*DerivativeInstruments and Hedging Activities*

 

BH/RE has issued warrantsin an effort to provide further consideration to the purchasers of membershipsinterests in EquityCo and MezzCo. BH/RE accounts for the senior note warrantsin EquityCo as embedded derivative instruments in accordance with SFAS No. 133,“*Accounting for Derivative Instruments and HedgingActivities,*” and SFAS No. 138, “*Accounting for CertainDerivative Instruments and Hedging Activities – an Amendment of FASB StatementNo. 133*”. The warrants issued in conjunction with the MezzanineFinancing contain a net cash settlement, and therefore are accounted for inaccordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFAS No. 133and EITF 00-19 require that the warrants be recognized as liabilities, withchanges in fair value affecting net income.

 

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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** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **                            | ** ** | **2005**                         | ** ** | **2004**   | ** ** | **2004**                     | ** ** |
| Rooms                                 |       | $                                | 857        |       | $          | —                       |       | $ | 915 |   |
| Food and  beverage                    |       | 2,463                            |       | —     |       | 2,812                        |       |
| Other                                 |       | 186                              |       | —     |       | 256                          |       |
| Total cost of  promotional allowances |       | $                                | 3,506      |       | $          | —                       |       | $ | 3,983 |   |

 

###### ***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 March 31, 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 $1.0 million and $0 for the three months ended March31, 2005 and 2004, respectively for BH/RE and approximately $1.7 million forthe three months ended March 31, 2004 for Aladdin Gaming.

 

*Income Taxes*

 

The consolidated financial statements include theoperations of BH/RE and its controlled subsidiaries: EquityCo, MezzCo, andOpBiz. BH/RE and EquityCo are limited liability companies and are taxed aspartnerships for federal income tax purposes. MezzCo has elected to be taxed asa corporation for federal income tax purposes. OpBiz, a wholly-owned subsidiaryof MezzCo, will be treated as a division of MezzCo for federal income taxpurposes, and accordingly, will also be subject to federal income taxes.

 

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 afuture tax benefit to the extent that realization of such benefit is morelikely than not. Otherwise, a valuation allowance is applied.

 

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

 

As of March31, 2005, BH/RE’s membership interests had not been unitized and BH/RE’smembers do not presently intend to unitize these membership interests.Accordingly, management of BH/RE has excluded earnings per share data requiredpursuant to SFAS 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 March 31, 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):

 
| ** **                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                      | ** ** | **unaudited**       | ** ** | ** **             | ** ** |
| Casino                          |       | $                   | 5,553      |                   | $          | 5,712 |   |
| Hotel                           |       | 10,330              |       | 7,735                  |       |
| Other                           |       | 1,046               |       | 1,433                  |       |
|                            |       | 16,929              |       | 14,880                 |       |
| Allowance for doubtful accounts |       | (2,690              | )          | (2,254                 | )          |
| Receivables, net                |       | $                   | 14,239     |                   | $          | 12,626 |   |

 

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

 

Property and equipment and the related accumulateddepreciation amounts listed below are estimates made by management and consistof the following (in thousands):

 
| ** **                         | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                         | ** ** | **unaudited**       | ** ** | ** **             | ** ** |
| Land                               |       | $                   | 97,979     |                   | $          | 97,979 |   |
| Building and  improvements         |       | 367,234             |       | 367,234                |       |
| Furniture,  fixtures and equipment |       | 35,284              |       | 35,172                 |       |
| Construction in  progress          |       | 3,688               |       | 1,787                  |       |
|                               |       | 504,185             |       | 502,172                |       |
| Accumulated  depreciation          |       | (12,916             | )          | (7,391                 | )          |
| Property and  equipment, net       |       | $                   | 491,269    |                   | $          | 494,781 |   |
|                                    |            |                     |            |                        |            |  |  |  |  |

 

Depreciation expense was approximately $5.6 millionand $7.4 million for the three months ended March 31, 2005 and the year endedDecember 31, 2004, respectively for BH/RE. Aladdin Gaming was not recordingdepreciation expense in 2004, as the assets were classified as “held for sale”.

 

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

 

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

 
| ** **                                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **unaudited**       | ** ** | ** **             | ** ** |
| Accrued payroll and  related                    |       | $                   | 10,848     |                   | $          | 10,652 |   |
| Accrued interest  payable                       |       | 6,753               |       | 6,498                  |       |
| Advance deposits                                |       | 3,881               |       | 4,040                  |       |
| Accrued gaming  and related                     |       | 3,519               |       | 4,395                  |       |
| Accrued taxes                                   |       | 3,132               |       | 2,500                  |       |
| Accrued and  advance commissions                |       | 1,821               |       | 1,245                  |       |
| Accrued Central  Utility Plant charges          |       | 1,140               |       | 1,287                  |       |
| Accrued  advertising                            |       | 781                 |       | 354                    |       |
| Accrued  acquisition costs                      |       | 608                 |       | 796                    |       |
| Other accrued  expenses and current liabilities |       | 3,576               |       | 4,432                  |       |
| Accrued expenses  and other current liabilities |       | $                   | 36,059     |                   | $          | 36,199 |   |

 

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

 

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

 
| ** **                                        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **unaudited**       | ** ** | ** **             | ** ** |
| Term Loan A -  $500 million senior notes          |       | $                   | 486,000    |                   | $          | 486,000 |   |
| Term Loan B -  $10 million senior notes           |       | 10,368              |       | 10,202                 |       |
| Mezzanine senior  secured subordinated notes      |       | 96,142              |       | 91,734                 |       |
| Northwind  Aladdin obligation under capital lease |       | 33,167              |       | 33,570                 |       |
| Total long-term  debt                             |       | 625,677             |       | 621,506                |       |
| Term A debt  discount, net                        |       | (29,805             | )          | (31,162                | )          |
| MezzCo warrants,  net                             |       | (4,172              | )          | (4,262                 | )          |
| EquityCo  warrants                                |       | (76                 | )          | —                 |       |
| Current portion  of long-term debt                |       | (1,304              | )          | (1,268                 | )          |
| Total long-term  debt, net                        |       | $                   | 590,320    |                   | $          | 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 will be guaranteed by MezzCo and MezzCo will secure itsguarantee by pledging its membership interests in OpBiz to the lenders. TheCredit 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. BH/RE simultaneously made a $14 million cashpayment to the holders of the Term Loan A notes to reduce the principal amountof the Term Loan A notes to $486 million and obtained a release of the lien onthe Timeshare Land.

 

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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 August31, 2006 and ending onAugust 31, 2007;

•        $3.75 millionon the first day of each fiscal quarter during the period beginning on August31, 2007 and ending onAugust 31, 2008;

•        $5.0 millionon the first day of each fiscal quarter during the period beginning on August31, 2008 and ending onAugust 31, 2009;

•        $6.25 millionon the first day of each fiscal quarter during the period beginning on August31, 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 August 31, 2007, OpBiz’s interest payment will not exceed its quarterlyEBITDA, reduced by certain permitted reductions (as defined in the CreditAgreement) , divided by a factor of 1.20. After August 31, 2007, OpBiz’sinterest payment will not exceed its quarterly EBITDA, reduced by certainpermitted reductions (as defined in the Credit Agreement). Interest on the TermLoan B notes will accrue at a rate of LIBOR plus 4% and will be added quarterlyto the outstanding principal amount of the Term Loan B notes and will be paidwhen OpBiz pays off the Term Loan B notes. OpBiz is also required to pay anannual administrative fee and certain other fees and expenses of the lenderunder 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 $81.0 millionis not spent on renovation capital expenditures by February 28, 2007 or (iii)an aggregate amount of $90.0 million is not spent on renovation capitalexpenditures 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 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 us under the hotel management contract or termination of Sheraton asthe manager of the Hotel (unless we replace Sheraton with another approvedmanager within 30 days of such termination), a default or termination of thePlanet Hollywood license agreement and certain defaults under the agreementswith Boulevard Invest or Northwind Aladdin.

 

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TheCredit Agreement includes warrants entitling the lenders to 2.5% of the fullydiluted membership interests in EquityCo at a price equal to the price paid bythe principals of EquityCo. BH/RE has issued warrants to purchase 2.94% of itsownership interest in EquityCo to the lenders under the Credit Agreement. Thewarrants can only be exercised upon the occurrence of (i) a liquidity event ordistribution (such as through the sale of the hotel/casino); (ii) a public saleof equity securities of EquityCo, MezzCo, or (iii) OpBiz; or payment in full ofthe obligations under the Credit Agreement. The warrants can either be settledin cash or in other membership interests upon exercise.

 

Asof March 31, 2005, management estimated the fair value of the warrants to beapproximately $0.1 million.  However,management is currently in the process of obtaining a third-party valuation ofthe warrants.

 

***Mezzanine Financing***

 

In August 2004, MezzCoentered into a mezzanine financing transaction (“Mezzanine Financing”) with agroup of purchasers. Pursuant to the Mezzanine Financing, MezzCo issued $87million 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 theclosing of the Aladdin acquisition, were used to (i) pay approximately $16.1million of fees and expenses related to the acquisition of the Aladdin, (ii)fund the $14 million lien release payment required under the Credit Agreement,and (iii) fund a portion of the planned renovations to the Aladdin. The notesmature in August 2011 and accrue interest at 16% per annum. Interest on thenotes is payable in kind or, at the option of MezzCo, in cash. The warrants areexercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereof.Currently all of MezzCo’s voting membership interests are represented by unitsowned by EquityCo. In addition to customary anti-dilution protections, thenumber of units representing MezzCo membership interests issuable upon exerciseof the warrants may be increased from time to time upon the occurrence ofcertain events as described in the warrants. The maximum aggregate increase is28%, following which the warrants would represent rights to purchase 45.5% ofthe units representing membership interests of MezzCo, on a fully-dilutedbasis. Holders of the warrants and any securities issued upon exercise of thewarrants may require MezzCo to redeem such securities commencing in August 2011at a redemption price based upon a formula set forth in the warrants. Theholders of warrants, and securities issued upon exercise thereof, have theright, starting in August 2008, to assume control of MezzCo and OpBiz andconduct a sale of the equity of, or all or substantially all of the assets of,either MezzCo or OpBiz. These rights are subject to (i) repayment in full ofall indebtedness that is senior to the notes (including all indebtedness ofOpBiz under the Credit Agreement), (ii) certain covenants related to OpBiz’sability to achieve targeted levels of EBITDA and (iii) the prior approval ofthe Nevada gaming authorities. These rights expire upon completion of a publicoffering by MezzCo or OpBiz. In connection with the Mezzanine Financing, OpBiz’sobligation to make expenditures on renovations to the Aladdin was increasedfrom $90 million, as required under the Credit Agreement, to $100 million.

 

As of March 31, 2005, theMezzCo financing was recorded net of the unamortized balance of the putwarrants of approximately $4.2 million. The estimated fair value of thewarrants was approximately $4.1 million at both March 31, 2005 and December 31,2004, respectively.

 

***EnergyServices 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 $500,000 per month.

 

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

 

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

 

BH/RE owns 85% of the membership interests in EquityCoand Starwood owns 15%. OpBiz is a wholly owned subsidiary of EquityCo. BH/REand Starwood made total equity contributions of $20 million each in EquityCo tofund the costs of the planned renovations to the Aladdin. Starwood’s equityinterest in EquityCo is reflected as minority interest in the accompanyingconsolidated financial statements. BH/RE recorded minority interest incomerelated to the Starwood interests of approximately $0.9 million for the yearended December 31, 2004.

 

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 (see Note 8) as a result of abreach by Sheraton. Starwood can require EquityCo to purchase all of itsmembership interests in EquityCo if the hotel management contract is terminatedfor any reason other than in accordance with its terms or as the result of abreach by Sheraton. In addition, BH/RE and Starwood entered into a registrationrights agreement with respect to their membership interests in EquityCo.

 

**8.****                                      RELATED PARTY 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 aquarterly licensing fee of 1.75% of OpBiz’s non-casino revenues. If OpBiz opensan attraction with paid admission using the Planet Hollywood marks ormemorabilia prior to beginning operations as the PH Resort, it will pay PlanetHollywood a quarterly licensing fee of 1.75% of the revenues of the attractionuntil OpBiz begins operating as the PH Resort. The initial term of thelicensing agreement will expire in 2028. OpBiz can renew the licensingagreement for three successive 10-year terms.

 

In addition to being a manager of BH/RE, Mr. Earl isthe chief executive officer and chairman of the board of directors of PlanetHollywood. Similarly, Mr. Teitelbaum is a manager of BH/RE and a director ofPlanet Hollywood. Together, Mr. Earl, a trust for the benefit of Mr. Earl’schildren and affiliates of Bay Harbour Management own substantially all of theequity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of

 

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any equity ofPlanet Hollywood owned by the trust.

 

***Sheraton HotelManagement Contract***

 

OpBiz and Sheraton have entered into a managementcontract pursuant to which Sheraton provides hotel management services toOpBiz, assists OpBiz in the management, operation and promotion of the Hotel andpermits OpBiz to use the Sheraton brand and trademarks in the promotion of theHotel. OpBiz pays Sheraton a monthly fee of 4% of gross hotel revenue andcertain food and beverage outlet revenues and 2% of rental income fromthird-party leases in the hotel. The management contract has a 20-year termcommencing on the completion of the Aladdin acquisition and is subject tocertain termination provisions by either OpBiz or Sheraton. Sheraton is awholly owned subsidiary of Starwood, which has a 15% equity interest inEquityCo and has the right to appoint two members to the EquityCo board ofmanagers. Starwood Management fees totaled approximately $3.1 million for thethree months ended March 31, 2005.

 

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

 

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 a future tax benefit to the extent that realization of suchbenefit is more likely than not. Otherwise, a valuation allowance is applied.

 

At March 31, 2005,OpBiz has a general business credit carryforward of approximately $0.3 millionthat expires in 2024. MezzCo and OpBiz recorded a valuation allowance atMarch 31, 2005 relating to recorded tax benefits because all benefits aremore likely than not to be unrealized.

 

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

 

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

 

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

 

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## **ITEM 2.**    MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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 our subsidiaries for theperiods covered in the report. The discussion of operations herein focuses onevents and the revenues and expenses during the three months ended March 31,2005 as compared to the three months ended March 31, 2004, as if there was nochange 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 toconsolidated financial statements of BH/RE and Aladdin Gaming, respectively,the “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included in BH/RE’s Form 10 Registration Statement (File No.000-50689) filed with the Securities and Exchange Commission on April 15,2004 and the unaudited condensed consolidated financial statements and noteshereto included in Part I, Item 1 of this report.

 

###### ***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. Gains orlosses on dispositions of property and equipment are included in thedetermination of income. Property and equipment are generally depreciated overthe following estimated useful lives on a straight-line basis:

 
| Buildings                         |   | 39.5 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 of Long-Lived Assets*.”For assets to be disposed of, the asset to be sold is recognized at the lowerof carrying value or fair value less costs of disposal. Fair value for assetsto be disposed of is estimated based on comparable asset sales, solicitedoffers or a discounted cash flow model.

 

Property and equipment are reviewed for 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.

 

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*DerivativeInstruments and Hedging Activities*

 

BH/RE has issued warrantsin an effort to provide further consideration to the purchasers of membershipsinterests in EquityCo and MezzCo. BH/RE accounts for the senior note warrantsin EquityCo as embedded derivative instruments in accordance with SFAS No. 133,“*Accounting for Derivative Instruments and HedgingActivities,*” and SFAS No. 138, “*Accounting for CertainDerivative Instruments and Hedging Activities – an Amendment of FASB StatementNo. 133*”. The warrants issued in conjunction with the MezzanineFinancing contain a net cash settlement, and therefore are accounted for inaccordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFAS No. 133and EITF 00-19 require that the warrants be recognized as liabilities, withchanges in fair value affecting net income.

 

###### ***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.

 

###### ***SlotClub Program***

 

Slot club members earn points based on gamingactivity, which can be redeemed for cash. A liability is recorded for theestimated cost of the outstanding points accrued under the slot club program.

 

*IncomeTaxes*

 

The consolidated financial statements include theoperations of BH/RE and its controlled subsidiaries: EquityCo, MezzCo, andOpBiz. BH/RE and EquityCo are limited liability companies and are taxed aspartnerships for federal income tax purposes. MezzCo has elected to be taxed asa corporation for federal income tax purposes. OpBiz, a wholly-owned subsidiaryof MezzCo, will be treated as a division of MezzCo for federal income taxpurposes, and accordingly, will also be subject to federal income taxes.

 

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 afuture tax benefit to the extent that realization of such benefit is morelikely than not. Otherwise, a valuation allowance is applied.

 

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

 

As of March31, 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 such disclosureswould not be meaningful to the financial statement presentation.

 

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

 

The following table highlights the results ofoperations of the Aladdin for the three months ended March 31, 2005 and 2004,respectively (dollars in thousands, unaudited). The amounts included in thebalances for the three months ended March 31, 2004 include the results fromboth BH/RE and Aladdin Gaming.

 
| ** **                           | ** ** | **Three months ended March 31,** | ** ** | **Percent** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|-------------|------------|
| ** **                           | ** ** | **2005**                         | ** ** | **2004**    | ** ** | **Change** | ** ** |
| Net revenues                         |       | $                                | 79,219     |        | $          | 73,356 |   | 8.0 | % |
| Operating  expenses:                 |       |                             |       |        |       |   |   |
| Casino                               |       | 17,458                           |       | 16,877      |       | 3.4 | % |
| Hotel                                |       | 9,056                            |       | 7,512       |       | 20.6 | % |
| Food and  beverage                   |       | 12,939                           |       | 11,439      |       | 13.1 | % |
| Other                                |       | 2,342                            |       | 3,434       |       | (31.8 | )% |
| Selling, general  and administrative |       | 17,500                           |       | 15,193      |       | 15.2 | % |
| Depreciation and  amortization       |       | 5,870                            |       | —      |       | 100.0 | % |
| Preopening  expenses                 |       | —                           |       | 286         |       | (100 | )% |
| Operating income                     |       | $                                | 14,054     |        | $          | 18,615 |   | (24.5 | )% |

 

Net revenues and overall operating results for the threemonths ended March 31, 2005 improved over that of the three months ended March31, 2004 due to more effective operating efficiencies as a result of thepurchase of the Aladdin by OpBiz, as well as an improvement in general economicconditions during the first quarter of 2005. The decrease in operating incomewas primarily due to depreciation not being recorded during the first eightmonths of 2004, while Aladdin Gaming was undergoing bankruptcy proceedings.

 

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The following tablehighlights the various sources of our revenues and expenses for the threemonths ended March 31, 2005 and 2004 (dollars in thousands, unaudited). Theamounts included in the balances for the three months ended March 31, 2004include the results from both BH/RE and Aladdin Gaming.

 
| ** **                                    | ** ** | **Three months ended  March 31,** | ** ** | **Percent** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **2005**                          | ** ** | **2004**    | ** ** | **Change** | ** ** |
| Casino revenues                               |       | $                                 | 32,913     |        | $          | 29,389 |   | 12.0 | % |
| Casino expenses                               |       | 17,458                            |       | 16,877      |       | 3.4 | % |
| *Margin*                                      | * *   | *47.0*                            | *%*        | *42.6*      | *%*        | *4.4* | *%* |
|                                          |       |                              |       |        |       |   |   |
| Hotel revenues                                |       | $                                 | 29,237     |        | $          | 28,512 |   | 2.5 | % |
| Hotel expenses                                |       | 9,056                             |       | 7,512       |       | 20.6 | % |
| *Margin*                                      | * *   | *69.0*                            | *%*        | *73.7*      | *%*        | *(4.7* | *)%* |
|                                          |       |                              |       |        |       |   |   |
| Food and  beverage revenues                   |       | $                                 | 19,319     |        | $          | 18,903 |   | 2.2 | % |
| Food and  beverage expenses                   |       | 12,939                            |       | 11,439      |       | 13.1 | % |
| *Margin*                                      | * *   | *33.0*                            | *%*        | *39.5*      | *%*        | *(6.5* | *)%* |
|                                          |       |                              |       |        |       |   |   |
| Other revenues                                |       | $                                 | 4,393      |        | $          | 4,124 |   | 6.5 | % |
| Other expenses                                |       | 2,342                             |       | 3,434       |       | (31.8 | )*%* |
|                                          |       |                              |       |        |       |   |   |
| Selling, general  and administrative expenses |       | $                                 | 17,500     |        | $          | 15,193 |   | 15.2 | % |
| *Percent  of net revenues*                    | * *   | *22.1*                            | *%*        | *20.7*      | *%*        | *1.4* | *%* |

 

*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. Casino revenue is definedas the win from gaming activities, computed as the difference between gamingwins 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 increased12.0% to $32.9 million for the three months ended March 31, 2005 as compared to$29.4 million for the three months ended March 31, 2004. The increase in casinorevenues is primarily due to the addition of new and more popular gamingdevices and the conversion of a significant amount of our gaming devices to “ticket-in,ticket-out” technology. Table games revenue for the three months ended March31, 2005 increased by approximately $2.0 million compared to the three monthsended March 31, 2004. The increase in table games revenue was due to anincrease in win percentage to 18.8% from 16.4% for the three months ended March31, 2005 and 2004, respectively.

 

Casino expenses increased3.4% to $17.5 million for the three months ended March 31, 2005 as compared to$16.9 million for the three months ended March 31, 2004. The casino margin increased4.4 percentage points in comparing the same three-month periods. The increasein casino expenses was mainly the result of an increase in gaming taxes andemployee benefit expenses for the three months ended March 31, 2005 as comparedto the three months ended March 31, 2004.

 

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*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 increased 2.5%to $29.2 million for the three months ended March 31, 2005 as compared to $28.5million for the three months ended March 31, 2004. Hotel occupancy percentages decreased3.5 percentage points to 94.1% for the three months ended March 31, 2005 ascompared to 97.6% for the three months ended March 31, 2004. Average daily roomrates increased to $134 for the three months ended March 31, 2005, as comparedto $126 for the three months ended March 31, 2004, resulting in increased hotelrevenues. The increase in hotel revenues and average daily room rates areprimarily due to an improvement in general economic conditions during the firstquarter of 2005 and a higher demand for rooms in Las Vegas in general.

 

Hotel expenses increased20.6% to $9.1 million for the three months ended March 31, 2005 as compared to$7.5 million for the three months ended March 31, 2004. Hotel margins decreased4.7 percentage points over the same three-month periods. The decrease in hotelmargins was primarily due to the commencement of management fees paid toStarwood under the management contract.

 

*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 2.2% to $19.3 million for the three months ended March 31,2005 as compared to $18.9 million for the three months ended March 31, 2004. Theaverage guest check increased to $22.60 for the three months ended March 31,2005 as compared to $20.75 for the three months ended March 31, 2004, whichresulted in increased food and beverage revenues. The increase in the averageguest check was primarily due to selected price increases, particularly in banquetsand the buffet.

 

Food and beverageexpenses increased 13.1% to $12.9 million for the three months ended March 31,2005 as compared to $11.4 million for the three months ended March 31, 2004.Food and beverage margins decreased 6.5 percentage points in comparing the samethree-month periods. The increase in food and beverage expenses was due to increasedemployee benefit expenses, as well as the commencement of management fees paidto Starwood under the management contract.

 

*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 increased 6.5%to $4.4 million for the three months ended March 31, 2005 as compared to $4.1million for the three months ended March 31, 2004. The increase in otherrevenues is primarily due to increases in telephone and leased outlets revenue,which were offset somewhat by a decrease in entertainment revenue.

 

Other expenses decreased 31.8%to $2.3 million for the three months ended March 31, 2005 as compared to $3.4million for the three months ended March 31, 2004. The decrease in otherexpenses is related to a decrease in contract entertainment costs as a resultof fewer performances in the TPA during the first quarter of 2005.

 

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

 

SG&A expensesincreased 15.2% to $17.5 million for the three months ended March 31, 2005 ascompared to $15.2 million for the three months ended March 31, 2004. SG&Aexpenses as a percentage of net revenues increased 1.4 percentage points incomparing the same three-month periods. The increase in SG&A expenses wasprimarily due to an increase in payroll and related expenses, as well as managementand centralized services fees incurred under the Starwood Management Agreement,which took effect beginning in September 2004. A large portion of these costsare fixed and, as a result, as revenues increased the percentage of SG&Aexpenses to net revenues decreased.

 

*Depreciationand Amortization*

 

Aladdin Gaming did notrecord depreciation expense during 2004, as the assets were classified as “heldfor sale”. As a result, the depreciation expense for the three months ended March31, 2005 are significantly greater than the same period in the prior year. Depreciationand amortization expense was approximately $5.9 million for the three monthsended March 31, 2005.

 

*InterestExpense, Net*

 

Interest expense, netincreased to $13.6 million for the three months ended March 31, 2005 ascompared to $0.9 million for the three months ended March 31, 2004. Theincrease in interest expense, net is directly related to the addition of theCredit Agreement we entered into upon the completion of the acquisition of theAladdin on September 1, 2004.

 

###### ***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 three monthsended March 31, 2005, we generated cash flows from operating activities ofapproximately $12.4 million. We also had restricted cash and cash equivalentsof approximately $94.5 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$100 million in capital expenditures related to the renovation project, (ii)approximately $7.0 million for maintenance capital expenditures and (iii) up toapproximately $32.4 million in interest payments on our debt.

 

We believe that cash generated from operations, thecapital invested in OpBiz at closing and the working capital, including thecash that we acquired from Aladdin Gaming under the purchase agreement will beadequate to meet the anticipated working capital, capital expenditure,renovation and debt service obligations of OpBiz for the first 12 monthsafter the Aladdin acquisition. We may have other liquidity needs, such as taxdistributions to the members of EquityCo and BH/RE. The Credit Agreement allowsOpBiz to make tax distributions.

 

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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 Credit Agreement is lower than theinterest 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. Our obligations under theCredit Agreement are secured by liens on all of our assets, including amortgage on our 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. We simultaneously made a $14 million cash paymentto the holders of the Term Loan A notes to reduce the principal amount of theTerm Loan A notes to $486 million and obtained a release of their lien on theTimeshare Land.

 

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 August31, 2006 and ending onAugust 31, 2007;

•        $3.75 millionon the first day of each fiscal quarter during the period beginning on August31, 2007 and ending onAugust 31, 2008;

•        $5.0 millionon the first day of each fiscal quarter during the period beginning on August31, 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.

 

We pay interest on theoutstanding Term Loan A notes quarterly, in cash, at the London Inter-BankOffered Rate, or LIBOR, plus an applicable margin that increases over time.Until August 31, 2007, our interest payment will not exceed our quarterlyEBITDA, reduced by certain permitted deductions (as defined in the CreditAgreement), divided by a factor of 1.20. After August 31, 2007, our interestpayment will not exceed our quarterly EBITDA, reduced by certain permittedreductions (as defined in the Credit Agreement). Interest on the Term Loan Bnotes will accrue 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 wepay off the Term Loan B notes. We are will also required to pay an annualadministrative fee and certain other fees and expenses of the lender under theCredit Agreement.

 

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We are required to prepayamounts 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 $81.0 millionis not spent on renovation capital expenditures by February 28, 2007 or (iii)an aggregate amount of $90.0 million is not spent on renovation capitalexpenditures by August 31, 2007; and

•        with theproceeds of certain asset sales.

 

In particular, after weaccumulate certain permitted cash reserves, we are required to pay 100% of ourexcess cash flow (as defined in the Credit Agreement) from operations to thelenders under the Credit Agreement. That percentage decreases to 75%, then 50%,if we meet certain targeted ratios of total debt to EBITDA, or leverage ratios,for any two consecutive fiscal quarters.

 

The Credit Agreementincludes covenants that, among other things, restrict our ability to sellassets, make distributions to our owners, other than distributions for taxes, incuror prepay additional indebtedness, enter into transactions with affiliates,incur liens, make investments, make capital expenditures,****develop the Timeshare Land adjacent to theDesert Passage and enter into material contracts. In addition, we are requiredto maintain certain levels of EBITDA that increase over time and, beginningAugust 31, 2007, maintain certain ratios of EBITDA to interest expense thatincrease over time and maintain certain leverage ratios that decrease overtime.

 

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 us under the hotel management contract or termination of Sheraton asthe manager of the Hotel (unless we replace Sheraton with another approvedmanager within 30 days of such termination), a default or termination of thePlanet Hollywood license agreement and certain defaults under the agreementswith Boulevard Invest or Northwind Aladdin.

 

TheCredit Agreement includes warrants entitling the lenders to 2.5% of the fullydiluted membership interests in EquityCo at a price equal to the price paid bythe principals of EquityCo. BH/RE has issued warrants to purchase 2.94% of itsownership interest in EquityCo to the lenders under the Credit Agreement. Thewarrants can only be exercised upon the occurrence of a (i) liquidity event ordistribution (such as through the sale of the hotel/casino); (ii) a public saleof equity securities of EquityCo, MezzCo, or (iii) OpBiz; or payment in full ofthe obligations under the Credit Agreement. The warrants can either be settledin cash or in other membership interests upon exercise.

 

Asof March 31, 2005, management estimated the fair value of the warrants to beapproximately $0.1 million.  However,management is currently in the process of obtaining a third-party valuation ofthe warrants.

 

*Mezzanine Financing*

 

In August 2004, MezzCoentered into a mezzanine financing transaction (“Mezzanine Financing”) with agroup of purchasers. Pursuant to the Mezzanine Financing, MezzCo issued $87million 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 theclosing of the Aladdin acquisition, were used to (i) pay approximately $16.1million of fees and expenses related to the acquisition of the Aladdin, (ii)fund the $14 million lien release payment required under the Credit Agreement,and (iii) fund a portion of the planned renovations to the Aladdin. The notesmature in August 2011 and accrue interest at 16% per annum. Interest on thenotes is payable in

 

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kind or, at the option of MezzCo, in cash. The warrants are exercisableat any time, subject to the approval of the Nevada gaming authorities, at apurchase price of $0.01 per unit. Subject to the approval of the Nevada gamingauthorities, the warrants may be exercised to purchase either voting ornon-voting membership interests of MezzCo or a combination thereof. Currentlyall of MezzCo’s voting membership interests are represented by units owned byEquityCo. In addition to customary anti-dilution protections, the number ofunits representing MezzCo membership interests issuable upon exercise of thewarrants may be increased from time to time upon the occurrence of certainevents as described in the warrants. The maximum aggregate increase is 28%,following which the warrants would represent rights to purchase 45.5% of theunits representing membership interests of MezzCo, on a fully-diluted basis.Holders of the warrants and any securities issued upon exercise of the warrantsmay require MezzCo to redeem such securities commencing in August 2011 at aredemption price based upon a formula set forth in the warrants. The holders ofwarrants, and securities issued upon exercise thereof, have the right, startingin August 2008, to assume control of MezzCo and OpBiz and conduct a sale of theequity of, or all or substantially all of the assets of, either MezzCo orOpBiz. These rights are subject to (i) repayment in full of all indebtedness thatis senior to the notes (including all indebtedness of OpBiz under the CreditAgreement), (ii) certain covenants related to OpBiz’s ability to achievetargeted levels of EBITDA and (iii) the prior approval of the Nevada gamingauthorities. These rights expire upon completion of a public offering by MezzCoor OpBiz. In connection with the Mezzanine Financing, our obligation to makeexpenditures on renovations to the Aladdin was increased from $90 million, asrequired under the Credit Agreement, to $100 million.

 

As of March 31, 2005, theMezzCo financing was recorded net of the unamortized balance of the putwarrants of approximately $4.2 million. The estimated fair value of thewarrants of approximately $4.1 million at March 31, 2005 and December 31, 2004,respectively.

 

*Energy Services Agreement*

 

Northwind Aladdin (“Northwind”), a third party, ownsand operates a central utility plant on land leased from us. The plant supplieshot and cold water and emergency power to the Aladdin under a contract betweenAladdin Gaming and Northwind. We have assumed the energy service agreement,which expires in 2018. Under the agreement, we are required to pay Northwind amonthly consumption charge, a monthly operational charge, a monthly debtservice payment and a monthly return on equity payment. Payments under theNorthwind agreement total approximately $500,000 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 publicly release any revisions tosuch forward-looking statements to reflect events or circumstances after thedate hereof.

 

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 onForm 10-K, filed by BH/RE with the Securities and Exchange Commission onApril 15, 2005.

 

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## **ITEM 3.**    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

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 acquisition projects,legal proceedings and employee matters are included in our filings with theSecurities and Exchange Commission. Readers are cautioned not to place unduereliance on any forward-looking statements. We undertake no obligation topublicly release any revisions to such forward-looking statements to reflectevents or circumstances after the date hereof.

 

Market risk is the riskof loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and commodity prices. Ourprimary exposure to market risk is interest rate risk associated with ourlong-term debt. We pay interest on the outstanding Term Loan A notes quarterly,in cash, at the London Inter-Bank Offered Rate, or LIBOR, plus an applicablemargin that increases over time. Interest on the Term Loan B notes will accrueat a rate of LIBOR plus 4% and will be added quarterly to the outstandingprincipal amount of the Term Loan B notes and will be paid when we pay off theTerm Loan B notes. An increase of one percentage point in the average interestrate applicable to the variable rate debt outstanding at March 31, 2005 wouldincrease the annual interest cost by approximately $3.8 million.

 

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

 

***Evaluationof Disclosure Controls***

 

Prior to September 1, 2004, we were a developmentstage company and as such, our management, under the supervision and with theparticipation of our Chief Executive Officer and our Chief Financial Officer,were developing a system of disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, asamended) and performed an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures implemented at such time.Since the closing of the acquisition of the Aladdin, a system of disclosurecontrols and procedures has been put in place that our management, includingour Chief Executive Officer and Chief Financial Officer, believe includedisclosure controls and procedures that are effective to ensure thatinformation required to be disclosed in reports that we file or submit underthe Exchange Act are recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin the reports that we file under the Securities Exchange Act of 1934 isaccumulated and communicated to our managers, as appropriate to allow timelydecisions regarding required disclosure.

 

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### ***Limitations on the Effectiveness of Controls***

 

Our managers do notexpect that our disclosure controls and procedures or our internal controlsover financial reporting will prevent all error and all fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,but not absolute, assurance that the objectives of a control system are met.Further, any control system reflects limitations on resources, and the benefitsof a control system must be considered relative to its costs. Because of theinherent limitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within us have been detected. These inherent limitations include the realitiesthat judgments in decision-making can be faulty and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of a control. The design of a control system is alsobased upon certain assumptions about the likelihood of future events, there canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, controls may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and may not be detected.

 

### ***Conclusions***

 

Based on this evaluation,we concluded that, subject to the limitations noted above, our disclosurecontrols and procedures are effective to ensure that information we arerequired to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 are recorded, processed, summarized, and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.

 

### ***Changes in Internal Controls***

 

There were no changes inour internal controls over financial reporting that occurred during our lastfiscal quarter, *i.e.*, the quarterended March 31, 2005, that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting.

 

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# **PART II  — OTHER INFORMATION**

 

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

 

**ITEM 2.****  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS –**None

 

**ITEM 3.****    DEFAULTS UPON SENIOR SECURITIES –**None

 

**ITEM 4.****  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS -**None

 

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

 

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

 

(a)                                    Exhibits:

 

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

 

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

 

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

 

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

 

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

 

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

 

(b)                                 Reportson Form 8-K None

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|          | BH/RE,  L.L.C.           |
|---------------|--------------------------|
|          |                     |
|          |                     |
| May 16,  2005 | By:                      | /S/  Donna Lehmann |   |
|          | Donna  Lehmann           |
|          | Chief  Financial Officer |

 

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