10-Q 1 mm8-1406_10q.txt 06-30-06 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2006 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 333-114339 PREMIER ENTERTAINMENT BILOXI LLC AND PREMIER FINANCE BILOXI CORP. (Exact Name of Registrant as specified in Its Charter) DELAWARE 20-0495680/20-0495563 (State or Other Jurisdiction of (IRS Employer Identification No) Incorporation or Organization) 777 BEACH BOULEVARD BILOXI, MS 39530 (Address, including zip code, or Principal Executive Offices) (228) 374-7625 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [_] NO [x] ================================================================================ The equity securities of Premier Entertainment Biloxi LLC are not publicly traded and are all owned by affiliates. The equity securities of Premier Finance Biloxi Corp. are not publicly traded and are all owned by Premier Entertainment Biloxi LLC. There is no established public trading market for these securities. On August 14, 2006, there were 1,000 shares of common stock of Premier Finance Biloxi Corp. outstanding and held by Premier Entertainment Biloxi LLC. 2 PREMIER ENTERTAINMENT BILOXI LLC AND PREMIER FINANCE BILOXI CORP. (A DEVELOPMENT STAGE COMPANY) INDEX PART I. FINANCIAL INFORMATION Item 1. Unaudited Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005............................................4 Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2006 and 2005 the Six Months ended June 30, 2006 and 2005 and for the period from commencement of operations on March 27, 2003 through June 30, 2006....................................................5 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2006 and 2005 and for the period from commencement of operations on March 27, 2003 through June 30, 2006............................................6 Notes to Condensed Consolidated Financial Statements................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................18 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........21 Item 4. Controls and Procedures............................................22 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................22 Item 4. Submission of Matters to a Vote of Security Holders................24 Item 6. Exhibits Index.....................................................25 Signatures Exhibits 3 PREMIER ENTERTAINMENT BILOXI LLC (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED BALANCE SHEETS

~~UNITED STATES~~JUNE 30, DECEMBER 31, 2006 2005 (UNAUDITED) (NOTE 1) ------------- ------------- ASSETS Current assets: Cash $ 813,475 $ 1,747,004 Government securities - restricted -- 8,332,711 Accounts receivable 224,306 163,005 Prepaid insurance 278,685 932,636 Prepaid expenses - other 853,346 586,944 Other current assets 8,600 23,600 ------------- ------------- Total current assets 2,178,412 11,785,900 Property and equipment, net of writedown 96,313,890 95,556,418 Other non-current assets: Restricted cash 117,488,378 34,191,301 Insurance receivable 47,915,640 92,877,100 Other assets, net 5,878,353 6,486,277 ------------- ------------- Total assets $ 269,774,673 $ 240,896,996 ============= ============= LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable $ 5,334,606 $ 7,003,665 Accounts payable - construction in progress 6,223,434 10,594,649 Accrued interest 9,016,656 8,326,097 Other accrued liabilities 7,086,506 3,725,252 Notes payable 158,345,035 158,240,569 Current maturities of long-term debt 12,092,616 2,741,735 ------------- ------------- Total current liabilities 198,098,853 190,631,967 Long-term debt, less current maturities 23,439,119 23,840,450 Members' contributed capital 52,775,215 52,775,215 Deficit accumulated during development stage (4,538,514) (26,350,636) ------------- ------------- Total members' equity 48,236,701 26,424,579 ------------- ------------- Total liabilities and members' equity $ 269,774,673 $ 240,896,996 ============= =============

See the accompanying notes to the condensed consolidated financial statements. 4 PREMIER ENTERTAINMENT BILOXI LLC (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

~~SECURITIES AND~~Period ~~EXCHANGE~~from ~~COMMISSION~~commencement of operations on March 27, 2003 Three Months Ended June 30, Six months ended June 30, through 2006 2005 2006 2005 June 30, 2006 ------------- ------------- ------------- ------------- ------------- Preopening expenses $ 3,072,053 $ 1,276,059 $ 4,003,009 $ 2,284,395 $ 13,398,320 Hurricane-related expenses: Preopening expenses - business interruption 1,922,445 -- 3,625,804 -- 10,387,272 Property and equipment writedowns 27,487 -- 30,994 -- 96,200,268 Other hurricane-related expenses 864,437 -- 1,073,195 -- 10,209,391 ------------- ------------- ------------- ------------- ------------- 2,814,369 -- 4,729,993 -- 116,796,931 Insurance recoveries (29,448,451) -- (31,364,076) -- (143,242,014) Depreciation and amortization 204,836 34,374 412,617 64,698 861,538 ------------- ------------- ------------- ------------- ------------- Income (loss) from operations 23,357,193 (1,310,433) 22,218,457 (2,349,093) 12,185,225 Other income (expense): Interest expense (5,538,995) (1,561,668) (10,873,913) (4,318,966) (36,890,654) Interest income 432,118 417,388 548,880 935,835 3,599,055 Insurance recoveries - interest 4,933,614 -- 9,918,698 -- 16,567,860 ------------- ------------- ------------- ------------- ------------- Total other income (expense) (173,263) (1,144,280) (406,335) (3,383,131) (16,723,739) ------------- ------------- ------------- ------------- ------------- Net income (loss) $ 23,183,930 $ (2,454,713) $ 21,812,122 $ (5,732,224) $ (4,538,514) ============= ============= ============= ============= =============

See the accompanying notes to the condensed consolidated financial statements. 5 PREMIER ENTERTAINMENT BILOXI LLC (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

~~Washington~~Period from commencement of operations on March 27, DC ~~20549~~2003 Six Months Ended June 30, through 2006 2005 June 30, 2006 ------------- ------------- ------------- Operating activities Net income (loss) $ 21,812,122 $ (5,732,224) $ (4,538,514) Depreciation and amortization 412,617 64,698 861,538 Amortization of deferred financing costs, discount and repayment premium 595,407 572,505 3,243,897 Property and equipment writedowns 30,994 -- 96,200,268 Other hurricane-related writedowns -- -- 638,473 Insurance recoveries (41,282,774) -- (159,809,874) Changes in prepaid assets 387,549 (249,131) (1,571,293) Changes in other operating assets and liabilities (1,908,907) (3,680,236) 4,921,026 ------------- ------------- ------------- Net cash used in operating activities (19,952,992) (9,024,388) (60,054,479) Investing activities Purchases of property and equipment (382,715) (56,890,735) (151,628,294) Insurance recoveries received 86,244,234 -- 111,894,234 Purchases of government securities -- -- (32,946,442) Sales of government securities 8,332,711 8,428,979 33,451,651 Acquisition of intangibles -- -- (965,672) Change in restricted cash (83,297,077) 54,432,972 (116,976,043) ------------- ------------- ------------- Net cash provided by (used in) investing activitie 10,897,153 5,971,216 (157,170,566) Financing activities (Increase) decrease in deferred financing costs 122,310 -- (8,088,335) Increase in line of credit -- -- 1,250,000 Proceeds from long-term debt -- 3,224,097 202,713,590 Proceeds from short-term borrowings 8,000,000 -- 8,000,000 Capital contribution -- -- 15,180,810 Change in restricted cash -- -- (1,017,545) ------------- ------------- ------------- Net cash provided by financing activities 8,122,310 3,224,097 218,038,520 Net change in cash (933,529) 170,925 813,475 Cash at beginning of period 1,747,004 5,215 -- ------------- ------------- ------------- Cash at end of period $ 813,475 $ 176,140 $ 813,475 ============= ============= =============

6 PREMIER ENTERTAINMENT BILOXI LLC (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED)

~~FORM~~Period 10from commencement of operations on March 27, 2003 Six Months Ended June 30, through 2006 2005 June 30, 2006 -Q---------- ----------- ----------- Supplemental schedule of non-cash investing and financing activities: Construction costs funded through accounts payable $ 805,867 $ 620,314 $ 6,223,434 Purchase of property and equipment funded through notes payable $ -- $ -- $14,120,932

See the accompanying notes to the condensed consolidated financial statements. 7 PREMIER ENTERTAINMENT BILOXI LLC AND PREMIER FINANCE BILOXI CORP. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005 and 2004 and the period from the commencement of operations on March 27, 2003 through December 31, 2005 filed with the Securities Exchange Commission in April 2006. In the opinion of management, all adjustments (consisting of normal recurring accruals or items discussed herein) necessary for a fair presentation have been included. The results of operations for the three months ended June 30, 2006 and 2005, for the six months ended June 30, 2006 and 2005 and for the period from the commencement of operations on March 27, 2003 through June 30, 2006 do not necessarily indicate the results that may be expected for the full year through December 31, 2006. Premier Entertainment Biloxi LLC, a Delaware limited liability company, ("Premier Entertainment" or the "Company") is a development stage company and was established to own, construct and manage the operations of the Hard Rock Hotel & Casino Biloxi ( "Hard Rock Biloxi"). The personal liability of the members and officers of the Company is limited to the maximum amount permitted under the laws of the state of Delaware. Premier Finance Biloxi Corp. ("Premier Finance") was incorporated in October 2003 as a Delaware corporation and is a wholly-owned subsidiary of Premier Entertainment. Under Mississippi law, certain expenditures are exempt from sales tax if purchased with the proceeds from industrial development revenue bonds issued by the Mississippi Finance Corporation. Premier Finance was formed to fund the capital expenditures that qualify for the tax-exempt status. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Premier Entertainment and its subsidiary, Premier Finance, and have been prepared by the Company's management in accordance with generally accepted accounting principles in the United States of America ("GAAP") and with the rules and regulations of the Securities and Exchange Commission ("SEC"). The Company has incurred a net loss of $4.5 million for the period from the commencement of operations on March 27, 2003 through June 30, 2006. Construction of the property was completed on-time and on-budget in August 2005. However, on August 29, 2005, the Company's casino was destroyed and the casino related facilities, low-rise building, hotel tower and parking garage sustained significant damage as a result of Hurricane Katrina. On August 15, 2005, the Company purchased a comprehensive blanket insurance policy providing up to $181.1 million in coverage for damage to real and personal property, including business interruption coverage. The insurance was comprised of a $25.0 million primary layer underwritten by Industrial Risk Insurers, a $25.0 million first excess layer underwritten by several insurance carriers, and a second excess layer comprising $131.1 million underwritten by several insurance carriers. The syndicated coverage was spread over twelve different insurance carriers. The Company had a 3.0% deductible on its coverage, but purchased three additional insurance policies to reduce the Company's exposure related to that deductible. As of June 30, 2006, the Company has successfully negotiated settlements totaling $159.8 million for $167.1 million face amount of coverage. Only $13 million of $14 million face value of insurance policies issued by James River Insurance Company remains unsettled and is currently in litigation. The $25.0 million primary layer of coverage and the $25.0 million first excess layer have been settled for the full amount of coverage; $50.0 million has been paid into restricted accounts. With respect to the second excess layer, the 8 Company has successfully negotiated settlements totaling $104.4 million for $117.1 million face amount of coverage. $66.1 million of these settlements has been received and deposited into a restricted account as of July 8, 2006. The $38.3 million balance of the settlements is due from the insurers prior to August 31, 2006 in accordance with the terms of the settlements. The Company has also recovered $5.4 million under its smaller deductible buy-down policies; these proceeds have also been deposited into a restricted account. On August 8, 2006, the Company received $1.0 million from James River, which represents, according to James River, the uncontested amount of the claim under their policy. The Company has sent the payment to the trustee and disbursement agent for deposit into a restricted account. In September 2005 the Company engaged its general contractor, Roy Anderson Corp. ("RAC"), to begin clearing the debris from the property and perform substantial remediation; however, remediation, debris removal and reconstruction efforts were halted as U.S. Bank National Association, in its capacity as trustee and disbursement agent for the 10-3/4% First Mortgage Notes due 2012 (the "Notes"), denied the Company's disbursement request for payment of construction expenses incurred prior to Hurricane Katrina, as well as the request to access insurance proceeds received for the purpose of remediation, debris removal, and reconstruction. On February 22, 2006, the trustee and disbursement agent agreed to disburse limited insurance proceeds for the payment of certain costs and expenses related to protecting and maintaining the Hard Rock Biloxi and the pursuit of the collection of insurance claims arising from damages caused by Hurricane Katrina. However, the Company continues to have a significant working capital deficit and has been unsuccessful in its attempt to pay various parties, including vendors, RAC and subcontractors, for construction work performed prior to Hurricane Katrina due to the trustee and disbursement agent's denial of those disbursement requests. During 2005, the Company commenced litigation against the trustee and disbursement agent for their failure to release the requested funds. The Company and the trustee and disbursement agent have agreed to defer all litigation activity including discovery until August 15, 2006. The Company believes that insurance settlements, cash on deposit in the construction disbursement account, and permitted equipment financing is adequate to reconstruct and open the Hard Rock Biloxi similar to its condition immediately preceding Hurricane Katrina, assuming the insurance proceeds are released from the trustee and disbursement agent in a timely manner. However, due to Premier's current inability to access the insurance proceeds, together with the litigation with the remaining insurance carrier, both the amount and timing of access to the insurance proceeds is uncertain. As a result, the Company may not be able to restore Hard Rock Biloxi as planned. Premier has estimated that the costs associated with opening the Hard Rock Biloxi, including, reconstruction, interest and expenses through the reconstruction period, and settlement of existing overdue obligations is approximately $195.0 million. On July 21, 2006, the Company bound a new insurance policy providing up to $149.3 million in coverage for damage to real and personal property and up to the lesser of six months or $30.0 million of business interruption and delayed opening coverage. The coverage is syndicated through several insurance carriers, each with an A.M. Best Rating of A- (Excellent) or better. The policy provides coverage for the existing structures, as well as for the repair and rebuild of the hotel, low rise building and parking garage and the construction of the new casino. Although the insurance policy is an "all risk" policy, weather catastrophe occurrence ("WCO"), which is defined to include damage caused by a named storm, is limited to $50.0 million with a deductible equal to the greater of $7.0 million or 5% of total insured values at risk. WCO coverage is subject to mandatory reinstatement of coverage for an additional pre-determined premium. Since the WCO coverage purchased is substantially less than the coverage in place prior to Hurricane Katrina, the Company has more exposure to property damage resulting from similar catastrophic storms. However, the Company's assessment of the probability of a similar type of loss occurring during the remainder of this year's hurricane season is remote, which is based on an assessment of the damage sustained to the non-casino facilities from Hurricane Katrina last year, and the amount of new construction that will be at risk during the balance of this hurricane season. Premiums for WCO coverage have increased dramatically as a result of Hurricane Katrina, and the amount of coverage that can be purchased has also been reduced as insurance companies seek to reduce their exposure to such events. CHANGE OF CONTROL On April 25, 2006, LUK-Ranch Entertainment, LLC, ("LRE"), a Delaware limited liability company and an indirect subsidiary of Leucadia National Corporation ("Leucadia"), indirectly acquired a controlling interest in the Company by 9 making a capital contribution to GAR, LLC, ("GAR"), owners of 100% of the class A Common Units of the Company. GAR used this capital contribution to acquire one-hundred percent (100%) of the equity interest held by AA Capital Equity Fund, L.P. ("AA Capital"), and AA Capital Biloxi Co-Investment Fund, L.P., ("AA Investment", with AA Investment and AA Capital, together, "AA") in the Company. These interests consisted of one-hundred percent (100%) of the issued and outstanding Class A Preferred Units of the Company and one-hundred percent (100%) of the Class B Common Units of the Company for an aggregate cash purchase price of $89 million. The acquisition was made upon receipt of Mississippi Gaming Commission approval of the acquisition of control, pursuant to a Unit Purchase Agreement by and among GAR, AA, Leucadia, and HRHC Holdings, LLC dated as of April 6, 2006. Pursuant to the agreement, GAR acquired all of AA's equity interest in the Company, which, when added to GAR's existing equity interest in the Company, represented 98% of the common equity of the Company on a fully diluted basis and 100% of the voting equity of the Company (the "Transaction"). LRE funded GAR's acquisition of AA's equity interest in the Company by purchasing (i) 100% of the Class B Common Units of GAR, representing approximately 45% of the total common units of GAR and (ii) 100% of the Class A Preferred Units of GAR (approximately $75.7 million at April 25, 2006), representing 100% of the preferred units in GAR for aggregate cash consideration of $89 million. Under the terms of the GAR operating agreement, LRE controls the Board of Managers of GAR and, as a result, under the Company's operating agreement, LRE controls the board of managers of the Company. The interests in the Company acquired by GAR from AA will continue to be subject to the Pledge and Security Agreement, dated January 23, 2004, among the Company, GAR, AA and U.S. Bank National Association, as are the interests in the Company held by GAR prior to consummation of the acquisition. In June 2006, GAR increased its ownership to 100% of the common equity of the Company by purchasing 100% of the Class C Common Units from Joseph Billhimer. As a result of the consummation of the Transaction, on May 5, 2006, BHR Holdings, Inc., a wholly owned indirect subsidiary of Leucadia and the parent company of LRE, commenced a tender offer (the "Offer") for all of the outstanding $160 million principal amount of the Notes at a price equal to 101% of the par value of the Notes, plus accrued and unpaid interest to the date of payment. The Offer, which expired at noon on June 9, 2006, satisfied the Company's obligation under the Indenture to make such an offer upon the occurrence of a change of control as defined in the Indenture. In connection with the Offer, GAR agreed to cause Premier to pay BHR a fee of $2.0 million, which will be paid only to the extent distributions from the Company are available for such purpose. The Company has recorded a liability for this fee as of June 30, 2006. In addition, the members of the Board of Managers of Premier are entitled to be paid an annual management fee in an aggregate amount of $2.0 million which will be paid by Premier to the extent distributions from the Company are available for such purpose. The Company began accruing for this fee as of the date of the Transaction and has accrued $0.4 for this management fee as of June 30, 2006. TRUSTEE PROPOSAL On June 29, 2006, the Company submitted a Comprehensive Hurricane Katrina Recovery Proposal (the "Proposal") to the trustee and disbursement agent. Under the terms of the Proposal, the Company formally requested that the trustee and disbursement agent exercise its discretion, subject to court approval, to allow the Company to use available insurance proceeds from Hurricane Katrina-related insurance claims that are held or are expected to be held by the trustee and disbursement agent by August 31, 2006 in accordance with the Cash Collateral and Disbursement Agreement (the "Disbursement Agreement") related to the Notes in order to repair, rebuild, and open Hard Rock Biloxi and to pay certain claims. In the Proposal, the Company set forth the sources and uses of cash and commitments needed to fully reconstruct and to have the Hard Rock Biloxi (the "Project") operating by no later than December 31, 2007, to settle overdue outstanding obligations that arose both prior and subsequent to Hurricane Katrina, to fund ongoing operations during the construction period and to fund an 18 month interest reserve from which semi-annual interest payments on the Notes due August 1, 2006, February 1, 2007 and August 1, 2007 will be paid. The Proposal also outlined five specific priorities of uses of the insurance recovery funds anticipated to be received by the trustee and disbursement agent on or before August 31, 2006. The first use of the funds would be to purchase at 10 100% of par, plus accrued but unpaid interest through and including the date of purchase, Notes tendered under an event of loss offer as required by the Indenture. Funds remaining after the first use would then be required to be used to fund interest payments through August 1, 2007. The third use of the funds would be to pay off certain indebtedness owed to equipment financiers to the extent the trustee and disbursement agent determines that those claims have a priority over the trustee and disbursement agent's claims. The fourth use of the funds would be to pay the costs to reconstruct, repair and open Hard Rock Biloxi. The fifth use of the funds would be to pay off certain other obligations directly relating to the Project that arose both prior and subsequent to Hurricane Katrina and are not otherwise prohibited under the Indenture. Funds will only be available for this fifth use to the extent that an 'as-built' appraisal of the Project ordered by the trustee and disbursement agent indicates that the Project as completed will have a value equal to or greater than 120% of the outstanding principal amount of the Notes. On June 30, 2006, the trustee and disbursement agent filed a petition with the State of Minnesota District Court, Second Judicial District, Ramsey County, seeking authorization to take all actions reasonable or necessary to consummate the Proposal. A hearing on this matter is scheduled for August 24, 2006. In accordance with the terms of the Proposal and as required by the Indenture, the Company commenced an event of loss offer on June 30, 2006 to purchase up to $94.0 million principal amount of the Notes at 100% of par, plus accrued and unpaid interest through and including the purchase date. Also on June 30, 2006, BHR commenced a tender offer to purchase all of the outstanding Notes at 101% of par, plus accrued and unpaid interest through and including the purchase date. The BHR offer was intended to enable the Company to have the maximum amount of insurance proceeds available to it to finance the opening of the Hard Rock Biloxi while still providing the holders of the Notes with the opportunity to sell all of their Notes without commission or expense associated with any such sale. Both offers expired on August 2, 2006 with no notes tendered. Upon the payment of certain additional insurance proceeds, the Company may be required to make another tender offer for the Notes up to the aggregate amount of additional insurance proceeds paid. BHR has also agreed, under certain conditions, to make an additional tender offer for all of the Notes at a price equal to 101% of par value contemporaneous with any such offer by the Company At present all debris has been removed, reconstruction efforts have commenced and are ongoing. In order to advance reconstruction efforts prior to obtaining access to the insurance proceeds held by the trustee and disbursement agent, the Company has taken certain actions and entered into the following agreements. o On May 23, 2006, the Company received an unsecured $8.0 million loan from BHR for the purpose of furthering reconstruction efforts. The proceeds of this loan were used to make payments to various parties, including vendors, RAC and subcontractors, for construction work performed prior to Hurricane Katrina and for remediation and debris removal work performed subsequent to Hurricane Katrina. o On June 16, 2006, the Company entered into an amended construction contract with RAC for a guaranteed maximum price of $78.3 million to rebuild the casino portion of Hard Rock and to renovate and repair the existing hotel tower, low-rise building, parking garage and pool and deck area that were severely damaged by Hurricane Katrina. The amended construction contract is an amendment and restatement of the construction contract with RAC dated December 24, 2003. As of August 14, 2006 RAC has billed $2.9 million under the amended construction contract. o On June 16, 2006, the Company entered into a receivables purchase agreement with BHR and RAC. Pursuant to the terms of the receivables purchase agreement, BHR has agreed to purchase up to $40.0 million of receivables due to RAC by the Company under the amended construction contract if such receivables are past due for more than 10 days. As of August 14, 2006 no receivables have been purchased by BHR. Management continues to operate at significantly reduced operating costs, and seek full settlement of the remaining insurance coverage. There can be no assurance that the Company's plans can be accomplished without additional financial support. These conditions raise substantial doubt about the Company's ability to continue as a going concern. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates used in preparing the financial statements that require management judgment include the estimated amount of 11 insurance recoveries, the replacement cost of the Company's property damaged by Hurricane Katrina and the operating costs and interest which will be incurred during the reconstruction period. Actual results could differ significantly from those estimates. RECLASSIFICATIONS The consolidated financial statements for the prior year reflect certain reclassifications to conform to the current year presentation. Reclassifications affecting the consolidated balance sheet as of December 31, 2005 include a decrease in current maturities of long-term debt and a corresponding increase in long-term debt of $1.1 million. Such reclassifications consistently present current maturities of long term debt for all periods presented. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. The Company capitalizes the cost of purchases of property and equipment and capitalizes the cost of improvements to property and equipment that increase the value or extend the useful life of the asset. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives of the assets: Building 35 years Furniture, fixtures and equipment 5-10 years The Company has included in the statements of operations depreciation expense related to office space and equipment that was placed in service after Hurricane Katrina. In accordance with SFAS No. 34, Capitalization of Interest Cost ("SFAS No. 34"), the Company capitalizes the interest cost associated with major development and construction projects as part of the cost of the project. Interest is typically capitalized on amounts expended on the project using the weighted-average cost of outstanding borrowings. Capitalization of interest starts when construction activities, as defined in SFAS No. 34, begin and ceases when construction is substantially complete or development activity is suspended for more than a brief period. Accordingly, the Company suspended the capitalization of interest after Hurricane Katrina. LONG-LIVED ASSETS Long-lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Factors that might indicate a potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset, a significant change in the long-lived asset's physical condition, a change in industry conditions or a reduction in cash flows associated with the use of the long-lived asset. If these or other factors indicate the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flow analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the fair value of the asset. The fair value of the asset is measured using market prices or, in the absence of market prices, is based on an estimate of discounted cash flows. The Company has included an impairment charge in its statement of operations for the year ended December 31, 2005, because of the damage caused by Hurricane Katrina. INTANGIBLE ASSETS The Company has a license agreement with Hard Rock Hotel Licensing, Inc., which provides for an initial term of twenty years and the option to renew for two successive 10-year terms. Under the license agreement the Company has the exclusive right to use and develop the "Hard Rock" brand name in connection with a hotel and casino resort in Biloxi, Mississippi. As consideration for the licensed rights as provided in the license agreement, the Company paid a one-time territory fee of $500,000. This cost was capitalized and is recorded as other assets on the balance sheet and is being amortized over a 20-year period that began in September 2005. DEFERRED FINANCING COSTS AND DEBT DISCOUNT The costs of issuing long-term debt are capitalized as other assets and, along with the original issue discount, are amortized over the term of the related debt. In the event the related debt is redeemed prior to its original term the unamortized portion of these costs and any remaining unamortized debt discount will be expensed as of the date of such redemption. 12 SELF-INSURANCE Prior to July 1, 2006, the Company was self-insured for employee medical insurance coverage up to an individual stop loss of $15,000. Self-insurance liabilities are estimated based on the Company's claims experience and are included in accrued liabilities on the consolidated balance sheets. Effective July 1, 2006, the Company changed to a fully insured plan due to the minimal number of current employees. PREOPENING COSTS Preopening costs are expensed as incurred, consistent with Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"). Expenses incurred include payroll and payroll related expenses, marketing expenses, rental expenses, outside services, and other expenses related to the start-up phase of operations. INCOME TAXES The Company was formed as a Delaware limited liability company and has elected to be treated as a partnership for income tax purposes. Accordingly, any tax related to the Company's income is the obligation of its members and no federal or state income tax provision has been recorded in the Company's financial statements. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2006, the Company adopted the provision of FASB Statement No. 123(R), Share-Based Payment, which is a revision of SFAS 123 and supersedes APB Opinion No. 25. The effect of adopting these new standards had no effect on the Company's accounting for its 2004 Membership Interest Appreciation Rights Plan which allow for the receipt of an award based on the increase in value of the Company. The plan was terminated in June 2006 and the fair market value of these rights at June 30, 2006 was $198,400. The liability has been recognized for the outstanding awards. 2. GOVERNMENT SECURITIES - RESTRICTED In February 2004, the Company invested $32.9 million in U.S. Treasury securities in accordance with the Disbursement Agreement with U.S. Bank as disbursement agent. The investment was classified as held to maturity, and was recorded as government securities at its acquisition cost including accrued interest. The investment plus the interest earned were designated to be used to pay the first four interest payments on the Notes as required by the Disbursement Agreement. The Company used the balance in this account of $8.3 million at December 31, 2005 to pay the February 1, 2006 interest payment on the Notes as required. 3. RESTRICTED CASH The net proceeds from the issuance of the Notes, a portion of the equity investment and the proceeds from the junior subordinated note were deposited into a construction disbursement account and a tidelands lease reserve account pursuant to the Disbursement Agreement. At June 30, 2006, the balance in these accounts was approximately $7.5 million. The insurance proceeds related to Hurricane Katrina totaling $111.9 million were also deposited into a restricted cash account, of which $1.4 million was released to pay professional fees on behalf of the noteholders and $1.8 was released to pay minimal operating costs of the Company for the purpose of protecting the collateral and pursuing the insurance recoveries. These accounts are pledged to the trustee and disbursement agent as security for the Company's obligations under the Notes, and can only be released to the Company in accordance with the Disbursement Agreement. The Company also has a $1.0 million certificate of deposit which is pledged as security for the Company's obligations under the Hard Rock license agreement. In the accompanying consolidated balance sheets, restricted cash is classified as non-current as it is primarily designated for the reconstruction of property and purchases of equipment. Restricted cash includes the following: 13 JUNE 30, DECEMBER 31, 2006 2005 Construction disbursement $ 6,529,925 $ 7,563,614 Interest reserve 8,064 -- Tidelands lease reserve 1,021,267 1,035,440 Insurance proceeds 108,929,122 24,577,870 ------------ ------------ Cash restricted by the Notes 116,488,378 33,176,924 Certificate of deposit restricted by the Hard Rock license agreement 1,000,000 1,014,377 ------------ ------------ Total restricted cash $117,488,378 $ 34,191,301 ============ ============ On July 6, 2006 and August 4, 2006, the trustee and disbursement agent released $90,892 and $228,432, respectively from the construction disbursement account to RAC as progress payments on the contract between the Company and RAC dated March 2, 2006. On July 26, 2006, the trustee and disbursement agent advanced to the Company $331,628 from the insurance proceeds to pay the anticipated monthly costs related to maintaining the property to mitigate further loss and costs related to the collection and prosecution of Hurricane Katrina insurance claims. On August 1, 2006, the trustee and disbursement agent paid $8.6 million from the insurance proceeds to the note holders for the semi-annual interest payment. 4. INSURANCE RECEIVABLE Due to the uncertainties regarding the amount of the insurance recovery that previously existed, the Company had limited the recorded insurance recovery to the costs it had incurred to date less the policy deductible and non-recoverable costs. As of June 30, 2006, the Company has successfully negotiated settlements totaling $159.8 million for $167.1 million face amount of coverage. Only $13 of $14 million face value of insurance policies issued by James River Insurance Company remains unsettled and is currently in litigation. Of these settlements, $111.9 million has been received and deposited into restricted accounts. Of the $47.9 million receivable at June 30, 2006, $9.6 million was received on July 8, 2006 and deposited into a restricted account and the balance of $38.3 million is due from insurance carriers by August 31, 2006 as per the terms of the settlement agreements. As a result of these insurance settlements, the Company recorded an increase to the insurance receivable to reflect the amounts that were resolved. Since the amount recorded for the resolved claims exceeded the amount previously recorded, the excess amount of $26.6 million is reflected in the Company's consolidated statements of operations as insurance recoveries for the three and six months periods ended June 30, 2006. 5. LONG-TERM DEBT AND LOAN AND SECURITY AGREEMENT Long-term debt consists of the following: 14 JUNE 30, DECEMBER 31, 2006 2005 10 3/4% First Mortgage Notes due 2012, net $158,345,035 $158,240,569 15% Junior Subordinated Note due 2012, net 13,410,803 12,461,253 Variable rate IGT note payable 12,870,932 12,870,932 Unsecured loan from BHR Holdings 8,000,000 -- Variable rate Senior Secured Reducing Line of Credit Facility 1,250,000 1,250,000 ------------ ------------ 193,876,770 184,822,754 Less: notes payable current 158,345,035 158,240,569 Less: current maturities 12,092,616 2,741,735 ------------ ------------ Long-term debt $ 23,439,119 $ 23,840,450 ============ ============ 10 3/4% FIRST MORTGAGE NOTES DUE 2012 On January 23, 2004, the Company issued $160.0 million of 10 3/4% First Mortgage Notes due February 1, 2012 in a private placement offering which were subsequently exchanged in an exchange offer registered on Form S-4. The debt outstanding at June 30, 2006 is net of an unamortized discount of $1.7 million, which is being amortized over the term of the Notes. In the event the Notes are redeemed prior to their original term the unamortized portion of this discount will be expensed as of the date of such redemption. The Notes are senior to all existing and future senior unsecured indebtedness, but are subordinated to $14.1 million of senior secured indebtedness incurred to finance the acquisition and installation of furniture, fixtures and equipment. The Notes are secured by a pledge of the Company's membership interests and substantially all of the existing and future assets, except for assets securing certain other indebtedness. In addition, the trustee and disbursement agent is named as a loss payee on behalf of the noteholders under the Company's blanket insurance policies. Interest on the Notes is payable semiannually on each February 1 and August 1 through maturity. The Notes may be redeemed, in whole or in part, at any time on or after February 1, 2008 at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest to the applicable redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below: YEAR PERCENTAGE ---------- ---------- 2008 105.38% 2009 102.69% 2010 and thereafter 100.00% In addition, up to 35% of the Notes may be redeemed at a premium on or prior to February 1, 2007 with the net cash proceeds of an initial public offering. As of June 30, 2006, the Company had recorded deferred financing costs totaling $5.3 million, net of accumulated amortization, which were incurred in connection with the private placement. These deferred financing costs are included in other assets and are being amortized over the term of the related long-term debt. In the event the related debt is redeemed prior to its original term the unamortized portion of these costs will be expensed as of the date of such redemption. As discussed in Note 1 above, BHR commenced a tender offer for the Notes on May 5, 2006. The tender offer, which expired at noon on June 9, 2006, satisfied the Company's obligation under the Indenture to make such an offer as a result of the occurrence of a change of control as defined in the Indenture. Also as discussed in Note 1 above, pursuant to the terms of the Indenture, in an event of loss arising from a storm such as Hurricane Katrina, the Company is required to make an event of loss offer to redeem certain of the Notes to the extent it receives certain net loss proceeds under its insurance policy. The Company commenced such an event of loss offer on June 30, 2006 to purchase up to $94.0 million principal amount of the Notes at 100% of par, plus accrued and unpaid interest through and including the purchase date. Contemporaneous with the Company's event of loss offer, BHR commenced a tender offer for all of the Notes at a purchase price of 101% of par, plus accrued and unpaid interest through and including the purchase date. The BHR offer was intended to enable the Company to have the maximum amount of insurance proceeds available to it to finance the opening of the Hard Rock Biloxi while still providing the holders of the Notes with the opportunity to sell all of their Notes without commission or expense associated with any such sale. Both offers expired on August 2, 2006 with no notes tendered. Upon the receipt of certain additional insurance 15 proceeds, the Company may be required to make another tender offer for the Notes up to the aggregate amount of additional insurance proceeds received. BHR has also agreed, under certain conditions, to make a tender offer for all of the Notes at a price equal to 101% of par value. As a result of the event of loss offer requirements, the Notes are classified as current in the accompanying consolidated balance sheets. The Notes contain certain covenants. As of June 30, 2006, the Company believes it is in compliance with these covenants; however, on January 6, 2006, the Company received a notice from the trustee and disbursement agent relating to its Notes that an Event of Default, as defined in the Indenture, had occurred due to the alleged failure of the Hard Rock Biloxi to be operating by the time specified in the Indenture (December 31, 2005). Further, the trustee and disbursement agent alleges that an additional Event of Default may have occurred due to an alleged failure of the Company to comply with the requirements under the Indenture regarding the Company's obligation to make an event of loss offer to redeem the Notes. On January 6, 2006, the Company responded via a letter to the trustee and disbursement agent that it disagrees with the trustee and disbursement agent that any Event of Default has occurred. Further, the letter noted that the trustee and disbursement agent has no right to declare an Event of Default pursuant to the event of loss criteria. In addition, the Company noted to the trustee and disbursement agent that certain of its assertions are subject to litigation in the United States District Court for the Southern District of Mississippi, Southern Division. In March 2006, the Company signed a litigation deferral agreement with the trustee and disbursement agent that deferred all litigation activity including discovery with respect to the 2005 lawsuits initiated by the Company until April 15, 2006. This deferral agreement was subsequently extended by both parties until August 15, 2006. 15% JUNIOR SUBORDINATED NOTE DUE 2012 Concurrently with the issuance of the Notes, the Company borrowed $10.0 million in the form of a junior subordinated note due August 1, 2012 from Rank America, Inc., an affiliate of The Rank Group Plc, and owner of Hard Rock Hotel Licensing, Inc. Interest on the junior subordinated note accrues at a rate of 15% per annum and will be paid semiannually. If the Company had opened as planned, the first interest payment would have been due on February 1, 2006. Accrued interest at each semi annual interest payment date prior to opening is added to the principal balance. The Company will be required to pay a repayment premium of 3% of the principal amount of the junior subordinated note when it is repaid. Such premium is being accrued over the term of the junior subordinated note. On April 25, 2006, LRE acquired the junior subordinated note from Rank America. Under the change of control event as described in Note 1 or should the Hard Rock license agreement be terminated and the project become owned, operated or licensed by a Hard Rock competitor, the Company may be required to repay all amounts due under the junior subordinated note agreement. In addition, the Company may be required to make mandatory quarterly prepayments as calculated under the terms of the junior subordinated note once the Company opens the hotel and casino after reconstruction. As of August 14, 2006, LRE has not required the Company to prepay the junior subordinated note as a result of the change of control event. Therefore the note is classified as long term in the accompanying consolidated balance sheets. The junior subordinated note contains covenants that are different and, in some instances, more restrictive than those covenants in the Indenture governing the Company's Notes. If there is a default under the junior subordinated note, then there will be a default under the Notes. Although the Company entered into an intercreditor agreement limiting the junior subordinated noteholder's rights to payment under the junior subordinated note, the Company may not have sufficient proceeds to pay its debt obligations under the Notes if there is a default under the junior subordinated note. IGT NOTE PAYABLE On January 5, 2005, the Company entered into a Commercial Sales and Security Agreement (the "IGT Agreement") with International Game Technology ("IGT") for the financing of certain gaming devices and gaming systems. Pursuant to the agreement, the Company purchased approximately 1,100 slot devices from IGT as well as software licenses and related equipment for the gaming system. Under the IGT Agreement, interest accrues at the "high Wall Street Journal prime lending rate" (8.25% at June 30, 2006) and payments are based on a 60-month amortization payable in thirty-six monthly installments of principal and accrued interest with the balance due on the thirty-seventh month (November, 2008). IGT is named as a loss payee under the Company's blanket insurance policies. SENIOR SECURED REDUCING LINE OF CREDIT FACILITY On August 26, 2005, the company received a $1.3 million loan from The Peoples Bank pursuant to a $10.0 million Senior Secured Reducing Line of Credit Facility (the "Credit Facility"). The Credit Facility is secured by a security interest in certain collateral purchased by the Company and the lender is named as a loss payee under the Company's blanket insurance policies. The Credit Facility has a 16 term of sixty-six months that includes an initial funding period that ended on December 31, 2005. Interest on the Credit Facility accrued at the rate of 9.6659% at June 30, 2006, based on twelve month LIBOR plus 4.25%. On December 31, 2005, the outstanding balance of the Credit Facility was converted into a fully amortizing, five year term loan due December 31, 2010, requiring quarterly payments of principal and interest. The Peoples Bank has waived the requirement for principal and interest payments through July 14, 2007. The Company continues to make monthly payments of interest only. BHR HOLDINGS, INC. NOTE PAYABLE On May 23, 2006, the Company received an $8.0 million loan from BHR. The note bears interest at 12% per annum and the principal balance and all accrued and upaid interest is due on the earlier of May 23, 2007 or the date on which sufficient insurance proceeds received from certain insurance carriers become available to repay the note. OTHER On July 1, 2005, the Company obtained an Irrevocable Letter of Credit from The Peoples Bank in favor of Hard Rock Hotel Licensing, Inc. in the amount of $1.0 million to comply with the terms and conditions of the Licensing Agreement with Hard Rock Hotel Licensing, Inc. The Letter of Credit is secured by a certificate of deposit in the amount of $1.0 million for a term of 90 days and will automatically renew. The Letter of Credit will be increased to $3.0 million within 90 days following the reconstruction and opening of the Hard Rock Biloxi. 6. RELATED PARTY TRANSACTIONS Roy Anderson, III a member of GAR is the President, Chief Executive Officer and majority stockholder of RAC, the Company's general contractor. The Company has entered into certain agreements with RAC, each of which the Company believes is on terms that are similar to and no less favorable to the Company than those that otherwise could have been obtained from third parties. Pursuant to a guaranteed maximum price construction agreement, dated December 24, 2003, (the "Initial Construction Agreement"), as amended, RAC had constructed the Project. Total payments for construction of the Project for the period from the commencement of operations on March 27, 2003 through June 30, 2006 were $89.5 million, of which $71.1 million was paid directly to RAC. Post-Katrina remedial work was performed by RAC and payments in respect thereof through June 30, 2006 were $4.5 million; $2.9 million is outstanding and reflected in accounts payable in the June 30, 2006 consolidated balance sheet. On June 16, 2006, the Initial Contract was amended and restated (the "Amended Construction Agreement") to provide for rebuilding the casino portion of the Hard Rock Biloxi and renovating and repairing the existing hotel tower, low-rise building, parking garage and pool and deck area that were severely damaged by Hurricane Katrina. Pursuant to the terms of the Amended Construction Agreement, the Company has agreed to pay RAC the cost of the work performed plus a contractor's fee, with the aggregate of such amounts not to exceed the guaranteed maximum price of $78.3 million. No payments under the Amended Construction Agreement have been made as of June 30, 2006. The Company believes that the terms of the amendments to the Initial Construction Agreement are no less favorable to the Company than the terms of the Initial Construction Agreement. In March 2006, the Company entered into an agreement with RAC to provide additional services at the property required as a result of the damage caused by Hurricane Katrina. The Company agreed to pay RAC the cost of the work performed plus a contractor's fee in an amount not to exceed the guaranteed maximum price of $1.4 million. At June 30, 2006, total amount billed under this agreement was $1.0 million with $90,892 outstanding and reflected in accounts payable in the June 30, 2006 balance sheet. 7. 2004 MEMBERSHIP INTEREST APPRECIATION RIGHTS PLAN On June 13, 2006, the Company entered into agreements with the employees who were participants in the Company's Membership Interest Appreciation Rights Plan, to terminate such plan. As a result of the plan termination, payments aggregating $198,400 will be made to plan participants on the first to occur of (i) the Company's having access for such purpose to restricted funds held by the trustee or (ii) 90 days from the date of the respective agreement. The Company has recorded such amount as a liability at June 30, 2006. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We were formed on October 18, 2002 and commenced operations on March 27, 2003. There were no assets, liabilities or operations from inception through the commencement of operations. Since our formation, we have been in the development stage. Our activities have included applying for certain necessary permits, licenses and regulatory approvals to enable us to own, construct and manage the operations of and engage in development activities for the Hard Rock Biloxi, as well as, pursuing insurance claim settlements related to Hurricane Katrina. We also purchased approximately 8.5 acres of land on the Mississippi Gulf Coast in Biloxi, Mississippi to build the Hard Rock Biloxi. In addition, we have entered into a 20-year licensing agreement with Hard Rock Hotel Licensing, Inc. under which we were granted the right to use and develop the Hard Rock brand name for our hotel and casino resort. We began construction in January 2004 and construction of Hard Rock Biloxi was completed on-time and on-budget in August 2005. On August 29, 2005, Hurricane Katrina destroyed the casino and damaged related facilities, the low-rise building, hotel tower and parking garage. RESULTS OF OPERATIONS We are in the development stage and do not have any historical operating results other than costs incurred in designing, developing and redeveloping Hard Rock Biloxi. For the period from commencement of operations on March 27, 2003 through June 30, 2006, we incurred a net loss of $4.5 million, which reflects preopening expenses of $23.8 million, depreciation and amortization expenses of $0.9 million and net interest expense of $33.3 million, partially offset by insurance recoveries of $159.8 million. As a result of Hurricane Katrina, we recorded an impairment charge of $96.2 million for property and equipment that was destroyed or damaged as well as $10.2 million in other hurricane-related expenses. Due to the resolution of claims under all but one of our insurance policies, the amount recorded for the resolved claims exceeded the amount previously recorded by $26.6 million and is reflected in our consolidated statements of operations as insurance recoveries for the three and six month periods ended June 30, 2006. The preopening costs primarily relate to payroll, utilities, insurance premiums, licensing expenses, transaction fees, legal fees and organizational costs related to the design, development, and redevelopment of Hard Rock Biloxi. We expect these losses to continue until operations commence. Our historical operating results will not be indicative of future operating results because we plan to operate a new gaming facility in the future. Insurance recoveries related to Hurricane Katrina insurance settlements for the three and six month periods ended June 30, 2006 were $34.4 million and $41.3 million respectively. For the three month periods ended June 30, 2006 and 2005 we had net income of $23.2 million and a net loss of $2.5 million, respectively and for the six month periods ended June 30, 2006 and 2005 we had net income of $21.8 million and a net loss of $5.7 million, respectively. Pre-opening expenses for the three month periods ended June 30, 2006 and 2005 were $5.0 million and $1.3 million, respectively and for the six month periods ended June 30, 2006 and 2005 were $7.6 million and $2.3 million, respectively. The increase in pre-opening expenses for the three and six month periods ended June 30, 2006 is related to payroll and other general and administrative expenses, fees associated with the Hard Rock License, utilities, professional fees associated with on-going efforts to settle insurance claims and resolve issues with the trustee and disbursement agent and fees associated with the change of control tender offer made by BHR on the Company's behalf as required by the Indenture. As a result of damage from Hurricane Katrina, property write downs and other hurricane related expenses for the three and six month periods ended June 30, 2006, were $0.9 million and $1.1 million, respectively. These expenses related primarily to costs associated with remediation and debris removal. Depreciation and amortization expenses for the three month periods ended June 30, 2006 and 2005 were $0.2 million and $34,000, respectively and for the six month periods ended June 30, 2006 and 2005 were $0.4 million and $65,000, respectively. The increase is a result of the increased amortization of intangibles and more depreciable assets placed into service. 18 Total net interest expense for the three month periods ended June 30, 2006 and 2005 was $5.1 million and $1.1 million, respectively and for the six month periods ended June 30, 2006 and 2005 was $10.3 million and $3.4 million, respectively. The increase primarily relates to interest capitalized for the three and six month periods ended June 30, 2005 of $3.4 million and $5.7 million respectively. No interest was capitalized for the three and six month periods ended June 30, 2006. LIQUIDITY AND CAPITAL RESOURCES For the period from commencement of operations on March 27, 2003 through June 30, 2006, we used cash for operating activities of $60.1 million. We also used cash for investing activities of $157.2 million, principally to purchase and develop property and equipment. Other cash resources include $117.5 million of cash; however, such funds along with the insurance receivable are restricted by the Notes and the Hard Rock license agreement. We have a significant working capital deficit. We used the gross proceeds we obtained from the offering of the Notes, the equity investment from AA Capital of $52.8 million, the junior subordinated note of $10.0 million and $14.1 million in furniture, fixtures and equipment financing to fund the costs associated with the original construction of Hard Rock Biloxi. The Notes are classified as a current liability on the consolidated balance sheets as a result of the event of loss offer requirements, pursuant to the terms of the Indenture. On August 29, 2005, we sustained an estimated $106.4 million in property, equipment, inventory and other asset losses at Hard Rock Biloxi due to Hurricane Katrina. As of June 30, 2006, we have successfully negotiated settlements totaling $159.8 million for $167.1 million face amount of coverage. Only $13 million of $14 million face value of insurance policies issued by James River Insurance Company remains unsettled and is currently in litigation. The $25.0 million primary layer of coverage and the $25.0 million first excess layer have been settled for the full amount of coverage; and $50.0 million has been paid into restricted accounts. With respect to the second excess layer, we have successfully negotiated settlements totaling $104.4 million for $117.1 million face amount of coverage. $66.1 million of these settlements has been received and deposited into a restricted account as of July 8, 2006. The $38.3 million balance of the settlements is due from the insurers prior to August 31, 2006 in accordance with the terms of the settlement. We have also recovered $5.4 million under certain smaller deductible buy-down policies; these proceeds have also been deposited into a restricted account. On August 8, 2006, the Company received $1.0 million from James River, which according to James River represents the uncontested amount of the claim under their policy. The Company has sent the payment to the trustee and disbursement agent for deposit into a restricted account. We believe that insurance settlements, cash on deposit in the construction disbursement account, and permitted equipment financing is adequate to reconstruct and open the Hard Rock Biloxi similar to its condition immediately preceding Hurricane Katrina, assuming the insurance proceeds are released from the trustee and disbursement agent in a timely manner. However, due to Premier's current inability to access the insurance proceeds, together with the litigation with the remaining insurance carrier, both the amount and timing of access to the insurance proceeds is uncertain. As a result, the Company may not be able to restore Hard Rock Biloxi as planned. Premier has estimated that the costs associated with opening the Hard Rock Biloxi, including, reconstruction, interest and expenses through the reconstruction period, and settlement of existing overdue obligations is approximately $$195.0 million. As more fully discussed in Note 1, - "Basis of Presentation" to the Financial Statements, on April 25, 2006 a subsidiary of Leucadia indirectly acquired a controlling interest in the Company for an aggregate cash purchase price of $89 million. In connection with that transaction, on May 5, 2006, BHR commenced a tender offer (the "Offer") for all of the outstanding $160 million principal amount of the Notes at a price equal to 101% of the par value of the Notes plus accrued and unpaid interest to the date of payment. The tender offer, which expired at noon on June 9, 2006, satisfied the Company's obligation under the Indenture to make such an offer as a result of the occurrence of a change of control as defined in the Indenture. In connection with the Offer, GAR has agreed to cause the Company to pay BHR a fee of $2 million, which will be paid in accordance with the provisions of the Indenture and only to the extent distributions from the Company are available for such purpose. Under the Indenture governing the Notes, in an event of loss such as Hurricane Katrina, we are required to make an event of loss offer to the extent we receive certain net loss proceeds under our insurance policy. What constitutes "net loss 19 proceeds" is the subject of litigation we have filed against the trustee and disbursement agent. To the extent the noteholders choose not to tender their Notes under an event of loss offer, the net loss proceeds may be used by us for remediation and reconstruction of the Hard Rock Biloxi and for any other purpose not otherwise prohibited by the Indenture. On June 30, 2006, we commenced an event of loss offer to purchase up to $94.0 million principal amount of the Notes at 100% of par, plus accrued and unpaid interest through and including the purchase date. Also on June 30, 2006, BHR commenced a tender offer to purchase all of the outstanding Notes at 101% of par, plus accrued and unpaid interest through and including the purchase date. Both offers expired on August 2, 2006 with no notes tendered. At present all debris has been removed, reconstruction efforts have commenced and are ongoing. In order to advance reconstruction efforts we took certain actions. First, we received an $8.0 million loan from BHR on May 23, 2006 and used the proceeds to make certain payments to various parties, including vendors, RAC and subcontractors, for construction work performed prior to Hurricane Katrina and for remediation and debris removal work performed subsequent to Hurricane Katrina. Secondly, on June 16, 2006, we entered into an amended construction contract with RAC for a guaranteed maximum price of $78.3 million to rebuild the casino portion of Hard Rock and to renovate and repair the existing hotel tower, low-rise building, parking garage and pool and deck area that were severely damaged by Hurricane Katrina. Thirdly, we entered into a receivables purchase agreement on June 16, 2006, with BHR and RAC whereby BHR has agreed to purchase up to $40 million of receivables due to RAC by the Company under the amended construction contract in the event such receivables are past due for more than 10 days. As more fully described above, we have submitted a Comprehensive Hurricane Katrina Recovery Proposal to the trustee and disbursement agent asking the trustee and disbursement agent to exercise its discretion to allow us to use available insurance proceeds from Hurricane Katrina-related insurance claims that are held or are expected to be held by the trustee and disbursement agent by August 31, 2006, to repair, rebuild, and open Hard Rock Biloxi and to pay certain claims, in accordance with the Cash Collateral and Disbursement Agreement related to the Notes. The trustee and disbursement agent filed a petition with the State of Minnesota District Court, Second Judicial District, Ramsey County, on June 30, 2006, seeking authorization to take all actions reasonable or necessary to consummate the proposal. A hearing on this matter is scheduled for August 24, 2006. In spite of certain payments made to various parties, including vendors, RAC and subcontractors with the proceeds of the $8.0 million loan from BHR, the actions by the trustee and disbursement agent have prevented us from paying all obligations that arose both prior and subsequent to Hurricane Katrina. Our inability to pay these obligations has resulted in liens being placed against the property. Furthermore, reconstruction efforts may be hindered as a result of the bad will that the nonpayment of past due amounts may create. Critical suppliers, vendors and subcontractors may either increase prices significantly or choose not to do business with us when we repair and reconstruct the property. Management continues to operate at significantly reduced operating costs, and seek full settlement of the remaining insurance coverage. There can be no assurance, however, that our plans can be accomplished without additional support. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Following the reconstruction and opening of the Hard Rock Biloxi, we expect to fund our business from operating cash flows. Mississippi Bond Financing. Mississippi law provides that certain expenditures for materials made in connection with certain economic development projects in the State of Mississippi, including the land-based portion of the Hard Biloxi (which includes the hotel tower, the parking garage, the low-rise pavilion and the pool area), are exempt from Mississippi's sales tax if such expenditures are paid for with proceeds from approved industrial development revenue bonds issued by the Mississippi Business Finance Corporation, ("MBFC"). At June 30, 2006, Premier Finance Biloxi, Corp. had funded consolidated capital expenditures of approximately $35.2 million to qualify for the tax-exempt status. We saved $1.7 million in sales tax that we would have otherwise been required to pay in connection with the purchase of materials used in the construction of the land-based portion of the Hard Rock Biloxi. Premier Finance Biloxi Corp. serves as the co-issuer of the Notes and will not have any material assets or operations, other than in connection with the Mississippi Business Finance Corporation financing. 20 The sale and issuance of the industrial development revenue bonds to Premier Finance Biloxi Corp. and the subsequent loan by MBFC of the proceeds thereof did not result in any additional net indebtedness for us. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles that require our management to make estimates and assumptions that affect reported amounts and related disclosures. Critical accounting policies and estimates discussed in the Form 10-K for the period ended December 31, 2005, have not changed. SEASONALITY We do not have an operating history. We anticipate that activity at the Hard Rock Biloxi may be modestly seasonal, with stronger results expected during the second and third quarters due in part to the relatively higher levels of tourism in the Mississippi Gulf Coast market during this time of the year and weaker results in the fourth quarter. In addition, operations may be impacted by adverse weather conditions and fluctuations in the tourism business generally. Accordingly, results of operations may fluctuate from quarter to quarter and the results for any one quarter may not be indicative of results for future quarters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Through June 30, 2006, we had not invested in derivative or foreign currency-based financial instruments. We are currently exposed to market risk from changes in interest rates. INTEREST RATES We are subject to interest rate risk on our long-term fixed interest rate debt and, to a lesser extent, variable-interest rate borrowings. Variable rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to changes in market interest rates reflected in the fair value of the debt and to the risk that we may need to refinance maturing debt with new debt at a higher rate. All other things being equal, the fair value of our fixed rate debt will increase or decrease as interest rates change. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 2IE of the Securities and Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. Words such as, but not limited to, "believes", "expects", "anticipates", "estimates", "intends", "plans", "could", "may", "should" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements, which may include, without limitation, statements regarding reconstruction plans, cash needs, cash reserves, liquidity, operating and capital expenses, financing options, expense reductions, operating results and pending regulatory matters, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by us. From time to time, oral or written forward-looking statements are also included in our other periodic reports on Forms l0-K, l0-Q and 8-K, press releases and other materials released to the public. Actual results may differ materially from those that might be anticipated from forward-looking statements. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that may cause our actual performance to differ materially from that contemplated by such forward-looking statements or that may materially and adversely affect our actual results include, among others: (1) in the aftermath of destruction to the property and the Mississippi Gulf Coast region caused by Hurricane Katrina, our ability to recover sufficient insurance proceeds to rebuild the property, to gain access to the insurance proceeds currently restricted by U.S. Bank National Association, as trustee and disbursement agent, and to recruit and retain employees, (2) the gaming industry is very competitive and a recent change in 21 the gaming law that has allowed shore based gaming along the Mississippi Gulf Coast could allow for increased competition in the Gulf Coast gaming market, as would the legalization or expansion of gaming in Mississippi or Alabama and the development or expansion of Native American casinos in or near our markets, (3) general construction risks and other factors, some of which are beyond our control, could prevent us from completing our reconstruction project as planned, (4) changes in gaming laws or regulations, and delays in obtaining or our inability to obtain necessary permits, licenses and approvals, including alcoholic beverage licenses and gaming commission approvals, (5) changes in federal or state tax laws, and (6) changes in the economy. Additional factors that could cause our actual performance to differ materially from that contemplated by such forward-looking statements are detailed in our Annual Report on Form 10-K in section 1A entitled "Risk Factors" that was filed in April 2006. ITEM 4. CONTROLS AND PROCEDURES An evaluation of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) was carried out under the supervision and with the participation of our management, including our chief executive officer and our chief financial and accounting officer. Based upon the evaluation, our chief executive officer and our chief financial and accounting officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are effective as of June 30, 2006. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) that occurred during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS U.S. Bank National Association Litigation ----------------------------------------- In the middle of October 2005, we submitted a construction disbursement request to U.S. Bank as trustee and disbursement agent, dated August 26, 2005, seeking a disbursement for payment of construction expenses incurred prior to Hurricane Katrina in the amount of approximately $11.4 million. The construction disbursement request, along with the appropriate certifications from the general contractor, the architect and the independent construction consultant, was submitted in compliance with the Disbursement Agreement and in similar form to eighteen other disbursement requests we submitted dating back to February 2004, all of which were funded by U.S. Bank per the Disbursement Agreement. Nevertheless, on or about October 19, 2005, U.S. Bank denied this August 2005 construction disbursement request. We do not understand the basis for the denial. Consequently, due to these actions of U.S. Bank as trustee and disbursement agent, we have been unsuccessful in our attempt to pay various parties, including vendors, RAC and subcontractors, for work performed prior to Hurricane Katrina to construct the Hard Rock Biloxi. In order to protect the Hard Rock Biloxi, our ongoing reconstruction efforts and to prevent liens from being filed against the property, we filed a Complaint for Injunctive Relief on October 27, 2005 against U.S. Bank National Association, as trustee and disbursement agent for the Notes in the United States District Court for the Southern District of Mississippi Southern Division in Gulfport, Mississippi. We asked the court to enforce the Disbursement Agreement and order the trustee and disbursement agent to disburse funds due under the properly submitted disbursement request. A hearing was held on November 8, 2005, at which time the judge suggested the parties meet to resolve their disagreement. The parties met; however, no solution was reached. On January 3, 2006, the trustee and disbursement agent filed a counterclaim in this matter alleging that funds disbursed to us for preopening expenses were used for other purposes. We deny these allegations and will vigorously defend all actions we took in this matter. On December 16, 2005, we filed another complaint against U.S. Bank National Association, as trustee and disbursement agent, in the United States District Court for the Southern District of Mississippi, Southern Division. We have asked the court to determine that (1) the trustee and disbursement agent has withheld to date, in violation of the Indenture with respect to the Notes, net loss proceeds from us for the rebuilding, repair, replacement or construction of improvements to our property, (2) the trustee and disbursement agent has 22 improperly withheld from us funds received from business interruption insurance; (3) that the definition of "net loss proceeds" in the Indenture does not include funds received from the business interruption insurance; and (4) that the 365 day grace period to rebuild the property granted in Section 4.11 of the Indenture tolls or extends the event of default provisions. The matter has been set for a trial in October 2006. There can be no assurance given as to the results of this litigation. On January 18, 2006, the two actions against U.S. Bank National Association were consolidated by order of the U.S. District Court for the Southern District of Mississippi, Southern Division. On March 3, 2006, we signed a litigation deferral agreement with the trustee and disbursement agent that deferred all litigation activity including discovery in the October 27, 2005 and December 16, 2005 lawsuits until April 15, 2006. The agreement has been extended by both parties until August 15, 2006. On June 27, 2006 we filed a First Amended complaint to the consolidated actions against U.S. Bank National Association, with the United States District Court for the Southern District of Mississippi, Southern Division. This First Amended Complaint essentially expanded the declaratory relief sought to include a determination that any alleged Default by us under the Indenture has been excused by impossibility of performance or otherwise waived and that insurance proceeds from the Hurricane Katrina related damage should immediately be made available to us to rebuild Hard Rock Biloxi. In connection with the agreement deferring litigation activity in the civil action involving the trustee and disbursement agent, the Company agreed to dismiss its claims for money damages against U.S. Bank National Association, however such dismissal did not affect, limit or impair any claims and rights of the Company in or to the assets now or hereafter held in trust by the trustee and disbursement agent under the Indenture or collateral documents. See, also, the Company's disclosure in Note 1 - "Basis of Presentation" to the Financial Statements included herein for a discussion of a petiton filed with respect to the Company's Comprehensive Hurricane Katrina Recovery Proposal submitted to the trustee and disbursement agent on June 29, 2006. Insurance Litigation -------------------- On January 10, 2006, we filed a complaint in the United States District Court for the Southern District of Mississippi, Southern Division against James River, one of the insurers that provided property insurance coverage for Hard Rock Biloxi. We, via the complaints, seek declaratory judgments against the insurer that the insurance policies provide coverage for the water damage to the hotel-casino property resulting from Hurricane Katrina. We are seeking compensatory and punitive damages as well as attorney's fees from the insurer. The policy issued by James River covers $14.0 million of the second excess layer of coverage. The complaint against James River alleges that water damage caused to the Hard Rock Biloxi property by Hurricane Katrina is covered under the James River policy because such water damage was part of a Weather Catastrophe Occurrence (as defined in such policy). Prior to filing our complaint against James River, we were advised by letter from counsel to James River that all flood coverage is excluded from the James River policy, including water damage that is part of a Weather Catastrophe Occurrence, by reason of the flood exclusion in the policy. Counsel acknowledged, however, that the wind damage is covered by the policy. On January 30, 2006, we filed an amended complaint against James River alleging, in addition to initial allegations, that the carrier's flood exclusion language, in any event, does not exclude flood damage to the casino because the casino floated on water. The applicable definition of flood in their policy describes an inundation of normally dry land. James River has moved to dismiss both the complaint and amended complaint. We have filed appropriate responsive pleadings. On May 5, 2006, we filed a Motion for Leave to file a Second Amended Complaint in the United States District Court for the Southern Division of Mississippi, Southern Division, seeking to add a count for declaratory relief against James River for wind damage sustained to the property during Hurricane Katrina. On July 28, 2006 a United States District Judge denied James River's motion to dismiss and motion to strike our jury trial request. James River's answer to our second amended complaint was due to be filed August 11, 2006. We intend to vigorously pursue this action; however, no assurance can be given as to the results of this litigation. 23 On April 28, 2006, the Company filed a Complaint in the Circuit Court of Harrison County, Mississippi, Second Judicial District, against Homeland Insurance Company of New York, Clarendon America Insurance Company, RSUI Indemnity Corporation and Great American E & S Insurance Company, four of the insurers that have provided property insurance coverage for the Hard Rock Biloxi. The Company, via the complaint, seeks declaratory relief, compensatory damages and punitive damages against the respective insurers for their failure to pay insurance proceeds under the insurers' respective policies following Hurricane Katrina in the total amount of $45.0 million. As a result of the settlement of the Company's insurance claims as described above, upon receipt of the settlement amount in accordance with the terms of the settlement agreements, this litigation will be dismissed. In June 2006, upon receipt of insurance proceeds in settlement of the Company's claims, the Company's previously disclosed litigation with SRI was dismissed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Upon consummation of the change of control as disclosed in Note 1 - "Basis of Presentation" to the Financial Statements, the AA-designated members of the Company's Board of Managers, Charles L. Wall, Jr., John A. Orecchio and Matthew R. Friesl, resigned from their positions with the Company, and Ian M. Cumming, Joseph S. Steinberg, Lawrence S. Hershfield and Joseph O'Connor, designees of LRE and Leucadia, were appointed to the Board of Managers by GAR. Ian M. Cumming is the Chairman of the Board of Leucadia, Joseph S. Steinberg is a Director and President of Leucadia, Joseph O'Connor is an employee of Leucadia and Lawrence S. Hershfield is Chief Executive Officer of Ranch Capital, LLC. Lawrence Hershfield was elected Chairman of the Board and will serve on the compensation committee with Joseph O'Connor. Joseph O'Connor and David Ross will serve on the audit committee. 24 ITEM 6. EXHIBITS EXHIBIT INDEX Exhibit Number Description of Exhibit 3.1 Composite Amended Limited Liability Company Operating Agreement of Premier Entertainment Biloxi LLC, 10.1 Promissory Note by Premier Entertainment Biloxi LLC in favor of BHR Holdings, LLC, dated May 23, 2006, 10.2 Amended and Restated Employment Agreement by and between Premier Entertainment Biloxi LLC and Joseph Billhimer, dated June 14, 2006. 10.3 Amended and Restated Employment Agreement by and between Premier Entertainment Biloxi LLC and Robert Callaway, dated June 15, 2006. 10.4 Amended and Restated Employment Agreement by and between Premier Entertainment Biloxi LLC and Todd Raziano, dated June 15, 2006. 10.5 Receivables Purchase Agreement by and between BHR Holdings, Inc., Roy Anderson Corp. and Premier Entertainment Biloxi LLC, dated June 16, 2006. 10.6 Amended and Restated Agreement between Owner and Contractor, dated as of June 16, 2006, between Premier Entertainment Biloxi LLC and Roy Anderson Corp. 31.1 Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act, as amended. 31.2 Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act, as amended. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIER ENTERTAINMENT BILOXI LLC (Registrant) Date: August 14, 2006 /s/ Todd J. Raziano ---------------------------- Todd J. Raziano Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25

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

For the quarterly period ended June 30, 2004

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

For the transition period from to

Commission file number 333-114339

PREMIER ENTERTAINMENT BILOXI, LLC and PREMIER FINANCE BILOXI CORP.

(Exact Name of Registrant as specified in Its Charter)

Delaware		20-0495680 / 20-0495563
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S Employer Identification No.)

111 Lameuse Street, Suite 104 Biloxi, MS 39530

(Address, including zip code, of Principal Executive Offices)

(228) 374-7625

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES o NO ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

On June 30, 2004, the registrant had no shares of common stock outstanding.

Premier Entertainment Biloxi, LLC

(A Development Stage Company)

Index

Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003
	Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2004 and 2003 and the period from commencement of operations on March 27, 2003 through June 30, 2004 (unaudited)
	Condensed Consolidated Statement of Cash Flows for the Six Months ended June 30, 2004 and 2003 and the period from commencement of operations on March 27, 2003 through June 30, 2004 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 6.	Exhibits
Signatures
Exhibits

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PREMIER ENTERTAINMENT BILOXI, LLC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash	$	896		$	16,908
Restricted cash	127,810,384			—
Government securities - restricted	33,126,632			—
Prepaid expenses and other current assets	74,873			274,625
Total current assets	161,012,785			291,533
Property, plant and equipment, net	59,947,733			36,151,817
Other assets, net	8,124,140			2,088,961
Total assets	$	229,084,658		$	38,532,311
LIABILITIES AND MEMBERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	2,968,220		$	2,384,758
Accrued interest	7,785,567			2,521,016
Other accrued liabilities	27,578			90,834
Term loan	—			34,602,544
Total current liabilities	10,781,365			39,599,152
Long-term debt	167,967,135			—
Members’ capital	52,775,216			—
Deficit accumulated during development stage	(2,439,058		)	(1,066,841		)
Total members’ equity (deficit)	50,336,158			(1,066,841		)
Total liabilities and members’ equity (deficit)	$	229,084,658		$	38,532,311

See the accompanying notes to the unaudited condensed consolidated financial statements

PREMIER ENTERTAINMENT BILOXI, LLC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Quarter ended June 30,						Six months ended June 30,						Period from commencement of operations on March 27, 2003, through June 30,
	2004			2003			2004			2003			2004
Operating expenses:
Preopening expenses	$	485,333		$	208,081		$	781,832		$	208,081		$	1,646,280
Loss from operations	(485,333		)	(208,081		)	(781,832		)	(208,081		)	(1,646,280		)
Other income (expense):
Interest expense	(550,570		)	(37,509		)	(1,257,217		)	(37,509		)	(1,460,017		)
Interest income	446,236			12			666,832			12			667,239
Total other income (expense)	(104,334		)	(37,497		)	(590,385		)	(37,497		)	(792,778		)
Net loss	$	(589,667	)	$	(245,578	)	$	(1,372,217	)	$	(245,578	)	$	(2,439,058	)

See the accompanying notes to the unaudited condensed consolidated financial statements

PREMIER ENTERTAINMENT BILOXI, LLC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,						Period from commencement of operations on March 27, 2003 through June 30,
	2004			2003			2004
Operating Activities
Net loss	$	(1,372,217	)	$	(245,578	)	$	(2,439,058	)
Depreciation and amortization	27,355			—			27,355
Amortization of deferred financing costs, discount and repayment premium	719,245			36,624			902,370
Changes in operating assets and liabilities	74,166			(53,818		)	350,872
Net cash used in operating activities	(551,451		)	(262,772		)	(1,158,461		)
Investing Activities
Purchases of property, plant and equipment	(14,382,433		)	(30,988,601		)	(47,050,035		)
Purchase of government securities	(32,946,442		)	—			(32,946,442		)
Acquisition of intangibles	(494,404		)	(500,000		)	(1,028,428		)
Increase in restricted cash	(126,620,079		)	—			(126,620,079		)
Net cash used in investing activities	(174,443,358		)	(31,488,601		)	(207,644,984		)
Financing Activities
Increase in deferred financing costs	(7,122,754		)	(439,500		)	(7,899,754		)
Proceeds from long-term debt	168,111,046			32,195,885			202,713,590
Capital contribution	15,180,810			—			15,180,810
Increase in restricted cash	(1,190,305		)	—			(1,190,305		)
Net cash provided by financing activities	174,978,797			31,756,385			208,804,341
Net increase (decrease) in cash	(16,012		)	5,012			896
Cash at beginning of period	16,908			—			—
Cash at end of period	$	896		$	5,012		$	896

See the accompanying notes to the unaudited condensed consolidated financial statements

Premier Entertainment Biloxi LLC

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the period from the commencement of operations on March 27, 2003 through December 31, 2003 included in the Premier Entertainment Biloxi, LLC (the Company) Registration Statement on Form S-4 filed effective with the Securities Exchange Commission in July 2004. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the three and six months ended June 30, 2004 and 2003 and the period from the commencement of operations on March 27, 2003 through June 30, 2004 do not necessarily indicate the results that may be expected for the full year or for the period from commencement of operations through December 31, 2004.

Premier Finance Biloxi Corp. (Premier Finance) was incorporated in October 2003 as a Delaware corporation and is a wholly-owned subsidiary of Premier Entertainment Biloxi LLC. Under Mississippi law, certain expenditures are exempt from sales tax if purchased with the proceeds from industrial development revenue bonds issued by the Mississippi Finance Corporation. Premier Finance was formed to fund the capital expenditures that qualify for the tax-exempt status. At June 30, 2004, Premier Finance had cash of $501,737 including interest income of $1,737 and a payable to the parent, Premier Entertainment Biloxi LLC, of $500,000. As of June 30, 2004, Premier Finance has funded consolidated capital expenditures of $1,541,666 to qualify for the tax-exempt status with equity contributions from the parent. Premier Finance’s assets and operations are included in the condensed consolidated balance sheet and statements of operations and all significant intercompany balances and transactions have been eliminated.

2. Long-Term Debt and Loan and Security Agreement

On January 23, 2004, the Company issued $160,000,000 aggregate principal amount of 10¾% First Mortgage Notes (Notes) due February 1, 2012 in a private placement offering. The debt outstanding at June 30, 2004 includes an unamortized discount of $2,040,497, which is being amortized over the term of the agreement. The Notes are senior to all existing and future senior unsecured indebtedness and subordinated up to $30,000,000 of senior secured indebtedness to be incurred to finance the acquisition and installation of furniture, fixtures and equipment. The Notes are secured by a pledge

of the Company’s membership interests and substantially all of the existing and future assets, other than furniture, fixtures and equipment purchased with the proceeds of certain other indebtedness, cash-on-hand and the casino vessels until they have been delivered and the ship mortgages are recorded. The Notes may be redeemed, in whole or in part, at any time on or after February 1, 2008 at a premium. In addition, up to 35% of the Notes may be redeemed at a premium on or prior to February 1, 2007 with the net cash proceeds of an initial public offering. The Company incurred $7,109,273 of costs, net of accumulated amortization, in connection with the private placement as of June 30, 2004. These deferred financing costs are included in other assets and are being amortized over the term of the related long-term debt.

Concurrently with the issuance of the Notes, the Company borrowed $10,000,000 in the form of a junior subordinated note due August 1, 2012 from Rank America, Inc., an affiliate of The Rank Group Plc, which owns Hard Rock Hotel Licensing, Inc. Also, at this time, AA Capital (consisting of AA Capital Equity Fund L.P. and AA Capital Biloxi Co-Investment Fund L.P.) converted to equity the unpaid principal outstanding under the loan and security agreement of $34,819,190 plus accrued interest of $2,775,216, and made a cash contribution of $15,180,810 in exchange for 100 Class B common and 100 Class A preferred membership units, resulting in an additional $52,775,216 of members’ equity.

Interest on the junior subordinated note accrues at a rate of 15% per annum and will be paid semiannually once the Property opens. The Company will be required to pay a repayment premium of 3% of the principal amount of the junior subordinated note when it is repaid. The Company is accruing the repayment premium over the term of the junior subordinated note. In the event of a change of control or if the Hard Rock license agreement is terminated and the Property becomes owned, operated or licensed by a Hard Rock competitor, the Company will be required to repay all amounts due under the junior subordinated note agreement. In addition, the Company may be required to make quarterly mandatory prepayments as calculated under the terms of the junior subordinated note once the Property opens.

3. Restricted Cash

The net proceeds from the issuance of the First Mortgage Notes, a portion of the equity investment and the proceeds from the junior subordinated note all totaling $177,600,000 were deposited into a construction disbursement account, an interest reserve account and a tidelands lease reserve account. These accounts were pledged to the trustee as security for the Company’s obligations under the Notes. The funds will be disbursed in accordance with a disbursement agreement (the Disbursement Agreement) under concurrence with the disbursement agent, the trustee and the independent construction consultant. At June 30, 2004, there was $127,810,384 in the construction disbursement and reserve accounts, which is classified as restricted cash.

4. Government Securities - Restricted

During the six months ended June 30, 2004, the Company invested $32,946,442 in U.S. Treasury securities in accordance with the Disbursement Agreement. The investment is classified as held to maturity, and is recorded as Government securities at its acquisition cost including accrued interest at June 30, 2004. The investment plus the interest earned will be used to pay the first four interest payments on the Notes as required by the Disbursement Agreement.

5. Related Party Transactions

A member of GAR LLC is the President and Chief Executive Officer of the Company’s general contractor. The Company believes that the terms of the agreement with the contractor are similar to those that could otherwise be received from a third party. Total payments to the general contractor for the period from the commencement of operations on March 27, 2003 through June 30, 2004 were $11,180,000.

6. Commitments and Contingencies

In January 2004, the Company executed the purchase of a leasehold contract with a third party whereby the Company paid $432,000 to assume such lease. The payment is classified as an intangible asset in Other assets at June 30, 2004 and is being amortized over the life of the lease. At the same time, the Company entered into a seven year triple net lease with the City of Biloxi, Mississippi. Beginning in February 2004 the Company must pay monthly rent of $1,529. The rent will increase by the Consumer Price Index beginning on the first anniversary date of execution of the lease and continuing on each yearly anniversary date.

In April 2004, the Company entered into an agreement with a third party to lease office space. The term of the lease is for a period of two years and the Company must pay monthly rent of $2,926. The rent may increase on a semi-annual basis to reflect the increased cost to the lessor based upon the previous six month period variable expenses. Variable expenses are defined as electricity, gas, water and sewer, taxes, insurance and common area janitorial services.

7. Subsequent Events

In August 2004, the Company and Kojis and Sons Signs, Inc. (Kojis) entered into an agreement whereby Kojis agreed to manufacture, install and maintain for one year a one hundred twenty foot (120’) high marquee guitar sign for $540,000.

In August 2004, the Company entered into a purchasing consulting agreement whereby the consultant is to provide services related to the purchasing and installation of certain owner supplied furniture, fixtures and equipment for a fee of $174,000 and reasonable reimbursable expenses. The services and payment for such services are to coincide and both shall conclude in October 2005.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We were formed on October 18, 2002 and commenced operations on March 27, 2003. There were no assets, liabilities or operations from inception through the commencement of operations. Since our formation, we have been in the development stage. Our activities included applying for certain necessary permits, licenses and regulatory approvals to enable us to construct and manage the operations of the Hard Rock Hotel & Casino Biloxi, and development activities in connection with the Hard Rock Hotel & Casino Biloxi. We have also purchased approximately 8.5 acres of land on the Mississippi Gulf Coast in Biloxi, Mississippi to build the Hard Rock Hotel & Casino Biloxi. In addition, we have entered into a 20-year licensing agreement with Hard Rock Hotel Licensing, Inc. under which we were granted the right to use and develop the Hard Rock brand name for our hotel and casino resort. We began construction in January 2004.

We anticipate the Hard Rock Hotel & Casino Biloxi will be approximately 388,000 square-foot in size featuring a casino (with approximately 1,500 slot machines and 50 table games), a 306-room hotel, a Hard Rock Cafe, a Hard Rock Live! entertainment venue, a Hard Rock retail store, a tropical-themed Hard Rock beach pool, restaurants, a full service fitness spa, a top floor lounge, and a parking garage with approximately 1,600 spaces, and various other amenities. We expect to open the Hard Rock Hotel & Casino Biloxi in the third quarter of 2005.

Premier Finance Biloxi Corp. is serving as the co-issuer of the $160,000,000 10 ¾% First Mortgage Notes due February 1, 2012 (Notes) and will not have any material assets or operations, other than in connection with the Mississippi Business Finance Corporation financing. See “—Liquidity and Capital Resources.”

Results of Operations

We are in the development stage and do not have any historical operating results other than costs incurred in designing and developing the Hard Rock Hotel & Casino Biloxi. For the period from commencement of operations on March 27, 2003 through June 30, 2004, we incurred a total of $2.4 million of net interest expense and non-capitalized design, development and pre-opening expenses in connection with the Hard Rock Hotel & Casino Biloxi. These costs primarily relate to licensing expenses, transaction fees, legal fees, interest expense and organizational costs to prepare us for becoming a gaming enterprise. We expect these losses to continue and to increase until operations commence with the planned opening of the Hard Rock Hotel and Casino Biloxi in the third quarter of 2005. Our historical operating results will not be indicative of future operating results because activities previously undertaken have been development stage in nature and planned future activities include the operation of a new gaming facility.

Liquidity and Capital Resources

As of June 30, 2004, we spent approximately $31.0 million to acquire the land and $9.1 million to fund operations and loan costs and expended $17.1 million to finance the initial design and development costs of the Hard Rock Hotel & Casino Biloxi, which have been capitalized. We will continue to use the gross proceeds we obtained on January 23, 2004 from the offering of the Notes in conjunction with an equity investment from AA Capital of $15.1 million, a junior subordinated note of $10.0 million from Rank America, Inc., an affiliate of The Rank Group Plc and $17.1 million in furniture, fixtures and equipment financing to fund the costs associated with the Hard Rock Hotel & Casino Biloxi. The $17.1 million in furniture, fixtures and equipment financing will be obtained from vendors or other third party lenders. The net proceeds of the offering of the Notes, an equity investment from AA Capital and the proceeds of the junior subordinated note have been deposited as follows: (1) approximately $143.5 million was deposited into a construction disbursement account and is being periodically drawn upon to finance the design, development, construction, equipping and opening of the Hard Rock Hotel & Casino Biloxi (2) approximately $33.1 million was deposited in an interest reserve account and was used to purchase government securities of $32.9 million representing sufficient funds to pay the first four interest payments on the Notes and (3) approximately $1.0 million was deposited into a tidelands lease account and will be used to fund rent payments to the State of Mississippi on a tidelands lease through the first year of operations.

The funds provided by the sources described above are expected to be sufficient to design, develop, construct, equip and commence operations of the Hard Rock Hotel & Casino Biloxi, provided there are no unexpected delay costs or construction cost overruns.

Following the opening of the Hard Rock Hotel & Casino Biloxi, we expect to fund our business from operating cash flows.

Mississippi Bond Financing. Mississippi law provides that certain expenditures for materials made in connection with certain economic development projects in the State of Mississippi, including the land-based portion of the Hard Rock Hotel & Casino Biloxi (which includes the hotel tower, the parking garage, the low-rise pavilion and the pool area), are exempt from Mississippi’s sales tax if such expenditures are paid for with proceeds from approved industrial development revenue bonds issued by the Mississippi Business Finance Corporation, (MBFC). Up to $60.0 million of our expected costs for the Hard Rock Hotel & Casino Biloxi could be eligible for this program. We have submitted an application to the MBFC and have received approval of our application.

In connection with the issuance of the industrial development revenue bonds, the following actions were taken:

• The disbursement agent distributed amounts to us from the construction disbursement account in accordance with the procedures set forth in the disbursement agreement to avail ourselves of this program.

• We used these funds distributed to us from the construction disbursement account to make an equity contribution to Premier Finance Biloxi Corp.

• Premier Finance Biloxi Corp. used the proceeds of this equity contribution to purchase industrial development revenue bonds issued by the MBFC.

• The MBFC loaned the proceeds from the sale and issuance of the industrial development revenue bonds to us.

• We will use amounts loaned to us by the MBFC to finance the purchase of certain permitted component materials required to construct and install the improvements to the land-based portion of the Hard Rock Hotel & Casino Biloxi.

• Premier Finance Biloxi Corp. pledged its interest in the industrial development revenue bonds that it purchased from the MBFC to the trustee under the indenture governing the Notes for the benefit of the holders of the Notes.

At June 30, 2004, Premier Finance Biloxi, Corp. funded consolidated capital expenditures of $1.5 million to qualify for the tax-exempt status. We expect to save up to $2.0 million in sales tax that we would have otherwise been required to pay in connection with purchasing materials to be used in the construction of the land-based portion of the Hard Rock Hotel & Casino Biloxi. Any such sales tax savings that we are able to realize will reduce the construction costs for the project and will increase our excess liquidity.

The sale and issuance of the industrial development revenue bonds to Premier Finance Biloxi Corp. and the subsequent loan by the MBFC of the proceeds thereof to us did not result in any additional net indebtedness for us. However, there can be no assurances that any purchases of materials made by or on behalf of us with the proceeds of industrial development revenue bonds will be exempt from Mississippi sales tax.

Seasonality

We have no operating history. We anticipate that activity at the Hard Rock Hotel & Casino Biloxi may be modestly seasonal, with stronger results expected during the second and third quarters due to the relatively higher levels of tourism to the Mississippi Gulf Coast during this time of the year. Results are expected to be lower during the fourth quarter. In addition, our operations may be impacted by adverse weather conditions and fluctuations in the tourism business. Accordingly, our results of operations may fluctuate from quarter to quarter and the results for any one quarter may not be indicative of results for future quarters.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. The borrowings in connection with the offering of the Notes and the junior subordinated note from Rank America, Inc. are fixed-rate indebtedness. Through June 30, 2004, we had not invested in derivative or foreign currency-based financial instruments.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27 A of the Securities Act of 1933, as amended, and Section 2IE of the Securities and Exchange Act of 1934, as amended. Words such as, but not limited to, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “could”, “may”, “should” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements, which may include, without limitation, statements regarding expansion plans, cash needs, cash reserves, liquidity, operating and capital expenses, financing options, expense reductions, operating results and pending regulatory matters, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company. From time to time, oral or written forward looking statements are also included in the Company’s other periodic reports on Forms l0-K, l0-Q and 8-K, press releases and other materials released to the public.

Actual results may differ materially from those that might be anticipated from forward-looking statements. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that may cause actual performance of the Company to differ materially from that contemplated by such forward-looking statements include, among others: (1) the gaming industry is very competitive and increased competition from the legalization or expansion of gaming in Mississippi or Alabama and the development or expansion of Native American casinos in or near the Company’s markets could adversely affect the Company’s profitability, (2) general construction risks and other factors, some of which are beyond the Company’s control, could prevent the Company from completing its construction and development projects as planned, (3) changes in gaming laws or regulations, (4) changes in federal or state tax laws, (5) changes in the economy, and (6) the additional furniture, fixture, and equipment financing to complete the project. Additional factors that could cause actual performance of the Company to differ materially from that contemplated by such forward-looking statements are detailed in the Company’s Registration Statement on Form S-4 filed effective with the Securities Exchange Commission in July 2004.

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. For more information on the potential factors that could affect the Company’s operating results and financial condition, review the Company’s other filings with the Securities and Exchange Commission.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2004. Based on this evaluation, the CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2004

Such officers also confirm that there was no change in the Company’s internal controls over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to material affect, the Company’s internal control over financial reporting.

PART II

Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number		Description of Exhibit
10.1*		Lease Assignment (Lancon), dated as of February 30, 2004, between Premier Entertainment Biloxi LLC, as assignee, and Joe Lancon and Charmaine Lancon, as assignor,
10.2*		Lease Agreement (Office), dated as of April 15, 2004, between Premier Entertainment Biloxi LLC, as lessee, and Charles T Harrison Realty Agency, as agent for Medical Plaza, Limited, as lessor.
10.3*		Consulting Agreement (Purchasing), dated August 10, 2004 between Premier Entertainment Biloxi LLC and C P Procurement Services, Inc.
10.4*		Purchase Agreement (Marquee), dated as of August 19, 2004, between Premier Entertainment Biloxi LLC and Kojis and Sons Signs, Inc.
31.1*		Chief Operating Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
31.2*		Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
32*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Operating Officer and Chief Financial Officer.

* Filed herewith

SIGNATURE

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

	PREMIER ENTERTAINMENT BILOXI, LLC
	(Registrant)
Date: September 1, 2004
	/s/ Gregory J Bosarge
	Gregory J Bosarge
	Vice President and Chief Financial Officer

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