Form 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| |
|
|
| þ |
|
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended: December 31, 2008
| |
|
|
| o |
|
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 1-32583
FULL HOUSE RESORTS, INC.
(Exact Name of Registrant as specified in Its Charter)
| |
|
|
| Delaware
|
|
13-3391527 |
| (State or Other Jurisdiction
|
|
(I.R.S. Employer |
| of Incorporation or Organization)
|
|
Identification No.) |
4670 S. Fort Apache Rd., Suite 190, Las Vegas, Nevada 89147
(Address and zip code of principal executive offices)
(702) 221-7800
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
| |
|
|
| Common Stock, $.0001 per Share
|
|
NYSE Amex (formerly American Stock Exchange) |
| (Title of Each Class)
|
|
(Name of Each Exchange on Which Registered) |
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issue, as defined in Rule
405 of the Securities Act. Yes
o No þ
Check if the issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. o
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 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 þ No o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation
S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| |
|
|
|
|
|
|
| Large Accelerated Filer o
|
|
Accelerated Filer o
|
|
Non Accelerated Filer o
Do not check if smaller reporting company
|
|
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
The aggregate market value of registrant’s voting $.0001 par value common stock held by
non-affiliates of the registrant, as of June 30, 2008, was: $26,846,421. As of March 25, 2009,
there were 17,993,681 shares of Common Stock, $.0001 par value per share, outstanding.
Documents Incorporated By Reference
The information required by Part III of this Form 10-K, to the extent not set forth herein, is
incorporated by reference from the Registrant’s definitive proxy statement relating the annual
meeting of stockholders to be held in 2009, which definitive proxy statement shall be filed with
the Securities and Exchange Commission within 120 days after the end of the fiscal year to which
this Form 10-K relates.
PART I
Item 1. Business.
BACKGROUND
Full House Resorts, Inc., a Delaware corporation formed in 1987, (Full House, we, our, ours,
us) develops, manages and invests in gaming related opportunities. In May 1994, Lee Iacocca, who
has been one of our directors since 1998, brought us several opportunities to become involved in
gaming projects, including the proposed FireKeepers Casino near Battle Creek, Michigan with the
Nottawaseppi Huron Band of Potawatomi (the “Michigan Tribe”) and a “racino” in Harrington,
Delaware, both of which are discussed in detail below.
We have an agreement with the Northern Cheyenne Tribe of Montana for the development and
management of a gaming facility in Montana. Also, on January 31, 2007, we acquired all of the
outstanding shares of capital stock of Stockman’s Casino (Stockman’s), a Nevada corporation, which
operates Stockman’s Casino and, until February 20, 2008, the Holiday Inn Express in Fallon, Nevada.
Details of the Stockman’s acquisition and its operations are discussed in detail below.
Projects Currently Operating
Harrington Raceway and Casino, Delaware
We are currently a 50%-investor in Gaming Entertainment (Delaware), LLC (“GED”), a joint
venture with Harrington Raceway, Inc. (“HRI”), which has a management contract with Harrington
Raceway and Casino (“Harrington Casino”). Harrington Raceway and Casino, a division of Harrington
Raceway, Inc., which operates video lottery terminals under the supervision of the Delaware State
Lottery Office, commenced operations on August 20, 1996. GED provided over $11 million in
financing, managed the development of the project and currently provides management services to HRI
for a fee under a 15-year contract, which expires in August 2011. The fee is based primarily on a
percentage of revenues and operating profits of Harrington Casino as defined, which was previously
subject to an annual limitation. The gaming facility was originally 35,000 square feet and opened
with 500 gaming devices, a simulcast parlor and a small buffet, but was expanded and renovated
during 2007. The expansion and renovation was completed in early February 2008, and the facility
now offers approximately 2,100 gaming devices, a 450-seat buffet, a fine dining restaurant, a
50-seat diner, and an entertainment lounge area.
On June 18, 2007, we restructured our joint venture agreement with HRI to allow HRI greater
flexibility in GED’s management of Harrington Casino, while providing us with guaranteed growth in
our GED adjusted management fee entitlement for the remaining term of the management agreement.
Under the terms of the restructured management agreement, we will receive the greater of 50% of
GED’s 2008 management fees as currently prescribed under the management agreement or an 8% increase
in our share of GED’s management fees paid in 2007. The 8% guaranteed growth factor reflects the
expansion at Harrington Casino that was completed in February 2008. The annual growth rate in 2009
through the expiration of the GED management contract in August 2011 will be 5% per year.
The Harrington Casino is located in Harrington, Delaware on Route 13, approximately 20 miles
south of Dover, Delaware between Philadelphia and Baltimore/Washington, D.C. and is one of three
gaming facilities operating in Delaware. The closest competing casino is in Dover and operates over
2,800 devices. In February 2006, the law was changed to allow up to 4,000 gaming devices at each of
the three authorized locations in Delaware. The third facility is approximately 60 miles north of
the Harrington Casino. In 2004, the Pennsylvania legislature passed a law authorizing gambling.
Included in the authorized types of games are slot machines similar to those operated in Delaware.
During 2006 and in January 2007, the Pennsylvania Gaming Control Board issued licenses for
operators and gaming equipment suppliers. Several of the “racino” licensed facilities have
subsequently opened. The Harrington Casino is located the furthest south of the three authorized
gaming locations in Delaware and does not attract a substantial patronage from Pennsylvania.
2
During 2008, the Maryland legislature approved casino-type gaming in certain designated
counties of the state. In the November 2008 elections, Maryland voters passed a referendum
approving the bill. The new law allows for a total of 15,000 slot machines in five locations,
including 4,750 slots in Anne Arundel County (within two miles of
Route 295); 3,750 slots in Baltimore City, (on city-owned land within one-half mile of I-95
and Route 295 that is in a nonresidential area and not adjacent to or within one-quarter mile or
residential property); 2,500 slots in Worcester County (within one mile of the intersection of
Route 50 and Route 589); 2,500 slots in Cecil County (within two miles of I-95) and 1,500 slots in
Allegany County (on state-owned land associated with the Rocky Gap State Park that is not in the
same physical building as the Rocky Gap Lodge and Golf Resort.) Recently, bids were submitted to
the state for authorization by private contractors to conduct gaming in Maryland. While we expect
there to be an adverse impact on the revenues of Harrington Casino from this added competition when
it is fully implemented, as well as from the current economic climate, we expect to be insulated
from the effect of such competitive and economic factors by the guaranteed minimum payment paid to
us under the restructured management agreement with HRI, which guarantees us a 5% increase in the
management fees we receive each year through the end of the agreement.
Stockman’s Casino
Effective January 31, 2007, we acquired Stockman’s Casino and Holiday Inn Express in Fallon,
Nevada (“Stockman’s”). The acquisition was funded by a reducing revolving loan agreement from
Nevada State Bank of $16.0 million, approximately $1.2 million of seller financing in the form of a
promissory note and approximately $10.2 million in cash which was raised in an equity offering in
December 2006. Stockman’s Casino has approximately 8,400 square feet of gaming space with
approximately 259 slot machines, four table games and keno. There is a bar, a fine dining
restaurant and a coffee shop. Initially, our facility included a Holiday Inn Express, which has 98
guest rooms, indoor and outdoor pools, sauna, fitness center and a meeting room.
On October 1, 2007, we entered into an agreement to sell the Holiday Inn Express. Under the
terms of the agreement, the buyer agreed to purchase the real property, building, improvements and
personal property comprising the hotel operations for $7.2 million. On February 20, 2008, the sale
was consummated and we received net cash proceeds of approximately $7.0 million, which we used to
reduce debt.
Stockman’s is located on the west side of Fallon on Highway 50, approximately 60 miles east of
Reno, Nevada and is the largest of several casinos in the Churchill County area. The county’s
population is roughly 27,000 with a nearby naval air base which has a significant economic impact
on our business. Of the nine casinos currently operating in the Fallon, Nevada market, our major
competitors are three other casinos that are smaller than Stockman’s in size and the number of
gaming machines. At December 31, 2008, Stockman’s share of the slot units in the Churchill County
market was approximately 22.9% and our share of slot revenues for the 2008 year was approximately
33.9%. While we are not aware of any planned expansion to gaming capacity in the Churchill County
area, additional competition in the area would adversely affect our financial condition or results
of operations.
Projects in Development
Nottawaseppi Huron Band of Potawatomi—Battle Creek, Michigan
We also own 50% of Gaming Entertainment (Michigan), LLC (“GEM”), a controlled (and, therefore,
consolidated) joint venture with RAM Entertainment, LLC (“RAM”), a privately-held investment
company. GEM has a management agreement with the Nottawaseppi Huron Band of Potawatomi Indians (the
“Michigan Tribe”), for the development and management of the FireKeepers Casino near Battle Creek,
Michigan. The land for the development was taken into trust in December 2006. A compact with the
State of Michigan was ratified several years earlier. The management agreement was approved by the
National Indian Gaming Commission (“NIGC”) on December 14, 2007, and an amended version containing
provisions required by the project financing investors was approved by the NIGC on April 21, 2008.
Construction at FireKeepers Casino has progressed on schedule and garage construction has been
completed. In addition, the FireKeepers Development Authority has approved an increase in slot
machines to approximately 2,680 from 2,500. Table games units will be reduced from 90 to 78 and
poker units will decrease from the planned 20 to 12. The project remains on budget and FireKeepers
Casino is still expected to open in the summer of 2009. The FireKeepers Casino will target
customers of the development reside in the Battle Creek, Kalamazoo, and Lansing, Michigan
metropolitan areas, as well as the Ft. Wayne, Indiana area.
In February 2002, following our acquisition of our then-partner’s interest in the Michigan
project, we entered into an investor agreement with RAM, whereby RAM was admitted as a 50% member
in our Michigan joint venture in exchange for providing a portion of the necessary funding for the
development of the project. Accordingly, RAM
loaned us $2.4 million, which we used to retire an outstanding loan. The loan was secured by
our income from our Delaware joint venture.
3
The Michigan tribe achieved final federal recognition as a tribe in April 1996 and obtained a
gaming compact from Michigan’s governor in December 1998 to operate an unlimited number of
electronic gaming devices as well as roulette, keno, dice and banking card games. The Michigan
legislature ratified the compact by resolution in December 1998. The compact became effective in
1999 upon its approval by the Secretary of the Interior and remains in effect for 20 years
thereafter.
Commencement of development of the FireKeepers Casino was delayed by two lawsuits; one
challenging the constitutionality of the approval process of the Michigan Tribe’s compact along
with the compacts of three other tribes and the other challenging the fee-to-trust application made
by the Michigan Tribe of identified ancestral land on which the casino would be constructed. Both
lawsuits were resolved in favor of the Michigan Tribe in May 2007 and July 2007, respectively. The
land designated for the casino was designated reservation land under federal law by the Secretary
of the Interior in October 2007.
Effective May 15, 2007, GEM entered into an agreement with Green Acres Casino Management, Inc.
(“Green Acres”) to acquire all of Green Acres’ interests in the FireKeepers Casino project for $10
million. Prior to the execution of the agreement, Green Acres had a right to receive royalty
payments based on numerous metrics, which would approximate in excess of 15% of the total
management fee to be received by GEM from the management of the FireKeepers Casino. GEM’s members
equally funded an initial deposit and periodic payments totaling approximately $0.6 million and the
remaining obligation became due once financing was obtained as part of the project funding for the
casino. On May 6, 2008, the FireKeepers Development Authority of the Nottawaseppi Huron Band of
Potawatomi Michigan Tribe (the “Authority”) closed on $340 million of Senior Secured Notes and a
$35 million equipment financing facility to fund the development and construction of the
FireKeepers Casino. In connection with the project financing, GEM received partial reimbursement of
its tribal notes receivable in the amount of $9.3 million, which was used to repay the remaining
obligation to Green Acres.
Through 2007 total advances to or on behalf of the Michigan Tribe, related to reimbursable
development costs, were $14.3 million. Effective December 14, 2007, following the land being taken
into trust and final approval of the management contract from NIGC, RAM exercised its right to
convert the aforementioned loan into a $2.0 million capital contribution in, and a $0.4 million
loan to, GEM. In addition, interest payable in the amount of $0.6 million, previously due on the
original promissory note, was also converted into a loan to GEM. Pursuant to the parties’
agreement, the balance of the original note payable ($1.0 million) is an obligation solely of GEM
and will mature no sooner than two years after the opening of the casino. In connection with the
2008 Michigan project financing, GEM received partial reimbursement of its tribal notes receivable
in the amount of $9.3 million, which was used to repay the remaining obligation to Green Acres,
leaving a balance of $5.0 million outstanding due to GEM from the Michigan Tribe.
The closest competition to the FireKeepers Casino is located in Detroit, approximately 100
miles east of the Battle Creek area and the Four Winds Casino in the New Buffalo, Michigan area.
The Gun Lake Tribe is also planning a casino development in Wayland, Michigan, approximately 75
miles northwest of our site. Litigation over the trust land for the casino being developed by the
Gun Lake Tribe was recently resolved in favor of the casino project and the Michigan state
legislature in early February 2009 approved a gaming compact with the Gun Lake Tribe. The Gun Lake
casino project still requires certain federal approvals as well as financing. It is unclear at this
time how long it will be before the Gun Lake project will be prepared to commence gaming
operations. FireKeepers Development Authority market studies and development efforts have taken
into account the impact of the existing and proposed casino facilities.
4
Northern Cheyenne Tribe — Decker, Montana
On March 7, 2005, we signed a letter of intent with the Northern Cheyenne Tribe of Montana to
explore gaming and other economic development. In May 2005, we signed a development agreement and
in January 2006 we signed a revised gaming management agreement for the development and management
of a site held in trust for the tribe in the Tongue River Reservoir area. The management agreement
provides for a management fee of 30% of revenues net of prizes and operating expenses. Plans are
for a 25,000 square foot facility housing 200 gaming devices and related amenities. The proposed
site for this project is on land, which although held in trust for the tribe, must be
approved by the Secretary of the Interior and the Governor of Montana, pursuant to the Indian
Gaming Regulatory Act. By letter of October 28, 2008, the tribe was notified that the Secretary of
the Interior had in fact approved the use of the land for gaming, subject to concurrence of the
State Governor. We are awaiting the Governor’s concurrence. In addition, any management contract
must be approved by the NIGC. We previously requested NIGC approval of the management agreement,
but have withheld further submission pending agreement with the tribe on the scope and extent of
the project. Our agreements with the tribe require us to arrange on a best efforts basis up to
$16.0 million in financing for the project. In November 2008, the tribe held elections for its
tribal council, which resulted in an entirely new council being seated. In January 2009, we
forwarded to the new council a revised proposal for the casino development taking into account the
current status and availability of financing for the development project. The council is currently
in the process of reviewing the proposal. As of December 31, 2008, our advances to the Northern
Cheyenne Tribe total $0.7 million. The Northern Cheyenne Tribe’s gaming compact with the State of
Montana was set to expire in June 2007. In April 2007, the tribe extended the existing agreement
with the State of Montana, while continuing negotiations on a new Class III Gaming compact, which
shall continue in effect until June 3, 2017, or until a new Class III compact is signed by the
State and the tribe, whichever comes first. Since the existing Compact does not apply to our site,
if the Northern Cheyenne Tribe is not able to successfully negotiate a Class III Gaming compact
with the State of Montana, we will be unable to develop the proposed casino and recover the
expenses we have already incurred in pursuing this project.
Discontinued Projects
Nambé Pueblo Indian Tribe — Santa Fe, New Mexico
In January 2008, we became aware that the Nambé Tribal council received a presentation from
another developer for the development of a multi-use economic development including a truck stop,
convenience store and retail space, which would also include a small slot parlor. In the first
quarter of 2008, we received notice that the Nambé tribal council had effectively terminated the
business relationship with Full House. As a result, the Company recorded an impairment loss of $0.2
million related to capitalized contract rights during the fourth quarter of 2007. We are in
discussions with the Nambé Tribe and the developer to determine the method and timing of the
reimbursement of our advances to date of $0.7 million. The development agreement between the
Company and the Nambé Tribe provides that the Company is entitled to recoup its advances from
future gaming development, even if the Company does not ultimately develop the project. The Nambé
Tribe has confirmed in writing that it is obligated to repay the reimbursable advances. In
addition, the Nambé Tribe has informed management that it intends to develop a small gaming
facility with another developer. Accordingly, management believes that the Nambé Tribe has the
intent and will likely have the ability to repay the advances, either using a portion of the
project financing or future cash flows of the project once open.
Hard Rock Casino, Biloxi, Mississippi
In November 2002, we entered into a termination agreement with Hard Rock Café International
with respect to licensing the rights to develop a Hard Rock Café-themed casino and hotel in Biloxi,
Mississippi. We received $0.1 million in exchange for relinquishing any right we had to prevent
Hard Rock from entering into any other licensing agreements in Mississippi prior to the original
contract termination date of November 20, 2003, and we also sold the land we previously acquired in
connection with the proposed development. Additionally, if Hard Rock executed a new licensing
agreement for Biloxi within one year of the termination agreement, we agreed to provide consulting
services to Hard Rock for a two year period for annual fees of $0.1 million or 10% of the licensing
fees, whichever is greater. During 2003, and within the one-year period, Hard Rock executed a new
licensing agreement and our consulting fees become payable upon opening of the facility, which was
originally scheduled for September 1, 2005. However, on August 29, 2005, Hurricane Katrina
devastated the Mississippi Gulf Coast, causing substantial damage to the Hard Rock Casino facility.
During the second quarter of 2007 we entered into an agreement with the Hard Rock casino project
which resulted in us receiving a lump sum payment in full settlement and for termination of our
consulting agreement and accordingly, we recognized one-time revenues of $0.3 million in the second
quarter of 2007.
5
Navajo Nation — New Mexico
Discussions with the executive director of the Navajo Nation during the fourth quarter of 2007
indicated that our site is not one currently being considered by the Nation for gaming activities,
and the Nation intends to develop its gaming operations without the services of a gaming developer.
As a result, we discontinued our pursuit of this project and recorded an impairment loss of $0.2
million related to previously capitalized contract rights. The land originally held for the
development of this project is included in assets held for sale as and it is management’s intention
to sell the land as soon as possible.
GOVERNMENT REGULATION
The ownership, management, and operation of gaming facilities are subject to many federal,
state, provincial, tribal and/or local laws, regulations and ordinances, which are administered by
the relevant regulatory agency or agencies in each jurisdiction. These laws, regulations and
ordinances are different in each jurisdiction, but primarily deal with the responsibility,
financial stability and character of the owners and managers of gaming operations as well as
persons financially interested or involved in gaming operations.
We may not own, manage or operate a gaming facility unless we obtain proper licenses, permits
and approvals. Applications for a license, permit or approval may be denied for reasonable cause.
Most regulatory authorities license, investigate, and determine the suitability of any person who
has a material relationship with us. Persons having material relationships include officers,
directors, employees, and security holders.
Once obtained, licenses, permits, and approvals must be renewed from time to time and
generally are not transferable. Regulatory authorities may at any time revoke, suspend, condition,
limit, or restrict a license for reasonable cause. License holders may be fined and in some
jurisdictions and under certain circumstances gaming operation revenues can be forfeited. We may be
unable to obtain any licenses, permits, or approvals, or if obtained, they may not be renewed or
may be revoked in the future. In addition, a rejection or termination of a license, permit, or
approval in one jurisdiction may have a negative effect in other jurisdictions. Some jurisdictions
require gaming operators licensed in that state to receive their permission before conducting
gaming in other jurisdictions.
The political and regulatory environment for gaming is dynamic and rapidly changing. The laws,
regulations, and procedures dealing with gaming are subject to the interpretation of the regulatory
authorities and may be amended. Any changes in such laws, regulations, or their interpretations
could have a negative effect on our operations and future development of gaming opportunities.
Certain specific provisions applicable to us are described below.
Delaware Regulatory Matters
As the owner of at least 10% of the management company operating video lottery machines in
Delaware, we are subject to approval under the Delaware Video Lottery Code in order for our
Delaware joint venture to maintain its license to manage the video lottery location of the
Harrington Casino. That law authorized the ownership and operation of video lottery machines, as
defined in the law and commonly known as slot machines, by the State Lottery Office through certain
licensed agents, including our Delaware joint venture.
The lottery director has discretion to adopt such rules and regulations as the lottery
director deems necessary or desirable for the efficient and economical operation and administration
of the system, including:
| |
• |
|
type and number of games permitted; |
| |
| |
• |
|
pricing of games; |
| |
| |
• |
|
numbers and sizes of prizes; |
| |
| |
• |
|
manner of payment; |
| |
| |
• |
|
value of bills, coins or tokens needed to play; |
| |
| |
• |
|
requirements for licensing agents and service providers; |
6
| |
• |
|
standards for advertising, marketing and promotional materials used by licensed agents; |
| |
| |
• |
|
procedures for accounting and reporting; |
| |
| |
• |
|
registration, kind, type, number and location of video lottery (slot) machines on a
licensed agent’s premises; |
| |
| |
• |
|
security arrangements for the video lottery system; and |
| |
| |
• |
|
reporting and auditing of financial information of licensed agents. |
There are continuing licensure requirements for all officers, directors, key employees and
persons who own directly or indirectly 10% or more of a licensed agent, which licensure
requirements shall include the satisfaction of such security, fitness and background standards as
the lottery director may deem necessary relating to competence, honesty and integrity, such that a
person’s reputation, habits and associations do not pose a threat to the public interest of the
State or to the reputation of or effective regulation and control of the video lottery; it being
specifically understood that any person convicted of any felony, a crime involving gambling, or a
crime of moral turpitude within 10 years prior to applying for a license or at any time thereafter
shall be deemed unfit.
The lottery director may revoke or suspend the license of a licensed agent for “cause.”
“Cause” is broadly defined and could potentially include falsifying any application for license or
report required by the rules and regulations, the failure to report any information required by the
rules and regulations, the material violation of any rules and regulations promulgated by the
lottery director or any conduct by the licensee which undermines the public confidence in the video
lottery system or serves the interest of organized gambling or crime and criminals in any manner. A
license may be revoked for an unintentional violation of any federal, state or local law, rule or
regulation provided that the violation is not cured within a reasonable time as determined by the
lottery director. A hearing officer’s decision revoking or suspending the license shall be
appealable to the Delaware Superior Court under the provisions of the Administrative Procedures
Act. All existing or new officers, directors, key employees and owners of a licensed agent are
subject to background investigation. Failure to satisfy the background investigation may constitute
cause for suspension or revocation of the license.
The license of our Delaware joint venture may also be revoked or suspended in the event that
we do not maintain our approval to own at least 10% of the joint venture. The same standard of
“cause” defined above applies to our approval. Currently, our officers have filed the required
application forms and have been found suitable by the Delaware State Police, which is empowered to
conduct the security, fitness and background checks required by the lottery director.
Nevada Regulatory Matters
In order to acquire and own Stockman’s Casino or any other gaming operation in Nevada, we are
subject to the Nevada Gaming Control Act and to the licensing and regulatory control of the Nevada
State Gaming Control Board, the Nevada Gaming Commission, and various local, city and county
regulatory agencies.
The laws, regulations and supervisory procedures of the Nevada gaming authorities are based
upon declarations of public policy which are concerned with, among other things:
| |
• |
|
the character of persons having any direct or indirect involvement with gaming to
prevent unsavory or unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity; |
| |
| |
• |
|
application of appropriate accounting practices and procedures; |
| |
| |
• |
|
maintenance of effective control over the financial practices and financial stability
of licensees, including procedures for internal controls and the safeguarding of assets and
revenues; |
| |
| |
• |
|
record-keeping and reporting to the Nevada gaming authorities; |
| |
| |
• |
|
fair operation of games; and |
| |
| |
• |
|
the raising of revenues through taxation and licensing fees. |
7
In May 2006, we applied for registration with the Nevada Gaming Commission as a publicly
traded corporation, which was granted on January 25, 2007. The registration is not transferable and
requires periodic payment of fees. The Nevada gaming authorities may limit, condition, suspend or
revoke a license, registration, approval or finding of suitability for any cause deemed reasonable
by the licensing agency. If a Nevada gaming authority determines that we violated gaming laws, then
the approvals and licenses we hold could be limited, conditioned, suspended or revoked, and we, and
the individuals involved, could be subject to substantial fines for each separate violation of the
gaming laws at the discretion of the Nevada Gaming Commission. Each type of gaming device, slot
game, slot game operating system, table game or associated equipment manufactured, distributed,
leased, licensed or sold in Nevada must first be approved by the Nevada State Gaming Control Board
and, in some cases, the Nevada Gaming Commission. We must regularly submit detailed financial and
operating reports to the Nevada State Gaming Control Board. Certain loans, leases, sales of
securities and similar financing transactions must also be reported to or approved by the Nevada
Gaming Commission.
Certain of our officers, directors and key employees are required to be, and have been, found
suitable by the Nevada Gaming Commission and employees associated with gaming must obtain work
permits which are subject to immediate suspension under certain circumstances. An application for
suitability may be denied for any cause deemed reasonable by the Nevada Gaming Commission. Changes
in specified key positions must be reported to the Nevada Gaming Commission. In addition to its
authority to deny an application for a license, the Nevada Gaming Commission has jurisdiction to
disapprove a change in position by an officer, director or key employee. The Nevada Gaming
Commission has the power to require licensed gaming companies to suspend or dismiss officers,
directors or other key employees and to sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such capacities.
The Nevada Gaming Commission may also require anyone having a material relationship or
involvement with us to be found suitable or licensed, in which case those persons are required to
pay the costs and fees of the Nevada State Gaming Control Board in connection with the
investigation. Any person who acquires more than 5% of our voting securities must report the
acquisition to the Nevada Gaming Commission; any person who becomes a beneficial owner of 10% or
more of our voting securities is required to apply for a finding of suitability. Under certain
circumstances, an “institutional investor,” as such term is defined in the regulations of the
Nevada Gaming Commission, which acquires more than 10% but not more than 15% of our voting
securities, may apply to the Nevada Gaming Commission for a waiver of such finding of suitability
requirements, provided the institutional investor holds the voting securities for investment
purposes only. The Nevada Gaming Commission has amended its regulations pertaining to institutional
investors to temporarily allow an institutional investor to beneficially own more than 15%, but not
more than 19%, if the ownership percentage results from a stock repurchase program. These
institutional investors may not acquire any additional shares and must reduce their holdings within
one year from constructive notice of exceeding 15%, or must file a suitability application. An
institutional investor will be deemed to hold voting securities for investment purposes only if the
voting securities were acquired and are held in the ordinary course of business as an institutional
investor and not for the purpose of causing, directly or indirectly, the election of a majority of
our board of directors, any change in our corporate charter, bylaws, management, policies or
operations, or any of our gaming affiliates, or any other action which the Nevada Gaming Commission
finds to be inconsistent with holding our voting securities for investment purposes only.
Any person who fails or refuses to apply for a finding of suitability or a license within 30
days after being ordered to do so by the Nevada Gaming Commission may be found unsuitable based
solely on such failure or refusal. The same restrictions apply to a record owner if the record
owner, when requested, fails to identify the beneficial owner. Any security holder found unsuitable
and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such
period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a gross
misdemeanor. We are subject to disciplinary action if, after we receive notice that a person is
unsuitable to be a security holder or to have any other relationship with us, we:
| |
• |
|
pay that person any dividend or interest upon our voting securities; |
| |
| |
• |
|
allow that person to exercise, directly or indirectly, any voting right conferred
through securities held by that person; or |
| |
| |
• |
|
give remuneration in any form to that person. |
8
If a security holder is found unsuitable, then we may be found unsuitable if we fail to pursue
all lawful efforts to require such unsuitable person to relinquish his or her voting securities for
cash at fair market value.
The Nevada Gaming Commission may also, in its discretion, require any other holders of our
debt or equity securities to file applications, be investigated and be found suitable to own the
debt or equity securities. The applicant security holder is required to pay all costs of such
investigation. If the Nevada Gaming Commission determines that a person is unsuitable to own such
security, then pursuant to the regulations of the Nevada Gaming Commission, we may be sanctioned,
including the loss of our approvals, if, without the prior approval of the Nevada Gaming
Commission, we:
| |
• |
|
pay to the unsuitable person any dividends, interest or any distribution whatsoever; |
| |
| |
• |
|
recognize any voting right by such unsuitable person in connection with such
securities; |
| |
| |
• |
|
pay the unsuitable person remuneration in any form; or |
| |
| |
• |
|
make any payment to the unsuitable person by way of principal, redemption, conversion;
exchange, liquidation or similar transaction. |
We are required to maintain a current stock ledger in Nevada which may be examined by the
Nevada Gaming Commission at any time, and to file with the Nevada Gaming Commission, at least
annually, a list of our stockholders. The Nevada Gaming Commission will have the power to require
our stock certificates to bear a legend indicating that the securities are subject to the Nevada
Gaming Control Act and the regulations of the Nevada Gaming Commission.
As a licensee or registrant, we may not make certain public offerings of our securities
without the prior approval of the Nevada Gaming Commission. Also, changes in control of us through
merger, consolidation, acquisition of assets, management or consulting agreements or any form of
takeover cannot occur without prior investigation by the Nevada State Gaming Control Board and
approval by the Nevada Gaming Commission.
The Nevada legislature has declared that some repurchases of voting securities, corporate
acquisitions opposed by management, and corporate defense tactics affecting Nevada gaming
licensees, and registered companies that are affiliated with those operations, may be harmful to
stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory
scheme to reduce the potentially adverse effects of these business practices upon Nevada’s gaming
industry and to further Nevada’s policy to:
| |
• |
|
assure the financial stability of corporate gaming licensees and their affiliates; |
| |
| |
• |
|
preserve the beneficial aspects of conducting business in the corporate form; and |
| |
| |
• |
|
promote a neutral environment for the orderly governance of corporate affairs. |
Because we are a registered company, approvals may be required from the Nevada Gaming
Commission before we can make exceptional repurchases of voting securities above their current
market price and before a corporate acquisition opposed by management can be consummated. The
Nevada Gaming Control Act also requires prior approval of a plan of recapitalization proposed by a
registered company’s board of directors in response to a tender offer made directly to its
stockholders for the purpose of acquiring control.
9
Any person who is licensed, required to be licensed, registered, required to be registered, or
who is under common control with those persons, collectively, “licensees,” and who proposes to
become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada
Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Gaming Control Board of the licensee’s participation in
foreign gaming. We currently comply with this requirement. The revolving fund is subject to
increase or decrease at the discretion of the Nevada Gaming Commission. Licensees are required to
comply with the reporting requirements imposed by the Nevada Gaming Control Act. A licensee is
also subject to disciplinary action by the Nevada Gaming Commission if it:
| |
• |
|
knowingly violates any laws of the foreign jurisdiction pertaining to the foreign
gaming operation; |
| |
| |
• |
|
fails to conduct the foreign gaming operation in accordance with the standards of
honesty and integrity required of Nevada gaming operations; |
| |
| |
• |
|
engages in any activity or enters into any association that is unsuitable because it
poses an unreasonable threat to the control of gaming in Nevada, reflects or tends to
reflect, discredit or disrepute upon the State of Nevada or gaming in Nevada, or is
contrary to the gaming policies of Nevada; |
| |
| |
• |
|
engages in activities or enters into associations that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees; or |
| |
| |
• |
|
employs, contracts with or associates with a person in the foreign operation who has
been denied a license or a finding of suitability in Nevada on the ground of unsuitability. |
In May 2006, we adopted a compliance plan and appointed a compliance committee which currently
consists of Company directors and officers, Ken Adams (Chair), Carl Braunlich (Director), Kathleen
Caracciolo (Director) and Mark Miller (CFO), in accordance with Nevada Gaming Commission
requirements. Our compliance committee meets quarterly and is responsible for implementing and
monitoring our compliance with Nevada regulatory matters. This committee will also review
information and reports regarding the suitability of potential key employees or other parties who
may be involved in material transactions or relationships with us.
Indian Gaming
Gaming on Indian Lands (lands over which Indian tribes have jurisdiction and which meet the
definition of Indian Lands under the Indian Gaming Regulatory Act of 1988, (the “Regulatory Act’)
is regulated by federal, state and tribal governments. The regulatory environment regarding Indian
gaming is always changing. Changes in federal, state or tribal law or regulations may limit or
otherwise affect Indian gaming or may be applied retroactively and could then have a negative
effect on our operations.
The terms and conditions of management agreements or other agreements, and the operation of
casinos on Indian Land, are subject to the Regulatory Act, which is implemented by the NIGC. The
contracts also are subject to the provisions of statutes relating to contracts with Indian tribes,
which are supervised by the Department of the Interior. The Regulatory Act is interpreted by the
Department of the Interior and the NIGC and may be clarified or amended by the judiciary or
legislature.
Under the Regulatory Act, the NIGC has the power to:
| |
• |
|
inspect and examine certain Indian gaming facilities; |
| |
| |
• |
|
perform background checks on persons associated with Indian gaming; |
| |
| |
• |
|
inspect, copy and audit all records of Indian gaming facilities; |
| |
| |
• |
|
hold hearings, issue subpoenas, take depositions, and adopt regulations; and |
| |
| |
• |
|
penalize violators of the Regulatory Act. |
Penalties for violations of the Regulatory Act include fines, and possible temporary or
permanent closing of gaming facilities. The Department of Justice may also impose federal criminal
sanctions for illegal gaming on Indian Lands and for theft from Indian gaming facilities.
10
The Regulatory Act also requires that the NIGC review tribal gaming ordinances. Such
ordinances are approved only if they meet certain requirements relating to:
| |
• |
|
ownership; |
| |
| |
• |
|
security; |
| |
| |
• |
|
personnel background; |
| |
| |
• |
|
record keeping and auditing of the tribe’s gaming enterprises; |
| |
| |
• |
|
use of the revenues from gaming; and |
| |
| |
• |
|
protection of the environment and the public health and safety. |
The Regulatory Act also regulates Indian gaming and management agreements. The NIGC must
approve management agreements and collateral agreements, including agreements like promissory
notes, loan agreements and security agreements. A management agreement can be approved only after
determining that the contract provides for:
| |
• |
|
adequate accounting procedures and verifiable financial reports, copies of which must
be furnished to the tribe; |
| |
• |
|
tribal access to the daily operations of the gaming enterprise, including the right to
verify gross revenues and income; |
| |
• |
|
minimum guaranteed payments to the tribe, which must have priority over the retirement
of development and construction costs; |
| |
• |
|
a ceiling on the repayment of such development and construction costs; and |
| |
• |
|
a contract term not exceeding five years and a management fee not exceeding 30% of
profits and a determination by the chairman of the NIGC that the fee is reasonable
considering the circumstances; provided that the NIGC may approve up to a seven year term
and a management fee not to exceed 40% of net revenues if the NIGC is satisfied that the
capital investment required or the income projections for the particular gaming activity
justify the larger profit allocation and longer term. |
Under the Regulatory Act, we must provide the NIGC with background information, including
financial statements and gaming experience, on:
| |
• |
|
each person with management responsibility for a management agreement; |
| |
| |
• |
|
each of our directors; and |
| |
| |
• |
|
the ten persons who have the greatest direct or indirect financial interest in a
management agreement to which we are a party. |
The NIGC will not approve a management company and may void an existing management agreement
if a director, key employee or an interested person of the management company:
| |
• |
|
is an elected member of the Indian tribal government that owns the facility being
managed; |
| |
• |
|
has been or is convicted of a felony or misdemeanor gaming offense; |
| |
• |
|
has knowingly and willfully provided materially false information to the NIGC or a
tribe; |
11
| |
• |
|
has refused to respond to questions from the NIGC; |
| |
• |
|
is a person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or enhance the
chance of unsuitable, unfair or illegal activities in gaming or the business and financial
arrangements incidental thereto; or |
| |
• |
|
has tried to influence any decision or process of tribal government relating to gaming. |
Contracts may also be voided if:
| |
• |
|
the management company has materially breached the terms of the management agreement,
or the tribe’s gaming ordinance; or |
| |
• |
|
a trustee, exercising the skill and diligence to which a trustee is commonly held,
would not approve such management agreement. |
The Regulatory Act divides games that may be played on Indian Land into three categories.
Class I Gaming includes traditional Indian games and private social games and is not regulated
under the Regulatory Act. Class II Gaming includes bingo, pull tabs, lotto, punch boards, tip jars,
instant bingo, and other games similar to bingo, if those games are played at a location where
bingo is played. Class III Gaming includes all other commercial forms of gaming, such as video
casino games (e.g., video slots, video blackjack), so-called “table games” (e.g., blackjack, craps,
roulette), and other commercial gaming (e.g., sports betting and pari-mutuel wagering).
Class II Gaming is allowed on Indian Land if performed according to a tribal ordinance which
has been approved by the NIGC and if the state in which the Indian Land is located allows such
gaming for any purpose. Class II Gaming also must comply with several other requirements, including
a requirement that key management officials and employees be licensed by the tribe.
Class III Gaming is permitted on Indian Land if the same conditions that apply to Class II
Gaming are met and if the gaming is performed according to the terms of a written gaming compact
between the tribe and the host state. The Regulatory Act requires states to negotiate in good faith
with Indian tribes that seek to enter into tribal-state compacts. Should the state not negotiate in
good faith, regulations of the Department of Interior allow the Secretary of the Interior to impose
the terms of a gaming compact on the state.
The negotiation and adoption of tribal-state compacts is vulnerable to legal and political
changes that may affect our future revenues and securities prices. Accordingly, we cannot predict:
| |
• |
|
which additional states, if any, will approve casino gaming on Indian Land; |
| |
| |
• |
|
the timing of any such approval; |
| |
| |
• |
|
the types of gaming permitted by each tribal-state compact; |
| |
| |
• |
|
any limits on the number of gaming machines allowed per facility; or |
| |
| |
• |
|
whether states will attempt to renegotiate or take other steps that may affect existing
compacts. |
Under the Regulatory Act, Indian tribal governments have primary regulatory authority over
gaming on Indian Land within the tribe’s jurisdiction unless a tribal-state compact has delegated
this authority. Therefore, persons engaged in gaming activities, including us, are subject to the
provisions of tribal ordinances and regulations on gaming.
Tribal-State compacts have been litigated in several states, including Michigan. In addition,
many bills have been introduced in Congress that would amend the Regulatory Act, including bills
introduced in 2005 that seek to limit “off reservation” gaming by Indian tribes. Although this
legislative attempt was rejected, the Department of the Interior under the Bush administration in
January 2008 issued a “guidance memorandum” immediately followed by
a series of decisions which gave effect to the defeated legislation, placing limitations on
the distance a tribal casino could be from the tribe’s reservation. If the Regulatory Act were
amended or this Department policy remain in effect, then the governmental structure and
requirements by which Indian tribes may conduct gaming could be significantly changed, which could
have an impact on our future operations and development of tribal gaming opportunities.
12
Huron Tribal Gaming Commission
The Nottawaseppi Huron Band of Potawatomi (the Michigan Tribe) has adopted a gaming ordinance
to regulate gaming at the FireKeepers Casino. Part of the gaming ordinance establishes and
authorizes a Gaming Commission to oversee the regulation of gaming at FireKeepers Casino. The
Gaming Commission shall license the management contractor, (which is GEM), all gaming employees,
gaming equipment vendors and others, pursuant to the standards of the ordinance (which are
substantially similar to those contained in Indian Gaming Regulatory Act, “IGRA” and NIGC
regulation), including a review of the honesty and integrity of the applicant and its financial
stability.
In conjunction with the issuance of the license to GEM, we were approved by the Huron Tribal
Gaming Commission on April 4, 2008. This license is renewable annually and we have submitted the
requisite renewal application for 2009. Once the casino is operational, the Gaming Commission will
also be responsible for the regulation of gaming operations, including oversight and audits to
ensure compliance with minimum internal controls, issued to ensure patron safety and safeguarding
of income and assets. Violations of internal controls and Gaming Commission imposed standards can
result in penalties, fines, loss of employment and loss or denial of gaming licenses.
Costs and Effects of Compliance with Environmental Laws
In order to have land taken into trust or otherwise be approved for use by an Indian tribe for
gaming purposes by the BIA, as a federal agency, the BIA is required to comply with the National
Environmental Policy Act (NEPA). Likewise, in order for the NIGC to approve a management agreement
for us to manage an Indian gaming casino as required by the Indian Gaming Regulatory Act, the NIGC,
as a federal agency, is required to comply with NEPA. For these purposes NEPA requires a federal
agency to consider the effect on the human, physical and natural environment of a development
project as part of its approval process. Compliance with NEPA begins with conducting an
environmental assessment, which considers the factors identified in NEPA, as implemented by the
Council on Environmental Quality, and determines whether the development will cause a significant
impact on the environment. If not, the federal agency may issue a finding of no significant impact
(“FONSI”). If the federal agency determines the development project may cause a significant impact
on the environment, then it will conduct a further study resulting in an environmental impact
statement, which considers all impacts on the environment and what can be done to mitigate those
impacts. Since this constitutes action by a federal agency, any of these determinations can be the
subject of litigation.
Appropriate environmental reviews were conducted by the BIA and NIGC reviewing the impacts
caused by the Nottawaseppi Huron Band of Potawatomi casino project in Michigan as part of their
approval process. The land was taken into trust in 2007 and the management agreement was approved
in December 2007 and an amendment was approved in April 2008.
During 2005 and 2006, we also funded environmental assessments related to the casino
development project for the Nambé Tribe and for the Northern Cheyenne Tribe. The environmental
assessment related to the Northern Cheyenne Tribe is on behalf of the BIA in conjunction with its
approval of the land chosen by the tribe for its casino site for use for gaming. The Secretary of
the Interior acting for the BIA approved the land for gaming use in October 2008, subject to the
concurrence of the Governor of the State of Montana, which has not yet been obtained.
COMPETITION
The gaming industry is highly competitive. Gaming activities include traditional land-based
casinos; river boat and dockside gaming, casino gaming on Indian land, state-sponsored lotteries,
video poker in restaurants, bars and hotels, pari-mutuel betting on horse racing, dog racing and
jai alai, sports bookmaking, card rooms, and casinos at
racetracks. The Indian-owned casinos that we are developing and plan to manage compete with
all these forms of gaming, and will compete with any new forms of gaming that may be legalized in
additional jurisdictions, as well as with other types of entertainment. Some of our competitors
have more personnel and greater financial or other resources.
13
Stockman’s is located on the west side of Fallon on Highway 50, approximately 60 miles east of
Reno, Nevada, and is the largest of several casinos in the Churchill County area. The county’s
population is roughly 27,000 with a nearby naval air base which has a significant economic impact
on our business. Of the nine casinos currently operating in the Fallon, Nevada market, our major
competitors are three other casinos that are smaller than Stockman’s in size and the number of
gaming machines. At December 31, 2008, Stockman’s share of the slot units in the Churchill County
market was approximately 22.9% and our share of slot revenues for 2008 was approximately 33.9%.
While we are not aware of any planned expansion to gaming capacity in the Churchill County area,
additional competition would adversely affect our financial condition or results of operations.
The closest competition to the FireKeepers Casino is located in Detroit, approximately 100
miles east of the Battle Creek area and the Four Winds Casino in the New Buffalo, Michigan area.
The Gun Lake Tribe is also planning a casino development in Wayland, Michigan, approximately 75
miles northwest of our site. Litigation over the trust land for the casino being developed by the
Gun Lake Tribe was recently resolved in favor of the casino project and the Michigan state
legislature in early February 2009 approved a gaming compact with the Gun Lake tribe. FireKeepers
Development Authority market studies and development efforts have taken into account the impact of
the existing and proposed casino facilities.
The Harrington Casino is one of three facilities currently operating in Delaware. The facility
draws a significant number of customers from Maryland and we believe that competitive gaming in
Maryland will have a negative impact on the facility. The magnitude will depend on both the form of
gaming that is authorized, and the locations of competing facilities.
During 2008, the Maryland legislature approved casino-type gaming in certain designated
counties of the State. Recently, bids were submitted to the State for authorization by private
contractors to conduct gaming in Maryland. While we can expect there to be an adverse impact on the
revenues of Harrington Casino from this added competition, as well as the current economic climate,
we expect to be insulated from the effect of such competitive and economic factors by the
guaranteed minimum payment paid to us, which guarantees us a 5% increase in the management fees we
receive from the operation over those received in 2008.
In 2004, the Pennsylvania legislature passed a law authorizing gambling. Included in the
authorized types of games are slot machines similar to those operated in Delaware to be conducted
at racetracks, selected stand-alone facilities and selected resort hotel sites. During 2006 and in
January 2007, the Pennsylvania Gaming Control Board issued licenses for operators and gaming
equipment suppliers. Several of the “racino” licensed facilities have subsequently opened.
Harrington Raceway is located the furthest south of the three authorized gaming locations in
Delaware and does not attract a substantial patronage from Pennsylvania. We have not seen and do
not anticipate that the commencement of gaming operations in Pennsylvania has or will have a
material adverse effect on our operations. Additionally, we are in constant competition with other
companies in the industry to acquire other legal gaming sites and for opportunities to develop and
manage casinos on Indian land. Many of our competitors are larger in terms of potential resources
and personnel. Competition in the gaming industry could adversely affect our ability to attract
customers and thus, adversely affect future operating results. In addition, further expansion of
gaming into new jurisdictions could also adversely affect our business by diverting customers from
our managed casinos to competitors in those jurisdictions.
EMPLOYEES
As of March 1, 2009, we have twelve full-time corporate employees, four of whom are executive
officers and an additional two are senior management. Our Stockman’s Casino has approximately 100
full-time employees and our Delaware joint venture management contract oversees approximately 518
full-time employees at the Harrington
Casino, none of which are direct employees of the Company. Management believes that its
relationship with its employees is good. None of our employees are currently represented by a labor
union, although such representation could occur in the future.
14
Item 1A. Risk Factors.
In addition to factors discussed elsewhere in this Form 10-K, the following are important
factors that could cause actual results or events to differ materially from those contained in any
forward-looking statement made by or on behalf of Full House.
Development of new casinos is subject to many risks, some of which we may not be able to
control — The opening of our proposed gaming facilities will depend on, among other things,
obtaining adequate financing, the completion of construction, hiring and training of sufficient
personnel and obtaining all regulatory licenses, permits, allocations and authorizations. The
number of the approvals by federal and state regulators and other authorities needed to construct
and open new gaming facilities is extensive, and any delay in obtaining or the failure to obtain
these approvals could prevent or delay the completion of construction or opening of all or part of
the gaming facilities or otherwise adversely affect the design and features of the proposed
casinos.
Even if approvals and financing are obtained, building a new casino is a major construction
project that entails significant risks. These risks include, but are not limited to:
| |
• |
|
shortages of materials or skilled labor; |
| |
| |
• |
|
unforeseen engineering, environmental and/or geological problems; |
| |
| |
• |
|
work stoppages; |
| |
| |
• |
|
weather interference; |
| |
| |
• |
|
unanticipated cost increases; and |
| |
| |
• |
|
unavailability of construction equipment. |
Obtaining any of the requisite licenses, permits, allocations and authorizations from
regulatory authorities could increase the total cost, delay or prevent the construction or opening
of any of these planned casino developments or otherwise affect their design. In addition, once
developed, we may be unable to manage these casinos on a profitable basis or to attract a
sufficient number of guests, gaming customers and other visitors to make the various operations
profitable independently.
We have a limited base of operations — Our principal operations currently consist of the
Stockman’s Casino and the income from the management of one facility in Delaware, the Harrington
Casino. These limited sources of income, combined with the potentially significant investment
associated with any new managed facilities, may cause our operating results to fluctuate
significantly. Additionally, delays in the opening of any future casinos or our failure to open a
new casino could also significantly adversely affect our profitability. Future growth in revenues
and profits will depend on our ability to increase the number of our owned and managed casinos and
facilities or develop new business opportunities. We may be unable to successfully acquire, develop
or manage any additional casinos or facilities.
Adverse changes in discretionary consumer spending would decrease our gaming revenues — The
gaming industry is heavily dependent on discretionary consumer spending patterns. Our business is
sensitive to numerous factors that affect discretionary consumer income, including adverse general
economic conditions, changes in employment trends and levels of unemployment, increases in interest
rates, acts of war, terrorist or political events, a significant rise in energy prices or other
events or actions that may lead to a decrease in consumer confidence or a reduction in
discretionary income. Declines in consumer spending within the gaming industry, especially for
extended periods, could have a material adverse effect on our business, financial condition and
results of operations.
15
We will need additional capital to fund development projects and pursue additional gaming
opportunities — We are obligated to arrange on a best efforts basis up to $16 million in
financing in connection with the Northern Cheyenne Tribe project. We may be unable to arrange the
required additional financing on acceptable terms or at all. An inability to raise funds when
needed might require us to delay, scale back or eliminate some of our planned expansion and
development goals, and might require us to cease operations entirely.
We have limited recourse against tribal assets — Development of our gaming opportunities will
require us to make, arrange or guarantee substantial loans to tribes for the construction,
development, equipment and operations of the relevant casino. We also make advances to tribes in
connection with our development and management agreements. Our only recourse for collection of
indebtedness from, and repayment of advances to, a tribe or money damages for breach or wrongful
termination of such agreements is from revenues, if any, from prospective casino operations. Under
our management agreements, the repayment of our loans made to a tribe and other distributions due
from a tribe (including management fees) is subordinated in favor of other obligations of the tribe
to other parties related to the casino operations. Accordingly, in the event of a default by a
tribe under such obligations, our loans and other claims against the tribe will not be repaid until
such default has been cured or the tribe’s senior casino-related creditors have been repaid in
full. In addition, because we have not yet filed financing statements to perfect our security
interest in the net revenues from the proposed casinos, the repayment of our loans and advances
made to a tribe and other distributions due to us from a tribe may also be subordinated in favor of
other creditors.
The Indian tribes have sovereign powers and we may be unable therefore to enforce remedies
against them — The tribes with which we have agreements are independent governments that have
rights to tax persons and enterprises conducting business on their lands. They also have the right
to require licenses and to impose other forms of regulation and regulatory fees on persons and
businesses operating on their tribal lands. As a sovereign power, Indian tribes are generally
subject only to federal regulation. States do not have the authority to regulate them, unless such
authority has been specifically granted by the U.S. Congress. Thus, state laws generally do not
apply to tribes or to activities taking place on tribal lands. In the absence of a conflicting
federal or properly authorized state law, tribal law governs. Unless another law is specified,
contracts with the tribes are governed by tribal law (and not state or federal law). In our
agreements with these tribes, we generally have agreed that state law will govern the rights and
obligations under these agreements. However, such provisions may be unenforceable particularly with
respect to remedies against collateral located on tribal lands and they offer no protection against
third-party claims against the collateral. If such provisions are determined to be unenforceable,
then we may be unable to recover any amounts loaned or advanced to the tribes.
The waiver of sovereign immunity and jurisdiction provisions in our agreements may not be
enforceable and thus we may be further limited in recourse with respect to Indian tribes and their
assets — Indian tribes enjoy sovereign immunity from un-consented suit similar to that of the
states and the United States. In order to sue them (or one of their agencies or instrumentalities),
the tribe must have clearly and explicitly waived its sovereign immunity with respect to the matter
in dispute. The various Indian tribes that are parties to our management, development and related
agreements have granted a limited waiver of their sovereign immunity only to the extent of
providing for binding arbitration, judicial review, and enforcement of any arbitration award in any
court of competent jurisdiction. In the event that the waiver of sovereign immunity is held to be
ineffective, we could be precluded from judicially enforcing any rights or remedies against the
tribes.
Assuming that the tribes have clearly and explicitly waived their sovereign immunity, the
question remains as to the forum in which a lawsuit or other action can be brought against them,
particularly with respect to the enforcement of any arbitration award generally provided for under
our agreements with the tribes. Since the parties to a transaction cannot confer jurisdiction on a
court which does not otherwise have jurisdiction, it is possible that neither a federal nor a state
court would have jurisdiction over a case relating to them. Federal courts are courts of limited
jurisdiction and generally do not have jurisdiction to hear civil cases relating to Indians.
Federal courts may have jurisdiction if a federal question is raised by the suit, which is unlikely
in a typical contract suit or other enforcement action. Diversity of citizenship, another common
basis for federal court jurisdiction, is not generally present in a suit against an Indian tribe
because the tribe would not be considered a citizen of any state. Accordingly, in most commercial
disputes with Indian tribes, the jurisdiction of the federal courts, which are courts of limited
jurisdiction, may be difficult or impossible to obtain. State courts may also lack jurisdiction
over suits brought by us against a tribe in the states in which we operate casinos.
16
The remedies available against the tribes also depend, at least in part, upon the rules of
comity requiring initial exhaustion of remedies of tribal tribunals and, as to some judicial
remedies, the tribe’s consent to jurisdictional provisions contained in the disputed agreements.
The U.S. Supreme Court has held that where a tribal court exists, the jurisdiction in that forum
must first be exhausted before any dispute can be properly heard by federal courts which would
otherwise have jurisdiction. Where a dispute as to the existence of jurisdiction in the tribal
forum exists, the tribal court must first rule as to the limits of its own jurisdiction. In this
event, we could be subjected to substantial delay, cost and expense while seeking such remedies
pursuant to the relevant tribe’s procedures of which currently there may be none and they are not
obligated to create any. In addition, unless the decisions of the tribunals of the specific tribe
violate applicable state or federal law, there might be no effective right to appeal such decisions
in state or federal court. Many tribes have established tribal courts to hear cases relating to
their tribes or arising on their reservations. Although a tribe’s constitution may permit the
establishment of a tribal court system, they may not have one nor are they obligated to establish
one.
The tribes with which we have agreements have agreed to binding arbitration with respect to
disputes arising from our agreements with them and have consented to the enforcement of any
arbitration award in any court of competent jurisdiction which, as described above, may be a tribal
court, pursuant to a limited waiver of their sovereign immunity. However, enforcement of an
arbitration award against the tribes could be affected by disputes over the waiver of their
sovereign immunity and will be subject to limitations imposed by federal law as described above.
We are dependent on our key employees and may not find suitable replacements if our key
personnel are no longer available to us — If any or all of our key employees were to terminate
their relationship with us then we may be unable to find suitable replacements on a timely basis to
manage our operations. We entered into employment agreements with certain key employees. We entered
into two-year agreements with Andre Hilliou, Chief Executive Officer and Mark Miller, CFO; and
entered into a one-year agreement with Wes Elam, Sr. VP of Operations. We also have a consulting
agreement with Lee Iacocca, one of our directors. The loss of the services of any of our key
personnel or our inability to hire or retain qualified personnel would make it difficult for us to
implement our business plan.
The gaming industry is subject to many risks, including adverse economic and political
conditions and changes in the legislative and land use regulatory climate — Similar to investment
in other entertainment enterprises, adverse changes in general and local economic conditions may
adversely impact investments in the gaming industry. Examples of economic conditions subject to
change include, among others:
| |
• |
|
competition in the form of other gaming facilities and entertainment opportunities; |
| |
| |
• |
|
changes in regional and local population and disposable income; |
| |
| |
• |
|
unanticipated increases in operating costs; |
| |
| |
• |
|
restrictive changes in zoning and similar land use laws and regulations, or in health,
safety and environmental laws, rules and regulations; |
| |
| |
• |
|
risks inherent in owning, financing and developing real estate as part of our casino
operations; |
| |
| |
• |
|
the inability to secure property and liability insurance to fully protect against all
losses, or to obtain such insurance at reasonable costs; |
| |
| |
• |
|
inability to hire trained and knowledgeable managers and supervisors; |
| |
| |
• |
|
inability to hire a sufficient number of employees to maintain our desired level of
operations; |
| |
| |
• |
|
seasonality; |
| |
| |
• |
|
changes or cancellations in local tourist, recreational or cultural events; and |
| |
| |
• |
|
changes in travel patterns or preferences (which may be affected by increases in
gasoline prices, changes in airline schedules and fares, strikes, weather patterns or
relocation or construction of highways). |
17
Our management agreements for gaming facilities are of limited duration — We currently have
management agreements with two tribes — one tribe has the requisite federal approval and one
management agreement is with a commercial entity to operate gaming facilities. Our management
agreement for the Harrington Casino in Delaware ends in August 2011. With respect to our management
agreements for the proposed Indian gaming facilities, we are prohibited by law from having an
ownership interest in any casino we manage for an Indian tribe. Federal law limits the term of
management agreements with Indian tribes to seven years. If a management agreement is not renewed,
then we will lose the revenues from that agreement which would negatively affect our results of
operations.
We may be unable to successfully compete with other gaming activities — The gaming industry is
highly competitive. Gaming activities include traditional land-based casinos; river boat and
dockside gaming; casino gaming on Indian land; state-sponsored lotteries and video poker in
restaurants, bars and hotels; pari-mutuel betting on horse racing, dog racing and jai alai; sports
bookmaking; Internet gaming; and card rooms. Our Delaware operations, Stockman’s Casino and the
Indian-owned casinos that we are trying to develop and operate, compete or will compete, as the
case may be, with all these forms of gaming, and any new forms of gaming that may be legalized in
additional jurisdictions, as well as with other types of entertainment. Our operations may be
unable to successfully compete with new or existing gaming operations within the vicinity of our
operations or with gaming operations available on the Internet.
We have pledged some of our assets as collateral — In connection with our acquisition of
Stockman’s Casino, we pledged all of the capital stock and assets of Stockman’s Casino to the
Nevada State Bank in connection with debt financing. If we are unable to generate sufficient cash
flow to make payments under this loan, then the lender will be able to foreclose on these assets,
and we may be required to scale back or curtail operations. In the event of liquidation, the
lenders would have priority over our stockholders.
Our current and future credit agreements impose restrictions on us which may prevent us from
engaging in transactions that might benefit us, including responding to changing business and
economic conditions or securing additional financing, if needed — Our reducing revolving loan
agreement with Nevada State Bank contains customary events of default and restrictive covenants
that require us to maintain specified levels of performance and financial ratios at our Stockman’s
subsidiary and prohibit us from taking certain actions without satisfying the financial tests or
obtaining the consent of the lenders. Additionally, the obligations are secured by all of the
capital stock and assets of our Stockman’s subsidiary. The prohibited actions for Stockman’s
include, among other things:
| |
• |
|
making investments in excess of specified amounts; |
| |
| |
• |
|
incurring additional indebtedness in excess of a specified amount; |
| |
| |
• |
|
paying cash dividends; |
| |
| |
• |
|
making capital expenditures in excess of a specified amount; |
| |
| |
• |
|
creating certain liens; |
| |
| |
• |
|
prepaying our other indebtedness; |
| |
| |
• |
|
engaging in certain mergers or combinations; and |
| |
| |
• |
|
engaging in transactions that would result in a change of control of our company. |
18
Any future credit agreements in connection with other projects may contain similar
restrictions. Should we be unable to comply with the terms and covenants of our credit agreements,
we would be required to obtain
modifications of the terms of these agreements or secure another source of financing to
continue to operate our business. A default could result in the acceleration of our obligations
under the credit agreements. In addition, these covenants may prevent us from engaging in
transactions that benefit us, including responding to changing business and economic conditions or
securing additional financing, if needed. Our business is capital intensive and, to the extent we
need additional financing, we may not be able to obtain such financing at all or on favorable
terms, which may decrease our profitability and liquidity.
Naval Air Station Fallon is a significant part of the economy of Fallon, Nevada, the site of
Stockman’s Casino — Stockman’s Casino is located in Fallon, Nevada, which is the location of Naval
Air Station Fallon, the home of the Naval Strike and Air Warfare Center. The naval base is an
important employer in the region and accounts for a significant part of the economy. Any decrease
in operations or closure of the naval base would have a negative impact on the region’s economy,
and in turn the future financial performance of Stockman’s Casino and our results of operations.
We will need to make substantial financial and manpower investments in order to assess our
internal controls over financial reporting, and our internal controls over financial reporting may
be found to be deficient — Section 404 of the Sarbanes-Oxley Act of 2002 requires management to
assess its internal controls over financial reporting and requires auditors to attest to that
assessment. Current regulations of the Securities and Exchange Commission require us to include a
management assessment in our Annual Report on this Form 10-K for our fiscal year ended December 31,
2008 and an auditor attestation beginning the following fiscal year.
We have incurred costs of $0.3 million and $0.01 million in 2007 and 2008, respectively,
implementing and responding to these requirements. In particular, the rules governing the standards
that must be met for management to assess its internal controls over financial reporting under
Section 404 are complex and require significant documentation, testing and, if necessary, possible
remediation. Our process of reviewing, documenting and testing our internal controls over financial
reporting may cause a significant strain on our management, information systems and resources. We
may be required to hire additional personnel and to use outside legal, accounting, and advisory
services as we pursue completion of this effort. In addition, we will incur additional fees from
our auditors as they perform the additional services necessary for them to provide their
attestation. If we are unable to favorably assess the effectiveness of our internal controls over
financial reporting when we are required to, or if our independent auditors are unable to provide
an unqualified attestation report on such assessment, then we may be required to change our
internal controls over financial reporting to remediate deficiencies. In addition, investors may
lose confidence in the reliability of our financial statements, causing our stock price to decline.
We currently have five persons in our finance department. This limited number of staff will make it
harder for us to comply with Section 404 and consequently a loss of any of our finance staff
members may adversely affect our ability to comply with Section 404.
Inability to obtain and maintain necessary approvals from various gaming regulators will limit
our expansion and our operations — Our operations and proposed expansion depend on our ability to
obtain and maintain regulatory approvals with various gaming regulators. We must maintain licenses
from the Nevada Gaming Commission in connection with our Stockman’s Casino. Our management
agreements with the Michigan Tribe and the Northern Cheyenne Tribe and any future management
agreements we enter into with Indian tribes are subject to approval by the NIGC. In addition, in
order to conduct Class III Gaming, which includes typical Las Vegas style games, as defined by the
Indian Gaming Regulatory Act, a tribe must have entered into a gaming compact with the state in
which the casino is to operate, which has been approved by the NIGC. The Northern Cheyenne Tribe’s
gaming compact with the State of Montana was set to expire in June 2007. In April 2007, the tribe
extended the existing agreement with the State of Montana, while continuing negotiations on a new
Class III Gaming compact, which shall continue in effect until June 3, 2017, or until a new Class
III compact is signed by the State and the tribe, whichever comes first. Since the existing Compact
does not apply to our site, if the Northern Cheyenne Tribe is not able to successfully negotiate a
Class III Gaming compact with the State of Montana, we will be unable to develop the proposed
casino and recover the expenses we have already incurred in pursuing this project.
Gaming facility ownership, management and operation is subject to many federal, state,
provincial, tribal and/or local laws, regulations, and ordinances which are administered by
particular regulatory agency or agencies in each jurisdiction. These laws, regulations and
ordinances are different in each jurisdiction but generally deal with the responsibility, financial
stability and character of the owners and managers of gaming operations and persons
financially interested or involved in gaming operations. Our inability to obtain or maintain
required gaming regulatory approvals and licenses, including from the Nevada Gaming Commission and
the NIGC, would materially adversely affect our business and financial condition. Changes in these
laws, regulations or ordinances could adversely affect our future performance.
19
The proposed site for the Northern Cheyenne Tribe project requires approvals before
development on the land can begin — The site for the Northern Cheyenne Tribe project was approved
for gaming by the Secretary of the Interior as of October 28, 2008, however, the consent of the
Governor of Montana is required which has not yet been obtained. If the Northern Cheyenne Tribe’s
gaming compact with the State of Montana is not extended to include the site or a satisfactory site
for the project is not approved, then we will be unable to develop the proposed casino and recover
the expenses we have already incurred pursuing this project.
Our management agreements with the various tribes are subject to governmental or regulatory
modification — The NIGC has the power to require modifications to Indian management agreements
under some circumstances or to void such agreements or secondary agreements, including loan
agreements, if we fail to obtain the required approvals or to comply with the necessary laws and
regulations. While we believe that our management agreements and related secondary documents meet
the applicable requirements, the NIGC has the right to review each of these agreements and has the
authority to reduce the term of a management agreement or the management fee or otherwise require
modification of the management agreements and secondary agreements. Such changes would negatively
affect our profitability.
The rate of taxation on gaming profits may not be predictable — The legislatures in the
various states in which we operate commercial casinos have the authority to set gaming tax rates.
These state legislatures may revise their gaming taxes at any time and increase the tax rates
applicable to our casinos. The compacts between the states and the tribes contain provisions with
respect to fees due to the state from gaming facilities and these fees may be increased upon
renewal of the compact. Additionally, from time to time, certain federal legislators have proposed
the imposition of federal tax on gaming revenues. Any increase in tax rates or imposition of new
taxes on gaming operations applicable to our casinos either at the state or federal level, or both,
could materially adversely affect our financial condition or results of operations.
Our controlling stockholder has significant influence over management — Mr. Michael Paulson,
our controlling stockholder, beneficially owns (individually and as trustee of the Allen E. Paulson
Living Trust) approximately 18.1% of our outstanding shares of common stock and our other executive
officers and directors collectively beneficially own an additional 10.7% of our outstanding shares
of common stock. As a result, our controlling stockholder and our other executive officers and
directors are able to exercise significant influence over our company, including, but not limited
to, any stockholder approvals for the election of our directors and, indirectly, the selection of
our senior management, new securities issuances, mergers and acquisitions and any amendments to our
by-laws or charter. This concentration of ownership may have the effect of delaying, preventing or
deterring a change in control of our company. Our stockholders may be deprived of an opportunity to
receive a premium for their shares as part of a sale of our company and it may negatively affect
the market price of our common stock. When voting on such matters, our controlling stockholders’
interests may conflict with that of other stockholders.
We have the right under our amended and restated charter to redeem our capital stock under
certain circumstances — One of the requirements of gaming licenses in Nevada is that our directors,
officers and those who own specified percentages of our capital stock must meet eligibility
requirements for licenses. In order to ensure compliance with regulatory requirements in Nevada,
our amended and restated certificate of incorporation allows us to repurchase shares of our capital
stock from any stockholder if continued ownership of those shares by that stockholder would
jeopardize any gaming license, approval, franchise, consent or management agreement held by us or
any of our subsidiaries. Payment of the redemption price may be made by an unsecured promissory
note. This redemption will apply even if the stockholder would not have chosen to sell the stock at
such time.
There are trading risks for low priced stocks — The Securities Enforcement and Penny Stock
Reform Act of 1990 requires additional disclosure, relating to the market for penny stocks, in
connection with trades in any stock defined as a penny stock. The Securities and Exchange
Commission has adopted regulations that generally define a penny stock to be any equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Unless an exception is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market
and the risks associated therewith.
20
If our common stock is delisted from the NYSE Amex Exchange, then trading in our common stock
will be covered by Rules 15-g-1 through 15-g-6 promulgated under the Securities Exchange Act of
1934, as amended. Under such rules, broker-dealers who recommend such securities to persons other
than established customers and accredited investors must make a special written suitability
determination that the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to this transaction. Securities are exempt from these rules if the
market price of the common stock is at least $5.00 per share.
Our stock price may be volatile because of factors beyond our control and you may lose all or
a part of your investment — The market price of our common stock has been volatile in recent years.
The market price of our common stock could be subject to significant fluctuations after this
offering and may decline below the offering price. Any of the following factors could affect the
market price of our common stock:
| |
• |
|
our failure to meet financial analysts’ performance expectations; |
| |
| |
• |
|
changes in earnings estimates and recommendations by financial analysts; |
| |
| |
• |
|
actual or anticipated variations in our quarterly results of operations; |
| |
| |
• |
|
changes in market valuations of similar companies; |
| |
| |
• |
|
announcements by us or our competitors of significant contracts, acquisitions,
renovations, joint ventures or capital commitments; |
| |
| |
• |
|
regulatory action or changes; or |
| |
| |
• |
|
general market, political and economic conditions. |
Our common stock is thinly-traded — For most of our history our common stock has been
thinly-traded, both privately and on the various exchanges on which it has been listed, making it
difficult for stockholders to sell shares of our common stock at a predictable price or at all. The
volatility in the market price of our common stock may cause stockholders to encounter significant
short term variations in the market price of the stock on account of factors beyond our control.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, the Company is not required to provide the information
required by this item.
Item 2. Properties.
Stockman’s, a wholly-owned subsidiary, owns the site on which Stockman’s Casino operates in
Fallon, Nevada. Stockman’s has approximately 8,400 square feet of gaming space with approximately
259 slot machines, four table games and keno. There is also a bar, a fine dining restaurant and a
coffee shop. Until February 20, 2008, the facility included a Holiday Inn Express, which had 98
guest rooms, indoor and outdoor pools, sauna, and a fitness center, meeting room. The hotel was
subsequently sold. Management considers Stockman’s Casino to be in good condition and well
maintained. The loan agreement is guaranteed by Stockman’s and is secured by a pledge of the stock
and the assets of Stockman’s. The loan from the Seller is secured by a second interest in the real
estate of Stockman’s Casino.
Full House Resorts owns a twelve-acre parcel in McKinley County, New Mexico, which was
previously intended to be a future gaming development site for the Navajo Nation project. Since
this project has been discontinued, it is management’s intention to sell the land. The land held
for the development of this project is now included in assets held for sale and valued at $45,000
as of December 31, 2008, and it is management’s intention to sell the land as soon as possible.
21
We lease the office space in Las Vegas, Nevada pursuant to a lease which has recently been
amended. Effective April 1, 2007, we occupy approximately 2,569 square feet of office space in the
same location we have occupied for the past several years. The lease agreement expires April 30,
2010.
Item 3. Legal Proceedings.
An action was filed by the Company against Ambanc, “American Federal” on December 13, 2005,
for refund of $0.1 million deposit on a loan commitment which was not fulfilled. On February 17,
2006, the arbitration between the Company and American Federal was stayed, pending a resolution of
a lawsuit brought against American Federal by the Missouri Attorney General, seeking damages for
consumer fraud. As of December 31, 2008, we were notified that the Missouri’s Attorney General’s
lawsuit was settled with no money benefiting the Company and we have instructed our local counsel
to reinstate the arbitration. The balance being claimed by the Company is regarded as a contingent
asset and not included in our consolidated balance sheet.
On October 20, 2008, the Company was served with a complaint in the Second Judicial District
Court of Nevada in and for Washoe County by RAM Entertainment, LLC and Robert A. Mathewson alleging
breach of contract and other claims related to the resolution of claims by Gaming Entertainment
(California) LLC (“GEC”), a consolidated investee of the Company, against the Torres-Martinez Tribe
of California. Certain officers were named as individual defendants as well. The complaint
alleged that the Company, and in some cases the other individual defendants (i) breached an oral
promise to share with RAM the $1.1 million settlement proceeds received by GEC in 2005 following a
successful arbitration against the tribe, (ii) wrongfully distributed such settlement proceeds to
the Company and (iii) failed to disclose material information to RAM regarding GEC, including debts
owed by GEC to the Company. Following a mediation session held before a former Washoe County
District Court Judge, the lawsuit was settled by the company agreeing to pay a total of $0.5
million to the plaintiffs with $0.2 million due on execution of the settlement documents and $0.3
million within 30 days following the opening of the FireKeepers Casino but no later than December
15, 2009. All claims against the individuals from the GEC suit were dismissed outright and the
claims against the company were dismissed pursuant to the settlement. As of December 31, 2008,
$0.2 million was paid to the plaintiffs in this case.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our security holders during the fourth quarter of 2008.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities. |
Our stock trades on the NYSE Amex under the symbol FLL. Set forth below are the high and low
sales prices of the common stock as reported on the American Stock Exchange and the NYSE Amex for
the periods indicated.
| |
|
|
|
|
|
|
|
|
| |
|
High |
|
|
Low |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
2.80 |
|
|
$ |
1.26 |
|
Second Quarter |
|
|
2.59 |
|
|
|
1.44 |
|
Third Quarter |
|
|
2.13 |
|
|
|
1.35 |
|
Fourth Quarter |
|
|
1.55 |
|
|
|
0.95 |
|
| |
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
4.70 |
|
|
$ |
3.40 |
|
Second Quarter |
|
|
4.10 |
|
|
|
3.35 |
|
Third Quarter |
|
|
4.00 |
|
|
|
2.75 |
|
Fourth Quarter |
|
|
3.21 |
|
|
|
2.00 |
|
On March 25, 2008, the last sale price of the Common Stock as reported by the NYSE Amex
Exchange was $1.19.
22
As of December 31, 2008, we had 137 holders of record of our common stock. We believe that
there are over 1,000 beneficial owners.
On December 18, 2006, we declared the accrued dividends on our preferred stock which were
payable since issuance, and paid the dividend totaling $3.0 million in January 2007. In conjunction
with the equity offering in December 2006, the holders of the outstanding shares of our Series
1992-1 Preferred Stock converted all of the shares into shares of our common stock in January 2007
on a one share-for-one share basis in accordance with their conversion right. As of December 31,
2008 and 2007 there were no preferred shares issued or outstanding.
We intend to retain future earnings, if any, to provide funds for the operation of our
business, retirement of our debt and pursue acquisitions and, accordingly, do not anticipate paying
any cash dividends on our common stock in the near future.
Issuer Purchases of Equity Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
| |
|
|
|
|
|
|
|
|
|
Total number |
|
|
dollar value of |
|
| |
|
Total |
|
|
Weighted- |
|
|
of shares |
|
|
shares that may |
|
| |
|
number of |
|
|
average |
|
|
purchased as part |
|
|
yet be purchased |
|
| |
|
shares |
|
|
price paid |
|
|
of publicly |
|
|
under the plans or |
|
| Period |
|
purchased |
|
|
per share |
|
|
announced plan |
|
|
programs |
|
| |
07/01/2008 –
07/31/2008 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
1,000,000 |
|
08/01/2008 –
08/31/2008 |
|
|
8,600 |
|
|
$ |
1.64 |
|
|
|
8,600 |
|
|
|
985,872 |
|
09/01/2008 –
09/30/2008 |
|
|
111,071 |
|
|
|
1.48 |
|
|
|
111,071 |
|
|
|
821,637 |
|
10/01/2008 –
10/31/2008 |
|
|
690,341 |
|
|
|
1.24 |
|
|
|
690,341 |
|
|
|
962,538 |
|
11/01/2008 –
11/30/2008 |
|
|
320,302 |
|
|
|
1.05 |
|
|
|
320,302 |
|
|
|
625,230 |
|
12/01/2008 –
12/31/2008 |
|
|
80,100 |
|
|
|
1.16 |
|
|
|
80,100 |
|
|
|
531,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,210,414 |
|
|
$ |
1.21 |
|
|
|
1,210,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 7, 2008, the Company announced a stock repurchase plan (the “Repurchase Plan”). Under
the Repurchase Plan, the Company’s board of directors authorized the repurchase of up to $1.0
million of shares of our common stock in the open market or in privately negotiated transactions
from time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934,
subject to market conditions, applicable legal requirements and other factors. On October 14,
2008, the Company’s board of directors authorized the repurchase of an additional $1.0 million of
the Company’s common stock, and extended the expiration of the Repurchase Plan to April 30, 2009.
Through December 31, 2008, the Company had repurchased 1,210,414 shares at a weighted average-price
per share of $1.21, costing $1.5 million, (including commissions and other related transaction
costs). As of March 25, 2009, the Company has repurchased an aggregate of 1,356,595 shares of
treasury stock at a weighted-average price of $1.19 per share, costing $1.7 million, (including
commissions and other related transaction costs). The Repurchase Plan does not obligate the
Company to acquire any particular amount of common stock and may be suspended at any time at
management’s discretion.
Item 6. Selected Financial Data
As a smaller reporting company, the Company is not required to provide the information
required by this item.
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial
condition, profitability, liquidity, resources, business outlook, market forces, corporate
strategies, contractual commitments, legal matters, capital requirements and other matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. We note that many factors could cause our actual results and experience to change
significantly from the anticipated results or expectations expressed in our forward-looking
statements. When words and expressions such as: “believes,” “expects,” “anticipates,” “estimates,”
“plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,”
“may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions are used in
this Form 10-K, as well as statements containing phrases such as “in our view,” “there can be no
assurance,” “although no assurance can be given,” or “there is no way to anticipate with
certainty,” forward-looking statements are being made.
In addition to the risks discussed in Item 1 “Factors That May Affect Our Future Performance”,
various other risks and uncertainties may affect the operation, performance, development and
results of our business and could cause future outcomes to change significantly from those set
forth in our forward-looking statements, including the following factors:
| |
• |
|
our growth strategies; |
| |
| |
• |
|
our development and potential acquisition of new facilities; |
| |
| |
• |
|
risks related to development and construction activities; |
| |
| |
• |
|
anticipated trends in the gaming industries; |
| |
| |
• |
|
patron demographics; |
| |
| |
• |
|
general market and economic conditions; |
| |
| |
• |
|
access to capital and credit, including our ability to finance future business
requirements; |
| |
| |
• |
|
the availability of adequate levels of insurance; |
| |
| |
• |
|
changes in federal, state, and local laws and regulations, including environmental and
gaming license legislation and regulations; |
| |
| |
• |
|
regulatory approvals; |
| |
| |
• |
|
competitive environment; |
| |
| |
• |
|
risks, uncertainties and other factors described from time to time in this and our
other SEC filings and reports. |
We undertake no obligation to publicly update or revise any forward-looking statements as a
result of future developments, events or conditions. New risk factors emerge from time to time and
it is not possible for us to predict all such risk factors, nor can we assess the impact of all
such risk factors on its business or the extent to which any factor, or combination of factors, may
cause actual results to differ significantly from those forecast in any
forward-looking statements.
Overview
We develop, manage and/or invest in gaming related opportunities. The Company continues to
actively investigate, individually and with partners, new business opportunities. We own and
operate Stockman’s Casino in Fallon, Nevada. In addition, we are a non-controlling 50%-investor in
GED, a joint venture with HRI. GED has a management contract through August 2011 with Harrington
Casino at the Delaware State Fairgrounds in Harrington, Delaware. We also own 50% of GEM, a joint
venture with RAM that we control and, therefore, consolidate in our consolidated financial
statements. RAM is a privately-held investment company. GEM has a management agreement with the
Nottawaseppi Huron Band of Potawatomi Indians for the development and management of the FireKeepers
Casino near Battle Creek, Michigan. The FireKeepers casino is currently being constructed, and it
is expected to open during the third quarter of 2009. In addition, the Company has development and
management agreements (subject to NIGC approval), with the Northern Cheyenne Nation of Montana for
the development and management of a 25,000 square foot gaming facility to be built approximately 28
miles north of Sheridan, Wyoming.
24
Critical Accounting Estimates and Policies
Although our financial statements necessarily make use of certain accounting estimates by
management, we believe that, except as discussed below, no matters that are the subject of such
estimates are so highly uncertain or susceptible to change as to present a significant risk of a
material impact on our financial condition or operating performance.
The significant accounting estimates inherent in the preparation of our financial statements
primarily include management’s fair value estimates related to notes receivable from tribal
governments, and the related evaluation of the recoverability of our investments in contract
rights. Various assumptions, principally affecting the timing and, to a lesser extent, the
probability of completing our various projects under development and getting them open for
business, and other factors underlie the determination of these significant estimates. The process
of determining significant estimates is fact- and project-specific and takes into account factors
such as historical experience and current and expected legal, regulatory and economic conditions.
We regularly evaluate these estimates and assumptions, particularly in areas, if any, where changes
in such estimates and assumptions could have a material impact on our results of operations,
financial position and, generally to a lesser extent, cash flows. Where recoverability of these
assets or planned investments are contingent upon the successful development and management of a
project, we evaluate the likelihood that the project will be completed, the prospective market
dynamics and how the proposed facilities should compete in that setting in order to forecast future
cash flows necessary to recover the recorded value of the assets or planned investment. In most
cases, we engage independent valuation consultants to assist management in preparing and
periodically updating market and/or feasibility studies for use in the preparation of forecasted
cash flows. We review our conclusions as warranted by changing conditions.
Long-term assets related to Indian casino projects
We account for the advances made to tribes as in-substance structured notes at estimated fair
value in accordance with the guidance contained in Emerging Issues Task Force Issue No. 96-12,
Recognition of Interest Income and Balance Sheet Classification of Structure Notes.
Because our right to recover our advances and development costs with respect to Indian gaming
projects is limited to, and contingent upon, the future net revenues of the proposed gaming
facilities, we evaluate the financial opportunity of each potential service arrangement before
entering into an agreement to provide financial support for the development of an Indian project.
This process includes (1) determining the financial feasibility of the project assuming the project
is built, (2) assessing the likelihood that the project will receive the necessary regulatory
approvals and funding for construction and operations to commence, and (3) estimating the expected
timing of the various elements of the project including commencement of operations. When we enter
into a service or lending arrangement, management has concluded, based on feasibility analyses and
legal reviews, that there is a high probability that the project will be completed and that the
probable future economic benefit is sufficient to compensate us for our efforts in relation to the
perceived financial risks. In arriving at our initial conclusion of probability, we consider both
positive and negative evidence. Positive evidence ordinarily consists not only of project-specific
advancement or progress, but the advancement of similar projects in the same and other
jurisdictions, while negative evidence ordinarily consists primarily of unexpected, unfavorable
legal, regulatory or political developments such as adverse actions by legislators, regulators or
courts. Such positive and negative evidence is reconsidered at least quarterly. No asset, including
notes receivable or contract rights, related to an Indian casino project is recorded on our books
unless it is considered probable that the project will be built and will result in an economic
benefit sufficient for us to recover the asset.
In initially determining the financial feasibility of the project, we analyze the proposed
facilities and their location in relation to market conditions, including customer demographics and
existing and proposed competition for the project. Typically, independent consultants are also
hired to prepare market and financial feasibility reports. These reports are reviewed by management
and updated periodically as conditions change.
25
In assessing the probability of completing the project, we also consider the status of the
regulatory approval process including whether:
| |
• |
|
the federal Bureau of Indian Affairs, or BIA, recognizes the tribe; |
| |
| |
• |
|
the tribe has the right to acquire land to be used as a casino site; |
| |
| |
• |
|
the Department of the Interior has put the land into trust as a casino site; |
| |
| |
• |
|
the tribe has a gaming compact with the state government; |
| |
| |
• |
|
the NIGC has approved a proposed management agreement; and |
| |
| |
• |
|
other legal or political obstacles exist or are likely to occur. |
The development phase of each relationship commences with the signing of the respective
agreements and continues until the casino is open for business. Thereafter, the management phase of
the relationship, governed by the management contract, typically continues for a period of between
five to seven years. We make advances to the tribes, recorded as notes receivable, primarily to
fund certain portions of the projects, which bear no interest or below market interest until
operations commence. Repayment of the notes receivable and accrued interest is only required if the
casino is successfully opened and distributable profits are available from the casino operations.
Under the management agreement, we typically earn a management fee calculated as a percentage of
the net income of the gaming facility. In addition, repayment of the loans and our management fees
are subordinated to certain other financial obligations of the respective operations. Generally,
the order of priority of payments from the casinos’ cash flows is as follows:
| |
• |
|
a certain minimum monthly priority payment to the tribe; |
| |
| |
• |
|
repayment of various senior debt associated with construction and equipping of the
casino with interest accrued thereon; |
| |
| |
• |
|
repayment of various debt with interest accrued thereon due to us; |
| |
| |
• |
|
management fee to us; |
| |
| |
• |
|
other obligations; and |
| |
| |
• |
|
the remaining funds distributed to the tribe. |
Notes receivable
We account for and present our notes receivable from and management agreements with the tribes
as separate assets. Under the contractual terms, the notes do not become due and payable unless and
until the projects are completed and operational. However, if our development activity is
terminated prior to completion, we generally would retain the right to collect on our notes
receivable in the event a casino project is completed by another developer. Because we ordinarily
do not consider the stated rate of interest on the notes receivable to be commensurate with the
risk inherent in these projects (prior to commencement of operations), the estimated fair value of
the notes receivable is generally less than the amount advanced. At the date of each advance, the
difference between the estimated fair value of the note receivable and the actual amount advanced
is recorded as either an intangible asset (contract rights) or if the rights were acquired in a
separate, unbundled transaction, expensed as period costs of retaining such rights.
Subsequent to its effective initial recording at estimated fair value, the note receivable
portion of the advance is adjusted to its current estimated fair value at each balance sheet date,
using “Level 3 inputs,” which are defined in Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (“SFAS No. 157”), as unobservable inputs that reflect management’s
estimates about the assumptions that market participants would use in pricing an asset or
liability. Financial Accounting Standards Board Staff Position FAS 157-3, Determining the Fair
Value of Financial Asset when the market for that asset is not active, (“FSP FAS 157-3”) was issued
in October 2008 and was retroactively effective for the quarter ended September 30, 2008. The
implementation of FSP FAS 157-3 did not have a material impact on the Company’s valuation
techniques, financial position, results of operations and cash flows.
We do not adjust notes receivable to an estimated fair value that exceeds the face value of
the note plus accrued interest, if any. Due to the uncertainties surrounding the projects, no
interest income is recognized in the consolidated financial statements during the development
period, but changes in estimated fair value of the notes receivable are recorded as unrealized
gains or losses in our statement of operations.
26
Upon opening of the casino, the difference, if any, between the then-recorded estimated fair
value of the notes receivable, subject to any appropriate impairment adjustments made pursuant to
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan, and the amount contractually due under the notes would be amortized into income using the
effective interest method over the remaining term of the note.
Contract rights
Contract rights are recognized as intangible assets related to the acquisition of the
management agreements and periodically evaluated for impairment based on the estimated cash flows
from the management contract on an undiscounted basis and amortized using the straight-line method
over the lesser of seven years or contractual lives of the agreements, typically beginning upon
commencement of casino operations. In the event the carrying value of the intangible assets were to
exceed the undiscounted cash flow, the difference between the estimated fair value and carrying
value of the assets would be charged to operations.
The cash flow estimates for each project were developed based upon published and other
information gathered pertaining to the applicable markets. We have many years of experience in
making these estimates and also utilize independent appraisers and feasibility consultants to
assist management in developing our estimates. The cash flow estimates are initially prepared (and
periodically updated) primarily for business planning purposes with the tribes and are secondarily
used in connection with our impairment analysis of the carrying value of contract rights, land held
for development, and other capitalized costs, if any, associated with our tribal casino projects.
The primary assumptions used in estimating the undiscounted cash flow from the projects include the
expected number of Class III gaming devices, table games, and poker tables, and the related
estimated win per unit per day (“WPUD”). Generally, within reasonably possible operating ranges,
our impairment decisions are not particularly sensitive to changes in these assumptions because
estimated cash flows greatly exceed the carrying value of the related intangibles and other
capitalized costs. We believe that the primary competitors to our Michigan project are the Four
Winds Casino in southwestern Michigan, five northern Indiana riverboats and three downtown Detroit
casinos, whose published WPUD has consistently averaged above the $255 used in our undiscounted
cash flow analysis. In addition, our market analysis assumes the development of another Native
American casino of approximately equal size by the Gun Lake Tribe approximately 75 miles to the
northwest of our facility sometime in late 2009 or 2010. Our Michigan project is located
approximately 100 miles west of Detroit and approximately 100 driving miles northeast of Four Winds
Casino, which opened in August 2007 near New Buffalo, Michigan.
Summary of long-term assets related to Indian casino projects
At December 31, 2008 and 2007, long-term assets associated with tribal casino projects are
summarized as follows, with notes receivable presented at their estimated fair value:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Fire Keepers: |
|
|
|
|
|
|
|
|
| |
Notes receivable, tribal governments |
|
$ |
4,097,002 |
|
|
$ |
11,189,359 |
|
Contract rights, net |
|
|
16,636,358 |
|
|
|
14,625,969 |
|
|
|
|
|
|
|
|
|
|
|
20,733,360 |
|
|
|
25,815,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other projects: |
|
|
|
|
|
|
|
|
| |
Notes receivable, tribal governments |
|
$ |
1,017,765 |
|
|
$ |
989,122 |
|
Contract rights, net |
|
|
159,194 |
|
|
|
135,164 |
|
|
|
|
|
|
|
|
| |
|
|
|
1,176,959 |
|
|
|
1,124,286 |
|
|
|
|
|
|
|
|
|
|
$ |
21,910,319 |
|
|
$ |
26,939,614 |
|
|
|
|
|
|
|
|
27
As previously noted, the FireKeepers project comprises the majority of long-term assets
related to tribal casino projects. We have an approved management agreement with the Authority
for the development and operation of the FireKeepers Casino, which provides that we will receive,
only from the operations and financing of the project, reimbursement for all advances we have
made to the Authority and a management fee equal to 26% of the net revenues of the casino
(defined effectively as net income prior to management fees) for a period of seven years
commencing upon opening. The terms of an amended management agreement were approved by the
NIGC in April 2008. In May 2008, in connection with the project financing, $9.3 million of the
notes receivable was repaid, which resulted in an increase in the estimated fair value of the
notes receivable of approximately $1.8 million, which was recorded as an unrealized gain in the
first quarter of 2008. The remaining $5.0 million of the note receivable is expected to be
repaid 180 days following opening of the casino, provided there are sufficient funds remaining in
the construction disbursement account. If there are insufficient funds remaining in the
construction disbursement account, the balance becomes payable in 60 equal monthly installments
beginning 180 days after the commencement of operations of the casino, plus interest at prime
plus 1%. We are monitoring the progress of the project and the development budget and believe
that sufficient funds will be left to fund the $5.0 million reimbursement following opening.
In arriving at the estimated opening date for the FireKeepers project, which we believe will
be in the third quarter of 2009, we considered the status of the following conditions and estimated
the time necessary to complete the construction:
| |
• |
|
the tribe is federally recognized; |
| |
• |
|
adequate land for the proposed casino resort has been placed in trust; |
| |
• |
|
the tribe has a valid gaming compact with the State of Michigan; |
| |
• |
|
the NIGC approved the management agreement; |
| |
• |
|
the BIA issued a record of decision approving the final environmental impact statement
in September 2006; |
| |
• |
|
project financing was obtained in May 2008; |
| |
• |
|
construction commenced, with an anticipated construction period of approximately 15
months; and |
| |
• |
|
construction to date has progressed on schedule. |
The Company extended its estimated opening date for the Montana casino from the second quarter
of 2010 to the third quarter of 2010. The Company had expected that the tribe would receive key
federal and state approvals during the fourth quarter of 2008 which were not received and the
pending change in the federal administration is expected to further delay the approval process
until the second quarter of next year. The effect of the change in the estimated opening date
reduced the estimated fair value of the note receivable related to the Montana project by $18,000
as of December 31, 2008.
On March 19, 2008, we announced that we are no longer pursuing the Nambé project. As of
December 31, 2008, we have advanced $0.7 million for the development of the project, all of which
is expected to be reimbursed by the Nambé Tribe from the revenues of their expected gaming project.
In addition, the Company expects to negotiate payment from the Nambé Tribe or its new developer for
the value of the exclusive gaming rights granted to the Company by the Nambé Tribe. However, in
December, 2007, the Company recorded an impairment loss associated with the related contract rights
of $0.2 million, pending a resolution with the Nambé Tribe. The estimated fair value of the
receivable from the Nambé project is now based on the assumption that the Nambé Tribe will develop
a smaller scope project and will repay the advances over a five-year period after the project opens
with interest at prime plus 2%. However, the collectability ultimately depends on the successful
development and operation of the project, which we have no influence over, and accordingly, we have
discounted the payment stream using a 20% discount rate. The development agreement between the
Company and the Nambé Tribe provides that the Company is entitled to recoup its advances from
future gaming development, even if the Company does not ultimately develop the project. The Nambé
Tribe has confirmed in writing that it is obligated to repay the reimbursable advances. In
addition, the Nambé Tribe has informed management that it intends to develop a small gaming
facility with another developer. Accordingly, management believes that the Nambé Tribe has the
intent and will likely have the ability to repay the advances, either using a portion of the
project financing or future cash flows of the project once open.
Due to the absence of observable market quotes on our notes receivable from tribal
governments, management develops inputs based on the best information available, including
internally-developed data, such as estimates of future interest rates, discount rates and casino
opening dates as discussed below.
The estimated fair value of our notes receivable related to tribal casino projects make up
approximately 11% of our total assets, and are the only assets in our financial statements that are
reported at estimated fair value. Changes
in the estimated fair value of our notes receivable are reported as unrealized gains (losses),
which affect reported net income, but do not affect cash flows.
28
The following table reflects selected key assumptions and information used to estimate the
fair value of the notes receivable for all projects at December 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Aggregate face amount of the notes receivable
(including interest) |
|
$ |
6,281,329 |
|
|
$ |
14,084,100 |
|
|
|
|
|
|
|
|
|
|
Estimated years until opening of casino: |
|
|
|
|
|
|
|
|
FireKeepers |
|
|
.75 |
|
|
|
1.50 |
|
Montana |
|
|
1.75 |
|
|
|
1.75 |
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
FireKeepers |
|
|
17.0 |
% |
|
|
17.5 |
% |
Montana |
|
|
23.0 |
% |
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
Estimated probability of the casino opening as expected: |
|
|
|
|
|
|
|
|
FireKeepers |
|
|
96 |
% |
|
|
96 |
% |
Montana |
|
|
70 |
% |
|
|
80 |
% |
For the portion of the notes not repaid prior to the commencement of operations, management
estimates that the stated interest rates during the loan repayment terms will be commensurate with
the inherent risk at that time. The estimated probability rates have been re-evaluated and
modified accordingly, based on project-specific risks such as delays of regulatory approvals for
the projects and review of the financing environment. The estimated casino opening dates used in
the valuations take into account project-specific circumstances such as ongoing litigation, the
status of required regulatory approvals, construction periods and other factors.
Factors that we consider in arriving at a discount rate include discount rates typically used
by gaming industry investors and appraisers to value individual casino properties outside of Nevada
and discount rates produced by the widely accepted Capital Asset Pricing Model, or CAPM, using the
following key assumptions:
| |
• |
|
S&P 500, 10 and 15-year average benchmark investment returns (medium-term horizon
risk premiums); |
| |
• |
|
Risk-free investment return equal to the trailing 10-year average for 90-day Treasury
Bills; |
| |
• |
|
Investment beta factor equal to the unlevered five-year average for the hotel/gaming
industry; and |
| |
• |
|
Project-specific adjustments based on typical size premiums for “micro-cap” and
“low-cap” companies using 10 and 15-year averages, and the status of outstanding
required regulatory approvals and/or litigation, if any. |
Management believes that under the circumstances, essentially three critical dates and events
that impact the project specific discount rate adjustment when using CAPM are: (1) the date that
management completes its feasibility assessment and decides to invest in the opportunity; (2) the
date that construction financing has been obtained after all legal obstacles have been removed; and
(3) the date that operations commence.
29
At December 31, 2008 and 2007, the sensitivity of changes in the key assumptions (discussed in
greater detail below) related to the FireKeepers project are illustrated by the following
hypothetical increases (decreases) in the estimated fair value of the note receivable:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Discount rate increases 2.5% |
|
$ |
(106,972 |
) |
|
$ |
(347,790 |
) |
Discount rate decreases 2.5% |
|
|
112,245 |
|
|
|
366,793 |
|
Forecasted opening date delayed one quarter |
|
|
(157,696 |
) |
|
|
(442,085 |
) |
Forecasted opening date accelerated one quarter |
|
|
164,009 |
|
|
|
460,273 |
|
Amortization of gaming and contract rights is, or is expected to be provided on a
straight-line basis over the contractual lives of the assets. The contractual lives may include, or
not begin until after a development period and/or the term of the subsequent management agreement.
Because the development period may vary based on evolving events, the estimated contractual lives
may require revision in future periods. Accordingly, we extended the amortization period in 2007 to
reflect the revised anticipated opening date for the Michigan casino. These gaming and contract
rights are held by us and are to be assigned to the appropriate operating subsidiary when the
related project is operational and, therefore, they are not included in the calculation of the
non-controlling interest in the subsidiaries.
Advances to tribes are expected to be repaid prior to commencement of operations, or within
the repayment term of typically between five and seven years, commencing 30 to 180 days after the
opening of the project. As of December 31, 2008, we estimate the following potential exposure
resulting from a project not reaching completion:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2008 |
|
FireKeepers |
|
|
New Mexico |
|
|
Montana |
|
|
Total |
|
Notes receivable |
|
$ |
4,097,002 |
|
|
$ |
444,996 |
|
|
$ |
572,769 |
|
|
$ |
5,114,767 |
|
Contract rights |
|
|
16,636,358 |
|
|
|
— |
|
|
|
159,194 |
|
|
|
16,795,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,733,360 |
|
|
$ |
444,996 |
|
|
$ |
731,963 |
|
|
$ |
21,910,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of contract rights is expected to be provided on a straight-line basis over the
contractual lives of the assets. The contractual lives may include, or not begin until after a
development period and/or the term of the subsequent management agreement. Because the development
period may vary based on evolving events, the estimated contractual lives may require revision in
future periods. The contract rights are owned solely by us and are expected to be assigned to the
appropriate operating subsidiary when the related project is operational and, therefore, the
contract rights are not currently included in the balance of non-controlling interests.
Due to our current financing arrangement for the development of the Michigan project through a
50%-owned joint venture, we believe we are exposed to the majority of risk of economic loss from
the joint venture’s activities. Therefore, in accordance with Financial Accounting Standards Board
(“FASB”) Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities (FIN 46(R)),
we consider the joint venture to be a variable interest entity that requires consolidation in our
financial statements.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. SFAS No. 157 defines fair
value and establishes a framework for measuring fair value and expands disclosures about fair value
measurements. Although SFAS No. 157 is effective now (and has been adopted) as amended by FASB
Staff Position (“FSP”) FAS 157-3, Determining the Fair Value of Financial Asset when the Market for
that Asset is not Active, issued in October 2008, for financial assets and liabilities carried at
estimated fair value, it will become effective in 2009 for any nonfinancial assets and liabilities
so carried, but we have none. Therefore, no future effect of the non-financial provisions of SFAS
No. 157 on our future financial position, results of operations or cash flows is expected.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51, which establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for us for 2009, and early adoption is prohibited. Among the
effects of SFAS No. 160 will be the future exclusion from net income (loss) of the non-controlling
interest therein and the relocation of such non-controlling interest to the stockholders’ equity
section of the balance sheet. We are currently evaluating the effects, if any, that SFAS No. 160
will have on our future financial position, results of operations and operating cash flows.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No.
141R will significantly change the accounting for business combinations for which the acquisition
date is in 2009 or thereafter. We are currently evaluating how SFAS 141R will impact our financial
statements should we enter into any business combination transactions after 2008. However, we
currently have no announced or pending business combination transactions.
30
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Operating revenues from continuing operations. For the year ended December 31, 2008, total
operating revenues from continuing operations increased by $0.1 million principally due to the fact
that Stockman’s Casino was acquired on January 31, 2007 resulting in eleven months of operations in
2007 and twelve months of operations in 2008. The increase in casino and food and beverage revenues
of $0.5 million was offset by a decrease of $0.4 million in other operating income principally due
to the recognition in the second quarter of 2007, of one-time revenues of $0.3 million related to
the termination of a consulting agreement with the Hard Rock casino in Biloxi.
Operating costs and expenses from continuing operations. For the year ended December 31, 2008,
total operating costs and expenses decreased $0.1 million compared to the prior year, primarily as
a result of decreases in project development costs and selling, general and administrative expenses
(as discussed below), offset by an increase in casino and food and beverage expenses of $0.5
million, due to the fact that Stockman’s, which was acquired on January 31, 2007, and was operated
by the Company for only eleven months in the prior year.
Project development costs. Project development costs decreased by $0.3 million or 65.0% due to
reductions in new business development activity and reduced expenses for the tribal projects
related to the discontinuance of the Nambé project, reduced activity in the Northern Cheyenne
project and as a result of the Michigan Tribe obtaining project financing, which enabled the
Michigan Tribe to fund the majority of its project costs beginning in the second quarter of 2008.
Selling, general and administrative expense. Selling, general and administrative expenses
decreased by $0.05 million or 8.1% as compared to 2007, primarily due to decreases at the corporate
level in employee related expenses related to the reduction of stock based compensation and offset
by increases related to the Stockman acquisition as noted above.
Depreciation and amortization. Depreciation expense increased by $0.2 million from the prior
year primarily due to the purchase of property and equipment of $0.5 million during 2008 and one
more month of depreciation in 2008 when compared to 2007.
Operating gains (losses). For the year ended December 31, 2008, operating gains increased by
$1.6 million or 33.8%. The increase is primarily due to the net impact of the change in the
discount rates and the estimated opening dates of the tribal projects which resulted in an increase
in unrealized gains of $1.3 million or 151.1% from the prior year. This increase is primarily due
to the Michigan project, which is scheduled to open in the third quarter of 2009. The increase also
included an increase in our share of income from the Delaware joint venture of $0.5 million or
11.8% over the prior year due, in part, to our restructured management contract with HRI.
Other income (expense). For the year ended December 31, 2008, other expenses increased by
$4,896 as compared to 2007, principally due to the decrease of interest and other income of $0.6
million, offset by a decrease of interest expense of $0.7 million and increase of $0.2 million in
non-controlling interest in net income of consolidated joint venture. The decrease of interest and
other income is due to the absence in 2008 of non-recurring revenues of $272,138 recorded in the
third quarter of 2007, related to the transfer of an obligation to pay an architectural firm
related to the Michigan project. Originally, the Company had guaranteed the tribe’s obligation to
pay the architectural firm. However, as part of the revised management agreement negotiated during
the third quarter of 2007, the obligation was transferred to the Michigan tribe without recourse to
the Company and, therefore, the liability was eliminated, as provided in SFAS No. 140. The
decrease of interest expense is due to the reduction in interest expense related to the reduction
of outstanding debt on the Company’s revolving line of credit.
31
Income taxes. For the year ended December 31, 2008, the effective income tax rate was
approximately 45%, compared to 40% in 2007. The increase in the effective tax rate from the prior
year is primarily due to income tax permanent differences related to restricted stock grants vested
in 2008.
Liquidity and Capital Resources
The Delaware joint venture and Stockman’s Casino operation are currently our primary sources
of recurring income and positive cash flow. Distributions from the Delaware operation are governed
by the terms of the applicable joint venture agreement and management reorganization agreement. We
expect to continue receiving management fees as currently prescribed under the management
agreement, with a minimum guaranteed growth factor over the prior year of 5% in years 2009 through
August 2011.
On a consolidated basis, for the fiscal year ended December 31, 2008, cash provided by
operations decreased $1.8 million due in part to the sale of the hotel in February 2008 and higher
GEM expenses. Cash provided by investing activities increased $23.9 million from the prior year
primarily due to cash proceeds generated from the sale of the Holiday Inn Express in February 2008
of $6.9 million and the repayment of tribal advances related to the FireKeepers project of $9.3
million in May 2008, partially offset by $2.1 million in cash used to acquire additional Michigan
contract rights in the second quarter. In the prior-year period, the primary use of cash for
investing activities related to the acquisition of Stockman’s Casino. Cash used in financing
activities increased $10.6 million primarily due to repayment of long-term debt using the net
proceeds received from investing activities. As of December 31, 2008, the Company had
approximately $5.3 million in cash and availability on its revolving credit facility of $6.0
million.
The United States is currently experiencing a recession accompanied by, among other things,
instability in the investment and commercial banking systems, reduced credit availability and
highly curtailed gaming and other recreational activities, and it is also engaged in war. The
effects and duration of these developments and related risks and uncertainties on the Company’s
future operations and cash flows cannot be estimated at this time but may be significant.
Our future cash requirements will include funding the remaining near and long-term cash
requirements of our development expenses for the Michigan and Montana projects, selling, general
and administrative expenses, capital expenditures primarily at Stockman’s and debt service.
Subject to the economic uncertainties discussed in the previous paragraph, we believe that adequate
financial resources will be available to execute our current growth plan from a combination of
operating cash flows and external debt and equity financing. However, continued downward pressure
on cash receipts due to, among other reasons, the adverse effects of the current economic
environment and/or the lack of available funding sources due to, among other reasons, the recent
unprecedented global contraction in available credit increases uncertainty with respect to our
development and growth plans.
Again, subject to the foregoing uncertainty about credit availability and a significant
national downward trend in casino gaming activity due to recent economic developments, we believe
that our casino development projects currently in progress will likely be constructed and
ultimately, will achieve profitable operations; however, no assurance can be made that this will
occur or how long it will take. If our casino development projects currently in progress are not
completed, or upon completion, if we fail to successfully compete within a reasonable timeframe in
the highly competitive and currently declining market for gaming activities, we may lack the funds
to compete for and develop future gaming or other business opportunities.
Long-term debt includes a reducing revolving loan from Nevada State Bank. The maximum amount
permitted to be outstanding under the reducing revolving loan decreases $0.3 million semiannually
on January 1 and July 1, and any outstanding amounts above such reduced maximum must be repaid on
each such date. The reducing revolving loan is payable over 15 years at a variable interest rate
based on the five-year LIBOR/Swap rate plus 2.1%. This rate, which was 7.39% per annum as of
December 31, 2008 and December 31, 2007, adjusts annually based on the funded debt to EBITDA ratio
of Stockman’s, with adjustments based on the five-year LIBOR/Swap rate occurring every five years.
With the sale of the Holiday Inn Express in February 2008, the balance on the loan was reduced from
$10.9 million to $3.9 million, and the Company’s availability under the facility increased to
approximately $5.3 million. In addition, periodic payment requirements were reduced on a pro-rata
basis. On October 23, 2008, the Company paid additional principal of $0.6 million and the line of
credit availability as of December 31, 2008 was $6.0 million. In March, 2009, the Company made
$2.3 million of voluntary principal payments on its revolving credit line, increasing the
availability under the line to $7.9 million and reducing its cash balance to $3.5 million. The
remaining balance of $0.2 million is not due until January of 2022.
32
The loan agreement with Nevada State Bank also contains customary financial representations
and warranties and requires that Stockman’s maintain specified financial covenants, including a
fixed charge coverage ratio, a funded debt to EBITDA ratio and a minimum tangible net worth. In
addition, the loan agreement limits the amount of distributions from and capital expenditures by
Stockman’s. The loan agreement also provides for customary events of default including payment
defaults and covenant defaults.
The promissory note payable to the seller of Stockman’s bears interest at 7.44% per annum, is
payable in 60 monthly installments of principal and interest and is secured by a second interest in
the real estate of Stockman’s.
On July 7, 2008, the Company announced a stock repurchase plan (the “Repurchase Plan”). Under
the Repurchase Plan, the Company’s board of directors authorized the repurchase of up to $1.0
million of the Company’s common stock in the open market or in privately negotiated transactions
from time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934,
subject to market conditions, applicable legal requirements and other factors. On October 14,
2008, the Company’s board of directors authorized the repurchase of an additional $1.0 million of
the Company’s common stock, and extended the expiration of the Repurchase Plan to April 30, 2009.
Through December 31, 2008, the Company had repurchased 1,210,414 shares at a weighted average-price
per share of $1.21, costing $1.5 million, (including commissions and other related transaction
costs). The Repurchase Plan does not obligate the Company to acquire any particular amount of
common stock and may be suspended at any time at management’s discretion.
As of December 31, 2008, the Company held $3.6 million in a U. S. Government money market
account, included in total cash of $5.3 million. On September 29, 2008 the US Treasury announced a
Temporary Guarantee Program for US Registered Money Market Funds. Under this new Treasury
Department program, investments in a money market fund as of September 19, 2008, will be
temporarily insured to enable shareholders to receive a net asset value of $1.00 per share if the
fund is liquidated. The program is designed to address current market conditions and will
initially exist only for a three-month period. The Treasury Department can extend the program for
up to an additional nine months, as needed. We believe it is unlikely that the insurance will be
necessary for our U.S. Government money market fund, as investments in the fund continue to adhere
to strict credit quality, liquidity and diversification guidelines.
On January 31, 2007, we acquired all of the outstanding shares of capital stock of Stockman’s
for $28.1 million, which included $0.7 million of capitalized costs, plus $0.7 million for the
right to adjust the tax basis of the assets acquired. Stockman’s owns and operates Stockman’s
Casino and, until February 20, 2008, the Holiday Inn Express in Fallon, Nevada. The transaction was
financed with a portion of the net proceeds from our December 2006 stock offering, cash on hand,
$16 million of debt secured by the capital stock and assets of Stockman’s and a $1.25 million
promissory note to the seller of Stockman’s.
Effective May 15, 2007, GEM entered into an agreement with Green Acres whereby GEM acquired
all of Green Acres’ interests in the Nottawaseppi Huron Band of Potawatomi casino project in
Michigan for $10 million. GEM’s members equally funded an initial deposit and periodic payments of
approximately $0.6 million. The remaining obligation of $9.5 million, although unsecured, was
recorded as a long-term liability once the management agreement between GEM and the Authority was
approved in December 2007. On May 6, 2008, in conjunction with the financing of the FireKeepers
Casino, the Company applied the proceeds of the $9.3 million tribal receivable reimbursement to pay
off the remaining balance of the $9.5 million Green Acres liability.
In December 2007, RAM exercised its conversion option on its $2.4 million loan to the Company.
As a result, $2.0 million of the loan was converted to a capital contribution to the Michigan joint
venture, and the loan balance of $0.4 million, plus $0.6 million of accrued interest on the
original loan, became a liability of GEM.
33
Additional projects are considered based on their forecasted profitability, development
period, regulatory and political environment and the ability to secure the funding necessary to
complete the development, among other considerations. As part of our agreements for tribal
developments, we typically fund costs associated with projects which may include legal, civil
engineering, environmental, design, training, land acquisition and other related advances while
assisting the tribes in securing financing for the construction of the project. The majority of
these costs are advanced to the tribes and are reimbursable to us, pursuant to management and
development agreements, as part of the financing of the project’s development. While each project
is unique, we forecast these costs when
determining the feasibility of each opportunity. Such agreements to finance costs associated
with the development and furtherance of projects are typical in this industry and have become
expected of tribal gaming developers.
Indian casino projects
Because we have received proposals from several funding sources for our Indian casino
projects, we expect to successfully arrange on behalf of the tribe third party funding for the
construction stage of our Indian casino projects. However, if none of these proposals result in
funding on acceptable terms, we believe that we could either sell our rights to one or more
projects and land held, find a partner with funding, or abandon the project and have our
receivables reimbursed from future tribal gaming operations, if any, developed by another party.
Presently, we do not generate sufficient internal cash flow to fund the construction phase of
our Indian casino projects. If we were to discontinue development activities related to any or all
of these projects, the related receivables and intangibles would then be evaluated for impairment.
The December 2008 balance of notes receivable from Indian advances was approximately $1.2 million
below the contractual value of the notes (including accrued interest) and the related contract
rights are valued below the anticipated undiscounted cash flows from the management fees of the
projects. Therefore, although the actual amount cannot be estimated at this time, we currently do
not believe that the carrying value of our long-term assets related to tribal casinos has been
impaired.
Our funding of the Michigan project and our liquidity are affected by an agreement with RAM,
the non-controlling, 50% owner of our Michigan joint venture. In February 2002, in exchange for
funding a portion of the development costs, RAM advanced us $2.4 million which was partially
convertible into a capital contribution to the Michigan joint venture upon federal approval of the
land into trust application and federal approval of the management agreement with the Michigan
Tribe, both of which had occurred as of December 31, 2007. Accordingly, in December 2007, RAM
exercised its conversion option and $2.0 million of the original loan was converted into a capital
contribution to the Michigan joint venture, with the remaining loan balance of $0.4 million, plus
$0.6 million of accrued interest becoming debt repayable solely from the Michigan joint venture.
On May 6, 2008, the Authority closed on the sale of $340 million of Senior Secured Notes and a
$35 million equipment financing facility to fund the development and construction of the Tribe’s
FireKeepers Casino in Michigan. On the same date, GEM received a payment of approximately $9.3
million on its notes receivable from the Authority, with the remaining $5.0 million to be paid 180
days following the opening of the casino, subject to there being adequate funds remaining in the
construction disbursement account. If there are insufficient funds to repay the remaining balance,
the Authority will be obligated to repay the balance in 60 monthly installments beginning 180 days
following the opening of the casino, plus interest at prime plus 1%. On the same day, GEM funded
$2.1 million in financing costs on behalf of the Authority, as required by the management
agreement, which was recorded as additional gaming rights related to the Michigan project. The
Company and RAM each contributed one-half of the funds to GEM for GEM to make this funding.
Our Michigan joint venture has the exclusive right to arrange the financing and provide casino
management services to the Michigan Tribe in exchange for a management fee of 26% of net revenues
(defined effectively as net income before management fees) for seven years. The terms of our
management agreement were approved by the NIGC in December 2007 and an amended contract as approved
in April 2008. No assurance can be given that the management fee paid by FireKeepers will have a
significant impact on the Company’s cash flow from operations.
34
In May 2005, we entered into development and management agreements with the Northern Cheyenne
Tribe of Montana for a proposed casino to be built approximately 28 miles north of Sheridan,
Wyoming. The Northern Cheyenne Tribe currently operates the Charging Horse casino in Lame Deer,
Montana, consisting of 200 gaming devices, a 300 seat bingo hall and restaurant. As part of the
agreements, we have committed on a best efforts basis to arrange financing for the costs associated
with the development and furtherance of this project up to $16 million. Our agreements with the
tribe provide for the reimbursement of these advances either from the proceeds of the financing of
the development, the actual operation itself or, in the event that we do not complete the
development, from the revenues of the tribal gaming operation undertaken by others. The management
agreement and related contracts have been submitted to the NIGC for approval, but will be revised
as necessary based on the final agreed upon size and scope of the project with the tribe.
Presently, we are not obligated to fund the construction phase of our Northern Cheyenne
project in Montana. The FireKeepers casino development financing has been secured by the tribe.
The recent unprecedented global contraction in available credit significantly decreases the
likelihood that financing could be obtained on favorable terms if at all for the Montana project
this year. We believe that credit markets will improve sufficiently in order for the Montana Tribe
to fund the project when we are expected to commence construction later next year. However, if
the Montana Tribe is unable to obtain funding on acceptable terms, we believe we could either sell
our rights to the Montana project, find a partner with funding, or abandon the Montana project and
have our receivables reimbursed from the gaming operations, if any, developed by another party.
However, if we were to discontinue the Montana project, the related receivables and intangibles
would then be evaluated for impairment.
In 2005, we signed gaming development and management agreements with the Nambé Tribe of New
Mexico to develop a 50,000 square foot facility including gaming, restaurants, entertainment and
other amenities as part of the tribe’s multi-phased master plan of economic development. In March
2008, management announced that the Company was no longer pursuing the Nambé project. Pursuant to
the terms of the development agreement, the Nambé Tribe has recognized the obligation to reimburse
all of the Company’s development advances for the project. Full House currently has advanced $0.7
million for the development of the project, all of which is expected to be reimbursed by the Nambé
Tribe. In addition, management expects to negotiate payment from the Nambé Tribe or its new
developer for the value of the exclusive gaming rights granted to the Company by the Nambé Tribe.
The receivable from the Nambé Tribe is valued based on the present value of a five-year collection
period and a 20% discount rate. The collectability ultimately depends on the quality and timing of
the project development which we are monitoring, but have no influence over.
Our agreements with the various Indian tribes contain limited waivers of sovereign immunity
and, in many cases, provide for arbitration to enforce the agreements. Generally, our only recourse
for collection of funds under these agreements is from revenues, if any, of prospective casino
operations.
Other
As part of the termination of our Hard Rock licensing rights in Biloxi, Mississippi, we agreed
to provide consulting services to Hard Rock if and when the Biloxi facility opens, entitling us to
annually receive the greater of $100,000 or 10% of licensing fees for the two year consulting
period. However, due to the devastation caused by Hurricane Katrina, which caused severe damage to
the Hard Rock Casino in Biloxi, the opening of the facility, which was originally scheduled for the
third quarter of 2005, was postponed to the summer of 2007. Full House received a one-time cash
payment of $0.3 million in the second quarter of 2007, related to the termination of a consulting
agreement with the Hard Rock casino in Biloxi, Mississippi.
In 2006, we declared a dividend of $3.0 million equal to the amount of previously accrued and
unpaid dividends, on the 700,000 outstanding shares of our Series 1992-1 Preferred Stock, which was
paid in January 2007. Concurrent with payment of the dividends, the holders’ exercised their right
to convert the preferred stock into common stock on a one-for-one basis and accordingly, as of
December 31, 2007 and 2008, there are no preferred shares issued or outstanding and no future
dividend payments are currently contemplated.
35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from changes in market rates or prices, such as interest rates
and commodity prices. We are exposed to market risk in the form of changes in interest rates and
the potential impact such changes may have on our variable rate debt. We have not invested in
derivative based financial instruments.
Our cash and cash equivalents are not subject to significant interest rate risk due to the
short maturities of these instruments. As of December 31, 2008, the carrying value of our cash and
cash equivalents approximates fair value. However, we have cash on deposit with financial
institutions substantially in excess of federally-insured limits, and the risk of losses related to
such concentrations may be increasing as a result of economic developments.
Of our total outstanding debt, including accrued interest, of approximately $6.4 million at
December 31, 2008, $5.6 million is subject to variable interest rates, which averaged 5.63% as of
December 31, 2008. The applicable interest rates are based on the prime lending rate or the
five-year LIBOR/Swap rate; and therefore, the interest rate
will fluctuate as the index lending rates change. Based on our outstanding variable rate debt
at December 31, 2008, a hypothetical 100 basis point (1%) change in rates would result in an annual
interest expense change of approximately $56,069. At this time, we do not anticipate that either
inflation or interest rate variations will have a material impact on our future operations.
36
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Full House Resorts, Inc.
Las Vegas, NV
We have audited the accompanying consolidated balance sheets of Full House Resorts, Inc. and
Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2008 and 2007, and the
results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
/s/ Piercy Bowler Taylor & Kern
Piercy Bowler Taylor & Kern
Certified Public Accountants
Las Vegas, Nevada
March 25, 2009
37
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
5,304,755 |
|
|
$ |
7,975,860 |
|
Accounts receivable, net of allowance for doubtful accounts of $20,000
and $20,000 |
|
|
597,848 |
|
|
|
319,865 |
|
Prepaid expenses |
|
|
504,021 |
|
|
|
351,658 |
|
Deposits and other current assets |
|
|
98,209 |
|
|
|
172,120 |
|
Deferred tax asset |
|
|
293,598 |
|
|
|
340,489 |
|
Assets held for sale |
|
|
45,000 |
|
|
|
6,960,762 |
|
|
|
|
|
|
|
|
|
|
|
6,843,431 |
|
|
|
16,120,754 |
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation, of $4,985,766 and
$3,848,439 |
|
|
8,630,024 |
|
|
|
9,227,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term assets related to tribal casino projects |
|
|
|
|
|
|
|
|
Notes receivable |
|
|
5,114,767 |
|
|
|
12,178,481 |
|
Contract rights, net of accumulated amortization of $729,228 and $670,927 |
|
|
16,795,552 |
|
|
|
14,761,133 |
|
|
|
|
|
|
|
|
|
|
|
21,910,319 |
|
|
|
26,939,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets |
|
|
|
|
|
|
|
|
Goodwill |
|
|
10,308,520 |
|
|
|
10,308,520 |
|
Deposits and other |
|
|
775,829 |
|
|
|
868,265 |
|
|
|
|
|
|
|
|
|
|
|
11,084,349 |
|
|
|
11,176,785 |
|
|
|
|
|
|
|
|
|
|
$ |
48,468,123 |
|
|
$ |
63,464,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
225,224 |
|
|
$ |
259,124 |
|
Accounts payable |
|
|
239,059 |
|
|
|
274,411 |
|
Accrued expenses |
|
|
1,021,817 |
|
|
|
1,364,293 |
|
|
|
|
|
|
|
|
|
|
|
1,486,100 |
|
|
|
1,897,828 |
|
Long-term debt due to joint venture affiliate, including accrued interest
of $153,610 and $17,231 net of current portion |
|
|
3,137,600 |
|
|
|
1,272,709 |
|
Other long-term debt, net of current portion |
|
|
3,066,639 |
|
|
|
21,693,314 |
|
Deferred tax liability |
|
|
1,594,424 |
|
|
|
699,512 |
|
|
|
|
|
|
|
|
|
|
|
9,284,763 |
|
|
|
25,563,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in consolidated joint venture |
|
|
4,600,068 |
|
|
|
4,232,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 25,000,000 shares authorized; 19,350,276
shares issued and 18,139,862 shares outstanding in 2008, and 19,342,276
shares issued and outstanding in 2007 |
|
|
1,935 |
|
|
|
1,934 |
|
Additional paid-in capital |
|
|
42,356,098 |
|
|
|
41,557,043 |
|
Treasury stock,1,210,414 shares at cost |
|
|
(1,502,182 |
) |
|
|
— |
|
Deficit |
|
|
(6,272,559 |
) |
|
|
(7,890,849 |
) |
|
|
|
|
|
|
|
|
|
|
34,583,292 |
|
|
|
33,668,128 |
|
|
|
|
|
|
|
|
|
|
$ |
48,468,123 |
|
|
$ |
63,464,266 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
38
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
Casino |
|
$ |
7,483,644 |
|
|
$ |
7,228,181 |
|
Food and beverage |
|
|
2,099,222 |
|
|
|
1,810,047 |
|
Other operating income |
|
|
89,075 |
|
|
|
526,183 |
|
|
|
|
|
|
|
|
|
|
|
9,671,941 |
|
|
|
9,564,411 |
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
Casino |
|
|
2,399,012 |
|
|
|
2,312,587 |
|
Food and beverage |
|
|
2,321,907 |
|
|
|
1,876,532 |
|
Project development costs |
|
|
151,120 |
|
|
|
431,437 |
|
Selling, general and administrative |
|
|
6,262,084 |
|
|
|
6,811,321 |
|
Depreciation and amortization |
|
|
1,213,636 |
|
|
|
1,016,494 |
|
|
|
|
|
|
|
|
|
|
|
12,347,759 |
|
|
|
12,448,371 |
|
|
|
|
|
|
|
|
Operating gains (losses) |
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated joint venture and related
guaranteed payments |
|
|
4,772,248 |
|
|
|
4,270,000 |
|
Unrealized gains on notes receivable, tribal governments |
|
|
2,103,630 |
|
|
|
839,749 |
|
Impairment and settlement losses |
|
|
(585,000 |
) |
|
|
(407,534 |
) |
|
|
|
|
|
|
|
|
|
|
6,290,878 |
|
|
|
4,702,215 |
|
|
|
|
|
|
|
|
Income from continuing operations before other income (expense) and
income taxes |
|
|
3,615,060 |
|
|
|
1,818,255 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest and other income |
|
|
171,962 |
|
|
|
745,656 |
|
Interest expense |
|
|
(532,499 |
) |
|
|
(1,270,857 |
) |
Non-controlling interest in net income of consolidated joint venture |
|
|
(367,293 |
) |
|
|
(197,733 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
2,887,230 |
|
|
|
1,095,321 |
|
Income taxes |
|
|
(1,307,085 |
) |
|
|
(441,024 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,580,145 |
|
|
|
654,297 |
|
Income from discontinued operations, net of tax |
|
|
38,145 |
|
|
|
286,294 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,618,290 |
|
|
$ |
940,591 |
|
|
|
|
|
|
|
|
Income from continuing operations per common share |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Income from discontinued operations per common share |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.00 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.08 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
19,116,311 |
|
|
|
19,304,251 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
39
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Total |
|
| |
|
Common stock |
|
|
Treasury stock |
|
|
paid-in |
|
|
|
|
|
|
stockholders’ |
|
| 2008 |
|
Shares |
|
|
Dollars |
|
|
Shares |
|
|
Dollars |
|
|
capital |
|
|
Deficit |
|
|
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
|
19,342,276 |
|
|
$ |
1,934 |
|
|
|
— |
|
|
|
— |
|
|
$ |
41,557,043 |
|
|
$ |
(7,890,849 |
) |
|
$ |
33,668,128 |
|
Previously
deferred
share-based
compensation
recognized |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
839,753 |
|
|
|
— |
|
|
|
839,753 |
|
Issuance of
common stock |
|
|
8,000 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
14,399 |
|
|
|
— |
|
|
|
14,400 |
|
Purchase of
treasury stock |
|
|
— |
|
|
|
— |
|
|
|
1,210,414 |
|
|
|
(1,502,182 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,502,182 |
) |
Income tax
expense
share-based
compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(55,097 |
) |
|
|
— |
|
|
|
(55,097 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,618,290 |
|
|
|
1,618,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
19,350,276 |
|
|
$ |
1,935 |
|
|
|
1,210,414 |
|
|
$ |
( 1,502,182 |
) |
|
$ |
42,356,098 |
|
|
$ |
(6,272,559 |
) |
|
$ |
34,583,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Total |
|
| |
|
Preferred stock |
|
|
Common stock |
|
|
paid-In |
|
|
|
|
|
|
stockholders’ |
|
| 2007 |
|
Shares |
|
|
Dollars |
|
|
Shares |
|
|
Dollars |
|
|
capital |
|
|
Deficit |
|
|
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
|
700,000 |
|
|
$ |
70 |
|
|
|
18,408,380 |
|
|
$ |
1,841 |
|
|
$ |
39,949,282 |
|
|
$ |
(8,831,440 |
) |
|
$ |
31,119,753 |
|
Conversion of preferred stock |
|
|
(700,000 |
) |
|
|
(70 |
) |
|
|
700,000 |
|
|
|
70 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Issuance of restricted stock
grants |
|
|
— |
|
|
|
— |
|
|
|
130,000 |
|
|
|
13 |
|
|
|
(13 |
) |
|
|
— |
|
|
|
— |
|
Issuance of stock on options
exercised |
|
|
— |
|
|
|
— |
|
|
|
103,896 |
|
|
|
10 |
|
|
|
(10 |
) |
|
|
— |
|
|
|
— |
|
Previously deferred share-based
compensation recognized |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,576,652 |
|
|
|
— |
|
|
|
1,576,652 |
|
Income tax benefit share-based
compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,132 |
|
|
|
— |
|
|
|
31,132 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
940,591 |
|
|
|
940,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
— |
|
|
$ |
— |
|
|
|
19,342,276 |
|
|
$ |
1,934 |
|
|
$ |
41,557,043 |
|
|
$ |
(7,890,849 |
) |
|
$ |
33,668,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
40
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,618,290 |
|
|
$ |
940,591 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated investee |
|
|
(3,691,146 |
) |
|
|
(4,270,000 |
) |
Non-controlling interest in consolidated joint venture |
|
|
367,293 |
|
|
|
197,733 |
|
Distributions from unconsolidated investee and management fees |
|
|
3,525,232 |
|
|
|
4,096,698 |
|
Unrealized gain on notes receivable, tribal governments |
|
|
(2,103,630 |
) |
|
|
(839,749 |
) |
Depreciation, including $250,957 related to discontinued operations in 2007 |
|
|
1,155,334 |
|
|
|
1,204,268 |
|
Amortization of gaming and other rights, including $3,977 related to
discontinued operations in 2007 |
|
|
58,301 |
|
|
|
66,005 |
|
Deferred tax liability |
|
|
894,912 |
|
|
|
(181,435 |
) |
Deferred tax asset |
|
|
46,891 |
|
|
|
699,512 |
|
Impairment losses |
|
|
85,000 |
|
|
|
407,534 |
|
Share-based compensation |
|
|
799,056 |
|
|
|
1,576,653 |
|
Other deposits |
|
|
13,132 |
|
|
|
— |
|
Increases in operating (assets) and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(277,983 |
) |
|
|
(93,498 |
) |
Prepaid expenses |
|
|
(152,362 |
) |
|
|
(46,042 |
) |
Deposits and other current assets |
|
|
73,909 |
|
|
|
229,741 |
|
Accounts payable and accrued expenses |
|
|
(135,344 |
) |
|
|
362,106 |
|
Income taxes payable |
|
|
— |
|
|
|
(237,623 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,276,885 |
|
|
|
4,112,494 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Advances to tribal governments, excluding ($2,123) and $18,312 (recovered) and
expensed |
|
|
(86,123 |
) |
|
|
(342,950 |
) |
Deposits and other costs of the Stockman’s Casino acquisition, net |
|
|
— |
|
|
|
(9,262,274 |
) |
Net proceeds from sale of hotel |
|
|
6,961,020 |
|
|
|
— |
|
Acquisition of contract rights and other assets |
|
|
(2,092,720 |
) |
|
|
(320,510 |
) |
Collection of tribal note receivable |
|
|
9,253,467 |
|
|
|
— |
|
Purchase of property and equipment |
|
|
(549,389 |
) |
|
|
(412,218 |
) |
Other |
|
|
— |
|
|
|
(92,202 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
13,486,255 |
|
|
|
(10,430,154 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(18,660,575 |
) |
|
|
(4,794,378 |
) |
Preferred dividend |
|
|
— |
|
|
|
(3,042,084 |
) |
Borrowings |
|
|
1,728,512 |
|
|
|
12,500 |
|
Purchase of treasury stock |
|
|
(1,502,182 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(18,434,245 |
) |
|
|
(7,823,962 |
) |
|
|
|
|
|
|
|
Net decrease in cash and equivalents |
|
|
(2,671,105 |
) |
|
|
(14,141,622 |
) |
Cash and equivalents, beginning of year |
|
|
7,975,860 |
|
|
|
22,117,482 |
|
|
|
|
|
|
|
|
Cash and equivalents, end of year |
|
$ |
5,304,755 |
|
|
$ |
7,975,860 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
440,561 |
|
|
$ |
959,546 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
815,210 |
|
|
$ |
680,777 |
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures financed with accounts payable |
|
$ |
8,856 |
|
|
$ |
157,751 |
|
|
|
|
|
|
|
|
Capitalized share-based compensation costs |
|
|
— |
|
|
$ |
476,000 |
|
|
|
|
|
|
|
|
|
Contract rights acquired with long-term debt |
|
|
— |
|
|
$ |
9,500,000 |
|
|
|
|
|
|
|
|
|
Conversion of long-term debt to capital contribution in consolidated joint
venture |
|
|
— |
|
|
$ |
2,000,000 |
|
|
|
|
|
|
|
|
|
Transfer of land previously held for development to other assets |
|
|
— |
|
|
$ |
130,000 |
|
|
|
|
|
|
|
|
|
Transfer of land, property, equipment and goodwill, net to assets held for sale |
|
|
— |
|
|
$ |
6,960,762 |
|
|
|
|
|
|
|
|
|
Acquisition of Stockman’s Casino: |
|
|
|
|
|
|
|
|
Net cash paid (including capitalized loan costs of $214,295 and cash
incentive of $730,812) |
|
|
— |
|
|
$ |
9,262,274 |
|
|
|
|
|
|
|
|
|
Fair value of non-cash assets acquired |
|
|
— |
|
|
$ |
17,806,346 |
|
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
— |
|
|
$ |
407,071 |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
41
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE AND HISTORY OF OPERATIONS
Nature of operations and key relationships. Full House Resorts, Inc. (“we,” “us,” “our,” “Full
House” or the “Company”), develops, manages and/or invests in gaming related opportunities. The
Company continues to actively investigate, individually and with partners, new business
opportunities including commercial and tribal gaming operations. The Company seeks to expand
through acquiring, managing, or developing casinos in profitable markets.
GED. We are currently a noncontrolling 50% investor in Gaming Entertainment (Delaware), LLC
(“GED”), a joint venture with Harrington Raceway, Inc. (“HRI”). GED has a management contract
through 2011 with Harrington Raceway and Casino, at the Delaware State Fairgrounds in Harrington,
Delaware (“Harrington Casino”). Harrington Casino has approximately 2,100 gaming devices, a
450-seat buffet, a 50-seat diner, a gourmet steakhouse and an entertainment lounge area.
Under the terms of the restructured management agreement with HRI, the Company is to receive the
greater of 50% of GED’s 2008 management fees as currently prescribed under the management agreement
or an 8% increase in its share of GED’s management fees received in 2007. The 8% guaranteed growth
factor takes into account the expansion at Harrington Casino that was completed in February 2008,
and the guaranteed annual growth rate will be 5% in 2009 through the expiration of the GED
management contract in August 2011(Note 4).
GEM. We also own 50% of Gaming Entertainment (Michigan), LLC (“GEM”), a joint venture with RAM
Entertainment, LLC (“RAM”), which we control (and therefore, consolidate in our financial
statements). RAM is a privately-held investment company. GEM has a management agreement with the
Nottawaseppi Huron Band of Potawatomi Indians (the “Michigan Tribe”), for the development and
management of the FireKeepers Casino near Battle Creek, Michigan. More specifically, our joint
venture has the exclusive right to arrange the financing and provide casino management services to
the Michigan tribe in exchange for 26% of net profits for seven years and certain other specified
consideration from any future gaming or related activities conducted by the Michigan tribe. The
management agreement was approved by the National Indian Gaming Commission (“NIGC”) on December 14,
2007, and an amended version containing provisions required by the project financing investors was
approved by the NIGC on April 21, 2008. Construction at FireKeepers Casino has progressed on
schedule and garage construction has been completed. In addition, the FireKeepers Development
Authority has approved an increase in slot machines to approximately 2,680 from 2,500. Table games
units will be reduced from 90 to 78 and poker units will decrease from the planned 20 to 12. The
project remains on budget and FireKeepers Casino is still expected to open in the summer of 2009.
The FireKeepers Casino will target potential customers in the Battle Creek, Kalamazoo, and Lansing,
Michigan metropolitan areas, as well as the Ft. Wayne, Indiana area.
In February 2002, the Company entered into an investor agreement with RAM, a privately held
investment company, whereby RAM was admitted as a 50% member in GEM and Gaming Entertainment
(California), LLC, (GEC), consolidated investee of the Company, in exchange for providing a portion
of the necessary funding for the development of planned projects in Michigan and California.
Accordingly, RAM loaned Full House $2.4 million to fund the projects. In 2005, the Company and RAM
amended the 2002 agreement to extend the maturity date of the note payable and the related accrued
interest to July 1, 2007 and subsequently extended until December 31, 2007.
Pursuant to the investor agreement, effective December 14, 2007, RAM exercised its right to convert
the loan into a $2.0 million capital contribution in, and a $0.4 million loan to GEM. In addition,
accrued interest payable in the amount of $0.6 million, previously due on the original promissory
note, was also converted into a loan to GEM which will mature no sooner than two years after the
opening of the Michigan project.
Stockman’s. On January 31, 2007, we acquired all of the outstanding shares of capital stock of
Stockman’s Casino (Stockman’s) which operates Stockman’s Casino (Note 3) and until February 20,
2008, the Holiday Inn Express in Fallon, Nevada when we sold its assets. (Note 7). Stockman’s has
approximately 8,400 square feet of gaming space with approximately 259 slot machines, four table
games and keno. There is a bar, a fine dining restaurant and a coffee shop.
42
Other. The Company also has development and management agreements with the Northern Cheyenne Nation
of Montana (the “Montana Tribe”) for the development and management of a 25,000 square foot gaming
facility to be built approximately 28 miles north of Sheridan, Wyoming. The management agreement
provides for a management fee of 30% of revenues net of prizes and operating expenses and is
subject to approval by the NIGC, while the development agreement obligates the Montana Tribe to
reimburse any development advances from future gaming revenue in the event the management agreement
is not approved. On October 28, 2008, the Tribe was notified that the Secretary of the Interior had
approved the use of the planned site for gaming, subject to concurrence of the State Governor. We
are awaiting the Governor’s concurrence. In addition, any management contract must be approved by
the NIGC. We previously requested NIGC approval of the management agreement, but have withheld
further submission pending agreement with the Tribe on the scope and extent of the project. In
November 2008, the Tribe conducted elections for its tribal council, which resulted in an entirely
new council being seated. In January 2009, we forwarded to the new council a revised proposal for
the casino development taking into account the current status and availability of financing for the
development project. We are waiting for the council’s review of the proposal and further
discussions with the new council.
During 2007, two projects were discontinued resulting in impairment losses of approximately $0.2
million each based upon Management’s decision to discontinue these projects.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, including Stockman’s Casino (“Stockman’s”). GEM, a 50%-owned
investee of the Company that is jointly owned by RAM (Note 6), has been consolidated pursuant to
the guidance in Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation
of Variable Interest Entities. The Company accounts for its investment in GED (Note 4) using the
equity method of accounting. All material intercompany accounts and transactions have been
eliminated.
Cash equivalents. Cash in excess of daily requirements is invested in highly liquid short-term
investments with initial maturities of three months or less when purchased. Such investments are
reported as cash equivalents in the consolidated financial statements.
Concentrations and economic risks and uncertainties. The Company’s operations are currently
concentrated in northern Nevada and Delaware. Accordingly, future operations could be affected by
adverse economic conditions in those areas and their key feeder markets in neighboring states.
Except as discussed in the following paragraph, the Company’s credit risk (or market risk) is
concentrated in long-term notes receivable from tribal governments (Note 5). Advances to tribal
governments are primarily related to the Michigan project and represent pre-construction advances
made to the tribe to fund its operations. The advances, including contractual accrued interest, if
any, are collateralized solely by the future cash flows generated by the operations of the gaming
facility and, although there can be no assurance that a facility will be opened, management does
not believe that there is significant risk of loss associated with such investment, but considers
its assessment of such risk in its fair value estimates (See Long-term assets related to Indian
casino projects, below). However, the maximum loss that could be sustained if such advances prove
to be uncollectible is limited to the recorded amount of the receivable and the related contract
rights, less any impairment or other allowances that may be provided.
Accounts receivable are uncollateralized and carried, net of an appropriate allowance, at their
estimated collectible value. Since credit is extended on a short-term basis, accounts receivables
do not normally bear interest. Management is required to make judgments, based on historical
experience and future expectations, as to the collectability of accounts receivable. The
allowances for doubtful accounts represent allowances for accounts receivable that are estimated to
be partially or entirely uncollectible. These allowances are used to reduce gross accounts
receivable to their estimated net realizable value. The Company records these allowances as a
charge to selling, general and administrative expenses based on estimates of customers past credit
history and current financial condition and on current general economic conditions.
The Company frequently has cash on deposit substantially in excess of federally-insured limits, and
the risk of losses related to such concentrations may be increasing as a result of recent economic
developments. However, the
extent of loss, if any, to be sustained as a result of the Company’s uninsured deposits is not
subject to estimation at this time.
43
The United States is currently experiencing a recession accompanied by, among other things,
instability in the investment and commercial banking systems, reduced credit availability and
highly curtailed gaming and other recreational activities, and it is engaged in a war on terrorism.
The effects and duration of these developments and related risks and uncertainties on the Company’s
future operations and cash flows cannot be estimated at this time but may be significant.
Discontinued operations and assets held for sale. On October 1, 2007, the Company entered into an
agreement to sell the assets of the Holiday Inn Express in Fallon, Nevada (the “Hotel”), formerly
owned and operated by Stockman’s (Note 7), which sale was completed in February 2008. Accordingly,
as of October 1, 2007, depreciation ceased on the assets of the Hotel, and the net book value of
the Hotel’s assets at the time the sale agreement was executed (approximately $6.9 million) was
reclassified as assets held for sale. The operations of the Hotel are reported as discontinued
operations in the accompanying consolidated financial statements (Note 8).
Property and equipment. Property and equipment (Note 9) are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets.
Debt issuance costs. Costs incurred in obtaining long-term financing are amortized over the life of
the related debt using the effective interest rate method. At December 31, 2008, accumulated
amortization of debt issuance costs was $0.05 million consisting solely of 2008 expense.
Investment in unconsolidated joint venture. The Company accounts for its investment in GED using
the equity method of accounting (Note 4). At December 31, 2007, due to a management fee rebate
accrual, cash distributions from GED exceeded the Company’s equity in the net income of GED,
resulting in a negative investment balance. Since the Company is required to fund the excess, in
2007 the negative investment balances of $0.1 million was included as liabilities (in accrued
expenses) in the accompanying consolidated financial statements.
Long-term assets related to Indian casino projects. The Company evaluates the financial opportunity
of each potential service arrangement before entering into an agreement to provide financial
support for the development of an Indian casino project. The Company accounts for its notes
receivable from and management contracts with the tribes as separate assets.
On January 1, 2008, the Company adopted the methods of fair value accounting described in Statement
of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, to value its financial
assets that were previously carried at estimated fair value. The adoption of SFAS No. 157 in the
first quarter of 2008 did not have any effect on the Company’s previously used fair value
estimation methodology or on net income. Financial Accounting Standards Board (“FASB”) Staff
Position FAS 157-3, Determining the Fair Value of Financial Asset when the market for that asset is
not active, was issued in October 2008 and was retroactively effective for the quarter ended
September 30, 2008. The implementation of FSP FAS 157-3 did not have a material impact on the
Company’s valuation techniques, financial position, results of operations and cash flows.
To date, the Company has chosen not to elect the fair value option as offered by SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities for its financial assets and
liabilities or other items that had not been previously carried at fair value. Therefore, material
financial assets and liabilities not carried at fair value are still reported on a historical cost
basis.
The Company’s financial assets that are measured at estimated fair value use inputs from among the
three levels of the fair value hierarchy set forth in SFAS No. 157 as follows:
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or
liabilities, which prices are available at the measurement date.
Level 2 inputs: Include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability (i.e.
interest rates, yield curves, etc.) and inputs that are derived principally from or
corroborated by observable market data by correlation or other means (marked corroborated
inputs).
44
Level 3 inputs: Unobservable inputs that reflect management’s estimates about the
assumptions that market participants would use in pricing the asset or liability. Management
develops these inputs based on the best information available, including
internally-developed data.
The Company has no financial assets that are measured using level 1 or 2 inputs. Due to the absence
of observable market quotes on the Company’s notes receivable from tribal governments (Note 5), the
Company utilizes valuation models that rely exclusively on Level 3 inputs, including those that are
based on management’s estimates of expected cash flow streams, future interest rates, casino
opening dates and discount rates. The estimated casino opening dates used in the valuations take
into account project-specific circumstances such as ongoing litigation, the status of required
regulatory approvals, construction periods and other factors. Factors considered in the
determination of an appropriate discount rate include discount rates typically used by gaming
industry investors and appraisers to value individual casino properties outside of Nevada, and
discount rates produced by the widely-accepted Capital Asset Pricing Model (“CAPM”). The following
key assumptions are used in the CAPM:
| |
• |
|
S&P 500, average benchmark investment returns (medium-term horizon risk premiums); |
| |
| |
• |
|
Risk free investment return equal to the trailing 10-year average for 90-day treasury
bills; |
| |
| |
• |
|
Investment beta factor equal to the average of a peer group of similar entities in the
hotel and gaming industry; |
| |
| |
• |
|
Project-specific adjustments based on the status of the project (i.e., litigation,
regulatory approvals, tribal politics, etc.), and typical size premiums for “micro-cap” and
“low-cap” companies. |
A tabular summary of the current period activity related to notes receivable from tribal
governments, is presented in Note 5.
Upon opening of the casino, any difference between the then estimated fair value of the notes
receivable and the amount contractually due under the notes will be amortized into income using the
effective interest method over the remaining term of the note. Such notes are then evaluated for
impairment pursuant to SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
Intangible assets consisting of contract rights related to the acquisition of the management
contracts (contract rights) are periodically evaluated for impairment based on the estimated cash
flows from the management contract on an undiscounted basis. In the event the carrying value of the
intangible assets were to exceed the estimated undiscounted cash flow, the difference between the
estimated fair value and carrying value of the assets would be charged to operations as an
impairment loss. The Company expects to amortize the contract rights using the straight-line method
over seven years, or the term of the related management contract, whichever is shorter, typically
beginning upon commencement of casino operations.
Goodwill. Goodwill represents the excess of the purchase price over fair market value of net assets
acquired in the Stockman’s transaction and relates to its casino operation. The Company performs an
annual review of goodwill in the fourth quarter of each fiscal year and whenever there might be an
impairment “triggering” event. No impairments were identified as a result of these impairment
reviews.
Fair value of financial instruments. The carrying value of the Company’s cash and cash equivalents,
and accounts payable, approximates fair value because of the short maturity of those instruments.
As discussed above, substantially all of the Company’s receivables are carried at estimated fair
value. The estimated fair values of the Company’s debt approximate their recorded values at
December 31, 2008, based on the current interest rates offered to the Company for loans of the same
remaining maturities.
Revenue recognition and promotional allowances. Casino revenue is the aggregate net difference
between gaming wins and losses, with liabilities recognized for funds deposited by customers before
gaming play occurs (casino front money) and for chips and tokens in the customers’ possession
(outstanding chip and token liability). Hotel (see Discontinued Operations), food and beverage,
entertainment and other operating revenues are recognized as services are performed, net of
revenue-based taxes. Advance deposits on rooms and advance ticket sales are recorded as deferred
revenue until services are provided to the customer.
Sales and similar revenue-linked taxes collected from customers are excluded from revenue but
rather are recorded as a liability payable to the appropriate taxing authority and included in
accrued expenses.
45
Revenues are recognized net of certain sales incentives in accordance with Emerging Issues Task
Force (EITF) Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products.) Accordingly, cash incentives to customers for
gambling activity, including the cash value of points redeemed by Players Club members, totaling
$0.6 million have been recognized as a direct reduction of casino revenue in 2008.
Revenue does not include the retail value of accommodations, food and beverage, and other services
gratuitously furnished to customers totaling $0.3 million in both 2008 and 2007.
The estimated cost of providing such gratuities is included primarily in casino expenses as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Food and beverage |
|
$ |
137,360 |
|
|
$ |
164,272 |
|
Cash incentives |
|
|
586,582 |
|
|
|
577,615 |
|
Other incentives |
|
|
1,251 |
|
|
|
17,423 |
|
|
|
|
|
|
|
|
|
|
$ |
725,193 |
|
|
$ |
759,310 |
|
|
|
|
|
|
|
|
Share-based compensation. In 2006, the Company adopted SFAS No. 123R, Share-Based Payments, to
account for its share-based compensation, and elected the modified prospective method of
transition. Accordingly, for 2008 and 2007, share-based compensation expense of approximately $0.9
million and $1.6 million respectively, from stock awards (Note 14) is included in general and
administrative expense. Unvested stock grants made in connection with the Company’s 2006 Incentive
Compensation Plan and a consulting agreement with a director are viewed as a series of individual
awards and the related share-based compensation expense has initially been deferred and recorded as
unearned stock-based compensation, shown as a reduction of stockholders’ equity, and will
subsequently be amortized into operations as compensation expense as services are provided on a
straight-line basis over the vesting period. The value of the restricted stock at the date of grant
is amortized through expense over the requisite service period using the straight-line method. The
Company believes the probability of forfeitures for granted shares of restricted stock to be
extremely remote and, therefore, currently estimates zero forfeitures in future periods for the
following reasons. The Company grants shares of restricted stock, rather than options, to key
members of management and the Board of Directors. Since SFAS No. 123R was implemented, there have
been no forfeitures of such restricted shares granted and none are likely for the foreseeable
future since currently, there are only unvested stock grants to a director and the Company’s Chief
Financial Officer that fully vest in May 2009 and February 2010, respectively.
At December 31, 2008, the Company had deferred share-based compensation of $0.3 million, which is
expected to be amortized through February 2010 using the straight-line method, by employee, as
mentioned above. Specifically, the Company expects to recognize share-based compensation expense
of approximately $0.28 million in 2009 and $0.02 million in 2010.
Legal defense costs. The Company does not accrue for estimated future legal and related defense
costs, if any, to be incurred in connection with outstanding or threatened litigation and other
disputed matters but rather, records such as period costs when the related services are rendered.
Earnings per common share. Basic earnings per share (“EPS”) is computed based upon the
weighted-average number of common shares outstanding during the year. Diluted EPS is ordinarily
computed based upon the weighted average number of common and common equivalent shares if their
effect upon exercise would have been dilutive using the treasury stock method. Approximately 17,000
common stock equivalents were not included in the calculation as diluted EPS as of December 31,
2007, as they would have been anti-dilutive.
Use of estimates. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period. Accordingly, actual results could
differ from those estimates. Estimated fair value of notes receivable and the recoverability of the
Company’s investment in other long-term assets related to Indian casino projects (Note 5) are
particularly vulnerable to variation and could change materially in the next year based on evolving
developments.
46
Reclassifications. Certain minor reclassifications in prior year balances have been made to conform
to the current presentation, which had no effect on previously reported net income.
3. ACQUISITION OF STOCKMAN’S CASINO
On January 31, 2007, the Company acquired Stockman’s in Fallon, Nevada for approximately $28.1
million, which includes acquisition costs of $0.7 million and an additional $0.7 million payment to
the seller related to the tax treatment of the assets acquired. The purchase price was funded by an
equity offering effected during 2006 (Note 11), a $16 million reducing revolving loan from a bank,
and a promissory note to the seller in the approximate amount of $1.2 million (Note 9).
Goodwill represents the excess of the purchase price over fair market value of net assets acquired
in the Stockman’s transaction and relates to its casino operation. Specifically, the Company
acquired older fixed assets via a stock purchase based on a modest earnings multiple, which took
into account Stockman’s stable historical cash flow. Stockman’s is an otherwise unaffiliated,
small casino in northern Nevada with patrons coming from the local community, travelers and
military personnel temporarily working at a nearby naval base. No trade names, relationships,
contracts or other material intangibles were identified.
The purchase price was allocated as of the acquisition date as follows:
| |
|
|
|
|
Land |
|
$ |
2,723,406 |
|
Improvements |
|
|
9,960,000 |
|
Personal property |
|
|
3,980,000 |
|
Goodwill |
|
|
10,331,128 |
|
Other |
|
|
1,142,940 |
|
|
|
|
|
|
|
$ |
28,137,474 |
|
|
|
|
|
The following unaudited, condensed consolidated pro forma data summarizes the Company’s results of
operations for the periods indicated as if the acquisition had occurred as of January 1, 2007. This
unaudited pro forma consolidated financial information is not necessarily indicative of what the
Company’s actual results would have been had the acquisition been completed on that date, or of
future financial results.
| |
|
|
|
|
| |
|
2007 |
|
Net revenues |
|
$ |
17,608,642 |
|
Net income |
|
|
1,004,410 |
|
Earnings per share, basic and diluted |
|
$ |
0.06 |
|
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company’s investment in unconsolidated joint venture is comprised of a 50% ownership interest
in GED, a joint venture. GED has no non-operating income or expenses, and is treated as a
partnership for income tax purposes and consequently records no federal or state income tax
provision. As a result, income from operations for GED is equal to net income for each period
presented, and there are no material differences between its income for financial and for tax
reporting purposes.
As a result of the restructured joint venture agreement, the Company has received or accrued
additional guaranteed payments of $1.1 and $0.3 million for 2008, and 2007 respectively, which is
combined with the equity in net income of GED and related guaranteed payments in the accompanying
consolidated financial statements.
47
Summary financial information for GED as of and for the years ended December 31, 2008 and 2007 is
as follows:
CONDENSED BALANCE SHEET INFORMATION
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Total assets |
|
$ |
636,553 |
|
|
$ |
665,493 |
|
Total liabilities |
|
|
516,936 |
|
|
|
877,704 |
|
Members’ capital (deficiency) |
|
|
119,617 |
|
|
|
(212,211 |
) |
CONDENSED STATEMENT OF INCOME INFORMATION
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
24,816,268 |
|
|
$ |
23,131,588 |
|
Net income |
|
|
7,382,290 |
|
|
|
7,944,170 |
|
5. NOTES RECEIVABLE, TRIBAL GOVERNMENTS
The Company has notes receivable related to advances to tribes to fund tribal operations and
development expenses related to potential casino projects. Repayment of these notes is contingent
upon the development of the projects, and ultimately, the successful operation of the facilities.
The Company’s agreements with the tribes provide for the reimbursement of these advances plus
applicable interest either from the proceeds of any outside financing of the development, the
actual operation itself or in the event that the Company does not complete the development, from
the revenues of the tribal gaming operation following completion of development activities
undertaken by others.
As of December 31, 2008 and 2007, Full House has notes receivable from tribal governments totaling
approximately $6.3 million and $14.1 million, respectively, as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Contractual (stated) amount ( including interest) |
|
|
|
|
|
|
|
|
FireKeepers Development Authority |
|
$ |
5,000,000 |
|
|
$ |
12,857,593 |
|
Others |
|
|
1,281,329 |
|
|
|
1,226,507 |
|
|
|
|
|
|
|
|
|
|
$ |
6,281,329 |
|
|
$ |
14,084,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of notes receivable related to tribal casino projects |
|
|
|
|
|
|
|
|
FireKeepers Development Authority |
|
$ |
4,097,002 |
|
|
$ |
11,189,358 |
|
Others |
|
|
1,017,765 |
|
|
|
989,123 |
|
|
|
|
|
|
|
|
|
|
$ |
5,114,767 |
|
|
$ |
12,178,481 |
|
|
|
|
|
|
|
|
On May 6, 2008, the FireKeepers Development Authority (the “Authority”) closed on the sale of $340
million of Senior Secured Notes and a $35 million equipment financing facility to fund the
development and construction of the Authority’s FireKeepers Casino in Michigan. On the same date,
GEM received a payment of approximately $9.3 million on its notes receivable from the Authority
which resulted in an increase in the estimated fair value of the notes receivable of approximately
$1.8 million recorded as an unrealized gain in the first quarter of 2008. The remaining $5.0
million is to be paid 180 days following the opening of the casino, subject to there being adequate
funds remaining in the construction disbursement account. If there are insufficient funds to repay
the remaining balance, the Authority will be obligated to repay the balance in 60 monthly
installments beginning 180 days following the opening of the casino, with interest at prime plus
1%.
As of December 31, 2008, management extended its estimate of the opening date for the Montana
casino from the second quarter of 2010 to the third quarter of 2010. Management had previously
expected that the tribe would receive key federal and state approvals during the fourth quarter of
2008 which have not yet been received. Management also expects that the recent change in the
federal administration will further delay the approval process until the second quarter of 2009.
The effect of the change in the estimated opening date reduced the estimated fair value of the note
receivable related to the Montana project by approximately $18,000 as of December 31, 2008.
48
In March 2008, management formally decided to discontinue pursuing the Nambé project. However, the
Nambé Tribe has affirmed its responsibility to repay reimbursable development advances of
approximately $0.7 million,
plus interest at prime plus 2%, out of any future gaming revenues, if any. Management currently
believes that the Nambé Tribe intends to develop a slot machine operation with approximately 200
devices, which would be attached to its travel center and provide the Nambé Tribe with the
financial wherewithal to repay the amounts owed to the Company. Accordingly, management has
estimated the fair value of the note receivable from the Nambé Tribe at approximately $0.4 million
as of December 31, 2008.
The following table summarizes the changes in the estimated fair value of notes receivable from
tribal governments, determined using Level 3 fair value inputs, from January 1, 2008, to December
31, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
| |
|
|
|
|
|
Michigan Tribe |
|
|
|
|
| |
|
Total |
|
|
Authority |
|
|
Other tribes |
|
Balances, January 1, 2008 |
|
$ |
12,178,481 |
|
|
$ |
11,189,358 |
|
|
$ |
989,123 |
|
Total advances |
|
|
108,029 |
|
|
|
— |
|
|
|
108,029 |
|
Advances allocated to contract rights |
|
|
(24,030 |
) |
|
|
— |
|
|
|
(24,030 |
) |
Advances expensed as period costs |
|
|
2,124 |
|
|
|
2,124 |
|
|
|
— |
|
Repayment of notes receivable |
|
|
(9,253,467 |
) |
|
|
(9,253,467 |
) |
|
|
— |
|
Unrealized gains |
|
|
2,103,630 |
|
|
|
2,158,987 |
|
|
|
(55,357 |
) |
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008 |
|
$ |
5,114,767 |
|
|
$ |
4,097,002 |
|
|
|
1,017,765 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
| |
|
|
|
|
|
Michigan Tribe |
|
|
|
|
| |
|
Total |
|
|
Authority |
|
|
Other tribes |
|
Balances, January 1, 2007 |
|
$ |
10,995,782 |
|
|
$ |
10,258,202 |
|
|
$ |
737,580 |
|
Total advances |
|
|
431,772 |
|
|
|
129,164 |
|
|
|
302,608 |
|
Advances allocated to contract rights |
|
|
(70,510 |
) |
|
|
— |
|
|
|
(70,510 |
) |
Advances expensed as period costs |
|
|
(18,312 |
) |
|
|
(18,312 |
) |
|
|
— |
|
Unrealized gains (losses) included in earnings |
|
|
839,749 |
|
|
|
820,304 |
|
|
|
19,445 |
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007 |
|
$ |
12,178,481 |
|
|
$ |
11,189,358 |
|
|
$ |
989,123 |
|
|
|
|
|
|
|
|
|
|
|
6. CONTRACT RIGHTS
Contract rights are comprised of the following as of December 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
| 2008 |
|
Cost |
|
|
amortization |
|
|
Net |
|
FireKeepers project, initial cost |
|
$ |
4,155,213 |
|
|
$ |
— |
|
|
$ |
4,155,213 |
|
Firekeepers project, additional |
|
|
13,210,373 |
|
|
|
(729,228 |
) |
|
|
12,481,145 |
|
Other projects |
|
|
159,194 |
|
|
|
— |
|
|
|
159,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,524,780 |
|
|
$ |
(729,228 |
) |
|
$ |
16,795,552 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
| 2007 |
|
Cost |
|
|
amortization |
|
|
Net |
|
Firekeepers project, initial cost |
|
$ |
4,155,213 |
|
|
$ |
— |
|
|
$ |
4,155,213 |
|
Firekeepers project, additional |
|
|
11,141,683 |
|
|
|
(670,927 |
) |
|
|
10,470,756 |
|
Other projects |
|
|
135,164 |
|
|
|
— |
|
|
|
135,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,432,060 |
|
|
$ |
(670,927 |
) |
|
$ |
14,761,133 |
|
|
|
|
|
|
|
|
|
|
|
The initial cost of the Michigan contract rights were the result of a 1995 merger agreement whereby
LA Associates, Inc. (“LAI”), (then owned 100% by a current director in the Company, Lee A. Iacocca)
and Omega Properties, Inc. (then owned 30% by former director, William P. McComas) merged into a
wholly-owned subsidiary of Full House. Pursuant to the merger, the Company issued a $0.4 million
promissory note and 1,750,000 shares of common stock in return for contract rights primarily
related to the Michigan project. An independent valuation consultant was retained to assist in the
valuation of the merger and the contributed rights. The initial contract rights relate to the
management of the Michigan project and amortization will begin once operations commence, at which
time the rights will be contributed to GEM.
49
Prior to 2007, the Company acquired the remaining 50% interest in three joint venture projects for
$1.8 million, $1.1 million allocated to the Michigan project for control of the development
processes. Accordingly, amortization of these rights commenced immediately with revisions to the
development/amortization period accounted for prospectively as changes in estimates.
In connection with the Authority’s financing of the FireKeepers Casino development in the second
quarter of 2008, GEM funded $2.1 million of financing costs on behalf of the Authority, as required
by the management agreement, which was recorded as additional contract rights related to the
FireKeepers project. The financing costs will be amortized over the management contract period (7
years) commencing upon the opening of the casino, which is expected in the summer of 2009.
During 2007, the Company executed an agreement to purchase contractual rights related to the
Michigan casino from Green Acres (“Green Acres”) for $10 million, which was contingent upon the
opening of the Michigan casino project. At the time the agreement was entered into, there were two
main contingencies regarding the Michigan project. Firstly, the amended management agreement had
not yet been approved by the NIGC, and secondly, the construction financing had not been obtained.
The management agreement was approved by the NIGC in December 2007, and at the time of the
Company’s 10-KSB filing, the Michigan project financing was likely to be obtained (the financing
was obtained early in May 2008). Accordingly, with the two primary contingencies likely to be
overcome, the obligation to pay Green Acres was triggered, and the contract rights and a liability
were recognized per SFAS No. 5. The additional contract rights will be amortized over the
management contract period (seven years) commencing upon the opening of the casino, which is
expected in the summer of 2009.
7. ASSETS HELD FOR SALE
On October 1, 2007, the Company entered into an agreement to sell the Hotel (Holiday Inn Express),
which was acquired as part of the Stockman’s stock purchase. The sale was consummated February 20,
2008, resulting in net cash proceeds of approximately $7.0 million, which were used to repay
long-term debt. Operations of the Hotel have been accounted for in the Company’s consolidated
financial statements as discontinued operations (Note 8).
At December 31, 2007, assets held for sale consisted primarily of $6.9 million related to the
Holiday Inn Express (the Hotel), which was sold on February 20, 2008, for a gross sales price of
$7.2 million. The Company received net cash proceeds at closing approximating the carrying value,
and accordingly, no estimated loss on disposal was accrued at December 31, 2007.
Assets held for sale consist of the following at December 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Land |
|
$ |
45,000 |
|
|
$ |
1,078,661 |
|
Buildings and improvements |
|
|
— |
|
|
|
6,414,273 |
|
Furniture and equipment |
|
|
— |
|
|
|
1,848,712 |
|
Goodwill |
|
|
— |
|
|
|
22,608 |
|
Other |
|
|
— |
|
|
|
89,500 |
|
|
|
|
|
|
|
|
|
|
|
45,000 |
|
|
|
9,453,754 |
|
Less accumulated depreciation |
|
|
— |
|
|
|
(2,492,992 |
) |
|
|
|
|
|
|
|
|
|
$ |
45,000 |
|
|
$ |
6,960,762 |
|
|
|
|
|
|
|
|
In the fourth quarter of 2007, the Company recorded impairment losses related to the Navajo Nation
(“Manuelito”) and Nambé Tribe contract rights of $0.2 million and $0.2 million, respectively, based
on management’s decision to discontinue pursuing these projects. During the second quarter of
2008, management formally approved and began executing a plan to sell land purchased for the
development of the Manuelito project. As a result, as of June 30, 2008, the land was classified as
a current asset held for sale and adjusted to its estimated net realizable value of $45,000,
resulting in an additional impairment loss of $85,000 recognized in the second quarter of 2008.
50
8. SUMMARY FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS
The operating results of the Hotel for the year ended December 31, 2008 and 2007, is presented as
income from discontinued operations. Summary operating results for the discontinued operations are
as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Net revenues |
|
$ |
251,337 |
|
|
$ |
1,938,532 |
|
Operating expenses |
|
|
(189,815 |
) |
|
|
(1,249,819 |
) |
Depreciation and amortization |
|
|
— |
|
|
|
(254,935 |
) |
Income taxes |
|
|
(23,377 |
) |
|
|
(147,484 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
38,145 |
|
|
$ |
286,294 |
|
|
|
|
|
|
|
|
9. PROPERTY AND EQUIPMENT
At December 31, 2008 and 2007, property and equipment consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Estimated |
|
|
|
|
|
|
|
| |
|
useful |
|
|
|
|
|
|
|
| |
|
life |
|
|
2008 |
|
|
2007 |
|
Land |
|
|
|
|
|
$ |
1,885,400 |
|
|
$ |
1,885,400 |
|
Buildings and improvements |
|
|
10–39 |
|
|
|
5,580,045 |
|
|
|
5,543,233 |
|
Furniture and equipment |
|
|
5–7 |
|
|
|
6,150,345 |
|
|
|
5,518,197 |
|
Construction in progress |
|
|
|
|
|
|
— |
|
|
|
128,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,615,790 |
|
|
|
13,075,552 |
|
Less accumulated depreciation |
|
|
|
|
|
|
(4,985,766 |
) |
|
|
(3,848,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,630,024 |
|
|
$ |
9,227,113 |
|
|
|
|
|
|
|
|
|
|
|
|
10. LONG-TERM DEBT
At December 31, 2008 and 2007, long-term debt consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, due to co-venturer (RAM): |
|
|
|
|
|
|
|
|
| |
Promissory notes, expected to be due in
2011, interest at 1% above the prime rate
(4.25% at December 31, 2008 and 8.35% at
December 31, 2007) (including accrued
interest of $153,610 and $17,231) |
|
$ |
3,137,600 |
|
|
$ |
1,272,709 |
|
|
|
|
|
|
|
|
RAM debt conversion. In December 2007, RAM exercised its conversion option on its $2.4 million loan
to the Company. As a result, $2.0 million of the loan was converted to a capital contribution to
the joint venture, and the loan balance of approximately $0.4 million, plus approximately $0.6
million of accrued interest on the original loan, became a liability of GEM. Interest expense
incurred on related party obligations was approximately $0.1 million and $0.2 million in 2008 and
2007, respectively.
Other long-term debt:
| |
|
|
|
|
|
|
|
|
Reducing revolving loan, due January
31, 2022, interest at 2.1% above the
five year LIBOR/Swap rate, adjusted
annually (7.39% at December 31, 2008
and 2007) |
|
$ |
2,469,275 |
|
|
$ |
11,401,000 |
|
|
|
|
|
|
|
|
|
|
Long-term obligation related to the
acquisition of contract rights from
Green Acres |
|
|
— |
|
|
|
9,500,000 |
|
Promissory note to Peter’s Family
Trust, , payable in 60 monthly
installments of principal and interest
(7.44% per anum, through February
2012, and is secured by a second lien
in the Stockman’s real property |
|
|
822,588 |
|
|
|
1,051,438 |
|
|
|
|
|
|
|
|
|
|
|
3,291,863 |
|
|
|
21,952,438 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
(225,224 |
) |
|
|
(259,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,066,639 |
|
|
$ |
21,693,314 |
|
|
|
|
|
|
|
|
51
Reducing revolving loan (the “Revolver”). The maximum amount permitted to be outstanding under the
Revolver (originally $16.0 million) decreases $312,000 semiannually on January 1 and July 1 of each
year and any outstanding amounts above such reduced maximum must be repaid on each such date. Draws
on the Revolver are payable over 15 years at a variable interest rate based on the five year
LIBOR/Swap rate plus 2.1%. This rate adjusts annually based on the funded debt to EBITDA ratio of
Stockman’s with adjustments based on the five year LIBOR/Swap rates. Stockman’s assets are pledged
as collateral for the loan (see next paragraph). The loan agreement also contains certain customary
financial representations and warranties and requires that Stockman’s maintain specified financial
covenants, including a fixed charge coverage ratio, a funded debt to EBITDA ratio and a minimum
tangible net worth. In addition, the Revolver provides restrictions on certain distributions and
capital expenditures by Stockman’s, and also provides for customary events of default including
payment defaults and covenant defaults. Management believes the Company is in compliance with the
covenants through the date of this filing.
During the first quarter of 2008, proceeds from the sale of the Hotel in Fallon, Nevada were
applied against outstanding balances payable on the Revolver. The outstanding balance was reduced
from $10.9 million to $3.9 million and the Company’s availability under the Revolver increased to
approximately $4.8 million. In addition, periodic payment requirements were reduced on a pro-rata
basis. As of December 31, 2008, there are no additional required principal payments due on the
Revolver until July, 2018. The Company had $6.0 million of availability under its revolving credit
line as of December 31, 2008. See Subsequent Events (note 17).
Green Acres. This was classified as long-term debt in 2007 since it was due to be repaid with
collection of long-term notes receivable.
Scheduled maturities of long-term debt as of the most recent balance sheet presented (including
obligations to joint venture affiliate) are as follows:
| |
|
|
|
|
2009 |
|
$ |
225,224 |
|
2010 |
|
$ |
263,809 |
|
2011 |
|
$ |
3,268,109 |
|
2012 |
|
$ |
49,436 |
|
2013 |
|
|
— |
|
Thereafter |
|
$ |
2,469,275 |
|
11. STOCKHOLDERS’ EQUITY
In January 2007, the then outstanding preferred shares were converted to common shares on a
one-for-one basis.
On July 7, 2008, the Company announced a stock repurchase plan (the “Repurchase Plan”). Under the
Repurchase Plan, the Company’s board of directors authorized the repurchase of up to $1.0 million
of the Company’s common stock in the open market or in privately negotiated transactions from time
to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934, subject to
market conditions, applicable legal requirements and other factors. On October 14, 2008, the
Company’s board of directors authorized the repurchase of an additional $1.0 million of the
Company’s common stock, and extended the expiration of the Repurchase Plan to April 30, 2009.
Through December 31, 2008, the Company had repurchased 1,210,414 shares at a weighted average-price
per share of $1.21 ($1.5 million, including commissions and other related transaction costs). The
Repurchase Plan does not obligate the Company to acquire any particular amount of common stock and
may be suspended at any time at management’s discretion.
52
12. INCOME TAXES
FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, was adopted by the
Company in the first quarter of 2007. Based on management’s assessment of its tax positions in
accordance with FIN No. 48, there was no effect of adopting FIN No. 48 on its opening retained
earnings or 2007 results of operations.
The income tax provision from continuing operations recognized in the consolidated financial
statements consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
2008 |
|
|
2007 |
|
| Current: |
|
Federal |
|
$ |
241,907 |
|
|
$ |
(202,801 |
) |
| |
|
|
|
State |
|
|
396,695 |
|
|
|
273,368 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
638,602 |
|
|
|
70,567 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Deferred: |
|
Federal |
|
|
691,860 |
|
|
|
517,941 |
|
| |
|
|
|
State |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
691,860 |
|
|
|
517,941 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
1,330,462 |
|
|
|
588,508 |
|
| |
|
|
|
Less discontinued operations |
|
|
(23,377 |
) |
|
|
(147,484 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Continuing operations |
|
$ |
1,307,085 |
|
|
$ |
441,024 |
|
| |
|
|
|
|
|
|
|
|
|
|
A reconciliation of the income tax provision relative to continuing operations with amounts
determined by applying the statutory U.S. Federal income tax rate of 34% to consolidated income
before income taxes is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Tax provision at U.S. statutory rate |
|
$ |
981,658 |
|
|
$ |
372,410 |
|
State taxes, net of federal benefit |
|
|
262,469 |
|
|
|
181,065 |
|
Other (benefit) |
|
|
62,958 |
|
|
|
(112,451 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,307,085 |
|
|
$ |
441,024 |
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, the Company’s deferred tax assets (liabilities) consist of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
161,146 |
|
|
$ |
233,339 |
|
Accrued bonuses |
|
|
84,280 |
|
|
|
57,850 |
|
Allowance for doubtful accounts |
|
|
6,800 |
|
|
|
49,300 |
|
Depreciation |
|
|
20,224 |
|
|
|
87,171 |
|
Other |
|
|
41,371 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
313,821 |
|
|
|
427,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Income related to Indian casino projects |
|
|
(1,153,989 |
) |
|
|
(572,025 |
) |
Goodwill |
|
|
(460,658 |
) |
|
|
(214,658 |
) |
|
|
|
|
|
|
|
|
|
|
(1,614,647 |
) |
|
|
(786,683 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(1,300,826 |
) |
|
$ |
(359,023 |
) |
|
|
|
|
|
|
|
13. COMMITMENTS
Operating leases. In March 2007, the Company entered into an agreement to lease other office space
in the current office complex for three years, with an option to renew for an additional three
years. Effective September 1, 2007, Stockman’s entered into a lease agreement for its primary
outdoor casino sign which expires on August 1, 2012.
Future minimum lease payments are as follows:
| |
|
|
|
|
2009 |
|
$ |
142,419 |
|
2010 |
|
|
91,567 |
|
2011 |
|
|
65,472 |
|
2012 |
|
|
43,648 |
|
|
|
|
|
|
|
$ |
343,106 |
|
|
|
|
|
53
Financing of Indian gaming projects. Through our management or development agreements, we have
agreed to arrange financing for the Montana Tribe on a best efforts basis based on the project’s
planned size and costs. Currently, it is estimated that the Montana project will require
approximately $16 million in financing.
GEM distributions to member. Non-interest bearing advances of $2.8 million in prior years by RAM to
GEM have been accounted for in the accompanying financial statements as capital contributions to
the joint venture due to the uncertainty of repayment and the inability of GEM to repay the
advances. It is the intent of GEM to distribute these amounts upon the commencement of management
fee receipts. The $2.8 is comprised of RAM’s funding of 50% the cost of acquiring the land for the
Michigan project in the amount of $1.9 and additional advances of $0.9 million to fund GEM
development expenditures.
Employment agreements. The Company has entered into employment agreements with certain key
employees. The agreements provide for a base salary, bonus, stock options and other customary
benefits to the employee as well as severance if the employee is terminated without cause or due to
a “change of control” as defined in the agreements. The severance amounts depend upon the term of
the agreement and can be up to two year’s base salary and an average bonus calculated as the
average bonus earned in the previous two years. If such termination occurs within two years of a
change of control, as defined in the agreements, by the Company without cause, the employee will
receive a lump sum payment equal to no less than one year’s annual base salary, a lump sum cash
payment equal the average bonus earned in the previous three years, and the acceleration and
vesting of all unvested shares and stock-based grants awarded upon the date of change of control,
along with insurance costs, 401(k) matching contributions and certain other benefits. In the event
the employee’s employment terminates due to illness, incapacity or death, the Company will pay the
employee their base salary to date of termination, an amount equal to the prior year bonus on a
pro-rata basis to date of termination, reimbursement of expenses incurred prior to date of
termination, applicable insurance and other group benefit proceeds including those due under any
Company long-term disability plan. In the event that the employee terminates his employment, with a
minimum notice, the employee will receive base salary, benefits and reimbursable expense that have
been accrued and unpaid at the termination date; and any earned, unpaid annual bonus declared by
the Board. If the Company properly terminates the executive’s employment for cause, the Company
will be without further liability to the employee, except for payment of all base salary and
benefits accrued but not paid through the date of such termination.
14. SHARE-BASED COMPENSATION PLANS
On May 31, 2006 (the “Grant Date”), the Company’s stockholders approved the 2006 Incentive
Compensation Plan (the “Plan”), authorizing the issuance of up to 1,100,000 restricted shares of
the Company’s common stock as incentive compensation to officers, directors and consultants. Also
on the Grant Date, the Company’s compensation committee approved the issuance of 668,000 shares of
restricted stock pursuant to the Plan, valued at the closing price of the Company’s stock ($3.25),
with no discount. Of the total shares granted, 145,500 vested on the Grant Date and the remaining
522,500 are expected to vest through February 2010, upon certain conditions including continuous
service of the recipient. The unvested grants are viewed as a series of individual awards and the
related share-based compensation expense has initially been recorded as deferred compensation
expense, reported as a reduction of stockholder’s equity, and will subsequently be amortized into
compensation expense on a straight-line basis as services are provided over the vesting period.
On September 25, 2006, the Company entered into a consulting agreement with Lee Iacocca, one of its
directors, under the terms of which Mr. Iacocca will provide consulting services to the Company
related to marketing and advertising for a period of three years. In consideration of these
services, on December 26, 2006, the Company granted Mr. Iacocca 300,000 restricted shares of the
Company’s common stock valued at the closing price on the grant date with no discount, which vest
in equal amounts over the three-year term of the agreement or immediately upon death. Based upon
the closing price of $3.73, the Company expects that $1.1 million of share-based compensation
expense will be amortized over the term of the consulting agreement. In addition, as part of the
agreement, Mr. Iacocca forfeited 250,000 options to purchase the Company’s common stock at an
exercise price of $3.69 per share that had previously been granted and vested. The restricted stock
grant was recorded as deferred compensation expense, reported as a reduction of stockholders’
equity and will subsequently be amortized into compensation expense on a straight-line basis as
services are provided over the vesting period. The forfeiture of the
250,000 of options had no effect on the financial statements, since the options were fully vested.
(See Note 15 for additional related party transactions.)
54
On March 13, 2007, the Company’s issued 110,000 shares of restricted stock valued at the closing
price of the Company’s stock ($3.64), with no discount. The shares vest annually through February
19, 2010, upon certain conditions including continuous service of the recipient. The unvested
grants are viewed as a series of individual awards and the related share-based compensation expense
of $0.4 million has initially been recorded as deferred compensation, reported as a reduction of
stockholder’s equity, and will subsequently be recognized as compensation expense on a
straight-line basis as services are provided over the vesting period.
On June 25, 2007, the Company issued 20,000 shares of unrestricted stock in conjunction with
director compensation, which was valued at $0.08 million based on the closing price of the
Company’s stock ($3.78), with no discount. Since the shares were fully vested at the date of grant,
the Company recognized share-based compensation expense of $0.08 million related to this grant
during the second quarter of 2007. In June 2007, the Company recognized additional expense of $0.3
million as a result of the vesting of 137,500 shares of restricted stock held by a former employee.
On May 29, 2008, the shareholders approved an additional allocation of 100,000 shares to the 2006
Incentive Compensation Plan. On July 11, 2008, the Company issued 8,000 shares of unrestricted
stock in conjunction with director compensation, which was valued at $0.01 million based on the
closing price of the Company’s stock ($1.80), with no discount. Since the shares were fully vested
at the date of grant, the Company recognized share-based compensation expense of $0.01 million
related to this grant during the third quarter of 2008.
Share-based stock compensation expense for 2008 and 2007 was $0.9 million and $1.6 million
respectively. Included in 2007 share-based compensation expense is the amortization of $0.3 million
and $0.02 million for shares in 2008 not vested upon termination of employees and affiliates. At
December 31, 2008, the Company has recorded deferred share-based compensation of $0.3 million,
which is expected to be amortized through February 2010.
The following table summarizes the Company’s restricted stock activity for the 2008 and 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
| |
|
|
|
|
|
grant date |
|
|
|
|
|
|
grant date |
|
| |
|
|
|
|
|
value (per |
|
|
|
|
|
|
value (per |
|
| |
|
Shares |
|
|
share) |
|
|
Shares |
|
|
share) |
|
Unvested at beginning of year |
|
|
514,169 |
|
|
$ |
3.52 |
|
|
|
822,500 |
|
|
$ |
3.43 |
|
| |
Granted |
|
|
— |
|
|
|
— |
|
|
|
130,000 |
|
|
|
3.66 |
|
Vested |
|
|
(238,750 |
) |
|
|
3.51 |
|
|
|
(438,331 |
) |
|
|
3.38 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at end of year |
|
|
275,419 |
|
|
$ |
3.53 |
|
|
|
514,169 |
|
|
$ |
3.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s ability to issue options under its earlier plans expired on June 30, 2002, and all
options granted were fully vested prior to 2006. A summary of the status of Full House’s stock
option plan as of December 31, 2008 and 2007, and changes during the years then ended are presented
below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
| |
|
Weighted average |
|
|
Weighted-average |
|
| |
|
exercise |
|
|
exercise |
|
| |
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding at beginning of year |
|
|
75,000 |
|
|
$ |
2.25 |
|
|
|
325,000 |
|
|
$ |
2.25 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
(250,000 |
) |
|
|
2.25 |
|
Forfeited |
|
|
(75,000 |
) |
|
|
2.25 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
|
|
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at year-end |
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
|
$ |
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
15. RELATED PARTY TRANSACTIONS
During the second quarter of 2007, management wrote-off a receivable from a related party, Allen E.
Paulson Living Trust, of which J. Michael Paulson, chairman of our board, is trustee, which
receivable was previously fully provided for with an allowance. The receivable originated in 2001,
when the Company made a $0.1 million payment for architectural drawings relating to a development
project in Mississippi.
On October 20, 2008, the Company was served with a complaint in the Second Judicial District Court
of Nevada in and for Washoe County by RAM and Robert A. Mathewson alleging breach of contract and
other claims related to the resolution of claims by GEC, a consolidated investee of the Company,
against the Torres-Martinez Tribe of California. Certain officers were named as individual
defendants as well. The complaint alleges that the Company, and in some cases the other individual
defendants (i)breached an oral promise to share with RAM the $1.1 million settlement proceeds
received by GEC in 2005 following a successful arbitration against the tribe. (ii) wrongfully
distributed such settlement proceeds to the Company and (iii) failed to disclose material
information to RAM regarding GEC, including debts owed by GEC to the Company. Following a mediation
session held before former Washoe County District Court Judge Jerry Whitehead, the lawsuit was
settled by the company agreeing to pay a total of $0.5 million to the plaintiffs (included in
impairment and settlement losses), payable $0.2 million on execution of the settlement documents
and $0.3 million within 30 days of the opening of the FireKeepers Casino but no later than December
15, 2009. All claims against the individuals were dismissed outright and the claims against the
company were dismissed. As of December 31, 2008, $0.2 million was paid to the plaintiffs in this
case.
16. SEGMENT REPORTING
Following the acquisition of Stockman’s in January 2007, the Company is comprised of three primary
business segments. The casino operations segment includes Stockman’s Casino operation in Fallon,
Nevada. The development/management segment includes costs associated with tribal casino projects
and the Delaware joint venture. The corporate segment includes general and administrative expenses
of the Company and one-time revenues of $0.3 million in the second quarter of 2007, related to the
termination of a consulting agreement with the Hard Rock casino in Biloxi, Mississippi.
Selected statements of operations data (for continuing operations) as of and for the years ended
December 31, 2008 and 2007 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Development/ |
|
|
|
|
|
|
|
| |
|
Casino operations |
|
|
management |
|
|
Corporate |
|
|
Consolidated |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,670,541 |
|
|
$ |
— |
|
|
$ |
1,400 |
|
|
$ |
9,671,941 |
|
Selling, general and administrative expense |
|
|
1,899,791 |
|
|
|
465,589 |
|
|
|
3,896,704 |
|
|
|
6,262,084 |
|
Depreciation and amortization |
|
|
1,086,323 |
|
|
|
58,637 |
|
|
|
68,676 |
|
|
|
1,213,636 |
|
Operating gains |
|
|
— |
|
|
|
6,290,878 |
|
|
|
— |
|
|
|
6,290,878 |
|
Income (loss) from continuing operations
before other income (expense) and income
taxes |
|
|
1,963,511 |
|
|
|
5,620,319 |
|
|
|
(3,968,770 |
) |
|
|
3,615,060 |
|
Income (loss) from continuing operations |
|
|
1,971,729 |
|
|
|
4,720,528 |
|
|
|
(5,112,112 |
) |
|
|
1,580,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9,280,857 |
|
|
$ |
— |
|
|
$ |
283,554 |
|
|
$ |
9,564,411 |
|
Selling, general and administrative expense |
|
|
1,562,807 |
|
|
|
22,700 |
|
|
|
5,225,814 |
|
|
|
6,811,321 |
|
Depreciation and amortization |
|
|
946,253 |
|
|
|
62,028 |
|
|
|
8,213 |
|
|
|
1,016,494 |
|
Operating gains |
|
|
— |
|
|
|
4,702,215 |
|
|
|
— |
|
|
|
4,702,215 |
|
Income (loss) from continuing operations
before other income (expense) and income
taxes |
|
|
2,582,677 |
|
|
|
4,499,104 |
|
|
|
(5,263,526 |
) |
|
|
1,818,255 |
|
Income (loss) from continuing operations |
|
|
2,755,644 |
|
|
|
4,243,320 |
|
|
|
(6,344,667 |
) |
|
|
654,297 |
|
56
Selected Balance Sheet data (for continuing operations) for the years ended December 31
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Development/ |
|
|
|
|
|
|
Discontinued |
|
|
|
|
| 2008 |
|
Casino operations |
|
|
management |
|
|
Corporate |
|
|
operations |
|
|
Consolidated |
|
Assets |
|
$ |
20,468,311 |
|
|
$ |
22,550,532 |
|
|
$ |
5,449,280 |
|
|
$ |
— |
|
|
$ |
48,468,123 |
|
Property and equipment, net |
|
|
8,443,650 |
|
|
|
1,394 |
|
|
|
184,980 |
|
|
|
— |
|
|
|
8,630,024 |
|
Goodwill |
|
|
10,308,520 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,308,520 |
|
Liabilities |
|
|
515,366 |
|
|
|
5,620,785 |
|
|
|
3,148,612 |
|
|
|
— |
|
|
|
9,284,763 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Development/ |
|
|
|
|
|
|
Discontinued |
|
|
|
|
| 2007 |
|
Casino operations |
|
|
management |
|
|
Corporate |
|
|
operations |
|
|
Consolidated |
|
Assets |
|
$ |
21,247,805 |
|
|
$ |
27,174,172 |
|
|
$ |
8,081,527 |
|
|
$ |
6,960,762 |
|
|
$ |
63,464,266 |
|
Property and equipment, net |
|
|
9,081,356 |
|
|
|
— |
|
|
|
145,757 |
|
|
|
— |
|
|
|
9,227,113 |
|
Goodwill |
|
|
10,308,520 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,308,520 |
|
Liabilities |
|
|
631,425 |
|
|
|
13,178,507 |
|
|
|
11,753,431 |
|
|
|
— |
|
|
|
25,563,363 |
|
17. SUBSEQUENT EVENTS
In March, 2009, the Company made $2.3 million of voluntary principal payments on its revolving
credit line, increasing the availability under the line to $7.9 million and reducing its cash
balance to $3.1 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A (T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures — As of December 31, 2008, we completed an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule
13a-15(e) and 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective at a
reasonable assurance level in timely alerting them to material information relating to us which is
required to be included in our periodic Securities and Exchange Commission filings.
Evaluation of Internal Control Over Financial Reporting — Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control system was designed to provide reasonable assurance to the Company’s
management and board of directors regarding the preparation and fair presentation of published
financial statements.
Management assessed the effectiveness of the Company’s internal control over financial
reporting (as defined in the Securities Exchange Act of 1934 Rule 13a-15(f) and 15d-15(f)) as of
December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment we believe that, as of December 31, 2008, the Company’s internal
control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
Item 9B. Other Information.
None.
57
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item will be set forth under the captions “Proposal No. 1.
Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
definitive Proxy Statement for our 2009 Annual Meeting of Stockholders (our “Proxy Statement”) to
be filed with the Securities and Exchange Commission on or before April 30, 2009 and is
incorporated herein by this reference.
Item 11. Executive Compensation.
The information required by this Item will be set forth under the caption “Executive
Compensation” in our Proxy Statement and is incorporated herein by this reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. |
The information required by this Item will be set forth under the captions “Proposal No. 1.
Election of Directors — Security Ownership of Certain Beneficial Owners and Management” and “Executive
Compensation — Equity Compensation Plan Information” in our Proxy Statement and is incorporated
herein by this reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be set forth under the caption “Certain
Transactions” in our Proxy Statement and is incorporated herein by this reference.
Item 14. Principal Accountants’ Fees and Services.
The information required by this Item will be set forth under the caption “Independent
Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by this
reference.
58
Item 15. Exhibits, Financial Statement Schedules.
| |
(a)1. |
|
Financial statements of the Company (including related notes to consolidated
financial statements) filed as part of this report are listed below: |
| |
• |
|
Report of Independent Registered Public Accounting Firm; |
| |
| |
• |
|
Consolidated Balance Sheets as of December 31, 2008 and 2007; |
| |
| |
• |
|
Consolidated Statements of Operations for the years ended December 31, 2008 and
2007; |
| |
| |
• |
|
Consolidated Statements of Stockholders’ Equity for the years ended December
31, 2008 and 2007; |
| |
| |
• |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and
2007; |
| |
| |
• |
|
Notes to Consolidated Financial Statements. |
| |
| |
|
|
2. Exhibits |
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
| |
|
|
|
|
| |
2.1 |
|
|
Assignment and Sale Agreement dated March 30, 2001 by and among GTECH
Corporation, Dreamport, Inc., GTECH Gaming Subsidiary 2 Corporation, Full
House Resorts, Inc., and Full House Subsidiary, Inc. (Incorporated by
reference to Full House’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on April 12, 2001) |
| |
|
|
|
|
| |
2.2 |
|
|
Stock Purchase Agreement, dated April 6, 2006, between Full House
Resorts, Inc. and the James R. Peters Family Trust. (Incorporated by
reference to Exhibit 2.1 to Full House’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on April 10, 2006) |
| |
|
|
|
|
| |
3.1 |
|
|
Certificate of Incorporation as amended to date (Incorporated by
reference to Exhibit 3.1 to Full House’s registration statement on Form
SB-2 (#333-136341) filed on August 4, 2006) |
| |
|
|
|
|
| |
3.2 |
|
|
Bylaws of Full House Resorts Inc. (As amended by Resolutions dated July
28, 1995, September 29, 1995, and November 24, 1997) (Incorporated by
reference to Exhibit 3.3 to Full House’s Annual Report on Form 10-KSB for
the fiscal ended December 31, 2005) |
| |
|
|
|
|
| |
10.1 |
|
|
Amended and Restated Class III Management Agreement dated November 18,
1996 between Nottawaseppi Huron Band of Potawatomi and Gaming
Entertainment (Michigan) LLC (Incorporated by reference to Full House’s
Annual Report on Form 10-KSB for the fiscal ended December 31, 1996) |
| |
|
|
|
|
| |
10.2 |
|
|
Investor Agreement by and between Full House Resorts, Inc. and RAM
Entertainment, LLC, dated February 15, 2002 (Incorporated by reference to
Full House’s Quarterly Report on Form 10-QSB for the quarter ended March
31, 2002) |
| |
|
|
|
|
| |
10.3 |
|
|
Management Agreement by and between Gaming Entertainment (Delaware), LLC
and Harrington Raceway, Inc. dated January 31,1996 (Incorporated by
reference to Full House’s Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2002) |
| |
|
|
|
|
| |
10.4 |
|
|
Amendment to Management Agreement by and between Gaming Entertainment
(Delaware), LLC and Harrington Raceway, Inc. dated March 18, 1998
(Incorporated by reference to Full House’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002) |
| |
|
|
|
|
| |
10.5 |
|
|
Amendment to Management Agreement by and between Gaming Entertainment
(Delaware), LLC and Harrington Raceway, Inc. dated July 1, 1999
(Incorporated by reference to Full House’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002) |
| |
|
|
|
|
| |
10.6 |
|
|
Amendment to Management Agreement by and between Gaming Entertainment
(Delaware), LLC and Harrington Raceway, Inc. dated February 4, 2002
(Incorporated by reference to Full House’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002) |
| |
|
|
|
|
| |
10.7 |
|
|
Amendment to Investor Agreement by and between Full House Resorts, Inc.
and RAM Entertainment, LLC, dated May 31, 2005 (Incorporated by reference
to Exhibit 10.62 to Full House’s Annual Report on Form 10-KSB for the
fiscal ended December 31, 2005) |
59
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
| |
|
|
|
|
| |
10.8 |
|
|
Economic Development Agreement between Full House Resorts, Inc. and
Northern Cheyenne Tribe dated May 24, 2005 (Incorporated by reference to
Exhibit 10.63 to Full House’s Annual Report on Form 10-KSB for the fiscal
ended December 31, 2005) |
| |
|
|
|
|
| |
10.9 |
|
|
Development Agreement by and among Pueblo of Nambé, Nambé Pueblo Gaming
Enterprise Board and Gaming Entertainment (Santa Fe), LLC dated as of
September 20, 2005 (Incorporated by reference to Exhibit 10.64 to Full
House’s Annual Report on Form 10-KSB for the fiscal ended December 31,
2005) |
| |
|
|
|
|
| |
10.10 |
|
|
Security and Reimbursement Agreement by and among the Nambé Pueblo Gaming
Enterprise Board, Gaming Entertainment (Santa Fe), LLC and the Pueblo of
Nambé dated as of September 20, 2005 (Incorporated by reference to
Exhibit 10.65 to Full House’s Annual Report on Form 10-KSB for the fiscal
ended December 31, 2005) |
| |
|
|
|
|
| |
10.11 |
|
|
Class III Gaming Management Agreement between the Northern Cheyenne Tribe
and Gaming Entertainment (Montana), LLC dated January 20, 2006 2005
(Incorporated by reference to Exhibit 10.67 to Full House’s Annual Report
on Form 10-KSB for the fiscal ended December 31, 2005) |
| |
|
|
|
|
| |
10.12 |
|
|
Development Agreement by and between the Northern Cheyenne Tribe and Full
House Resorts, Inc. dated May 24, 2005. (Incorporated by reference to
Exhibit 10.68 to Full House’s Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2006) |
| |
|
|
|
|
| |
10.13 |
|
|
Security and Reimbursement Agreement by and between the Northern Cheyenne
Tribe and Full House Resorts, Inc. dated August 23, 2005. (Incorporated
by reference to Exhibit 10.69 to Full House’s Quarterly Report on Form
10-QSB for the quarter ended March 31, 2006) |
| |
|
|
|
|
| |
10.14 |
|
|
Management Agreement between Nottawaseppi Huron Band of Potawatomi and
Gaming Entertainment (Michigan), LLC dated June 12, 2006. (Incorporated
by reference to Exhibit 10.70 to Full House’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on June 16, 2006) |
| |
|
|
|
|
| |
10.15 |
|
|
Loan Agreement between Nottawaseppi Huron Band of Potawatomi and Gaming
Entertainment (Michigan), LLC dated November 3, 2002. (Incorporated by
reference to Exhibit 10.71 to Full House’s Registration Statement on Form
SB-2 (#333-136341) filed on August 4, 2006) |
| |
|
|
|
|
| |
10.16 |
|
|
Security Agreement between Nottawaseppi Huron Band of Potawatomi and
Gaming Entertainment (Michigan), LLC dated November 3, 2002.
(Incorporated by reference to Exhibit 10.72 to Full House’s Registration
Statement on Form SB-2 (#333-136341) filed on August 4, 2006) |
| |
|
|
|
|
| |
10.17 |
|
|
Promissory Note by the Nottawaseppi Huron Band of Potawatomi dated
November 3, 2002. (Incorporated by reference to Exhibit 10.73 to Full
House’s Registration Statement on Form SB-2 (#333-136341) filed on August
4, 2006) |
| |
|
|
|
|
| |
10.18 |
|
|
2006 Incentive Compensation Plan (Incorporated by reference to Appendix E
to Full House’s Definitive Proxy Statement as filed with the Securities
and Exchange Commission on May 1, 2006) |
| |
|
|
|
|
| |
10.19 |
|
|
Form of Restricted Stock Agreement. (Incorporated by reference to Exhibit
10.75 to Full House’s Quarterly Report on Form 10-QSB as filed with the
Commission on August 14, 2006) |
| |
|
|
|
|
| |
10.20 |
|
|
Consulting Agreement dated September 25, 2006 between Full House and Lee
Iacocca. (Incorporated by reference to Exhibit 10.66 to Full House’s
Amendment No. 1 to Registration Statement on Form SB-2 (#333-136341)
filed on September 27, 2006) |
| |
|
|
|
|
| |
10.21 |
|
|
Reducing Revolving Loan Agreement, dated January 31, 2007 between Full
House Resorts, Inc. and Nevada State Bank. (Incorporated by reference to
Exhibit 10.80 to Full House’s Current Report on Form 8-K as filed with
the Securities and Exchange Commission on February 5, 2007) |
| |
|
|
|
|
| |
10.22 |
|
|
Reducing Revolving Promissory Note, dated January 31, 2007 by Full House
Resorts in favor of Nevada State Bank. (Incorporated by reference to
Exhibit 10.81 to Full House’s Current Report on Form 8-K as filed with
the Securities and Exchange Commission on February 5, 2007) |
| |
|
|
|
|
| |
10.23 |
|
|
Promissory Note, dated January 31, 2007 by Full House Resorts in favor of
The James R. Peters Family Trust Dated October 18, 2002. (Incorporated by
reference to Exhibit 10.82 to Full House’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 5, 2007) |
60
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
| |
|
|
|
|
| |
10.24 |
|
|
Purchase and Sale Agreement, dated May 15, 2007, between Gaming
Entertainment (Michigan), LLC and Green Acres Casino Management, Inc.
(Incorporated by reference to Exhibit 10.1 to Full House’s Current Report
on Form 8-K as filed with the Securities and Exchange Commission on May
31, 2007) |
| |
|
|
|
|
| |
10.25 |
|
|
Termination of Consulting Agreement, dated June 4, 2007, between Full
House Resort, Inc., and Hard Rock Cafe International (USA), Inc.
(Incorporated by reference to Exhibit 10.2 to Full House’s Current Report
on Form 8-K as filed with the Securities and Exchange Commission on May
31, 2007) |
| |
|
|
|
|
| |
10.26 |
|
|
Management Reorganization Agreement, dated June 18, 2007 by Gaming
Entertainment (Delaware), LLC and Harrington Raceway, Inc. (Incorporated
by reference to Exhibit 10.1 to Full House’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on June 21, 2007) |
| |
|
|
|
|
| |
10.27 |
|
|
Employment Agreement, dated July 17, 2007, between Full House Resorts,
Inc. and Andre Hilliou. (Incorporated by reference to Exhibit 10.1 to
Full House’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 20, 2007) + |
| |
|
|
|
|
| |
10.28 |
|
|
Employment Agreement, dated July 17, 2007, between Full House Resorts,
Inc. and Mark J. Miller. (Incorporated by reference to Exhibit 10.2 to
Full House’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 20, 2007) + |
| |
|
|
|
|
| |
10.29 |
|
|
Employment Agreement, dated April 10, 2007, between Full House Resorts,
Inc. and Wes Elam (Incorporated by reference to Exhibit 10.3 to Full
House’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on April 26, 2007) + |
| |
|
|
|
|
| |
10.30 |
|
|
Agreement of Sale and Purchase, dated October 1, 2007 between Stockman’s
Casino, Inc. and Dhillon Hospitality Management Inc. (Incorporated by
reference to Exhibit 10.1 to Full House’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on October 5, 2007) |
| |
|
|
|
|
| |
21 |
|
|
List of Subsidiaries of Full House Resorts, Inc. * |
| |
|
|
|
|
| |
23 |
|
|
Consent of Piercy Bowler Taylor & Kern Certified Public Accountants* |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of principal executive officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 * |
| |
|
|
|
|
| |
31.2 |
|
|
Certification of principal financial officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 * |
| |
|
|
|
|
| |
32.1 |
|
|
Certification of principal executive and financial officers pursuant to
18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 * |
| |
|
|
| * |
|
Filed herewith. |
| |
| + |
|
Executive compensation plan or arrangement |
61
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
FULL HOUSE RESORTS, INC.
|
|
| Date: March 26, 2009 |
By: |
/s/ ANDRE M. HILLIOU
|
|
| |
|
Andre M. Hilliou, Chief Executive Officer |
|
In accordance with the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| |
|
|
| Name and Capacity |
|
Date |
|
|
|
/s/ J. MICHAEL PAULSON
J. Michael Paulson,
|
|
March 26, 2009 |
Chairman of the Board |
|
|
|
|
|
/s/ ANDRE M. HILLIOU
Andre M. Hilliou,
|
|
March 26, 2009 |
Chief Executive Officer and
Director |
|
|
(Principal Executive Officer) |
|
|
|
|
|
/s/ LEE A. IACOCCA
Lee A. Iacocca, Director
|
|
March 26, 2009 |
|
|
|
/s/ KEN ADAMS
Ken Adams, Director
|
|
March 26, 2009 |
|
|
|
/s/ CARL G. BRAUNLICH
Carl G. Braunlich, Director
|
|
March 26, 2009 |
|
|
|
/s/ KATHLEEN CARACCIOLO
Kathleen Caracciolo, Director
|
|
March 26, 2009 |
|
|
|
/s/ MARK J. MILLER
Mark J. Miller,
|
|
March 26, 2009 |
Chief Financial Officer |
|
|
(Principal Financial and
Accounting Officer) |
|
|
62
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
| |
|
|
|
|
| |
2.1 |
|
|
Assignment and Sale Agreement dated March 30, 2001 by and among GTECH
Corporation, Dreamport, Inc., GTECH Gaming Subsidiary 2 Corporation, Full
House Resorts, Inc., and Full House Subsidiary, Inc. (Incorporated by
reference to Full House’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on April 12, 2001) |
| |
|
|
|
|
| |
2.2 |
|
|
Stock Purchase Agreement, dated April 6, 2006, between Full House
Resorts, Inc. and the James R. Peters Family Trust. (Incorporated by
reference to Exhibit 2.1 to Full House’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on April 10, 2006) |
| |
|
|
|
|
| |
3.1 |
|
|
Certificate of Incorporation as amended to date (Incorporated by
reference to Exhibit 3.1 to Full House’s registration statement on Form
SB-2 (#333-136341) filed on August 4, 2006) |
| |
|
|
|
|
| |
3.2 |
|
|
Bylaws of Full House Resorts Inc. (As amended by Resolutions dated July
28, 1995, September 29, 1995, and November 24, 1997) (Incorporated by
reference to Exhibit 3.3 to Full House’s Annual Report on Form 10-KSB for
the fiscal ended December 31, 2005) |
| |
|
|
|
|
| |
10.1 |
|
|
Amended and Restated Class III Management Agreement dated November 18,
1996 between Nottawaseppi Huron Band of Potawatomi and Gaming
Entertainment (Michigan) LLC (Incorporated by reference to Full House’s
Annual Report on Form 10-KSB for the fiscal ended December 31, 1996) |
| |
|
|
|
|
| |
10.2 |
|
|
Investor Agreement by and between Full House Resorts, Inc. and RAM
Entertainment, LLC, dated February 15, 2002 (Incorporated by reference to
Full House’s Quarterly Report on Form 10-QSB for the quarter ended March
31, 2002) |
| |
|
|
|
|
| |
10.3 |
|
|
Management Agreement by and between Gaming Entertainment (Delaware), LLC
and Harrington Raceway, Inc. dated January 31,1996 (Incorporated by
reference to Full House’s Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2002) |
| |
|
|
|
|
| |
10.4 |
|
|
Amendment to Management Agreement by and between Gaming Entertainment
(Delaware), LLC and Harrington Raceway, Inc. dated March 18, 1998
(Incorporated by reference to Full House’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002) |
| |
|
|
|
|
| |
10.5 |
|
|
Amendment to Management Agreement by and between Gaming Entertainment
(Delaware), LLC and Harrington Raceway, Inc. dated July 1, 1999
(Incorporated by reference to Full House’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002) |
| |
|
|
|
|
| |
10.6 |
|
|
Amendment to Management Agreement by and between Gaming Entertainment
(Delaware), LLC and Harrington Raceway, Inc. dated February 4, 2002
(Incorporated by reference to Full House’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002) |
| |
|
|
|
|
| |
10.7 |
|
|
Amendment to Investor Agreement by and between Full House Resorts, Inc.
and RAM Entertainment, LLC, dated May 31, 2005 (Incorporated by reference
to Exhibit 10.62 to Full House’s Annual Report on Form 10-KSB for the
fiscal ended December 31, 2005) |
| |
|
|
|
|
| |
10.08 |
|
|
Economic Development Agreement between Full House Resorts, Inc. and
Northern Cheyenne Tribe dated May 24, 2005 (Incorporated by reference to
Exhibit 10.63 to Full House’s Annual Report on Form 10-KSB for the fiscal
ended December 31, 2005) |
| |
|
|
|
|
| |
10.09 |
|
|
Development Agreement by and among Pueblo of Nambé, Nambé Pueblo Gaming
Enterprise Board and Gaming Entertainment (Santa Fe), LLC dated as of
September 20, 2005 (Incorporated by reference to Exhibit 10.64 to Full
House’s Annual Report on Form 10-KSB for the fiscal ended December 31,
2005) |
| |
|
|
|
|
| |
10.10 |
|
|
Security and Reimbursement Agreement by and among the Nambé Pueblo Gaming
Enterprise Board, Gaming Entertainment (Santa Fe), LLC and the Pueblo of
Nambé dated as of September 20, 2005 (Incorporated by reference to
Exhibit 10.65 to Full House’s Annual Report on Form 10-KSB for the fiscal
ended December 31, 2005) |
63
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
| |
|
|
|
|
| |
10.11 |
|
|
Class III Gaming Management Agreement between the Northern Cheyenne Tribe
and Gaming Entertainment (Montana), LLC dated January 20, 2006 2005
(Incorporated by reference to Exhibit 10.67 to Full House’s Annual Report
on Form 10-KSB for the fiscal ended December 31, 2005) |
| |
|
|
|
|
| |
10.12 |
|
|
Development Agreement by and between the Northern Cheyenne Tribe and Full
House Resorts, Inc. dated May 24, 2005. (Incorporated by reference to
Exhibit 10.68 to Full House’s Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2006) |
| |
|
|
|
|
| |
10.13 |
|
|
Security and Reimbursement Agreement by and between the Northern Cheyenne
Tribe and Full House Resorts, Inc. dated August 23, 2005. (Incorporated
by reference to Exhibit 10.69 to Full House’s Quarterly Report on Form
10-QSB for the quarter ended March 31, 2006) |
| |
|
|
|
|
| |
10.14 |
|
|
Management Agreement between Nottawaseppi Huron Band of Potawatomi and
Gaming Entertainment (Michigan), LLC dated June 12, 2006. (Incorporated
by reference to Exhibit 10.70 to Full House’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on June 16, 2006) |
| |
|
|
|
|
| |
10.15 |
|
|
Loan Agreement between Nottawaseppi Huron Band of Potawatomi and Gaming
Entertainment (Michigan), LLC dated November 3, 2002. (Incorporated by
reference to Exhibit 10.71 to Full House’s Registration Statement on Form
SB-2 (#333-136341) filed on August 4, 2006) |
| |
|
|
|
|
| |
10.16 |
|
|
Security Agreement between Nottawaseppi Huron Band of Potawatomi and
Gaming Entertainment (Michigan), LLC dated November 3, 2002.
(Incorporated by reference to Exhibit 10.72 to Full House’s Registration
Statement on Form SB-2 (#333-136341) filed on August 4, 2006) |
| |
|
|
|
|
| |
10.17 |
|
|
Promissory Note by the Nottawaseppi Huron Band of Potawatomi dated
November 3, 2002. (Incorporated by reference to Exhibit 10.73 to Full
House’s Registration Statement on Form SB-2 (#333-136341) filed on August
4, 2006) |
| |
|
|
|
|
| |
10.18 |
|
|
2006 Incentive Compensation Plan (Incorporated by reference to Appendix E
to Full House’s Definitive Proxy Statement as filed with the Securities
and Exchange Commission on May 1, 2006) |
| |
|
|
|
|
| |
10.19 |
|
|
Form of Restricted Stock Agreement. (Incorporated by reference to Exhibit
10.75 to Full House’s Quarterly Report on Form 10-QSB as filed with the
Commission on August 14, 2006) |
| |
|
|
|
|
| |
10.20 |
|
|
Consulting Agreement dated September 25, 2006 between Full House and Lee
Iacocca. (Incorporated by reference to Exhibit 10.66 to Full House’s
Amendment No. 1 to Registration Statement on Form SB-2 (#333-136341)
filed on September 27, 2006) |
| |
|
|
|
|
| |
10.21 |
|
|
Reducing Revolving Loan Agreement, dated January 31, 2007 between Full
House Resorts, Inc. and Nevada State Bank. (Incorporated by reference to
Exhibit 10.80 to Full House’s Current Report on Form 8-K as filed with
the Securities and Exchange Commission on February 5, 2007) |
| |
|
|
|
|
| |
10.22 |
|
|
Reducing Revolving Promissory Note, dated January 31, 2007 by Full House
Resorts in favor of Nevada State Bank. (Incorporated by reference to
Exhibit 10.81 to Full House’s Current Report on Form 8-K as filed with
the Securities and Exchange Commission on February 5, 2007) |
| |
|
|
|
|
| |
10.23 |
|
|
Promissory Note, dated January 31, 2007 by Full House Resorts in favor of
The James R. Peters Family Trust Dated October 18, 2002. (Incorporated by
reference to Exhibit 10.82 to Full House’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 5, 2007) |
| |
|
|
|
|
| |
10.24 |
|
|
Purchase and Sale Agreement, dated May 15, 2007, between Gaming
Entertainment (Michigan), LLC and Green Acres Casino Management, Inc.
(Incorporated by reference to Exhibit 10.1 to Full House’s Current Report
on Form 8-K as filed with the Securities and Exchange Commission on May
31, 2007) |
| |
|
|
|
|
| |
10.25 |
|
|
Termination of Consulting Agreement, dated June 4, 2007, between Full
House Resort, Inc., and Hard Rock Cafe International (USA), Inc.
(Incorporated by reference to Exhibit 10.2 to Full House’s Current Report
on Form 8-K as filed with the Securities and Exchange Commission on May
31, 2007) |
64
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Description |
| |
|
|
|
|
| |
10.26 |
|
|
Management Reorganization Agreement, dated June 18, 2007 by Gaming
Entertainment (Delaware), LLC and Harrington Raceway, Inc. (Incorporated
by reference to Exhibit 10.1 to Full House’s Current Report on Form 8-K
as filed with the Securities and Exchange Commission on June 21, 2007) |
| |
|
|
|
|
| |
10.27 |
|
|
Employment Agreement, dated July 17, 2007, between Full House Resorts,
Inc. and Andre Hilliou. (Incorporated by reference to Exhibit 10.1 to
Full House’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 20, 2007) + |
| |
|
|
|
|
| |
10.28 |
|
|
Employment Agreement, dated July 17, 2007, between Full House Resorts,
Inc. and Mark J. Miller. (Incorporated by reference to Exhibit 10.2 to
Full House’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on July 20, 2007) + |
| |
|
|
|
|
| |
10.29 |
|
|
Employment Agreement, dated April 10, 2007, between Full House Resorts,
Inc. and Wes Elam (Incorporated by reference to Exhibit 10.3 to Full
House’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on April 26, 2007) + |
| |
|
|
|
|
| |
10.30 |
|
|
Agreement of Sale and Purchase, dated October 1, 2007 between Stockman’s
Casino, Inc. and Dhillon Hospitality Management Inc. (Incorporated by
reference to Exhibit 10.1 to Full House’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on October 5, 2007) |
| |
|
|
|
|
| |
21 |
|
|
List of Subsidiaries of Full House Resorts, Inc. * |
| |
|
|
|
|
| |
23 |
|
|
Consent of Piercy Bowler Taylor & Kern Certified Public Accountants* |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of principal executive officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 * |
| |
|
|
|
|
| |
31.2 |
|
|
Certification of principal financial officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 * |
| |
|
|
|
|
| |
32.1 |
|
|
Certification of principal executive and financial officers pursuant to
18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 * |
| |
|
|
| * |
|
Filed herewith. |
| |
| + |
|
Executive compensation plan or arrangement |
65