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FLL > SEC Filings for FLL > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for FULL HOUSE RESORTS INC

Form 10-Q for FULL HOUSE RESORTS INC


7-Nov-2012

Quarterly Report


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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions, trends and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections:

? Overview
? Results of continuing operations
? Liquidity and capital resources
? Off-balance-sheet arrangements
? Seasonality
? Regulation and taxes
? Critical accounting estimates and policies

Overview

We own, develop, manage, and/or invest in gaming-related enterprises. We continue to actively investigate, individually and with partners, new business opportunities and our long-term strategy is to transition to primarily an operating company and to drive revenues from owned operations rather than management fees.

Specifically, we own and operate the Rising Star Casino Resort in Rising Sun, Indiana ("Rising Star"), Stockman's Casino ("Stockman's") in Fallon, Nevada and we lease and operate the Grand Lodge Casino ("Grand Lodge") in Incline Village, Nevada. We also have a management agreement with the Pueblo of Pojoaque in Santa Fe, New Mexico, which became effective September 23, 2011. As of October 1, 2012, we acquired and now operate the Silver Slipper Casino in Bay St. Louis, Mississippi.

On April 1, 2011, we acquired all of the operating assets of Grand Victoria Casino & Resort, L.P. through Gaming Entertainment (Indiana) LLC, our wholly-owned subsidiary. In August 2011, the property was renamed Rising Star Casino Resort. In May 2011, we entered into a three-year agreement with the Pueblo of Pojoaque, which has been approved by the NIGC as a management contract, to advise on the operations of the Buffalo Thunder Casino and Resort in Santa Fe, New Mexico along with the Pueblo's Cities of Gold and Sports Bar casino facilities. Our management and related agreements with the Buffalo Thunder Casino and Resort became effective on September 23, 2011. As of September 1, 2011, we own the operating assets of the Grand Lodge Casino, and have a 5-year lease with Hyatt Equities LLC for the casino space in the Hyatt Regency Resort, Spa and Casino in Incline Village, Nevada on the north shore of Lake Tahoe. Until August 31, 2011, we were a non-controlling 50%-investor in Gaming Entertainment (Delaware), LLC ("GED"), a joint venture with Harrington Raceway Inc. ("HRI"). GED had a 15-year management contract through August 2011 with Harrington Casino at the Delaware State Fairgrounds in Harrington, Delaware.

On March 30, 2012, we entered into a Membership Interest Purchase Agreement with Silver Slipper Casino Venture, LLC to acquire all of the outstanding membership interest of the entity operating the Silver Slipper Casino in Bay St. Louis, Mississippi. The purchase was closed on October 1, 2012, for a price of approximately $70.0 million and $6.7 million in cash, exclusive of net working capital balances, fees and expenses and other adjustments. We entered into the First Lien Credit Agreement ("First Lien Credit Agreement") with Capital One on June 29, 2012 and the Second Lien Credit Agreement ("Second Lien Credit Agreement") with ABC Funding, LLC on October 1, 2012, as discussed in Note 7 to the consolidated financial statements, and we used the debt to fund the approximately $70.0 million Silver Slipper ("Silver Slipper") purchase price. We also paid approximately $6.7 million in cash for the property working capital and cash balances.


Management believes the acquisition of the Silver Slipper is consistent with our long-stated growth strategy and will create long-term shareholder value. The Silver Slipper, which opened in November 2006, is on the far west end of the Mississippi Gulf Coast (22 miles west of Gulfport, 34 miles from Biloxi) and is approximately one hour (56 miles) from New Orleans (versus 90mi/1.5hrs to the Beau Rivage). The property has over 37,000 square feet of gaming space, approximately 1,000 slot and video poker machines, 26 table games, a poker room and the only live keno game on the Gulf Coast. The property includes a fine dining restaurant, buffet, quick service restaurant and two casino bars. The property draws heavily from the New Orleans metropolitan area and other communities in southern Louisiana and southwestern Mississippi.

The Gulf Coast is one of the country's largest gaming markets and its proximity to southern Louisiana, Alabama, Mississippi and the Florida Panhandle, as well as ample non-gaming amenities and a seasonal draw, make the market attractive.

Until March 30, 2012, we owned 50% of Gaming Entertainment (Michigan), LLC ("GEM"), a joint venture with RAM Entertainment, LLC ("RAM"), where we were the primary beneficiary and, therefore, consolidated GEM in our consolidated financial statements. On March 30, 2012, we, along with our 50% joint venture partner RAM, entered into an Equity Purchase Agreement ('the GEM Sale Agreement") and closed on the $97.5 million sale of our limited liability company interests in GEM and the FireKeepers management agreement to the FireKeepers Development Authority ("FDA"), $48.8 million to RAM and $48.8 million to us. The gross proceeds were paid, less a $0.2 million holdback amount which the FDA may use to satisfy any liabilities arising before the sale date which are paid subsequently, or to satisfy any indemnification obligations of us and RAM under the sale agreement. The holdback receivable, less any amounts used to satisfy such liabilities, will be paid to RAM and us on December 31, 2012 in equal amounts. The FDA paid $48.7 million to us and also $48.6 million to RAM, on March 30, 2012, which reflected the deduction of the hold back amount split between RAM and us and $0.03 million of buyer transaction expenses deducted from RAM's portion. GEM had a 7-year 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 opened on August 5, 2009, which triggered the commencement of the 7-year management agreement term.

In addition to the $97.5 million, the FDA paid RAM and us $1.2 million each, equal to the management fee that would have been earned under the management agreement for April 2012, which was defined as the 'wind up fee' less $0.3 million, which was split between RAM and us. The wind up fee was received in May 2012, and was $0.4 million more than estimated at March 31, 2012; therefore the gain on sale was increased from $40.8 million to $41.2 million during the second quarter. During the first quarter, we used a portion of the sale proceeds to pay-off our remaining outstanding debt of $25.3 million to Wells Fargo, which consisted of $24.8 million of our existing long term debt and $0.5 million due on the interest rate swap agreement ("Swap") related to the Credit Agreement with Wells Fargo, to extinguish the credit facility and related interest-rate hedge. The Wells Fargo Credit Agreement, which was scheduled to mature on June 30, 2016, was terminated without the incurrence of any early termination penalties or fees.

Our gain on the sale of joint venture, related to the sale of our interest in GEM, was $41.2 million and allocated as follows (in millions):

Gross proceeds, before $0.1 million holdback receivable                   $ 48.8
Plus: April 2012 'Wind up' fee received, net of $0.03 million deduction      0.9
                                                                            49.7
Less: Net basis of contract rights expensed                                 (2.8 )
Less: Our interest in joint venture                                         (5.7 )
Gain on sale of joint venture                                             $ 41.2


Results of continuing operations

A significant portion of our revenue had been generated from our management agreements with the FireKeepers Casino in Michigan, the Harrington Casino in Delaware and Buffalo Thunder in New Mexico. The Delaware agreement expired on August 31, 2011. The FireKeepers management agreement ended March 30, 2012, with the sale of our interest in GEM and the New Mexico agreement ends in September 2014. There can be no assurance that the New Mexico management agreement will be extended. Additionally, our 2012 and 2011 results of continuing operation were significantly impacted by our newly acquired Rising Star on April 1, 2011 and Grand Lodge on September 1, 2011.

For the nine months ended September 30, 2012 and 2011, our revenues from the FireKeepers management agreement were $5.3 million and $18.3 million, respectively, which represent a significant amount of our total annual operating income. Management fees represented 6% and 25% of total revenues for the years ended September 30, 2012 and 2011, respectively, as we have executed our strategy to transition to primarily an operating company and drive revenue from owned operations rather than management fees. We funded the acquisition of the Silver Slipper with the First and Second Lien Credit Agreements totaling $70.0 million on October 1, 2012. We believe the impact of the lost revenues from the sale of our interest in GEM and the FireKeepers management agreement will be diminished with the acquisition of the Silver Slipper, as well as a full year of operations at the Rising Star and Grand Lodge.

Three Months Ended September 30, 2012, Compared to Three Months Ended September 30, 2011

Revenues. For the three months ended September 30, 2012, total revenues decreased $3.3 million (10%) as compared to 2011, primarily due to a $5.6 million (93%) and $1.8 million (8%) decrease in our development / management and casino operations Mid-west segments, respectively, offset by a $4.1 million increase (123%) in our casino operations Nevada segment.

The $5.6 million decrease in revenues in our development / management segment is related to lower management fees, comprised mainly of a $6.0 million decrease and a $0.2 million increase in management fees related to FireKeepers and Buffalo Thunder, respectively. FireKeepers management fees were lower due to the sale of our interest in GEM and the FireKeepers management agreement which closed March 30, 2012. Buffalo Thunder management fees are higher in the current year as the management contract began in September 2011.

The $1.8 million decrease in revenues in our casino operations Mid-west segment is related to Rising Star operations. The lower Rising Star casino revenues were largely due to both lower slot and table games revenue caused by a decline in slot volume as well as lower table game win percentages in the current year period. Rising Star slot coin-in decreased approximately 7% over the prior year period. Rising Star table games volume increased 6%, however the hold percentage declined approximately 300 basis points year over year. The primary reasons for the shortfalls against prior year are due to weakness in the Southeastern Indiana gaming market. The weakness is a result of increased competition from Scioto Downs Racino in Columbus, Ohio. This racino opened up in early June 2012 and has impacted the play from the Columbus, Ohio market. Other factors include a stagnant economy that has negatively affected most of the gaming properties across the Mid-west and the United States.

The $4.1 million increase in revenues in our casino operations Nevada segment was predominantly attributable to the lease of the Grand Lodge on September 1, 2011. For the three months ended September 30, 2012, Grand Lodge's casino revenues increased $4.2 million over the prior year, as the prior year period only includes operations for the month of September 2011.

Operating costs and expenses. For the three months ended September 30, 2012, total operating costs and expenses decreased $1.0 million (3%), as compared to 2011, primarily due to decreases in our casino operations Mid-west and development / management segments of $2.2 million (10%) and $.8 million (98%), respectively, offset by a $2.1 million (69%) increase in our casino operations Nevada segment.


The $2.2 million decrease in our casino operations Mid-west operating expenses were largely due to lower expenses at the Rising Star, mostly related to lower gaming taxes, marine operating costs and other employee related costs in the current year period. The decrease in our development / management operating costs was largely due to a $0.4 million (100%) decrease in amortization, related to the sale of the Michigan gaming rights on March 30, 2012.

The $2.1 million increase in our casino operations Nevada operating expenses was attributable to the lease of the Grand Lodge on September 1, 2011. For the three months ended September 30, 2012, Grand Lodge's operating expenses increased $2.3 million, as the prior year period only includes operations for the month of September, offset by a $0.2 million (11%) decrease at Stockman's Casino. The decrease at Stockman's Casino was mostly related to a decrease in depreciation expense, as assets have become fully depreciated.

Project development and acquisition costs. For the three months ended September 30, 2012, project development costs were flat as compared to 2011, and included $0.01 million of Silver Slipper acquisition costs, as compared to $0.04 million of Grand Lodge acquisition costs in the prior year period. Project development and acquisition costs are allocated to our development / management operations segment.

Selling, general and administrative expense. For the three months ended September 30, 2012, selling, general and administrative expenses decreased $0.4 million (4%) as compared to 2011 primarily due to a $0.8 million (13%) decrease in our casino operations Mid-west segment and a $0.1 million (4%) decrease in our corporate operations segment, offset by a $0.6 million (70%) increase in our casino operations Nevada segment.

The a $0.8 million decrease in our casino operations Mid-west segment selling, general and administrative costs was predominantly attributable to lower Rising Star benefit expenses and marine operating costs in the current year period. The $0.6 million increase in our casino operations Nevada segment selling, general and administrative costs was related to the Grand Lodge, due to the lease and operation of the Grand Lodge effective September 1, 2011. The $0.1 million decrease in our corporate operation's segment selling, general and administrative expenses was largely due to lower benefit expenses.

Operating gains (losses). For the three months ended September 30, 2012, operating gains increased by $3.8 million (100%), due to $4.9 million of impairment losses recorded in the prior year period, related to a $4.5 million Stockman's goodwill impairment and $0.4 million Nambé Pueblo note receivable impairment, and a $1.1 million decrease in equity in net income of unconsolidated joint venture. The GED management contract was terminated August 2011, as discussed in Note 3 to the consolidated financial statements. These operating gains (losses) are allocated to our development / management operations segment.

Other income (expense). For the three months ended September 30, 2012, other expense decreased by $1.0 million (94%), primarily due to $0.9 million of interest expense and $0.2 million loss on derivative instrument in the prior year period. The interest expense and loss on derivative in the prior year period were related to long term debt which was funded March 31, 2011, when we borrowed $33.0 million on the term loan to fund our acquisition of the Rising Star. On March 30, 2012, we used a portion of the proceeds from the sale of our interest in GEM to pay off our remaining outstanding debt of $25.3 million, as discussed in note 7 to the consolidated financial statements. The interest expense in the current year period was related to Capital One Bank, N.A. commitment fees on the First Lien Credit Agreement. Interest expense and other income (expense) related to derivative instruments are allocated to our corporate operations segment.


Income taxes. For the three months ended September 30, 2012, the estimated effective annual income tax rate applied for the current year period is approximately 29%, compared to a prior year benefit effective annual income tax rate of (205%) and compared to the prior quarter's estimated effective annual income tax rate of 49%. The prior year's rate benefited from the impairment losses during the quarter, as well as a 2010 GEM state tax refund, as GEM's filing status changed from filing as a stand-alone entity to filing unitarily with Full House Resorts, Inc. during the prior year period. Also, the current period's rate benefited from a change in estimates related to Indiana state taxes. There is no allowance on the current deferred tax asset of $0.7 million and the long-term deferred tax asset of $0.4 million as of September 30, 2012, and we believe the deferred tax assets are fully realizable.

Noncontrolling interest. For the three months ended September 30, 2012, the net income attributable to non-controlling interest in consolidated joint venture decreased by $2.6 million (100%), as we no longer own the 50% interest in GEM, effective March 30, 2012.

Nine Months Ended September 30, 2012, Compared to Nine Months Ended September 30, 2011

Revenues. For the nine months ended September 30, 2012, total revenues increased $18.4 million (25%) as compared to 2011, primarily due to a $20.0 million (42%) and $10.2 million (138%) increase in our casino operations Mid-west and Nevada segment's revenues, respectively, offset by an $11.7 million decrease (64%) in our development / management segment revenues. The $20.0 million increase in revenues in our casino operations Mid-west segment was largely due to the acquisition of the Rising Star on April 1, 2011. The $10.2 million increase in revenues in our casino operations Nevada segment is related to the lease and operations of the Grand Lodge.

The $11.7 million decrease in our development / management segment revenues was predominantly attributable to the $12.9 million (71%) decrease in FireKeepers management fees, offset by a $1.1 million increase in Buffalo Thunder management fees. FireKeepers management fees were lower due to the sale of our interest in GEM and the FireKeepers management agreement which closed March 30, 2012. Our management agreement with the Buffalo Thunder Casino & Resort became effective September 2011.

Operating costs and expenses. For the nine months ended September 30, 2012, total operating costs and expenses increased $25.0 million (43%), as compared to 2011, primarily due to a $17.9 million (40%) and $7.6 million (118%) increase in our casino operations Mid-west and Nevada segment's operating costs, respectively, offset by an $1.9 million decrease (69%) in our development / management segment operating costs.

The $17.9 million and $7.6 million increases in our casino operations Mid-west and Nevada segment's operating expenses, respectively, were largely due to the acquisition of the Rising Star and Grand Lodge. The $1.9 million decrease in our development / management segment's operating costs was attributable to the sale of our interest in GEM and the FireKeepers Management agreement which closed March 30, 2012.

Project development and acquisition costs. For the nine months ended September 30, 2012, project development costs decreased $0.3 million (48%), as compared to 2011, primarily due to $0.5 million of acquisition expenses for the Rising Star in the prior year, offset by $0.1 million of acquisition expenses for the Silver Slipper in the current year. Project development and acquisition costs are allocated to our development / management operations segment.

Selling, general and administrative expense. For the nine months ended September 30, 2012, selling, general and administrative expenses increased $7.3 million (43%) as compared to 2011 primarily due to a $3.7 million (33%) increase in our casino operations Mid-west segment and a $2.8 million increase in our casino operations Nevada segment, due to the acquisition of the Rising Star and the Grand Lodge, and a $1.1 million (30%) increase in our corporate operations segment. For the nine months ended September 30, 2012, the Rising Star's and Grand Lodge's selling, general and administrative expenses increased $3.7 million (33%) and $2.9 million, respectively.

Selling, general and administrative expenses increased at the corporate level by $1.1 million, mostly related to a $0.9 million increase in payroll and related costs, comprised principally of a $0.5 million increase in stock compensation expense related to the issuance of 660,000 shares of restricted stock as discussed in Note 2 to the consolidated financial statements and a $0.2 million increase in incentive compensation, related to the sale of our interest in GEM. Selling, general and administrative expenses also increased at the corporate level due to a $0.2 million increase in Delaware franchise taxes, related to a larger number of authorized shares.


Operating gains (losses). For the nine months ended September 30, 2012, operating gains increased by $42.8 million consisting primarily of the gain on sale of the joint venture of $41.2 million, related to the sale of our interest in GEM, and the $4.9 million of impairment losses in the prior year period, related to a $4.5 million goodwill impairment and $0.4 million Nambé Pueblo note receivable impairment, offset by a $3.3 million (100%) decrease in equity in net income of unconsolidated joint venture. The GED management contract was terminated August 2011, as discussed in Note 3 to the consolidated financial statements. These operating gains (losses) are allocated to our development / management operations segment.

Other income (expense). For the nine months ended September 30, 2012, other expense decreased by $0.07 million (3%), primarily due to a $1.7 million loss on extinguishment of debt related to the write-off of the Wells Fargo loan costs, due to the payoff of the debt which is discussed in Note 7 to the consolidated financial statements, offset by a $1.2 million (60%) decrease in interest expense and a $0.6 million (102%) decrease in the loss on derivative instrument related to long term debt which was funded March 31, 2011, when we borrowed $33.0 million on the term loan to fund our acquisition of the Rising Star. These other income (expense) items are allocated to our corporate operations segment.

Income taxes. For the nine months ended September 30, 2012, the estimated effective annual income tax rate applied for the current year period is approximately 38%, compared to 16% for the same period in 2011. The lower tax rate in the prior year was primarily due to the tax benefit of the impairment losses during the prior year, as well as a 2010 GEM state tax refund, as GEM's filing status changed from filing as a stand-alone entity to filing unitarily with Full House Resorts, Inc. during the third quarter of 2011. There is no allowance on the current deferred tax asset of $0.7 million and the long-term deferred tax asset of $0.4 million as of September 30, 2012, and we believe the deferred tax assets are fully realizable.

Noncontrolling interest. For the nine months ended September 30, 2012, the net income attributable to non-controlling interest in consolidated joint venture decreased by $5.8 million (73%), as the current year non-controlling interest only represents the first quarter's 50% interest in GEM. Our interest in GEM was sold on March 30, 2012.

Liquidity and capital resources

Economic conditions and related risks and uncertainties

The United States and the world has experienced a widespread and severe economic slowdown accompanied by, among other things, weakness in consumer spending including gaming activity and reduced credit and capital financing availability, all of which have far-reaching effects on economic conditions in the country for an indeterminate period. Our operations are currently concentrated in Indiana, northern Nevada, New Mexico and the Gulf Coast. Accordingly, future operations could be affected by adverse economic conditions and increased competition particularly in those areas and their key feeder markets in neighboring states. Prior to March 30, 2012, our operations included the FireKeepers Casino in Michigan, and prior to September 1, 2011, our operations also included the Harrington Casino in Delaware. The effects and duration of these conditions and related risks and uncertainties on our future operations and cash flows, including our access to capital or credit financing, cannot be estimated at this time, but may be significant.

The Rising Star, Grand Lodge, Stockman's and Silver Slipper operations and the Buffalo Thunder management agreement are currently our primary sources of recurring income and significant positive cash flow. Our management agreement for the Harrington Casino in Delaware ended on August 31, 2011 and our interest in GEM and the management agreement for the FireKeepers Casino was sold on March 30, 2012. There can be no assurance that the Buffalo Thunder management agreement ending in September 2014, will be extended beyond its term. Future cash flow is expected to be positively impacted by our acquisition on October 1, 2012 of the Silver Slipper.


The Rising Star is one of three riverboat casinos located on the Ohio River in southeastern Indiana. Its closest competitor is the Hollywood Casino, approximately a twenty minute drive, which is larger with 150,000 square feet of casino space, over 3,000 slot machines, 84 table games, poker room and five dining options. To the south is the Belterra Casino, approximately thirty minutes away, with 1,550 slot machines and 41 table games. Ohio has recently authorized legalized gambling and the new Scioto Downs Racino and Hollywood Casino opened in Columbus, Ohio in June and October 2012, respectively. The Scioto Downs Racino includes over 2,100 slots and live horse racing. The Ohio Hollywood Casino includes over 3,000 slots, 70 table games and a poker room. The Horseshoe Casino Cincinnati is currently being built and is expected to open in the spring of 2013 and will feature approximately 100,000 square feet of casino space, 2,000 slot machines, 85 table games and a poker room. There are also two proposed racinos nearby in the Cincinnati area. Each of these facilities is within the general market of Rising Star and is expected to provide competition to our Rising Star operation in 2014. While Kentucky has limited legal gaming, the cities of Lexington and Louisville are within the market of the Rising Star and there is a possibility that Kentucky will expand legalized gaming in the near future.

On a consolidated basis, cash provided by operations during the nine months ended September 30, 2012 decreased $21.4 million over the same prior year period, partially attributable to the approximately $11.6 million in taxes paid related to the gain on sale of our interest in GEM. The decrease in cash provided by operations was also attributable to a $14.4 million decrease in net income, exclusive of the $41.2 million gain on sale of our interst in GEM in the current year, primarily due to the sale of our interest in FireKeepers, offset by Rising Star and Grand Lodge operations. Cash provided by investing activities increased $58.1 million from the prior year period primarily due to the $49.7 . . .

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