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FLL > SEC Filings for FLL > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for FULL HOUSE RESORTS INC

Form 10-Q for FULL HOUSE RESORTS INC


7-Nov-2013

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 we have been successful in our long-term strategy to transition from primarily a management company to primarily an owner/operator of regional casino operations with our significant acquisitions of the Rising Star Casino Resort ("Rising Star") in 2011 and the Silver Slipper Casino ("Silver Slipper") in 2012. With the sale of our interest in Gaming Entertainment (Michigan), LLC ("GEM") and the related management agreement for the FireKeepers Casino also in 2012, we transitioned the primary source of our revenues to owned entities. Our current ongoing strategy is to continue to create memorable experiences for our customers through customer service, employee engagement and entertainment as well as to continue to seek new business opportunities.

We own and operate the Silver Slipper in Bay St. Louis, Mississippi, the Rising Star in Rising Sun, Indiana, Stockman's Casino ("Stockman's") in Fallon, Nevada and we lease and operate the Grand Lodge Casino ("Grand Lodge") in Incline Village, Nevada. We receive management fees from our management agreement with the Pueblo of Pojoaque for the management of the Buffalo Thunder in Santa Fe, New Mexico, ("Buffalo Thunder") along with the Pueblo's Cities of Gold and Sports Bar casino facilities, which is in effect through September 23, 2014.

On October 1, 2012, we purchased the Silver Slipper for approximately $69.3 million, exclusive of cash and working capital in the amount of $6.4 million and $2.9 million, respectively. We entered into the first lien term loan ("First Lien Credit Agreement") with Capital One Bank, N.A. ("Capital One") on June 29, 2012 and the second lien term loan ("Second Lien Credit Agreement") with ABC Funding, LLC on October 1, 2012, as discussed in Note 6 to the consolidated financial statements, and we used the debt to fund the Silver Slipper purchase price. A $5.0 million revolving loan under the First Lien Credit Agreement remains undrawn and available.

Until March 30, 2012, we owned 50% of GEM, a joint venture with RAM Entertainment, LLC ("RAM"), where we were the primary beneficiary and, therefore, consolidated GEM in our consolidated financial statements. We and RAM sold GEM and its management rights and responsibilities under the management agreement to FireKeepers Development Authority, ("FDA") for approximately $97.5 million. The sale closed March 30, 2012 and effectively terminated the existing management agreement, which was scheduled to run through August 2016. We used a portion of the proceeds to pay-off our then remaining outstanding debt under the Wells Fargo Credit Agreement.

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, less a $0.3 million reduction and a $0.1 million holdback receivable. The $0.1 million holdback receivable was received in May 2012, less expenses related to the sale, deducted by the FDA. Our gain on the sale of GEM and related management rights was $41.2 million and allocated as follows (in millions):

Gross proceeds, before $0.3 million reduction and $0.1 million

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

Results of continuing operations

A significant portion of our operating income in 2012 and prior years was generated from our management agreements, including agreements with the FireKeepers Casino in Michigan and the Buffalo Thunder in New Mexico. The FireKeepers management agreement ended March 30, 2012, with the sale of our interest in GEM. The Buffalo Thunder management agreement is in effect through September 2014. There can be no assurance that the Buffalo Thunder management agreement will be extended. We have owned Stockman's Casino since 2007. Consistent with our long-term strategy, we have acquired gaming properties and have transitioned from primarily a management company to primarily an owner/operator of regional casino operations. With the acquisition of the Rising Star and the leasing of the casino at Grand Lodge in 2011 and the acquisition of the Silver Slipper in 2012, our results of continuing operations have been significantly impacted and our revenues are currently primarily derived from owned operations.

For the three months ended March 31, 2012, our revenues from the FireKeepers management agreement were $5.3 million, which represented a significant amount of our total annual operating income for 2012. With the sale of our interest in GEM and the acquisition of the Silver Slipper, we have completed the planned strategic transition from primarily a management company to primarily an owner/operator of regional casino operations and have secured an earnings stream that should be easier for the investor community to understand and value. We believe the impact of the lost revenues from the sale of our interest in GEM and the FireKeepers management agreement was diminished with the acquisition of the Silver Slipper, as well as the Rising Star and Grand Lodge operations.

During the quarter ended June 30, 2013, a new Indiana gaming tax legislation was passed, which allowed $2.5 million in free play to be tax-free for the State of Indiana's twelve month fiscal year ended June 30, 2013, resulting in a savings of $0.6 million for the Rising Star. Also, during the State of Indiana's fiscal year ending June 30, 2014, $5.0 million in free play will be tax-free and the tax benefit for our quarter ended September 30, 2013 was $0.2 million. In addition, as part of the legislation, if Rising Star's gross gaming revenues are less than $75.0 million during the State of Indiana's fiscal year ended June 30, 2014, we may be entitled to additional tax relief currently estimated at about $2.5 million per year, beginning July 1, 2014.

Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012

Revenues.For the three months ended September 30, 2013, total revenues increased $7.3 million (24%) as compared to 2012, primarily due to $13.0 million in revenues at Silver Slipper, our Gulf Coast segment's revenues, which was purchased on October 1, 2012, offset by a $5.3 million (24%) decrease in our Midwest segment revenues derived from Rising Star Casino in Indiana. The decrease in Rising Star's revenues was driven by the $5.1 million (25%) decrease in casino revenues due to increased competition from three new casino operations in Ohio.

Operating costs and expenses. For the three months ended September 30, 2013, total operating costs and expenses increased $7.6 million (28%), as compared to 2012, primarily due to the purchase of the Silver Slipper operations with $12.0 million in operating costs, offset by a $4.0 million (19%) decrease in our Midwest segment operating costs.

The $4.0 million decrease in our Midwest segment operating expenses was largely due to $2.8 million (23%) lower casino expenses, $0.8 million (15%) lower selling, general and administrative expenses (explained below) and $0.4 million (34%) lower depreciation expense. Rising Star's casino expenses decreased from the prior year period, due to a $2.2 million (34%) decrease in gaming taxes, a $0.5 million (17%) decrease in complimentary expense and a $0.2 million (11%) decrease in casino payroll and related expenses. The lower gaming taxes were partially the result of new Indiana gaming tax legislation, which allowed $2.5 million in free play to be tax-free for the State of Indiana's twelve month fiscal year beginning July 1, 2013, resulting in a savings of $0.2 million, as well as lower volume in gaming revenues. Rising Star's depreciation expenses decreased $0.4 million over the prior year period, caused by fixed assets which became fully depreciated.

Project development and acquisition costs. For the three months ended September 30, 2013, project development costs decreased $0.1 million (79%), as compared to 2012, primarily due to Silver Slipper acquisition costs that were incurred 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, 2013, selling, general and administrative expenses increased $3.3 million (42%) as compared to 2012. Selling, general and administrative expenses were $4.4 million for the quarter at the Silver Slipper, purchased October 1, 2012, offset by a $0.8 million (15%) decrease in our Midwest segment expenses.

The $0.8 million decrease in our Midwest segment's selling, general and administrative expenses was largely attributable to Rising Star's $0.5 million
(23%) lower payroll and other employee related expenses and $0.2 million (46%)
lower advertising expenses, as a result of cost control initiatives.

Operating gains (losses). For the three months ended September 30, 2013, we incurred an impairment loss of $4.0 million related to Stockman's goodwill as discussed in Note 5 to the consolidated financial statements.

Other (expense) income. For the three months ended September 30, 2013, interest expense increased $1.8 million related to the First and Second Lien Credit Agreements with Capital One and ABC Funding, LLC, which were incurred with the purchase of Silver Slipper. In 2012, we had no loans outstanding or related interest expense in the third quarter. These other (expense) income items are allocated to our corporate operations segment.

Income taxes. The estimated effective tax rate for the three months ended September 30, 2013 is approximately 30%, compared to 29% for the same period in 2012. The higher tax rate in the current year is primarily a function of a pre-tax book loss at September 30, 2013 and its impact on permanent items, including the non-deductibility of gaming taxes in calculating state tax, and the deductibility of restricted stock partially as a result of permanent differences related to the deductibility of executive compensation. State tax expense is typically high as a result of the non-deductibility of gaming taxes in certain states. The tax deduction for restricted stock, which vested in June 2013, was lower than the cumulative expense recognized on the income statement over the three year vesting period. There is no valuation allowance on the current deferred tax asset of $2.1 million and the long-term deferred tax asset of $1.0 million as of September 30, 2013, as we believe the deferred tax assets are fully realizable.

Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012

Revenues. For the nine months ended September 30, 2013, total revenues increased $22.0 million (24%) as compared to 2012, principally related to $40.0 million in revenue at Silver Slipper, our Gulf Coast segment's revenues, purchased on October 1, 2012, offset by a $12.7 million (19%) decrease in our Midwest segment revenues as a result of increased competition and a $5.5 million (83%) decrease in our development/management segment revenues as a result of the sale of our interest in GEM and the FireKeepers management agreement on March 30, 2012.

The $12.7 million decrease in our Midwest segment revenues was the result of lower casino revenues at the Rising Star, which decreased $12.4 million (20%) due to the opening of a new casino in Cincinnati, Ohio, in March 2013 as well as two casinos which opened in Columbus, Ohio in 2012.

Operating costs and expenses. For the nine months ended September 30, 2013, total operating costs and expenses increased $23.6 million (29%), as compared to 2012, chiefly as a result of the purchase of the Silver Slipper operations with $36.3 million in operating costs, offset by a $10.9 million (18%) decrease in our Midwest segment costs and a $0.8 million (93%) decrease in our development/management segment operating costs. Operating costs also decreased $0.6 million (12%) in our Corporate segment due to a $0.3 million (7%) decrease in selling, general and administrative expenses as explained below.

The $10.9 million decrease in our Midwest segment operating expenses was largely due to $7.8 million (21%) lower casino expenses, $1.7 million (11%) lower selling, general and administrative expenses (as explained below), $1.2 million (35%) lower depreciation expense and $0.3 million (11%) lower food and beverage expenses. Rising Star's casino expenses decreased $7.8 million over the prior year period, largely due to a $5.4 million (28%) decrease in gaming taxes, a $1.3 million (15%) decrease in complimentary expense and a $0.6 million (9%) decrease in casino payroll and related expenses. The lower gaming taxes were partially attributable to new Indiana gaming tax legislation, which allows a portion of the free play to be tax-free resulting in a savings of $0.8 million for the nine months ended September 30, 2013. Gaming taxes were also lower for the nine months ended September 30, 2013 due to lower taxable gaming revenues. Rising Star's depreciation expenses decreased $1.2 million over the prior year period, as a result of fixed assets that became fully depreciated. Rising Star's food and beverage expenses decreased $0.3 million over the prior year period due to the decline in business which lowered food and beverage cost of sales. The $0.8 million decrease in our development/management segment operating costs was predominantly attributable to the sale of our interest in GEM and the FireKeepers management agreement on March 30, 2012.

Project development and acquisition costs. For the nine months ended September 30, 2013, project development costs decreased $0.3 million (84%), as compared to 2012, mainly as a result of the Silver Slipper acquisition costs incurred 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 nine months ended September 30, 2013, selling, general and administrative expenses increased $11.4 million (47%) as compared to 2012. Selling, general and administrative expenses were $13.7 million for the nine months ended September 30, 2013 at the Silver Slipper, which was acquired October 1, 2012, offset by a $1.7 million (11%) decrease in our Midwest segment expenses and also a $0.3 million (7%) decrease in our Corporate segment expenses due to lower payroll and other employee related expenses.

The $1.7 million decrease in our Midwest segment's selling, general and administrative expenses was due to Rising Star's cost control initiatives which resulted in $0.9 million (14%) lower payroll and other employee related expenses, $0.3 million lower maintenance expenses related to dredging and a $0.4 million (35%) decline in advertising expenses.

Operating gains (losses). For the nine months ended September 30, 2013, we incurred an impairment loss of $4.0 million related to Stockman's goodwill as discussed in Note 5 to the consolidated financial statements. This contrasts with a $41.2 million gain on sale of the joint venture, related to the sale of our interest in GEM in the prior year period.

Other (expense) income. For the nine months ended September 30, 2013 we incurred a $4.8 million increase in interest expense related to the First and Second Lien Credit Agreements with Capital One and ABC Funding, LLC, whose proceeds were used to purchase Silver Slipper Casino. In the nine months ended September 30, 2012, we incurred a $1.7 million loss on extinguishment of debt related to the write-off of the Wells Fargo loan costs. These other (expense) income items are allocated to our corporate operations segment.

Income taxes. The estimated effective tax rate for the nine months ended September 30, 2013 is approximately 5% compared to 38% for the same period in 2012. The lower tax rate in the current year is primarily a function of pre-tax book loss of $1.7 million compared to pre-tax book income of $48.3 million for the nine months ended September 30, 2013 and September 30, 2012, respectively, and its impact on permanent items, including the non-deductibility of gaming taxes in calculating state tax, and the deductibility of restricted stock partially as a result of permanent differences related to the deductibility of executive compensation. State tax expense is typically high as a result of the non-deductibility of gaming taxes in certain states. The tax deduction for restricted stock, which vested in June 2013, was lower than the cumulative expense recognized on the income statement over the three year vesting period. There is no valuation allowance on the current deferred tax asset of $2.1 million and the long-term deferred tax asset of $1.0 million as of September 30, 2013, as we believe the deferred tax assets are fully realizable.

Noncontrolling interest. For the nine months ended September 30, 2012, we recorded net income attributable to non-controlling interest in consolidated joint venture of $2.2 million as a result of our 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 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 the Gulf Coast, Indiana, northern Nevada and New Mexico. 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. 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 Silver Slipper, Rising Star, Grand Lodge, and Stockman's operations, along with the Buffalo Thunder management agreement, are currently our primary sources of recurring income and significant positive cash flow. There can be no assurance that the Buffalo Thunder management agreement ending in September 2014, will be extended beyond its term.

On a consolidated basis, cash provided by operations for the first nine months of 2013 was $11.0 million. Cash of $3.6 million was used in investing activities, largely due to the purchase of $3.3 million in property and equipment at our various properties, including $0.4 million for Silver Slipper Hotel pre-construction costs. Cash of $2.7 million was used in financing activities to repay $2.5 million in debt and pay $0.2 million in loan fees connected with the Silver Slipper Hotel financing.

As of September 30, 2013, we had approximately $25.4 million in cash.

Our future cash requirements include funding approximately $7.3 million in remaining construction costs, net of $0.4 million of pre-construction costs funded for the nine months ended September 30, 2013, for a six-story, 142-room hotel at Silver Slipper Casino in Mississippi ("Silver Slipper Hotel") being built between the south side of the casino and the waterfront, with rooms facing views of the bay. On August 26, 2013, the Silver Slipper entered into an agreement with WHD Silver Slipper, LLC related to construction of the Silver Slipper Hotel (the "Construction Agreement"). We estimate that construction of the Silver Slipper Hotel will take approximately one year to complete from the expected commencement of construction in November 2013. We intend to finance $10.0 million of the construction cost with the proceeds of the term loan under the First Lien Credit Agreement as described in Note 6 to the consolidated financial statements, with the remaining $7.7 million of the construction cost to be funded from available cash.

We believe the Silver Slipper Hotel is a much-needed amenity which will allow guests to extend their visits and enjoy more of what the Silver Slipper has to offer and favorably impact customer loyalty and revenues.

In October 2011, the Rising Sun/Ohio County First, Inc. (RSOCF), an Indiana non-profit corporation, and the Rising Sun Regional Foundation, Inc. teamed up to develop a new 104-room hotel on land adjacent to our property. Construction commenced in December 2012, and the hotel is expected to open in the fourth quarter of 2013. We believe that the added hotel room inventory in proximity to the casino facility will favorably impact revenues and visitor counts.

On August 16, 2013, we entered into an agreement to lease/purchase a hotel at Rising Star (the "Rising Star Hotel Agreement") with RSOCF (the "Landlord"). Upon completion of construction, we will operate the Landlord's 104-room hotel (the "Rising Star Hotel"), adjacent to the Rising Star. The Rising Star Hotel is currently under construction and is scheduled to open in the fourth quarter of 2013. The Rising Star Hotel Agreement provides we will be the lessee of the Rising Star Hotel and assume all responsibilities, revenues, expenses, profits and losses related to the Rising Star Hotel's operations. The term of the Rising Star Hotel Agreement is for 10 years from the date the Rising Star Hotel is first open to the public (subject to certain early termination rights of the parties under the Rising Star Hotel Agreement) with the Landlord having a right to sell the Rising Star Hotel to us at the end of the term and our corresponding obligation to purchase it on the terms set forth in the Rising Star Hotel Agreement. During the term, we will have the exclusive option to purchase the Rising Star Hotel at a pre-set price. Beginning on January 1, 2014, we will pay a fixed monthly rent payment of approximately $83,000 during the term of the Rising Star Hotel Agreement unless we elect to purchase the hotel before the end of the lease period.

Subject to the effects of the economic uncertainties discussed above, 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 flow from operations due to, among other reasons, the adverse effects on gaming activity of the current economic environment, increased competition and a generally tight credit environment, increases the uncertainty with respect to our development and growth plans.

Banking Relationships

On March 30, 2012, we paid off the then remaining $25.3 million debt and extinguished the Wells Fargo Credit Agreement, which consisted of $24.8 million of our existing long term debt and $0.5 million due on the Swap, from proceeds from the sale of our interest in GEM and the FireKeepers management agreement.

On October 1, 2012, we closed on the acquisition of all of the equity membership interests in Silver Slipper Casino Venture LLC d/b/a Silver Slipper Casino located in Bay St. Louis, Mississippi. The purchase price of approximately $69.3 million, exclusive of $6.4 million cash and $2.9 million working capital, was funded by the First Lien Credit Agreement and the Second Lien Credit Agreement. The $5.0 million revolving loan under the First Lien Credit Agreement remains undrawn and available. The First and Second Lien Credit Agreements are secured by substantially all of our assets and therefore, our wholly-owned subsidiaries guarantee our obligation under the agreements. The Second Lien Credit Agreement is subject to the lien of the First Lien Credit agreement.

We have elected to pay interest on the First Lien Credit Agreement based on a LIBOR rate plus a margin rate as set forth in the agreement. LIBOR rate means a rate per annum equal to the quotient of (a) the greater of (1) 1.00% and (2) the rate per annum referenced to as the BBA (British Bankers Association) LIBOR divided by (b) one minus the reserve requirement set forth in the First Lien Credit Agreement for such loan in effect from time to time. We pay interest on the Second Lien Credit Agreement at the rate of 13.25% per annum. The First and Second Lien Credit Agreements contain customary negative covenants and events of default for transactions of this type.

As of December 31, 2012, we had elected, at our discretion, to prepay the principal payment of $1.3 million due April 1, 2013 on the First Lien Credit Agreement, in order to reduce interest costs. We elected, at our discretion, to prepay on June 3, 2013 the sum of $2.5 million in principal payments due July 1, 2013 and October 1, 2013. We further elected, at our discretion, to prepay on November 1, 2013 the sum of $2.5 million in principal payments due January 1, 2014 and April 1, 2014. The next scheduled principal payment is due July 1, 2014.

We are required to make prepayments under the First Lien Credit Agreement, under certain conditions defined in the agreement, in addition to the scheduled principal installments for any fiscal year ending December 31, 2012 and thereafter. Prepayment penalties will be assessed in the event that prepayments are made on the Second Lien Credit Agreement prior to the discharge of the First Lien Credit Agreement.

On August 26, 2013, we entered into a first amendment to the First Lien Credit Agreement, ("First Lien Amendment") and an amendment no. 1 to the Second Lien Credit Agreement, ("Second Lien Amendment") which amended certain provisions of the First and Second Lien Credit Agreements. The First Lien Amendment modifications include a $10.0 million increase to the term loan portion of the First Lien Credit Agreement to $56.3 million, a 1% lower interest rate and an extended maturity date to June 29, 2016. Also, certain financial ratio covenants were revised under the First and Second Lien Credit Agreements to accommodate the additional extension of credit under the First Lien Credit Agreement and our lease/purchase agreement related to the Rising Star Hotel, as discussed in Note 10 to the consolidated financial statements. The $10.0 million term loan under the First Lien Credit Agreement remains undrawn and available and will be used to fund a portion of the $17.7 million construction of the six-story, 142-room Silver Slipper Hotel being built between the south side of the casino and the waterfront, with rooms facing views of the bay. The remaining $7.7 million of the construction cost will be funded from available cash. As of September 30, 2013 we had funded $0.4 million in pre-construction costs for the Silver Slipper Hotel. We estimate that construction of the hotel will take approximately one year from expected commencement of construction in November 2013.

Other projects

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 or acquisition, among other considerations. No assurance can be given that any additional projects will be pursued or completed or that any completed projects will be successful.

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