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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
[X] For the fiscal year ended December 31, 1995
OR
[ ] For the transition period from ____________ to ____________
Commission file number 0-20630
FULL HOUSE RESORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3391527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Deadwood Gulch Resort, Hwy 85 S, P.O. Box 643, Deadwood, SD 57732
(Address of principal executive offices) (Zip Code)
(605) 578-1294
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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-KSB/A or any amendment to
this Form 10-KSB/A. [ X ]
State issuer's revenues for its most recent fiscal year: $5,633,146
The aggregate market value of registrant's voting $.0001 par value common stock
held by non-affiliates of the registrant, as of March 22, 1996, was:
$21,005,495.
The number of shares outstanding of registrant's $.0001 par value common stock,
as of March 22, 1996, was 10,533,078 shares.
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The following items of the Registrant's Form 10-KSB for the year ended December
31, 1995 are hereby amended to read in their entirety as follows:
Item 1. Description of Business
Recent Developments
The Company has determined that continued ownership of a resort in a
mountain area with limited-stakes gaming is not consistent with maximization of
the business opportunities available to the Company. It has therefore determined
to focus its gaming activities in areas of higher population density and
locations at which applicable regulations permit high-stakes and expanded types
of gaming. On April 9, 1996, the Company signed a non-binding letter of intent
for the purchase of the Deadwood Gulch Resort by RGB Deadwood Gulch L.L.C.
Although negotiations for the sale of the Resort to RGB Deadwood Gulch L.L.C.
terminated on May 15, 1996, the Company is still actively marketing the Resort
for sale. From the time of acquisition by the Company through the end of the
first quarter of 1996, the Resort has a cumulative operating deficit of
approximately $3.80 million. In addition, through such date, the Company has
recognized an impairment loss of $3.35 million. Any sale will be subject to
approval by the Company's stockholders and a finding by the South Dakota
Commission on Gaming that the purchaser is suitable to obtain a gaming license
in South Dakota. There can be no assurance that a sale will ultimately be
consummated. The Company intends to continue to operate the Resort in accordance
with past practice while attempting to consummate a sale.
Background
Full House was incorporated in the State of Delaware as Hour Corp. on
January 5, 1987 and changed its name to D.H.Z. Capital Corp. on June 1, 1987. On
July 17, 1992, Full House entered into a Letter of Intent with Deadwood Hotel
Joint Venture, a South Dakota joint venture ("DHJV") and the owner of the
Deadwood Gulch Resort, regarding the recapitalization of Full House and the
acquisition of DHJV. On September 2, 1992, the Company's name was changed to
Full House and the Company completed a 1 for 200 reverse stock split of its then
outstanding 99,930,000 shares of common stock, resulting in 499,650 shares
outstanding. At the same time, Full House's authorized capitalization was
changed to 25,000,000 shares of $.0001 par value common stock (the "Common
Stock") and 5,000,000 shares of $.0001 par value preferred stock (the "Preferred
Stock").
On November 20, 1992, Full House, through the issuance of 4,901,850
shares of Common Stock and 1,000,000 shares of Series 1992-1 Preferred Stock,
acquired Deadwood Gulch Resort and Gaming Corp., which, as a result of a
restructuring among the joint venturers of DHJV, had become the owner of the
assets of the joint venture. On August 17, 1993, Full House completed a
registered public offering of units, each consisting of three shares of its
Common Stock and a warrant (the "Warrant") entitling the holder to purchase, for
$5.00, one additional share of Common Stock during the period between August 10,
1994 and August 9, 1996 for gross proceeds of $8,000,000. The net proceeds to
Full House after payment of costs and expenses were $6,742,781.
In connection with the public offering, Full House entered into an
Agreement to Provide and Accept Commitment to Restructure First and Second
Mortgage Loans ("Mortgage Restructuring Agreement"). In accordance with such
Agreement and upon the closing of the public offering and receipt of the
proceeds, two notes were issued in the amounts of $2,500,000 and $1,250,000. The
notes required the payment of interest only at the rate of 12% for one year from
the date of funding, payable monthly in arrears. Although the majority of the
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funds needed were obtained from offering proceeds, an $8,000,000 line of credit
provided to Full House through an agreement with Allen E. Paulson (the Chairman
of the Board of Directors of Full House) enabled Full House to repay the
$2,500,000 note on March 14, 1994. In August, 1994, Full House began monthly
payments of principal and interest on the other note which was held by H. Joe
Frazier, a director of Full House until January, 1996. The entire principal
balance was repaid on May 31, 1995.
Full House has been actively engaged in the process of identifying
business opportunities in the gaming industry to expand its base and has
determined that opportunities exist through the establishment of agreements with
Indian Tribes.
In addition to recognizing the need to expand its gaming operations,
Full House had previously determined to expand into other activities not
directly dependent upon gaming. On May 6, 1995, Full House entered into a letter
of intent with Branson W.R. Productions, Inc. ("Branson W.R.") to merge Branson
W.R. with Full House or a wholly-owned subsidiary of Full House (the "Branson
Transaction"). However, after commencing its due diligence investigation, Full
House determined not to proceed with the Branson Transaction.
Although the Branson Transaction was not completed, during the course
of the negotiations in May 1994, Lee Iacocca, one of the principals of Branson
W.R., brought to the attention of Full House management certain opportunities to
enter into gaming agreements. Specifically, Mr. Iacocca advised Full House of
his negotiations, together with Omega Properties, Inc. ("Omega"), with certain
Indian Tribes (the "Organized Tribes") regarding the development of a gaming
operation in the Detroit, Michigan metropolitan area. Mr. Iacocca also advised
Full House of the ongoing discussions with a second Indian Tribe in Michigan
(the Nottawaseppi Huron Band of Potawatomi), a tribe in southern California (the
Torres Martinez Desert Cahuilla) and a project at the Delaware State
Fairgrounds. In each case, the other parties had entered into discussions with
Mr. Iacocca based upon their perception of his integrity and ability to
facilitate completion of the proposed transactions. Mr. Iacocca had conducted
these negotiations through LAI Associates, Inc. ("LAI"), a corporation owned by
him.
In addition, LAI owned a 25% interest in a total of 21 acres in
Branson, Missouri, consisting of a 1.75 acre parcel ("Parcel 15"), a 7.76 acre
site ("Parcel 16") and an 11.51 acre site ("Parcel BB") (collectively, the
"Branson Real Estate") and a 50% interest in royalties receivable pursuant to an
agreement (the "Royalty Agreement") which provided for receipt by LAI of $100
per apartment unit (2,353 units) and $250 per residential ownership unit (951
units) sold after October 25, 1993 in Branson Hills, a mixed use planned
community located in Taney County, Missouri.
Following extensive discussions with the principals of LAI and Omega,
Full House determined that a merger transaction involving Full House, LAI and
Omega would provide Full House with the advantages of both the real estate
development opportunities in Branson and the opportunity to develop the gaming
and commercial nongaming activities, the rights to which were held by LAI and
Omega. During these negotiations, the parties agreed that the shareholders of
LAI would receive 1,250,000 shares of Full House Common Stock and that the
shareholders of Omega would receive 500,000 shares and a promissory note of Full
House in the principal amount of $375,000. This decision was based upon Full
House's determination that access to these four projects was only available
through a merger with LAI and Omega.
Full House further concluded that a merger would facilitate access to
additional projects into which it desired to expand as a result of an
association with both Mr. Iacocca and John Fugazy, who, together with William P.
McComas, a director and stockholder of Full House, owned the outstanding shares
of Omega. Thus, Full House determined that an arrangement pursuant to which
Messrs. Iacocca and Fugazy would receive shares of Full House Common Stock was
an appropriate means of both acquiring the rights of Omega and LAI to the
<PAGE>
subject projects, but also provided the possibility of promoting their
continuing association with Full House by aligning their interests with those of
the other stockholders of Full House. There is, however, no agreement requiring
continuing efforts by Messrs. Iacocca or Fugazy and there can be no assurance
that they will perform any further activities on behalf of Full House. As Omega
and LAI were then engaged in active negotiations of these opportunities, Full
House does not believe that the rights to these projects could have been
obtained by utilizing current employees or other agents available to it.
Accordingly, on August 18, 1994, pursuant to a May 1994 letter of
intent, Full House entered into a Merger Agreement (the "Merger Agreement") with
Full House Subsidiary, Inc. ("FHS"), LAI and Omega Properties, Inc. (30% owned
by William P. McComas, a director and stockholder of Full House) whereby these
entities were to merge with FHS, a newly formed subsidiary of Full House. In
exchange, the entities were to receive 1,750,000 shares of common stock of Full
House and a note from Full House for $375,000 bearing interest of the "Prime
Rate" of Bank of America, N.A. and due on demand, but in no event prior to
August 31, 1996. Although, Full House entered into a Purchase Agreement with Mr.
McComas on the same date, to purchase a portion of the assets originally
included in the May 1994 letter of intent in exchange for a $625,000 note from
Full House this portion of the transaction was not consummated and the note was
not issued .
Subsequently, the parties determined that it was in their best
interests to proceed with the merger with LAI prior to consummating the merger
with Omega. On March 23, 1995, the parties amended the Merger Agreement and the
Merger between LAI and FHS was consummated on the same date.
Swan Valuation Group, Inc., an independent organization, valued 100%
interests in Parcel 15 at $270,000, Parcel 16 at $1,090,000 and Parcel BB at
$1,510,000 and a 100% interest in the Royalty Agreement at $210,000. Based upon
these appraisals, Full House valued the 25% interest of LAI in the Branson Real
Estate at $717,500 and the 50% interest of LAI in the Royalty Agreements at
$105,000. Swan Valuation Group was selected by Full House based upon its
experience in real estate appraisals in the Branson, Missouri area and was
utilized to assist the Board of Directors of Full House in determining the total
value of all of the assets of LAI. The appraisal of the real property is based
upon a sales comparison approach and assumes completion of certain roads and
utilities to the Hotel Site which was expected in 1997. The value of the Royalty
Agreement was based upon a sell-out period of 25 to 26 years for the real estate
units, a 15% discount rate and the full performance of the applicable contract
by all parties.
The balance of the value of the Full House Common Stock issued in
connection with the LAI Merger was allocated to LAI's interest in the agreements
with the Organized Tribes (55%), the Nottawaseppi Huron Band of Potawatomi
(55%), the Torres Martinez Desert Cahuilla Indians (50%) and the Delaware State
Fair, Inc. (50%) described below. (The balance of the interests in these
agreements was owned by Omega.) Based on the Company's analyses of estimated
fair values of such agreements, primarily developed through discounted cash flow
projections of the proposed projects, $3,111,571 of the purchase price was
allocated to gaming agreements. Although certain of these agreements were not
executed until after the LAI Merger, negotiations were under way and agreement
in principle had been reached prior to the Merger. Full House management does
not believe that it would have been able to enter into such agreements in the
absence of its relationship with LAI. Other assets consist of the royalty
interest discussed above and the value that the Company perceives to be obtained
through the association of Lee Iacocca with the Company as a major stockholder.
The remainder of the purchase price of $1,534,064 was allocated to these other
assets. Prior to the merger with Full House, Omega owned a 45% interest in the
transactions with the Organized Tribes and the Nottawaseppi Huron Band of
Potawatomi and a 50% interest in the transactions with the Torres Martinez
Desert Cahuilla Indians and the Delaware State Fair, Inc.
<PAGE>
On March 23, 1995, the date of the Merger between FHS and LAI, Full
House Common Stock was trading on the NASDAQ Small-Cap Market at $5-3/8.
Although Full House valued the shares at $4.25 each based upon its valuation of
the assets received by Full House in the LAI Merger as described above, the
shares are "restricted securities" as such term is defined in Rule 144 under the
Securities Act of 1933, as amended, and, based upon the fact that "restricted
securities," as a general rule, must be held for at least two years prior to
sale and then may be sold only in limited quantities, Full House believes that
the valuation bears an appropriate relationship to the market price of freely
trading shares.
The parties again amended the Merger Agreement as of June 30, 1995 to
provide that, rather than Omega merging into FHS, the subsidiary of Full House
into which LAI was merged, a new wholly-owned subsidiary of Full House, Full
House Joint Venture Subsidiary, Inc. ("Full House Sub"), would be merged into
Omega. The merger was effected on November 20, 1995. In exchange, the
shareholders of Omega received an aggregate of 500,000 shares of Full House
Common Stock and a promissory note of Full House in the principal amount of
$375,000. The principal amount of this promissory note accrues interest, payable
quarterly, at a rate equal to the "prime" rate and such principal amount,
together with all accrued interest, is due and payable in full upon demand by
the holder(s) of this note, but in no event before August 31, 1996. William P.
McComas received the note and the other stockholder of Omega received the shares
in exchange for their interests as shareholders of Omega. As a result of such
merger, Full House obtained the remaining 45% interests in the agreements with
the Organized Tribes and the Nottawaseppi Huron Band of Potawatomi and the
remaining 50% interests in the agreements with the Torres Martinez Desert
Cahuilla Indians and the Delaware State Fair.
In determining the consideration paid as part of the LAI and Omega
Mergers, Full House evaluated all of the potential benefits to be obtained and
risks associated with successful completion of such transaction, including the
value of the association of Lee Iacocca as a major stockholder. Therefore, the
Merger Agreement did not assign a specific value to each gaming project and
provide for a reduction in price if the need for approvals or other obstacles
prevent the completion of the project. Management of Full House believes that
the consideration paid as part of the Merger was fair.
The Omega transaction was accounted for as a purchase valued at
$2,561,007. The purchase price has been allocated to the following assets and
liabilities, based on their estimated relative fair values: cash $3,913; gaming
agreements $2,575,367; other assets $578; and accrued expenses $(18,851). The
gaming agreements were valued, as of March 23, 1995, by discounting to then
present value the estimated future after tax cash flow for the proposed ventures
and by applying a further discount based upon the expected likelihood of
successfully developing the projects. In making this determination, Full House
estimated the cash needs, the income and the cash flow related to its agreements
with the Organized Tribes (the "Organized Tribes Agreement") and the
Nottawaseppi Huron Band of Potawatomi (the "Nottawaseppi Agreement"). Through
the use of these forecasts and an after-tax discount rate, Full House valued the
Organized Tribes Agreement and the Nottawaseppi Agreement at $28 million and $37
million, respectively. The after-tax discount rate used was 13.8 percent. This
rate was derived through use of the capital asset pricing model and/or the
weighted average cost of capital model. Full House further reduced the above
valuations by applying a "success factor" to account for the possibility that
performance under the Organized Tribes Agreement and the Nottawaseppi Agreement
would not occur on schedule due to the failure to receive or delays in the
receipt of certain approvals. Although the actions of the Governor of Michigan
with respect to off reservation gaming have resulted in Full House writing off
the value of the Organized Tribes Agreement. Full House believes that
such action has increased the value of the Nottawaseppi Agreement. Full House
believes that the increase in the value of the Nottawaseppi Agreement, together
with the value of the other agreements discussed above, supports the amount
attributed to the gaming agreements.
<PAGE>
On June 30, 1995, the date of the last amendment to the Merger
Agreement, Full House Common Stock was trading on the Nasdaq Small-Cap Market at
$6 per share. Full House has valued the shares of Full House Common Stock
delivered to the Omega shareholders at $4.25 each. Although Full House reached
this valuation based upon its valuation of the assets to be received by Full
House in the Omega Merger, Full House believes that the valuation bears an
appropriate relationship to the market value of freely trading shares based upon
the fact that the shares will be "restricted securities" as such term is defined
in Rule 144, which shares, as a general rule, must first be held for at least
two years after their issuance before sales are permitted and then may be sold
only in limited quantities and further based on the number of shares issued in
the transaction.
In late 1995, Full House was named as a defendant in a lawsuit in Taney
County, Missouri, as a result of its acquisition (through the merger of its
wholly-owned subsidiary with LAI) of an interest in the Branson Real Estate and
Royalties. After negotiations with Mr. Iacocca, in March 1996 Mr. Iacocca
accepted the reconveyance of the interests in the Branson Real Estate and
Royalties in exchange for 193,529 shares of Common Stock to Full House which the
Company believes had a value equal to the appraised value of the surrendered
interests in the Real Estate and Royalty Agreement. Such action was intended to
minimize the Company's exposure to the litigation.
Full House's executive offices are located at Suite 380, 12555 High
Bluff Drive, San Diego, California 92130, telephone (619) 350-2030.
GTECH Relationship
Full House entered into a series of agreements with GTECH Corporation,
a wholly-owned subsidiary of GTECH Holdings Corporation, a leading supplier of
computerized on-line lottery systems and services for government-authorized
lotteries ("GTECH"), to jointly pursue all existing (except the Deadwood Gulch
Resort) and future gaming opportunities. Although the agreements were dated as
of December 29, 1995, the parties agreed to share equally in the equity
investment, financing responsibility and in revenues and expenses of each
project commencing April 1, 1995. The shares of GTECH Holdings Corporation are
listed on the New York Stock Exchange and according to its published financial
statements, GTECH Holdings Corporation had a net worth of $297 million as of
February 24, 1996. No officers or directors of the Company are affiliates of
GTECH. Pursuant to the agreements, joint venture corporations equally owned by
GTECH and Full House have been formed. Full House has contributed its rights (as
described below) to the North Bend, Oregon facility and the rights to develop
the Torres Martinez and Delaware State Fair Projects to the joint venture
companies. Full House has agreed, subject to further discussions with the
Nottawaseppi Huron Band of Potawatomi and with Green Acres Casino Management,
Inc., the holder of a 15% interest in that gaming contract, to assign to a joint
venture company its rights to develop a project with such Tribe. If the
assignment is not completed, Full House will assign its rights to revenues and
GTECH will share equally in the revenues and related expenses with Full House.
In payment for its interest in the joint venture companies, GTECH has
contributed cash and other intangible assets to the companies and committed to
loan the joint venture entities up to $16.4 million to complete the North Bend,
Oregon and Delaware facilities. Full House has agreed to guarantee one-half of
the obligations of the joint venture companies to GTECH under these loans and at
June 1, 1996 had guaranteed to GTECH one-half of $10.4 million of such loans to
the North Bend, Oregon joint venture company. GTECH has also agreed to make
loans to Full House for its portion of the financing of projects if Full House
is unable to otherwise obtain financing. GTECH will also provide project
management, technology and other expertise to analyze and develop/manage the
implementation of opportunities developed by the joint venture entities. GTECH
has also loaned Full House $3 million, which loan is convertible, subject to
regulatory approval into 600,000 shares of Full House's Common Stock. In
<PAGE>
addition, Full House has been reimbursed by one of the joint venture companies
for certain advances and expenditures made by Full House relating to the gaming
development agreements. As part of this transaction, the directors of Full House
and Lee Iacocca have granted to GTECH an option to purchase their shares should
they propose to transfer the same.
Set forth below is a brief description of each of the gaming
opportunities which have been or will be transferred to the limited liability
companies which are equally owned by Full House and GTECH.
North Bend, Oregon Facility.
On May 19, 1995, the first phase of the facility known as the "Mill"
was opened with 250 video lottery terminals (366 as of December 31, 1995), six
blackjack tables, three poker tables, a gift shop and a snack bar on Tribal
Trust Lands of the Coquille Indian Tribe in North Bend, Oregon. A Full House -
GTECH joint venture entity leases approximately 12.5 acres of Tribal Trust Lands
from an entity owned by the Coquille Indian Tribe on which the Mill is located
and subleases a portion of the land on which the casino is located back to the
same entity. The master lease expires in 2019 and the sublease expires in 1999
with options to renew.
On July 19, 1995, an addendum to the agreement with the Coquille Indian
Tribe was signed by Full House and GTECH. The addendum will reduce the
obligations of the joint venture entity to provide financing to $10.4 million,
extend the date when repayments begin and modify the method of computing
participating rents and loan repayments. Lease and debt payments commenced on
August 19, 1995 and September 19, 1995, respectively. As of December 31, 1995,
approximately $10.5 million had been advanced for the project. The indebtedness
is to be repaid over a seven-year period and the right of recovery is limited to
revenues and personal property at the facility. As of December 31, 1995, the
Tribe had repaid $330,921 of this indebtedness.
The Mill is located in North Bend, Oregon on the Port of Coos Bay. The
Coos County population in 1994, which includes the Bay area, was 62,800. The Bay
area's economy is primarily based on forestry and fishing. Oregon's Coos Bay
area is located on the Pacific Coast midway between San Francisco, California
and Seattle, Washington. The communities of Coos Bay, North Bend and Charleston
are approximately 115 miles from Eugene, Oregon's second largest city. The North
Bend Municipal Airport is Southwestern Oregon's regional air terminal that
provides commercial air service to and from Portland.
The Mill Casino is one of six Indian casinos presently operating in
Oregon. The closest competing casino is located approximately 90 miles from
North Bend and operates 230 devices, a card room, bingo and keno. The other
casinos are located approximately 140, 160, 265 and 435 miles from North Bend.
The two facilities which are 140 and 160 miles from North Bend are located
closer to Portland, Oregon. Full House believes that there are three other
Indian Casinos presently being contemplated in Oregon.
Delaware State Fair.
On January 31, 1996, a company 50% owned by each of Full House and
GTECH entered into agreements with the Delaware State Fair, Inc. and Harrington
Raceway, Inc. to develop video lottery terminals at the Delaware State
Fairgrounds in Harrington, Delaware. Legislation enacted by the Delaware State
Legislature permits the installation of video lottery, coin-operated slot
machines at existing pari-mutuel track facilities in Delaware. Owned by the
Delaware State Fair, Inc. and located near Dover, Delaware and Baltimore,
Maryland, the Harrington Raceway has been in continuous existence since 1945 and
is the home of the Delaware State Fair. Under the agreements, the joint venture
company will advance a total of up to $9 million (including $150,000 previously
<PAGE>
advanced) to be used for improvements. The gaming facility will contain 500
gaming devices.
Organized Tribes.
Pursuant to a September 16, 1994, an agreement with the Organized
Tribes in the State of Michigan, Full House obtained the right to pursue
off-reservation gaming and related non-gaming activities. On June 28, 1995, the
Governor of the State of Michigan determined to prohibit off-reservation gaming
in the State of Michigan. As a result of this action and reimbursement of
certain costs to Full House by GTECH, Full House wrote off project costs of
$1,867,730 in 1995.
Nottawaseppi Huron Band of Potawatomi.
Full House entered into a series of agreements in January, 1995, with
the Nottawaseppi Huron Band of Potawatomi, another Michigan Indian Tribe, to
develop gaming and non-gaming commercial opportunities for that Tribe and to
construct and manage Class II and Class III gaming facilities. The Tribe's state
reservation lands are located in Southcentral Michigan. If developed, the
facility will target the Ft. Wayne, Indiana and Lansing and Detroit, Michigan
metropolitan areas. The Tribe recently received federal recognition as a tribe
from the Bureau of Indian Affairs. The Tribe intends to apply to have its
existing State reservation land as well as additional land in its ancestral
territory taken into trust by the Bureau of Indian Affairs. The agreements give
Green House Management, Inc., an entity 85% owned by Full House, the exclusive
right to provide financing and casino management expertise to the Tribe in
exchange for a defined percentage of net profits and certain other
considerations from any future gaming or related activities of the Tribe. The
agreements and commencement of gaming are subject to all applicable federal and
state approvals. Although there can be no assurance that all approvals will be
obtained, unlike the Detroit project with the Organized Tribes, which required
special approvals, there are existing Indian casinos located on Tribal Trust
Lands already operating in Michigan. Full House believes that the recent
prohibition of off-reservation gaming in Michigan enhances the potential of this
relationship. No recognized tribe has reservation lands located within the
targeted area. As noted above, subject to further discussions, Full House has
agreed to assign the rights to these agreements to a Full House-GTECH joint
venture company. In the absence of assignment, Full House will assign its rights
to revenues and GTECH will share equally in the revenues and related expenses
with Full House.
Torres Martinez.
On April 21, 1995, Full House entered into a Gaming and Development
Agreement with the Torres Martinez Desert Cahuilla Indians. The agreement grants
Full House certain rights to develop, manage and operate gaming activities for
the Tribe and the right to receive 40% of the net revenues from gaming
activities subject to the obligation of Full House to pay the costs of the same.
For all non-gaming activities, Full House is to provide 50% of the financing for
develop ment and will receive 50% of the net revenues from said activities,
subject to the obligation of Full House to lend funds to the Tribe prior to
commencement of gaming operations. On April 23, 1995, Full House and the Tribe
entered into a Gaming Management Agreement further defining Full House's and the
Tribe's rights and obligations under the Gaming and Development Agreement. As
noted above, the rights to these agreements have been assigned to a Full
House-GTECH joint venture company.
Deadwood Gulch Resort.
Full House operates Deadwood Gulch Resort in Deadwood, South Dakota.
The Deadwood Gulch Resort consists of a 56-acre complex which includes a 97-room
hotel with three small casinos, a freestanding restaurant and saloon, a
<PAGE>
freestanding conference center, a convenience store/gas mart, a recreational
vehicle park and campground and the Gulches of Fun family center (which was
completed in July 1994). DGR's hotel casinos occupy 1,575 square feet and the
Gulches of Fun occupies 2,400 square feet. Full House currently operates 95 slot
machines, two blackjack tables and three video lottery devices within the resort
complex.
Description of Resort. Deadwood is located in western South Dakota,
approximately 50 miles northwest of Rapid City and had a population of 1,800 in
1990. Deadwood originated in the 1870's with the discovery of gold nearby and
was the home of numerous gambling establishments, saloons and brothels, serving
the gold miners and prospectors. Statehood in 1889 brought constitutional
prohibitions against gambling. South Dakota amended its constitution to permit
limited gambling exclusively in Deadwood, commencing on November 1, 1989.
Full House's management estimates that a large proportion of its
customers at Deadwood Gulch Resort are derived from the tourists, primarily
families, who visit Deadwood, South Dakota. Many of these tourists are attracted
to the Black Hills area of South Dakota and the Mount Rushmore National
Memorial. Since the Deadwood Gulch Resort significantly relies on the tourist
trade, business at Deadwood Gulch Resort has tended to be seasonal.
Approximately 58% of the operating revenues (net of promotional allowances) for
the year ended December 31, 1995 were received in the four-month period from
June through September. While business probably will remain somewhat seasonal,
Deadwood Gulch Resort has attempted to market itself as a year-round destination
resort by attracting tourists who use the Black Hills for winter recreation such
as skiing and snowmobiling. Deadwood Gulch Resort is principally marketed
through printed brochures and advertising, billboards, radio, television and
direct mail promotions within a 600 mile market radius of Deadwood, South
Dakota, including the States of South Dakota, North Dakota, Wyoming, Colorado,
and Iowa, and the Province of Saskatchewan, Canada. In addition, Deadwood Gulch
Resort promotes group travel, including charter bus tours and gaming junkets,
utilizing independent travel agents, and trade and travel advertising. Deadwood
Gulch Resort also promotes periodic gaming tournaments and features
entertainment during selected periods.
The initial Phase 1 facilities, including the hotel/casino,
restaurant/saloon, convenience store/gas mart, and outdoor pool/recreation area,
opened for business beginning in late July, 1990. An 8,000 square foot freestand
ing conference center facility, adjacent to the existing complex, was completed
in September, 1991. The complex has parking available for 267 cars, and 6
recreational vehicles or buses.
Construction of Phase 2 of the Resort Complex, a Recreational Vehicle
Campground, was completed in July 1994. There are currently 92 RV sites of which
90 are full service and an additional 30 tent sites. Although Phase 3 had
originally been designated to be a convention center hotel, as a result of a
1993 general election repealing legislation which would have permitted an
increase in gaming devices at the new hotel, Full House developed the Gulches of
Fun family center in 1994. The project includes an 18-hole miniature golf
course, a go-kart track, bumper boat pond, batting cages, kiddie playland and
rides and arcade and redemption games.
The following table sets forth the percent of total operating revenues
(net of promotional allowances) generated by the Deadwood Gulch Resort Casino,
Hotel/RV, Retail, Food and Beverage and Gulches of Fun operations for the
indicated periods.
<PAGE>
<TABLE>
<CAPTION>
Percent of Total Operating
Revenues
Year Ended December 31,
--------------------------
Revenue Source 1994 1995
---- ----
<S> <C> <C>
Casino ....................................... 29% 27%
Hotel/RV ..................................... 26 26
Retail ....................................... 22 22
Food and beverage ............................ 10 10
Gulches of Fun ............................... 13 15
-- --
100% 100%
=== ===
</TABLE>
Since the commencement of the Resort's gaming operations, most of its
gaming revenues have been derived from its operation of slot machines. For the
years ended December 31, 1994 and 1995, 92% and 95%, respectively, of the
Resort's gaming revenue was from slot machines. The remainder was from
blackjack.
The following table sets forth the average hotel occupancy rate for
Deadwood Gulch Resort for the indicated periods.
Average Hotel Occupancy Rate
Year Ended December 31,
----------------------------
1994 1995
---- ----
71% 63%
The following table sets forth the average daily hotel room rate for
Deadwood Gulch Resort for the indicated periods.
Average Daily Hotel Room Rate
Year Ended December 31,
-----------------------------
1994 1995
---- ----
$52.34 $56.85
Competition. Gaming operations at the Deadwood Gulch Resort are in
competition with a significant number of existing and proposed gaming operations
in South Dakota and Colorado, many of which are, or will be, owned or operated
by organizations which are significantly better capitalized than Full House,
which have or may have significantly larger facilities, and which may employ
personnel who have more experience in the gaming industry than those currently
employed, or proposed to be employed, by Full House. In addition, the Resort is
in competition with other businesses which provide opportunities for gambling,
such as racetracks and lotteries, or which provide entertainment which may
divert the spending of discretionary income from gaming activities. Furthermore,
<PAGE>
the gaming industry is expanding rapidly, with more establishments competing for
a customer base which may not be expanding as rapidly, if at all.
Gaming may be legally conducted in accordance with the South Dakota
Gaming Act by licensed operators in the City of Deadwood, South Dakota, and may
also be conducted by American Indian Tribes located in South Dakota under the
Federal Indian Gaming Regulatory Act of 1988. As of December 31, 1995 there were
89 licensed gaming establishments in Deadwood which operated approximately 2,220
slot machines and 69 table games, including poker and blackjack. The revenues
derived from the Resort's gaming operations accounted for approximately 3.7% and
3.1% of all gaming revenues in Deadwood, South Dakota for 1994 and 1995, respect
ively. Factors which affect gaming competition in Deadwood are location in
relation to Deadwood's historic main street, proximity to motel rooms and
parking, and the ability to serve alcoholic beverages. Six gaming locations in
Deadwood offer a full range of alcoholic beverages, including Deadwood Gulch
Resort. Gaming in Deadwood is conducted primarily in establishments along a four
block long area on historic main street. Deadwood Gulch Resort is approximately
one mile south of this highly concentrated area, which may limit the pedestrian
traffic which passes Deadwood Gulch Resort. Full House's principal competitors
in Deadwood are the Mineral Palace, First Gold Hotel, the Franklin Hotel, the
Bullock Hotel, the Gold Dust Casino, the Silverado Casino and the Four Aces
Casino. In addition, a well known actor and others have commenced construction
of a large, upscale resort near the north entrance to Deadwood. Additional
groups of investors have also proposed other resorts for the north entrance to
Deadwood. No construction has commenced on these projects. Such resorts, if
completed, may have significantly larger facilities, including hotel and meeting
rooms, entertainment facilities, and more gaming devices than Deadwood Gulch
Resort and would likely offer significant direct competition for Deadwood Gulch
Resort.
While Deadwood Gulch Resort may also be in competition with gaming
operations conducted by American Indian Tribes at or near Watertown, Flandreau,
Fort Randall, Pine Ridge and Lower Brule, South Dakota, all of these locations
are 250 miles or more from Deadwood, except for Pine Ridge, which is
approximately 100 miles from Deadwood. Although all operations in Deadwood, and
three of the four American Indian operations currently are subject to $5.00 bet
limits by law, the Sisseton Wahpeton Sioux Tribe at Watertown, South Dakota, 400
miles from Deadwood, is permitted to have up to $100 bet limits. In addition,
there are three other Indian tribes with reservations located within 100, 150
and 200 miles, respectively, from Deadwood, that could establish gaming
operations in the future.
Deadwood Gulch Resort is also in competition with establishments
throughout the State of South Dakota holding beer and wine licenses or liquor
licenses, which may operate up to 10 "video lottery" gaming devices per
establishment. The video lottery devices allow customers to play electronic
versions of blackjack, poker, keno and bingo. Full House believes that there are
approximately 8,000 such video lottery devices installed in the State of South
Dakota. Full House currently operates three video lottery devices.
Route Operation Agreement. Beginning with the opening of the Gulches of
Fun family center in July of 1994 and continuing through June 30, 1995, the
Company had a route operation agreement to place 60 of the Company's gaming
devices, under two retail licenses, in its Gulches of Fun family center. Under
the Agreement, the Company paid the operator a net fee of $5,000 per month and
bore all expenses related to the operation of the gaming devices. For the period
from opening of the family center through December 31, 1994, this route
operation agreement generated $560,365 in gaming revenues. For the period
January 1 through June 30, 1995, the route operation agreement generated
$212,194 in gaming revenues. On July 1, 1995, the Company transferred one of its
retail gaming licenses from its convenience store/gas mart to its Gulches of Fun
family center and terminated the route operation agreement with the prior
operator. Also on July 1, 1995 the Company entered into a route operation
<PAGE>
agreement with a new operator to place eight of the Company's gaming devices in
its convenience store/gas mart and pay him 5% of the net profit from the
machines.
Full House intends to seek additional such route operation agreements
in the future. However, there can be no assurance that Full House will be
successful in obtaining any such additional route operation agreements on terms
acceptable to Full House.
Fuel Supply Agreement. DGR purchases its requirements of various fuels
for use and sale at its gas mart. The current term of the agreement is through
June, 1996, and is renewable thereafter from year to year, provided that DGR may
cancel the agreement at the end of any such year by giving at least 30 days
prior written notice. In addition, the supplier may cancel the agreement at any
time on 10 days prior written notice. DGR pays $.01 per gallon above the
supplier's Rapid City, South Dakota posted Conoco prices, plus the then current
published freight charges from Rapid City to Deadwood. DGR has agreed to comply
with the brand and image/signage standards established for Conoco-branded retail
outlets.
Government Regulation.
The ownership and operation of a gaming business by Full House,
wherever conducted in the United States, will be subject to extensive and
complex governmental regulation and control under federal, state and/or local
laws and regulations.
Indian Gaming. Gaming on Indian Lands (lands over which Indian tribes
exercise jurisdiction and which meet the definition of Indian Lands under the
Indian Gaming Regulatory Act of 1988 ("IGRA")) is extensively regulated by
federal, state and tribal governments. The current regulatory environment
regarding Indian gaming is evolving rapidly. Changes in federal, state or tribal
law or regulations may limit or otherwise affect Indian gaming or may be applied
retroactively and could therefore have a material, adverse effect on the Company
or its operations.
The terms and conditions of management contracts and collateral
agreements, and the operation of casinos on Indian Land, are subject to IGRA,
which is implemented by the National Indian Gaming Commission (the "Gaming
Commission"), and also are subject to the provisions of statutes relating to
contracts with Indian tribes, which are overseen by the Secretary of the U.S.
Department of the Interior (the "Secretary"). IGRA is subject to interpretation
by the Secretary and the Gaming Commission and may be subject to judicial and
legislative clarification or amendment. Under IGRA, the Gaming Commission has
the power to inspect and examine certain Indian gaming facilities, to conduct
background checks on persons associated with Indian gaming, to inspect, copy and
audit all records of Indian gaming facilities, and to hold hearings, issue
subpoenas, take depositions, and adopt regulations in furtherance of its
responsibilities. IGRA authorizes the Gaming Commission to impose civil
penalties for violations of the IGRA or the regulations promulgated thereunder
(the "Regulations"), including fines, and to temporarily or permanently close
gaming facilities for violations of the law or the Regulations. The Department
of Justice may also impose federal criminal sanctions for illegal gaming on
Indian Lands and for theft from Indian gaming facilities.
IGRA also requires that the Gaming Commission review tribal gaming
ordinances and approve such ordinances only if they meet certain requirements
relating to the ownership, security, personnel background, recordkeeping, and
auditing of the tribe's gaming enterprises; the use of the revenues from such
gaming; and the protection of the environment and the public health and safety.
<PAGE>
IGRA also regulates Indian gaming management contracts, requiring the
Gaming Commission to approve management contracts and collateral agreements,
which include agreements such as promissory notes, loan agreements and security
agreements. A management contract can be approved only after determination that
the contract provides for: (i) adequate accounting procedures and verifiable
financial reports, which must be furnished to the tribe; (ii) tribal access to
the daily operations of the gaming enterprise, including the right to verify
daily gross revenues and income; (iii) minimum guaranteed payments to the tribe,
which must have priority over the retirement of development and constructions
costs; (iv) a ceiling on the repayment of such development and constructions
costs; and (v) a contract term not exceeding five years and a management fee not
exceeding 30% of profits if the Chairman of the Gaming Commission determines
that the fee is reasonable considering the circumstances; provided that the
Gaming Commission may approve up to a seven year term and a management fee not
to exceed 40% of net revenues if the Gaming Commission 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 IGRA, the Company must provide the Gaming Commission with
background information on each person with management responsibility for a
management contract, each director of the Company and the ten persons who have
the greatest direct or indirect financial interest in a management contract to
which the Company is a party (an "Interested Party"), including a complete
financial statement and a description of such person's gaming experience. Such a
person must also agree to respond to questions from the Gaming Commission.
The Gaming Commission will not approve a management company and may
void an existing management contract if a director, key employee or an
Interested Party of the management company is (i) an elected member of the
Indian tribal government that owns the facility being managed; (ii) has been or
is convicted of a felony or misdemeanor gaming offense; (iii) has knowingly and
wilfully provided materially false information to the Gaming Commission or a
tribe; (iv) has refused to respond to questions from the Gaming Commission; or
(v) 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. In addition, the
Gaming Commission will not approve a management contract if the management
company or any of its agents has attempted to unduly influence any decision or
process of tribal government relating to gaming, or if the management company
has materially breached the terms of the management contract, or the tribe's
gaming ordinance, or, if a trustee, exercising the skill and diligence to which
a trustee is commonly held, would not approve such management contract.
IGRA 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 IGRA. 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
parimutuel wagering).
Class II Gaming is permitted on Indian Land if conducted in accordance
with a tribal ordinance which has been approved by the Gaming Commission and the
state in which the Indian Land is located permits 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 conditions
applicable to Class II Gaming are met and, in addition, if the gaming is
<PAGE>
conducted in compliance with the terms of a written agreement between the tribe
and the host state. IGRA requires states to negotiate in good faith with Indian
tribes that seek to enter into tribal-state compacts, and grants Indian tribes
the right to seek a federal court order to compel such negotiations. The
negotiation and adoption of tribal-state compacts is susceptible to daily legal
and political developments that may impact the Company's future revenues and
securities prices. The Company 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 IGRA, 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 the Company, are subject to the provisions of tribal
ordinances and regulations on gaming.
The Gaming Commission has determined that provisions of IGRA relating
to management agreements do not govern the current operations of Full House in
North Bend, Oregon.
Tribal-State Compacts have been the subject of litigation in several
states, including California. Among the issues being litigated is the
constitutionality of the provision of IGRA that entitles tribes to sue in
federal court to force states to negotiate Tribal-State Compacts. On March 27,
1996, the United States Supreme Court ruled that the portion of IGRA permitting
tribes to sue states for failing to negotiate in good faith over compacts was
unconstitutional. In addition, several bills have been introduced in Congress
which would amend IGRA. If IGRA were amended, the amendment could change the
governmental structure and requirements within which Indian tribes may conduct
gaming.
South Dakota. The ownership and operation of a gaming business in South
Dakota is subject to gaming laws established by the State of South Dakota (the
"South Dakota Laws"), and regulations (the "South Dakota Regulations")
promulgated by the South Dakota Commission on Gaming (the "South Dakota
Commission") established by the South Dakota Laws. Except for gaming which may
be conducted on American Indian Lands, and except for any establishment holding
a beer and wine license or liquor license in South Dakota which may operate up
to 10 video lottery machines, gaming in South Dakota can be legally conducted
only in the City of Deadwood.
The South Dakota Laws require that each retailer who maintains gaming
at his place of business, each operator of gaming devices, and each route
operator (including any corporation or other entity) must have a gaming license
in order to conduct gaming operations in Deadwood. The South Dakota Laws also
require that key employees of the licensee, and support persons who are directly
engaged in the gaming operation, such as dealers, be licensed through the South
Dakota Commission. A license will be approved only if the applicant and the
location where gaming is to be conducted, after an in-depth investigation, are
found suitable by the South Dakota Commission. Under the South Dakota Laws, each
licensee, and any officer, director or shareholder owning in excess of 5% of any
corporation (or others which the Commission, in the exercise of its discretion,
elects to review) engaged in the retail operation of the gaming establishment
(i) is required to be of good character, honesty and integrity, (ii) shall not
have been convicted of a felony or found to have violated the South Dakota Law
and Regulations, and (iii) may not be viewed as posing a threat to public
interest or the conduct of gaming by reason of any prior activities, criminal
record, reputation, habits or associations. All such licenses must be renewed
annually.
<PAGE>
The South Dakota Laws specify that no one person may hold a financial
interest in more than three retail licenses. However, one person may operate
under an unlimited number of additional gaming licenses pursuant to Route
Operation Agreements, if approved by the South Dakota Commission. Each retail
licensee is limited to 30 gaming devices (for example, 25 slot machines, three
blackjack and two poker tables). Full House has three retail licenses covering
its operations in the two hotel casinos and in the Gulches of Fun family center.
Full House has leased the Casino space in the convenience store to Richard
Cleveland, who has obtained a retail license in his name which permits him to
conduct gaming on these premises. Full House has entered into a Route Operation
Agreement with Mr. Cleveland whereby Full House furnishes the gaming equipment
and employees and conducts the gaming operations. See "-- Route Operation
Agreement."
Gaming in Deadwood is limited under the South Dakota Regulations to
slot machines, and with respect to card games, to blackjack and poker.
Currently, each wager on any game is limited (in the case of poker per betting
round) to $5.00. The $5.00 limit will stay in effect until at least December,
1997. The South Dakota Laws prohibit the extension of credit to another person
for participation in gaming.
The South Dakota Commission is vested with broad enforcement powers,
and upon an opportunity for hearing, may suspend or revoke any gaming license
for cause, including a violation of the South Dakota Laws or South Dakota
Regulations, or conviction of a crime of moral turpitude or a felony. In
addition, the South Dakota Commission can fine any licensee who operates a
retail gaming establishment up to $12,500, any key employee licensee up to
$5,000, and any support licensee up to $2,500, for violations. The South Dakota
Commission may inspect all premises where gaming is conducted or gaming
equipment is located, without notice to the interested parties. The South Dakota
Commission may also seize and remove gaming equipment or supplies without notice
for purposes of inspection, as well as inspect or remove papers, books or
records at any time. A suspension of all gaming activities is within the
discretion of the South Dakota Commission after a disaster, such as a flood,
fire or earthquake, or in the event of war or national emergency. Moreover, a
retail operating licensee must report to the South Dakota Commission at least
quarterly the full name and address of every person who has a right to share in
the revenue of licensed games or to whom any interest or share in the profits of
a licensed game has been pledged or deposited as security.
Each retail gaming licensee who operates a gaming establishment must
pay an annual license fee of $100 and an annual license stamp fee of $2,000 upon
each slot machine or card game located on a licensed premise. In addition, each
operator who places slot machines upon his own business premises or engages in
the business of placing and operating slot machines or gaming within Deadwood
must pay an annual license fee of $200. South Dakota also imposes an 8% gaming
tax on adjusted gross gaming receipts (gross receipts less payouts to customers
as winnings) subject to change by the South Dakota Commission. However, if the
South Dakota Commission proposes to change the tax, the rate may not be
decreased to less than 5% or increased to more than 15%. The gaming taxes are in
lieu of any sales, use or amusement tax which might otherwise be imposed on
gaming activity.
Employees
As of June 9, 1996, the Company and its subsidiaries had approximately
60 full-time employees, three of which are executive officers of the Company,
and 109 part-time employees. The Company's management believes that its
relationship with its employees is good. None of the Company's employees are
currently represented by a labor union, although such representation could occur
in the future.
<PAGE>
Item 2. Description of Property
A Full House - GTECH joint venture company leases approximately 12.5
acres of Tribal Trust Lands from an entity owned by the Coquille Indian Tribe on
which the Mill is located. The joint venture company subleases the land on which
the casino is located back to the same entity. The master lease expires in 2019
and the sublease expires in 1999 with options to renew. Pursuant to a July 19,
1995 addendum, the joint venture company receives 13% of "Gross Gaming Revenues"
(as defined) of the casino. Payments commenced August 19, 1995.
Full House currently owns approximately 56 acres of property and the
improvements thereon, consisting primarily of Deadwood Gulch Resort.
Litigation has been filed against Full House relating to ownership and
access pertaining to a portion (approximately 1,200 square feet) of the Deadwood
Gulch Resort hotel and parking lot property. Neighboring landowners (the
"Katons") allege trespass among other claims, as a result of the construction of
the Resort parking lot. Other adjoining landowners to the rear of the Resort
have also filed a lawsuit, alleging that the Resort has blocked their right of
way across the creek to their property, insofar as their current access is
across an alleged portion of the Katons' property. Although Full House is unable
to predict the outcome of this matter, it does not believe that any reasonably
foreseeable adverse decision by a court regarding such potential claim would
materially affect the present and proposed operations of Deadwood Gulch Resort.
Management is unable to determine the outcome of this litigation, but does not
believe the outcome will have a material adverse effect on Full House's
financial condition.
In addition, Full House was made aware, in November 1993, of claimed
easements over a portion of its RV Resort and Campground property with respect
to access to property at higher elevations. Management is in the process of
negotiating the scope of the easement and does not believe that there will be
any material financial expense or other material adverse impact on Full House as
a result of these claims.
Full House acquired a 25% interest in commercial acreage located in
Branson, Missouri as part of the LAI merger. Full House has conveyed this
property interest back to LAI's former shareholder who has returned 193,529 of
the Full House Common Shares delivered to him as part of the merger
consideration.
Item 3. Legal Proceedings
In October 1995, litigation was filed against Full House relating to
ownership and access pertaining to a portion (approximately 1,200 square feet)
of the Deadwood Gulch Resort hotel and parking lot property. The Katons, who are
neighboring landowners, allege trespass as a result of the construction of the
Resort parking lot. Other adjoining landowners to the rear of the Resort also
filed a lawsuit, alleging that the Resort has blocked their right of way across
the creek to their property, insofar as their current access is across an
alleged portion of the Katons' property and seeking removal of the structures
(sidewalk and trash dumpster) blocking the alleged easement as well as damages
for any harm suffered by the plaintiffs as a result of blocking the easement.
Katon, et al v. Deadwood Gulch Resort and Gaming Corp., Eighth Judicial Circuit,
Lawrence County, South Dakota and Sowers, et al v. Deadwood Gulch Resort and
Gaming Corp., Eighth Judicial Circuit, Lawrence County, South Dakota. Management
is unable to determine the outcome of this litigation, but does not believe the
outcome will have a material adverse effect on Full House's financial condition.
In October 1994, Full House filed an action for declaratory relief in
Mississippi, seeking a determination by the court that no relationship exists
<PAGE>
between it and Lone Star Casino Corporation regarding the potential acquisition
of a riverboat casino on the Mississippi gulf coast (Full House Resorts, Inc. v.
Lone Star Casino Corporation v. Allen E. Paulson, Second Judicial District of
the Chancery Court of Harrison County, Mississippi). Lone Star has filed a
counterclaim alleging breaches of fiduciary duty, breach of contract, conspiracy
to breach contract and to breach fiduciary duty and common law fraud. Both Full
House and Mr. Paulson have been granted summary judgment on Lone Star's breach
of contract claim and all claims arising therefrom. The Company's motion for
summary judgment on Lone Star's remaining claims against it has also been
granted. Lone Star recently appealed those judgments. An action filed by Lone
Star in Texas in December 1994 raising similar issues has been dismissed.
Management is unable to determine the outcome of this litigation, but does not
believe the outcome will have a material adverse effect on Full House's
financial condition.
In late 1995, Branson Hills Associates, L.P. (the "Plaintiff") filed a
lawsuit in the Circuit Court of Taney County, Missouri, naming Lee Iacocca,
William P. McComas, Ron Richey, and the Company and certain of its subsidiaries
as defendants (collectively, the "Defendants") although no defendants were
served until March 1996. The suit involves a claim that Messrs. Iacocca and
McComas failed to use their best efforts to find a developer and financing for
the Plaintiff in connection with the development of properties owned by the
Plaintiff. The Plaintiff seeks rescission of the contract granting certain
property rights to Iacocca and McComas in consideration of said best efforts,
and further seeks damages for fraud and breach of contract arising out of Mr.
McComas's loaning of funds to Plaintiff when alternative financing could not be
arranged. Mr. Richey and the Company are further named in a count of conspiracy.
A portion of the property rights involved in the lawsuit were briefly held by
the Company subsequent to the merger involving LAI as described above, and have
since been returned to Mr. Iacocca. The Company no longer holds any interest in
such property. See "Business - Background." All Defendants have responded to the
claims and vigorously dispute liability. Management is unable to determine the
outcome of this litigation, but does not believe the outcome will have a
material adverse effect on Full House's financial condition or results of
operations.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Developments
Effective December 29, 1995, Full House entered into a series of
agreements with GTECH Corporation. Pursuant to the agreements, limited liability
joint venture companies were formed which are equally owned by GTECH and Full
House. The rights of Full House to agreements with various Indian tribes and the
Delaware State Fair were contributed to the joint ventures. See "Results of
Operations" and "Liquidity."
On April 9, 1996, the Company signed a non-binding letter of intent for
the purchase of the Deadwood Gulch Resort by RGB Deadwood Gulch L.L.C. Although
negotiations for the sale of the Resort to RGB Deadwood Gulch L.L.C. terminated
on May 15, 1996, the Company is still actively marketing the Resort for sale.
The Company determined that continued ownership of the Resort is not consistent
with its future plans which anticipate focusing on gaming facilities in areas of
higher population density and locations at which applicable regulations permit
high stakes and expanded types of gaming. Any sale will be subject to approval
by the Company's stockholders and a finding by the South Dakota Commission on
Gaming that the purchaser is suitable to obtain a gaming license in South
Dakota. There can be no assurance that a sale will ultimately be consummated.
<PAGE>
Results of Operations
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 decreased $59,374 to
$5,633,146, as compared with revenues of $5,692,520 for the year ended December
31, 1994. The decrease was offset by income from joint ventures of $160,224.
Joint Ventures. During 1995, four limited liability joint venture
companies were formed by Full House and GTECH to pursue gaming opportunities and
to which Full House transferred three of its present gaming ventures. Excluded
were the Deadwood Gulch Resort and an additional venture where assignment was
not completed pending further discussions with the tribe and with the holder of
a 15% interest in that gaming contract. If assignment is not completed, Full
House will assign its rights to revenues only and GTECH will bear an appropriate
portion of the expenses. Full House and GTECH each have a 50% interest in each
limited liability company. Full House's share of the income generated by those
companies was $160,224.
Casino Operations. Revenues decreased $218,951 or 13.1% for the year
ended December 31, 1995 over the same period in 1994. Departmental expenses
decreased $3,292 or .3% for the year ended December 31, 1995 from 1994. As a
result of the decrease in revenues, departmental profit decreased by $215,659 or
34.8% as compared to the same period in 1994. Management attributes the decrease
in revenues to the decline in gaming activity in the entire Deadwood market as
reported by the South Dakota Commission on Gaming.
Hotel/RV Resort. Although hotel occupancy declined 10.7% for the year
ended December 31, 1995, the average daily rate increased 8.6% to $56.85. As a
result, revenues for the period decreased $57,891 or 4.2% for the Hotel.
Revenues at the RV Resort increased $18,211 for the year ended December 31, 1995
from $90,553 for the same period in 1994. The combination of these factors
resulted in an increase in Hotel/RV Resort departmental profit of $25,305 or
3.0%. Management attributes the decline in revenues of the Hotel to a decline in
tourism due to snowfall levels of approximately 60% of normal in the Black Hills
during the first and second quarters of 1995, compared to snowfall of 175% of
normal in 1994.
Retail. Revenues declined by $7,697 or .6% for the year ended December
31, 1995 from 1994 due to the poor 1995 winter skiing and snowmobiling
conditions. Departmental profit increased $22,543 for the year ended December
31, 1995 from 1994. Management attributes the increase in departmental profit to
more aggressive pricing, as well as increased productivity.
Food and Beverage. Revenues for 1995 were $727,865 (which includes
$176,742 of promotional allowances), a decrease of $16,844 or 2.3% from 1994
revenues of $744,709 (which included $166,632 of promotional allowances). The
departmental loss after subtracting promotional allowances decreased $21,128
over 1994. Management attributes the improvement to better cost of sales
management and the development of a new menu, repositioning the restaurant in
the market.
Gulches of Fun Family Center. Although revenues for the year ended
December 31, 1995 increased $65,983 from 1994, departmental profit decreased
$90,581 from 1994. The summer season of 1995 was one of the three wettest in the
recent history of the Black Hills and management attributes the decrease in
departmental profit to adverse weather conditions during peak operating times
for the outdoor activities.
General and Administrative Expenses - Resort. Expenses increased
$33,833 for the year ended December 31, 1995 from 1994. Resort general and
<PAGE>
administrative expenses reflect increased property taxes and insurance as a
result of the completion of the Gulches of Fun family center and the RV Resort.
All other Resort specific general and administrative expenses declined as
compared to the prior periods.
Non-Resort General and Administration Expenses. Non-Resort expenses for
the year ended December 31, 1995 totaled $1,820,733, an increase of $756,011
over the prior year. In 1995, the Company continued to incur costs related to
the investigation, due diligence and pre-development of various ongoing
opportunities for expansion of its business and the increase in the Company's
corporate structure necessary to administer the Company's expansion.
Depreciation. Depreciation and amortization increased $735,235 for the
year ended December 31, 1995 over 1994. This increase is primarily due to the
amortization of goodwill in 1995 which totaled $615,307.
Abandoned Project Cost. On June 28, 1995, the Governor of the State of
Michigan determined to prohibit off-reservation gaming in the State of Michigan.
As a result, the Company recognized a loss of $1,867,730 relating to costs
associated with its proposed gaming project in Detroit, Michigan.
Impairment of Long Lived Assets. In January, 1996, the Company
announced its intent to dispose of the Deadwood Gulch Resort. The Company
adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, during the fourth
quarter of the year ended December 31, 1995. Under SFAS No. 121, the Company
reviews the carrying values of its long-lived and identifiable intangible assets
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Based upon available
information which indicates a loss may be incurred upon disposition, the Company
reduced the carrying value of the Deadwood Gulch Resort in 1995 and recognized
an impairment loss of $3,100,000.
Interest Expense and Debt Issue Costs. Interest expense and debt issue
costs increased by $187,061 due to refinancing the first mortgage on the
Deadwood Gulch Resort, use of the Company's line of credit and the $4,000,000
loan from GTECH (which was repaid in 1996). This increase was offset by reduced
levels of debt issue costs in 1995 versus 1994.
Interest and Other Income. Interest and other income increased to
$828,302 in 1995 as compared to $57,645 in 1994, principally as a result of
$804,390 of interest income relating to Full House's advances in connection with
certain gaming agreements.
Income Tax Benefit. The income tax benefit increased to $1,944,710 in
1995 from $2,000 in 1994. This tax benefit is a result of the Company's 1995 net
loss of $5,550,888.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Revenues for the year ended December 31, 1994 increased 28.7% to
$5,895,268 as compared with revenues of $4,581,781 for the year ended December
31, 1993.
Revenues from Casino Operations increased 4.9% from $1,594,527 in 1993
to $1,672,559 in 1994; Hotel/RV Resort revenues increased 10.5% from $1,325,087
in 1993 to $1,464,108 in 1994; revenues from Retail increased 32.2% from
$950,839 in 1993 to $1,256,982 in 1994; and Food and Beverage revenues increased
4.7% from $711,328 in 1993 to $744,709 in 1994. The operations for the Gulches
of Fun family fun center contributed $756,910 in 1994.
Casino Operations. Revenues increased 4.9% in 1994 over 1993. As a
result of departmental expenses increasing 21% over 1993, department profit
<PAGE>
decreased $104,898 as compared to 1993. The terminated Route Operation Agreement
with the Lucky 8 Gaming Hall contributed $84,255 in revenues during 1993.
Management attributes the increase in revenues in 1994 to the opening
of two new casinos at the Gulches of Fun family fun center in 1994. At December
31, 1994, there were 117 slots and four blackjack tables at the fun center.
Competition, however, has increased both within the Deadwood market and
countrywide and the fact that gaming is no longer a new attraction for the
typical visitor to Deadwood. Three new casinos opened in downtown Deadwood in
September, 1993 at the Four Aces facility. They have conducted an aggressive
marketing program of giveaways and deeply discounted food and beverage prices to
establish themselves in the market. Other downtown casinos have responded with
promotional programs to protect their market share as the overall market has not
expanded. The Company has also increased its promotional allowances and has been
able to maintain its market share.
The increase in the departmental expense is a result of adding the two
new casinos at the Gulches of Fun family fun center. These new operations, due
to their distance from the existing casinos, South Dakota regulations, and the
table games played, requires additional staffing.
Hotel/RV Resort. Hotel occupancy increased from 70% in 1993 to 71% in
1994 and the average daily rate increased from $50.59 to $52.34, resulting in a
slight increase in revenues. Hotel expenses increased from 36.6% of sales in
1993 to 38.4% of sales in 1994. Hotel profits net of promotional allowances
increased from $813,765 in 1993 to $824,512 in 1994.
Operations commenced for the RV Resort and Campground in the later part
of the second quarter of 1994. The revenues for 1994 were $90,553. The RV Resort
and Campground expenses were $93,639, resulting in a RV Resort and Campground
loss of $3,086. The facility was closed for the season on October 1, 1994.
RV Resort and Campground payroll expenses were higher than normal as
part of the initial start up of the operation in 1994. The Company expects that
this expense will decline as a percentage of revenues and revenues will increase
in 1995 with the Campground in operation for the full season.
Retail. Revenues increased 32.2% in 1994 as compared to 1993 and
departmental profits increased from $65,099 in 1993 to $135,791 in 1994. This
was partially attributable to the completion of the highway construction at the
entrance to the Resort which restricted access and depressed sales through
September 1993.
Food and Beverage. Revenues increased by 4.7% in 1994 as compared to
1993. Cost of sales and other departmental expenses increased in 1994 resulting
in a reduction in departmental profit (net of promotional allowances) from
$28,663 in 1993 to a loss of $48,689 in 1994. Management is focusing its
attention in this area to revise the menu, increase marketing efforts and reduce
costs.
Gulches of Fun Family Fun Center. Partial operations commenced for the
Gulches of Fun family fun center in the later part of the second quarter of
1994. The entire facility opened to the public on July 1, 1994. The Gulches of
Fun family fun center contains two new casinos with state of the art design and
equipment in conjunction with family oriented activities of miniature golf, go
kart track, batting cages, bumper boat pond, kiddie playland, redemption and
arcade games and family oriented food and beverage services.
Revenues for 1994 were $756,910 and the departmental expenses were
$476,330, resulting in a departmental profit of $280,580.
Sales and Marketing Expenses. Sales and marketing expense remained
constant at 4% of revenues for both 1994 and 1993. Due to the Company's plan for
<PAGE>
an extensive marketing program to promote its new facilities of the RV Park and
Campground and Gulches of Fun family center, the Company expects that
expenditures for sales and marketing will remain at approximately the same
percentage of revenues in the coming year.
General and Administrative Expense - Resort. The Resort general and
administrative expenses were approximately $596,242 for 1994, a decrease of
$15,290, or 2.5%, over 1993 despite the increase in total revenues at the Resort
of 29.4% over 1993.
Depreciation. Depreciation and Amortization increased $139,599 over
1993. This increase is primarily due to the addition of the Gulches of Fun
family fun center and the RV Resort and Campground.
Non-Resort General and Administrative Expenses. The Non-Resort expenses
were $1,064,722 for 1994, an increase of $955,972 over 1993.
In 1994, the Company incurred costs related to the investigation, due
diligence and pre-development of various ongoing opportunities for corporate
expansion and the expansion of the Company's corporate structure necessary to
administer the Company's expansion. The major categories and approximate expense
levels for 1994 were legal and consulting fees of $472,764, travel of $176,540,
salary and benefits of $204,173, investor relations of $99,802, independent
accounting fees of $59,136 and other of $52,307. Additionally, the Company has
capitalized outside professional fees of approximately $426,664 during 1994,
associated primarily with the Native American and merger opportunities.
Non-operating Income and Expense. Non-operating Expense increased by
$495,787 over 1993. This increase is due to debt issue costs of $647,349 in the
first quarter of 1994 primarily related to restructuring a major portion of the
Company's mortgage debt and for costs incurred with Allen E. Paulson's providing
an $8 million line of credit to the Company from the Bank of America.
Liquidity and Capital Resources
For the year ended December 31, 1995, cash flow from operating
activities was negative in the amount of $1,433,791. Included was the net loss
of $5,550,888, more fully explained above, reduced by depreciation and
amortization of $1,240,446, write-off of abandoned project costs of $1,867,730
and recognition of impairment in long-lived assets of $3,100,000 offset by a
decrease in deferred tax liability of $1,944,710 and the net other changes of
approximately $146,369. Cash flow from investing activities was negative in the
amount of $11,130,555 as a result of an increase in investments in gaming and
merger opportunities. Cash flows from financing activities were the result of
borrowings from GTECH Corporation, refinancing of the resort in Deadwood and the
Bank of America line totaling $14,306,285 reduced by repayment of debt and
payment of debt issue costs of $1,787,925. As a result of the above factors,
there was a net decrease in cash and cash equivalents of $27,916.
On March 24, 1994, Allen E. Paulson purchased 1,000,000 shares of Full
House's common stock for $800,000. Full House also issued 500,000 shares of its
Common Stock to Mr. Paulson in exchange for his agreement to individually
provide or to take such actions as were required for a financial institution to
provide a commercial line of credit to Full House in the minimum amount of $8
million. Full House valued the shares of stock at $.80 per share based upon the
size of the transaction, the fact that the shares were not registered and are
not subject to registration rights. In addition, a large block of shares was
repurchased by the Company from a then principal stockholder at a price per
share and time sequence reasonably close to the transaction with Mr. Paulson.
The 500,000 shares issued to Mr. Paulson as compensation for securing the $8
million financing were charged as a period cost in Full House's results of
<PAGE>
operation for 1994. On June 7, 1994, Bank of America, as a result of the joint
and several guarantees of the full amount of the loan by Mr. Paulson and the
other directors of Full House, provided Full House with a line of credit in the
amount of $8 million at the "reference rate" of Bank of America, N.A. As of
December 31, 1995, a balance of $6,206,286 was outstanding under the line of
credit. The outstanding balance was repaid with funds received as part of the
agreement with GTECH Corporation discussed below. As of June 15, 1996, no
amounts were outstanding under this line of credit. All amounts outstanding
under this line of credit bear interest at the bank's "reference rate" and are
due and payable upon demand or, if no demand is made, on July 1, 1996. Full
House believes that it would have been unable to obtain this line of credit
without the actions of Mr. Paulson, as its financial condition would not have
supported such an extension of credit.
On March 23, 1995, LAI Associates, Inc., a corporation wholly-owned by
Lee Iacocca, merged with a subsidiary of Full House and became a wholly-owned
subsidiary of Full House. The Company issued 1,250,000 shares of Common Stock to
Mr. Iacocca. In exchange, the Company received LAI's interest in its agreements
with the Organized Tribes (55%), Nottawaseppi Huron Band of Potawatomi (55%),
Torres Martinez Desert Cahuilla Indians (50%) and Delaware State Fair (50%)
projects. The remainder of the interests in these projects was acquired through
the Omega merger described below. Subsequently, Full House returned to Mr.
Iacocca a 25% interest in a total of 21 acres of land in Branson, Missouri, and
a 50% interest in certain royalties receivable. In exchange, Mr. Iacocca
returned 193,529 shares of Common Stock to Full House in March, 1996. See "Legal
Proceedings."
On November 20, 1995, Full House merged a wholly-owned subsidiary into
Omega Properties Inc. (30% owned by William P. McComas, a director/stockholder
of the Company). In exchange, the shareholders of Omega received an aggregate of
500,000 shares of Full House Common Stock and a promissory note of Full House in
the principal amount of $375,000. The principal amount of this promissory note
accrues interest, payable quarterly, at a rate equal to the "prime" rate and
such principal amount, together with all accrued interest, is due and payable in
full upon demand by the holder(s) of this note, but in no event before August
31, 1996. William P. McComas received the note and Mr. Fugazy, the other
stockholder of Omega, received the shares in exchange for their interests as
shareholders of Omega. As a result of such merger, Full House obtained the
remaining 45% interests in the agreements with the Organized Tribes and the
Nottawaseppi Huron Band of Potawatomi and the remaining 50% interests in the
agreements with the Torres Martinez Desert Cahuilla Indians and the Delaware
State Fair.
Full House entered into a series of agreements with GTECH Corporation,
a wholly-owned subsidiary of GTECH Holdings Corporation, a leading supplier of
computerized on-line lottery systems and services for government-authorized
lotteries, to jointly pursue existing (except the Deadwood Gulch Resort and
certain other specified projects) and future gaming opportunities. Although the
agreements were dated as of December 29, 1995, the parties agreed to share
equally in the equity investment, financing responsibility and in revenues and
expenses of each project commencing April 1, 1995. Pursuant to the agreements,
joint venture corporations equally owned by GTECH and Full House have been
formed. Full House has contributed its rights to the North Bend, Oregon facility
and the rights to develop the Torres Martinez and Delaware State Fair Projects
to the joint venture companies. Full House has agreed, subject to further
discussion with the Nottawaseppi Huron Band of Potawatomi and with the holder of
a 15% interest in that gaming contract, to assign to a joint venture company its
rights to develop a project with such Tribe. If the assignment is not completed,
Full House will assign its rights to revenues and GTECH will bear an appropriate
portion of the expenses related thereto. See "Business."
In payment for its interest in the joint venture companies, GTECH
contributed cash and other intangible assets to the companies and committed to
<PAGE>
loan the joint venture entities up to $16.4 million to complete the North Bend,
Oregon and Delaware facilities. Full House has agreed to guarantee one-half of
the obligations of the joint venture companies to GTECH under these loans and at
June 1, 1996 had guaranteed to GTECH one-half of $10.4 million of such loans to
the North Bend, Oregon joint venture company. Upon completion of the Delaware
project, currently anticipated in August 1996, Full House will execute a
guarantee to GTECH of one-half of the amounts loaned to the joint venture
company by GTECH. The amount of the guarantee is currently estimated to be
approximately $4.5 million. The guarantees provide for full subrogation of Full
House to GTECH's rights and prohibit acceleration of the underlying indebtedness
so long as Full House makes the defaulted payments. The terms of the loans vary
by project, but in those instances in which the joint venture companies loan
funds to others involved in the project (e.g., North Bend, Oregon), the loans to
the joint venture companies are intended to be a mirror image of the loans
between the joint ventures and the third parties.
GTECH will also provide project management, technology and other
expertise to analyze and develop/manage the implementation of opportunities
developed by the joint venture entities. GTECH has also loaned Full House $3
million, which loan is convertible, subject to regulatory approval into 600,000
shares of Full House's Common Stock. In addition, Full House has been reimbursed
by one of the joint venture companies for certain advances and expenditures made
by Full House relating to the gaming development agreements. As part of this
transaction, certain directors of Full House and Lee Iacocca have granted to
GTECH an option to purchase their shares should they propose to transfer the
same.
The agreement between Full House and GTECH provides that the joint
venture partners will provide the funds needed to finance the development of the
joint venture projects. While the amounts necessary to finance the development
of the projects are subject to regulatory approval and adjustment as the
projects are more fully developed, the Company estimates that the amount to be
provided by the joint venture companies will be approximately $70 million during
the next three years. Although the agreement between Full House and GTECH
establishes a performance for obtaining non-recourse financing for the projects
undertaken in the joint venture companies, it may not be possible to obtain
needed funds in this manner. In the event that Full House is unable to obtain
the required funds on more favorable terms, GTECH has agreed to lend to Full
House its required portion of the financing at GTECH's cost of financing plus
22.5% of Full House's share of the "Profits" from the venture until the later of
repayment of the loan or one year after the project begins to receive revenues
from patrons of the facilities comprising the project. In the event that GTECH
loans funds to a joint venture entity, Full House has agreed to guarantee
one-half of the obligations of the joint venture company to GTECH.
Full House borrowed $4 million from GTECH during 1995. Such amounts
were repaid on January 26, 1996 with funds received as a part of the agreement
with GTECH. See "Business - GTECH Relationship." Interest expense on this
indebtedness was $270,517.
As a result of its agreements with GTECH, receipt by Full House of
revenues from the operations of projects (other than the Deadwood Gulch Resort)
is governed by the terms of the joint venture agreements applicable to such
projects. These contracts provide that net cash flow (after certain deductions)
is to be distributed monthly to Full House and GTECH. While Full House does not
believe that this arrangement will adversely impact its liquidity, no assurances
of the same can be given based upon the lack of operating experience with this
structure.
On July 19, 1995, an addendum to the agreement with the Coquille Indian
Tribe was executed. Pending regulatory approval, the addendum will reduce the
obligation of the Full House-GTECH joint venture company to provide financing to
$10.4 million, extend the date when repayments begin and modify the method of
<PAGE>
computing participating rents (from net revenues to modified gross revenues) and
loan repayments. Lease and debt payments commenced on August 19, 1995, and
September 19, 1995, respectively. As of March 31, 1996, the Full House-GTECH
joint venture company had advanced approximately $10.7 million for the project
of which approximately $.5 million had been repaid.
Pursuant to a September 16, 1994 agreement with the Organized Tribes in
the State of Michigan, Full House obtained the rights to pursue off-reservation
gaming and related non-gaming activities. On June 28, 1995, the Governor of the
State of Michigan determined to prohibit off-reservation gaming in the State of
Michigan. As a result of this action and after reimbursement of certain costs
incurred by Full House from GTECH, Full House has written off project costs of
$1,867,730.
On May 31, 1995, DGR borrowed $5 million, secured by its real property.
The proceeds from the loan were used to repay its obligation to H. Joe Frazier,
a stockholder and a then director of the Company, and to repay a portion of the
revolving note payable to Bank of America. The note bears interest at 10.25%
through May, 1996, and at prime plus 2-1/4% for the period June 1, 1996 through
May 1, 2002. Payments are due in monthly installments of principal and interest
based on a ten-year amortization with the remaining balance due on May 31, 2002.
A portion of the loan has been guaranteed by Messrs. Frazier, McComas and
Paulson. The agreement restricts substantially all of DGR's cash to pay
operating expenses and debt service of DGR. Cash from operations is placed into
a series of restricted accounts to pay obligations in the following priority:
(1) operating expenses of DGR for the current month; (2) a reserve for operating
expenses for off-season months; (3) a reserve for debt service (over and above
scheduled payments); and (4) an asset replacement reserve. Because of these
restrictions, no DGR cash has been available for dividends or distribution to
the Company for expansion purposes. The agreements also include financial
covenants which require maintenance of minimum tangible net worth and debt
service coverage ratios. The Company was not in compliance with these covenants
at December 31, 1995. However, the lender has waived these defaults through the
year ended December 31, 1996. The Company prepaid $751,827 of this indebtedness
in March, 1996.
The 800,000 Warrants and 80,000 units (the "Representative's Units")
issued to the representative of the underwriters in Full House's 1993 public
offering became exercisable on August 10, 1994. Each Warrant may be exercised
for 1.1894 shares of Common Stock at a price of $4.20 per share. As of June 15,
1996, 778,534 Warrants to purchase 925,988 shares were outstanding. Full House
may, in accordance with the Warrant Agreement, call the Warrants. Each
Representative's Unit (each consisting of three shares of Common Stock and the
right to buy one additional share) may be exercised at a price of $13.17 per
Unit. The Warrants can be exercised until February 10, 1997. As of June 15,
1996, a total of 57,500 Representative's Units had been exercised, leaving a
balance of 22,500 which may be exercised. As a result of such exercises, 57,500
warrants, which were included in the Representative's Units, are now
outstanding.
As of December 31, 1995, Full House had cumulative undeclared and
unpaid dividends in the amount of $735,000 on the 700,000 outstanding shares of
its 1992-1 Preferred Stock. Such dividends are cumulative whether or not
declared, and are currently in arrears.
Full House had a working capital of $391,116 as of December 31, 1996.
Additional financing will be required for the Company to effect its
business strategy and no assurance can be given that such financing will be
available upon commercially reasonable terms.
<PAGE>
Item 7. Financial Statements
The following financial statements are filed as part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Company:
Independent Auditors' Report............................................. F-1
Consolidated Balance Sheet as of December 31, 1995....................... F-2
Consolidated Statements of Operations for the Years
Ended December 31, 1994 and 1995....................................... F-3
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1994 and 1995......................... F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994 and 1995....................................... F-5
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
Item 9. Directors, Executive Officers, Promoters and Control Persons
Names, ages and positions of all directors and executive officers of
the Company as of May 31, 1996 are listed below, followed by a brief account of
their business experience during the past five years.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Allen E. Paulson 73 Chairman and Chief Executive Officer
William P. McComas 69 Director
Ronald K. Richey 69 Director
Robert L. Kelley 63 President and Chief Operating Officer
William R. Jackson 46 Executive Vice President - Corporate
Finance
Megan G. McIntosh 40 Secretary
</TABLE>
Allen E. Paulson has been the Chairman and Chief Executive Officer and
Chairman of the Board of Directors of the Company since August 20, 1994. Mr.
Paulson was the Chairman and Chief Executive Officer of Gulfstream Aerospace
Corporation until his retirement in 1992 and he is currently the Chairman
Emeritus on the Board of Directors. Mr. Paulson owns five automobile dealerships
in Beverly Hills, California. He is also a thoroughbred breeder and is the owner
of the Del Mar Country Club in Rancho Santa Fe, California which includes both a
golf course and club house and lots for residential development surrounding the
country club. Mr. Paulson also serves on the Boards of Directors of DIAL
Corporation and CardioDynamics International Corporation.
<PAGE>
William P. McComas has been a Director of Full House since November,
1992. He has been President of McComas Properties, Inc., a California real
estate development company since January 1984. Mr. McComas and companies
controlled by him have developed several hotels and resorts, including Marina
Bay Resort, Fort Lauderdale, Florida; Ocean Colony Hotel and Resort, Half Moon
Bay, California; Residence Inn by Marriott, Somers Point, New Jersey; and five
Holiday Inns located in Des Moines, Iowa; San Angelo, Texas; Suffern, New York;
Niagara Falls, New York; and Fort Myers, Florida.
Ronald K. Richey has been a director of the Company since April 9,
1996. He has been Chairman of Torchmark Corporation, an insurance holding
company since August 1986 and has been the Chief Executive Officer of that
company since December 1984. From December 1984 through August 1986, Mr. Richey
was President of Torchmark Corporation. Mr. Richey is an attorney and a member
of the Oklahoma Bar Association.
Robert L. Kelley has been the President and Chief Operating Officer of
the Company since August 10, 1994. Mr. Kelley was the Executive Vice President
in charge of casino operations for Lone Star Casino Corporation from May, 1993
until beginning employment with Full House. Mr. Kelley was a partner in a
consulting partnership that evaluated hotel casinos from April, 1990 until May,
1991. Prior to that, Mr. Kelley had over 20 years experience as a senior
executive of Las Vegas hotel casinos including the Las Vegas Hilton, Flamingo
Hilton and Tropicana Hotel and Casino.
William R. Jackson has been Executive Vice President -- Corporate
Finance of Full House since June, 1994. Mr. Jackson was the Chief Financial
Officer of Westinghouse Communities, Inc. for over 6 years. Mr. Jackson received
a Bachelor of Business Administration Degree in Accounting from Stetson
University in Deland, Florida. He is a member of the American Institute of
Certified Public Accountants and the Florida Institute of Certified Public
Accountants.
Megan G. McIntosh has been employed by Full House since December 1,
1994 and has been the Secretary of Full House since November 20, 1995. From
April 1991 until she joined Full House, Ms. McIntosh was an administrative
assistant for a civil engineering firm located in California. Prior to that
time, Ms. McIntosh was an administrative assistant for a real estate development
firm located in Southern California.
Item 12. Certain Relationships and Related Transactions
During the fiscal years ended December 31, 1994 and 1995, the Company
paid $149,921 and $61,655, respectively, in interest costs to H. Joe Frazier in
connection with loans to the Company provided by Mr. Frazier in March 1993. The
loan was repaid in full in May 1995 as discussed in the next paragraph. Mr.
Frazier resigned as a director of the Company in January, 1996.
On May 31, 1995, DGR borrowed $5 million from Miller & Schroeder
Investment Corporation, secured by a mortgage on its real property. The proceeds
of the loan were used to repay its obligation to H. Joe Frazier, a stockholder
and a then director of the Company ($1,237,789.43), to repay a portion of the
revolving note payable to Bank of America ($3,525,676.57) which was also
guaranteed by the directors of the Company and the balance was used to pay costs
associated with the loan. Allen E. Paulson, William P. McComas and H. Joe
Frazier, severally, guaranteed 8.33% of the loan from Miller & Schroeder under
an arrangement which provides that the amount guaranteed by them is
proportionately reduced as the loan is repaid. In March, 1996, as partial
consideration for the lender waiving certain covenant violations by DGR, the
Company issued a guaranty of $1,420,000 of DGR's indebtedness under this loan.
<PAGE>
On March 24, 1994, Allen E. Paulson purchased 1,000,000 shares of Full
House's common stock for $800,000. Full House also issued 500,000 shares of its
Common Stock to Mr. Paulson in exchange for his agreement to individually
provide or to take such actions as were required for a financial institution to
provide a commercial line of credit to Full House in the minimum amount of $8
million. Full House valued the shares of stock at $.80 per share based upon the
size of the transaction, the fact that the shares were not registered and are
not subject to registration rights. On March 14, 1994, 1,025,635 shares of
Common Stock and 300,000 shares of Preferred Stock were repurchased by the
Company from Eugene Gatti, for $1,903,000. The 500,000 shares issued to Mr.
Paulson as compensation for securing the $8 million financing were charged as a
period cost in Full House's results of operation for 1994. On June 7, 1994, Bank
of America, as a result of the joint and several guarantees of the full amount
of the loan by Messrs. Paulson, Frazier and McComas, provided Full House with a
line of credit in the amount of $8 million at the "reference rate" of Bank of
America, N.A. As of December 31, 1995, a balance of $6,206,286 was outstanding
under the line of credit. As of March 15, 1996, no amounts were outstanding
under this line of credit. All amounts outstanding under this line of credit
bear interest at the bank's "reference rate" and are due and payable upon demand
or, if no demand is made, on July 1, 1996. Full House believes that it would
have been unable to obtain this line of credit without the actions of Mr.
Paulson, as its financial condition would not have supported such an extension
of credit.
As part of the merger of a subsidiary of Full House into Omega
Properties Inc., the shareholders of Omega received an aggregate of 500,000
shares of Full House Common Stock and a promissory note of Full House in the
principal amount of $375,000. The principal amount of this promissory note
accrues interest at a rate equal to the "prime" rate and such principal amount,
together with all accrued interest, is due and payable in full upon demand by
the holder(s) of this note, but in no event before August 31, 1996. William P.
McComas received the note and the other stockholder of Omega received the shares
in exchange for their interests as shareholders of Omega. See
"Business-Background."
As part of its transactions with GTECH Corporation, Full House issued
to GTECH a convertible promissory note in the principal amount of $3,000,000.
The note is convertible, subject to regulatory approval, at any time prior to
January 25, 1998, into 600,000 shares of Common Stock. The note is non-interest
bearing until January 25, 1998, at which point the unpaid principal balance of
the note will bear interest at the "prime rate." The note matures on January 25,
2001. See "Business-GTECH Relationship."
With respect to the foregoing transactions, Full House believes that
such transactions were on terms as favorable to Full House as would have been
available from unrelated parties.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
2.1 Letter of Intent (incorporated by reference to Exhibit 2.1 to the
Company's Amended Registration Statement on Form 10)
2.2 Stock Acquisition Agreement Among Full House Resorts, Inc., Deadwood
Gulch Resort and Gaming Corp. and the Stockholders thereof, dated
November 6, 1992 (incorporated by reference to Exhibit 2.2 to the
Company's Amended Registration Statement on Form 10)
2.3 Agreement Among Joint Venturers of Deadwood Hotel Joint Venture,
dated June 30, 1992 (incorporated by reference to Exhibit 2.3 to the
Company's Amended Registration Statement on Form 10)
<PAGE>
2.4 Agreement for Transfer of Property to Corporation Pursuant to
Section 351 of the Internal Revenue Code, dated June 30, 1992
(incorporated by reference to Exhibit 2.4 to the Company's Amended
Registration Statement on Form 10 )
3.1 Certificate of Incorporation of Full House Resorts, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's Amended
Registration Statement on Form 10)
3.2 Bylaws of Full House Resorts, Inc. (incorporated by reference to
Exhibit 3.2 to the Company's Amended Registration Statement on Form
10)
4.1 Certificate of Designation of Series 1992-1 Preferred Stock of Full
House Resorts, Inc., dated November 6, 1992 (incorporated by
reference to Exhibit 4.1 to the Company's Amended Registration
Statement on Form 10)
4.2 Form of Underwriter's Warrant (incorporated by reference to Exhibit
(4)(c) to the Registration Statement on Form S-18 (No. 33-15292-NY)
of Full House Resorts, Inc. (incorporated by reference to Exhibit
4.2 to the Company's Amended Registration Statement on Form 10)
10.1 1992 Non-Employee Director Stock Plan of Full House Resorts, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Amended
Registration Statement on Form 10)
10.2 1992 Incentive Plan of Full House Resorts, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Amended Registration
Statement on Form 10)
10.3 Mortgage-180 Day Redemption, dated August 30, 1991, Between Deadwood
Hotel Joint Venture and Eugene V. Gatti (incorporated by reference
to Exhibit 10.3 to the Company's Amended Registration Statement on
Form 10)
10.4 Mortgage-180 Day Redemption, dated January 27, 1992, Among Deadwood
Hotel Joint Venture, Eugene V. Gatti, William P. McComas, Hotel
Properties, Inc. and Kober Corporation (incorporated by reference to
Exhibit 10.4 to the Company's Amended Registration Statement on Form
10)
10.5 Debt Reduction Agreement, dated July 27, 1991, among Westdak Limited
Partnership, Gatti & McComas, Inc., Eugene V. Gatti, William P.
McComas, James E. Hosch, William J. Durst, and James E. Hosch as
Trustee of the Interest of William J. Durst in Westdak Limited
Partnership (incorporated by reference to Exhibit 10.5 to the
Company's Amended Registration Statement on Form 10)
10.6 Deadwood Hotel Joint Venture Standard Route Operation Agreement,
dated June 30, 1992, Between Deadwood Hotel Joint Venture and Lucky
8 Gaming Hall (incorporated by reference to Exhibit 10.6 to the
Company's Amended Registration Statement on Form 10)
10.7 Management and Operating Agreement between Trimark Hotel Corporation
and Deadwood Hotel Joint Venture, dated February 23, 1990
(incorporated by reference to Exhibit 10.7 to the Company's Amended
Registration Statement on Form 10)
10.8 Franchise Agreement Between Park Inns International, Inc. and
Deadwood Hotel Joint Venture, dated February 28, 1990 (incorporated
by reference to Exhibit 10.8 to the Company's Amended Registration
Statement on Form 10)
<PAGE>
10.9 Dealer Gasoline and Franchise Agreement, dated June 8, 1992, between
M.G. Oil Company and Deadwood Gulch Resort (incorporated by
reference to Exhibit 10.9 to the Company's Amended Registration
Statement on Form 10)
10.10 Common Stock Purchase Warrant of Full House Resorts, Inc. issued to
Generation Capital Associates, dated November 20, 1992 (incorporated
by reference to Exhibit 10.10 to the Company's Amended Registration
Statement on Form 10)
10.11 Promissory Note of Full House Resorts, Inc. in the amount of
$90,000, dated November 10, 1992, payable to Bearer (incorporated by
reference to Exhibit 10.11 to the Company's Amended Registration
Statement on Form 10)
10.12 Employment Agreement between Full House Resorts, Inc. and David K.
Cantley, dated December 1, 1992 (incorporated by reference to
Exhibit 10.12 to the Company's Amended Registration Statement on
Form 10)
10.13 Letter of Intent between Full House Resorts, Inc. and Stuart,
Coleman & Co., Inc., dated February 23, 1993 (incorporated by
reference to Exhibit 10.13 to the Company's Amended Registration
Statement on Form 10)
10.14 Agreement to Provide and Accept Commitment to Restructure First and
Second Mortgage Loans Among Full House Resorts, Inc., Deadwood Gulch
Resort and Gaming Corp., Eugene V. Gatti, William P. McComas, H. Joe
Frazier and Rober Corporation, dated March 15, 1993 (incorporated by
reference to Exhibit 10.14 to the Company's Amended Registration
Statement on Form 10)
10.15 $1,000,000 Term Life Insurance Policy, dated March 19, 1993, on the
life of David K. Cantley, issued by Federal Kemper Life Assurance
Company (incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1992)
10.16 Agreement dated February 11, 1994 and Amendment to Agreement dated
March 13, 1994 among the Company, H. Joe Frazier, William P. McComas
and Allan Paulson (incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1993)
10.17 Debt Reduction Agreement, dated April 16, 1993, among the Company,
Deadwood Gulch Resort and Gaming Corp., Eugene V. Gatti, William P.
McComas and H. Joe Frazier. (Incorporated by reference to the
Company's Registration Statement on Form SB-2, No. 33-61580 as filed
with the Securities and Exchange Commission)
10.18 Letter Agreement, dated May 17, 1993, between the Company and H. Joe
Frazier, extending mortgage commitment expiration date to July 7,
1993. (Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 33-61580 as filed with the Securities
and Exchange Commission)
10.19 Letter Agreement, dated May 17, 1993, between the Company and Eugene
V. Gatti, extending mortgage commitment expiration date to July 7,
1993. (Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 33-61580 as filed with the Securities
and Exchange Commission)
10.20 General Release and Covenant Not to Sue, dated June 7, 1993, among
the Company, Deadwood Gulch Resort and Gaming Corp., Trimark Hotel
Corporation and Park Inns International, Inc. (Incorporated by
reference to the Company's Registration Statement on Form SB-2, No.
33-61580 as filed with the Securities and Exchange Commission)
<PAGE>
10.21 Letter Agreement, dated July 23, 1993, between the Company and H.
Joe Frazier, extending mortgage commitment expiration date to August
7, 1993. (Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 33-61580 as filed with the Securities
and Exchange Commission)
10.22 Letter Agreement, dated July 2, 1993, between the Company and Eugene
V. Gatti, extending mortgage commitment expiration date to August 7,
1993. (Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 33-61580 as filed with the Securities
and Exchange Commission)
10.23 Lock-Up Agreement, dated June 16, 1993, among the Company, David K.
Cantley, Thomas M. Blair, James E. Hosch, H. Joe Frazier, Eugene V.
Gatti, Kober Corporation, William P. McComas, Richard M. Gawlik,
George M. Bashara and the Director of the South Dakota Division of
Securities. (Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 33-61580 as filed with the Securities
and Exchange Commission)
10.24 Stock Purchase Agreement, dated July 20, 1993, among Kober
Corporation, H. Joe Frazier, William P. McComas, James E. Hosch and
Peter N. Bowinski. (Incorporated by reference to the Company's
Registration Statement on Form SB-2, No. 33-61580 as filed with the
Securities and Exchange Commission)
10.25 Master Lease between Coquille Economic Development Corporation
("CEDC") and the Company. (Incorporated by reference to the
Company's Post Effective Amendment No. 1 to Registration Statement
on Form SB-2, No. 33-61580 as filed with the Securities and Exchange
Commission on July 28, 1994)
10.26 Participating lease between CEDC and the Company. (Incorporated by
reference to the Company's Post Effective Amendment No. 1 to
Registration Statement on Form SB-2, No. 33-61580 as filed with the
Securities and Exchange Commission on July 28, 1994)
10.27 Loan Agreement between CEDC and the Company. (Incorporated by
reference to the Company's Post Effective Amendment No. 1 to
Registration Statement on Form SB-2, No. 33-61580 as filed with the
Securities and Exchange Commission on July 28, 1994)
10.28 Promissory Note from The Coquille Indian Tribe and CEDC to the
Company. (Incorporated by reference to the Company's Post Effective
Amendment No. 1 to Registration Statement on Form SB-2, No. 33-61580
as filed with the Securities and Exchange Commission on July 28,
1994)
10.29 Security Agreement between The Coquille Indian Tribe, CEDC and the
Company. (Incorporated by reference to the Company's Post Effective
Amendment No. 1 to Registration Statement on Form SB-2, No. 33-61580
as filed with the Securities and Exchange Commission on July 28,
1994)
10.30 Absolute Assignment of Rents and Leases from The Coquille Indian
Tribe to the Company. (Incorporated by reference to the Company's
Post Effective Amendment No. 1 to Registration Statement on Form SB-
2, No. 33-61580 as filed with the Securities and Exchange Commission
on July 28, 1994)
<PAGE>
10.31 Escrow Agreement by and among the Company, CEDC, The Coquille Indian
Tribe, Sun Plywood, Inc. and Ticor Title Insurance Company of
California (Incorporated by reference to the Company's Post
Effective Amendment No. 1. to Registration Statement on Form SB-2,
No. 33-61580 as filed with the Securities and Exchange Commission on
July 28, 1994)
10.32 Purchase Agreement between the Company and William P. McComas dated
August 18, 1994 (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994)
10.33 Agreement among the Company, Hannahville Indian Community, Lac Vieux
Desert Band of Lake Supperior Chippewa Indians, Grand Traverse Band
of Ohawa and Chippewa Indians and Keween and Bay Indian Community
dated September 10, 1994 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1994)
10.34 Agreement between Green Acres Casino Management Company, Inc. and
the Company dated January 4, 1995 (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994)
10.35 Agreement for Commercial Development between the Nottawaseppi Huron
Band of Potawatomi, Green Acres Casino Management Company, Inc. and
the Company dated January 11, 1995 (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994)
10.36 Addendum to Class II and III Management Agreements among the
Nottawaseppi Huron Band of Potawatomi, Green Acres Casino Management
Company, Inc. and the Company dated January 12, 1995 (Incorporated
by reference to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994)
10.37 Promissory Note dated November 20, 1995 in the original principal
amount of $375,000 from the Company to William P. McComas*
10.38 Master Agreement dated as of December 29, 1995 by and between GTECH
Corporation and the Company*
10.39 Option Agreement dated as of December 29, 1995 by and among GTECH
Corporation, the Company, Lee Iacocca, William P. McComas and Allen
E. Paulson*
10.40 Convertible Note dated July 26, 1996 in the original principal
amount of $3,000,000 payable by the Company to GTECH Corporation*
10.41 Guaranty Agreement dated as of December 29, 1995 from the Company to
GTECH Corporation pursuant to which the Company guarantees 50% of
the obligations of Gaming Entertainment, L.L.C. to GTECH under a
Promissory Note of even date therewith in the amount of $10,400,000*
10.42 Guaranty Agreement dated as of December 29, 1995 from the Company to
GTECH Corporation pursuant to which the Company guarantees 50% of
the obligations of Gaming Entertainment (Delaware), L.L.C. to GTECH
in an amount not to exceed $6,000,000*
<PAGE>
10.43 Loan Agreement dated as of May 31, 1995 between Deadwood Gulch
Resort and Gaming Corp. and Miller & Schroeder Investment
Corporation; Guaranty dated as of May 31, 1995 by Allen E. Paulson,
H. Joe Frazier and William P. McComas; Subordination Agreement dated
as of May 31, 1995 among Miller & Schroeder Investment Corporation,
Deadwood Gulch Resort and Gaming Corp. and the Corporation; Waiver
of Breach of Covenants and Amendment Number 1 to Loan Agreement
dated March 28, 1996; and Guaranty dated March 28, 1996 by the
Company.
21 List of Subsidiaries of Full House Resorts, Inc.*
23.1 Consent of Deloitte & Touche LLP, Certified Public Accountants**
- --------------------
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
July 3, 1996 FULL HOUSE RESORTS, INC.
By: /s/William R. Jackson
William R. Jackson
Executive Vice-President -
Corporate Finance
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Full House Resorts, Inc.:
We have audited the accompanying consolidated balance sheet of Full House
Resorts, Inc. and Subsidiaries (the "Company") as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1995 and 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Full House Resorts, Inc. and
Subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the years ended December 31, 1995 and 1994 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Reno, Nevada
March 13, 1996
<PAGE>
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 356,754
Restricted cash................................................... 224,775
Accounts receivable, net of allowance of $16,300.................. 24,959
Receivable from GTECH............................................. 1,149,486
Receivables from joint ventures................................... 10,211,703
Inventories....................................................... 90,730
Prepaid expenses.................................................. 373,217
----------
Total current assets............................................. 12,431,624
GAMING RIGHTS...................................................... 3,258,836
ASSETS HELD FOR SALE - net......................................... 6,560,333
INVESTMENTS IN JOINT VENTURES...................................... 862,508
GOODWILL - net..................................................... 2,912,698
OTHER ASSETS....................................................... 11,750
----------
TOTAL.............................................................. $26,037,749
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................. $11,042,260
Accounts payable.................................................. 386,914
Accrued expenses.................................................. 611,334
----------
Total current liabilities........................................ 12,040,508
----------
LONG-TERM DEBT, net of current portion............................. 4,545,194
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative, convertible preferred stock, par value $.0001,
5,000,000 shares authorized; 700,000 shares issued and
outstanding; aggregate liquidation preference of $2,835,000...... 70
Common stock, par value $.0001, 25,000,000 shares authorized;
10,339,549 shares issued and outstanding......................... 1,034
Additional paid in capital........................................ 16,413,315
Accumulated deficit............................................... (6,962,372)
----------
Total stockholders' equity....................................... 9,452,047
----------
TOTAL.............................................................. $26,037,749
==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING REVENUES:
Casino............................................. $1,453,608 $1,672,559
Hotel/RV park...................................... 1,424,428 1,464,108
Retail............................................. 1,249,285 1,256,982
Food and beverage.................................. 727,865 744,709
Fun park........................................... 822,893 756,910
Joint ventures..................................... 160,224 -
--------- ---------
5,838,303 5,895,268
Less: promotional allowances....................... (205,157) (202,748)
--------- ---------
Net operating revenues............................ 5,633,146 5,692,520
--------- ---------
OPERATING COSTS AND EXPENSES:
Casino............................................. 1,049,363 1,052,655
Hotel/RV park...................................... 637,062 606,567
Retail............................................. 1,090,951 1,121,191
Food and beverage.................................. 578,684 626,766
Fun park........................................... 632,894 476,330
Sales and marketing................................ 224,334 246,579
General and administrative......................... 2,450,808 1,660,964
Depreciation and amortization...................... 1,240,446 505,231
Abandoned project cost............................. 1,867,730 -
Impairment of long-lived assets.................... 3,100,000 -
Other.............................................. 75,917 -
--------- ---------
Total operating costs and expenses................ 12,948,189 6,296,283
---------- ---------
(7,315,043) (603,763)
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE):
Interest expense and debt issue costs (including
$81,015 and $626,868 to related parties)........... (1,008,857) (821,796)
Interest and other income........................... 828,302 57,645
--------- ---------
LOSS BEFORE INCOME TAXES............................. (7,495,598) (1,367,914)
INCOME TAX BENEFIT................................... 1,944,710 2,000
--------- ---------
NET LOSS............................................. (5,550,888) (1,365,914)
Less, undeclared dividends on cumulative
preferred stock..................................... (210,000) (225,000)
--------- ---------
NET LOSS APPLICABLE TO COMMON SHARES................. $(5,760,888) $(1,590,914)
========= =========
LOSS PER COMMON SHARE................................ $ (0.59) $ (0.19)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING......................................... 9,806,723 8,417,176
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deferred
Preferred Stock Common Stock Additional Debt
--------------- ---------------- Paid-in Issue Accumlated
Shares Amount Shares Amount Capital Costs Deficit Total
------ ------ ------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994...... 1,000,000 $100 7,953,500 $ 795 $ 9,296,456 $(200,000) $ (45,570) $9,051,781
Net loss.............. - - - - - - (1,365,914) (1,365,914)
Purchase and retirement
of stock............. (300,000) (30) (1,025,635) (103) (1,902,867) - - (1,903,000)
Purchase of shares by
an officer, director
and stockholder...... - - 1,000,000 100 799,900 - - 800,000
Issuance of common stock
to an officer, director
and stockholder related
to debt issue costs... - - 500,000 50 399,950 - - 400,000
Issuance of common stock
as compensation....... - - 50,000 5 117,495 - - 117,500
Exercise of options.... - - 50,000 5 149,995 - - 150,000
Exercise of options
under incentive plan.. - - 57,188 6 151,542 - - 151,548
Exercise of warrants,
net of $38,450 in
registration costs... - - 182,964 19 767,931 - - 767,950
Write off and amortization
of debt issue costs.. - - - - - 200,000 - 200,000
--------- ---- ---------- ------ ---------- --------- ---------- ---------
BALANCE,
DECEMBER 31, 1994.... 700,000 70 8,768,017 877 9,780,402 - (1,411,484) 8,369,865
Net loss.............. - - - - - - (5,550,888) (5,550,888)
Shares issued for
acquisition of LAI
Associates, Inc.
("LAI").............. - - 1,250,000 125 5,312,375 - - 5,312,500
Receivable for shares
issued for acquisition
of LAI to be returned.. - - (193,529) (19) (822,481) - - 822,500)
Shares issued for
acquisition of Omega
Properties, Inc. ..... - - 500,000 50 2,124,950 - - 2,125,000
Exercise of warrants,
net of $45,189 in
registration costs.... - - 15,061 1 18,069 - - 18,070
--------- ---- ---------- ----- ---------- -------- ---------- ---------
BALANCE,
DECEMBER 31, 1995.... 700,000 $ 70 10,339,549 $1,034 $16,413,315 $ - $(6,962,372) $9,452,047
========== ==== ========== ===== ========== ======== ========== ==========
</TABLE>
See notes to consoldiated financial statements.
<PAGE>
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................................... $(5,550,888) $(1,365,914)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization................... 1,240,446 505,231
Stock issued as compensation.................... - 117,500
Debt issue costs................................ 41,170 647,349
Abandoned project costs......................... 1,867,730 -
Impairment of long-lived assets................. 3,100,000 -
Loss on disposition of assets................... - 5,787
Bad debt expense................................ 16,300 -
Equity in earnings of joint ventures............ (160,224) -
Changes in assets and liabilities:
Increase in restricted cash (224,775) -
Increase in accounts receivable................ (223,805) (4,295)
Increase in inventories........................ (588) (3,449)
Increase in prepaid expenses................... (177,380) (23,227)
Increase in accounts payable and accrued
expenses...................................... 582,933 116,142
Decrease in deferred tax liability............. (1,944,710) (2,000)
--------- ----------
Net cash used in operating activities......... (1,433,791) (6,876)
--------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment.............. (431,495) (3,650,424)
Proceeds from disposition of property and
equipment....................................... - 5,350
Increase in note receivable...................... (9,919,079) (400,000)
Gaming development costs......................... (607,245) (426,665)
Acquisition of businesses, net of cash acquired.. (172,736) -
--------- ---------
Net cash used in investing activities.......... (11,130,555) (4,471,739)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt................... 14,306,285 2,150,000
Repayment of debt................................ (1,527,107) (3,817,934)
Payment of debt issue costs...................... (260,818) -
Purchase and retirement of stock................. - (1,903,000)
Proceeds from sale of common stock and exercise
of warrants, net of offering costs.............. 18,070 1,869,498
---------- ----------
Net cash provided by (used in) financing
activities.................................... 12,536,430 (1,701,436)
---------- ----------
</TABLE>
(Continued)
<PAGE>
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
NET DECREASE IN
CASH AND CASH EQUIVALENTS........................ (27,916) (6,180,051)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR................................ 384,670 6,564,721
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR...................................... $ 356,754 $ 384,670
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND NATURE OF OPERATIONS
Full House Resorts, Inc. ("FHRI") was incorporated in the State of
Delaware as Hour Corp. on January 5, 1987 and changed its name to D.H.Z.
Capital Corp. on June 1, 1987 and to Full House Resorts, Inc. on September
2, 1992. FHRI from inception to November 20, 1992, conducted no
significant operations other than the investigation of potential business
opportunities.
On November 20, 1992, FHRI acquired 100% of the outstanding common stock
of Deadwood Gulch Resort and Gaming Corp. ("DGR"). DGR currently operates
in Deadwood, South Dakota a 97-room hotel, a recreational vehicle park and
campground, conference center, convenience store/gas mart, restaurant,
lounge, family entertainment facility and two small casinos. During
January of 1996, the Company announced its intent to dispose of DGR and is
actively seeking a buyer. The Company has classified the assets of DGR as
assets held for sale. (See Note 4).
On July 12, 1994, Full House Subsidiary of Nevada, Inc. ("FHSN"), a wholly
owned subsidiary of FHRI, was incorporated to conduct development
activities in Nevada.
On August 19, 1994, Full House Subsidiary, Inc. ("FHS"), a wholly owned
subsidiary of FHRI, was incorporated to effect the business combination
with LAI Associates, Inc.("LAI") described in Note 3.
On March 3, 1995, Full House Subsidiary of Oregon, Inc. ("FHSO"), a wholly
owned subsidiary of FHRI, was incorporated to conduct gaming development
activities in Oregon.
On April 10, 1995, Green House Management, Inc. ("GHM"), an 85% owned
subsidiary of FHRI, was incorporated to conduct gaming development
activities with the Nottawaseppi Huron Band of Potawatomi.
On June 22, 1995, Full House Joint Venture Subsidiary Inc. ("FHJVS"), a
wholly owned subsidiary of FHRI, was incorporated to effect the business
combination with Omega Properties, Inc. ("Omega") described in Note 3.
Effective December 29, 1995, FHRI entered into a series of agreements with
GTECH Corporation ("GTECH") to jointly pursue gaming opportunities.
Pursuant to the agreements, four limited liability companies were formed.
FHRI has a 50% interest in the joint ventures.
FHRI is currently pursuing various gaming opportunities throughout North
America and the U.S. Virgin Islands.
The consolidated financial statements include the accounts and operations
of FHRI and its wholly owned and majority owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company conform to generally accepted
accounting principles. The following is a summary of the more significant
of such policies.
Cash and Cash Equivalents - Cash and cash equivalents include cash
required for gaming operations. At December 31, 1995, the Company had bank
deposits exceeding federally insured limits by approximately $202,665.
Cash in excess of daily requirements is invested in short-term investments
with maturities of three months or less when purchased. Such investments
are stated at cost, which approximates market, and are deemed to be cash
equivalents for purposes of the consolidated statements of cash flows.
Receivables - Receivables consist principally of amounts receivable from
joint ventures and GTECH as a result of agreements entered into between
the Company and GTECH effective December 29, 1995. Receivables of
$10,026,304 were collected in January of 1996.
Inventories - Inventories consisting principally of fuel, groceries, food
and beverage items are recorded at the lower of first-in, first-out cost
or market.
Investments in Joint Ventures - Investments in joint ventures are
accounted for using the equity method of accounting.
Goodwill - Goodwill represents the excess cost over the net assets of
businesses acquired during 1995 (See Note 3). Goodwill is being amortized
on the straight-line basis over 6 years. The Company reviews the carrying
value of goodwill quarterly to determine whether any impairment has
occurred. Amortization expense for 1995 totaled $615,307.
Gaming Rights and Development Costs - Costs associated with gaming rights
and gaming development activities for which the Company has signed
agreements are capitalized until the project begins operations and
amortized over the term of the respective agreements. If a project is
unsuccessful, and its value is determined to be impaired, the related
deferred costs are charged to expense at the time of impairment. The
Company reviews each project in process and the costs capitalized on a
quarterly basis for accounting purposes to determine whether any
impairment of the assets has occurred.
Casino Revenues - Casino revenue is the net win from gaming activities,
which is the difference between gaming wins and losses.
Promotional Allowances - Food and beverage furnished without charge to
customers is included in gross revenues at a value which approximates
retail and then deducted as complimentary services to arrive at net
revenues. The estimated cost of such complimentary services is charged to
the casino department and was $57,912 and $51,696 for the years ended
December 31, 1995 and 1994.
Impairment of Long-Lived Assets - Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, was issued by the
Financial Accounting Standards Board ("FASB") in March 1995, and
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company adopted the provisions of SFAS
No. 121 during the fourth quarter of the year ended December 31, 1995. The
Company reviews the carrying values of its long-lived and
<PAGE>
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may
not be recoverable.
Fair Value of Financial Instruments - The carrying value of the Company's
cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximates fair value because of the short maturity of
those instruments. The Company estimates the fair value of its long-term
debt based on the current rates offered to the Company for debt of the
same remaining maturities. The estimated fair value of the Company's
long-term debt approximates its recorded value at December 31, 1995.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109 Accounting
for Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been reflected in the financial statements or tax returns. Deferred income
taxes reflect the net effect of (a) temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating
loss and tax credit carryforwards.
Loss per Common Share - Loss per common share is computed based upon the
weighted average number of common and common equivalent shares outstanding
during the year. The common equivalent shares resulting from stock options
and warrants have not been included in the computations since their
inclusion would have an anti-dilutive effect.
Recently Issued Accounting Standards - The FASB issued in October, 1995
SFAS No. 123 Accounting for Awards of Stock-Based Compensation. This
statement, effective for the Company's fiscal year ending December 31,
1996, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions where equity
securities are issued for goods and services. This statement defines a
fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Management's current intention is to continue to follow APB
Opinion No. 25 and therefore believes that the adoption of SFAS No. 123
will not have had a significant effect on the financial position or
results of operations of the Company.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications - Certain 1994 amounts have been reclassified to conform
to the current year presentation.
<PAGE>
3. ACQUISITIONS
On March 23, 1995, LAI (a company owned 100% by Lee A. Iacocca) merged
into the Company's wholly-owned subsidiary, FHS. Pursuant to the merger,
Mr. Iacocca received 1,250,000 shares of the Company's restricted common
stock. In late 1995, the Company was named as a defendant in a lawsuit in
Taney County, Missouri, as a result of its acquisition through the LAI
merger of certain assets. After negotiations with Mr. Iacocca, in March
1996 Mr. Iacocca accepted the reconveyance of the interest in the assets
in exchange for 193,529 shares of common stock of the Company, which the
Company believes had a value equal to the book value of the surrendered
interests in the assets. Such action was intended to minimize the
Company's exposure to the litigation. As a result, the book value of the
assets returned was reduced by $822,500 at December 31, 1995, the value
assigned to the assets in the acquisition, and no gain or loss was
recorded on the transaction. In addition, as of December 31, 1995,
stockholders' equity has been reduced by $822,500 for the receivable due
from Mr. Iacocca for the shares of stock returned, and the number of
common shares outstanding has been reduced by 193,529 shares.
On November 20, 1995, FHJVS merged into Omega (a company owned 30% by a
director and stockholder of the Company). Pursuant to this agreement the
stockholders of Omega received 500,000 shares of the Company's restricted
common stock and a note from the Company in the amount of $375,000.
The transactions have been recorded using the purchase method.
The purchase price of the acquisitions and related allocation (as adjusted
for the return of assets and stock discussed above) consist of the
following:
Purchase price
Issuance of 1,556,471 unregistered shares of common stock
of the Company valued at $4.25 per share:
Common stock............................................... $ 156
Additional paid-in capital................................. 6,614,844
Issuance of note payable.................................... 375,000
Transaction cost............................................ 181,858
---------
Total purchase price........................................ $7,171,858
=========
Allocation of purchase price
Current assets............................................... $ 9,122
Goodwill..................................................... 3,555,634
Gaming rights................................................ 5,556,313
Current liabilities.......................................... (4,501)
Deferred tax liability....................................... (1,944,710)
----------
Total........................................................ $7,171,858
=========
The operating results of the acquired businesses are included in the
Company's consolidated results of operations from the respective dates of
acquisition.
<PAGE>
The following pro forma financial information assumes the acquisitions
occurred at the beginning of each year presented. These results have been
prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisitions been made at the
beginning of these years, or of the results which may occur in the future.
December 31,
-------------------
1995 1994
---- ----
Net revenues................................... $5,633,146 $5,692,520
Net loss....................................... (7,069,546) (2,884,572)
Net loss per common share...................... (.70) (0.31)
4. ASSETS HELD FOR SALE / IMPAIRMENT OF LONG-LIVED ASSETS
Because of the Company's intent to dispose of DGR, the Company has
reclassified certain assets of DGR to other assets - assets held for sale.
The Company has determined that the carrying amount of the assets held for
sale may not be recoverable. The calculated impairment of long-lived
assets as of December 31, 1995, was $3.1 million based upon available
information which indicates the estimated loss which could be incurred
upon disposition, based on estimated fair value of the assets, less costs
of disposition.
During the year ended December 31, 1995 and 1994, DGR incurred a net loss
of $3,586,446, including the impairment loss of $3.1 million, and net
income before taxes of $288,440, respectively.
5. INVESTMENTS IN JOINT VENTURES
The Company entered into a series of agreements with GTECH to jointly
pursue gaming opportunities. Pursuant to the agreements, the following
limited liability companies, equally owned by GTECH and the Company were
formed: Gaming Entertainment L.L.C. ("GELLC"), Gaming Entertainment
(Delaware) L.L.C. ("GEDLLC"), Gaming Entertainment (Michigan) L.L.C.
("GEMLLC"), and Gaming Entertainment (California) L.L.C. ("GECLLC").
Although the agreements were dated December 29, 1995, the joint venture
participants agreed to share equally in the equity investment, financing
responsibility, and revenues and expenses commencing April 1, 1995.
Therefore, revenues received or expenses paid by participants on behalf of
the joint ventures from April 1, 1995 were to be collected from or repaid
to the participants by the joint ventures. In addition, the participants
agreed to reimburse each other directly, such that certain costs and
expenses were shared equally. As a result of these arrangements, as of
December 31, 1995, the Company had a receivable from GTECH of $1,149,486,
$896,377 for reimbursement of costs incurred by the Company for gaming
rights and a net $253,109 for reimbursement of other expenses incurred by
the Company. Principally all of the receivable from GTECH was collected in
January 1996.
The following is a summary of items transferred by the Company at book
value to the joint ventures in exchange for its 50% interest, or for which
the Company was reimbursed by the joint ventures.
During 1994, the Company entered into a series of agreements with the
Coquille Indian Tribe to develop a gaming and entertainment facility in
North Bend, Oregon. The Company agreed to provide up to $10.5 million in
<PAGE>
financing for the facility in exchange for a percentage of "Gross Profit"
as defined, and certain other payments. The advances to the tribe were
converted to a promissory note, bearing interest at prime plus 2% and
receivable in installments through August 2002. During 1995, the facility
began operations. Effective December 29, 1995, the financing obligation
and the gaming agreement (which had no recorded book value), gaming
development costs of $226,312, notes receivable of $10,169,079,
participation fees revenues of $527,557, and general and administrative
costs of $82,450 were transferred to GELLC.
As a result of the acquisitions discussed in Note 3, the Company acquired
the development rights to current and future gaming projects with the
Nottawaseppi Huron Band of Potawatomi. The Company has agreed, subject to
the approval of the tribe, to assign to GEMLLC, the development rights. If
the tribe does not consent, the Company will assign its rights to revenues
and GTECH will bear an appropriate portion of the related expenses.
Effective December 29, 1995, the financing obligation, gaming development
costs of $449,254, and general and administrative costs of $65,897 were
transferred to GEMLLC. GEMLLC is a development stage company as of
December 31, 1995.
On April 21, 1995, the Company entered into a Gaming and Development
Agreement with the Torres Martinez Desert Cahuilla Indians (the "Tribe").
The agreement grants the Company certain rights to develop, manage and
operate gaming activities for the Tribe and the right to receive 40% of
the net revenues from gaming activities subject to the obligation of the
Company to pay the costs of the same. For all non-gaming activities, the
Company is to provide 50% of the financing for development and will
receive 50% of the net revenues from said activities, subject to the
obligation of the Company to lend funds to the Tribe prior to commencement
of gaming operations. Effective December 29, 1995, the financing
obligation, gaming development costs of $117,418, and the gaming agreement
(which had no recorded book value) were transferred to GECLLC. GECLLC is a
development stage company as of December 31, 1995.
On April 12, 1995, the Company entered into an agreement with the Delaware
State Fair, Inc. to provide management services and funding for the
development of a gaming entertainment center at Harrington Raceway in
Harrington, Delaware. The Company agreed to provide $6.3 million in
financing. Effective December 29, 1995, advances of $150,000, gaming
development costs of $181,134, the financing obligation and the gaming
agreement (which had no recorded book value) were transferred to GEDLLC.
GEDLLC is a development stage company as of December 31, 1995.
GTECH has contributed cash and other intangible assets and has agreed to
loan the joint ventures up to $16.4 million to complete the North Bend,
Oregon and Delaware facilities and make loans to the Company for its
portion of the financing of projects if the Company is unable to otherwise
obtain financing. GTECH will also provide project management, technology
and other expertise to analyze and develop/manage the implementation of
opportunities developed by the joint ventures.
As part of this transaction, the directors of the Company and Mr. Iacocca
have granted to GTECH an option to purchase their shares should they
propose to transfer the same.
The Company has agreed to guarantee 50% of the up to $16.4 million which
GTECH has agreed to loan the joint ventures.
As of December 31, 1995, the Company had guaranteed 50% of $10.5 million
in loans to the joint ventures.
<PAGE>
The following is a summary of condensed financial information for the
joint ventures as of December 31, 1995 and for the year then ended:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
GELLC GEMLLC GEDLLC GECLLC Total
----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Current assets.... $ 1,666,850 $ 25,000 $ 25,000 $ 25,000 $ 1,741,850
Noncurrent
assets.......... 9,347,147 504,427 368,706 126,794 10,347,074
---------- ------- ------- ------- ----------
Total............. $11,013,997 $529,427 $393,706 $151,794 $12,088,924
========== ======= ======= ======= ==========
Current
liabilities...... $10,289,178 $ 71,923 $ 2,806 $ - $10,363,907
Members' capital.. 724,819 457,504 390,900 151,794 1,725,017
---------- ------- ------- ------- ----------
Total............. $11,013,997 $529,427 $393,706 $151,794 $12,088,924
========== ======= ======= ======= ==========
Company's equity
in net assets.... $ 362,409 $228,752 $195,450 $ 75,897 $ 862,508
========== ======= ======= ======= =========
CONDENSED STATEMENTS OF OPERATIONS
Revenues.......... $ 527,557 $ - $ - $ - $ 527,557
========== ======= ======= ======= =========
Net income (loss). $ 395,176 $(71,923) $ (2,806) $ - $ 320,447
========== ======= ======= ======= =========
Company's equity
in net income
(loss)........... $ 197,588 $(35,962) $ (1,402) $ - $ 160,224
========== ====== ======= ======= =========
</TABLE>
<PAGE>
6. DEBT
Debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Revolving $8,000,000 note payable to a bank; interest
payable monthly (8.25% at December 31, 1995); principal is
due on demand or if no demand is made, July 1996; secured
by the personal guarantee of certain stockholders and the
Company's Chief Executive Officer.
Repaid during January 1996................................. $ 6,206,286
Note payable, secured by a first mortgage on all real property
of DGR (included in assets held for sale) and partially
secured by the personal guarantee of certain stockholders and
the Company's Chief Executive Officer; interest at 10.25%
through May 1996 and at prime plus 2 1/4% for the period of
June 1, 1996 through May, 2002; due in monthly installments
of principal and interest; $67,165 through June and $69,794
thereafter through May 31, 2002, at which time all unpaid
principal and interest are due............................. 4,853,671
Note payable to GTECH; repaid during January 1996........... 4,000,000
Note payable to stockholder; interest at prime (8.75% at
December 31, 1995) payable quarterly commencing on January 31,
1996; principal payable on demand, but in no event prior to
August 31, 1996............................................ 375,000
Note payable; secured by gaming equipment; repaid during
February 1996.............................................. 152,497
-----------
Total....................................................... 15,587,454
Less current portion........................................ (11,042,260)
-----------
Long-term portion........................................... $ 4,545,194
===========
</TABLE>
The first mortgage note payable includes certain financial covenants which
restrict the uses of DGR's cash to the operations and debt service of DGR
and which require DGR to maintain a certain tangible net worth and debt
service coverage ratio. DGR was not in compliance with the tangible net
worth requirement and the debt service coverage ratio at December 31,
1995. However, DGR has obtained a waiver of these covenants for 1996.
The scheduled maturities of debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1996 $11,042,260
1997 336,330
1998 376,762
1999 422,055
2000 472,793
Thereafter 2,937,254
----------
Total $15,587,454
==========
</TABLE>
<PAGE>
Of the total interest expense and debt issue costs of $1,008,857 and
$821,796 in 1995 and 1994, none and $88,186 has been capitalized into
property and equipment.
7. STOCKHOLDERS' EQUITY
As part of a public offering in August 1993, warrants to purchase shares
of the Company's common stock were issued. The exercise price of the
warrants and the number of shares issuable per warrant are based on a
dilution agreement and, as of December 31, 1995, 778,534 warrants to
purchase 925,988 shares of common stock at $4.20 per share were
exercisable through August 10, 1996. The Company may redeem the warrants
on not less than 30 days notice at $.05 per warrant provided the Company's
stock trades at $5.04 per share for at least twenty consecutive days and
there is an effective registration statement under the Securities Act of
1933, as amended, covering the warrants.
The Company also sold to the underwriters of the Company's public offering
warrants at $.01 per warrant to acquire 80,000 units, each unit consisting
of three shares of the Company's common stock and a warrant to purchase
additional shares of the Company's common stock. The exercise price of
warrants to purchase the units and the exercise price and number of shares
issuable per warrant for the warrants issuable upon purchase of the unit
are based upon a dilution agreement. As of December 31, 1995, warrants to
purchase 22,500 units were exercisable at $13.17 per unit through August
9, 1998 and 57,500 warrants to purchase 68,393 shares of common stock at
$4.20 per share were exercisable through August 9, 1996.
On March 24, 1994, the Company purchased and retired 1,025,635 shares of
its common stock at $.87 per share and 300,000 shares of its preferred
stock at $3.38 per share for a total consideration of $1,903,000,
representing all of the stock owned by one of its principal stockholders.
On March 24, 1994, the Company sold for cash 1,000,000 shares of its
restricted common stock at $.80 per share to an officer, director and
stockholder. Additionally, this individual was issued 500,000 shares of
the Company's restricted common stock in exchange for causing a bank to
provide and his guarantee of an $8,000,000 revolving note payable. The
Company valued these shares at $400,000 or $.80 per share and expensed
such costs as debt issue costs.
On June 15, 1994, the Company issued 50,000 shares of its restricted
common stock valued at $2.35 per share (market value on date of issuance)
or $117,500 to the Company's General Counsel as a signing bonus.
Additionally, through December 31, 1995 options to purchase 150,000 shares
of common stock at $3.69 per share (market value on date of grant) were
issued to the Company's General Counsel, and as of December 31, 1995
options to purchase 112,500 shares of common stock were exercisable.
On August 16, 1994, the Company issued an option to purchase 50,000 shares
of its restricted common stock at $3.00 per share (market value on date of
grant) to an individual who owns a company with which the Company has a
public relations agreement. This option was exercised during the year
ended December 31, 1994 for a total consideration of $150,000.
During the year ended December 31, 1994, the Company issued 182,964 shares
of its common stock at an average price of $4.40 per share upon exercise
of warrants for a total consideration of $806,400.
During the year ended December 31, 1995, the Company issued 15,061 shares
of its common stock at an average price of $4.20 per share upon exercise
of warrants for a total consideration of $63,259.
<PAGE>
The Company has reserved 300,000 shares of its common stock for issuance
under the Nonemployee Director Stock Plan. The Plan allows for options to
be granted at prices not less than fair market value on the date of grant
and are generally exercisable over a term of five years. No options have
been issued under the Nonemployee Director Stock Plan.
The Company has reserved 1,000,000 shares of its common stock for issuance
under an Incentive Plan. The Plan allows for the issuance of options and
other forms of incentive awards, including qualified and non-qualified
incentive stock options. Incentive stock options may be granted at prices
not less than fair market value on the date of grant, while non-qualified
incentive stock options may be granted at a price less than fair market
value on the date of grant. Options issued under the Incentive Plan are
generally exercisable over a term of ten years. As of December 31, 1994
options to purchase 235,000 shares of common stock were outstanding and no
options were exercisable. Options to purchase 57,188 shares at $2.65 per
share were exercised during 1994 with net proceeds to the Company of
$151,548. As of December 31, 1995 options to purchase 210,000 shares of
common stock at $3.88 per share were outstanding and 70,000 options were
exercisable. Options to purchase 25,000 shares at $5.34 per share were
forfeited during 1995 and no options were exercised.
The Company's preferred stock may be converted, at the option of the
holder, to common stock on a one-for-one basis, has a $.30 per share
cumulative dividend rate and has a liquidation preference equal to $3.00
per share plus all unpaid dividends. If the Company is in default in
declaring, setting apart for payment of dividends on the preferred stock,
it is restricted from paying any dividend or making any other distribution
or redeeming any stock ranking junior to the preferred stock. The
stockholders' right to the $.30 per share cumulative dividends on the
preferred stock commenced as of June 30, 1992 and totaled $735,000 at
December 31, 1995.
Through December 31, 1995, no dividends have been declared or paid.
During the year ended December 31, 1995, the Company issued 1,556,471
shares of restricted common stock to acquire businesses. See Note 3.
<PAGE>
8. INCOME TAXES
The income tax benefit recognized in the consolidated financial statements
consists of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred benefit............................ $1,944,710 $2,000
========= =====
</TABLE>
A reconciliation of the income tax benefit with amounts determined by
applying the statutory U.S. Federal income tax rate to consolidated loss
before income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Tax benefit at U.S. statutory rate............ $2,623,459 $462,846
Loss for which no tax benefit is available.... (457,237) (465,308)
Non-taxable/deductible items.................. (221,512) 4,462
--------- --------
Total......................................... $1,944,710 $ 2,000
========= ========
</TABLE>
<PAGE>
The Company's deferred tax items as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Current Non-Current Total
------- ----------- -----
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward...... $ - $1,313,475 $1,313,475
Difference between book and tax
basis of assets held for sale....... - 967,982 967,982
Accrued expenses..................... 29,374 - 29,374
Other................................ - 66,039 66,039
------- --------- ---------
Total deferred tax assets........... 29,374 2,347,496 2,376,870
Deferred tax liabilities -
Difference between book and tax
basis of gaming rights............. - 1,454,325 1,454,325
Valuation allowance.................. - - -
Net deferred tax liability........... $ - $ - $ -
======== ========= =========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $3,753,000, which may be carried
forward to offset future taxable income. The carryforwards expire in 2007
through 2010. The availability of the loss carryfowards may be limited in
the event of a significant change in ownership of the Company.
9. RELATED PARTY TRANSACTIONS
During 1995, the Company repaid a note payable to a stockholder in the
amount of $1,244,981.
Total interest expense and debt issue costs charged to operations in 1995
and 1994 related to the note payable to a stockholder were $81,015 and
$626,868.
See Note 7 for other issuances of the Company's common stock to and the
purchase of common and preferred stock from related parties.
See Note 3 for a discussion of a business combination with a company owned
30% by a director and stockholder of the Company.
See Note 12 for a discussion of transactions with joint ventures.
10. BENEFIT PLAN
On January 1, 1994, the Company adopted a 401(k) plan that covers all
eligible employees. Participants may contribute a percentage of eligible
wages up to 15% of their annual salaries, with the Company matching up to
a maximum of 50% of the first 4% of participant wages contributed. The
Company's matching contributions were $19,415 and $14,001 for the years
ended December 31, 1995 and 1994.
<PAGE>
11. ABANDONED PROJECT COST
On June 28, 1995, the Governor of the State of Michigan determined to
prohibit off-reservation gaming in the State of Michigan. As a result, the
Company recognized a loss of $1,867,730 relating to the write-off of costs
of the gaming agreement acquired in the acquisitions of LAI and Omega
discussed in Note 3, and other costs.
12. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Cash payments for interest for the years ended December 31, 1995 and 1994
were $814,002 and $174,447, respectively.
The following noncash investing and financing activities are not reflected
in the consolidated statements of cash flows:
During the year ended December 31, 1995, the Company increased its
investments in joint ventures by $702,284 by contributing gaming
development costs of $103,596 and recording capital contributions payable
of $598,688.
During the year ended December 31, 1995, the Company recorded a receivable
from joint ventures of $10,211,703. The receivable is net of capital
contributions payable of $598,688 and resulted from transfers of the
following items to the joint ventures: notes receivable of $10,169,079,
gaming development costs of $870,522, revenues of $527,557, general and
administrative costs of $148,347 and advances receivable of $150,000.
During the year ended December 31, 1995, the Company recorded a receivable
from GTECH of $896,377, and a reduction in gaming rights of $896,377. The
receivable is a result of the joint venture agreement between the Company
and GTECH.
During the year ended December 31, 1994, the Company issued stock for debt
issue costs of $400,000 and purchased equipment through the issuance of
notes payable of $351,209.
The Company transferred the following assets of DGR to assets held for
sale during the year ended December 31, 1995:
<TABLE>
<S> <C>
Property and equipment-net............................... $6,203,062
Other assets............................................. 357,271
---------
Total.................................................... 6,560,333
=========
</TABLE>
<PAGE>
The Company's business acquisitions in 1995 involved the following:
<TABLE>
<S> <C>
Fair value of assets acquired, other than cash and
cash equivalents........................................ $ 9,112,045
Liabilities assumed...................................... (1,949,210)
Issuance of common stock................................. (6,615,099)
Issuance of note payable................................. (375,000)
----------
Net cash paid.......................................... $ 172,736
==========
</TABLE>
<PAGE>
13. LEGAL MATTERS
The Company is party to legal proceedings arising in the normal conduct of
business. Management believes that the final outcome of these matters,
including the items described below, will not have a material adverse
effect upon the Company's consolidated financial position, results of
operations or cash flows.
The Company has filed an action for declaratory relief in Mississippi,
seeking a determination by the court that no relationship exists between
it and Lone Star Casino Corporation regarding the potential acquisition of
a riverboat casino on the Mississippi gulf coast, (Full House Resorts,
Inc. v. Lone Star Casino Corporation v. Allen E. Paulson, Second Judicial
District of the Chancery Court of Harrison County, Mississippi). Lone Star
has filed a counterclaim alleging breaches of fiduciary duty, breach of
contract and other claims. Both the Company and Mr. Paulson have been
granted summary judgment on Lone Star's breach of contract claim and all
claims arising therefrom. The Company's motion for summary judgment on
Lone Star's remaining claims against it has been granted. The period
during which Lone Star may file an appeal has not yet expired. An action
filed by Lone Star in Texas in December 1994 raising similar issues has
been dismissed.
Litigation has been filed against the Company relating to ownership and
access pertaining to a portion (approximately 1,200 square feet) of the
Deadwood Gulch Resort hotel and parking lot property. The Katons, who are
neighboring landowners, allege trespass among other claims, as a result of
the construction of the Resort parking lot. Other adjoining landowners to
the rear of the Resort have also filed a lawsuit, alleging that the Resort
has blocked their right of way across the creek to their property, insofar
as their current access is across an alleged portion of the Katons'
property. Katon, et al v. Deadwood Gulch Resort and Gaming Corp., and
Sowers, et al v. Deadwood Gulch Resort and Gaming Corp., Eighth Judicial
Circuit, Lawrence County, South Dakota.
14. SUBSEQUENT EVENTS (UNAUDITED)
On January 26, 1996, GTECH loaned the Company $3 million, which loan is
convertible, subject to regulatory approval, into 600,000 shares of the
Company's common stock. The loan is non-interest bearing through January
25, 1998, at which time the note begins to accrue interest at the prime
rate. Monthly interest only payments commence on February 1, 1998, with
the total principal and any unpaid interest due on January 25, 2001.
During March 1996, the Company repaid $752,000 in principal on the first
mortgage note payable, discussed in Note 6.
15. LETTER OF INTENT (UNAUDITED)
On April 9, 1996, the Company signed a non-binding letter of intent for
the sale of DGR (see Note 4). Subsequently, during May 1996, negotiations
with the purchaser under the letter of intent terminated. The Company will
continue its efforts to sell DGR.
Because of the Company's intent to dispose of DGR, the Company has
reclassified certain assets of DGR to other assets - assets held for sale.
Further analysis of the estimated realizable value of the assets held for
sale resulted in an additional impairment loss recorded in the three
months ended March 31, 1996.
******
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
33-84226 and 33-80858 of Full House Resorts, Inc. on Form S-8 of our report
dated March 13, 1996, appearing in this Annual Report on Form 10-KSB/A of Full
House Resorts, Inc. for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Reno, Nevada
July __, 1996
