U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended: December 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] Commission file number 0-20630 FULL HOUSE RESORTS, INC. (Name of Small Business Issuer in Its Charter) Delaware 13-3391527 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2300 West Sahara Avenue, Suite 450 - Box 23, Las Vegas, Nevada 89102 (Address and zip code of principal executive offices) (702) 221-7800 (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None None (Title of Each Class) (Name of Each Exchange on Which Registered) Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.0001 per Share (Title of class) Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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 or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $3,529,687. The aggregate market value of registrant's voting $.0001 par value common stock held by non-affiliates of the registrant, as of March 24, 1999, was: $12,668,189. The number of shares outstanding of registrant's $.0001 par value common stock, as of March 24, 1999, was 10,340,380 shares. PART I 1. DESCRIPTION OF BUSINESS. Background Full House Resorts, Inc. ("Full House" or the "Company"), a developer of destination resorts and entertainment, gaming and commercial centers, was incorporated in the State of Delaware on January 5, 1987. 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 net proceeds of $6,742,841. The Company extended the exercise period of the Warrants until February 10, 1997. In May 1994, Lee Iacocca, currently a director of the Company, 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 Indians) 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. 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 (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 at 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 also 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 Merger between LAI and FHS was consummated. As a result of the Merger, Full House obtained a 55% interest in the agreements with the Organized Tribes and the Nottawaseppi Huron Band of Potawatomi, and a 50% interest in the agreements with the Torres Martinez Desert Cahuilla Indians and the Delaware State Fair. The merger with Omega 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 accrued interest, payable quarterly, at a rate equal to the "prime" rate and such principal amount, together with all accrued interest, was 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. The promissory note was paid in full in 1998. 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's executive offices are located at 2300 West Sahara Avenue, Suite 450 - Box 23, Las Vegas, Nevada 89102, telephone (702) 221-7800. -2- GTECH Relationship Effective April 1, 1995, 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 future gaming opportunities. Pursuant to the agreements, joint venture companies equally owned by Dreamport, Inc., the gaming and entertainment subsidiary of GTECH, and Full House have been formed. Full House contributed its rights (as described below) to the North Bend, Oregon facility and the rights to develop the Torres Martinez, Nottawaseppi Huron Band of Potawatomi and Delaware State Fair projects to the joint venture companies. In payment for its interest in the joint venture companies, GTECH contributed cash and other intangible assets to the companies and committed to loan the joint venture companies up to $16.4 million to complete the North Bend, Oregon and Delaware facilities. Full House agreed to guarantee one-half of the obligations of the joint venture companies to GTECH under these loans and at December 31, 1998 had guaranteed to GTECH one-half of a loan to the Oregon Tribe with a balance of $2 million. The Delaware venture loan was paid in full during February 1998. GTECH 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 companies. GTECH has also loaned Full House $3 million. Although the loan was convertible into 600,000 shares of Full House's Common Stock in January 1998, the loan conversion clause expired without exercise. As part of the GTECH relationship, Allen E. Paulson, William P. McComas and Lee Iacocca have granted to GTECH an option to purchase their shares should they propose to transfer the same. In March 1997, Full House and GTECH modified their agreement to no longer require each party to present prospective business opportunities to the other. Set forth below is a brief description of each of the gaming opportunities which have been transferred to the joint venture companies which are equally owned by Full House and Dreamport. THE MILL CASINO-NORTH BEND, OREGON. On May 19, 1995, the first phase of the facility known as the "Mill" was opened with 250 video lottery terminals, nine blackjack tables, three poker tables, a restaurant and buffet, a saloon, a bingo hall, a gift shop and a snack bar on Tribal Trust Lands of the Coquille Indian Tribe in North Bend, Oregon (as of December 31, 1998, there were 350 video lottery terminals, 10 blackjack tables and nine poker tables). A Full House - Dreamport 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 sublease expires in 2002. On July 19, 1995, an addendum to the agreement with the Coquille Indian Tribe was signed by Full House and Dreamport, which reduced the obligations of the joint venture company to provide financing to $10.4 million, extended the date when repayments begin and modified the method of computing participating rents and loan repayments. Lease and debt payments commenced on August 19, 1995 and September 19, 1995, respectively. In October 1996, the Tribe secured a new $17.5 million loan to refinance certain outstanding indebtedness, finance the acquisition of gaming equipment and finance certain improvements to the gaming facility. The joint venture company was repaid 100% of its original development loan from the refinancing. GTECH Corporation purchased a $2 million participation in that new loan, half of which is guaranteed by Full House. As part of the loan, the joint venture company subordinated its rights to receive a percentage of Gross Gaming Revenues. As rental under the sublease to the Tribal entity, from October 8, 1996 through October 7, 1999, the joint venture company will receive 13% of Gross Gaming Revenue. The monthly percentage rental will be reduced to 12% from October 8, 1999 until October 8, 2000 when it will reduce to 11% until October 8, 2001. Thereafter, it will be 10% of Gross Gaming Revenue. No Annual Percentage Rental will be paid after August 19, 2002; provided, however, in the event Gross Gaming Revenue for any twelve month period exceeds $20,000,000, 10% of amounts in excess of such threshold will be paid as rent under the sublease. The Mill is located in North Bend, Oregon on the Port of Coos Bay. The Coos County population, which includes the Bay area, is approximately 65,000. The Bay area's economy is primarily based on forestry and fishing. -3- 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 seven Indian casinos presently operating in Oregon. The closest competing casino is located approximately 90 miles from North Bend and operates 700 devices, a card room, bingo and keno. The other casinos are located approximately 140, 160, 200, 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 other Indian casinos presently being contemplated in Oregon. MIDWAY SLOTS AND SIMULCAST-HARRINGTON, DELAWARE. On August 20,1996 Midway Slots and Simulcast, owned by Harrington Raceway, Inc., was opened. The 35,000 square foot facility located near Dover, Delaware, was developed, financed and is managed by a Full House-Dreamport joint venture company. The facility employs approximately 270 people, and features 702 gaming devices and a 150-seat simulcast parlor. Individual screens for players broadcast horse racing from harness and thoroughbred tracks around the world. The facility also features a 150-seat Las Vegas-style buffet, lounge, and gift shop. The joint venture provided over $11 million in financing, developed the project and acts as manager of the gaming facility pursuant to a 15-year contract. The development loan was paid in full in February 1998. Midway Slots and Simulcast is located in Harrington, Delaware on Route 13, south of Dover, Delaware between Philadelphia and Baltimore/Washington, D.C. Midway Slots and Simulcast is one of three facilities presently operating in Delaware. The closest competing casino is located approximately 20 miles from Harrington and currently operates 1,000 devices with plans to add an additional 500 devices in 1999. The other facility is located approximately 60 miles from Harrington. Under the 15-year management agreement with the joint venture company, the venture receives a percentage of Gross Revenues and Operating Profits, as defined in the agreements. The joint venture company developed and constructed the gaming facility and provided financing through a capital lease arrangement. During 1998, the 150-seat simulcast parlor was moved to the Harrington Raceway Grandstand, the food and beverage operation in the Grandstand was improved and expanded, and the number of gaming devices in the facility was increased by 122. Harrington Raceway, Inc. secured a bank loan to pay for these and other improvements and pay off the development loan from the joint venture company. NOTTAWASEPPI HURON BAND OF POTAWATOMI-BATTLE CREEK, MICHIGAN. Full House entered into a series of agreements in January 1995 with the Nottawaseppi Huron Band of Potawatomi, a Michigan Indian Tribe, to develop gaming and non-gaming commercial opportunities for the 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 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. A joint venture company owned by Full House and Dreamport has 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. A third party will be paid a royalty fee in lieu of its original 15% ownership interest in earlier contracts with the Tribe. The Huron Potawatomi achieved final federal recognition as a tribe in April 1996, and won a Class III Gaming Compact from Michigan's governor early in 1997, to operate an unlimited number of electronic gaming devices as well as roulette, Keno, dice and banking card games and other Class III games. Legislative ratification of the Compact occurred in December, 1998. Approval by the U. S. Department of the Interior and National Indian Gaming Commission remains pending. The Company is in the process of identifying a suitable site for the Tribe's gaming operation and beginning the process of having the land placed in trust for the Tribe. -4- On November 5, 1996, Michigan voters approved licenses for three gaming facilities within the City of Detroit, approximately 100 miles from the Battle Creek area. Construction of temporary facilities has begun with openings projected in 1999. The Company does not believe that operation of three gaming facilities in Detroit will materially adversely impact the proposed Huron Potawatomi casino. TORRES MARTINEZ BAND OF DESERT CAHUILLA INDIANS-THERMAL, CALIFORNIA. In April 1995, Full House entered into a Gaming and Development Agreement and a Gaming Management Agreement with the Torres Martinez Desert Cahuilla Indians. The agreements grant Full House certain rights to develop, manage and operate gaming activities for the Tribe and the right to receive a defined percentage of the net revenues from gaming activities subject to the obligation of Full House to arrange or provide financing for the development. The rights to these agreements were assigned to a Full House-Dreamport joint venture company. In 1997, a new Gaming Management Agreement was executed, further defining the rights and obligations of the Tribe and the Company. During 1996, the Tribe reached a settlement in its litigation with the Department of Justice and two water districts, pursuant to which the Tribe will be paid $14 million in compensation, and will have the right to select up to 11,200 acres of new reservation land to be taken into trust in replacement for the same quantity of land which was flooded by the rising level of the Salton Sea. That settlement, which requires legislative enactment, was approved by the U. S. House of Representatives but not by the Senate. The bill was not reintroduced during the 1997 session as the Tribe focused its attention upon a settlement with the State of California under which it will also take replacement lands in exchange for granting a right of way through its reservation to accommodate the re-routing of a state highway. On March 6, 1998, California Governor Pete Wilson announced that he had reached an agreement on a compact for gaming which was intended to be the standard for gaming compacts with all Indian tribes in California. The Compact would limit electronic gaming devices in Indian casinos to lottery-style devices and limit the number of devices to 19,900 statewide, which would be allocated equally among California's 100 federally recognized tribes. Tribes that do not choose to operate their own casinos could lease their allotment of gaming devices for up to $5,000 per device, per year. Tribal casinos would be limited to 975 gaming devices each, including leased machines. In November 1998, the "Tribal Government Gaming and Economic Self-Sufficiency Act of 1998" (the "Act") was passed by the voters of California in the general election. The Act guarantees any federally recognized tribe within the state that has land eligible for gaming, the right to operate limited forms of Class III gaming under specific terms. However, the Act's constitutionality is pending before the California Superior Court. The Tribe and the Company have not determined which course of action to pursue, if any, in light of the continuing uncertainty of the future scope and direction of Indian gaming in California. Therefore, the Company cannot determine the impact on the future development of gaming operations with the Tribe. THEME HOTEL/CASINO-BILOXI, MISSISSIPPI The Company purchased a one acre parcel of land on the gulf coast in Biloxi, Mississippi in February 1998, with the intent of developing a themed casino resort. The land is located near the interchange of Beach Blvd. and Interstate 110, and next to the recently opened Beau Rivage Resort developed by Mirage Resorts, Inc. The Company has subsequently obtained options to purchase and/or lease approximately six additional acres, which, together with the parcel already acquired, will constitute the project site. The Company and Mr. Allen Paulson (the Company's principal stockholder) have formed a limited liability company, equally owned, for the purpose of owning and developing the proposed resort. Mr. Paulson has agreed to contribute a gaming vessel (the former Treasure Bay barge in Tunica, Mississippi) and the Company has agreed to contribute its rights to various agreements with Hard Rock Cafe International ("Hard Rock"). These agreements provide the Company with the exclusive right to develop a Hard Rock Casino-Hotel in the defined territory in exchange for the payment of a $2,000,000 territory fee and a continuing fee based on gaming and hotel revenues generated by the project. The Company has paid $1,000,000 towards the territory fee as of December -5- 31, 1998, with the balance due on March 31, 1999. The Company has formed a management company with Hard Rock, which will serve as the manager and developer of the project. The Hard Rock-Biloxi, as currently envisioned, is expected to cost between $250 and $300 million, and the Company is exploring various financing alternatives. Substantial additional financing will be required for the Company to effect its business strategy, and there can be no assurance that the Company will be able to obtain such financing on acceptable terms. DEADWOOD GULCH RESORT On May 12, 1998, the Company completed the sale of Deadwood Gulch Resort ("DGR") for $6 million cash and the proration of certain related items. The Company received net proceeds of $5,933,160 from the sale of DGR, which includes the $6 million cash portion of the sales price in addition to $11,439 received from the buyer for the proration of inventory, receivables and prepaid assets, offset by advance deposits, progressive jackpot liabilities and closing costs of $78,279. The gain on the sale, recorded in the second quarter 1998, was $385,225. The Company determined that its ownership of this facility was inconsistent with the Company's future plans which are to focus on gaming facilities in areas of higher population density and at locations which permit higher stakes and more types of gambling than are allowed in Deadwood, South Dakota. From the time of its acquisition through its sale, the Resort had a cumulative operating deficit of approximately $3.41 million and the Company had recognized an impairment loss of $4.15 million through such date. Full House operated Deadwood Gulch Resort in Deadwood, South Dakota until its sale in May 1998. The Deadwood Gulch Resort consists of a 56-acre complex which includes a 99-room hotel (including an outdoor pool/recreation area) with two small casinos, a freestanding restaurant and saloon, a freestanding 8,000 square foot conference center, a convenience store/gas mart, a recreational vehicle park and campground and the Gulches of Fun family center. Full House operated 96 slot machines, two blackjack tables and three video lottery devices within the resort complex. 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. -6- 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. 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 construction costs; (iv) a ceiling on the repayment of such development and construction 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 willfully 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 pari-mutuel 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 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 -7- 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. 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. MISSISSIPPI. The ownership and operation of casino gaming facilities in Mississippi are subject to extensive state and local regulation, but primarily the licensing and regulatory control of the Mississippi Gaming Commission. The Mississippi Gaming Commission has the authority to require a finding of suitability with respect to any security holder of a licensed entity, regardless of the percentage of ownership. Applicable Mississippi law requires the Company, and its respective officers, directors, members and significant equity holders to submit to a background regulatory review process prior to the licensing of the Hard Rock-Biloxi. The review process includes the submission of a gaming application, an investigation and submission of a personnel history and financial information. In addition, employees engaged in gaming operations will have to be separately licensed. The applicant for the gaming license has the burden of proving its qualifications for license. Any license issued or other approval granted is a revocable privilege, and must be renewed, as a general rule, on an annual basis. The Mississippi gaming authorities have broad discretion to condition, suspend, revoke, limit, restrict or deny renewal of any gaming license at any time. Persons found unsuitable by the Mississippi gaming authorities may be required immediately to terminate any interest in, association or agreement with or relationship to a licensee. A finding of unsuitability with respect to any officer, director, employee, associate, lender or beneficial owner of a licensee or applicant also may jeopardize the licensee's license or the applicant's license application. A license grant may be conditioned upon the termination of any relationship with unsuitable persons. Unless properly licensed, no person is permitted to collect gaming revenues. In addition, no person is permitted to act as an attorney in fact for any licensee. Gaming licensed are not saleable, otherwise transferable or subject to nominee arrangements. EMPLOYEES As of March 15, 1999, the Company and its subsidiaries had six full-time employees, three of whom are executive officers of the Company. 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. 2. DESCRIPTION OF PROPERTY. A Full House-Dreamport 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 2002 with options to renew. Pursuant to a July 19, 1995 addendum, the joint venture company receives a percentage of "Gross Gaming Revenues" (as defined) of the casino. Payments commenced August 19, 1995. See "--Description of Business." -8- A Full House-Dreamport joint venture company has a lease and leaseback agreement with Harrington Raceway, Inc. The lease encumbers the revenues of the gaming facility. The lease is treated as a capital lease and payments commenced on August 20, 1996. See "Description of Business - GTECH Relationship." The Company owns a parcel of land in Biloxi, Mississippi, which is intended to be a portion of a future gaming development site. The property was acquired in February 1998 and comprises approximately one acre. 3. LEGAL PROCEEDINGS. In October 1994, Full House 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 filed a counterclaim alleging breaches of fiduciary duty, breach of contract, conspiracy to breach contract and to breach fiduciary duty and common law fraud. The trial court granted summary judgment in favor of all defendants on that counterclaim, and Lone Star appealed that judgment to the Mississippi appellate court. In April 1998, the Appeals Court affirmed the dismissal of all counts against all parties, excepting Lone Star's claim against the Company for breach of contract, which it remanded to the trial court for additional hearing. No action has been taken on that matter to date. Management is unable to determine the outcome of this litigation, but does not believe the outcome will have a material adverse effect on the Company's financial condition. In January 1999, the Company was advised that the U.S. Securities and Exchange Commission ("SEC") was conducting an informal inquiry into trading of the Company's stock by its President, Gregg R. Giuffria, for a period beginning prior to his association with the Company and continuing for a short period after he became a consultant to the Company. In February 1999, the Company was further advised that the SEC had issued a Formal Order of Investigation in the matter. The Company is cooperating fully with the SEC in its investigation. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. -9- PART II 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (A) MARKET INFORMATION The Company's Common Stock is listed on the Nasdaq SmallCap Market under the symbol FHRI. Set forth below are the high and low sales price of the Company's Common Stock as reported on the Nasdaq SmallCap Market System for the periods indicated. HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 1998 First Quarter $3.88 $2.00 Second Quarter 3.75 1.94 Third Quarter 3.00 1.25 Fourth Quarter 3.50 1.50 YEAR ENDED DECEMBER 31, 1997 First Quarter $4.38 $2.75 Second Quarter 3.63 2.38 Third Quarter 2.88 1.38 Fourth Quarter 3.06 1.69 The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. On March 24, 1999, the last sale price of the Common Stock as reported by the Nasdaq SmallCap Market was $2.19. (B) HOLDERS As of March 24, 1999, the Company had approximately 161 holders of record of its Common Stock. The Company believes that there are over 2,000 beneficial owners of its Common Stock. (C) DIVIDENDS The Company has paid no dividends on its Common Stock or Preferred Stock since its inception. Holders of the Company's Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. Holders of the Company's Series 1992-1 Preferred Stock are entitled to receive dividends, when, as and if declared by the Board of Directors out of funds legally available therefor, in the annual amount of $.30per share, payable in arrears semi-annually on the 15th day of December and June, in each year. Dividends on the Series 1992-1 Preferred Stock commenced accruing on July 1, 1992 and are cumulative. The Company has not declared or paid the accrued dividends on its Preferred Stock which were payable since issuance, totaling $1,365,000 and, accordingly, is in default in regard thereto. As the Company is in default in declaring, setting apart for payment or paying 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. -10- The Company intends to retain future earnings to provide funds for the operation of its business, retirement of its debt and payment of preferred stock dividends and, accordingly, does not anticipate paying any cash dividends on its common stock in the reasonably foreseeable future. 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 JOINT VENTURE INCOME. Joint venture income increased $419,822, or 13.5% for the year ended December 31, 1998 as compared to 1997. These increases are due to the improved operating results from the Delaware and Oregon joint ventures. DELAWARE JOINT VENTURE. The Company's share of income from the Delaware joint venture was $2,506,437 for the year ended December 31, 1998. This represented an increase in the Company's share of income of $350,011, or 16.2%, over 1997. The increase is attributed to a new marketing plan at the facility and the addition of 122 video slot machines on May 22, 1998. As a result of operating results exceeding initial projections, Midway Slots and Simulcast has prepaid its obligation to the Delaware joint venture. The joint venture, in turn, prepaid its obligation to the Company in February 1998. OREGON JOINT VENTURE. The Company's share of income from the Oregon joint venture increased $80,662, or 8.1% for the year ended December 31, 1998 as compared to 1997 primarily as a result of improved marketing of the casino. CALIFORNIA AND MICHIGAN JOINT VENTURES. The Company's share of the loss from the California and Michigan joint ventures increased to $57,486 for the year ended December 31, 1998 as compared to $46,634 in 1997. These joint venture companies are still in the development stage and do not have operating revenues. GENERAL AND ADMINISTRATIVE EXPENSES. Non-resort expenses increased $217,416, or 13.5% for the year ended December 31, 1998 as compared to 1997. This increase is primarily due to the grant, on January 6, 1998 of a vested stock option to Gregg Giuffria, who later became president and chief operating officer of the Company, to purchase 70,001 common shares at $2.03, and an unvested option to purchase 279,999 shares at $2.03. The value of $240,964 for the options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 95 percent, risk-free interest rate of 5.4 percent, and expected life of 2.0 years. As the vested options were granted to a then nonemployee in return for prior services, consulting expense was recognized in the first quarter of 1998 in the amount of $74,644, and the remaining $166,320 is being amortized over the 36 month vesting period beginning April 1998. In addition, in 1998, 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. INTEREST EXPENSE AND DEBT ISSUE COSTS. For the year ended December 31, 1998, interest expense and debt issue costs decreased by $98,131 as compared to 1997. This decrease is primarily due to interest on the $3 million GTECH note, which became interest bearing in January 1998, and the bank loan used to fund the Mississippi land acquisition, offset by the decrease in interest expense due to the payoff of the DGR loan. INTEREST AND OTHER INCOME. Interest and other income increased by $443,271 for the year ended December 31, 1998 primarily due to the $385,227 gain on the sale of DGR and a one time reimbursement of $85,532 from the former Chairman of the Board for costs -11- associated with the gaming opportunities presented to the Company by him, partially offset by a reduction in interest income due to the prepayment of the Delaware LLC note receivable. INCOME TAX EXPENSE. Income tax expense was $344,082 for the year ended December 31, 1998 and primarily reflects state taxes due on joint venture revenues. At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $3,600,000, which may be carried forward to offset future taxable income. The loss carryforwards expire in 2007 through 2018. The availability of the loss carryforwards may be limited in the event of a significant change in ownership of the Company or its subsidiaries. DEADWOOD GULCH RESORT INCOME (LOSS) FROM OPERATIONS. The operating loss from DGR was ($345,769) for 1998 as compared to a profit of $424,815 in 1997 primarily due to the sale of the Resort in May 1998, which was prior to the beginning of the peak season. IMPAIRMENT OF LONG-LIVED ASSETS. In January 1996, the Company announced its intent to dispose of DGR. The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF 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. Since the adoption of SFAS No. 121, the Company has written off $4,154,290 related to DGR. GAIN ON SALE OF ASSETS HELD FOR SALE. The Company recognized a gain on the sale of DGR of $385,227 after considering the impairment of long-lived assets discussed above. DGR was sold on May 12, 1998. See also "Liquidity and Capital Resources". YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues for the year ended December 31, 1997 increased $628,451 or 8.2% to $8,298,789 as compared with revenues of $7,670,338 for the year ended December 31, 1996. The net income per share for the year ended December 31, 1997 increased $0.17 or 189% to $.08 as compared with a loss per share of $0.09 for the year ended December 31, 1996. JOINT VENTURE INCOME Joint Venture income increased $1,000,832 or 47.5% for the year ended December 31, 1997 as compared to 1996. This increase is due to inclusion of income from the Delaware joint venture, which was not in operation until August 1996 for a full year in 1997, and to the improved operating results from the Oregon joint venture. The revenues for 1996 include a one time gain of $834,370 relating to the formation of the four joint venture companies with GTECH. OREGON JOINT VENTURE. The Company's share of income from the Oregon joint venture increased $172,324 or 20.8% year ended December 31, 1997, as compared to 1996 as a result of improved marketing of and road access to the casino. DELAWARE JOINT VENTURE. The Company's share of income from the Delaware joint venture was $2,156,427 for the year ended December 31, 1997. Midway Slots and Simulcast began operations in August of 1996. As reported by the Delaware Lottery Board, Midway Slots & Simulcast had a net win of $58.2 million for the year ended December 31, 1997. As a result of operating results exceeding initial projections, Midway Slots and Simulcast has prepaid a portion of its obligation to the Delaware joint venture. The joint venture, in turn, prepaid a portion of the obligation to the Company. The outstanding principal balance of the obligation to the Company was $544,911 at December 31, 1997, which was paid in full in February 1998. -12- CALIFORNIA AND MICHIGAN JOINT VENTURES. As compared to 1996, the Company's share of the loss from the California and Michigan joint ventures declined by $25,563 during 1997. These joint venture companies are still in the development stage and do not have operating revenues. DEADWOOD GULCH RESORT The annual report of the South Dakota Commission on Gaming, which was released during the second quarter of 1997, announced that gaming revenues in Deadwood had declined by 6.4% in 1996 and that only 40% of the gaming businesses were profitable in 1996 versus 58% in 1995. This trend has continued during the first nine months of 1997 with a further decline in gaming revenues. The Company believes that the decline is attributable in part to decreased attendance at regional national parks (Mount Rushmore, Badlands National Park and Yellowstone National Park). These factors have significantly impacted the operating results of Deadwood Gulch Resort. However, as a result of management programs, Resort income from operations for 1997 increased by $72,700 despite a decline in revenues of $372,381. CASINO OPERATIONS. Revenues decreased 12.0% Or $173,909 to $1,271,413 for the year ended December 31, 1997 as compared to 1996. Although departmental expenses decreased 13.9% in 1997, department profit decreased $25,783. Management attributes the decline in revenues to the general decline in the market area explained above and aggressive giveaways by other casinos. HOTEL/RV RESORT. Hotel/RV Resort revenues increased 3.7% or $56,918, to $1,580,340 for the year ended December 31, 1997 as compared to 1996. Hotel/RV Resort departmental profit increased $119,817 or 13.0%. Management attributes the improvements to marketing and cost-reduction measures in both the Hotel and RV Resort. RETAIL. For the year ended December 31, 1997, revenues decreased 7.8% or $99,671 to $1,171,001 and departmental profits decreased 40.8% or $46,568 to $67,600 as compared to the same period in 1996. Department profit was lower than the prior year period due to a decline in sales as a result of lower tourism and increased pricing competition. FOOD AND BEVERAGE. Revenues for the year ended December 31, 1997 decreased 1.4% or $10,821 to $755,621 (which includes $139,646 of promotional allowances) as compared to $766,422 (which includes $132,292 of promotional allowances). The departmental income after subtracting promotional allowances increased $14,688 over the year ended December 31, 1996. Management attributes the improvement to continued management of cost of sales and reduced departmental expenses. GULCHES OF FUN FAMILY CENTER. Although revenues decreased 19.8% or $139,250 to $564,958 for the year ended December 31, 1997, departmental profits increased 13.8% or $27,517 to $226,734 as compared to 1996, due to a change in staffing of the facility and other cost-reduction measures. SALES AND MARKETING EXPENSES. Sales and Marketing expenses increased 10.2% or $26,396 to $286,195 as compared to the same period in 1996. Management attributes the increase to efforts to increase or maintain market share. GENERAL AND ADMINISTRATIVE EXPENSES - RESORT. For the year ended December 31, 1997, expenses decreased 0.5% or $3,094 to $580,220 as compared to 1996. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased 2.4% or $12,465 to $524,049 for the year ended December 31, 1997 as compared to 1996. -13- 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. Further analysis of the estimated realizable value of the Deadwood Gulch Resort assets resulted in an additional impairment loss of $1,051,070 recorded during the year ended December 31, 1996 and $3,220 for the year ended December 31, 1997. Pursuant to SFAS No. 121, the Company has suspended recording depreciation of the assets of the Deadwood Gulch Resort. GENERAL AND ADMINISTRATION EXPENSES Non-Resort expenses for the year ended December 31, 1997 totaled $1,614,677, an increase of $95,577 over the prior year, reflecting savings resulting from the consolidation of the Company's executive offices in 1996 offset by increases in 1997 expenditures 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. INTEREST EXPENSE AND DEBT ISSUE COSTS For the year ended December 31, 1997, interest expense and debt issue cost decreased by $122,813 as compared to 1996, as a result of reduced levels of debt. INTEREST AND OTHER INCOME Interest and other income decreased by $113,113 during the year ended December 31, 1997 compared to 1996 due to a reduction of notes receivables from the Delaware joint venture. INCOME TAX EXPENSE Federal and state income tax expense was $275,641 for the year ended December 31, 1997 and -0- for the same period in 1996. At December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $2,620,000, which may be carried forward to offset future taxable income. The loss carryforwards expire in 2007 through 2014. The availability of the loss carryforwards may be limited in the event of a significant change in ownership of the Company or its subsidiaries. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION Earnings before interest, taxes, depreciation and amortization (EBITDA), for the year ended December 31, 1997 improved by $977,955 over 1996 after exclusion of the impairment of long-lived assets (sale of Deadwood Gulch Resort) to $2,341,136 for the year ended December 31, 1997. EBITDA should not be construed as an indication of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that it enhances the understanding of the financial performance of companies with substantial depreciation and amortization. LIQUIDITY AND CAPITAL RESOURCES The Company held cash and cash equivalents of $1,092,178 as of December 31, 1998. Net cash provided by operating activities was $2,446,719 as compared to $2,116,766 in the comparable prior year period. Net cash provided by investing activities of $144,074 and net cash used in financing activities of $3,921,499 were the result of two significant transactions described below. -14- On May 12, 1998, the Company completed the sale of DGR for $6 million cash and the proration of certain related items. The Company received net proceeds of $5,933,160 from the sale of DGR, which includes the $6 million cash portion of the sales price in addition to $11,439 received from the buyer for the proration of inventory, receivables and prepaid assets, offset by advance deposits, progressive jackpot liabilities and closing costs of $78,279. On May 31, 1995, DGR had borrowed $5 million, secured by its real property. The Company repaid the remaining $3,165,861 due under this note from the proceeds from the sale. The Company also used approximately $200,000 of the sale proceeds to payoff the remaining current liabilities of DGR. On February 23, 1998, the Company completed the purchase of a portion of a proposed gaming site in Biloxi, Mississippi. The Company acquired the site for $4,155,000 and the payment of certain related costs. The Company utilized cash on hand of $2,155,000 and obtained a $2 million bank loan in connection with the purchase. The bank loan was repaid on June 3, 1998 using proceeds from the sale of DGR. The Company has spent an additional $450,000 on deposits and purchase options for additional parcels of land in Mississippi. Upon the payoff of the bank loan, the Company negotiated a $2 million line of credit with the same bank. The line bears interest adjustable daily at one percent above prime, requires interest payments monthly on the outstanding balance, and all principal and accrued interest is due at maturity on February 25, 1999. No amounts have been drawn on the line through December 31, 1998. In February 1999, the Company received a one year extension on the line and the interest rate was reduced to prime, plus 1/2%. In November 1998, the Company executed a series of agreements with Hard Rock Cafe International related to its proposed development project in Biloxi, Mississippi. Pursuant to a licensing agreement, the Company has agreed to pay a $2,000,000 territory fee with $1,000,000 paid in 1998, and the second $1,000,000 due March 31, 1999. In September 1998, the Company and Allen Paulson formed a limited liability company, equally owned, for the purpose of developing this project. Mr. Paulson agreed to contribute a gaming vessel (the former Treasure Bay barge in Tunica, Mississippi) and the Company agreed to contribute its rights to the Hard Rock agreements. The newly formed entity expects to develop a Hard Rock-Biloxi and is currently exploring various financing alternatives. The project, as currently envisioned, is expected to cost between $250 and $300 million. Substantial 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, or at all. 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 accrued interest, payable quarterly, at a rate equal to the "prime" rate, and such principal amount, together with all accrued interest, was due and payable in full upon demand by the holder of this note. 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. The note was paid in full in 1998. Full House is a party to a series of agreements with GTECH Corporation, a leading supplier of computerized systems and services for government-authorized lotteries, to jointly pursue certain gaming opportunities. Pursuant to the agreements, joint venture companies 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, Nottawaseppi Huron Band of Potawatomi and Delaware State Fair projects to the joint venture companies. GTECH has contributed cash and other intangible assets and has agreed 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 has guaranteed to GTECH one-half of a $2.0 million loan to the North Bend, Oregon Indian Tribe. GTECH also provides 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 was convertible, until January 1998 into 600,000 shares of Full House Common Stock. The loan conversion clause expired without exercise. 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, Allen E. Paulson, William P. McComas and Lee Iacocca have granted to GTECH an option to purchase their shares should they propose to transfer the same. The parties are no longer required to present gaming opportunities to the other for joint development. The Company advanced funds to the Delaware joint venture company totaling $1,886,498, of which $544,911 was outstanding as of December 31, 1997. The note was paid in full as of February 1998. -15- 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, with the sale of DGR, the Company's continuing cash flow is dependent on the operating performance of its joint ventures, and the ability to receive monthly distributions. As of December 31, 1998, Full House had cumulative undeclared and unpaid dividends in the amount of $1,365,000 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. On May 31, 1995, DGR borrowed $5 million, secured by its real property. The note accrued interest at prime plus 2-1/4%, and payments were 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 was guaranteed by Messrs. McComas and Paulson and a former director of the Company. This note was paid in full from the proceeds of the sale of the Resort in 1998. YEAR 2000 ISSUES The Company has implemented a Year 2000 program to ensure that its computer systems and applications will function properly beyond 1999. The Company believes that it has allocated adequate resources for this purpose and expects its Year 2000 date conversion program to be completed successfully on a timely basis. Although the ability of third parties with whom the Company transacts business to address their Year 2000 issues is outside the Company's control, the Company is discussing with its joint venture partners, significant vendors and customers the possibility of any interface difficulties which may affect the Company. The Company has analyzed all of its internal hardware and software applications and has incurred approximately $10,000 to replace or upgrade the deficient components. Based upon a comprehensive review, the Company does not anticipate incurring any material additional costs to resolve its internal Year 2000 issues. The Company continues to monitor the progress of its joint venture partners and vendors in their efforts to address this issue and provide assurances concerning their state of readiness. RECENTLY ISSUED ACCOUNTING STANDARDS - In June 30, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, and measure those instruments at fair value, and is effective for all fiscal quarters of the fiscal years beginning after June 15, 1999. Management has not completed its determination of this new statement's impact on the consolidated financial statements of the Company. RECENT ACCOUNTING PRONOUNCEMENTS - In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (the "SOP"). The SOP requires the costs of start-up activities that had been previously capitalized be expensed as incurred. The Company is required to adopt the provisions of the SOP in the fiscal year beginning January 1, 1999. Accordingly, the Company will expense approximately $824,000, in the first quarter of 1999, as a cumulative effect accounting change, which results from the Company's Joint Venture investments. 7. FINANCIAL STATEMENTS. The following financial statements are filed as part of this Report /bullet/ Independent Auditors' Report /bullet/ Consolidated Balance Sheets as of December 31, 1998 and 1997 /bullet/ Consolidated Statements of Income for the years ended December 31, 1998 and 1997 -16- /bullet/ Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997 /bullet/ Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 /bullet/ Notes to Consolidated Financial Statements 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -17- PART III 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. (A) DIRECTORS OF THE COMPANY The information required regarding the identification of the Company's directors is incorporated by reference to the information in the Proxy Statement for the 1999 Annual Meeting of Stockholders of the Company. (B) EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company and their ages as of March 21, 1998 are as follows:
NAME AGE POSITIONS --------------------- --- ------------------------------------------------ William P. McComas 72 Chairman, Chief Executive Officer Gregg R. Giuffria 47 President, Chief Operating Officer and Director Michael P. Shaunnessy 45 Executive Vice President-Finance Megan G. McIntosh 43 Secretary
WILLIAM P. MCCOMAS became Chairman of the Board and Chief Executive Officer on March 5, 1998. Mr. McComas has been a Director of Full House since November, 1992. Mr. McComas 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. GREGG R. GIUFFRIA joined the Company as President, Chief Operating Officer and Director in April 1998. Mr. Giuffria has been involved in the gaming industry since 1991, following nearly 20 years in the music, film, and publishing business. From 1995 to 1996 he was with Casino Data Systems, Inc. as the head of corporate development with responsibility for design and development of innovative technology for casino gaming. From 1993 to 1995 he was Vice President of MEC American Leisure Technology. Since 1997 he has owned American Laser Cutting, Inc., which provides specialty items to the gaming industry, among others. MICHAEL P. SHAUNNESSY joined the Company as Executive Vice President-Finance and Chief Financial Officer in July 1998. Mr. Shaunnessy has over 15 years experience in the gaming industry. From 1995 to 1998 he was Vice President-Finance and Chief Accounting Officer of Primadonna Resorts, Inc., the developer of New York - New York in Las Vegas, Nevada. He was with Aztar Corporation from 1983 to 1995, serving in senior financial positions at properties in New Jersey and Nevada. 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. 10. EXECUTIVE COMPENSATION. The information required in response to this item is incorporated by reference to the information contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders of the Company. -18- 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required in response to this item is incorporated by reference to the information contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders of the Company. 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required in response to this item is incorporated by reference to the information contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders of the Company. 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) 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-8 (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) -19- 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) 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 Kober 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) -20- 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) 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) -21- 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) 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 Superior Chippewa Indians, Grand Traverse Band of Ohawa and Chippewa Indians and Keweenah 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 Gaming and Development Agreement between the Company and the Torres Martinez Desert Cahuilla Indians dated March 21, 1993 (incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1995) 10.38 Gaming Management Agreement between the Company and the Torres Martinez Desert Cahuilla Indians dated April 23, 1993 (incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1995) 10.39 Agreement between the Company and GTECH Corporation dated May 20, 1995 (Incorporated by reference to the Company's Post Effective Amendment No. 2 to Registration Statement on Form SB-2, No. 33-61580 as filed with the Securities and Exchange Commission on May 26, 1995) 10.40 Promissory Note dated November 20, 1995 in the original principal amount of $375,000 from the Company to William P. McComas (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) -22- 10.41 Master Agreement dated as of December 29, 1995 by and between GTECH Corporation and the Company (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) 10.42 Option Agreement dated as of December 29, 1995 by and among GTECH Corporation, the Company, Lee Iacocca, William P. McComas and Allen E. Paulson (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) 10.43 Convertible Note dated July 26, 1996 in the original principal amount of $3,000,000 payable by the Company to GTECH Corporation (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) 10.44 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 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) 10.45 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 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) 10.46 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 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995) 10.47 Subordination and Participation Agreement dated as of October 8, 1996 between Gaming Entertainment L.L.C. and Miller & Schroeder Investments Corporation (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.) 10.48 First Amended and Restated Participating Lease dated as of October 8, 1996 between Gaming Entertainment L.L.C. and Coquille Economic Development Corporation (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.) 10.49 First Amended and Restated Master Lease dated as of October 8, 1996 between Gaming Entertainment L.L.C. and Coquille Economic Development Corporation (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.) 10.50 Agreement dated as of November 18, 1996 by and among Green Acres Casino Management Company, GTECH Corporation, Gaming Entertainment (Michigan) L.L.C. and the Company (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.) 10.51 Amended and Restated Class III Management Agreement dated November 18, 1996 between Nottawaseppi Huron Band of Potawatomi and Gaming Entertainment (Michigan) L.L.C. (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.) 10.52 License Agreement between Hard Rock Cafe International (USA), Inc. and Full House Mississippi, LLC dated November 18, 1998.* -23- 10.53 Management and Development Agreement by and between FH/HR Management, LLC and Full House Mississippi, LLC dated November 18, 1998.* 21 List of Subsidiaries of Full House Resorts, Inc.* 23.1 Consent of Deloitte & Touche LLP* 27.1 Financial Data Schedule* - ------------------ * Filed herewith. (B) REPORTS ON FORM 8-K. None. -24- SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. FULL HOUSE RESORTS, INC. Date: March 29, 1999 By: /s/ WILLIAM P. MCCOMAS ------------------------- William P. McComas, CEO In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME AND CAPACITY DATE ----------------- ---- /s/ WILLIAM P. MCCOMAS March 29, 1999 - ------------------------------------------------- William P. McComas, Chairman of the Board and Chief Executive Officer /s/ GREGG R. GIUFFRIA March 29, 1999 - ------------------------------------------------- Gregg R. Giuffria, President , Chief Operating Officer and Director /s/ RONALD K. RICHEY March 29, 1999 - ------------------------------------------------- Ronald K. Richey, Director /s/ LEE A. IACOCCA March 29, 1999 - ------------------------------------------------- Lee A. Iacocca, Director /s/ JAMES C. GILSTRAP March 29, 1999 - ------------------------------------------------- James C. Gilstrap, Director /s/ MICHAEL P. SHAUNNESSY March 29, 1999 - ------------------------------------------------- Michael P. Shaunnessy, Executive Vice President- Finance (Principal Financial and Accounting Officer) -25- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Full House Resorts, Inc.: We have audited the accompanying consolidated balance sheets of Full House Resorts, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Reno, Nevada February 19, 1999 F-1
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 - ----------------------------------------------------------------------------------------------------------------- ASSETS 1998 1997 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,092,178 $ 2,422,884 Note receivable - joint venture, current-portion - 544,911 Restricted cash - 530,881 Accounts receivable - 10,210 Receivable from director - 106,760 Inventories - 89,437 Income tax refund receivable 35,871 - Receivable from joint ventures 216,188 343,200 Prepaid expenses 88,018 286,126 ----------- ----------- Total current assets 1,432,255 4,334,409 LAND HELD FOR DEVELOPMENT 4,621,670 - ASSETS HELD FOR SALE - net - 5,542,078 INVESTMENTS IN JOINT VENTURES 5,017,470 5,025,379 GOODWILL - net 1,392,249 1,898,517 NOTE RECEIVABLE - JOINT VENTURE 232,421 23,748 DEPOSITS AND OTHER ASSETS 2,777,199 922,612 ----------- ----------- TOTAL $15,473,264 $17,746,743 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ - $ 697,100 Accounts payable 33,566 93,504 Income taxes payable - 16,862 Accrued expenses 1,111,158 526,297 ----------- ----------- Total current liabilities 1,144,724 1,333,763 ----------- ----------- LONG-TERM DEBT, net of current portion 3,000,000 6,190,562 ----------- ----------- DEFERRED INCOME TAXES 121,235 - ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Cumulative, preferred stock, par value $.0001, 5,000,000 shares authorized; 700,000 shares issued and outstanding; aggregate liquidation preference of $3,465,000 70 70 Common stock, par value $.0001, 25,000,000 shares authorized; 10,340,380 shares issued and outstanding 1,034 1,034 Additional paid in capital 17,218,065 16,957,487 Accumulated deficit (6,011,864) (6,736,173) ----------- ----------- Total stockholders' equity 11,207,305 10,222,418 ----------- ----------- TOTAL $15,473,264 $17,746,743 =========== ===========
See notes to consolidated financial statements. F-2
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 - ----------------------------------------------------------------------------------------------------------------- 1998 1997 ----------- ----------- OPERATING REVENUES: Casino $ 281,796 $ 1,271,413 Hotel/RV park 320,313 1,580,340 Retail 303,713 1,171,001 Food and beverage 230,659 755,621 Fun park 3,985 564,958 Joint ventures 3,529,687 3,109,865 ----------- ----------- 4,670,153 8,453,198 Less: promotional allowances (64,226) (154,409) ----------- ----------- Net operating revenues 4,605,927 8,298,789 ----------- ----------- OPERATING COSTS AND EXPENSS: Casino 286,134 916,783 Hotel/RV park 172,675 539,031 Retail 304,032 1,103,401 Food and beverage 176,409 579,122 Fun park 18,680 338,224 Sales and marketing 95,154 286,195 General and administrative 1,957,346 2,194,897 Depreciation and amortization 517,081 524,049 Impairment of long-lived assets -- 3,220 ----------- ----------- Total operating costs and expenses 3,527,511 6,484,922 ----------- ----------- INCOME FROM OPERATIONS 1,078,416 1,813,867 OTHER INCOME (EXPENSE): Interest expense and debt issue costs (including $11,702 and $31,567 to related parties) (597,921) (696,052) Interest and other income 587,896 144,625 ----------- ----------- INCOME BEFORE INCOME TAXES 1,068,391 1,262,440 INCOME TAX PROVISION (344,082) (275,641) ----------- ----------- NET INCOME 724,309 986,799 Less, undeclared dividends on cummulative preferred stock (210,000) (210,000) ----------- ----------- NET INCOME APPLICABLE TO COMMON SHARES $ 514,309 $ 776,799 =========== =========== INCOME PER COMMON SHARE, BASIC AND DILUTED $ 0.05 $ 0.08 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,340,380 10,340,284 =========== ===========
See notes to consolidated financial statements. F-3
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 - ----------------------------------------------------------------------------------------------------------------------- ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------ ---------- ----------- ------ BALANCE JANUARY 1, 1997 700,000 $ 70 10,339,549 $ 1,034 $16,853,042 $ (7,722,972) $ 9,131,174 Net income - - - - - 986,799 986,799 Amortization of deferred compensation expense - - - - 100,945 - 100,945 Proceeds from exercise of warrants - - 831 - 3,500 - 3,500 ------- ------- ---------- ------- ----------- ------------ ----------- BALANCE DECEMBER 31, 1997 700,000 70 10,340,380 1,034 16,957,487 (6,736,173) 10,222,418 Net income - - - - - 724,309 724,309 Amortization of deferred compensation expense - - - - 260,578 - 260,578 ------- ------- ---------- ------- ----------- ------------ ----------- BALANCE DECEMBER 31, 1998 700,000 $ 70 10,340,380 $ 1,034 $17,218,065 $ (6,011,864) $11,207,305 ======= ======= ========== ======= =========== ============ ===========
See notes to consolidated financial statements. F-4
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 - -------------------------------------------------------------------------------------------------------------- 1998 1997 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 724,309 $ 986,799 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 517,081 524,049 Debt issue costs and debt discount 33,840 257,112 Amortization of deferred compensation expense 260,578 100,945 Impairment of long-lived assets - 3,220 Gain on disposition of assets (385,227) (274) Equity in earnings of joint ventures (3,529,687) (3,109,865) Distributions from joint ventures 3,537,597 3,445,000 Investments in joint ventures - (177,060) Changes in assets and liabilities: Decrease in restricted cash 530,881 55,053 (Increase) decrease in accounts receivable 125,671 (96,481) Decrease in inventories 8,297 3,141 Decrease in prepaid expenses 171,734 31,598 Increase in other assets (229,151) (1,479) Increase (decrease) in federal income taxes payable (52,733) 16,862 Increase in deferred taxes 121,235 - Increase in accounts payable and accrued expenses 612,294 78,146 -------------- --------------- Net cash provided by operating activities 2,446,719 2,116,766 -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of assets held for sale (5,855) (67,962) Proceeds from disposal of assets held for sale 5,933,160 43,660 Proceeds from sale of current assets and liabilities 11,439 - Decrease in notes receivable - 1,236,708 Acquisition of land for development (4,007,920) - (Increase) decrease in receivables from GTECH and joint ventures 463,250 (778,856) Deposits on purchase option (2,250,000) (890,000) -------------- --------------- Net cash (used in) provided by investing activities 144,074 (456,450) -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 2,000,000 - Repayment of debt (5,921,499) (290,115) Proceeds from exercise of warrants - 3,500 -------------- --------------- Net cash used in financing activities (3,921,499) (286,615) -------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,330,706) 1,373,701 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,422,884 1,049,183 -------------- --------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,092,178 $ 2,422,884 ============== ===============
See notes to consolidated financial statements. F-5 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 on January 5, 1987. FHRI is currently pursuing various gaming opportunities throughout North America. 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 ("Joint Ventures") were formed. FHRI has a 50% interest in the joint ventures, which interest is accounted for using the equity method. FHRI and its principal stockholder entered into an agreement to jointly pursue development of a themed casino resort in Biloxi, Mississippi and formed a limited liability company for such purpose, which is 50% owned by each member. Through its subsidiary, Deadwood Gulch Resort and Gaming Corp. ("DGR"), FHRI operated a 99-room hotel, a recreational vehicle park and campground, conference center, convenience store/gas mart, restaurant, lounge, family entertainment facility and two small casinos in Deadwood, South Dakota. During January 1996, the Company announced its intent to dispose of DGR, and in May 1998 consummated a sale. The Company has classified DGR as assets held for sale. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS - Cash in excess of daily requirements is invested in highly liquid 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. CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents. A portion of the Company's cash equivalents are in high quality securities placed with major banks and financial institutions. Management does not believe that there is significant risk of loss associated with such investments. 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. 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 both 1998 and 1997 totaled $506,268. IMPAIRMENT OF LONG-LIVED ASSETS - The Company has adopted 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." SFAS No. 121 establishes 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 reviews the carrying values of its long-lived and F-6 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, restricted cash, receivables and accounts payable, 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 loans of the same remaining maturities. The estimated fair values of the Company's long-term debt approximate their recorded values at December 31, 1998. INCOME TAXES - The Company accounts for income taxes in accordance with 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. EARNINGS (LOSS) PER COMMON SHARE - Statement of Financial Accounting Standards ("SFAS") No. 128, "EARNINGS PER SHARE," was issued by the Financial Accounting Standards Board ("FASB") in February 1997. SFAS 128 replaced the presentation of primary and fully diluted earnings per share ("EPS") with a presentation of basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effects of options, warrants and convertible securities. Diluted EPS is similar to the previously reported fully diluted EPS. The Company adopted the provisions of SFAS No. 128 during the fourth quarter of the year ended December 31, 1997. Earnings per common share is computed based upon the weighted average number of common and common equivalent shares outstanding during the year. AWARDS OF STOCK-BASED COMPENSATION - The Company has adopted SFAS No. 123, "ACCOUNTING FOR AWARDS OF STOCK-BASED COMPENSATION," which 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." The Company continues to apply APB Opinion No. 25 to its stock based compensation awards to employees and discloses the required pro forma effect on net income and net income per common share. (See Note 13.) SEGMENT INFORMATION - The Company adopted FASB statement No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," for its annual report as of December 31, 1998. The Company operated one hotel/casino property in Deadwood, South Dakota which was sold during May 1998, and has investments in four joint venture companies which have developed or are developing gaming opportunities through management contracts in the states of California, Delaware, Michigan and Oregon. Footnote 6 to the financial statements contains information as to the operations of the joint venture companies which are accounted for under the equity method. The statements of income of the Company contain the information as to the operations of the Deadwood property. The Company evaluates performance on several factors, of which the primary financial measure is business segment operating income. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (Note 2). RECENTLY ISSUED ACCOUNTING STANDARDS - In June 30, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, and measure those instruments at fair value, and is effective for all fiscal quarters of the fiscal years beginning after June 15, 1999. Management has not completed its determination of this new statement's impact on the consolidated financial statements of the Company. RECENT ACCOUNTING PRONOUNCEMENTS - In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (the "SOP"). The SOP requires the costs of start-up activities that had been previously capitalized be expensed as incurred. The Company is required to adopt the provisions of the SOP in the fiscal year beginning January 1, 1999. Accordingly, the Company will expense approximately $824,000, in the first quarter of 1999, as a cumulative effect accounting change, which results from the Company's Joint Venture investments. F-7 RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the current year presentation. 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. 3. LAND HELD FOR DEVELOPMENT On February 23, 1998, the Company purchased a parcel of land for $4,621,670 which represents a portion of a proposed gaming site in Biloxi, Mississippi. The Company has options to acquire the necessary additional six acres. 4. DEPOSITS AND OTHER ASSETS On November 18, 1998, the Company executed a series of agreements with Hard Rock Cafe International ("Hard Rock") for purposes of developing a Hard Rock Hotel & Casino on the Gulf Coast of Mississippi. The agreements required a Territory Fee of $2,000,000, due in two installments. The first was paid in November 1998, and the second is due in March 1999 (included in "Accrued Expenses"). The Company has also expended $450,000 for options and deposits on a number of parcels of land contiguous to the parcel it acquired in February 1998. 5. ASSETS HELD FOR SALE Because of the Company's intent to dispose of DGR, the Company previously reclassified certain assets of DGR to other assets - assets held for sale. The Company previously determined that the carrying amount of the assets held for sale were not recoverable and therefore recorded an allowance for impairment as of December 31, 1997 of $4,154,290. The allowance was calculated using available information which indicated the estimated loss which would be incurred upon disposition, based on estimated fair value of the assets, less costs of disposition. In May 1998, the Company sold all of the assets and operations of DGR for $6,000,000 cash and the proration of certain related items, and recorded a gain on the transaction of $385,227. This gain represented the proceeds in excess of the carrying value, which had been reduced by the impairment loss estimate. The operations of DGR prior to its sale resulted in an operating loss of $345,769 in 1998 and operating income of $424,815 for 1997. 6. INVESTMENTS IN JOINT VENTURES GTECH RELATIONSHIP The Company entered into a series of agreements with GTECH in 1995 to jointly pursue gaming opportunities. Pursuant to the agreements, the following limited liability companies, equally owned by Dreamport, Inc. ("Dreamport"), a subsidiary of 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"). The Company contributed to the capital of the joint ventures its rights to agreements with the Coquille Indian Tribe to finance and develop a gaming and entertainment facility in North Bend, Oregon and the rights to develop the Torres Martinez, Nottawaseppi Huron Band of Potawatomi and Delaware State Fair gaming projects. In payment for its interest in the joint ventures, GTECH contributed cash and other intangible assets and committed to loan the joint ventures up to $16.4 million to complete the North Bend, Oregon, and Delaware facilities. The Company agreed to guarantee one-half of the obligations of the joint ventures to GTECH under these loans. At December 31, 1998, the advances to the joint venture had been repaid. GTECH has also agreed to make loans to the F-8 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 the formation of the joint ventures, certain directors of the Company and a stockholder have granted to GTECH an option to purchase their shares of the Company should they propose to transfer the same. In March 1997, the Company and GTECH modified their agreement to no longer require each party to present prospective business opportunities to the other. The following is a summary of each of the gaming opportunities and the material items which the Company has contributed, at book value, to capital of the joint ventures. GELLC GELLC leases approximately 12.5 acres of Tribal Trust Lands from an entity owned by the Coquilla Tribe on which the gaming facility is located and subleases a portion of the land back to the same entity. The master lease expires in 2019 and the sublease expires in 2002 with options to renew. In July 1995, an addendum to the agreement with the tribe was signed by the Company and Dreamport, which reduced the obligations of GELLC to provide financing to $10.4 million, extended the date when payments begin and modified the method of computing participating rents and loan repayments. During 1995, the facility began operations. In October 1996, the tribe secured a new $17.5 million loan to refinance certain outstanding indebtedness, finance the acquisition of gaming equipment and finance certain improvements to the gaming facility. GELLC was repaid 100% of its original development loan from the financing. As part of the loan, the joint venture subordinated its rights to receive a percentage of Gross Gaming Revenues, as defined. As rental under the sublease to the tribal entity, GELLC will receive rental payments based on a schedule of percentages of Gross Gaming Revenues through 2002. GEDLLC GEDLLC developed, constructed and equipped a gaming entertainment center at Harrington Raceway in Harrington, Delaware, and provided financing through a capital lease arrangement. GEDLLC has a 15 year management agreement and is compensated based upon a percentage of Gross Revenues and a percentage of Operating Profits, as both are defined. The facility began operations in August 1996. Through December 31, 1997, the Company had advanced funds to GEDLLC totaling $544,890 evidenced by an interest bearing note at prime, plus 1% (9. 5% at December 31, 1997), and payable from available operating cash flows. The note was secured by a similar receivable from Midway Slots and Simulcast, a division of Harrington Raceway, Inc., with the same terms and interest rate. The note was paid in full in March 1998. GEMLLC In late 1996, GEMLLC renegotiated its management contract with the Nottawaseppi Huron Band of Potawatomi and with the 15% owner of the interests in the agreements. Under the new contract, the joint venture will finance, develop and manage gaming operations on reservation lands to be acquired near Battle Creek, Michigan. The 15% owner will be paid a royalty fee in lieu of its original 15% ownership in earlier contracts with the tribe. During 1996, the assignment of the development rights by the Company to GEMLLC was approved by the tribe, and gaming development costs of $4,372,446 were contributed to capital of GEMLLC by the Company. During 1997, the Company contributed additional gaming development costs of $160,962 and cash of $12,500 to capital of GEMLLC. On December 18, 1998, the Michigan legislature approved a gaming compact that had been negotiated between the Tribe and the Governor of Michigan. The Company is in the process of identifying a suitable site for the F-9 Tribe's gaming operation and beginning the process of having the land placed in trust for the Tribe. GEMLLC is a development stage company as of December 31, 1998. GECLLC GECLLC, pursuant to an agreement with the Torres Martinez Desert Cahuilla Indians, has certain rights to develop, manage and operate gaming activities for the tribe. During 1997 and 1996, the Company contributed gaming development costs of $67,768 and cash of $12,500 to the capital of GECLLC. GECLLC is a development stage company as of December 31, 1998. The following is a summary of condensed financial information for the joint ventures as of December 31, 1998 and 1997 and for the years then ended:
1998 CONDENSED BALANCE SHEETS GELLC GEMLLC GEDLLC GECLLC TOTAL ------------- ------------- -------------- ----------- ------------- Total assets $ 550,624 $ 5,490,350 $ 516,194 $ 265,954 $ 6,823,122 Long term debt $ - $ 49,130 $ - $ - $ 49,130 Members' capital $ 333,650 $ 5,236,275 $ 263,781 $ 45,962 $ 5,879,668 CONDENSED STATEMENTS OF OPERATIONS Revenues $ 2,236,903 $ - $ 12,152,631 $ - $ 14,389,534 Operating income (loss) $ 2,159,382 $ (34,371) $ 4,870,523 $ (80,602) $ 6,914,932 Interest expense $ - $ - $ 45,478 $ - $ 45,478 Net income (loss) $ 2,161,470 $ (34,371) $ 5,012,876 $ (80,602) $ 7,059,373 Company's equity in net income (loss) $ 1,080,735 $ (17,185) $ 2,506,438 $ (40,301) $ 3,529,687 ============= ============= ============== =========== =============
F-10
1997 CONDENSED BALANCE SHEETS GELLC GEMLLC GEDLLC GECLLC TOTAL ------------- ------------- -------------- ----------- ------------- Total assets $ 550,624 $ 5,490,350 $ 516,194 $ 265,954 $ 6,823,122 Total assets $ 561,679 $ 5,488,694 $ 4,403,546 $ 265,911 $ 10,719,830 Long term debt $ - $ 47,499 $ 3,303,416 $ - $ 3,350,915 Member's capital $ 365,694 $ 5,270,646 $ 132,643 $ 126,564 $ 5,895,547 CONDENSED STATEMENTS OF OPERATIONS Revenues $ 2,062,212 $ - $ 11,242,145 $ - $ 13,304,357 Operating income (loss) $ 1,987,691 $ (19,424) $ 4,307,605 $ (73,843) $ 6,202,029 Interest expense $ - $ - $ 218,836 $ - $ 218,836 Net income (loss) $ 2,000,145 $ (19,424) $ 4,312,854 $ (73,843) $ 6,219,732 Company's equity in net income (loss) $ 1,000,073 $ (9,712) $ 2,156,426 $ (36,922) $ 3,109,865 ============= ============= ============== =========== =============
7. DEBT Debt consists of the following at December 31, 1998 and 1997: 1998 1997 ------------ ----------- Note payable, secured by a first mortgage on all real property of DGR (included in assets held for sale) and partially secured by the guarantee of FHRI, and the personal guarantee of certain stockholders; interest at prime plus 21/4%, paid in full during 1998. $ - $ 3,530,983 Convertible, unsecured note payable to GTECH Corporation; original principal amount of $3,000,000, no payments or accrued interest until January 25, 1998 when interest began to accrue at the lesser of the maximum lawful rate of interest, or the prime rate (7 3/4% at December 31, 1998); interest due monthly beginning February 1, 1998 through January 25, 2001, at which time all unpaid principal and interest will be due. The note was convertible, subject to regulatory approval, at the holder's option in whole or part at any time prior to January 25, 1998 into common stock of the Company at a conversion price of five dollars principal amount of the note for one share of stock, recorded net of unamortized discount at December 31, 1997 of $18,321 based on imputed interest rate of 8.25%. On January 25, 1998, the conversion option expired. 3,000,000 2,981,679 Note payable to stockholder; interest at prime payable quarterly commencing on January 31, 1996; principal payable on demand, paid in full during 1998. - 375,000 ------------ ----------- Total 3,000,000 6,887,662 Less current portion - 697,100 ------------ ----------- Long-term portion $ 3,000,000 $ 6,190,562 ============ ===========
F-11 The Company obtained a $2,000,000 line of credit from the bank that provided the initial loan for its acquisition of land in Biloxi, Mississippi. The line bears interest at prime, plus 1%, requires interest payments monthly, and all principal and accrued interest is due at maturity on February 25, 1999. As of December 31, 1998, there was no amount outstanding. In February 1999, the line was extended for an additional one year period, and the interest rate was reduced to prime, plus 1/2%. The scheduled maturities of debt are as follows: YEAR ENDING DECEMBER 31, ------------ 1998 $ - 1999 - 2000 - 2001 3,000,000 ------------ Total $ 3,000,000 ============ 8. STOCKHOLDERS' EQUITY As part of a public offering in August 1993, the Company sold to the underwriters 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 January 1, 1997, 57,500 warrants to purchase 68,393 shares of common stock at $4.20 per share were exercisable through, and expired on February 10, 1997. As of January 1, 1998, warrants to purchase 22,500 units at $13.17 per unit were exercisable through, and expired on, August 9, 1998. Also part of the public offering, 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 were based on a dilution agreement and, as of January 1, 1997, 778,534, warrants to purchase 925,988 shares of common stock at $4.20 per share were exercisable through February 10, 1997. In February 1997, 700 warrants were exercised for 831 common shares of the Company, with net proceeds of $3,500. The remaining warrants expired on February 10, 1997. Options to purchase 150,000 shares of common stock at $3.69 per share (market value on date of grant) were issued in 1994 to a consultant, all of which were exercisable at December 31, 1998. These options were repriced in June 1998 at $2.25 per share (market value on the repricing date). The fair value of $43,410 for the options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 97 percent, risk-free interest rate of 5.0 percent, and expected life of 2.0 years. As the options were granted to a nonemployee in return for services, consulting expense of $43,410 was recognized in 1998, along with an equivalent increase in paid in capital. All of these options were exercisable at December 31, 1998. On December 20, 1996, a consultant, who is also a principal stockholder, was granted an option to purchase 250,000 common shares at $3.69 in return for consulting services to be provided over an approximate three year period. The options vested immediately. The fair value of $302,826 for the options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 80 percent, risk-free interest rate of 6.0 percent, and expected life of 2.0 years. As the options were granted to a nonemployee in return for services, consulting expense is being be recognized ratably over the three year service period commencing in 1997. Options to purchase 70,001 shares of common stock at $2.06 per share (market value on date of grant) were issued in 1998 to the Company's current President for services previously performed in a consulting capacity. The Company recognized consulting expense of $116,224 and recorded an equivalent increase in paid in capital. The fair value for the options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 95 percent, risk-free interest rate of 5.4 percent, and expected life of two years. F-12 The Company's preferred stock 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 or setting apart for payment of dividends on the preferred stock, it is restricted from paying any dividend, 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 $1,365,000 and $1,155,000 at December 31, 1998 and 1997, respectively. Through December 31, 1998, no dividends have been declared or paid. 9. INCOME TAX PROVISION The income tax provision recognized in the consolidated financial statements consists of the following:
1998 1997 ------------ ------------- Current: Federal $ -- $ (16,862) State (222,847) (258,779) ------------ ------------- Total current (222,847) (275,641) ------------ ------------- Deferred: Federal 132,495 - State (253,730) - ------------ ------------- Total deferred (121,235) - ------------ ------------- Total Provision $ (344,082) $ (275,641) ============ =============
A reconciliation of the income tax provision with amounts determined by applying the statutory U.S. Federal income tax rate to consolidated income before income taxes is as follows:
1998 1997 ------------ ------------- Tax provision at U.S. statutory rate $ (363,253) $ (429,230) State taxes (314,541) (170,794) Change in valuation allowance 507,315 493,249 Goodwill amortization (172,131) (172,131) Other (1,472) 3,265 ------------ ------------- Total $ (344,082) $ (275,641) ============ =============
The Company's deferred tax items as of December 31, 1998 and 1997 are as follows:
1998 1997 ------------ ------------- Deferred tax assets: Net operating loss carryforward $ 1,225,606 $ 890,765 Tax credit carryforwards 23,416 24,414 Difference between book and tax basis of assets held for sale - 1,380,700 Intangibles 21,497 - Accrued expenses 6,437 22,123 State taxes 115,548 - Stock option plans 109,443 - ------------ ------------- Total deferred tax assets 1,501,947 2,318,002 ------------ -------------
F-13 Deferred tax liabilities: Difference between book and tax basis of gaming rights (1,618,339) (2,008,915) Other (4,843) (2,025) ------------ ------------- Total deferred tax liabilities (1,623,182) (2,010,940) Valuation allowance - (307,062) ------------ ------------- Net $ (121,235) $ - ============ =============
At December 31, 1998, the Company had net operating loss carryforwards for income tax purposes of approximately $3,600,000, which may be carried forward to offset future taxable income. The loss carryforwards expire in 2007 through 2018. The availability of the loss carryfowards may be limited in the event of a significant change in ownership of the Company or its subsidiaries. 10. RELATED PARTY TRANSACTIONS At December 31, 1997, the Company held a note receivable of $106,760 from a director of the Company. This note was paid in full in 1998. Total interest expense charged to operations in 1998 and 1997 related to the note payable to a stockholder were $11,702 and $31,567, respectively. See Note 6 for discussion of transactions with joint ventures. See Note 7 for a discussion of a note payable to stockholder. 11. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION Cash payments for interest for the years ended December 31, 1998 and 1997 were $518,187 and $440,612, respectively. The following noncash investing and financing activities are not reflected in the consolidated statements of cash flows: During the year ended December 31, 1997, the Company purchased property with a fair value of $24,047, in exchange for property with a net book value of $11,005 which approximated its fair value, and cash payment of $13,042. During the year ended December 31, 1997, the Company transferred computer equipment with a net book value of $16,530 from assets held for sale to other assets. During the year ended December 31, 1998, additional paid-in capital increased by $260,578 as a result of granting and repricing stock options issued to non-employees for consulting services. During the year ended December 31, 1998, the Company applied purchase option deposits of $613,750 towards the acquisition of land held for development. 12. COMMITMENTS AND CONTINGENCIES The Company is party to legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these matters, will not have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. F-14 In October 1994, Full House 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 filed a counterclaim alleging breaches of fiduciary duty, breach of contract, conspiracy to breach contract and to breach fiduciary duty and common law fraud. The trial court granted summary judgment in favor of all defendants on that counterclaim, and Lone Star appealed that judgment to the Mississippi appellate court. In April 1998, the Appeals Court affirmed the dismissal of all counts against all parties, excepting Lone Star's claim against the Company for breach of contract, which it remanded to the trial court for additional hearing. No action has been taken on that matter to date. Management is unable to determine the outcome of this litigation, but does not believe the outcome will have a material adverse effect on the Company's financial condition. See notes 3, 4 and 6 for additional information. 13. STOCK-BASED COMPENSATION PLANS At December 31, 1998, the Company had three stock-based compensation plans which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for these plans. Because options have been granted with exercise prices equal to market value on the grant date, no compensation cost has been recognized for options granted under the Nonemployee Director Stock Plan, Incentive Stock Plan (except as disclosed below related to options granted under the Incentive Stock Plan to a consultant/principal shareholder) and an informal director stock plan. Had compensation cost for options granted under the Company's three stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS Statement 123, the Company's net income and income per common share would have been restated to the pro forma amounts indicated below:
1998 1997 ------------- ------------- Net income As reported $ 724,309 $ 986,799 Pro forma $ 568,250 $ 113,181 Income (loss) per common share, basic and diluted As reported $ 0.05 $ 0.08 Pro forma $ 0.03 $ (0.01)
The fair value of each option grant for the pro forma disclosure was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997: expected volatility of 95% and 80%, risk-free interest rate of 5.1 percent and 6.2 percent, and expected life of 3.6 years and 3.5 years. 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. The Company issued 20,000 options under the Plan during 1998, and 10,000 options in 1997. The Company has reserved 1,000,000 shares of its common stock for issuance under the 1992 Incentive Plan. On September 24, 1998, the Board approved an increase of an additional 500,000 shares, subject to shareholder approval. 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. The persons eligible for such plan include employees and officers of the Company (whether or not such officers are also directors of the Company) and consultants and advisors to the Company, who are largely responsible for the management, growth and protection of the business of the Company. Options issued under the Incentive Plan are generally exercisable over a term of ten years. F-15 On March 3, 1997 ("the Grant Date"), the Board of Directors approved a grant of an option ("Option") to each of the Company's three directors, to purchase 250,000 shares of common stock at an exercise price per share of $3.375, the closing price of the common stock on the business day of the Grant Date. The Options were granted in consideration of the fact that services to the Company by such directors have exceeded and are expected to continue to exceed the duties of a typical corporate director. On May 12, 1997, at the Company's annual meeting, the stockholders ratified the Options. The Options become exercisable in 50,000 share increments commencing April 9, 1997 and on each anniversary thereafter. In addition, the Options for two of the directors provide that a 50,000 share increment became exercisable on the Grant Date. In March 1998, 250,000 of these shares were forfeited, and in June 1998, the remaining 500,000 shares were repriced to $2.25 per share (fair market value at repricing). The total options outstanding under the 1992 Incentive Plan, including the consulting options at December 31, 1998 and 1997 were 1,236,000 and 510,000, respectively. The total options outstanding under the Nonemployee Director Stock Plan at December 31, 1998 and 1997 were 30,000 and 10,000, respectively. The total options outstanding under the Director Stock Plan at December 31, 1998 and 1997 were 575,000 and 750,000, respectively. A summary of the status of the Company's stock option plans, including consultant options, as of December 31, 1998 and 1997, and changes during the years then ended is presented below:
1998 1997 -------------------------------- --------------------------------- WEIGHTED - WEIGHTED - AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- Outstanding at beginning of year 1,420,000 $ 3.45 660,000 $ 3.54 Granted 1,081,000 $ 2.11 760,000 $ 3.38 Exercised - - - - Forfeited 510,000 $ 3.34 - --------- --------- Outstanding at end of year 1,991,000 $ 2.36 1,420,000 $ 3.45 ========= ========= Options exercisable at year-end 835,000 $ 2.68 890,000 $ 3.50 Weighted-average fair value of options granted during the year $ 1.53 $ 1.97
As of December 31, 1998, the 1,991,000 options outstanding have exercise prices ranging between $2.00 and $3.69, and a weighted average remaining contractual life of 7 years. The options exercisable of 835,000 also have exercise prices ranging between $2.00 and $3.69, and their weighted average remaining contractual life is 7.7 years. F-16 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 10.52 License Agreement by and between Hard Rock Cafe International (USA), Inc. and Full House Mississippi, LLC dated November 18, 1998 10.53 Management and Development Agreement by and between FH/HR Management, LLC and Full House Mississippi, LLC dated November 18, 1998 21 List of Subsidiaries of Full House Resorts, Inc. 23.1 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule