Full House Resorts, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report; the supplied text does not provide a clear standalone fourth-quarter income statement or other Q4-only financial metrics.
Business context
Full House develops, manages, invests in and operates gaming businesses. During 2011 it added the Rising Star Casino Resort in Indiana (acquired April 1) and Grand Lodge Casino in Nevada (operations acquired September 1), and began advising on Pueblo of Pojoaque casino operations in New Mexico. It also owns Stockman’s Casino and holds a 50% interest in GEM, which manages Michigan’s FireKeepers Casino. The Harrington, Delaware management contract ended August 31, 2011.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $105.5 million | $32.9 million |
| Operating income | $19.2 million | $23.5 million |
| Income before taxes | $15.8 million | $23.6 million |
| Consolidated net income | $12.6 million | $17.9 million |
| Net income attributable to Full House | $2.3 million; $0.13 per share | $7.7 million; $0.43 per share |
| Cash from operations | $27.0 million | $18.1 million |
| Cash and equivalents at year-end | $14.7 million | $13.3 million |
| Long-term debt, including current portion | $26.4 million term loan, plus $0.5 million swap liability | No long-term debt reported |
Revenue increased $72.6 million, principally from the Rising Star and Grand Lodge acquisitions; those properties contributed $69.0 million and $4.4 million, respectively, in reported operating revenue. Operating expenses also rose substantially. Operating income fell about 19%, and income attributable to Full House fell about 69%, reflecting impairment charges, lower income from the expired Harrington contract, higher interest costs and the larger noncontrolling-interest allocation. The reported operating margin was approximately 18% in 2011; comparisons with 2010 are affected by the substantial change in business mix.
Net cash used in investing was $22.7 million, mainly reflecting acquisitions and capital spending. Net cash used in financing was $2.9 million, including $6.6 million of debt repayment and $10.7 million of distributions to the noncontrolling interest. At year-end, $4.25 million remained available under the revolving credit line. Current assets were $23.2 million and current liabilities were $17.2 million.
Material changes and unusual items
- The Rising Star acquisition was funded with approximately $19 million in cash and $33 million drawn under the Wells Fargo credit agreement. The agreement is secured by substantially all company assets, includes financial covenants, and matures in 2016. The term loan rate was reported as 7.0% in 2011.
- Stockman’s goodwill and related assets were impaired by $4.5 million. The Nambé tribal note was written down to zero, including a reported $0.4 million impairment charge; collection depends on future development and casino revenues.
- The filing reports a $0.5 million loss on the interest-rate swap. The swap’s fixed rate was amended to 3.06% in September 2011; the year-end fair-value liability was approximately $0.5 million.
- The Harrington contract’s expiration reduced 2011 revenue by an estimated $2.1 million versus a renewal under its prior terms. The company sold its interest in GED during the fourth quarter.
- After year-end, GEM and RAM agreed in principle to sell their FireKeepers management rights for $97.5 million. The proposed transaction was conditional on regulatory approval and refinancing by the Authority, with closing targeted for the second quarter of 2012. Full House said it intended to use part of any after-tax proceeds to repay debt.
Outlook, risks and contingencies
Management said it expected to fund its growth plans from operating cash flows and external debt or equity financing, but cautioned that economic weakness, gaming competition and constrained credit access could impede those plans. The company planned to apply substantially all excess cash to debt reduction. Key exposures include competition in Indiana and Michigan, tribal management-contract renewals, gaming approvals and regulation, variable-rate borrowing, and the performance of recently acquired casinos. The FireKeepers management agreement was scheduled to end in August 2016 and Buffalo Thunder’s in September 2014; extensions were not assured. A proposed hotel at Rising Star faced a planning-commission denial, and the company was considering alternatives.
The filing reports no material off-balance-sheet arrangements and no legal proceedings under Item 3. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2011, while noting its assessment of controls at the newly acquired properties was still in progress. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control effectiveness.
Investor verification priorities
- Confirm Q4-only results from quarterly filings; this 10-K’s figures are annual, and the supplied text does not clearly state fourth-quarter financial results.
- Review acquisition accounting and the acquired casinos’ ongoing profitability, including the costs and cash flows behind the Rising Star and Grand Lodge contributions.
- Verify the status, approvals, financing and final proceeds of the proposed $97.5 million FireKeepers management-rights sale, and any resulting debt repayment.
- Assess Wells Fargo covenant headroom, required amortization, borrowing costs and liquidity after the reported January 2012 principal payment.
- Reconcile the filing’s stated estimated effective tax rate of approximately 58% with the reported tax provision and deferred-tax movements.
- Monitor the assumptions supporting Stockman’s goodwill valuation, the Nambé receivable write-off, and the remaining tribal contract-rights balance.