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Full House Resorts, Inc. (NASDAQ:FLL)

Q4 2007 Earnings Call

March 27, 2008, 9:00 am ET

Executives

Andre Hilliou – CEO and Director

Mark Miller – Senior Vice President CFO and Director

William Schmitt – Integrated Corporate Relations

Analysts

Stuart Vaughn - Vander Capital

Justin Sebastiano – Morgan Joseph

Nick Dano – Sterne Agee

Operator

Welcome to the Full House Resorts Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to William Schmitt, Investor Relations for ICR. Please go ahead, sir.

William Schmitt

Thank you, Eric; and good morning, everyone. By now everyone should have access to our earnings announcement which we released earlier today on Form 10-K which was filed last night. These may also be found on our website at Fullhousereorts.com under the Investor Section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are guarantees of future performance and therefore undo reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detail discussion of the risks that could impact the future operating results and financial condition of Full House Resorts.

With that, I would like to now introduce Andre Hilliou, CEO of Full House Resorts. Andre.

Andre Hilliou

Thank you, Bill. Here with me today is Mark Miller, our CFO, who will discuss our financial results for the quarter. But first I wanted to go over a few key highlights from the first quarter in early ’08 to bring you to speed on the Full House story and where we stand.

First, I want to briefly discuss our long-term strategy. Going forward, Full House will continue to pursue (inaudible) to purchase casinos that meet our standards. We look to be an opportunistic strategic buyer to that, and we are seeking casinos that are able to be purchased at the right multiple either market leaders or have the potential to be a market leader and have good management waiting to remain with the property. There are many properties to look at, and we believe financing on favorable terms will be available for well-established and moderately priced acquisitions.

We believe that the current uncertainty and turmoil in the credit market is an advantage for well financed strategic buyers, such as ourselves, and should be viewed as a strength in negotiating a transaction with a seller.

Moving on to a development project: On December 14th, we received approval from the National Indian Gaming Commission for our Gaming Management Contract for the FireKeepers’ Casino to be built near Battle Creek, Michigan, clearing the last major legal and regulatory hurdle to the project. Since that time, the tribe has engaged the construction manager substantially completed the design document and executed guaranteed maximum price contract for the project construction. Further, steel orders have been placed to secure long lead items.

ADM, a 50% owned venture of Full House has identified the general manager who will join the project as soon as the financing is in place. Our top priority right now is to assist the tribe in obtaining financing and to begin construction shortly thereafter. At this time of course we are unable to provide any detail as to the status of project financing. We have adjusted the opening date of the casino to June ’09 from our previous plan of first quarter ’09 based on the now completed design drawing and a negotiated and executed contract with the construction manager.

Despite the struggle and delays that we and the tribe have experienced, we remain very exciting about the FireKeepers’ casinos. The property is located on 78 acres of land between Detroit and Chicago right by exit 103 following interstate 94 and would include over 3,000 gaming positions, 5 restaurants, and a 2,078-space covered parking garage. There is already an easy on/off interchange in place which will provide customers with convenient access directly to the site. In addition, the site is only 4-mile west of the I-69/I-94 junction. As we all know, location, easy accessibility, and a great product as the main ingredients for casino success, and we believe this project has it all.

Next, I wanted to briefly discuss Nambé Casino. Last week we put out a press release announcing that we would no longer be pursuing the Nambé Casino project. As a result, we took an impairment charge of around $200,000 in the quarter on a development contract rights pending a resolution with the Pueblo. However, the Pueblo has recognized the obligation to reimburse all the Company’s development advance for the project which total approximately $655,000 as of December 31st. We expect all of those advance to be reimbursed by the Pueblo on yet to be negotiated terms. In addition, Full House will negotiate with the Pueblo of its new developer for payment of the value of the exclusive gaming rights granted to the Company by the Pueblo.

In term of our Northern Cheyenne Casino in Montano, the regulatory approval process is ongoing but slower than expected. We will continue to pursue the project; however, our focus remain with FireKeepers.

Now let’s move on to our current operation: For the quarter, Stockman’s Casino performed reasonably close to our expectation generating revenue of $2.2 million and $9.0 million and $9 million for the 3 and 11 months we have owned it respectively. Of note, those numbers do not include the revenue we received from our hotel operation which was classified as discontinued operation for the first quarter. During the quarter, our coffeehouse was renovated which contributed to some softness in our quarterly revenue. The renovation was completed in December and the restaurant is currently doing very well.

Our equity in lending term from our Harrington Raceway and Casino joint venture in Delaware generated $1.2 million for the quarter, up $29 from last year. We want to note that for 2008, Full House is guaranteed at least an 8% increase over the approximated $4.1 million cash flow we receive from the joint venture in ’07, which in (inaudible) potential competition in Pennsylvania, Atlantic City, and Maryland.

Finally on February 21st, we announced that we had closed on a previously announced sale of the Holiday Inn Express in Fallon, Nevada, for $7 million in net proceeds. We applied the proceed to the Company revolving loan with the Nevada State Bank reducing the balance of the loan from $10.9 million to $3.9 million, while the Company availability under the facility increased to $4.8 million. In addition, future amortization requirement we reduce on a pro rata basis and the Company has no required principal payment until January 2016.

I will now turn the call over to Mark, our CFO, to go into more detail about the financial result for the quarter, and then I will close with a few additional comments. Mark.

Mark Miller

Thank you, Andre. I’d like to quickly review a few highlights of our financial performance for this quarter and then we’ll be happy to respond to any questions you may have at the end of our prepared remarks.

For the 3 months ended December 31, 2007, income from operations fell slightly to approximately $493,000 compared to $515 in the prior year period with the Company recording net income of approximately $8,600 compared to approximately $244,000 in the fourth quarter of 2006.

For the fourth quarter ended December 31st, earnings per share was flat compared to earnings per share of $0.02 in the prior year period based on diluted common shares outstanding of 19.3 million and 11 million respectively. As Andre mentioned, we recorded an impairment loss of approximately $407,000 related to the Nambé and Manuelito projects. Exclusive of the impairment loss, net income for the quarter would’ve been approximately $277,000 or about $0.01.4, which would’ve been comparable with the prior year. It should also be noted that we booked substantially less in unrealized gains on tribal receivables this year than last, which has impacted net income both for the quarter and the full year.

We would note that the main reason for the decrease in these metrics was the $407,000 impairment charge for the discontinuation of the Nambé casino project and the Manuelito project also located in New Mexico. With regard to the latter, the land that Full House was holding for a potential casino project with the Manuelito Chapter of the Navajo Nation is now classified in other assets and we are pursing the sale of that land. The cost basis of that land is approximately is $130,000.

Stockman’s Casino, which we acquired in January 2007, contributed approximately $2.2 million and $9 million in revenue for the 3-month and 11-month periods ended respectively, exclusive of the hotel, which is included in income from discontinued operations for the entire year.

The results were reasonably within our expectations despite some softness, as Andre mentioned earlier, due to the coffeehouse being closed for most of the quarter, as well as a weaker Fallon market due to economic factors and hasher weather this year versus last year. Despite those challenges, we believe Stockman’s held up relatively well, primarily because we’ve been able to improve our slot market share from 34.8% last year to 36.2% for the full year 2007.

EBITDA for Stockman’s was approximately $1.2 million and $4.2 million for the same 3-month and 11-month periods respectively, including the hotel. These results are consistent with management’s expectations even despite the remodeling of the coffee shop and the harsher weather. Annualized Stockman’s EBITDA would be in the range of $4.5 to $4.6 million, which is right on track with our expectations when we closed on the transaction back in January of 2007.

We are pleased that Stockman’s increase has increased its market share during the year from 34.8 for 2006 to 36.2 for 2007 despite the coffeehouse closure. We want to note that our steakhouse was closed for most of January 2008 due to its own renovation. It reopened at the end of January and is performing very well. We believe that with the completion of the coffeehouse, coffee shop and the steakhouse renovations, we are poised to continue improving on our Fallon market share leadership.

It should also be noted that we expect the sale of the hotel to be neutral to slightly accretive to our 2008 earnings due to the reduction in appreciation and interest expense. Ongoing development expense remain down somewhat from the prior year because most Michigan project expenses are now being funded by the tribe using the IGT bridge loan which was put in place during the second quarter of 2007.

SG&A expenses increased from $0.9 million last year to $1.6 million during the fourth quarter. The increase is primarily due to Stockman’s expense not reflected in prior year’s results as well as stock compensation expense and other personnel costs.

Equity and net income from Harrington Raceway and Casino was up 29% from the prior year period in the fourth quarter to $1.2 million. Our management fees were up during the quarter to the fee guarantee, the 5% fee guarantee we received, as well as the timing of some rebate payments and the increase is all the more impressive when you consider that Harrington operated in the fourth quarter with less than its full compliment of machines due to the renovation and expansion project that was in progress. The expansion was completed in early February 2008, and Harrington now has approximately 2,100 machines online. We are guaranteed an 8% management fee increase over 2007’s cash flow of approximately $4.1 million and a reminder that we are also guaranteed a minimum 5% annual increase from 2009 through 2011.

As Andre indicated, based on the now completed design and construction drawings and contracts that have been executed with the construction manager for the FireKeepers’ casino project, we have had to move its estimated opening date to June 2009. As a result, we recognize less than expected unrealized gains during this quarter.

The change in our estimated opening date for FireKeepers was partially offset by a reduction in the discount rate based on changes in economic elements of the valuation model we use as well as a reduction in the project’s specific risk factors due to the NIGC approval we received in December and the progress that’s been made in preparing to begin construction. Please keep in mind that these adjustments to fair value are non-cash. As we have stated in our previous conference calls, these amounts remain subject to some volatility as timing estimates change. I would refer you to the somewhat extensive disclosures we have in our December 31, 2007, 10-K to better understand the nature of these items which are significant to our financial results.

Earnings per share for the quarter were essentially flat versus earnings per share of $0.02 for the same period last year on approximately 19.3 million shares outstanding at the end of Q4 compared with approximately 11 million shares outstanding at the same time last year. This of course reflects the offering that was done in December 2006 and the conversion and retirement of the preferred shares during the first quarter of this year. There haven’t been any significant changes to the share count during the most recent quarter.

We had approximately $8 million in cash on hand at the end of Q4. During the quarter, we made additional voluntary prepayments on the Nevada State Bank loan in the amount of $700,000 bringing total prepayments for 2007 to about $4.8 million. As a result, we had around $4.l million in availability on our revolving line of credit.

Debt as of December 31st, including current maturities and the Green Acres obligation, stood at approximately $23.2 million. We have no required principal payments on our Nevada State Bank loan for quite some time.

On February 21, 2008, the Company closed the sale of the Holiday Inn Express in Fallon for net proceeds of $7 million. We applied the proceeds to the Company’s revolving Nevada State Bank loan reducing the balance from $10.9 million to $3.9 million and increasing the Company’s availability under the facility to approximately $4.8 million. Further future amortization requirements were reduced on a pro rata basis and the Company has no required principal payments now until January of 2016.

During this quarter, we also booked approximately $9.5 million in long-term debt associated with the previously announced Green Acres buyout. This obligation is shared with our 50% partner in the Michigan management company, RAM, and is expected to be funded out of either a separate financing or from cash repaid by the tribe in conjunction with our tribal advances. In either case, all is part of an overall financing of the Michigan project. The obligation had not been previously recorded because the transaction had a major contingency, that being the approval by the NIGC of our 7-year management agreement. With that contingency satisfied in December, we have recorded the remaining buyout obligation.

As of February 25, 2008, fo0llowing the sale of the Holiday Inn Express, the Company had cash on hand of $7.3 million and debt outstanding of $15.7 million, including the $9.5 million shared Green Acre obligation.

With that, I’ll turn it back over to Andre for a few final comments before we open it up for questions.

Andre Hilliou

Thank you, Mark. Before turning it over to questions, we just wanted to briefly reiterate the Full House story and our strategy. While we have moved back the expected opening date for FireKeepers, we are very pleased that we received final NIGC approval, which we believe was the largest remaining obstacle in that path and we have had made significant progress in preparing to actually begin construction of the facility. We look forward to obtaining financing and beginning construction in the near future on our number one priority.

Meanwhile we are pleased, the progress of Stockman’s and the lock-in equity income we will receive over the next few years from Harrington Raceway and Casino. Long-term, our goal is to own and develop market leading local casinos similar to Stockman’s. We continue to investigate potential acquisition and management project, but we will only act on the opportunities that are the right multiples and can provide long-term value for Full House and our shareholders.

Thank you for your time today, and I will now open the call for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Stuart Vaughn with Vander Capital. Please go ahead.

Stuart Vaughn – Vander Capital

Good morning, guys. Mark, can you just tell me what the amount, the undiscounted amount of the note receivable due from Michigan is?

Mark Miller

It’s $14.2 million, Stuart. I would just remind you that that is not all Full House’s receivable. Some of that money is, it will be ultimately paid to RAM. It’s not a 50/50 sharing of that $14.2 million. But the total undiscounted note from the tribe is $14.2 million.

Stuart Vaughn – Vander Capital

How much of that is due to Full House?

Mark Miller

Probably, Stuart, somewhere between $9 and $10.

Stuart Vaughn – Vander Capital

Undiscounted?

Mark Miller

Undiscounted.

Stuart Vaughn – Vander Capital

So if the financing, once the financing is in place, when that happens, you would anticipate receiving that $9 to $10 million in a lump sum?

Mark Miller

Well I think, Stuart, that is the plan would be for the tribe to be able to repay to GEM the entire receivable out of a financing transaction. But until a financing transaction is completed, we’re not absolutely sure that we would be able to get it all out. Do you follow me?

Stuart Vaughn – Vander Capital

Yes sir.

Mark Miller

So I don’t want to give any absolute assurances that tribal receivable would be fully repaid, but that is our objective.

Stuart Vaughn – Vander Capital

The $9.5 million that you booked on your, in long-term debt for the Green Acre transaction, that just an accounting mechanism where you had to recognize the whole $9.5 as opposed to your only on the hook for half of that, right?

Mark Miller

That’s correct because GEM is a consolidated entity for us. It all shows up on our books, that’s correct. But that obligation is shared on a 50/50 basis between us and RAM.

Stuart Vaughn – Vander Capital

Thank you.

Operator

(Operator Instructions) The next question comes from Justin Sebastiano with Morgan Joseph; please go ahead.

Justin Sebastiano – Morgan Joseph

Morning, guys. For the notes receivable, the interest that’s accrued on that, is that in that number, that $9 to $10 million you’re talking about that you could receive if the tribe does get the financing.

Mark Miller

The way the interest works on that note, Justin, is it’s kind of on an element-by-element basis. Some of that $14.2 million was used to acquire the land and interest accrued on that piece of it until we turn the land over to the federal government for it to go into trust. So there is some accrued interest in there on that, but we stopped accruing interest when the land was turned over to go into trust. The rest of the note does not accrue interest until the casino opens, so it’s only if we don’t get repaid out of the financing, and the note ultimately gets repaid out of operating cash flows. That interest would accrue on that. So other than the land piece, there’s no accrued interest in that $14.2 million and there wouldn’t be any until after opening.

Justin Sebastiano – Morgan Joseph

Understood. Then as far as the advances from New Mexico, I mean I know it’s a very small amount, but you said the tribe knows they’re going to have to pay you back but at a negotiable term. So does that mean that you expect to get less than $655,000?

Mark Miller

No, we expect to get the $655. I think that what the agreement provides for is that it will get repaid out of gaming revenues and the tribe has indicated that they’re going to pursue a smaller development with another developer. We do not know all the details of that yet as to what exactly what it’s going to be and when it’s going to be opened, what we can expect from a revenue stream. So ultimately once we know those pieces, we’re going to have to sit down with them and negotiate a repayment schedule, and we just don’t know what that is yet.

Justin Sebastiano – Morgan Joseph

So I assume that there will be interest on top of that something like prime plus a margin or something?

Mark Miller

The agreement does call for some interest. Again, I expected that will be sort of a negotiated term. I would note that the $655 is the undiscounted value. We have a discount against that in our books. It’s currently valued at, I don’t remember the exact amount but it’s right around $0.5 million. But anyway, we expect to have those negotiation with the Pueblo.

Justin Sebastiano – Morgan Joseph

All right, thanks a lot, guys.

Operator

Our next question comes from Nick Dano with Sterne Agee; please go ahead.

Nick Dano – Sterne Agee

Good morning. My question related to the final GMP, if you could share with this the final cost and any scope changes from the last press release from you guys or the tribe?

Mark Miller

Nick, we haven’t publicly disclosed the contract value of those GMP contracts. I can tell you that, and it’s really not ours to disclose. That’s the tribe’s agreement. We’re not a party to that agreement. But I will tell you that there have been no scope changes. The project is still expected to be 2,500 slot machines, 90 table games, 20 pokers, and slightly under 2,100 car parking garage, 5 restaurants, 3 bars, so none of that has changed. I guess I can just tell you that generally the cost of the hard construction, the GMPs is not substantially different from what we had anticipated previously.

Nick Dano – Sterne Agee

That’s fair. I just saw the $330 million I think was in the 10-K and I didn’t know what else that may include.

Mark Miller

Yeah, most of the… You’re talking about the change from the previous estimate of

$270 to $330, almost of that change is related to increases in financing costs that are anticipated given the changes in the credit market.

Nick Dano – Sterne Agee

Understood. Just sort of a modeling question: Depreciation in the quarter was obviously very low I’m assuming because the hotel was excluded. Will it be that low going forward or is there anything else in there that…

Mark Miller

It’ll be a little bit more than that because there were some adjustments related to the Holiday Inn sale. We made some purchase price adjustments. I don’t have in front of me right this second exactly what it’ll be on a go forward basis, but it’ll be a little bit more than that.

Nick Dano – Sterne Agee

Understood. Thanks, guys.

Mark Miller

It’ll be substantially less though because that Holiday Inn had a pretty high depreciation basis.

Nick Dano – Sterne Agee

Yeah, that’s what I would’ve assumed. Thank you.

Operator

Our next question is a follow-up from Stuart Vaughn; please go ahead.

Stuart Vaughn – Vander Capital

Is there any recovery from the Navaho project other than the $130,000 value of the land that you bought there?

Mark Miller

This is Stuart?

Stuart Vaughn – Vander Capital

Yes sir.

Mark Miller

You’re talking about against the contract rights? We do not believe that we’ll have any meaningful recovery against those contract rights. It was approximately $200,000 and we have written it completely off. The reason principally, Stuart, is the indications from the nation is that they’re not going to pursue a gaming development in that area at least not for a very long time and therefore there probably is not going to be any gaming revenues that we would be able to recover against which is kind of the basis of the agreement.

Stuart Vaughn – Vander Capital

Understood. How many acres is it that you own there?

Mark Miller

It’s 10 or 12 acres; I’m not exactly sure the exact number of acres, but it’s about 10 or 12 acres.

Stuart Vaughn – Vander Capital

What do you anticipate the end use of that land to be in terms of finding a potential seller? Is that potential residential land or commercial?

Mark Miller

Commercial. We really don’t know right now. We’ve just begun sort of the sales process. I think that sometime during the next couple of months, we’re going to get a good feel for that land could be used for and what our options are for disposing of it.

Stuart Vaughn – Vander Capital

Great. Any thoughts to a share buyback?

Mark Miller

Well we’ve had this conversation a couple of times. I can just tell you that it is a matter of discussion; it is matter of something that we’re looking at. Again, it’s the best use of our cash. The two significant options right now would be a share back or an acquisition. We continue to be very active in looking for acquisitions. That is the primary focus of the management team and the Board, but we do have periodic discussions with the Board regarding a share buyback. That’s about all I can tell you at this point.

Stuart Vaughn – Vander Capital

Thank you, gentlemen.

Operator

We have a follow-up question from Nick Dano; please go ahead.

Nick Dano – Sterne Agee

Sorry, two other things for me. One is for the Delaware agreement, does the 8% increase, is that going to be done very quarter or will there be sort of a true-up at the end of ’08?

Mark Miller

No, the agreement calls for quarterly true-ups. So we have had 2 true-ups so far. We have the third quarter true-up and the fourth quarter true-up for 2007 and then we’ll move forward. They’re quarterly true-ups.

Nick Dano – Sterne Agee

Regarding, as a follow-up to the question about the buyback, in terms of the agreement that you have with your banks, is that a possibility? Would it just be a matter of getting Board approval or would there need to be any amendments or changes to the bank agreements to be able to make that happen?

Mark Miller

It would just be a matter of Board approval.

Nick Dano – Sterne Agee

All right, thank you.

Operator

At this time, I’m showing no additional questions in the queue. I’d like to turn the call back over to management for any concluding remarks they may have.

Andre Hilliou

Well we would like to thank everyone for their participation on the call today and for their support as we continue pursuing growth on behalf of our shareholders. With that, we will end the call and wish all of you a great rest of the day. Thank you.

Operator

Ladies and gentlemen, this concludes the Full House Resorts Fourth Quarter 2007 Earnings Conference Call. You may now disconnect, and we thank for using ACT Conferencing.

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