**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-KSB**

 
| **ý** | **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, 2001**

 
| **o** | **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 Incorporation or Organization)           |   | (I.R.S. Employer 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 whetherthe registrant:  (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý  No o

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.  o

 

State issuer’srevenues for its most recent fiscal year: $4,995,826*.*

 

The aggregatemarket value of registrant’s voting $.0001 par value common stock held bynon-affiliates of the registrant, as of March 15, 2002 was: $1,965,488.

 

The number ofshares outstanding of registrant’s $.0001 par value common stock, as of March15 2002, was 10,340,380 shares.

 

 

**PART I**

 

**1.             Description of Business.**

 

**BACKGROUND**

 

Full HouseResorts, Inc. develops and operates destination resorts and entertainment,gaming and commercial centers.  Weoperate Midway Slots andSimulcast at the Delaware State Fairgrounds in Harrington, Delaware.  Midway Slots and Simulcast has a total ofapproximately 1,140 gaming devices, a 450-seat buffet, a 50-seat diner and anentertainment lounge area.  We also operatethe Mill Casino, which, as of December 31, 2001, had approximately 350 videolottery terminals, 10 blackjack tables, nine poker tables, a restaurant andbuffet, a saloon, a bingo hall, a gift shop and a snack bar.  The Mill Casino is located on Tribal TrustLands of the Coquille Indian Tribe in North Bend, Oregon. We are also involvedin the development of projects in Battle Creek, Michigan and SouthernCalifornia.

 

Ourinvolvement with Indian Tribes began in May 1994 when Lee Iacocca, currentlyone of our directors, brought to us opportunities to become involved in thedevelopment of gaming projects in the Detroit, Michigan metropolitan areatogether with certain Indian tribes that we refer to as the Organized Tribes, asecond project in Michigan with the Nottawaseppi Huron Band of Potawatomi, aproject in southern California with the Torres Martinez Desert Cahuilla Indiansand the Harrington, Delaware project.

 

We wereincorporated in Delaware on January 5, 1987.  Our executive offices are located at 2300 West Sahara Avenue,Suite 450 - Box 23, Las Vegas, Nevada 89102, telephone (702) 221-7800.

 

**GTECH JOINT VENTURES**

 

In April 1995,we entered into a series of agreements with GTECH Corporation, a wholly-ownedsubsidiary of GTECH Holdings Corporation, a leading supplier of computerizedon-line lottery systems and services for government-authorized lotteries, tojointly pursue gaming opportunities.  Excluded from these agreements was the Deadwood Gulch Resort, which wethen owned.  Pursuant to the agreements,joint venture companies equally owned by Dreamport, Inc., the gaming and entertainmentsubsidiary of GTECH, and Full House were formed.  We contributed our rights to the North Bend, Oregon facility andour rights to develop the Torres Martinez, Nottawaseppi Huron Band ofPotawatomi and Delaware State Fair projects to the joint venture companies.

 

In payment forour interest in the joint venture companies, we contributed cash and otherintangible assets to the companies and committed to loan the joint venturecompanies up to $16.4 million to complete the North Bend, Oregon and Delawarefacilities.  We agreed to guaranteeone-half of the obligations of the joint venture companies to GTECH under theseloans.  The Delaware and Oregon loanshave been repaid in full.  GTECH alsoagreed to make loans to us for our portion of the financing of projects if wewere unable to otherwise obtain financing. GTECH provided project management, technology and other expertise toanalyze, develop and manage the implementation of opportunities developed bythe joint venture companies.  GTECH alsoloaned us $3.0 million, with interest payable monthly at prime, and theprincipal balance originally due in January 2001.  This note was paid in February 2002.  Although the loan was convertible into 600,000 shares of ourcommon stock, the loan conversion clause expired without exercise.  As part of the GTECH relationship, Allen E.Paulson, William P. McComas and Lee Iacocca gave GTECH an option, which expiredon December  29, 2000, to buy their shares should they propose to transferthem.

 

**Acquisition ofGTECH’s Interest**

 

OnMarch 30, 2001, we bought GTECH’s 50% interest in three joint ventureprojects that had been equally owned by the two companies:

 

Gaming Entertainment, LLC,owner of an agreement continuing through August 2002 with the Coquille IndianTribe, which conducts gaming at The Mill Casino in North Bend, Oregon;

 

Gaming Entertainment(Michigan), LLC, owner of a management agreement with the Nottawaseppi HuronBand of Potawatomi to develop and manage a gaming facility near Battle Creek,Michigan; and

 

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Gaming Entertainment(California), LLC, owner of a management agreement with the Torres MartinezBand of Desert Cahuilla Indians to manage a gaming facility near Palm Springs,California.

 

The purchaseprice was $1.8 million, and was funded through our existing creditfacility.  As part of this transaction,GTECH extended the due date of our $3.0 million promissory note until January 25, 2002, with interest at prime. This note was repaid in full in February 2002.  Also, as part of this transaction, GTECH was no longer requiredto provide the necessary financing for the development projects in Michigan andCalifornia.  Since we are unable to fundthese projects alone, we are actively seeking other ways of financing thesedevelopments.  We cannot guarantee thatsatisfactory financing will be available.

 

Thistransaction did not include our other joint venture with GTECH, GamingEntertainment (Delaware), LLC, owner of a management agreement, continuing through2011, to manage Midway Slots & Simulcast in Harrington, Delaware.  We continue to own this joint venture withGTECH.

 

Below is ashort description of our remaining joint venture with GTECH and the gamingprojects and opportunities that we now own.

 

**Projects Currently Operating**

 

**Midway Slots andSimulcast-—Harrington, Delaware**

 

We openedMidway Slots and Simulcast, owned by Harrington Raceway, Inc. onAugust 20, 1996.  The original35,000 square foot facility near Dover, Delaware, was developed, financed andis managed by a Full House-Dreamport joint venture company.  The joint venture provided over $11 millionin financing, developed the project and acts as manager of the gaming facilityunder to a 15-year contract.  Thefacility opened with 500 gaming devices, a simulcast parlor and a small buffet.

 

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 additional gaming devices were added to the facility bringing the total to742.  Harrington Raceway, Inc. secured abank loan to pay for these and other improvements and to pay off thedevelopment loan from the joint venture company.

 

In May 2000,the facility was expanded by an additional 35,000 square feet, the expansion ofthe food service offerings to include a 450-seat buffet and a 50-seat diner,and an entertainment lounge area.  Thefacility can now accommodate an additional 400 gaming devices.  The total cost of approximately $6.5 millionwas funded by the owner.

 

Midway Slotsand Simulcast is located in Harrington, Delaware on Route 13, approximately 20miles south of Dover, Delaware between Philadelphia and Baltimore/Washington,D.C.  Midway Slots and Simulcast is oneof three facilities operating in Delaware. The closest competing casino is in Dover and operates 2,000 devices, themaximum number allowed in Delaware.  Theother facility is approximately 60 miles north of Harrington.

 

Under the 15year management agreement, the venture receives a percentage of gross revenuesand operating profits.  The jointventure company changed its management fee structure for revenues and operatingprofits in excess of defined amounts, in recognition of the owner providingcomplete financing for the May 2000 expansion.

 

**The Mill Casino—NorthBend, Oregon**

 

The firstphase of the facility known as the “Mill” opened on May 19, 1995 with 250video lottery terminals, nine blackjack tables, three poker tables, arestaurant and buffet, a saloon, a bingo hall, a gift shop and a snack bar onTribal Trust Lands of the Coquille Indian Tribe in North Bend, Oregon.  As of December  31, 2001,

 

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there were approximately 350video lottery terminals, 10 blackjack tables and nine poker tables.  We bought 100% ownership in this agreementin March 2001.

 

We leaseapproximately 12.5 acres of Tribal Trust Lands from an entity owned by theCoquille Indian Tribe on which the Mill is located.  We in turn sublease a portion of the land on which the casino islocated back to the Tribe.   Thesublease expires in August 2002.  If thesublease is not renewed the master lease will expire.  The Tribe is not expected to renew this lease.

 

The agreementwith the Coquille Indian Tribe was amended in 1995 to:

 

•               reduce the obligation to providefinancing to $10.4 million;

 

•               extend the date when repaymentsbegan; and

 

•               modify the method of computingparticipating rents and loan repayments.

 

Lease and debtpayments started in 1995.  In 1996, theTribe received a new $17.5 million loan to refinance certain outstandingindebtedness and finance the acquisition of gaming equipment and improvementsto the gaming facility.  The initialdevelopment loan was repaid 100% from the refinancing. GTECH Corporationpurchased a $2.0 million participation in the new loan, half of which weguaranteed.  In 2001, the Tribe securedadditional financing for purposes of adding a small hotel, and GTECH was repaidtheir $2.0 million participation.  Aspart of these loans, the rights to receive a percentage of gross gamingrevenues were subordinated to the debt. Rental payments for the sublease were originally 13% of gaming revenue,but have decreased to 10% under the terms of our agreement. Also, if gross gamingrevenue for any twelve-month period exceeds $20,000,000, then only 10% ofamounts in excess of such threshold will be paid as rent under thesublease.  No Annual Percentage Rentalwill be paid after August  19, 2002. Approximate gross gaming revenue for the year ended December 31,2001 was $22,000,000.

 

The Mill is inNorth Bend, Oregon on the Port of Coos Bay. The Coos County population, which including the Bay area, isapproximately 65,000.  The Bay area’seconomy is primarily based on forestry and fishing.  Oregon’s Coos Bay area is located on the Pacific Coast midwaybetween San Francisco, California and Seattle, Washington.  The communities of Coos Bay, North Bend and Charlestonare approximately 115 miles from Eugene, Oregon’s second largest city.  The North Bend Municipal Airport isSouthwestern Oregon’s regional air terminal that provides commercial airservice to and from Portland.

 

The MillCasino is one of several Indian casinos operating in Oregon.  The closest competing casino is located approximately90 miles from North Bend and operates approximately 700 devices, a card room,bingo and keno.  Two other facilities,which are 140 and 160 miles from North Bend, are located closer to Portland,Oregon.

 

**Projects in Development**

 

**Nottawaseppi HuronBand of Potawatomi—Battle Creek, Michigan**

 

We enteredinto a series of agreements in January 1995 with the Nottawaseppi Huron Band ofPotawatomi, a Michigan Indian Tribe, to develop and manage gaming andnon-gaming commercial opportunities for the Tribe.  The Tribe’s state reservation lands are in SouthcentralMichigan.  If developed, the facilitywill target the Ft. Wayne, Indiana and Lansing and Detroit, Michigan metropolitanareas.

 

In December1999, the Tribe applied to have its existing reservation lands, as well asadditional land in its ancestral territory, taken into trust by the Bureau ofIndian Affairs.  A Full House-GTECHjoint venture company had the exclusive right to provide financing and casinomanagement expertise to the Tribe in exchange for a defined percentage of netprofits and certain other considerations from any future gaming or relatedactivities of the Tribe.  If the projectis developed, a third party will be paid a royalty fee in lieu of its original15% ownership interest in earlier contracts with the Tribe.

 

We acquiredGTECH’s interest in this project in March 2001.  On February 15, 2002, we entered into an agreement with RAMEntertainment, LLC, a privately held investment company, whereby RAM willacquire a 50% interest in the California and Michigan projects and provide thenecessary funding for their development.

 

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The Tribeachieved final federal recognition as a tribe in April 1996.  The Tribe obtained a Gaming Compact fromMichigan’s governor early in 1997 to operate an unlimited number of electronicgaming devices as well as roulette, keno, dice and banking card games.  The Michigan Legislature ratified theCompact by resolution in December 1998, along with compacts for three othertribes.  A lawsuit was filed in 1999 by“Taxpayers of Michigan Against Casinos” in Ingham County Circuit Court.  The lawsuit challenges the constitutionalityof the approval process of these gaming compacts.  On January  18, 2000, Judge Peter D. Houk ruled that thecompacts must be approved by a legislative bill rather than by resolution.  The State of Michigan filed an appeal to theMichigan Court of Appeals on February  4, 2000.  We joined in the appeal filing as an intervening defendant.  The appeal is still pending and oralarguments have not yet been scheduled.

 

Full House,along with the Tribe, continues to move forward with casino development planswhile working toward a favorable resolution of the current litigation.  In December 1999, the management agreements,along with the required licensing applications were submitted to the NationalIndian Gaming Commission, which we refer to as the NIGC.  The parties have selected a parcel of landfor the gaming enterprise.  The land isunder option, and we have completed a Fee-to-Trust application that was sent bythe Minneapolis regional office of the Bureau of Indian Affairs to the nationaloffice in Washington, D.C. in February 2002. We are awaiting the notice of the intent to take the land into trust.  We met with the NIGC in January 2002 toreview suggested revisions to the management agreements and are currentlyworking with the Tribe to incorporate the appropriate changes.

 

On November 5,1996, Michigan voters approved licenses for three gaming facilities within theCity of Detroit, approximately 100 miles from the Battle Creek area.  Two temporary facilities began operations in1999, and the third opened in 2000.  Wedo not believe that operation of three gaming facilities in Detroit will have amaterial adverse impact on the proposed Huron Potawatomi casino.

 

**Torres Martinez Bandof Desert Cahuilla Indians—Thermal, California**

 

In April 1995,we entered into a Gaming and Development Agreement and a Gaming ManagementAgreement with the Torres Martinez Desert Cahuilla Indians.  The agreements give us certain rights todevelop, manage, and operate gaming activities for the Tribe and the right toreceive a defined percentage of the net revenues from gaming activities.  Our right to receive a percentage of therevenues is subject to our obligation to arrange or provide financing for thedevelopment.  The rights to theseagreements were assigned to a Full House-GTECH joint venture company.  In 1997, a new Gaming Management Agreementwas signed, further defining the rights and obligations of the Tribe and FullHouse.  In March 2001, we acquiredGTECH’s interest in this project.

 

During 1996,the Tribe reached a settlement in its litigation with the Department of Justiceand two water districts, under which the Tribe will be paid $14.0 million incompensation.  Additionally, the Tribewill have the right to select up to 11,200 acres of new reservation land to betaken into trust in replacement for the same quantity of land, which wasflooded by the rising level of the Salton Sea. That settlement, which required legislative enactment, was approved bythe U. S. House of Representatives and the Senate in December 2000.  The settlement allows the Tribe to acquireland in a specifically defined area (generally in the Palm Springs, Californiaarea) for purposes of conducting a gaming enterprise.

 

The Tribeasked the California governor to negotiate a compact allowing them to conductgaming on their current reservation.  Todate the request has not been honored. In February 2001, an action was filed in U.S. District Court by severalCard Club owners challenging the Tribal compacts.  The litigation claims that awarding exclusive rights to IndianTribes violates federal statutory and constitutional law.  We understand that the governor is awaitingaction by the courts before taking any further action with respect to ourrequest and other pending compact requests.

 

In August2001, we received a notice from the Tribe purporting to sever ourrelationship.  We are discussing anappropriate resolution of this matter including reimbursement for costs that weincurred on their behalf.  TheReceivable on our balance sheet include a $25,000 advance due from the Tribe.  In addition, Gaming Contract Rights includesapproximately $170,000 attributable to this contract.  We have incurred an aggregate of approximately $1 million incosts, including interest, on the Tribe’s behalf.  While there can be no assurance, we believe that we can recoverthe amounts carried on our balance sheet based upon the Tribe’s expressedintentions as well as the contractual rights that we continue to hold.

 

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**THEMEHOTEL/CASINO—BILOXI, MISSISSIPPI**

 

We bought aone-acre parcel of land on the gulf coast in Biloxi, Mississippi in February1998, for $4,621,670 with the intent of developing a themed casino resort.  The land is near the interchange of BeachBlvd. and Interstate 110, and next to the Beau Rivage Resort developed byMirage Resorts, Inc.  We later negotiatedto buy and/or lease approximately six additional acres, which, together withthe parcel already acquired, would constitute the project site.

 

In November1998, we executed a series of agreements with Hard Rock Cafe International todevelop the project in Biloxi, Mississippi. The agreements give us the right to develop and operate a Hard RockCasino in Biloxi.  We paid a territoryfee of $2,000,000.  In September 1998,Full House and Allen  E. Paulson formed a limited liability company,equally owned, for the purpose of developing this project.  Mr. Paulson agreed to contribute a gamingvessel (the former Treasure Bay barge in Tunica, MS.), and we agreed tocontribute our rights to the Hard Rock agreements.  In June 2001, we agreed to dissolve this company with each partyretaining their respective rights and assets.

 

Hard Rock wasto be a partner with us in a Management and Development Agreement for anongoing management fee.  In February1999, we entered into various option agreements with several owners of theadjacent properties needed for our project.  We also started discussions with investment bankers concerning thefinancing for the project, and started preparing our offering materials.  During those discussions, it became clearthat the expected capital market requirements for the project financing werenot acceptable to either Hard Rock or us.

 

By mutualagreement we ended the Management and Development Agreement which relieved HardRock of its obligation to co-manage the facility.  We are still allowed to seek an equity partner to fill HardRock’s role. Additionally, the parties amended certain portions of theLicensing Agreement.  While negotiatingto amend the agreements, we entered into discussions with potential equitypartners.  Discussions with potentialpartners ended in November 1999 without a definitive agreement.

 

After beingunable to find an equity partner, we were faced with expiring, but extendible,purchase options and deposits.  Afteranalyzing the costs and risks of those options, we elected not to spend thenecessary $600,000 for additional extensions, since it was unlikely that wewould be able to complete the transaction by the extended expiration date.  As a result, the options expired and weforfeited our deposits, resulting in a write-off of $1,350,000 in 1999.  In addition in 1999, we also expensed thecosts incurred for preparing the draft offering documents.

 

Although we nolonger had agreements in place to control the development site, we continuedcommunications with the various landowners and potential equity partners toassist in the development and management of the project.  During the third quarter of 2001, ourdiscussions with various potential partners for the development of the HardRock - Biloxi project concluded with no agreement.  Because of the timing requirements in our agreements with HardRock, and the current conditions in the tourism industry we do not believe wecan develop this project as planned.

 

Since we willnot be developing this project as planned, we reviewed the carrying values ofour Mississippi investments which include a one acre parcel of land acquiredfor $4,621,670, the Hard Rock license acquired for $2,000,000, and developmentpermits and plans carried at $444,130. We recorded an impairment provision of $4,593,800, to reduce thecarrying value to $2,472,000, which primarily represents the value of our landparcel.  We also expensed $250,000 inthe first quarter of 2001 related to the expiration of a land purchase optionthat we chose not to exercise or renew.

 

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**GOVERNMENT REGULATION**

 

The ownership,management, and operation of gaming facilities are subject to many federal,state, provincial, tribal and/or local laws, regulations and ordinances, whichare administered by the relevant regulatory agency or agencies in eachjurisdiction.  These laws, regulationsand ordinances are different in each jurisdiction, but mostly deal with theresponsibility, financial stability and character of the owners and managers ofgaming operations as well as persons financially interested or involved ingaming operations.

 

Neither FullHouse nor any subsidiary may own, manage or operate a gaming facility unlessthey obtain proper licenses, permits and approvals.  Applications for a license, permit or approval may be denied forreasonable cause.  Most regulatoryauthorities license, investigate, and determine the suitability of any personwho has a material relationship with us. Persons having material relationships include officers, directors,employees, and security holders.

 

Once obtained,licenses, permits, and approvals must be renewed from time to time andgenerally are not transferable. Regulatory authorities may at any time revoke, suspend, condition,limit, or restrict a license for reasonable cause.  License holders may be fined and in some jurisdictions and undercertain circumstances gaming operation revenues can be forfeited.  We cannot guarantee that we will obtain anylicenses, permits, or approvals, or if obtained, will be renewed or not revokedin the future.  In addition, a rejectionor termination of a license, permit, or approval in one jurisdiction may have anegative effect in other jurisdictions. Some jurisdictions require gaming operators licensed in that state toreceive their permission before conducting gaming in other jurisdictions.

 

The politicaland regulatory environment for gaming is dynamic and rapidly changing.  The laws, regulations, and proceduresdealing with gaming are subject to the interpretation of the regulatoryauthorities and may be amended.  Anychanges in such laws, regulations, or their interpretations could have anegative effect on Full House.

 

Certainspecific provisions applicable to us are described below.

 

**Indian Gaming.**  Gaming on Indian Lands (lands over whichIndian tribes have jurisdiction and which meet the definition of Indian Landsunder the Indian Gaming Regulatory Act of 1988, which we refer to as theRegulatory Act), is regulated by federal, state and tribal governments.  The regulatory environment regarding Indiangaming is always changing.   Changes infederal, state or tribal law or regulations may limit or otherwise affectIndian gaming or may be applied retroactively and could then have a negativeeffect on Full House or its operations.

 

The terms andconditions of management contracts or other agreements, and the operation ofcasinos on Indian Land, are subject to the Regulatory Act, which is implementedby NIGC.  The contracts also are subjectto the provisions of statutes relating to contracts with Indian tribes, whichare supervised by the Secretary of the U.S. Department of the Interior.  The Regulatory Act is interpreted by theSecretary of the Interior and the NIGC and may be clarified or amended by thejudiciary or legislature.   Under theRegulatory Act, the NIGC has the power to:

 

•               inspect and examine certainIndian gaming facilities;

 

•               do background checks on personsassociated with Indian gaming;

 

•               inspect, copy and audit all recordsof Indian gaming facilities;

 

•               hold hearings, issue subpoenas,take depositions, and adopt regulations; and

 

•               penalize violators of theRegulatory Act.

 

Penalties forRegulatory Act violators include fines, and possible temporary or permanentclosing of gaming facilities.   The Department of Justice may also impose federal criminal sanctions forillegal gaming on Indian Lands and for theft from Indian gaming facilities.

 

The RegulatoryAct also requires that the NIGC review tribal gaming ordinances.  Such ordinances are approved only if theymeet certain requirements relating to:

 

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•               ownership;

 

•               security;

 

•               personnel background;

 

•               record keeping and auditing ofthe tribe’s gaming enterprises;

 

•               use of the revenues from gaming;and

 

•               protection of the environment andthe public health and safety.

 

The RegulatoryAct also regulates Indian gaming and management contracts.  The NIGC must approve management contractsand collateral agreements, including agreements like promissory notes, loanagreements and security agreements.  Amanagement contract can be approved only after determining that the contractprovides for:

 

•               adequate accounting proceduresand verifiable financial reports, copies of which must be furnished to thetribe;

 

•                                            tribalaccess to the daily operations of the gaming enterprise, including the right toverify daily gross revenues and income;

 

•                                            minimumguaranteed payments to the tribe, which must have priority over the retirementof development and construction costs;

 

•                                            a ceilingon the repayment of such development and construction costs; and

 

•                                            a contractterm not exceeding five years and a management fee not exceeding 30% of profitsif the Chairman of the NIGC determines that the fee is reasonable consideringthe circumstances; provided that the NIGC may approve up to a seven year termand a management fee not to exceed 40% of net revenues if the NIGC is satisfiedthat the capital investment required or the income projections for theparticular gaming activity justify the larger profit allocation and longerterm.

 

Under theRegulatory Act, we must provide the NIGC with background information, includingfinancial statements and gaming experience, on:

 

•                                            eachperson with management responsibility for a management contract;

 

•                                            eachof our directors; and

 

•                                            theten persons who have the greatest direct or indirect financial interest in amanagement contract to which we are a party.

 

The NIGC willnot approve a management company and may void an existing management contractif a director, key employee or an interested person of the management company:

 

•                                            isan elected member of the Indian tribal government that owns the facility beingmanaged;

 

•                                            hasbeen or is convicted of a felony or misdemeanor gaming offense;

 

•                                            hasknowingly and willfully provided materially false information to the NIGC or atribe;

 

•                                            hasrefused to respond to questions from the NIGC;

 

•                                            isa person whose prior history, reputation and associations pose a threat to the public interest or toeffective gaming regulation and control, or create or enhance the chance ofunsuitable, unfair or illegal activities in gaming or the business andfinancial arrangements incidental thereto; or

 

•                                            hastried to influence any decision or process of tribal government relating togaming.

 

Contracts may also be voided if:

 

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•                                            themanagement company has materially breached the terms of the managementcontract, or the tribe’s gaming ordinance; or

 

•                                            atrustee, exercising the skill and diligence to which a trustee is commonlyheld, would not approve such management contract.

 

The RegulatoryAct divides games that may be played on Indian Land into three categories.  Class I Gaming includes traditional Indiangames and private social games and is not regulated under the RegulatoryAct.  Class II Gaming includes bingo,pull tabs, lotto, punch boards, tip jars, instant bingo, and other gamessimilar to bingo, if those games are played at a location where bingo isplayed.  Class III Gaming includes allother commercial forms of gaming, such as video casino games (e.g., videoslots, video blackjack); so-called “table games” (e.g., blackjack, craps,roulette); and other commercial gaming (e.g., sports betting and pari-mutuelwagering).

 

Class IIGaming is allowed on Indian Land if performed according to a tribal ordinancewhich has been approved by the NIGC and if the state in which the Indian Landis located allows 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 licensedby the tribe.

 

Class IIIGaming is permitted on Indian Land if the same conditions that apply to ClassII Gaming are met and if the gaming is performed according to the terms of awritten agreement between the tribe and the host state.  The Regulatory Act requires states tonegotiate in good faith with Indian tribes that seek to enter into tribal-statecompacts, and gives Indian tribes the right to get a federal court order toforce negotiations.

 

Thenegotiation and adoption of tribal-state compacts is vulnerable to legal andpolitical changes that may affect our future revenues and securitiesprices.  Full House cannot predict:

 

•                                            whichadditional states, if any, will approve casino gaming on Indian Land;

 

•                                            thetiming of any such approval;

 

•                                            thetypes of gaming permitted by each tribal-state compact;

 

•                                            anylimits on the number of gaming machines allowed per facility; or

 

•                                            whetherstates will attempt to renegotiate or take other steps that may affect existingcompacts.

 

Under theRegulatory Act, Indian tribal governments have primary regulatory authorityover gaming on Indian Land within the tribe’s jurisdiction unless a tribal-statecompact has delegated this authority.  Therefore, persons engaged in gaming activities, including Full House,are subject to the provisions of tribal ordinances and regulations on gaming.

 

The NIGC hasdetermined that provisions of the Regulatory Act dealing with managementagreements do not control our present operations in North Bend, Oregon.

 

Tribal-StateCompacts have been litigated in several states, including California andMichigan.  In addition, many bills havebeen introduced in Congress that would amend the Regulatory Act.   If the Regulatory Act were amended, thegovernmental structure and requirements by which Indian tribes may performgaming could be significantly changed.

 

**COMPETITION**

 

The gaming industry is highlycompetitive.  Gaming activities includetraditional land-based casinos; river boat and dockside gaming; casino gamingon Indian land; state-sponsored lotteries and video poker in restaurants, barsand hotels; pari-mutuel betting on horse racing, dog racing and jai alai; sportsbookmaking; and card rooms.  TheIndian-owned casinos that we developed and operate compete with all these formsof gaming, and will compete with any new forms of gaming that may be legalizedin additional jurisdictions, as well as with other types of entertainment.

 

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Midway Slots and Simulcast is one of threefacilities currently operating in Delaware.  InOregon, the Mill Casino is one of several Indian casinos operating in thatstate.  The State of Michigan, apotential development site for Full House, currently has three gamingfacilities operating in Detroit and numerous Indian casinos.

 

Additionally, we are in constant competitionwith other companies in the industry to acquire other legal gaming sites andfor opportunities to manage casinos on Indian land.  Many of our competitors are larger in terms of potentialresources and personnel.  Suchcompetition in the gaming industry could adversely affect our ability toattract customers and thus, adversely affect operating results. In addition,further expansion of gaming into new jurisdictions could also adversely affectour business by diverting customers from its managed casinos to competitors insuch jurisdictions.

 

**RISK FACTORS**

 

In addition to factors discussed elsewhere inthis Form 10-KSB, the following are important factors that could cause actualresults or events to differ materially from those contained in anyforward-looking statement made by or on behalf of Full House.

 

The Gaming Industry is Highly Regulated.  Gaming facility ownership, management andoperation is subject to many federal, state, provincial, tribal and/or locallaws, regulations, and ordinances which are administered by particular regulatoryagency or agencies in each jurisdiction. These laws, regulations and ordinances are different in eachjurisdiction but generally deal with the responsibility, financial stabilityand character of the owners and managers of gaming operations and personsfinancially interested or involved in gaming operations.  The change of these laws, regulations orordinances could affect our performance.

 

We Currently Have Pending Litigation.  Full House and some of our current andformer directors and officers are defendants in a lawsuit with Lone Star Casinoregarding the potential acquisition of a riverboat casino on the MississippiGulf Coast.  We cannot guarantee theresults of such litigation.

 

Our Future Capital Needs and Our Uncertaintyof Obtaining Future Funding.  We believewe have enough revenue to finance present operations.  We will, however, need substantial additional funding to pursuegaming opportunities in Michigan and California.  We may not be able to get such financing if needed.  However, if we get such financing, youshould know that any additional equity financings may be dilutive to Companyshareholders, and any debt financing may involve additional restrictions.  An inability to raise such funds when neededmight require us to delay, scale back or eliminate some of our expansion anddevelopment goals, and might require us to cease its operations entirely.

 

We Have Numerous Competitors.  The gaming industry is highlycompetitive.  Gaming activities includetraditional land-based casinos; river boat and dockside gaming; casino gamingon Indian land; state-sponsored lotteries and video poker in restaurants, barsand hotels; pari-mutuel betting on horse racing, dog racing and jai alai;sports bookmaking; and card rooms.  TheIndian-owned casinos that we developed and operate compete with all these formsof gaming, and will compete with any new forms of gaming that may be legalizedin additional jurisdictions, as well as with other types of entertainment.

 

Our Management Contracts Are of LimitedDuration.  We are prohibited under the RegulatoryAct from having an ownership interest in any casino we manage for Indiantribes.  The current management contractfor the Coquille Indian Tribe, which conducts the gaming at The Mill Casino,ends in August 2002.  Our managementcontract for Midway Slots and Simulcast ends in August 2011.  If a management contract is not renewed wewill lose the revenues from such contract which would have a negative effect onour results of operations.  There can beno assurance that our current management contracts will be renewed.

 

Our Management Contracts are Subject toGovernmental or Regulatory Modification. The NIGC has the power to require modifications to Indian managementcontracts under some circumstances or to void such contracts or secondaryagreements including loan agreements if we fail to obtain the requiredapprovals or to comply with the necessary laws and regulations.  While we believe that our managementcontracts meet the requirements of the Regulatory Act, NIGC has the right toreview each contract and has the authority to reduce the term of a management

 

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contract or the management fee or otherwise require modification of thecontract.  Such changes would have anegative effect on our profitability.

 

We Have Limited Recourses Against TribalAssets.  Development of our gamingopportunities will require us to make substantial loans to tribes for theconstruction, development, equipment and operations.  Our only recourse for collection of indebtedness from a tribe ormoney damages for breach or wrongful termination of a management contract isfrom revenues, if any, from casino operations.

 

We Depend Heavily on Key Personnel.  We currently have only four full timeemployees, and therefore we rely heavily on the efforts of each of theseemployees.  The loss of any of ourpersonnel would have a negative impact on Full House.

 

We Have a Limited Base of Operations.  Our principal operations currently consistof the management of two facilities (Midway Slots and Simulcast and The MillCasino).  The combination of therelatively small number of facilities and the potentially significantinvestment associated with any new managed facilities may cause our operatingresults to fluctuate significantly and adversely affect our profits.  Since we only operate two facilities, pooroperation results from either facility greatly impact our profitability.  Additionally, delays in the opening ornon-opening of any future casinos could also significantly affect our profitability.  Future growth in revenues and profits willdepend on our ability to continue to increase the number of our managed casinosand facilities or develop new business opportunities.  There is no guarantee that we will be able to increase the numberof managed casinos.

 

RisksAssociated With New Development Activities. The opening of each of the proposed facilities will depend on, amongother things, the completion of construction, hiring and training of sufficientpersonnel and obtaining all regulatory licenses, permits, allocations andauthorizations.  The number of theapprovals needed to construct and open new facilities is extensive, and thefailure to obtain such approvals could prevent or delay the completion ofconstruction or opening of all or part of such facilities or otherwise affectthe design and features of the proposed casinos.

 

Even ifapprovals and financing are obtained, major construction projects entailsignificant risks, including a shortages of materials or skilled labor, unforeseenengineering, environmental and/or geological problems, work stoppages, weatherinterference, unanticipated cost increases and non-availability of constructionequipment.  Construction, equipment orstalling problems or difficulties in obtaining any of the requisite licenses,permits, allocations and authorizations from regulatory authorities couldincrease the total cost, delay or prevent the construction or opening or any ofthese planned casino developments or otherwise affect their design.  In addition, once developed, we cannotguarantee that we will be able to manage these casinos on a profitable basis orto attract a sufficient number of guests, gaming customers and other visitorsto make the various operations profitable independently.

 

**EMPLOYEES**

 

As of March  19, 2002, we had four fulltime employees, three of whom are our executive officers.  Our joint venture operations haveapproximately 420 full time employees, and management believes that its relationshipwith its employees is good.  None of ouremployees are currently represented by a labor union, although suchrepresentation could occur in the future.

 

**2.             Description of Property.**

 

We lease approximately 12.5 acres of TribalTrust Lands from an entity owned by the Coquille Indian Tribe on which the MillCasino is located.  We sublease the landon which the casino is located back to the Tribal entity.  The master lease expires in 2019 and thesublease expires on August 15, 2002 with options to renew.  Should the sublease not be renewed, the masterlease will automatically terminate. Pursuant to a July  19, 1995 addendum, we receive a percentage of “Gross Gaming Revenues” (as defined) of the casino.

 

A Full House-GTECH joint venture company hasa lease and leaseback agreement with Harrington Raceway, Inc.  The lease encumbers the revenues of thegaming facility.  The lease is treatedas a capital lease and payments began on August  20, 1996.

 

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Full House bought a one-acre parcel of landin Biloxi, Mississippi in February 1998, which is intended to be a portion of afuture gaming development site.

 

**3.             Legal Proceedings.**

 

In October 1994, we filed an action fordeclaratory relief in Mississippi, seeking a determination by the court that norelationship exists between us and Lone Star Casino Corporation regarding thepotential acquisition of a riverboat casino on the Mississippi gulf coast (FullHouse Resorts, Inc. v. Lone Star Casino Corporation v. Allen E. Paulson, SecondJudicial District of the Chancery Court of Harrison County, Mississippi).  Lone Star filed a counterclaim allegingbreaches of fiduciary duty, breach of contract, conspiracy to breach contractand to breach fiduciary duty and common law fraud.  The trial court granted summary judgment in favor of alldefendants on that counterclaim, and Lone Star appealed that judgment to theMississippi appellate court.   In April1998, the Appeals Court affirmed the dismissal of all counts against all parties,excepting Lone Star’s claim against us for breach of contract, which itremanded to the trial court for additional hearing.  In January 2000, LS Capital, successor entity to Lone Star CasinoCorporation, announced that it had retained counsel to pursue the two remainingclaims it had alleged against us which were not already dismissed by theMississippi appellate courts.  In April2000, the trial judge dismissed both counts for Lone Star’s failure toprosecute its claims for nearly twenty months after their remand from the Courtof Appeals.  Lone Star appealed thatruling and the Mississippi State Court of Appeals reversed the dismissal, andin late 2001 again remanded the claims against the Company for breach ofcontract, back to the trial court for further proceedings.

 

In January 1999, we were advised that theSecurities and Exchange Commission was conducting an inquiry into trading ofour stock by our former President, Gregg R. Giuffria, for a period beginningprior to his association with Full House and continuing for a period after hebecame a consultant to Full House.  TheSEC has admonished that this inquiry is not to be construed as an indicationthat any violations of federal securities laws have occurred.  We and Mr. Giuffria voluntarily provided allinformation requested, and cooperated fully with the SEC in itsinvestigation.  We believe that Mr.Giuffria has reached a settlement agreement with the SEC, which does notinvolve the Company, and that the matter will be concluded upon the consummationof that settlement.

 

In September2001, entities controlled by architect Paul Steelman filed a Notice of Lienagainst real property owned by the Company in Biloxi, Mississippi, and acomplaint against the Company in Harrison County Circuit Court, allegedly basedupon an unexecuted Standard Form of Agreement between Owner and Architect inregard to the Company’s former Hard Rock – Biloxi project (Paul Steelman Ltd.v. Full House Resorts, Inc.). The Company believes it has meritorious defensesand intends to vigorously defend the claim.

 

**4.             Submission of Matters to a Vote ofSecurity Holders**.

 

None.

 

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**PART II**

 

**5.             Market for Common Equity AndRelated Stockholder Matters.**

 

**(a)           MarketInformation**

 

Our common stock was listed by The NasdaqSmallCap Market under the symbol FHRI until April  17, 2001.  The stock in now traded on the OTC BulletinBoard.  Set forth below are the high andlow sales prices of the common stock as reported on the Nasdaq SmallCap MarketSystem and the OTC Bulletin Board for the periods indicated.

 
|                          |   | **High** |   | **Low** |   |
|-------------------------------|--------|----------|--------|---------|--------|
| Year Ended December 31, 2001  |   |     |   |    |   |
|                          |   |     |   |    |   |
| First Quarter                 |   | $        | 1.22   |    | $      | 0.56 |   |
| Second Quarter                |   | 0.95     |   | 0.65    |   |
| Third Quarter                 |   | 0.83     |   | 0.51    |   |
| Fourth Quarter                |   | 0.51     |   | 0.26    |   |
|                          |   |     |   |    |   |
| Year Ended  December 31, 2000 |   |     |   |    |   |
|                          |   |     |   |    |   |
| First Quarter                 |   | $        | 1.63   |    | $      | 1.25 |   |
| Second Quarter                |   | 2.25     |   | 1.00    |   |
| Third Quarter                 |   | 1.88     |   | 1.06    |   |
| Fourth Quarter                |   | 1.50     |   | 0.25    |   |

 

The quotations reflect inter-dealer prices,without retail mark-up, mark-down or commission, and may not represent actualtransactions.  On March 15, 2002, thelast sale price of the Common Stock as reported by the OTC Bulletin Board was$0.41.

 

**(b)           Holders**

 

As of March  15, 2002, we hadapproximately 132 holders of record of our common stock.  We believe that there are over 1,200beneficial owners.

 

**(c)           Dividends**

 

We have never paid dividends on our commonstock or Preferred Stock since our inception. Holders of common stock are entitled to receive such dividends as may bedeclared by the Board of Directors out of funds legally available therefor.

 

Holders of our Series 1992-1 Preferred Stock areentitled to receive dividends, when, as and if declared by the Board ofDirectors out of funds legally available therefor, in the annual amount of $.30per share, payable in arrears semi-annually on the 15th day of December andJune, in each year.  Dividends on theSeries 1992-1Preferred Stock commenced accruing on July  1, 1992 and arecumulative.  We have not declared orpaid the accrued dividends on our Preferred Stock which were payable sinceissuance, totaling $1,995,000 and, accordingly, are in default in regardthereto.

 

Since we are in default in declaring, settingapart for payment or paying dividends on the Preferred Stock, we are restrictedfrom paying any dividend or making any other distribution or redeeming anystock ranking junior to the Preferred Stock.

 

We intend to retain future earnings, if any,to provide funds for the operation of our business, retirement of our debt andpayment of preferred stock dividends and, accordingly, do not anticipate payingany cash dividends on our common stock in the near future.

 

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**6.             Management’****s Discussion and Analysis of Financial Condition and Resultsof Operations**.

 

**Forward Looking Statements**

 

This Annual Report on Form 10–KSBcontains forward -looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, relating to our financialcondition, profitability, liquidity, resources, business outlook, proposedacquisitions, market forces, corporate strategies, consumer preferences,contractual commitments, legal matters, capital requirements and othermatters.  The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements.  We note that many factorscould cause our actual results and experience change significantly from theanticipated results or other expectations expressed in our forward-lookingstatements.  When words and expressionssuch as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,”“objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,”“may,” “could,” “should,” “might,” “likely,” “enable,” or similar words orexpressions are used in this Form 10–KSB, as well as statementscontaining phrases such as “in our view,” “there can be no assurance,”“although no assurance can be given,” or “there is no way to anticipate withcertainty,” forward-looking statements are being made.

 

Various risks and uncertainties may affectthe operation, performance, development and results of our business and couldcause future outcomes to change significantly from those set forth in ourforward-looking statements, including the following factors:

 

•                                            our growthstrategies;

 

•                                            our developmentand potential acquisition of new facilities;

 

•                                            risksrelated to development and construction activities;

 

•                                            anticipatedtrends in the gaming industries;

 

•                                            patrondemographics;

 

•                                            our abilityto enter into additional contracts with sponsors and broadcast media;

 

•                                            access tocapital;

 

•                                            ourrelationships with sponsors;

 

•                                            generalmarket and economic conditions;

 

•                                            our abilityto finance future business requirements;

 

•                                            theavailability of adequate levels of insurance;

 

•                                            the abilityto successfully integrate acquired companies and businesses;

 

•                                            managementretention and development;

 

•                                            changes inFederal, state, and local laws and regulations, including environmental andgaming license legislation and regulations;

 

•                                            regulatoryapprovals;

 

•                                            competitiveenvironment;

 

•                                            risks,uncertainties and other factors described from time to time in this and ourother  SEC filings and reports.

 

We undertake no obligation to publicly updateor revise any forward-looking statements as a result of future developments,events or conditions.  New risk factorsemerge from time to time and it is not possible for us to predict all such riskfactors, nor can we assess the impact of all such risk factors on its businessor the extent to which any factor, or combination of factors, may cause actualresults to differ significantly from those forecast in any forward-lookingstatements.

 

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**Accounting Policies**

 

Our accounting policies are more fullydescribed in Note 2 of Notes to Consolidated Financial Statements.  As disclosed therein, the preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions about futureevents that affect the amounts reported in the financial statements andaccompanying notes.  Future events andtheir effects cannot be determined with absolute certainty.  Therefore, the determination of estimatesrequires the exercise of judgment. Actual results inevitably will differ from those estimates and suchdifferences may be material to the financial statements.

 

The most significant accounting estimatesinherent in the preparation of our financial statements include estimatesassociated with management’s evaluation of the recoverability ofintangibles.  Various assumptions andother factors underlie the determination of these significant estimates.  The process of determining significant estimatesis fact specific and takes into account factors such as historical experience,current and expected economic conditions. We constantly re-evaluate these significant factors and make adjustmentswhere facts and circumstances dictate. Historically, actual results have not significantly deviated from thosedetermined using the estimates described above.

 

**Resultsof Operations**

 

**Year Ended December 31, 2001 Compared to YearEnded December 31, 2000**

 

**Revenues**.  As a result of the acquisition of GTECH’s interest in three jointventure projects (Oregon, Michigan and California), our classification ofrevenues is not directly comparable to prior periods.  The revenues related to our Delaware contract continue to bereported as joint venture revenue, but as of March  31, 2001, the revenuerelated to the Oregon contract is reported as management fees.

 

Total operating revenues increased$1,072,497, or 27% from the prior year period. This increase is due to improvedperformance in Delaware and the acquisition of the additional 50% interest inthe Oregon joint venture.

 

*DelawareJoint Venture*.  Our share ofincome from the Delaware joint venture was $2,974,674, an increase of $191,031,or 7%, compared to $2,783,643 in 2000. On May  11, 2000, we opened an expansion of the Harringtonfacility, and these revenue increases are primarily attributable to theincreased gaming capacity, coupled with continuing growth in the market.

 

*Oregon*.  The total fees attributable to the Oregon contract were$2,303,519 in 2001 compared to $2,279,372 in 2000.  As a result of our March 2001 acquisition of GTECH’s 50%interest, we received a total of $2,021,152 of these fees during 2001.  This compared to our joint venture share ofrevenues of $1,139,686 in the prior year.

 

**Cost and Expenses**.  As a result of our acquisition of GTECH’s interest in three jointventure projects, our classification of expenses is not directly comparable toprior periods.  The expenses related toour California and Michigan projects, which had been reported as joint venturepre-opening costs, as of March  31, 2001, are reported as developmentcosts.

 

**Pre-opening and Development**.  Total development related costs (joint venture pre-opening costsand development costs) for the California and Michigan projects were $955,441in 2001, compared to $584,337 for the prior year.  The majority of these costs were due to increased activitiesrelated to the Michigan venture with the Huron Potawatomi Tribe in BattleCreek.  These costs were primarily forlegal and consulting fees to assist the Tribe in obtaining suitable land andcomplying with the requirements of the Indian Gaming Regulatory Act, as well asland option payments.  We also increasedour ownership in these projects to 100%.

 

We also expensed $250,000 in the firstquarter of 2001 related to the expiration of a land purchase option in Biloxi,Mississippi that we chose not to exercise or renew.

 

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**General and Administrative Expenses**.  General and administrative expenses decreased by $202,508 to$1,643,196 in 2001 compared to $1,845,704 in the prior year.  This decrease is primarily due to reducedpayroll expenses and legal fees.

 

**Impairment**.  The Impairment provision of $4,593,800, recorded in the thirdquarter of 2001, resulted from an assessment of the carrying values of ourMississippi assets as a result of the unsuccessful conclusion of discussionswith potential partners.  These assetstotaled $7,065,800, for land, licenses and permits.  The reduction of the carrying value to $2,472,000 represents theestimated net realizable value of the land parcel.

 

**Depreciation and Amortization**.  Although our goodwill had been fully amortized as of September 30, 2001, as a result of the Gaming Rights acquired in the GTECHacquisition, our depreciation and amortization expense increased by $41,326.

 

**Interest Expense**.  Interest expense was $286,745 in 2001 compared to $328,379 in2000.  The decrease of  $41,634 is primarily due to the reductionsin the prime interest rate during 2001.

 

**Interest and Other Income**.  Interest and other income was comparable to the prior year and isprimarily due to earnings on invested cash balances.

 

**Income Tax Benefit (Provision).**  The income tax benefit for the current year period is primarily aresult of the expected tax benefit from the realization of the Impairmentprovision recorded in the third quarter. The effective tax rate reflects a combination of state taxes on jointventure earnings combined with the tax effect of non-deductible amortizationexpenses.  At December  31, 2001,we had net operating loss carryforwards for federal income tax purposes ofapproximately $173,000, which may be carried forward to offset future taxableincome.  The loss carryforwards expirein 2019.  The availability of the losscarryforwards may be limited in the event of a significant change in ownershipof Full House or our subsidiaries.

 

**Year Ended December 31, 2000 Compared to YearEnded December 31, 1999**

 

**Joint Venture Revenues.**  Joint venture revenues increased $318,857, or 8.8%, for the yearended December  31, 2000 as compared to 1999.  This increase was due to the improved operating results from theDelaware and Oregon joint ventures.

 

*DelawareJoint Venture.*  Our share ofoperating income from the Delaware joint venture was $2,783,643 for the yearended December  31, 2000, which represented an increase of $308,440, or12.5%, from 1999.  This increase wasprimarily due to the May 2000 expansion of the facility, which increased thenumber of gaming units from 742 to 1,142.

 

*OregonJoint Venture.*  Our share ofoperating income from the Oregon joint venture was $1,139,686 for the yearended December  31, 2000, which represented an increase of $14,996 from1999.  This increase was due tocontinued market growth, which offset the reduction in the development fee.

 

**Joint Venture Preopening Costs.**  Our share of costs from the development stage joint ventures inCalifornia and Michigan increased to $584,337 for the year ended December 31, 2000 as compared to $515,802 in 1999.  This increase is primarily due to increased activity in Michigan.

 

*MichiganJoint Venture.*  During 2000, thejoint venture incurred legal, consulting, payroll, and land costs associatedwith the planned development of a tribal casino in Battle Creek.  Our share of these costs amounted to$509,488, compared to $474,336 during 1999. In December of 1998, the Michigan legislature ratified the tribalcompact and as a result, the joint venture has significantly increased itsactive pursuit of this project.

 

*CaliforniaJoint Venture.*  Our share of costsassociated with the California project amounted to $74,849 for the year endedDecember  31, 2000, as compared to $41,466 in 1999.  This increase was due to expenses associatedwith approval of the land settlement agreement.

 

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**Development Costs.**  In 1999, we expensed development costs related to the BiloxiProject of $1,644,542.  These costs wereprimarily for land deposits and options of $1,350,000, which expired and wereeither not renewed, or the available extensions were not exercised.  Our negotiations with a potential jointventure partner broke off in November 1999, and as a result, we had noreasonable expectation of being able to consummate the land transaction priorto a later expiration of the available extension periods.  We also expensed $294,542 of deferred legaland consulting fees that were primarily due to a postponed debt offering forthe project.

 

**General and Administrative Expenses.**  General and administrative expenses decreased by $319,735, or14.8% for the year ended December  31, 2000 as compared to 1999.  This decrease is primarily due to reducedlegal, professional and consulting costs related to the investigation, duediligence and pre-development of various ongoing expansion opportunities.

 

**Interest Expense and Debt Issue Costs.**  For the year ended December  31, 2000, interest expense anddebt issue costs increased by $73,424 as compared to 1999.  This increase is primarily due to increasedborrowing on our credit line coupled with an increase in interest rates.

 

**Interest and Other Income.**  Interest and other income decreased by $279,291 for the yearended December  31, 2000.  In 1999,we received proceeds of $262,767 from a litigation settlement in connectionwith Full House’sland in Mississippi.

 

**Income Tax Expense.**  Income tax expense of $490,393 for the year ended December 31, 2000, primarily reflects state taxes due on joint venture revenues,coupled with the change in deferred taxes. At December  31, 2000, we had net operating loss carryforwards forfederal income tax purposes of approximately $2,327,000, which may be carriedforward to offset future taxable income. The loss carryforwards expire in 2010 through 2019.  The availability of the loss carryforwardsmay be limited in the event of a significant change in ownership of Full Houseor our subsidiaries.

 

**Cumulative Effect of Change in AccountingPrinciple. **In April 1998, theAccounting Standards Executive Committee of the American Institute of CertifiedPublic Accountants issued Statement of Position 98–5, “Reporting on Costs ofStart-Up Activities.”  It requires thatthe costs of start-up activities that had been previously capitalized, beexpensed as incurred.  During the firstquarter of 1999, we expensed $824,045 of such costs that had been previouslyincurred by our joint venture investments, net of the related tax benefit of$280,175.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We held cash and cash equivalents of $867,419as of December  31, 2001.  Net cashprovided by operating activities was $1,962,276 as compared to $1,578,842 inthe prior year.  The increase isprimarily due to the increased cash flow from Oregon as a result of acquiringthe additional ownership.  Net cash usedin investing activities was $2,000,000 compared to $962,499.  We used $1,800,000 to fund the GTECHacquisition and $200,000 as an advance to the Michigan Tribe.  In 2000, we used $962,499 in investingactivities, primarily as net advances to joint ventures to fund expenses of theMichigan project. Financing activities provided net cash of $450,000 in 2001,as we drew $1,800,000 on our credit line to fund the GTECH acquisition, andrepaid $1,350,000 during the year. During 2000, we used cash in financing activities to repay $600,000outstanding under our credit line.

 

In 1998, we obtained a $2,000,000 line ofcredit with Coast Community Bank of Mississippi with an initial maturity dateof February  25, 1999.  We haverenewed this line on an annual basis, and in February 2002, the renewal alsoreduced the availability to $1,000,000. The line bears interest adjustable daily at one-half percent above prime(5.25% at December 31, 2001) and requires interest payments monthly on theoutstanding balance with all principal and accrued interest due at maturity onFebruary  25, 2003.  At December 31, 2001, $600,000 was outstanding on the bank line.

 

Full House was a party to a series ofagreements with GTECH Corporation, a leading supplier of computerized systemsand services for government-authorized lotteries, to jointly pursue certaingaming opportunities.  Pursuant to theagreements, joint venture companies equally owned by GTECH and Full House were

 

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formed.  Full House contributedits rights to the North Bend, Oregon facility and the rights to develop theTorres Martinez, Nottawaseppi Huron Band of Potawatomi and Delaware State Fairprojects to the joint venture companies.  GTECH contributed cash and otherintangible assets and agreed to loan the joint venture entities up to $16.4 millionto complete the North Bend, Oregon and Delaware facilities.  Full House agreed to guarantee one-half ofthe obligations of the joint venture companies to GTECH under these loans, allof which have been repaid. GTECH also provided project management, technologyand other expertise to analyze and develop/manage the implementation ofopportunities developed by the joint venture entities.  GTECH also loaned Full House $3.0 million,which loan was convertible into 600,000 shares of Full House Common Stock.  The loan conversion clause expired withoutexercise.  In addition, Full House hasbeen reimbursed by one of the joint venture companies for certain advances andexpenditures made by Full House relating to the gaming development agreements. As part of this transaction, Allen  E. Paulson, William  P.McComas and Lee Iacocca granted to GTECH an option, which expired December 29, 2000, to purchase their shares should they propose to transfer them.   The parties are no longerrequired to present gaming opportunities to the other for joint development.

 

On March  30, 2001, we acquired GTECH’s50% interest in three joint venture projects that had been equally owned by thetwo companies: Gaming Entertainment, LLC, Gaming Entertainment (Michigan), LLC,and Gaming Entertainment (California), LLC. The purchase price was $1.8 million, and was funded through Full House’s existing creditfacility.  As part of this transaction,GTECH extended the due date of our $3.0 million promissory note until January 25, 2002, with interest at prime. This note was paid in February 2002.

 

On February 15, 2002, we entered into anagreement with RAM Entertainment, LLC, a privately held investment company,whereby RAM will acquire a 50% interest in the California and Michigan projectsand provide the necessary funding for their development.  RAM advanced $2,381,260 to us in the form ofa loan, to be forgiven upon receipt by the Huron Potawatomi Tribe of federalapprovals for its proposed casino near Battle Creek, Michigan.  The loan bears interest adjustable daily atprime and requires interest payments monthly. The principal is due at maturity on February  15, 2003 unlessearlier forgiven pursuant to its terms.

 

As a result of our agreement with GTECH,receipt by Full House of revenues from the Delaware venture is governed by theterms of the joint venture agreement. The contract provides that net cash flow (after certain deductions) isto be distributed monthly to Full House and GTECH.  While Full House does not believe that this arrangement willadversely impact its liquidity, our continuing cash flow is dependent on theoperating performance of this joint venture, and the ability to receive monthlydistributions.

 

Our future cash needs will primarily be tofund general and administrative expenses. As a result of the agreement with RAM, development funding cash needsfor the Michigan project will be provided by RAM.  The Oregon contract will expire in August of 2002, leaving theDelaware joint venture as our sole source of operating cash thereafter.  We believe that adequate financial resourceswill be available to execute our current business plans.

 

As part of the Michigan and Californiamanagement agreements with the tribes, we have advanced funds for tribaloperations and the construction of a tribal community center.  The Receivable is attributable to thisfunding, and the repayment obligation is dependent on the future profitableoperation of the tribes’ gaming enterprises. In August 2001, we received a notice from the Torres-Martinez Tribe inCalifornia purporting to sever our relationship.  We are in the process of discussing an appropriate resolution ofthis matter that includes reimbursement for costs that we incurred on theirbehalf.  The Receivable on the balancesheet includes a $25,000 advance due from Torres-Martinez Tribe, and GamingContract Rights includes approximately $170,000 attributable to thiscontact.  We have incurred an aggregateof approximately $1 million, including interest, on behalf of Torres-MartinezTribe.  We believe that the balancesheet amounts are recoverable based upon the expressed intentions ofTorres-Martinez Tribe, as well as the contractual rights that we continue tohold.

 

In November 1998, we executed a series ofagreements with Hard Rock related to the proposed development project inBiloxi, Mississippi.  Pursuant to alicensing agreement, Full House has the right to develop and operate a HardRock Casino in Biloxi.  We have paid aterritory fee of $2,000,000.  InSeptember 1998, Full House and Allen  E. Paulson formed a limitedliability company, equally owned, for the purpose of developing thisproject.  Mr. Paulson agreed tocontribute a gaming vessel (the former Treasure Bay barge in Tunica, MS.), andwe agreed to contribute our rights to the Hard Rock agreements.  In June 2001, we agreed to dissolve thiscompany with each party retaining their respective rights and assets.

 

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In September 2001, our discussions withpotential partners concluded with no agreements.  Based upon the timing requirements in our agreements with HardRock, and the current conditions in the tourism industry we do not reasonablyexpect to be able to develop this project as planned.  As a result of these circumstances, we have reviewed the carryingvalues of our Mississippi investments and recorded an Impairment provision of$4,593,800.

 

As of December  31, 2001, we hadcumulative undeclared and unpaid dividends in the amount of $1,995,000 on the700,000 outstanding shares of our 1992–1 Preferred Stock.  Such dividends are cumulative whether or notdeclared, and are currently in arrears.

 

**Quantitative Disclosure About Market Risk**.  Market risk is the risk of loss from changes in market rates orprices, such as interest rates and commodity prices.  We are exposed to market risk in the form of changes in interestrates and the potential impact such changes may have on our variable ratedebt.  We have not invested inderivative based financial instruments.

 

**Recent Accounting Pronouncements**.  In July 2001, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard (“SFAS”) No.  141,“Business Combinations” and SFAS No.  142, “Goodwill and Other IntangibleAssets.”  SFAS  141 prohibits thepooling of interests method of accounting for business combinations initiatedafter June  30, 2001.  SFAS 142, which will be effective for Full House in January 2002, requires,among other things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing intangibles asgoodwill, reassessment of the useful lives of existing intangibles, and ongoingassessments of potential impairment of existing goodwill.

 

As of December  31, 2001, our goodwill,net of accumulated amortization, and the carrying value of the Hard Rocklicensing and development rights have been reduced to zero.  Other existing intangibles consist of netGaming Contract Rights of $5,390,239. Full House has not yet determined the impact, if any, that thisstatement will have on its consolidated financial position or results ofoperations.

 

In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This Statement applies to legalobligations associated with the retirement of long-lived assets that resultfrom the acquisition, construction, development and / or normal operation,except for certain obligations of lessees. This Statement is effective for fiscal years beginning after June 15, 2002.  Full House is assessingthe impact of SFAS No.  143 on its financial position and results ofoperations.

 

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”which addresses financial accounting and reporting for the impairment ordisposal of long-lived assets and supersedes FASB Statement No.  121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.”     The provisionsof this Statement are effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years.  Full House is assessing the impact of SFASNo.  144 on its financial position and results of operations.

 

**7.             Financial Statements**.

 

The following financial statements are filedas part of this Report:

 

•               Independent Auditors’ Report;

 

•               Consolidated Balance Sheetsas of December  31, 2001 and 2000;

 

•               Consolidated Statements ofOperations for the years ended December  31, 2001 and 2000;

 

19

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•               Consolidated Statements ofStockholders’Equity for the years ended December  31, 2001 and 2000;

 

•               Consolidated Statements ofCash Flows for the years ended December  31, 2001 and 2000;

 

•               Notes to ConsolidatedFinancial Statements.

 

**8.             Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**PART III**

 

**9.             Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of the ExchangeAct.**

 

**(a)           Directorsof Full House**

 

The information required regarding theidentification of our directors is incorporated by reference to the informationin the Proxy Statement for the 2002 Annual Meeting of Stockholders.

 

**(b)           ExecutiveOfficers of Full House**

 

Our executiveofficers and their ages as of March 22, 2002 are as follows:

 
| **Name**               |   | **Age** |   | **Positions**                                      |
|------------------------|--------|---------|--------|----------------------------------------------------|
| William P.  McComas    |   | 75      |   | Chairman, Chief  Executive Officer                 |
|                   |   |    |   |                                               |
| Michael P.  Shaunnessy |   | 48      |   | Executive Vice  President, Chief Financial Officer |
|                   |   |    |   |                                               |
| Megan G. McIntosh      |   | 46      |   | Secretary                                          |

 

**William P. McComas** became Chairman of theBoard and Chief Executive Officer on March  5, 1998.  Mr.  McComas has been a Director ofFull House since November 1992.   Mr.McComas has been President of McComas Properties, Inc., a California realestate development company since January 1984. Mr. McComas and companies controlled by him have developed severalhotels and resorts, including Marina Bay Resort, Fort Lauderdale, Florida;Ocean Colony Hotel and Resort, Half Moon Bay, California; Residence Inn byMarriott, Somers Point, New Jersey; and five Holiday Inns located in DesMoines, Iowa; San Angelo, Texas; Suffern, New York; Niagara Falls, New York;and Fort Myers, Florida.

 

**Michael P. Shaunnessy** became Executive VicePresident and Chief Financial Officer in July 1998.  Mr.  Shaunnessy has over 15 years experience in the gamingindustry.   From 1995 to 1998, he wasVice President and Chief Accounting Officer of Primadonna Resorts, Inc., thedeveloper of New York – New York in Las Vegas, Nevada.  He was with Aztar Corporation from 1983 to 1995, serving insenior financial positions at properties in New Jersey and Nevada, mostrecently as Vice President-Finance for the Tropicana Resort in Las Vegas.

 

**Megan G. McIntosh** has been employed by FullHouse since December  1, 1994 and has been the Secretary of Full Housesince November  20, 1995.  FromApril 1991 until she joined Full House, Ms. McIntosh was an administrativeassistant for a civil engineering firm located in California.  Prior to that time, Ms. McIntosh was anadministrative assistant for a real estate development firm located in SouthernCalifornia.

 

**10.          Executive Compensation.**

 

The information required in response to thisitem is incorporated by reference to the information contained in the ProxyStatement for the 2002 Annual Meeting of Stockholders.

 

20

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**11.          Security Ownership of CertainBeneficial Owners and Management**.

 

The information required in response to thisitem is incorporated by reference to the information contained in the ProxyStatement for the 2002 Annual Meeting of Stockholders.

 

**12.          Certain Relationships and RelatedTransactions**.

 

The information required in response to thisitem is incorporated by reference to the information contained in the ProxyStatement for the 2002 Annual Meeting of Stockholders of Full House.

 

**13.          Exhibits and Reports on Form 8-K.**

 

**(a)           Exhibits**

 

2.5           Assignment and Sale Agreement datedMarch  30, 2001 by and among GTECH Corporation, Dreamport, Inc., GTECHGaming Subsidiary 2 Corporation, Full House Resorts, Inc., and Full HouseSubsidiary, Inc.  (Incorporated byreference to Full House’s Current Report on Form 8-K as filed with theSecurities and Exchange Commission on April 12, 2001)

 

10.25       Master Lease between Coquille EconomicDevelopment Corporation (“CEDC”) and Full House (Incorporated by reference to Full House’sPost Effective Amendment No.  1 to Registration Statement on Form SB–2, No. 33–61580 as filed with theSecurities and Exchange Commission on July  28, 1994)

 

10.26       Participating lease between CEDC and FullHouse (Incorporated by reference to Full House’s Post Effective Amendment No. 1 to Registration Statement on Form SB-2, No. 33–61580 as filed with theSecurities and Exchange Commission on July  28, 1994)

 

10.34       Agreement between Green Acres CasinoManagement Company, Inc. and Full House dated January  4, 1995(Incorporated by reference to Full House’s Annual Report on Form 10–KSB for the fiscal yearended December  31, 1994)

 

10.35       Agreement for Commercial Developmentbetween the Nottawaseppi Huron Band of Potawatomi, Green Acres CasinoManagement Company, Inc. and Full House dated January  11, 1995(Incorporated by reference to Full House’s Annual Report on Form 10-KSB for the fiscal yearended December  31, 1994)

 

10.36       Addendum to Class II and III ManagementAgreements among the Nottawaseppi Huron Band of Potawatomi, Green Acres CasinoManagement Company, Inc. and Full House dated January  12, 1995(Incorporated by reference to Full House’s Annual Report on Form 10–KSB for the fiscal yearended December  31, 1994)

 

10.37       Gaming and Development Agreement betweenFull House and the Torres Martinez Desert Cahuilla Indians dated March 21, 1993 (incorporated by reference to Full House’s Quarterly Report onForm  10–QSB for the quarter endedMarch  31, 1995)

 

10.38       Gaming Management Agreement between FullHouse and the Torres Martinez Desert Cahuilla Indians dated April  23,1993 (incorporated by reference to Full House’s Quarterly Report on Form 10–QSB for the quarter endedMarch  31, 1995)

 

21

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10.43       Convertible Note dated July  26,1996 in the original principal amount of $3,000,000 payable by Full House toGTECH Corporation (Incorporated by reference to Full House’s Annual Report on Form 10–KSB for the fiscal yearended December  31, 1995)

 

10.48       First Amended and Restated ParticipatingLease dated as of October  8, 1996 between Gaming Entertainment LLC andCoquille Economic Development Corporation (Incorporated by reference to FullHouse’s Annual Report on Form 10–KSB for the fiscal yearended December  31, 1996.)

 

10.49       First Amended and Restated Master Leasedated as of October  8, 1996 between Gaming Entertainment LLC and CoquilleEconomic Development Corporation (Incorporated by reference to Full House’s Annual Report on Form 10–KSB for the fiscal yearended 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) LLC and Full House (Incorporated by referenceto Full House’s Annual Report on Form 10–KSB for the fiscal yearended December  31, 1996.)

 

10.51       Amended and Restated Class III ManagementAgreement dated November  18, 1996 between Nottawaseppi Huron Band ofPotawatomi and Gaming Entertainment (Michigan) LLC (Incorporated by referenceto Full House’s Annual Report on Form 10–KSB for the fiscal yearended December  31, 1996.)

 

10.52       License Agreement between Hard Rock CaféInternational (USA), Inc. and Full House Mississippi, LLC dated November 18, 1998

 

10.54       Amendment to License Agreement betweenHard Rock Café International (USA), Inc. and Full House Mississippi, LLC datedNovember  30, 1999

 

21            Listof Subsidiaries of Full House Resorts, Inc.*

 

23.1         Consentof Deloitte & Touche LLP *

 

----

*  Filed herewith.

 

**(b)           Reportson Form 8-K**

 

None

 

22

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has caused this Report to besigned on its behalf by the undersigned thereunto duly authorized.

 
|                        |   | FULL HOUSE RESORTS, INC. |
|-----------------------------|--------|--------------------------|
|                        |   |                     |
| Date:   March 25, 2002 |   | By:                      | /s/ WILLIAM P. MCCOMAS |
|                        |   |                     | William P.  McComas, CEO |
|                             |        |                          |  |  |

 

In accordance with the Securities ExchangeAct of 1934, this Report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.

 
| **Name and Capacity**                            |   | **Date**       |
|--------------------------------------------------|--------|----------------|
|                                             |   |           |
| /s/ WILLIAM P. MCCOMAS                           |   | March 25, 2002 |
| William P. McComas, Chairman of the Board  and   |   |           |
| Chief Executive Officer                          |   |           |
|                                             |   |           |
| /s/ LEE A. IACOCCA                               |   | March 25, 2002 |
| Lee A. Iacocca, Director                         |   |           |
|                                             |   |           |
| /s/ MICHAEL P. SHAUNNESSY                        |   | March 25, 2002 |
| Michael P. Shaunnessy, Executive Vice  President |   |           |
| (Principal Financial and Accounting  Officer)    |   |           |

 

23

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** **

**INDEPENDENTAUDITORS**’**REPORT**

 

To the Board of Directors and Stockholders of Full House Resorts, Inc.:

 

We have audited the accompanying consolidated balance sheets of FullHouse Resorts, Inc. and Subsidiaries (the “Company”) as of December 31, 2001and 2000, and the related consolidated statements of operations, stockholders’ equity, and cash flows forthe years then ended.  These financialstatements are the responsibility of the Company's management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable 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, 2001 and 2000, and the results of itsoperations and its cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

DELOITTE & TOUCHE LLP

 

Las Vegas, Nevada

February 15, 2002

 

 

F-1

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**FULLHOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETSDECEMBER 31, 2001 AND 2000**

 
| **ASSETS**                                                                                                                                                                                       |   | **2001**   |       | **2000**   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| CURRENT ASSETS:                                                                                                                                                                                  |   |       |       |       |   |
| Cash and cash  equivalents                                                                                                                                                                       |   | $          | 867,419    |       | $      | 455,143 |   |
| Receivables                                                                                                                                                                                      |   | 209,992    |       | –     |   |
| Prepaid expenses                                                                                                                                                                                 |   | 93,878     |       | 92,804     |   |
| Total current  assets                                                                                                                                                                            |   | 1,171,289  |       | 547,947    |   |
|                                                                                                                                                                                             |   |       |       |       |   |
| LAND HELD FOR  DEVELOPMENT                                                                                                                                                                       |   | 2,472,000  |       | 4,621,670  |   |
| FIXTURES AND  EQUIPMENT, net                                                                                                                                                                     |   | 23,374     |       | 47,202     |   |
| INVESTMENTS IN  JOINT VENTURES                                                                                                                                                                   |   | –     |       | 3,192,634  |   |
| GOODWILL, net                                                                                                                                                                                    |   | –     |       | 379,713    |   |
| RECEIVABLES                                                                                                                                                                                      |   | 1,017,291  |       | 1,667,269  |   |
| GAMING CONTRACT  RIGHTS, net                                                                                                                                                                     |   | 5,390,239  |       | –     |   |
| DEFERRED TAX  ASSET                                                                                                                                                                              |   | 1,375,949  |       | 294,900    |   |
| DEPOSITS AND  OTHER ASSETS                                                                                                                                                                       |   | 14,782     |       | 2,701,344  |   |
| TOTAL                                                                                                                                                                                            |   | $          | 11,464,924 |       | $      | 13,452,679 |   |
|                                                                                                                                                                                             |   |       |       |       |   |
| **LIABILITIES AND  STOCKHOLDERS**’**EQUITY**                                                                                                                                                |   |       |       |       |   |
| CURRENT  LIABILITIES:                                                                                                                                                                            |   |       |       |       |   |
| Accounts payable                                                                                                                                                                                 |   | $          | 21,468     |       | $      | 18,106 |   |
| Payable to joint  ventures                                                                                                                                                                       |   | 48,033     |       | 27,831     |   |
| Current portion  of long-term debt                                                                                                                                                               |   | 3,000,000  |       | –     |   |
| Accrued expenses                                                                                                                                                                                 |   | 171,316    |       | 182,024    |   |
| Total current  liabilities                                                                                                                                                                       |   | 3,240,817  |       | 227,961    |   |
|                                                                                                                                                                                             |   |       |       |       |   |
| LONG-TERM DEBT,  net of current portion                                                                                                                                                          |   | 600,000    |       | 3,150,000  |   |
| COMMITMENTS AND  CONTINGENCIES (Note 14)                                                                                                                                                         |   |       |       |       |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                       |   |       |       |       |   |
| Cumulative  preferred stock, par value $.0001, 5,000,000 shares authorized;  700,000 shares issued and outstanding; aggregate liquidation preference of  $4,095,000 and $3,885,000, respectively |   | 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                                                                                                                                                                      |   | 17,429,889 |       | 17,429,889 |   |
| Accumulated  deficit                                                                                                                                                                             |   | (9,806,886 | )          | (7,356,275 | )      |
| Total  stockholders’  equity                                                                                                                                                                |   | 7,624,107  |       | 10,074,718 |   |
| TOTAL                                                                                                                                                                                            |   | $          | 11,464,924 |       | $      | 13,452,679 |   |

 

See notes to consolidated financial statements.

 

F-2

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**FULLHOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000**

 
|                                                                     |   | **2001**   |       | **2000**   |   |
|--------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| OPERATING  REVENUES                                                      |   |       |       |       |   |
| Joint venture revenue                                                    |   | $          | 3,257,041  |       | $      | 3,923,329 |   |
| Management fees                                                          |   | 1,738,785  |       | –     |   |
| Total operating  revenues                                                |   | 4,995,826  |       | 3,923,329  |   |
|                                                                     |   |       |       |       |   |
| OPERATING COSTS  AND EXPENSES                                            |   |       |       |       |   |
| Joint venture  pre-opening costs                                         |   | 122,441    |       | 584,337    |   |
| Development costs                                                        |   | 1,083,000  |       | –     |   |
| General and  administrative                                              |   | 1,643,196  |       | 1,845,704  |   |
| Impairment                                                               |   | 4,593,800  |       | –     |   |
| Depreciation and  amortization                                           |   | 572,369    |       | 531,043    |   |
| Total operating  costs and expenses                                      |   | 8,014,806  |       | 2,961,084  |   |
|                                                                     |   |       |       |       |   |
| INCOME (LOSS)  FROM OPERATIONS                                           |   | (3,018,980 | )          | 962,245    |   |
|                                                                     |   |       |       |       |   |
| Interest expense                                                         |   | (286,745   | )          | (328,379   | )      |
| Interest and  other income                                               |   | 9,067      |       | 11,616     |   |
|                                                                     |   |       |       |       |   |
| INCOME (LOSS)  BEFORE INCOME TAXES                                       |   | (3,296,658 | )          | 645,482    |   |
|                                                                     |   |       |       |       |   |
| INCOME TAX  BENEFIT (PROVISION)                                          |   | 846,047    |       | (490,393   | )      |
|                                                                     |   |       |       |       |   |
| NET INCOME (LOSS)                                                        |   | (2,450,611 | )          | 155,089    |   |
|                                                                     |   |       |       |       |   |
| Less, undeclared  dividends on cumulative preferred stock                |   | (210,000   | )          | (210,000   | )      |
|                                                                     |   |       |       |       |   |
| NET LOSS  APPLICABLE TO COMMON SHARES                                    |   | $          | (2,660,611 | )          | $      | (54,911 | ) |
|                                                                     |   |       |       |       |   |
| NET LOSS PER  COMMON SHARE, basic and diluted                            |   | $          | (0.26      | )          | $      | (0.01 | ) |
|                                                                     |   |       |       |       |   |
| WEIGHTED AVERAGE  NUMBER OF COMMON SHARES OUTSTANDING, basic and diluted |   | 10,340,380 |       | 10,340,380 |   |

 

See notes to consolidated financial statements.

 

F-3

----

 

**FULLHOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’****EQUITY**

**FORTHE YEARS ENDED DECEMBER 31, 2001 AND 2000**

 
|                                           |   | **Preferred Stock** |   | **Common Stock** |   | **Additional Paid-in** |       | **Accumulated** |        |       |        |       |
|------------------------------------------------|--------|---------------------|--------|------------------|--------|------------------------|------------|-----------------|-------------|------------|-------------|------------|
|                                           |   | **Shares**          |   | **Amount**       |   | **Shares**             |       | **Amount**      | **Capital** |       | **Deficit** |       | **Total** |   |
| BALANCE  JANUARY 1, 2000                       |   | 700,000             |   | $                | 70     |                   | 10,340,380 |            | $           | 1,034      |        | $          | 17,374,449 |   | $ | (7,511,364 | ) | $ | 9,864,189 |   |
|                                           |   |                |   |             |   |                   |       |            |        |       |        |       |   |   |   |
| Net income                                     |   | –              |   | –           |   | –                 |       | –          |        | –     |        | 155,089    |   | 155,089 |   |
|                                           |   |                |   |             |   |                   |       |            |        |       |        |       |   |   |   |
| Amortization of  deferred compensation expense |   | –              |   | –           |   | –                 |       | –          |        | 55,440     |        | –     |   | 55,440 |   |
|                                           |   |                |   |             |   |                   |       |            |        |       |        |       |   |   |   |
| BALANCE DECEMBER 31, 2000                 |   | 700,000             |   | 70               |   | 10,340,380             |       | 1,034           |        | 17,429,889 |        | (7,356,275 | ) | 10,074,718 |   |
|                                           |   |                |   |             |   |                   |       |            |        |       |        |       |   |   |   |
| Net loss                                       |   | –              |   | –           |   | –                 |       | –          |        | –     |        | (2,450,611 | ) | (2,450,611 | ) |
|                                           |   |                |   |             |   |                   |       |            |        |       |        |       |   |   |   |
| BALANCE

DECEMBER 31, 2001                     |   | 700,000             |   |             |   |                   |       |            |        |       |        |       |   |   |   |
|                                           | $      | 70                  |   | 10,340,380       |   | $                      | 1,034      |            | $           | 17,429,889 |        | $          | (9,806,886 | ) | $ | 7,624,107 |   |
|                                                |        |                     |        |                  |        |                        |            |                 |             |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

F-4

----

 

**FULLHOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED DECEMBER 31, 2001 AND 2000**

 
|                                                                                      |   | **2001**   |       | **2000**   |   |
|-------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |   |       |       |       |   |
| Net income (loss)                                                                         |   | $          | (2,450,611 | )          | $      | 155,089 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |       |       |       |   |
| Depreciation and  amortization                                                            |   | 572,369    |       | 531,043    |   |
| Amortization of  deferred compensation expense                                            |   | –     |       | 55,440     |   |
| Impairment                                                                                |   | 4,593,800  |       | –     |   |
| Expired purchase  options                                                                 |   | 250,000    |       | –     |   |
| Equity in  earnings of joint ventures                                                     |   | (3,134,600 | )          | (3,338,992 | )      |
| Distributions  from joint ventures                                                        |   | 3,438,348  |       | 3,818,533  |   |
| Changes in  operating assets and liabilities:                                             |   |       |       |       |   |
| Receivables                                                                               |   | (209,992   | )          | 34,057     |   |
| Prepaid expenses                                                                          |   | (1,074     | )          | (5,214     | )      |
| Deposits and  other assets                                                                |   | (7,568     | )          | 19,141     |   |
| Deferred taxes                                                                            |   | (1,081,049 | )          | 319,183    |   |
| Accounts payable  and accrued expenses                                                    |   | (7,347     | )          | (9,438     | )      |
| Net cash provided  by operating activities                                                |   | 1,962,276  |       | 1,578,842  |   |
|                                                                                      |   |       |       |       |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |   |       |       |       |   |
| Purchase of 50%  joint venture interests                                                  |   | (1,800,000 | )          | –     |   |
| Purchases of  fixtures and equipment                                                      |   | –     |       | (2,564     | )      |
| Advances on  receivable                                                                   |   | (200,000   | )          | –     |   |
| Deposits on  purchase options                                                             |   | –     |       | (100,000   | )      |
| Net advances to  joint ventures                                                           |   | –     |       | (859,935   | )      |
| Net cash (used  in) investing activities                                                  |   | (2,000,000 | )          | (962,499   | )      |
|                                                                                      |   |       |       |       |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |   |       |       |       |   |
| Proceeds from  line of credit                                                             |   | 1,800,000  |       | –     |   |
| Repayment of debt                                                                         |   | (1,350,000 | )          | (600,000   | )      |
| Net cash (used  in) provided by financing activities                                      |   | 450,000    |       | (600,000   | )      |
|                                                                                      |   |       |       |       |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |   | 412,276    |       | 16,343     |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR                                             |   | 455,143    |       | 438,800    |   |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                                                   |   | $          | 867,419    |       | $      | 455,143 |   |
|                                                                                      |   |       |       |       |   |
| Supplemental Cash Flow disclosure:                                                        |   |       |       |       |   |
| Gaming contract rights                                                                    |   | $          | 5,559,067  |       |   |   |
| Receivable - joint ventures                                                               |   | (822,147   | )          |       |   |
| Investments in joint ventures                                                             |   | (2,936,920 | )          |       |   |
| Purchase of 50%  joint venture interests                                                  |   | $          | 1,800,000  |       |   |   |

 

See notes to consolidated financial statements.

 

F-5

----

 

**FULLHOUSE RESORTS, INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.             ORGANIZATION AND NATUREOF OPERATIONS

 

Full House Resorts, Inc. (“Full House” or the “Company”) wasincorporated in the State of Delaware on January 5, 1987.  We are currently pursuing various gamingopportunities throughout North America.

 

Effective December 29, 1995, we entered intoa series of agreements with GTECH Corporation (“GTECH”) to jointly pursuegaming opportunities.  Pursuant to theagreements, four limited liability companies (“Joint Ventures”) were formed. Wehad a 50% interest in each joint venture, which was accounted for using theequity method.  On March 30, 2001 weacquired the GTECH ownership in three of these joint ventures, Oregon, Michiganand California, which are now wholly-owned and consolidated.  The Delaware venture was not included inthis transaction and continues to be accounted for using the equity method.

 

Full House and its principal stockholderentered into an agreement to jointly pursue development of a themed casinoresort in Biloxi, Mississippi and formed a limited liability company for suchpurpose, which was 50% owned by each member. In June 2001, this arrangement was terminated by mutual agreement.

 

The consolidated financial statements includethe accounts of Full House and all its majority–owned subsidiaries. Priorto March 31, 2001, we had four joint ventures with GTECH that were accountedfor using the equity method.  On March31, 2001 we purchased GTECH’s 50% interest in three of these joint ventureswhich are now wholly-owned by Full House, and accordingly are no longeraccounted for using the equity method. All material intercompany accounts and transactions have beeneliminated.

 

2.             SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

CASH AND CASH EQUIVALENTS - Cash in excess ofdaily requirements is invested in highly liquid short-term investments withmaturities 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 consolidatedstatements of cash flows.

 

CONCENTRATIONS OF CREDIT RISK - Full House’sfinancial instruments that are exposed to concentrations of credit risk consistprimarily of cash equivalents.  Aportion of Full House’s cash equivalents is in high quality securities placedwith major banks and financial institutions. Management does not believe that there is significant risk of lossassociated with such investments.

 

INVESTMENTS IN JOINT VENTURES - Investmentsin joint ventures are accounted for using the equity method of accounting.  Under the equity method, originalinvestments are recorded at cost and adjusted by Full House’s share of earnings, losses,and distributions of the joint ventures.

 

FIXTURES AND EQUIPMENT - Fixtures andequipment are stated at cost and consist primarily of office furniture andfixtures and computer equipment. Depreciation is computed by the straight-line method over periods of 3to 7 years.  Accumulated depreciationwas $108,217 and $84,389 at December 31, 2001 and 2000, respectively.

 

GOODWILL - Goodwill represents the excesscost over the net assets of businesses acquired during 1995. Goodwill was beingamortized on the straight-line basis over 6 years, and was fully amortized atDecember 31, 2001.  Full House reviewsthe carrying value of goodwill quarterly to determine whether any impairmenthas occurred.  Amortization expense was$379,713 and $506,268 for 2001 and 2000, respectively.

 

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IMPAIRMENT OF LONG-LIVED ASSETS - Full Housereviews the carrying values of its long-lived and identifiable intangibleassets for possible impairment, at least annually, or whenever events orchanges in circumstances indicate that the carrying amount of assets may not berecoverable.  During 2001, Full Houserecorded an impairment provision of $4,593,800, as described in Note 3.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS - Thecarrying value of Full House’s cash and cash equivalents, receivables andaccounts payable, approximates fair value because of the short maturity ofthose instruments.  Full House estimatesthe fair value of its long-term debt based on the current rates offered to FullHouse for loans of the same remaining maturities.  The estimated fair values of Full House’s long-term debtapproximate their recorded values at December 31, 2001.

 

INCOME TAXES - Full House accounts for incometaxes in accordance with SFAS No. 109, *“**Accounting for Income Taxes*,” which requires recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenreflected in the financial statements or tax returns.  Deferred income taxes reflect the net effect of (a) temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes, and(b) operating loss and tax credit carryforwards.

 

EARNINGS PER COMMON SHARE - Basic earningsper share (“EPS”) is computed based upon the weighted average number of commonshares outstanding during the year. Diluted EPS is computed based upon the weighted average number of commonand common equivalent shares plus the weighted average number of optionsoutstanding if their effect upon exercise would have been dilutive using thetreasury stock method.

 

AWARDS OF STOCK-BASED COMPENSATION - FullHouse has adopted SFAS No. 123, *“**Accounting for Awards of Stock-Based Compensation”***whichestablishes financial accounting and reporting standards for stock-basedemployee compensation plans and for transactions where equity securities areissued for goods and services.  Thisstatement defines a fair value based method of accounting for an employee stockoption or similar equity instrument and encourages all entities to adopt thatmethod of accounting for all of their employee stock compensation plans.  However, it also allows an entity tocontinue to measure compensation cost for those plans using the intrinsic valuebased method of accounting prescribed by APB Opinion No. 25, *“**Accounting for Stock Issued to Employees.”*  Full House continues to apply APB Opinion No. 25 to its stockbased compensation awards to employees and discloses the required pro formaeffect on net income and net income per common share (Note 14).

 

SEGMENT REPORTING - Full House has threebusiness segments consisting of operations, development and a corporateoverhead department.  Full House evaluatesperformance primarily based upon operating income of the segment.  The accounting policies of the segments arethe same as those described in this summary of significant accounting policies.

** **

RECENTLY ISSUED ACCOUNTING STANDARDS *** -*** In July 2001, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No.141, “Business Combinations” and SFAS No. 142, “Goodwill and Other IntangibleAssets.”  SFAS 141 prohibits the poolingof interests method of accounting for business combinations initiated afterJune 30, 2001.  SFAS 142, which will beeffective for Full House in January 2002, requires, among other things, thediscontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassificationof certain existing intangibles as goodwill, reassessment of the useful livesof existing intangibles, and ongoing assessments of potential impairment ofexisting goodwill.

 

As of December 31, 2001, our goodwill, net ofaccumulated amortization, and the carrying value of the Hard Rock licensing anddevelopment rights have been reduced to zero. Other existing intangibles consist of net Gaming Contract Rights of$5,390,239.  Full House has not yetdetermined the impact, if any, that this statement will have on itsconsolidated financial position or results of operations.

 

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In June 2001, the FASB issued SFAS No. 143“Accounting for Asset Retirement Obligations” which addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This Statement applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and / or normal operation, except forcertain obligations of lessees.  ThisStatement is effective for fiscal years beginning after June 15, 2002.  Full House is assessing the impact of SFASNo. 143 on its financial position and results of operations.

 

In August 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” whichaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets and supersedes FASB Statement No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.”   The provisions of this Statementare effective for fiscal years beginning after December 15, 2001 and interimperiods within those fiscal years.  FullHouse is assessing the impact of SFAS No. 144 on its financial position andresults of operations.

 

USE OF ESTIMATES - The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates used by Full House include estimated useful livesfor depreciable and amortizable assets, and certain accrued liabilities.  Actual results could differ from thoseestimates.

 

3.             IMPAIRMENT

 

In September 2001, Full House, in accordancewith SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” recorded an impairment charge of$4,593,800.

 

In November 1998, we executed a series ofagreements with Hard Rock Cafe International (“Hard Rock”) related to theproposed development project in Biloxi, Mississippi.  Pursuant to a licensing agreement, we paid a territory fee of$2,000,000 and have the right to develop and operate a Hard Rock Casino inBiloxi. Full House and Allen E. Paulson formed a limited liability company,equally owned, for the purpose of developing this project.  Mr. Paulson agreed to contribute a gamingvessel (the former Treasure Bay barge in Tunica, MS.), and we agreed tocontribute our rights to the Hard Rock agreements.  In June 2001, we agreed to dissolve this company with each partyretaining their respective rights and assets. We then entered negotiations with interested parties to develop thisproject in various alternative forms.

 

During the third quarter, our discussionswith various potential partners for the development of the Hard Rock - Biloxiproject concluded with no agreement. Based upon the timing requirements in our agreements with Hard Rock, andthe current conditions in the tourism industry we do not reasonably expect tobe able to develop this project as planned. As a result of these circumstances, we have reviewed the carrying valuesof our Mississippi investments which include a one acre parcel of land acquiredfor $4,621,670, the Hard Rock license acquired for $2,000,000, and developmentpermits and plans carried at $444,130.  We recorded an impairment provision of $4,593,800, to reduce thecarrying value to $2,472,000, which represents the net realizable value of ourland parcel.

 

 

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4.             LAND HELD FORDEVELOPMENT

 

On February 23, 1998, Full House purchased aparcel of land for $4,621,670 that represents a portion of a proposed gamingsite in Biloxi, Mississippi.  During thethird quarter of 2001, we recorded an impairment charge that reduced thecarrying value of this parcel to $2,472,000. (See Note 3.)

 

5.             DEPOSITS AND OTHERASSETS

 

On November 18, 1998, Full House executed aseries of agreements with Hard Rock for purposes of developing a Hard RockHotel & Casino on the Gulf Coast of Mississippi.  Pursuant to these agreements we paid a Territory Fee of$2,000,000.  We subsequently incurred$444,130 of deferred costs related to this project. During the third quarter of2001, we recorded an impairment charge which includes this total amount of$2,444,130.  (See Note 3.)

 

6.             RECEIVABLES

 

Full House has advanced funds to the Michiganand California Tribes to fund tribal operations and for development expensesrelated to these projects.  Therepayment of these amounts is dependent upon the development of the projects,and ultimately, the successful operation of the facilities.  As of December 31, 2001 the net receivablerepresented $992,291 due from the Michigan Tribe and $25,000 due from theCalifornia Tribe.  The prior yearbalance included amounts due from the respective joint venture entities thathad funded these projects.

 

The current receivables represent $180,774due from Oregon for the December fees, and $29,218 due from the Delaware LLC.

 

7.             INVESTMENTS INJOINT VENTURES

 

Full House entered into a series ofagreements with GTECH in 1995 to jointly pursue gaming opportunities. Pursuantto the agreements, the following limited liability companies, each owned 50% byDreamport, Inc.  (“Dreamport”), a subsidiary of GTECH,and 50% by Full House were formed: Gaming Entertainment, LLC (“Oregon”),Gaming Entertainment (Delaware), LLC (“Delaware”),Gaming Entertainment (Michigan), LLC (“Michigan”),and Gaming Entertainment (California), LLC (“California”).

 

Full House contributed to the capital of thejoint ventures its rights to agreements with the Oregon Tribe to finance anddevelop a gaming and entertainment facility in North Bend, Oregon and therights to develop the California Tribe, Michigan Tribe and Delaware State Fairgaming projects.  In payment for itsinterest in the joint ventures, GTECH contributed cash and other intangibleassets and committed to loan the joint ventures up to $16.4 million to completethe North Bend, Oregon and Delaware facilities

 

On March 30, 2001, we acquired GTECH’s 50%interest in three of these joint venture projects that had been equally ownedby the two companies: Gaming Entertainment LLC, Gaming Entertainment(Michigan), LLC, and Gaming Entertainment (California), LLC.  The purchase price was $1.8 million, and wasfunded through Full House’s existing credit facility.  As part of this transaction, GTECH extended the due date of our$3.0 million promissory note, which was repaid in February 2002.

 

This transaction did not include our otherjoint venture with GTECH, Gaming Entertainment (Delaware), LLC, owner of amanagement agreement, continuing through 2011, to manage Midway Slots &Simulcast in Harrington, Delaware.  Thisjoint venture continues to be equally owned by us and GTECH.

 

As a result of acquiring full ownership ofthree previous joint ventures, the classification of both revenue and expensesrelated to these projects has changed. The revenues related to the Delaware contract continue to be reported asjoint venture revenue, but as of March  31, 2001, the revenues related tothe Oregon contract are reported as management fees.  The expenses related to the California and Michigan projects,which had been reported as joint venture pre-opening costs, as of March 31, 2001, are reported as development costs.

 

The Investments in Joint Ventures on thebalance sheet will now reflect only our ownership interest in the Delaware LLC,however, as of December 31, 2001 this investment is carried at zero because theaggregate cash distributions have exceeded the reported earnings of the jointventure by $48,033.  This amount isreflected on the balance sheet as Payable to Joint Ventures.  The Delaware LLC earnings are reported onthe accrual basis while distributions are based on cash available.  During fiscal year 2002, the reportedearnings should exceed cash distributions, as cash generated will be used tomeet the outstanding accounts payable obligations of the entity.

 

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8.             JOINT VENTUREACQUISITION

 

On March 30, 2001, we acquired GTECH’s 50%interest in three joint venture projects that had been equally owned by the twocompanies: Gaming Entertainment, LLC, owner of an agreement continuing throughAugust 2002, with the Coquille Indian Tribe (“Oregon Tribe”), which conductsgaming at The Mill Casino in Oregon; Gaming Entertainment (Michigan), LLC, ownerof a Management Agreement with the Nottawaseppi Huron Band of Potawatomi(“Michigan Tribe”) to develop and manage a gaming facility near Battle Creek;and Gaming Entertainment (California), LLC owner of a Management Agreement withthe Torres-Martinez Band of Desert Cahuilla Indians (“California Tribe”) todevelop and manage a gaming facility near Palm Springs.

 

The purchase price was $1,800,000, and wasfunded through our existing credit facility. As part of this transaction, GTECH extended the due date of our$3,000,000 promissory note from January 25, 2001 until January 25, 2002, withinterest at prime.  The note was paid inFebruary 2002.  Also as part of thistransaction, GTECH is no longer required to provide the necessary financing forthe two development projects (Michigan and California) that we acquired.  This transaction did not include our otherjoint venture with GTECH, Gaming Entertainment (Delaware), LLC, owner of amanagement agreement continuing through 2011, to manage Midway Slots &Simulcast in Harrington, Delaware.

 

In addition to the gaming contract rights, weacquired the other 50% interest in a note receivable from the Michigan Tribe inthe amount of $396,146.  The excesspurchase price over the fair value of assets acquired was allocated to thegaming contract rights acquired based on the discounted present value ofexpected future cash flows.  The excesspurchase price of $1,403,854 was allocated as follows:

 
|                 |   | **Value** |      | **Amortization  Term** |      |
|----------------------|--------|-----------|-----------|------------------------|-----------|
| Michigan contract    |   | $         | 1,141,682 |                   | 8.0 years |   |
| California  contract |   | 182,776   |      | 8.0 years              |      |
| Oregon Contract      |   | 79,396    |      | 1.4 years              |      |
|                 |   | $         | 1,403,854 |                   |      |   |

 

As part of the Michigan and Californiamanagement agreements with the tribes, we have advanced funds for tribaloperations and the construction of a tribal community center.  The Receivables are attributable to thisfunding, and the repayment obligation is dependent on the future profitableoperation of the tribes’ gaming enterprise.

 

The following summary pro forma results ofoperations assume that the acquisition occurred as of the beginning of therespective periods ended December 31:

 

|                                  |   | **2001**   |      | **2000** |   |
|---------------------------------------|--------|------------|-----------|----------|--------|
| Operating  revenues                   |   | $          | 5,278,193 |     | $      | 5,063,015 |   |
| Income (loss)  before income taxes    |   | (3,229,008 | )         | 825,727  |   |
| Net income (loss)                     |   | (2,425,095 | )         | 197,515  |   |
| Net loss  applicable to common shares |   | (2,635,095 | )         | (12,485  | )      |
| Net loss per  common share            |   | (0.25      | )         | (0.00    | )      |
|                                       |        |            |           |          |        |  |  |

 

 

GAMING ENTERTAINMENT, LLC

 

Oregon leases approximately 12.5 acres oftribal trust lands from an entity owned by the Oregon Tribe on which the gamingfacility is located and subleases a portion of the land back to the sameentity. The master lease expires in 2019 and the sublease expires in August2002 with options to renew.  If thesublease is not renewed, this serves to automatically terminate the master lease.  The Tribe is not expected to renew thislease.  In July 1995, an addendum to theagreement with the Oregon Tribe was signed by Full House and Dreamport, whichreduced the obligations to provide financing to $10.4 million, extended thedate when payments began and modified the method of computing participatingrents and loan repayments.  During 1995,the facility began operations.

 

Lease and debtpayments started in 1995.  In 1996, theTribe received a new $17.5 million loan to refinance certain outstandingindebtedness and finance the acquisition of gaming equipment and improvementsto the gaming facility.  The initialdevelopment loan was repaid 100% from the refinancing. GTECH Corporationpurchased a $2.0 million participation in the new loan, half of which weguaranteed.  In 2001, the Tribe securedadditional financing for purposes of adding a small hotel, and GTECH was repaidtheir $2.0 million participation.  Aspart of these loans, the rights to receive a percentage of gross gamingrevenues were subordinated to the debt. Rental payments for the sublease were originally 13% of gaming revenue,but have decreased to 10% under the terms of our agreement. Also, if grossgaming revenue for any twelve-month period exceeds $20,000,000, then only 10%of amounts in excess of such threshold will be paid as rent under thesublease.  No Annual Percentage Rentalwill be paid after August  19, 2002. Approximate gross gaming revenue for the year ended December 31,2001 was $22,000,000.

 

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GAMING ENTERTAINMENT (MICHIGAN), LLC

 

In late 1996, we renegotiated the managementcontract with the Michigan Tribe and with the 15% owner of the interests in theagreements. Under the new contract, the joint venture will finance, develop andmanage gaming operations on reservation lands to be acquired near Battle Creek,Michigan.  The 15% owner will be paid aroyalty fee in lieu of its original 15% ownership in earlier contracts.

 

On December  18, 1998, the Michiganlegislature approved a gaming compact that had been negotiated between theTribe and the Governor of Michigan.  Asuit was filed in 1999 by “Taxpayers of Michigan Against Casinos” in InghamCounty Circuit Court challenging the constitutionality of the approval processof these gaming compacts.  On January 18, 2000, Judge Peter D. Houk issued a ruling that the compacts must beapproved by a legislative bill rather than by resolution.  The State of Michigan filed an appeal to theMichigan Court of Appeals on February 4, 2000. The joint venture company, as an intervening defendant, joined in theappeal filing.  The appeal is stillpending and oral arguments have not yet been scheduled.

 

Full House and the Tribe have continued tomove forward with casino development plans while working towards a favorableresolution of the current litigation. The management agreements, along with the required licensingapplications were submitted to the National Indian Gaming Commission (“NIGC”)in December 1999.  The parties haveidentified a suitable parcel of land for the gaming enterprise, which is underoption, and have completed a Fee-to-Trust application that was sent by theMinneapolis regional office of the Bureau of Indian Affairs (“BIA”) to thenational office in Washington, D.C. in February 2002.  We are now awaiting the notice of the intent to take the landinto trust.  In January 2002, we metwith the NIGC to review suggested revisions to the management agreements andare currently working with the Tribe to incorporate the appropriate changes.

 

GAMING ENTERTAINMENT (CALIFORNIA), LLC

 

Pursuant to an agreement with the CaliforniaTribe, we have certain rights to develop, manage and operate gaming activitiesfor them.

 

During 1996, the Tribe reached a settlementin its litigation with the Department of Justice and two water districts,pursuant to which the Tribe will be paid $14.0 million in compensation, andwill have the right to select up to 11,200 acres of new reservation land to betaken into trust in replacement for the same quantity of land which was floodedby the rising level of the Salton Sea. That settlement, which required legislative enactment, was approved bythe U. S. House of Representatives and the Senate in December 2000.   Under the settlement, the Tribe may acquireland in a specifically defined area (generally in the Palm Springs, Californiaarea) for purposes of conducting a gaming enterprise.

 

The Tribe requested that the Californiagovernor negotiate a compact to allow them to conduct gaming on their currentreservation.  To date the request hasnot been honored.  In February 2001, anaction was filed in U.S. District Court by several Card Club owners thatchallenges the Tribal compacts.  Thelitigation claims that awarding exclusive monopoly rights to Indian Tribesviolates federal statutory and constitutional law.   The governor has indicated that he will await action by thecourts before taking any further action with respect to pending compactrequests.

 

In August 2001, we received a notice from theCalifornia Tribe purporting to sever our relationship.  We are in the process of discussing anappropriate resolution of this matter that includes reimbursement for coststhat we incurred on their behalf.  TheNotes Receivable on the balance sheet includes a $25,000 advance due from theCalifornia Tribe and Gaming Contract Rights include approximately $170,000attributable to this contract.  We haveincurred an aggregate of approximately $1 million, including interest, onbehalf of this Tribe.  We believe thatthe balance sheet amounts are recoverable based upon the expressed intentionsof the Tribe, as well as the contractual rights that we continue to hold.

 

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The following is a summary of condensedfinancial information for the joint ventures as of December 31, 2001 and 2000and for the years then ended:

 

**2001**

 

**CONDENSED BALANCE SHEET INFORMATION**

 
|                                               |   | **DELAWARE** |       | **OREGON** |       | **MICHIGAN** |       | **CALIFORNIA** |       | **TOTAL** |       |
|----------------------------------------------------|--------|--------------|------------|------------|------------|--------------|------------|----------------|------------|-----------|------------|
| Total assets                                       |   | $            | 667,264    |       | $          | –       |       | $              | –     |      | $          | – |   | $ | 667,264 |   |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Total liabilities                                  |   | 763,328      |       | –     |       | –       |       | –         |       | 763,328   |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Members’ capital                              |   | (96,064      | )          | –     |       | –       |       | –         |       | (96,064   | )          |
|                                               |   |
| **CONDENSED STATEMENT  OF OPERATIONS INFORMATION** |   |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Revenues                                           |   | $            | 18,407,301 |       | $          | 570,137      |       | $              | –     |      | $          | – |   | $ | 18,977,438 |   |
|                                               |   |         | ** ** |       | ** ** |         | ** ** |           | ** ** |      | ** ** |
| Income (loss)  from operations                     |   | 5,949,348    |       | 564,734    |       | (197,522     | )          | (47,360        | )          | 6,269,200 |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Net income (loss)                                  |   | 5,949,348    |       | 564,734    |       | (197,522     | )          | (47,360        | )          | 6,269,200 |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Company’s equity in net income  (loss)        |   | 2,974,674    |       | 282,367    |       | (98,761      | )          | (23,680        | )          | 3,134,600 |       |
|                                                    |        |              |            |            |            |              |            |                |            |           |            |  |  |  |  |  |  |

 

**2000**

 

**CONDENSED BALANCE SHEET INFORMATION**

 
|                  |   | **DELAWARE** |    | **OREGON** |   | **MICHIGAN** |   | **CALIFORNIA** |      | **TOTAL** |   |
|-----------------------|--------|--------------|---------|------------|--------|--------------|--------|----------------|-----------|-----------|--------|
| Total assets          |   | $            | 713,255 |       | $      | 177,596      |   | $              | 4,919,876 |      | $      | 11,610 |   | $ | 5,822,337 |   |
|                  |   |         |    |       |   |         |   |           |      |      |   |
| Total liabilities     |   | 248,222      |    | –     |   | 2,912,064    |   | 439,043        |      | 3,599,329 |   |
|                  |   |         |    |       |   |         |   |           |      |      |   |
| Members’ capital |   | 465,033      |    | 177,596    |   | 2,007,812    |   | (427,433       | )         | 2,223,008 |   |
|                       |        |              |         |            |        |              |        |                |           |           |        |  |  |  |  |  |

 

**CONDENSED STATEMENT OF OPERATIONS INFORMATION**

 
| Revenues                                    |   | $         | 15,275,702 |      | $      | 2,311,497  |   | $        | – |      | $      | – |   | $ | 17,587,199 |   |
|---------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|----------|--------|-----------|--------|--------|--------|---|------------|--------|
| Income (loss)  from operations              |   | 5,567,286 |       | 2,279,372 |   | (1,018,975 | )      | (149,699 | )      | 6,677,984 |   |
|                                        |   |      |       |      |   |       |   |     |   |      |   |
| Net income (loss)                           |   | 5,567,286 |       | 2,279,372 |   | (1,018,975 | )      | (149,699 | )      | 6,677,984 |   |
|                                        |   |      |       |      |   |       |   |     |   |      |   |
| Company’s equity in net income  (loss) |   | 2,783,643 |       | 1,139,686 |   | (509,488   | )      | (74,849  | )      | 3,338,992 |   |

 

The joint venture entities are treated aspartnerships for tax purposes and consequently, no tax provision or tax benefitis recognized at the venture level.

 

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9.             GAMING CONTRACTRIGHTS

 

As a result of the GTECH acquisition, thethree joint ventures that had previously been accounted for using the equitymethod are now wholly-owned consolidated entities.  A substantial portion of our investment in these joint ventureswas comprised of previously contributed Michigan gaming rights of $4,155,213that we acquired in 1995.  Now thatthese are wholly-owned consolidated entities, these previously contributedrights are reflected in Gaming Contract Rights, along with the rights acquiredin the GTECH acquisition of $1,403,854.

 

| Contributed  Michigan gaming rights |   | $         | 4,155,213 |   |
|-------------------------------------|--------|-----------|-----------|--------|
| Acquired gaming  rights             |   | 1,403,854 |      |
| Less accumulated  amortization      |   | (168,828  | )         |
| Gaming Contract  Rights, net        |   | $         | 5,390,239 |   |

 

The Michigan and California ventures are inthe development stage.  Successfuldevelopment and, ultimately, sustaining profitable operations is dependent onfuture events, including appropriate regulatory approvals and adequate marketdemand.  These two ventures have notgenerated any revenues, and the costs incurred to date relate to pre-openingexpenses such as payroll, legal and consulting.

 

 

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10.           LONG-TERM DEBT

                

                Long-term debt consists ofthe following:
|                                                                                                                                                                                                                                                                                                                                           |   | **2001**  |      | **2000**  |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Unsecured note  payable to GTECH Corporation; interest at the prime rate (4.75% at December  31, 2001) due monthly through January 25, 2002, at which time all unpaid  principal and interest will be due.                                                                                                                                     |   | $         | 3,000,000 |      | $      | 3,000,000 |   |
|                                                                                                                                                                                                                                                                                                                                           |   |      |      |      |   |
| Line of credit;  interest at prime plus 1⁄2% (5.25% at December 31, 2001), payable monthly,  principal due February 25, 2002. Amount represents the balance outstanding at  December 31, under a $2,000,000 line of credit from Coast Community Bank,  which provided the initial loan for the acquisition of Land in Biloxi,  Mississippi. |   | 600,000   |      | 150,000   |   |
|                                                                                                                                                                                                                                                                                                                                           |   |      |      |      |   |
| Total                                                                                                                                                                                                                                                                                                                                          |   | 3,600,000 |      | 3,150,000 |   |
| Less current  portion                                                                                                                                                                                                                                                                                                                          |   | 3,000,000 |      | -         |   |
|                                                                                                                                                                                                                                                                                                                                           |   |      |      |      |   |
| Long-term portion                                                                                                                                                                                                                                                                                                                              |   | $         | 600,000   |      | $      | 3,150,000 |   |

 

                The scheduled maturities ofdebt are as follows:
|   |   |    |      |
|--------|--------|---------|-----------|
| 2002   |   | $       | 3,000,000 |   |
| 2003   |   | 600,000 |      |
|   |   |    |      |
| Total  |   | $       | 3,600,000 |   |

 

In February 2002, the GTECH note waspaid.  Also, the bank line was extendedfor an additional year but was reduced to $1,000,000.

 

11.           STOCKHOLDERS’ EQUITY

 

Options to purchase 150,000 shares of commonstock at $3.69 per share (market value on date of grant) were issued in 1994 toa consultant.  These options wererepriced in June 1998 at $2.25 per share (market value on the repricingdate).  The fair value of $43,410 forthe options was estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions: expected volatility of 97percent, risk-free interest rate of 5.0 percent, and expected life of 2.0years.  As the options were granted to anonemployee in return for services, consulting expense of $43,410 wasrecognized in 1998, along with an equivalent increase in paid in capital.  All of these options were exercisable atDecember 31, 2001.

 

On December 20, 1996, a consultant, who isalso a principal stockholder, was granted an option to purchase 250,000 commonshares at $3.69 in return for consulting services to be provided over anapproximate three- year period.  Theoptions vested immediately.  The fairvalue of $302,826 for the options was estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions: expectedvolatility of 80 percent, risk-free interest rate of 6.0 percent, and expectedlife of 2.0 years.  As the options weregranted to a non-employee in return for services, consulting expense wasrecognized ratably over the three-year service period commencing in 1997.

 

Options to purchase 70,001 shares of commonstock at $2.06 per share (market value on date of grant) were issued in 1998 toFull House’s current President for services previously performed in aconsulting capacity.  Full Houserecognized consulting expense of $116,224 and recorded an equivalent increasein paid in capital.  The fair value forthe options was estimated on the date of grant using the Black-Scholesoption-pricing 

 

F-14

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model with the following assumptions:expected volatility of 95 percent, risk-free interest rate of 5.4 percent, andexpected life of 2.0 years.  Theseoptions were forfeited in 2000.

 

Full House’s preferred stock has a $.30 pershare cumulative dividend rate, and has a liquidation preference equal to $3.00per share plus all unpaid dividends.  IfFull House is in default in declaring or setting apart for payment of dividendson the preferred stock, it is restricted from paying any dividend, making anyother distribution, or redeeming any stock ranking junior to the preferredstock.  The stockholders’ right to the$.30 per share cumulative dividends on the preferred stock commenced as of June30, 1992 and totaled $1,995,000 and $1,785,000 at December 31, 2001 and 2000,respectively.  Through December 31,2001, no dividends have been declared or paid.

 

12.           INCOME TAX PROVISION

 

The income tax benefit (provision) recognized in the consolidatedfinancial statements consists of the following:

 
|          |   |           |   | **2001**  |    | **2000** |   |
|---------------|--------|----------------|--------|-----------|---------|----------|--------|
| Current:      |   | Federal        |   | $         | (20,000 | )        | $      | - |   |
|          |   | State          |   | (215,000  | )       | (171,210 | )      |
|          |   | Total current  |   | (235,000  | )       | (171,210 | )      |
| Deferred:     |   | Federal        |   | 1,020,961 |    | (336,810 | )      |
|          |   | State          |   | 60,086    |    | 17,627   |   |
|          |   | Total deferred |   | 1,081,087 |    | (319,183 | )      |
|          |   |           |   |      |    |     |   |
| Total Benefit |   | (Provision)    |   | $         | 846,047 |     | $      | (490,393 | ) |

 

A reconciliation of the income tax provisionwith amounts determined by applying the statutory U.S. Federal income tax rateof 34% to consolidated income before income taxes is as follows:

 
|                                            |   | **2001** |      | **2000** |   |
|-------------------------------------------------|--------|----------|-----------|----------|--------|
| Tax  benefit (provision) at U.S. statutory rate |   | $        | 1,120,864 |     | $      | (219,464 | ) |
| State taxes                                     |   | (102,234 | )         | (101,534 | )      |
| Goodwill amortization                           |   | (186,504 | )         | (172,131 | )      |
| Other                                           |   | 13,921   |      | 2,736    |   |
| Total                                           |   | $        | 846,047   |     | $      | (490,393 | ) |

 

F-15

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Full House’s deferred tax items as ofDecember 31, 2001 and 2000 are as follows:

 
|                                                    |   | **2001**   |      | **2000**   |   |
|---------------------------------------------------------|--------|------------|-----------|------------|--------|
| Deferred tax assets:                                    |   |       |      |       |   |
| Net operating  loss carryforward                        |   | $          | 58,855    |       | $      | 791,384 |   |
| Tax credit  carryforwards                               |   | 51,706     |      | 27,294     |   |
| Intangibles                                             |   | 1,097,772  |      | 763,679    |   |
| Accrued expenses                                        |   | 7,609      |      | 6,034      |   |
| Stock option  plans                                     |   | 165,332    |      | 165,332    |   |
| Asset impairment                                        |   | 1,452,386  |      | –     |   |
| Total deferred  tax assets                              |   | 2,833,660  |      | 1,753,723  |   |
|                                                    |   |       |      |       |   |
| Deferred tax  liabilities:                              |   |       |      |       |   |
| Difference  between book and tax basis of gaming rights |   | (1,454,325 | )         | (1,454,325 | )      |
| Other                                                   |   | (3,386     | )         | (4,499     | )      |
| Total deferred  tax liabilities                         |   | (1,457,711 | )         | (1,458,823 | )      |
|                                                    |   |       |      |       |   |
| Net                                                     |   | $          | 1,375,949 |       | $      | 294,900 |   |

 

At December  31, 2001, Full House hadnet operating loss carryforwards for federal income tax purposes ofapproximately $173,000, which may be carried forward to offset future taxableincome.  The loss carryforwards expirein 2019.  The availability of the losscarryforwards may be limited in the event of a significant change in ownershipof Full House or our subsidiaries.

 

13.           SUPPLEMENTALSTATEMENT OF CASH FLOWS INFORMATION

 

Cash payments for interest for the yearsended December 31, 2001 and 2000 were $286,939 and $321,911, respectively.

 

Income taxes paid for the years endedDecember 31, 2001 and 2000 were $291,422 and $174,708, respectively.

 

The following noncash investing and financingactivities are not reflected in the consolidated statements of cash flows:

 

During the year ended December 31, 2000,additional paid-in capital increased by $55,440 as a result of granting andrepricing stock options issued to non-employees for consulting services.

 

14.           COMMITMENTS ANDCONTINGENCIES

 

Full House leases office space under anoncancellable lease expiring on March 31, 2002. Future minimum leaseobligations are $19,980 for fiscal year 2002. Rent expense pertaining to operating leases was $79,920 and $72,261 forthe years ended December 31, 2001 and 2000, respectively.

 

In February 2002, Full House entered into anew noncancellable office lease expiring on March 31, 2007.  Future minimum lease obligations are $35,178annually.

 

In October 1994, we filed an action fordeclaratory relief in Mississippi, seeking a determination by the court that norelationship exists between us and Lone Star Casino Corporation regarding thepotential acquisition of a riverboat casino on the Mississippi gulf coast (FullHouse Resorts, Inc. v. Lone Star Casino Corporation v. Allen E. Paulson, SecondJudicial District of the Chancery Court of Harrison County, Mississippi).  Lone Star filed a counterclaim allegingbreaches of fiduciary duty, breach of contract, conspiracy to breach contractand to breach fiduciary duty and common law fraud.  The trial court granted summary judgment in favor of alldefendants on that counterclaim, and Lone Star appealed that judgment to theMississippi appellate court.   In April1998, the Appeals Court affirmed the dismissal of all counts against allparties, excepting Lone Star’s claim against us for breach of contract, whichit remanded to the trial court for additional hearing.  In January 2000, LS Capital, successorentity to Lone Star Casino

 

F-16

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Corporation, announced that it had retainedcounsel to pursue the two remaining claims it had alleged against us which werenot already dismissed by the Mississippi appellate courts.  In April 2000, the trial judge dismissedboth those counts for Lone Star’s failure to prosecute its claims for nearlytwenty months after their remand from the Court of Appeals.  Lone Star appealed that ruling and theMississippi State Court of Appeals reversed the dismissal, and in late 2001again remanded the claims against the Company for breach of contract, back tothe trial court for further proceedings.

** **

In September2001, entities controlled by architect Paul Steelman filed a Notice of Lienagainst real property owned by the Company in Biloxi, Mississippi, and acomplaint against the Company in Harrison County Circuit Court, allegedly basedupon an unexecuted Standard Form of Agreement between Owner and Architect inregard to the Company’s former Hard Rock – Biloxi project (Paul Steelman Ltd.v. Full House Resorts, Inc.).  TheCompany believes it has meritorious defenses and intends to vigorously defendthe claim.

 

Management is unable to determine the outcomeof this litigation, but does not believe the outcome will have a materialadverse effect on Full House’s consolidated financial condition.

 

15.           STOCK-BASEDCOMPENSATION PLANS

 

At December 31, 2001, Full House had threestock-based compensation plans that are described below.  Full House applies APB Opinion No. 25 andrelated interpretations in accounting for these plans.  Because options have been granted withexercise prices equal to market value on the grant date, no compensation costhas been recognized for options granted under the Non-employee Director StockPlan, Incentive Stock Plan (except as disclosed below related to optionsgranted under the Incentive Stock Plan to a consultant/principal shareholder)and an informal director stock plan. Had compensation cost for options granted under Full House’s threestock-based compensation plans been determined based on the fair value at thegrant dates for awards under those plans consistent with the method of SFASStatement 123, Full House’s net income (loss) and income (loss) per commonshare would have been restated to the pro forma amounts indicated below:

 
|                             |   | **2001** |       | **2000** |   |
|----------------------------------|--------|----------|------------|----------|--------|
| Net income  (loss)               |   |     |       |     |   |
| As reported                      |   | $        | (2,660,611 | )        | $      | 155,089 |   |
| Pro forma                        |   | $        | (2,651,118 | )        | $      | 399,687 |   |
|                             |   |     |       |     |   |
| Income (loss) per  common share, |   |     |       |     |   |
| basic and diluted                |   |     |       |     |   |
| As reported                      |   | $        | (0.26      | )        | $      | (0.01 | ) |
| Pro forma                        |   | $        | (0.26      | )        | $      | 0.04 |   |

 

The fair value of each option grant for thepro forma disclosure was estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants in 2001 and 2000: expected volatility of 90% and 88%, risk-free interestrate of 3.5% and 6.6%, and expected life of 2.5 years.

 

Full House has reserved 300,000 shares of itscommon stock for issuance under the non-employee Director Stock Plan.  The Plan allows for options to be granted atprices not less than fair market value on the date of grant and are generallyexercisable over a term of five years. Full House issued 10,000 and 20,000 options under the Plan during both2001 and 2000, respectively.

 

Full House has reserved 3,000,000 shares ofits common stock for issuance under the 1992 Incentive Plan as amended in June1999.  The Plan allows for the issuanceof options and other forms of incentive awards, including qualified andnon-qualified incentive stock options. Incentive stock options may be granted at prices not less than fairmarket value on the date of grant, while non-qualified incentive stock optionsmay be granted at a price less than fair market value on the date ofgrant.  The persons eligible for suchplan include employees and officers of Full House (whether or not such officersare also directors of Full House)

 

F-17

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and consultants and advisors to Full House,who are largely responsible for the management, growth and protection of thebusiness of Full House.  Options issuedunder the Incentive Plan are generally exercisable over a term of ten years.

 

During 2000, the departure of our formerpresident resulted in the forfeiture of his options to purchase 800,000shares.  There were no options issuedunder this plan during either 2001 or 2000.

 

On March 3, 1997 (“the Grant Date”), the Board of Directorsapproved a grant of an option (“Option”)to each of Full House’s three directors, to purchase 250,000 shares of commonstock at an exercise price per share of $3.375, the closing price of the commonstock on the Grant Date.  The Optionswere granted in consideration of the fact that services to Full House by suchdirectors have exceeded and are expected to continue to exceed the duties of atypical corporate director.  On May 12,1997, at Full House’s annual meeting, the stockholders ratified theOptions.  The Options become exercisablein 50,000 share increments commencing April 9, 1997 and on each anniversarythereafter.  In addition, the Optionsfor two of the directors provide that a 50,000 share increment became exercisableon the Grant Date.  In March 1998,250,000 of these shares were forfeited, and in June 1998, the remaining 500,000shares were repriced to $2.25 per share (fair market value at repricing).

 

The total options outstanding under the 1992Incentive Plan, including the consulting options at December  31, 2001 and2000 were 586,000.  The total optionsoutstanding under the Non employee Director Stock Plan at December 31, 2001 and2000 were 50,000 and 70,000, respectively. The total options outstanding under the Director Stock Plan at December31, 2001 and 2000 were 575,000.

 

A summary of the status of Full House’s stockoption plans, including consultant options, as of December 31, 2001 and 2000,and changes during the years then ended is presented below:

 
|                                                            |   | **2001**             |   | **2000**              |   |
|-----------------------------------------------------------------|--------|----------------------|--------|-----------------------|--------|
|                                                            |   | **WEIGHTED-AVERAGE** |   | **WEIGHTED- AVERAGE** |   |
|                                                            |   | **EXERCISE**         |   | **EXERCISE**          |   |
|                                                            |   | **SHARES**           |   | **PRICE**             |   | **SHARES** |   | **PRICE** |   |
| Outstanding at  beginning of year                               |   | 1,231,000            |   | $                     | 2.54   |   | 2,011,000 |   | $ | 2.35 |   |
| Granted                                                         |   | 10,000               |   | 0.90                  |   | 20,000 |   | 1.57 |   |
| Exercised                                                       |   | –               |   | –                |   | – |   | – |   |
| Forfeited                                                       |   | 30,000               |   | 2.04                  |   | 800,000 |   | 2.06 |   |
|                                                            |   |                 |   |                  |   |   |   |   |   |
| Outstanding at  end of year                                     |   | 1,211,000            |   | 2.54                  |   | 1,231,000 |   | 2.54 |   |
| Exercisable at  year-end                                        |   | 1,211,000            |   | 2.54                  |   | 1,137,000 |   | 2.56 |   |
|                                                            |   |                 |   |                  |   |   |   |   |   |
| Weighted-average  fair value of options granted during the year |   |                 |   | $                     | 0.42   |   |   |   | $ | 1.32 |   |

 

As of December 31, 2001, the 1,211,000options outstanding and exercisable have exercise prices ranging between $0.90and $3.69, and a weighted average remaining contractual life of 4 years.

 

F-18

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16.           SEGMENT REPORTING

 

Since the GTECH acquisition transaction, wenow view our business in three primary business segments.  The Operations segment includes theperformance of the Delaware and Oregon projects.  The Development segment includes costs associated with our activitiesin Michigan, California, and Mississippi. The Corporate segment reflects the management and administrativeexpenses of the business.  The prioryear amounts have been reclassified to conform with the current yearpresentation.

** **

**SUMMARY INFORMATION FOR THE YEARS ENDEDDECEMBER 31,**

 

**2001**

 
|                                 |   | **Operations** |      | **Development** |   | **Corporate** |   | **Consolidated** |   |
|--------------------------------------|--------|----------------|-----------|-----------------|--------|---------------|--------|------------------|--------|
| Revenues                             |   | $              | 4,995,826 |            | $      | –        |   | $                | – |   | $ | 4,995,826 |   |
| Development /  Impairment            |   | –         |      | 5,799,241       |   | –        |   | 5,799,241        |   |
| Income (loss)  from operations       |   | 4,826,353      |      | (6,237,895      | )      | (1,607,438    | )      | (3,018,980       | )      |
| Interest expense                     |   | (218,872       | )         | (67,873         | )      | –        |   | (286,745         | )      |
| Other income                         |   | –         |      | –          |   | 9,067         |   | 9,067            |   |
| Tax (provision)  benefit             |   | (1,814,341     | )         | 2,119,081       |   | 541,307       |   | 846,047          |   |
| Net income (loss)                    |   | 2,793,140      |      | (4,186,687      | )      | (1,057,064    | )      | (2,450,611       | )      |
|                                 |   |           |      |            |   |          |   |             |   |
| Approximate  Identifiable assets (a) |   | 245,000        |      | 10,220,000      |   | 1,000,000     |   | 11,465,000       |   |
|                                      |        |                |           |                 |        |               |        |                  |        |  |  |  |  |

 

(a) Primarily as a result of the Impairmentprovision of $4,593,800 discussed in Note 3*,* partially offset by the $1,800,000 GTECHacquisition discussed in Note 4*,* the approximate identifiable assets forour Development segment have declined from previous periods.

 

**2000**

 
|                            |   | **Operations** |      | **Development** |   | **Corporate** |   | **Consolidated** |   |
|---------------------------------|--------|----------------|-----------|-----------------|--------|---------------|--------|------------------|--------|
| Revenues                        |   | $              | 3,923,329 |            | $      | –        |   | $                | – |   | $ | 3,923,329 |   |
| Development / Impairment        |   | –         |      | 584,337         |   | –        |   | 584,337          |   |
| Income (loss) from operations   |   | 3,748,346      |      | (921,849        | )      | (1,864,252    | )      | 962,245          |   |
| Interest expense                |   | (328,379       | )         | –          |   |          |   | (328,379         | )      |
| Other income                    |   | –         |      | –          |   | 11,616        |   | 11,616           |   |
| Tax (provision) benefit         |   | (1,448,063     | )         | 329,900         |   | 627,770       |   | 490,393          |   |
| Net income (loss)               |   | 1,971,904      |      | (591,949        | )      | (1,224,866    | )      | 155,089          |   |
|                            |   |           |      |            |   |          |   |             |   |
| Approximate Identifiable assets |   | 232,000        |      | 12,369,000      |   | 852,000       |   | 13,453,000       |   |
|                                 |        |                |           |                 |        |               |        |                  |        |  |  |  |  |

 

17.           SUBSEQUENT EVENT

 

On February 15, 2002, we entered into anagreement with RAM Entertainment, LLC (“RAM”), a privately held investmentcompany, whereby RAM will acquire a 50% interest in the California and Michiganprojects and provide the necessary funding for their development.  RAM advanced $2,381,260 to us in the form ofa loan, to be forgiven upon receipt by the Huron Potawatomi Tribe of federalapprovals for its proposed casino near Battle Creek, Michigan.  The loan bears interest adjustable daily atprime and requires interest payments monthly. The principal is due at maturity on February 15, 2003 unless earlierforgiven pursuant to its terms.

 

The proceeds of this loan, together with cashon hand, was used to repay the $3,000,000 GTECH note.

 

F-19

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**EXHIBIT INDEX**

 
| **EXHIBIT** |   | **DESCRIPTION**                                   |
|-------------|--------|---------------------------------------------------|
|        |   |                                              |
| 21          |   | List of Subsidiaries of Full House Resorts,  Inc. |
|        |   |                                              |
| 23.1        |   | Consent of Deloitte & Touche LLP              |

 

 

----