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Pinnacle Entertainment, Inc. 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-11
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2006

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 

 

Commission file number: 001-13641

 


 

PINNACLE ENTERTAINMENT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   95-3667491
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

 

3800 Howard Hughes Parkway

Las Vegas, NV 89109

(Address of Principal Executive Offices) (Zip Code)

 

(702) 784-7777

(Registrant’s Telephone Number, Including Area Code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    YES  x    NO  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer    x  Accelerated Filer    ¨  Non-Accelerated Filer    ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

 

The number of outstanding shares of the registrant’s common stock, as of the close of business on August 4, 2006: 48,013,842.

 



Table of Contents

PINNACLE ENTERTAINMENT, INC.

TABLE OF CONTENTS

 

     PART I     
Item 1.   

Financial Statements

    
    

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2006 and 2005

   1
    

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005

   2
    

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2006 and 2005

   3
    

Notes to Unaudited Condensed Consolidated Financial Statements

   4
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   30
    

Results of Operations

   32
    

Liquidity and Capital Resources

   35
    

Other Supplemental Data

   39
    

Contractual Obligations and Other Commitments

   41
    

Factors Affecting Future Operating Results

   41
    

Critical Accounting Policies

   42
    

Forward-Looking Statements

   42
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   43
Item 4.   

Controls and Procedures

   44
     PART II     
Item 1.   

Legal Proceedings

   45
Item 1A.   

Risk Factors

   46
Item 4.   

Submission of Matters to a Vote of Security Holders

   47
Item 6.   

Exhibits

   49
Signature    51


Table of Contents

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

PINNACLE ENTERTAINMENT, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the three months
ended June 30,


    For the six months
ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands, except per share data, unaudited)  

Revenues:

                                

Gaming

   $ 194,679     $ 127,926     $ 400,043     $ 227,661  

Food and beverage

     11,793       8,780       22,433       14,914  

Truck stop and service station

     8,187       6,878       14,015       11,858  

Hotel and recreational vehicle park

     7,937       4,351       14,598       6,776  

Other operating income

     6,234       3,608       11,881       5,827  
    


 


 


 


       228,830       151,543       462,970       267,036  
    


 


 


 


Expenses and Other Costs:

                                

Gaming

     108,561       74,310       222,265       132,693  

Food and beverage

     11,046       8,231       21,374       13,957  

Truck stop and service station

     7,776       6,437       13,221       11,124  

Hotel and recreational vehicle park

     3,464       2,082       7,009       3,264  

General and administrative

     42,237       27,513       83,049       50,925  

Depreciation and amortization

     16,963       11,852       33,369       22,010  

Other operating expenses

     2,448       2,737       4,638       4,277  

Pre-opening and development costs

     6,984       17,367       11,040       23,967  
    


 


 


 


       199,479       150,529       395,965       262,217  
    


 


 


 


Operating income

     29,351       1,014       67,005       4,819  

Merger termination proceeds, net of expenses

     44,821       0       44,821       0  

Interest income

     3,463       742       5,968       1,938  

Interest expense, net of capitalized interest

     (13,550 )     (10,137 )     (27,685 )     (20,623 )

Loss on early extinguishment of debt

     0       28       0       (1,419 )
    


 


 


 


Income (loss) from continuing operations before income taxes

     64,085       (8,353 )     90,109       (15,285 )

Income tax (expense) benefit

     (25,389 )     2,271       (35,988 )     4,728  
    


 


 


 


Income (loss) from continuing operations

     38,696       (6,082 )     54,121       (10,557 )

Income from discontinued operations, net of taxes

     7,311       1,904       5,360       4,148  
    


 


 


 


Net income (loss)

   $ 46,007     $ (4,178 )   $ 59,481     $ (6,409 )
    


 


 


 


Net income (loss) per common share—basic

                                

Income (loss) from continuing operations

   $ 0.81     $ (0.15 )   $ 1.15     $ (0.26 )

Income from discontinued operations, net of taxes

     0.15       0.05       0.11       0.10  
    


 


 


 


Net income (loss) per common share—basic

   $ 0.96     $ (0.10 )   $ 1.26     $ (0.16 )
    


 


 


 


Net income (loss) per common share—diluted

                                

Income (loss) from continuing operations

   $ 0.78     $ (0.15 )   $ 1.11     $ (0.26 )

Income from discontinued operations, net of taxes

     0.15       0.05       0.11       0.10  
    


 


 


 


Net income (loss) per common share—diluted

   $ 0.93     $ (0.10 )   $ 1.22     $ (0.16 )
    


 


 


 


Number of shares—basic

     47,968       40,534       47,181       40,518  

Number of shares—diluted

     49,607       40,534       48,798       40,518  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30,
2006


    December 31,
2005


 
     (in thousands, except share
data, unaudited)
 
ASSETS                 

Current Assets:

                

Cash and cash equivalents

   $ 371,960     $ 147,332  

Insurance receivable related to inventory and continuing expenses

     23,814       16,734  

Accounts receivable, net of allowance for doubtful accounts of $3,860 and $3,349

     17,505       16,777  

Inventories

     7,259       6,435  

Prepaid expenses and other assets

     33,472       16,141  

Income tax receivable

     4,719       4,742  

Deferred income taxes

     4,850       5,819  
    


 


Total current assets

     463,579       213,980  

Restricted cash

     5,635       9,138  

Insurance receivable related to property and equipment impairment charges, net

     7,795       32,813  

Property and equipment, net

     880,751       890,318  

Goodwill

     26,656       26,656  

Gaming licenses, net

     21,035       21,082  

Debt issuance costs, net

     19,349       21,091  

Other assets

     11,039       7,330  

Assets held for sale

     61,709       22,469  
    


 


     $ 1,497,548     $ 1,244,877  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current Liabilities:

                

Accounts payable

   $ 26,189     $ 40,651  

Accrued interest

     10,713       10,766  

Accrued compensation

     25,537       34,064  

Other accrued liabilities

     76,535       57,412  

Current portion of long-term debt

     144       139  
    


 


Total current liabilities

     139,118       143,032  

Long-term debt

     637,340       657,534  

Other long-term liabilities

     10,869       1,474  

Deferred income taxes

     29,033       4,497  

Liabilities associated with assets held for sale

     9,307       10,526  

Commitments and contingencies (Note 9)

                

Stockholders’ Equity:

                

Preferred stock

     0       0  

Common stock—$0.10 par value, 48,013,042 and 40,975,588 shares outstanding, net of treasury shares

     5,002       4,298  

Additional paid in capital

     618,886       435,512  

Retained earnings

     78,684       19,203  

Accumulated other comprehensive loss

     (10,601 )     (11,109 )

Treasury stock, at cost

     (20,090 )     (20,090 )
    


 


Total stockholders’ equity

     671,881       427,814  
    


 


     $ 1,497,548     $ 1,244,877  
    


 


 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the six months
ended June 30,


 
     2006

    2005

 
     (in thousands, unaudited)  

Cash flows from operating activities:

                

Net income (loss)

   $ 59,481     $ (6,409 )

Depreciation and amortization

     33,369       27,010  

Gain on sale of assets

     (10,664 )     0  

Amortization of debt issuance costs

     1,814       1,582  

Asset impairment

     4,939       0  

Share-based compensation expense

     2,618       0  

Excess tax benefits relating to share-based payment arrangements

     (885 )     0  

Loss on early extinguishment of debt

     0       1,419  

Changes in working capital:

                

Accounts and insurance receivables, net

     (7,767 )     (4,243 )

Prepaid expenses and other assets

     (17,073 )     (10,326 )

Accounts payable

     (8,372 )     7,960  

Other accrued liabilities

     18,060       5,182  

Accrued interest

     (53 )     (1,994 )

Change in deferred taxes

     26,508       0  

All other, net

     (1,947 )     394  
    


 


Net cash provided by operating activities

     100,028       20,575  
    


 


Cash flows from investing activities:

                

Decrease in restricted cash

     3,503       81,756  

Additions to property and equipment

     (80,818 )     (145,695 )

Receipts from dispositions of property and equipment

     16,614       158  

Receipts from insurance proceeds

     25,000       0  
    


 


Net cash used in investing activities

     (35,701 )     (63,781 )
    


 


Cash flows from financing activities:

                

Proceeds from (payments of) credit facility

     (20,000 )     69,000  

Payment of senior subordinated notes

     0       (65,000 )

Payment of other secured and unsecured notes payable

     (1,313 )     (1,245 )

Debt issuance costs

     (72 )     (1,002 )

Common stock options exercised

     1,542       963  

Common stock equity offering

     178,862       0  

Excess tax benefits relating to share-based payment arrangements

     885       0  

Other financing activities, net

     261       159  
    


 


Net cash provided by financing activities

     160,165       2,875  
    


 


Effect of exchange rate changes on cash and cash equivalents

     136       (134 )
    


 


Increase (decrease) in cash and cash equivalents

     224,628       (40,465 )

Cash and cash equivalents at the beginning of the period

     147,332       202,374  
    


 


Cash and cash equivalents at the end of the period

   $ 371,960     $ 161,909  
    


 


 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Summary of Significant Accounting Policies

 

General Pinnacle Entertainment, Inc. owns and operates gaming entertainment facilities in numerous gaming markets. These include five properties in the United States, located in southeastern Indiana (“Belterra Casino Resort”); Lake Charles, New Orleans and Bossier City, Louisiana (“L’Auberge du Lac,” “Boomtown New Orleans” and “Boomtown Bossier City,” respectively); and Reno, Nevada (“Boomtown Reno”). In addition, we are building a major casino in downtown St. Louis, Missouri (“St. Louis City Project”), adjacent to the Embassy Suites Hotel we acquired in 2005, and a major casino in south St. Louis County, Missouri (to be known as the “River City Project”). We have also signed an agreement to acquire two additional gaming licenses in Louisiana, one of which we intend to utilize to build a second casino resort in Lake Charles (“Sugarcane Bay”). We are also one of five companies that has filed a gaming license application for one of two available licenses in Philadelphia, Pennsylvania. Additionally, we have a significant insurance claim related to a hotel casino previously operated in Biloxi, Mississippi (“Casino Magic Biloxi”).We are selling the site on which the casino operated prior to Hurricane Katrina. Internationally, we operate casinos in Argentina (“Casino Magic Argentina”); and since May 2006, a casino adjoining the Four Seasons Resort Great Exuma at Emerald Bay in the Bahamas (“The Casino at Emerald Bay”); and have filed a gaming license application for an available license in Rancagua, Chile. Finally, we recently sold our interests in two card club casinos in California, both of which generated lease income.

 

Terminated Merger Agreement In March 2006, we entered into an agreement to acquire Aztar Corporation for $38 per share. Such agreement was subject to approval by Aztar’s shareholders. Under the agreement, Aztar’s board was permitted to evaluate and recommend to its shareholders any unsolicited, superior proposals from qualified entities in accordance with its fiduciary duties. We had the right to match any such proposals. If we chose to not match a superior proposal, Aztar could terminate its merger agreement with us by making a merger termination payment.

 

During April and May, Aztar received several proposals that its board deemed to be superior to ours. We matched or exceeded several of these proposals. Ultimately, we chose not to match a proposal to acquire Aztar for $54 per share. Aztar’s board then terminated its merger agreement with us and made a merger termination payment of $78 million.

 

We utilized the services of several investment banking and legal firms in pursuing our acquisition of Aztar. In payment for such services, and in particular for the commitment of more than $3.5 billion of capital that would have been needed to consummate the transaction, these firms were paid significant fees, some of which involved percentages of our merger termination fee, subject to a cap. Net of such fees and expenses, the merger termination payment received by us was approximately $44.8 million, which amount is included in our cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006.

 

Basis of Presentation The accompanying interim condensed consolidated financial statements include the accounts of Pinnacle Entertainment, Inc. and subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim condensed consolidated financial statements presented herein reflect all adjustments of a normal and recurring nature which are considered necessary for a fair presentation of the results for the interim periods presented and all inter-company accounts and transactions have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

 

4


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The condensed consolidated financial statements and these notes to the condensed consolidated financial statements reflect certain assets held for sale and the related treatment of operations of such assets as discontinued for all periods presented. These condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

 

Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Estimates used by us include, among other things, (i) the evaluation of the non-impairment of property, equipment and other long-term assets, (ii) the evaluation of the future realization of deferred tax assets, (iii) determining the adequacy of reserves, and (iv) estimating the forfeiture rate when computing the share-based compensation expense. Actual results could differ from those estimates.

 

Accounts Receivable Accounts receivable consist primarily of casino, hotel and other receivables, net of an allowance for doubtful accounts of $3,860,000 and $3,349,000 as of June 30, 2006 and December 31, 2005, respectively. The allowance for doubtful accounts is estimated based upon, among other things, collection experience, customer credit evaluations and the age of the receivables.

 

We extend casino credit to approved customers following background checks and investigations of creditworthiness. In May 2005, we opened L’Auberge du Lac, wherein we have experienced, and anticipate continuing to experience, a higher volume of credit play than has historically been experienced at our other casinos.

 

Capitalization of Interest Capitalized interest was $901,000 and $3,399,000 for the three months ended June 30, 2006 and 2005, respectively, and $1,349,000 and $6,522,000 for the six months ended June 30, 2006 and 2005, respectively. Such amounts were deducted from interest expense on the accompanying condensed consolidated statements of operations. The 2006 capitalized interest relates primarily to the St. Louis projects, which interest will increase as the capital spending on the projects increase. The 2005 capitalized interest was primarily related to construction at L’Auberge du Lac.

 

Debt Issuance Costs and Related Amortization Amortization of debt issuance costs included in interest expense was $908,000 and $772,000 for the three months ended June 30, 2006 and 2005, respectively, and $1,813,0000 and $1,582,000 for the six months ended June 30, 2006 and 2005, respectively. Accumulated amortization as of June 30, 2006 and December 31, 2005 was $6,414,000 and $4,601,000, respectively.

 

Revenue Recognition Revenues in the accompanying condensed consolidated statements of operations exclude the retail value of hotel rooms, food and beverage and other items provided to patrons on a complimentary basis. Complimentary revenues that have been excluded from the accompanying condensed consolidated statements of operations are $20,292,000 and $12,063,000 for the three months ended June 30, 2006 and 2005, respectively, and $40,423,000 and $21,895,000 for the six months ended June 30, 2006 and 2005, respectively. The estimated cost of providing these promotional allowances (which is included in gaming expenses) was $15,482,000 and $9,818,000 for the three months ended June 30, 2006 and 2005, respectively, and $31,972,000 and $17,211,000 for the six months ended June 30, 2006 and 2005, respectively. The majority of the increase in complimentary revenue and the associated cost is due to the May 2005 opening of L’Auberge du Lac.

 

Advertising Costs Advertising costs (excluding such expenses included in pre-opening and development costs) were $5,378,000 and $4,189,000 for the three months ended June 30, 2006 and 2005, respectively, and

 

5


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$10,129,000 and $6,696,000 for the six months ended June 30, 2006 and 2005, respectively. Such costs are included in gaming expenses on the accompanying condensed consolidated statements of operations.

 

Pre-opening and Development Costs Pre-opening and development costs in the 2006 periods were primarily associated with the St. Louis development projects, and in the 2005 periods L’Auberge du Lac and the St. Louis development projects.

 

Comprehensive Income We had pre-tax unrealized gains of approximately $0.9 million and $1.8 million for the three and six months ended June 30, 2006, respectively, in connection with equity securities we held at June 30 (which we sold in July and realized a pre-tax gain of approximately $1.8 million). We did not hold any such securities as of June 30, 2005. We do not actively trade such equity securities and therefore, pursuant to Statement of Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” recorded the after-tax unrealized gain in accumulated other comprehensive loss on the condensed consolidated balance sheet as of June 30, 2006. We determined the fair value of the securities based on the closing market price of the equity securities as of June 30, 2006.

 

Our comprehensive income (loss), which is the sum of net income (loss) and our foreign currency translation activity and unrealized gain on securities, is as follows:

 

     For the three months
ended June 30,


    For the six months
ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands)  

Net income (loss)

   $ 46,007     $ (4,178 )   $ 59,481     $ (6,409 )

Foreign currency translation income (loss)

     (136 )     95       (574 )     266  

Unrealized gain on securities, net of income taxes

     510       0       1,082       0  
    


 


 


 


Comprehensive income (loss)

   $ 46,381     $ (4,083 )   $ 59,989     $ (6,143 )
    


 


 


 


 

Earnings per Share Diluted earnings per share assume exercise of in-the-money stock options (those options with exercise prices at or below the weighted average market price for the periods presented) outstanding at the beginning of the period or at the date of the issuance, unless the assumed exercises are antidilutive. We calculate the effect of dilutive securities using the treasury stock method. As of June 30, 2006 and 2005, our only share-based awards issued under our Stock Option Plans (defined below) were common stock option grants.

 

For the three and six months ended June 30, 2006, the dilutive effect of the in-the-money common stock options was an increase of 1,639,000 and 1,617,000 shares, respectively. All common stock options were in-the-money for the three and six months ended June 30, 2006.

 

For the three and six months ended June 30, 2005, the potentially dilutive in-the-money common stock options were 1,975,000 and 1,948,000 shares, respectively, which amounts were not affected by the adoption of SFAS No. 123R. As we incurred a net loss in each period and such inclusion would have been antidilutive, the shares were not included in the diluted calculations for the periods. There were 423,000 common stock options in the 2005 periods that were not in-the-money.

 

Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”) In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” which requires all companies to measure compensation costs for all share-based payments (including employee stock options) at “fair value.” This statement became effective for us January 1, 2006. See Note 2 for additional information.

 

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Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

FASB Interpretation No. 48 (“FIN 48”) In July 2006, the FASB released FIN 48, “Uncertainty in Income Taxes,” which defines accounting for uncertain tax positions and includes amendments to SFAS No. 109, “Accounting for Income Taxes.” FIN 48 addresses the recognition, measurement, classification and disclosure issues related to the recording of financial statement benefits for income tax positions that have some degree of uncertainty. FIN 48 is effective for us January 1, 2007 (our first fiscal year after December 15, 2006). We have not yet determined the effect FIN 48 will have on our financial statements.

 

Note 2—Stock-based Compensation

 

As of June 30, 2006, we have approximately 5.4 million share-based awards issued, all of which are common stock options. Such options have been granted pursuant to our 2005 Equity and Performance Incentive Plan (which plan provides for the granting of stock options, stock appreciation rights, restricted stock and other performance awards—the “2005 Plan”), prior stock option plans or are individual stock option grants (collectively, the “Stock Option Plans”). There were approximately 1.46 million share-based awards remaining available for grant under the 2005 Plan as of June 30, 2006.

 

Our stock options become exercisable ratably over a vesting period as determined by the Compensation Committee (generally five years for options granted since mid-2002 and generally three years for options granted prior to such time period) and expire over terms not exceeding 10 years from the date of grant. The purchase price for all shares granted under the Stock Option Plans shall be determined by the Compensation Committee, but in the case of incentive stock options, the price will not be less than the fair market value of the common stock at the date of grant. Substantially all options issued historically have been exercisable at the market price on the date of the grant.

 

On January 1, 2006, we adopted SFAS No. 123R using the modified prospective method. Accordingly, we have not restated prior-year amounts. Pursuant to SFAS No. 123R, for all share-based awards granted after the adoption of SFAS No. 123R and for the unvested portion of previously granted share-based awards that were outstanding on the date of adoption, compensation costs related to our share-based payment transactions are to be measured at fair value on the grant date and recognized in the financial statements over the vesting period during which the employee provides service in exchange for the award.

 

Pursuant to SFAS No. 123R, we recorded pre-tax compensation expense of approximately $1.2 million and $2.6 million in the three and six months ended June 30, 2006, respectively, all of which was incremental expense as we did not incur share-based compensation prior to the adoption of SFAS No. 123R. Such expense resulted in a reduction in net income of $734,000 (net of a tax benefit of $484,000) for the three months ended June 30, 2006 and approximately $1.6 million (net of a tax benefit of approximately $1.0 million) for the six months ended June 30, 2006. The reduction of diluted earnings per share was $0.01 and $0.03 for the three and six months ended June 30, 2006, respectively. Theoretical compensation costs not yet amortized related to stock options totaled approximately $16.5 million at June 30, 2006, and the weighted average period over which the costs are expected to be recognized is approximately three years.

 

The aggregate amount of cash we received from the exercise of stock options was $663,000 and $939,000 for the three months ended June 30, 2006 and 2005, respectively, and $1,384,000 and $963,000 for the six months ended June 30, 2006 and 2005, respectively, which shares, consistent with prior periods, were newly issued common stock. Prior to the adoption of SFAS No. 123R, we reported tax benefits resulting from the exercise of stock options as operating cash flows. In accordance with SFAS No. 123R, we now present such tax benefits as financing cash flows. Therefore, for the six months ended June 30, 2006, cash flows from operating activities decreased by $885,000, and cash flows from financing activities increased by $885,000.

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes information related to our common stock options under the Stock Option Plans:

 

     Number of
Stock Options


    Weighted Average
Exercise Price


For options outstanding at January 1, 2006

     5,504,227     $ 11.48

Granted

     169,000     $ 27.54

Exercised

     (137,454 )   $ 10.07

Cancelled

     (119,304 )   $ 11.40
    


     

Options outstanding at June 30, 2006

     5,416,469     $ 12.02
    


     

Options exercisable at June 30, 2006

     2,948,673     $ 9.61

Weighted-average value per granted option calculated using the Black-Scholes option-pricing model for options, granted during the six months ended:

              

June 30, 2006

   $ 14.06        

June 30, 2005

   $ 8.19        

 

A majority of all options granted in both periods have exercise prices equal to the market value on the date of grant. The increase in the value per granted option reflects the increase in our stock price and U.S. Treasury rates, offset by a decrease in our implied volatility which are key factors in the Black-Scholes option-pricing model.

 

Stock options outstanding as of June 30, 2006, were as follows:

 

     Outstanding

   Exercisable

     Number of
Stock Options


   Weighted Average
Remaining Life


   Weighted Average
Exercise Price


   Number of
Exercisable
Stock Options


   Weighted Average
Exercise Price


          (in years)               

$5.00–$8.00

   1,053,843    6.3    $ 6.36    698,047    $ 6.28

$8.01–$9.00

   999,101    5.8    $ 8.41    978,401    $ 8.41

$9.01–$13.00

   968,500    5.9    $ 10.21    725,700    $ 10.06

$13.01–$15.00

   1,023,735    7.8    $ 14.52    322,547    $ 14.37

$15.01–$20.00

   1,202,290    8.8    $ 17.14    223,978    $ 16.97

$20.01–$30.00

   169,000    9.7    $ 27.54    0    $ 0.00
    
              
      
     5,416,469    7.1    $ 12.02    2,948,673    $ 9.61
    
              
      

 

Our stock price has risen relative to the average price on the date that our stock options were granted. As a result, the total intrinsic value of options outstanding and exercisable at June 30, 2006 was approximately $62.0 million. The total intrinsic value for stock options exercised during the three and six months ended June 30, 2006 was approximately $1.5 million and $2.7 million, respectively. The “intrinsic value” is the number of exercisable options multiplied by the excess of the current share price over the weighted average exercise price of such options.

 

As permitted under SFAS No. 123R, we continued to use a Black-Scholes option-pricing model in order to calculate the compensation costs of employee stock-based compensation. Such model requires the use of subjective assumptions, including the expected life of the option, the expected volatility of the underlying stock, and the expected dividend on the stock.

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In computing the stock-based compensation, the following is a weighted average of the assumptions used:

 

     Risk-Free
Interest Rate


    Expected Life
at Issuance


   Expected
Volatility


    Expected
Dividends


Options granted in the following periods:

                     

June 30, 2006

   4.8 %   6.7 years    42.6 %   None

June 30, 2005

   4.0 %   6.7 years    44.7 %   None

 

The expected volatility was derived from the implied volatilities of traded options in our common stock. Future volatility may be substantially less or greater than the implied volatility. We do not currently pay dividends and we do not anticipate that dividends will be paid within the average expected life of existing options. U.S. Treasury rates with similar maturities are used as the proxy for the risk-free rate. The expected life at issuance is based on our experience as to the average historical term of option grants that were exercised or forfeited.

 

Prior to adopting SFAS No. 123R, we accounted for our employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations. Pursuant to APB No. 25, we did not record share-based compensation, but followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.”

 

The following sets forth the theoretical pro forma costs and effect on our net loss as if we had applied the fair value recognition provisions of SFAS No. 123R to our employee stock-based compensation plans for the three and six months ended June 30, 2005 (in thousands, except per share data):

 

     For the three
months ended
June 30, 2005


    For the six
months ended
June 30, 2005


 

Loss from continuing operations as reported

   $ (6,082 )   $ (10,557 )

Pro forma stock-based compensation expense, net of taxes

     (947 )     (1,446 )
    


 


Pro forma loss from continuing operations

     (7,029 )     (12,003 )

Income from discontinued operations, net of taxes

     1,904       4,148  
    


 


Pro forma net loss

   $ (5,125 )   $ (7,855 )
    


 


As reported:

                

Loss from continuing operations

   $ (0.15 )   $ (0.26 )

Income from discontinued operations, net of taxes

     0.05       0.10  
    


 


Net loss per share—basic and diluted

   $ (0.10 )   $ (0.16 )
    


 


Pro forma:

                

Pro forma loss from continuing operations

   $ (0.17 )   $ (0.29 )

Income from discontinued operations, net of taxes

     0.05       0.10  
    


 


Pro forma net loss per share—basic and diluted

   $ (0.12 )   $ (0.19 )
    


 


Number of shares—basic and diluted

     40,534       40,518  

 

Note 3—Hurricane-Related Matters

 

Casino Magic Biloxi As a result of extensive damage caused by Hurricane Katrina, Casino Magic Biloxi was closed in late August 2005. In April 2006, we filed a $346.5 million insurance claim for our losses associated with the hurricane. Net of our insurance deductible, such claim would be approximately $340 million. Such claim includes approximately $259 million for property damage, approximately $80 million for business

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

interruption insurance (including approximately $37 million for our lost profits) and approximately $7.6 million for emergency, mitigation and demolition expenses. As of June 30, 2006, we have received $50 million in advances towards our insurance claim.

 

On August 1, 2006, we filed suit in the United States District Court for the District of Nevada against three of our excess insurance carriers. Collectively, the three insurers provide $300 million of coverage, in excess of $100 million of coverage provided to us by other insurers. In total, our policies applicable to the Hurricane Katrina loss provide an aggregate of up to $400 million of coverage for loss caused by a weather catastrophe occurrence (as defined by the policies) and up to $100 million of inclusive coverage for loss caused by a flood occurrence. The three insurers are Allianz Global Risks US Insurance Company, Arch Specialty Insurance Company and RSUI Indemnity Company.

 

The suit alleges, among other things, that the defendants have improperly asserted that our losses were due to a flood occurrence as opposed to a weather catastrophe occurrence; that, after the close of the proposed sale of certain Casino Magic Biloxi assets to Harrah’s Entertainment, Inc. (“Harrah’s”) (see Note 5), we are not covered for any continued business interruption loss at Casino Magic Biloxi incurred after that sale; and that we are not entitled to designate our River City Project as a replacement for Casino Magic Biloxi. These positions, among others, taken by the insurers could materially reduce our recovery with respect to the claim.

 

The suit seeks damages equal to the outstanding amount of Pinnacle’s claim (totaling $346.5 million, less the $100 million previously paid or anticipated to be paid in the near future). It also seeks declarations that our River City Project constitutes a permissible replacement property under the applicable policies and that we are entitled to receive the full amount of our Casino Magic Biloxi business interruption loss arising out of Hurricane Katrina, even though we are in the process of selling the Casino Magic Biloxi site and certain related assets to Harrah’s. Our insurance policies permit a “replacement facility” to be built anywhere in the United States. Finally, the suit also seeks unspecified punitive damages for the improper actions of the defendants in connection with our claim. We anticipate that any negotiated or litigated resolution of our insurance claim will be protracted.

 

Although the River City Project is expected to cost more than it would have to repair/ rebuild Casino Magic Biloxi, recovery under the policies is nevertheless limited to the lesser of what would have been the cost to repair/ rebuild Casino Magic or the actual cost incurred in constructing the River City Project.

 

We wrote down by approximately $57.8 million the net book value of property and equipment impaired by the storm and a corresponding insurance receivable was recorded. We also recorded a receivable for inventory write-downs and expenses covered by insurance of approximately $23.8 million. We have insurance coverage for interruption of income at the property, but pursuant to GAAP will not book such income until the insurance claim is resolved. Net of the $50.0 million in advances received through June 30, 2006, the cumulative receivable at June 30, 2006 was approximately $31.6 million. We anticipate recording additional insurance receivables as we proceed to a resolution of the insurance claim; however, such receivables may be substantially delayed due to the pending litigation associated with our claim. The Company’s ultimate insurance claim and recovery amounts are based on replacement costs rather than book value and are unrelated to, computed differently from, and likely to be substantially larger than the impairment charges recorded. We are applying funds received against the long-term insurance receivable, as the insurers have not designated the payments as being pertinent to any specific part of the claim.

 

Boomtown New Orleans In the 2006 second quarter, we filed an insurance claim aggregating approximately $11 million for 2005 property damage and business interruption losses associated with Hurricane Katrina at Boomtown New Orleans. Net of our insurance deductible, the claim would be approximately $6 million. We have not recorded any potential recovery for lost profits.

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

L’Auberge du Lac recorded various costs and expenses in 2005 in connection with Hurricane Rita. Our deductible amounts under our insurance policies are based on the declared value of the specific damaged asset. L’Auberge du Lac is larger and was relatively less damaged than the Biloxi and New Orleans facilities. Hence, the expenses incurred and lost profits resulting from the storm do not presently appear to exceed the relevant insurance deductible. Therefore, we do not anticipate filing an insurance claim for such losses.

 

Note 4—Property and Equipment

 

Property and equipment held at June 30, 2006 and December 31, 2005 consisted of the following:

 

     June 30,
2006


    December 31,
2005


 
     (in thousands)  

Land and land improvements

   $ 143,657     $ 175,176  

Buildings

     492,873       513,867  

Equipment

     296,515       293,450  

Vessels

     138,504       137,905  

Construction in progress

     77,774       25,880  
    


 


       1,149,323       1,146,278  

Less accumulated depreciation

     (268,572 )     (255,960 )
    


 


     $ 880,751     $ 890,318  
    


 


 

Depreciation expense for the three months ended June 30, 2006 and 2005 was $16,858,000 and $11,739,000, respectively, and $33,154,000 and $21,785,000 for the six months ended June 30, 2006 and 2005, respectively.

 

On July 7, 2006, we closed on the sale of approximately 28 acres of land to Cabela’s Retail, Inc. for approximately $5.1 million. Cabela’s intends to build a large retail store featuring outdoor sporting goods adjacent to Boomtown Reno. We currently use a portion of such land to provide parking for our existing truck stop and satellite casino and therefore are leasing back approximately 12 acres from Cabela’s for a nominal fee. That lease, which land is intended to be used by Cabela’s for surface parking, terminates on the date that is 60 days prior to the opening of the Cabela’s facility.

 

We also entered into an agreement under which we may sell to Cabela’s an additional parcel of approximately two acres, following the receipt of certain environmental clearances. Such parcel is currently utilized by the existing truck stop and satellite casino. In connection with this transaction, we intend to commence construction of a new truck stop and satellite casino in the 2006 third quarter at another location on our Reno property. We estimate the cost to be approximately $15 million and that the project will be completed in the 2007 third quarter. At such time, we intend to remove the truck stop and other improvements on the two-acre parcel and begin environmental remediation activities, if needed, to obtain the environmental clearances required. In the event we are unable to provide such clearances, and Cabela’s does not waive such condition and elects to lease the site, we would enter into a 99-year lease with Cabela’s. The net book value of the existing truck stop and satellite casino is approximately $0.2 million, which assets are being depreciated over the revised estimated life of one year.

 

Pursuant to current accounting guidelines, our continuing involvement in the two-acre parcel (contiguous to the larger parcel and an integral part of the transaction with Cabela’s) precludes us from recognizing a gain on the sale of the larger parcel at this time. In the event we execute the long-term lease for the smaller parcel, the gain on the larger parcel will be deferred and amortized over the 99-year lease, with such gain offset by the costs,

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

if any, of our continued involvement with the smaller parcel. In the event Cabela’s completes the purchase of the smaller parcel, the gain on the larger parcel will be recognized at such time. The book value of the entire approximate 30 acres at June 30, 2006 was approximately $1.0 million.

 

For tax purposes, we anticipate realizing a taxable gain on the transaction. Therefore, we intend to effect a deferred like-kind exchange of the property under Section 1031 of the Internal Revenue Code (“1031 Exchange”) within the required 180 days, assuming we can find suitable replacement property.

 

Construction is also set to begin shortly to improve access to the site, with a portion of the cost needed for such improvement expected to be financed through the issuance of industrial revenue bonds through local or state governmental authorities. The bonds are expected to be serviced by a portion of the sales taxes generated by the new retail facilities. We have agreed to purchase at par, if necessary, some of these bonds. We estimate that we may be required to purchase between $4 million and $10 million of these bonds and believe such bonds could be resold to other investors, particularly after the new retail facilities have opened.

 

Note 5—Expansion and Development

 

St. Louis Projects: In 2005, we broke ground on our St. Louis City Project, which is located adjacent to the St. Louis convention district just north of the famed Gateway Arch. The facility is planned to include a casino with approximately 2,000 slot machines, a 200-guestroom luxury hotel, spa, several restaurants and 12,000 square feet of meeting and convention space. In June 2006, we revised the project budget to approximately $430 million to reflect certain project scope changes and increases in the cost of construction materials since the original budget was established. We anticipate opening the facility in the fall of 2007, subject to licensing by the Missouri Gaming Commission (“MGC”). We have also committed to arrange or provide $50 million of investment in other nearby developments within five years of the opening of the casino and hotel, $25 million of which may be satisfied by the condominium joint venture project discussed below.

 

Also in 2005, we completed the purchase of the Embassy Suites Hotel, a 297-suite hotel that adjoins the St. Louis City Project, and purchased approximately eight acres of land adjoining the proposed casino site. Cumulatively, we own, or have an option to purchase approximately 18 acres of contiguous land for and around the St. Louis City Project.

 

We have entered into an agreement with a joint venture partner to develop a $25 million, 10-story luxury condominium project near our St. Louis City Project site and overlooking the Mississippi River, which development will be funded primarily through non-recourse project financing.

 

In July 2006, we launched a tender offer to purchase all of the outstanding bonds of President Casinos, Inc., as well as the claims of other general unsecured creditors, in order to facilitate the acquisition of the President Casino—St. Louis riverboat casino. Such riverboat casino is located within walking distance of the St. Louis City Project site and is operating under the protection of federal bankruptcy law. The purchase is subject to various approvals, including the MGC, and, if successful, is expected to be completed in the 2006 third quarter. See “President Riverboat Casino” in Note 9 for a more detailed discussion of our proposed acquisition of the President Casino—St. Louis and the related tender offer process.

 

At the River City Project, our $375 million project in south St. Louis County, site work continues. Plans for a new access road have been submitted to the appropriate government authorities for approval. The facility is

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

scheduled to open in 2008, approximately one year after the opening of the St. Louis City Project, subject to licensing by the MGC. The River City Project will include a casino with approximately 3,000 slot machines and 60 table games, a 100-room hotel, full-service spa, restaurants, a boutique bowling alley, a multiplex movie theatre, an indoor ice rink, a public park with athletic fields and a hatch-shell music and entertainment venue.

 

In 2004, we were selected by the MGC for both St. Louis projects for “priority investigation,” a term used by the MGC as an indication that it has accepted our application for licensure of the project and that it will investigate the application on a priority basis in order to reach a final determination on licensure. On July 26, 2006, the MGC approved the Company as a key business entity which is suitable to operate the facilities if licensed at the end of the construction progress. We will not open either facility, nor begin operating the President Casino—St. Louis, until we have MGC approval.

 

Lake Charles, Louisiana: In January 2006, we announced a 250-guestroom expansion of L’Auberge du Lac for approximately $45 million, which when completed will bring the total guestrooms at L’Auberge du Lac to nearly 1,000. We intend to begin construction in the 2006 third quarter, with completion planned for 2007.

 

In May 2006, we signed a definitive agreement under which we will acquire certain Lake Charles, Louisiana gaming assets of Harrah’s, including two casino boats and related gaming licenses. Additionally, Harrah’s will acquire our Casino Magic Biloxi site and certain related assets, and receive an additional payment of approximately $25 million from us. Each company will retain its respective insurance claim related to extensive damage resulting from last year’s hurricanes. The definitive agreement is subject to receipt of all required regulatory approvals, including from the Louisiana Gaming Control Board (“LGCB”), and, unless waived by us, the passage of a local-option referendum in Lake Charles.

 

In June 2006, we announced plans to build Sugarcane Bay, a new $350 million casino resort located adjacent to L’Auberge du Lac. Sugarcane Bay will evoke the laid-back island feeling of the Caribbean, combined with gracious Southern hospitality in an environment of comfortable luxury. It will feature approximately 1,500 slot machines, a state-of-the-art poker room, table games, 400 guestrooms, various dining and retail shopping amenities, a tropical pool area and an island spa. Construction on Sugarcane Bay is expected to begin in 2007 with a planned opening in 2009, subject to final approval from the LGCB and passage of the local-option referendum in Lake Charles.

 

Louisiana law provides for a fixed number of casino riverboat licenses, and Sugarcane Bay is planned to utilize one of the gaming licenses associated with the pending Harrah’s transaction. We continue to explore our options with regard to the other assets and additional gaming license included in the pending Harrah’s transaction.

 

In July 2006, we executed our option to lease an additional 60 acres of unimproved land for construction of the Sugarcane Bay casino resort. The terms of the lease are substantially similar on a per-acre basis to the terms of the adjacent 242-acre leased land upon which L’Auberge du Lac resides. The term of such lease, including all extensions, expires in May 2075. Rent is currently approximately $325 per acre per month and adjusts periodically for inflation.

 

Additional Guestroom Expansion: In early 2006, we also announced plans to add 250 guestrooms to Belterra Casino Resort for approximately $45 million, which when complete will bring the total to approximately 850 guestrooms. In addition, we announced plans for an approximately $30 million 200-guestroom hotel at Boomtown New Orleans, the first guestrooms at the property. We anticipate beginning construction on both expansion projects later in 2006, with completion planned for 2007.

 

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Philadelphia, Pennsylvania: In December 2005, we filed an application seeking one of two available gaming licenses for Philadelphia. We are one of five applicants. In April 2006, we presented our development plans to the Pennsylvania Gaming Control Board (“PGCB”). If selected, we intend to build a single-level, 80,000-square-foot casino with approximately 3,000 slot machines; 3,000 parking spaces; five restaurants and a food court; a multiplex movie theater; an expansive, outdoor waterfront reflection pool that becomes an ice skating rink in the winter; and 36,000 square feet of retail and entertainment outlets. We estimate this initial phase, including land and Pennsylvania’s $50 million initial gaming license fee, will cost between $300 million and $400 million. In connection with filing the application, we posted a $50 million letter of credit for the benefit of the PGCB. Such letter of credit will be drawn upon by the PGCB only in the event we are awarded a gaming license and we do not pay the $50 million licensing fee within approximately 10 days of the award.

 

Additional later phases, contingent on the success of the initial phase, include the possible expansion of the casino to accommodate a total of approximately 5,000 slot machines, the addition of a 500-guestroom hotel tower, the construction of a residential and office tower, and the further addition of restaurants, retail and entertainment outlets.

 

Great Exuma, Bahamas: In May 2006, we opened The Casino at Emerald Bay, our casino located on the picturesque island of Great Exuma in the Bahamas. The Casino at Emerald Bay adjoins the Four Seasons Resort Great Exuma and is the first and only casino on the island. It includes 65 slot machines and eight table games, including blackjack, craps and roulette, as well as a full-service bar.

 

Chile: In August 2005, we submitted bids for two of the 17 licenses the Chilean government declared available earlier in the year—one in Antofagasta and one in Rancagua. In July 2006, the Chilean government announced that it had chosen a competing proposal for the sole license in Antofagasta. The competing proposal promised a greater investment in the market than we believed was warranted. The government’s decision regarding Rancagua is expected later this year.

 

In connection with the filing of the applications in August 2005, we posted two letters of credit totaling approximately $2 million. Such letters of credit are for the benefit of the Chilean Superintendent of Gaming in support of our proposed projects. A letter of credit will only be drawn in the event we are awarded a gaming license and do not fulfill our construction obligations for the particular project.

 

Note 6—Assets Held for Sale

 

In April 2006, we completed the sale of our Crystal Park Casino card club (which had net book value of approximately $5.8 million) for net cash proceeds of approximately $16.5 million. Although we generated a pre-tax book gain of approximately $10.7 million in the 2006 second quarter, our tax basis in the sold assets was above the sale price and therefore we do not anticipate paying any income taxes on the sale.

 

In connection with the agreement to sell our Casino Magic Biloxi site, in the 2006 second quarter, we reclassified the $45 million net book value of assets being sold to Harrah’s (comprised entirely of property and equipment) to assets held for sale. In addition, the results of operations for Casino Magic Biloxi, including an impairment charge of approximately $4.9 million recorded in the 2006 first quarter, have been reported as discontinued operations for all periods, net of income taxes.

 

In July 2006, we closed on the sale of our leasehold interest and related receivables in the Hollywood Park Casino card club for net cash proceeds of approximately $24.2 million plus the cancellation of our lease obligation, resulting in a pre-tax book gain of approximately $16.5 million. The lease obligation was for $3 million per year and expired in 2009. We had an option to extend such lease to 2019, with the rent adjusting

 

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pursuant to a formula based upon the Consumer Price Index. The net book value of these assets reflected as held for sale was approximately $16.7 million, comprised of the leasehold interest of approximately $14.2 million and related receivable of approximately $2.5 million. The book liabilities associated with these assets held for sale were approximately $9.3 million, comprised of the capital lease obligation of approximately $8.9 million and certain payables of $414,000.

 

Unlike the Crystal Park Casino sale, the sale of the Hollywood Park Casino assets generated taxable income. Therefore, we also intend to effect a 1031 Exchange for the Hollywood Park Casino.

 

Revenues, operating income and income from discontinued operations associated with the assets held for sale is summarized as follows:

 

     For the three months
ended June 30,


    For the six months
ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands)  

Revenues

   $ 1,770     $ 23,457     $ 3,582     $ 47,775  
    


 


 


 


Operating income

   $ 12,406     $ 3,366     $ 9,264     $ 7,312  

Interest expense

     (118 )     (157 )     (255 )     (333 )
    


 


 


 


Income before income taxes

     12,288       3,209       9,009       6,979  

Income tax expense

     (4,977 )     (1,305 )     (3,649 )     (2,831 )
    


 


 


 


Income from discontinued operations

   $ 7,311     $ 1,904     $ 5,360     $ 4,148  
    


 


 


 


 

Note 7—Long-Term Debt

 

Long-term debt at June 30, 2006 and December 31, 2005 consisted of the following:

 

     June 30,
2006


    December 31,
2005


 
     (in thousands)  

Secured Credit Facility

   $ 200,000     $ 220,000  

Unsecured 8.25% Notes due 2012

     303,020       303,227  

Unsecured 8.75% Notes due 2013

     133,231       133,144  

Other secured and unsecured notes payable

     1,233       1,302  
    


 


       637,484       657,673  

Less current maturities

     (144 )     (139 )
    


 


     $ 637,340     $ 657,534  
    


 


 

Secured Credit Facility: We have a $750 million senior secured bank credit facility (the “Credit Facility”) consisting of a $450 million five-year revolving credit facility and a $300 million six-year term loan, of which $200 million was outstanding at June 30, 2006 and $100 million of which can be drawn on a delayed basis. During the six months ended June 30, 2006, we repaid the $20 million of revolver facility borrowings outstanding at December 31, 2005. As of June 30, 2006, we had issued letters of credit aggregating approximately $65.8 million, which bore facility fees of 1.50% per annum, and therefore had approximately $384.2 million of the revolving credit facility that we have not utilized.

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Interest on the Credit Facility is subject to change based on the floating rate index selected. For borrowings under the revolving loan facility, the interest rate margin is based on our “leverage ratio,” which margin was 1.50% over LIBOR as of June 30, 2006. The term loan bore an interest rate of 7.30% per annum (2.00% over LIBOR) as of June 30, 2006. The undrawn revolver facility bore a facility fee for unborrowed amounts of 0.25% per annum as of June 30, 2006, which rate is also based on our leverage ratio. The delayed draw term loan bore a commitment fee of 0.75% per annum at June 30, 2006, which fee will increase to 1.00% per annum in December 2006 for the duration of the delayed draw period.

 

Under our most restrictive indenture, we are permitted to incur up to $350 million in senior indebtedness, all of which was available to us as of June 30, 2006. Our indentures also permit us to incur additional indebtedness (senior or otherwise) in excess of the $350 million for debt refinancing, such as a portion of the Credit Facility that was used to refinance the remaining 9.25% senior subordinated notes outstanding in February 2005.

 

We may also incur additional indebtedness if, at the time the indebtedness is proposed to be incurred, our consolidated coverage ratio for a trailing four-quarter period on a pro forma basis (as defined in the indentures) would be at least 2.0 to 1.0. As of March 31, 2006, we achieved the required 2.0 to 1.0 coverage ratio. We had previously issued senior debt under the senior indebtedness basket. With the achievement of the 2:1 ratio, we have reclassified such debt as indebtedness incurred under the consolidated coverage ratio, thereby reinstating the ability to borrow the full amount allowed under the senior indebtedness basket. Our consolidated coverage ratio at June 30, 2006 continued to exceed 2.0 to 1.0.

 

The Credit Facility has customary restrictive financial covenants and capital spending limits, and other affirmative and negative covenants, which we were in compliance with as of June 30, 2006.

 

Note 8—Stockholders’ Equity

 

Common Stock: In early 2006, we consummated the public offering of 6.9 million newly issued common shares (including over-allotment shares) at $27.35 per share, resulting in net proceeds to us of approximately $179 million after underwriters’ fees and expenses, which funds will be used for general corporate purposes.

 

Shelf Registration: Also in early 2006, we filed an automatic shelf registration statement with the SEC, which registration statement was used to issue the 6.9 million shares of common stock. Such registration statement permits the issuance of debt, equity or other securities, and is not limited in the cumulative amount of securities to be issued over a three-year period. There can be no assurance, however, that we will be able to issue any additional securities on terms acceptable to us in future periods.

 

Note 9—Commitments and Contingencies

 

Redevelopment Agreement: In connection with our St. Louis City Project, we have a redevelopment agreement, which, among other things, commits us to: (a) invest at least $208 million to construct a gaming and multi-use facility; (b) invest, potentially with one or more development partners, a minimum of $50 million in residential housing, retail, or mixed-use developments in the City of St. Louis within five years of the opening of the casino and hotel; (c) pay, beginning after the facility opens, the City of St. Louis annual and other services fees; and, (d) pay penalties to the City of St. Louis if the project fails to open before certain future dates (such penalties could be as much as $1 million, unless the agreement is amended, based on the current construction schedule).

 

Lease and Development Agreement: In connection with our River City Project, we have a lease and development agreement, which, among other things, commits us to: (a) lease a parcel of land for 99 years (not including certain termination provisions) for annual rent of $4 million or 2.5% of adjusted gross receipts

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(whichever is greater, as defined in the lease agreement) commencing on the date the project opens; (b) invest a minimum of $300 million to construct a gaming and multi-use facility; (c) construct a combination retail, commercial and/or entertainment facility within three years of the casino opening; (d) construct additional community and recreational facilities; (e) construct a roadway into the facility; (f) remediate the 56-acre site, with lease termination provisions for our benefit if the cost exceeds a certain amount; and (g) pay penalties if the project fails to open prior to certain future dates.

 

In May 2005, we deposited $2.5 million into escrow pursuant to the lease and development agreement. We anticipate amending the lease and development agreement to, among other things, reduce the contractual rent obligations in the first twelve months of operations by approximately $2.5 million and release the $2.5 million held in escrow to St. Louis County.

 

President Riverboat Casino: In July 2006, we launched a tender offer for all the outstanding 13% senior exchange notes and 12% notes of President Casinos, Inc., parent company of the entity that owns the President Casino—St. Louis riverboat casino. If fully subscribed, and combined with a concurrent offer for general unsecured claims, we would pay approximately $62.6 million to acquire substantially all of the debt of this entity. The holders of more than 82% of the principal amount of the bonds have agreed to tender and not withdraw from our offer. The tender offer provides for an early tender process once those holders have tendered their bonds. As previously disclosed, we agreed to purchase the riverboat casino for $31.5 million through a bankruptcy proceeding. According to reports filed with the bankruptcy court, as of May 31, 2006, the riverboat subsidiary had cash balances of approximately $29 million and post-petition liabilities of approximately $6 million. The holders of the bonds, which should include us with a super-majority position, are expected to receive a large portion of the distribution to creditors in the final plan of reorganization. The completion of the acquisition of the operating entity is subject to several approvals by the MGC, as well as the implementation of a bankruptcy-court reorganization plan.

 

Pennsylvania Gaming Application: As noted above, we submitted a bid for the development of a slots-only casino in Philadelphia, Pennsylvania, and posted a $50 million irrevocable letter of credit for the benefit of the PGCB. The letter of credit posted will be drawn upon by the PGCB only in the event we are awarded a gaming license and we do not pay the $50 million licensing fee within approximately 10 days of the award.

 

Chilean Gaming Applications: As noted above, we have a bid for the development of a gaming site in Chile. The letter of credit posted for the project will be drawn upon by the Chilean government only in the event we are awarded a gaming license for the proposed location and do not fulfill our construction obligation.

 

Employment and Severance Agreements: We have entered into employment agreements with key employees, including our Chief Executive Officer (“CEO”), President, Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”) and General Counsel. These agreements (excluding the CEO) generally grant the employee the right to receive his or her annual salary for up to the balance of the employment agreement, plus extension of certain benefits and the immediate vesting of stock options, if the employee terminates his or her employment for good reason or we terminate the employee without cause (both as defined in the respective agreements). Upon certain events (including the employee’s termination of his or her employment after a diminution of his or her responsibilities or after our failure to pay a minimum bonus, or our termination of the employee) (each a “Severance Trigger”) following a change in control (as defined in the various agreements), the employee (excluding the CEO) is entitled to (i) a lump-sum payment equal to two times the largest annual salary and incentive compensation that was paid to the employee during the two years preceding the change in control (or in the case of the CFO and General Counsel, a lump-sum payment equal to their annual salary through the end of the term, or if the balance of the contract is less than one year, for one year), (ii) the extension of certain benefits for at least one year after termination, and (iii) the immediate vesting of the employee’s stock options. In

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

the case of the CEO, the amount of a lump-sum payment and term of extended benefits is dependent on various termination scenarios more fully described in the agreement filed by us in 2005. As of June 30, 2006, the maximum aggregate amount that would be paid to this group of 22 employees if a triggering event occurs, in every case following a change in control where applicable, is approximately $17.7 million.

 

Deferred Bonus Plan: In 2004, we established a deferred bonus plan in which a portion of an employee’s bonus is deferred and paid in three equal annual installments contingent on the individual remaining employed by the company. Payments are accelerated under certain circumstances, including death, disability and a change in control. We are expensing the deferred portion over the remaining service period. As of June 30, 2006, the deferred bonus commitment (inclusive of bonuses awarded and deferred for 2004 and 2005), which for example would have to be paid commensurate with a change in control, was approximately $2.6 million.

 

Directors Health and Medical Insurance Plan: In June 2006, the board of directors, subject to final documentation, approved a directors health and medical plan designed to provide health and medical insurance benefits comparable to those provided to corporate executives. To the extent that a covered individual has other insurance or medicare coverage, the benefits under the Company’s coverage would be supplemental to those otherwise provided. The plan terms have not been finalized at this time. We anticipate that the plan will cover directors and their dependents while the director is in office and provides life time benefits for those directors who leave the board after age 70 and their dependents and for directors who have at least three years of service at the time of a change of control and their dependents. At present three members of the board are the only directors over age 70.

 

Self Insurance: We self-insure various levels of general liability, property, workers’ compensation and medical coverage. Insurance reserves include accruals for estimated settlements for known claims, as well as accruals for estimates of claims not yet made, which are included in accrued compensation and other accrued liabilities on the condensed consolidated balance sheet.

 

Legal

 

Indiana State Sales Tax Dispute: The State of Indiana conducted a sales and use tax audit at our Belterra entity in 2001. In October 2002, we received a proposed assessment in the amount of approximately $3.1 million with respect to the Miss Belterra casino riverboat, including interest and a penalty. A protest was filed by us in December of 2002. On June 16, 2003, the Indiana Tax Court issued two favorable rulings for other taxpayers. On September 21, 2004, the Indiana Supreme Court reversed the Tax Court’s ruling with respect to one of those taxpayers. The other taxpayer settled its assessment with the State of Indiana. We believe that these cases do not apply to our case because of the different facts involved. The Indiana Department of Revenue (“IDR”) conducted an administrative hearing of our protest on March 24, 2006. On April 24, 2006, the IDR issued a Letter of Findings denying our protest with respect to almost the entire assessment. On May 23, 2006, we filed an appeal of the IDR’s findings with the Indiana Tax Court regarding a portion of the original assessment and conceded on a smaller portion (which amount was expensed in the 2006 first quarter). As of June 30, 2006, the disputed assessment, including estimated interest and penalties through such date, is approximately $2.7 million. We have not accrued for this matter at this time. Until such time as we settle this dispute, the assessment will increase due to ongoing interest costs.

 

Louisiana Use Tax Matter: The Department of Revenue for the State of Louisiana (“LDR”) filed suit against several licensees in that state, asserting that payments made to third parties on participating progressive slot machines are lease obligations and subject to a use tax. Our Bossier City property was served with two such suits in December 2002, relating to two separate tax audit periods and primarily relating to this progressive slots issue. In 2003, a federal bankruptcy court in a similar case involving a third-party casino ruled the vendor

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

relationship represents a service arrangement and therefore is not a taxable lease arrangement. The U.S. District Court affirmed the bankruptcy court decision. The LDR appealed the U.S. District Court decision and the 5th Circuit Court of Appeals ruled in favor of the taxpayer, holding that the payments under the agreements in that case are not taxable. In a decision rendered on August 25, 2005, and by judgment entered on September 27, 2005 the 19th Judicial District Court in the Parish of East Baton Rouge in another similar case reached the same conclusions reached by the bankruptcy court as affirmed by the District Court and the Fifth Circuit Court of Appeals. On August 29, 2005, we were informed by the LDR that it will no longer pursue the progressive slots issue for the current audit cycle, and the LDR has conceded this issue in all pending litigation. On April 3, 2006, the 26th Judicial District Court dismissed one of the two matters with prejudice, as it involved only the progressive slot issue. We advised the LDR that we believe that we are also entitled to a dismissal of the LDR’s claim in the remaining lawsuit and the LDR has agreed but for a nominal sum allegedly owed that is unrelated to the progressive slot matter. We have agreed to pay a nominal $2,000 in return for which the LDR has agreed to dismiss the remaining lawsuit with prejudice.

 

Hubbard Litigation: In connection with the resignation of R.D. Hubbard as our Chairman in 2002 (“former Chairman”), we agreed to extend the exercise period for stock options (“subject options”) covering 322,000 shares held by the former Chairman with a weighted average exercise price of $10.60 per share provided that the Indiana Gaming Commission approved his exercise of these options as so extended. In December 2004, the former Chairman sought to exercise stock options (“specific options”) covering an aggregate of 185,000 of these shares (“requested option shares”). On January 21, 2005, the Indiana Gaming Commission advised us that it did not approve the former Chairman’s option exercise. On January 25, 2005, we filed an action seeking a declaratory judgment in the U.S. District Court for the Southern District of Indiana (“Indiana Action”), naming the former Chairman and the Indiana Gaming Commission as defendants, and requesting an order from the court determining whether the former Chairman is entitled to exercise the subject options and whether we are obligated to sell the former Chairman the requested option shares. On or about January 26, 2005, our former Chairman commenced litigation against us and our current Chairman by filing a Complaint in the Superior Court of the County of Riverside, California (“California Action”). The former Chairman, in that action, has asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, equitable estoppel and indemnity. The former Chairman seeks compensatory damages in an amount greater than $5 million and punitive damages based on our allegedly wrongful failure to sell to the former Chairman the requested option shares pursuant to the former Chairman’s attempted exercise of the specific options. In the California Action, we have removed the action from the state court in California to the United States District Court for the Central District of California. At the initial pretrial conference in the Indiana Action held on April 11, 2005, the parties agreed to stay both the Indiana Action and the California Action to help facilitate settlement negotiations and to allow the parties to participate in court-sponsored settlement discussions in the Indiana Action. The stay in the Indiana Action was lifted as of October 7, 2005. On November 16, 2005, we dismissed the Indiana Gaming Commission from the Indiana Action. On November 30, 2005, we dismissed the former Chairman from the Indiana Action. The stay was lifted in the California Action as of November 14, 2005. The parties are engaging in discovery, and trial is currently set for November 14, 2006. While the outcome of this litigation is uncertain, management intends to defend it vigorously.

 

In April 2006, 85,000 of the subject options expired under the original 10-year term of the option grant. Due to the litigation surrounding the extension of the remaining 237,000 subject options, we continue to include such subject options in the balance of our outstanding options as of June 30, 2006 disclosed in Note 2 above.

 

Columbia Sussex Litigation: On January 26, 2005, Columbia Sussex Corporation (“Columbia Sussex”) and three other plaintiffs filed a petition against the MGC and Casino One Corporation (“Casino One”), our wholly owned subsidiary, in the Circuit Court of Cole County, Missouri. At that time, Columbia Sussex had an agreement to purchase the President Casino—St. Louis, an existing bankrupt casino in downtown St. Louis that

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

is near our project now under construction. In addition to Columbia Sussex, named plaintiffs are Wimar Tahoe Corporation (a company related to Columbia Sussex), as an owner of property near the proposed Casino One site; President of Columbia Sussex William J. Yung, as a Missouri taxpayer; and Fred Dehner, a resident of Osage Beach, Missouri, as a registered Missouri voter and taxpayer. The City of St. Louis filed a motion to intervene as defendants in the case, which was granted by the Court on April 8, 2005. The plaintiffs sought to undo the MGC’s approval of Casino One’s docking site on the St. Louis riverfront under a claim for judicial review by original writ, declaratory judgment, writ of prohibition and appeal of the decision of the MGC to the Missouri Court of Appeals. The factual allegations for each claim were that the Commission could not grant approval to Casino One because the facility’s planned gaming floor is allegedly not within 1,000 feet of the main channel of the Mississippi River, as required under the Missouri constitution.

 

On March 7, 2005, the Defendants filed a motion to dismiss this lawsuit on the grounds that the court lacks subject matter jurisdiction over decisions of the MGC. On April 8, 2005, the court granted Defendants’ motion and dismissed the suit. On May 11, 2005, the plaintiffs filed an appeal of the April 8, 2005 decision of the Circuit Court of Cole County, Missouri. On September 28, 2005, the plaintiffs filed a motion for an extension of time until October 18, 2005 to file an appellate brief in the matter.

 

On April 18, 2005, the plaintiffs filed a petition with the Missouri Court of Appeals Western District, seeking a hearing and de novo review of the MGC’s approval of Casino One’s docking site. On August 8, 2005, plaintiffs filed a motion to consolidate the case with the appeal of the decision of the Circuit Court of Cole County, Missouri. The Court denied plaintiffs’ motion on August 18, 2005. On September 13, 2005, plaintiffs filed a motion to stay or, alternatively, for appointment of a special master pending resolution of the appeal of the decision of the Circuit Court of Cole County, Missouri. On September 27, 2005, the Court of Appeals ruled that the briefing schedule in the April 18, 2005 petition is to be stayed pending the Court of Appeals’ opinion in the appeal of the decision of the Circuit Court of Cole County, Missouri.

 

On October 25, 2005, the bankrupt casino indicated publicly that Columbia Sussex had withdrawn its application for licensure in Missouri related to its planned purchase of such facility. Following the withdrawal of its application, Columbia Sussex then terminated its agreement to purchase the President Casino. The bankrupt casino company then moved to intervene in both appeals which motion has been denied by the Court of Appeals. The appeal of the decision of the Circuit Court of Cole County dismissing that case for lack of subject matter jurisdiction has been fully briefed by the City of St. Louis, the Missouri Gaming Commission and by us. The direct appeal from the decision of the Missouri Gaming Commission remains stayed pending a resolution of the appeal of the Cole County decision. The appeal of the Cole County decision was argued before a three judge panel of the Court of Appeals on February 9, 2006. On April 25, 2006 the Missouri Court of Appeals upheld the lower court’s dismissal of the lawsuit. The Court agreed with our position that plaintiff had no standing to sue. On May 9, 2006, plaintiffs filed a Motion for Rehearing or Rehearing En Banc in the Court of Appeals. Plaintiffs also filed in the Court of Appeals an application to transfer the case to the Missouri Supreme Court (“Motions”). On May 30, 2006, the Motions were denied by the Court of Appeals. On June 14, 2006, Plaintiffs filed in the Missouri Supreme Court an Application for Transfer of the case from the Missouri Court of Appeals to the Missouri Supreme Court. It is uncertain whether the relief requested by plaintiffs will be granted but if we are requested by the Missouri Supreme Court to file an opposition, we will oppose plaintiffs’ requests vigorously.

 

The stay in the Court of Appeals relating to plaintiffs’ seeking of a hearing and de novo review of the Missouri Gaming Commission’s approval of Casino One’s docking site has not yet been lifted. While the outcome of this litigation is uncertain, management intends to defend it vigorously.

 

After Columbia Sussex terminated its agreement to purchase the President Casino—St. Louis, the bankrupt entity scheduled a new auction for May 16, 2006 to sell the facility. We entered into a purchase agreement with

 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

the bankrupt entity to acquire the President Casino—St. Louis for $31.5 million (the “Pinnacle Agreement”). The purchase price agreed to in the Pinnacle Agreement served as the opening bid at the auction and was subject to potential overbids by third parties. No other bids were received at the auction and, on May 26, 2006, the bankruptcy court entered an order approving the Pinnacle Agreement. However, the sale of the President Casino—St. Louis will not become final until a plan of reorganization incorporating the Pinnacle Agreement is confirmed by the bankruptcy court. As noted above, in connection with a tender offer we launched in July 2006, we anticipate owning a majority of the outstanding bonds of President Casinos, Inc. Although we cannot be certain, we anticipate that the confirmation of a plan of reorganization incorporating the Pinnacle Agreement will occur in the fall of 2006.

 

Action by Greek Authorities: Prior to our acquisition of Casino Magic Corp. in 1998, Casino Magic had a Greek subsidiary that conducted gaming-related operations in Greece in 1995 and 1996. By the time of our acquisition of Casino Magic, that Greek subsidiary had become inactive. The Greek taxing authorities assessed penalties against the subsidiary and against certain former representatives of the Greek subsidiary arising out of its pre-acquisition activities and such representatives were also prosecuted and convicted in absentia. We defended those former representatives, one of whom was then a director of our company and one of whom was then an employee of our company. Their criminal convictions were overturned by a Greek court in 2003. In October 2005, we learned that the Greek taxing authorities had commenced a new proceeding against the former employee and another former representative of the Greek subsidiary seeking to collect fines and assessments of approximately $6.7 million from these individuals stemming from their status as representatives of the Greek subsidiary. Some or all of the fines and assessments involved in this new action relate to the penalties originally assessed against the Greek subsidiary. We are obligated to indemnify the former employee and have retained counsel to defend him in this current action. The other former representative is now deceased.

 

Insurance Litigation: On August 1, 2006, we filed suit in the United States District Court for the District of Nevada against three of our excess insurance carriers. The suit relates to the loss incurred by us as a result of Hurricane Katrina at our Casino Magic property in Biloxi, Mississippi. Collectively, the three insurers provide $300 million of coverage, in excess of $100 million of coverage provided to us by other insurers. In total, our policies applicable to the Hurricane Katrina loss provide an aggregate of up to $400 million of coverage for loss caused by a weather catastrophe occurrence (as defined by the policies) and up to $100 million of inclusive coverage for loss caused by a flood occurrence. The three insurers are Allianz Global Risks US Insurance Company, Arch Specialty Insurance Company and RSUI Indemnity Company.

 

The suit alleges, among other things, that the defendants have improperly asserted that our losses were due to a flood occurrence as opposed to a weather catastrophe occurrence; that, after the close of the proposed sale of certain Casino Magic Biloxi assets to Harrah’s, we are not covered for any continued business interruption loss at Casino Magic Biloxi incurred after that sale; and that we are not entitled to designate our River City Project as a replacement for Casino Magic Biloxi. These positions, among others, taken by the insurers could materially reduce our recovery with respect to the claim.

 

The suit seeks damages equal to the outstanding amount of our claim (totaling $346.5 million, less the $100 million previously paid or anticipated to be paid in the near future). It also seeks declarations that our River City Project constitutes a permissible replacement property under the applicable policies and that we are entitled to receive the full amount of our Casino Magic Biloxi business interruption loss arising out of Hurricane Katrina, even though we are in the process of selling the Casino Magic Biloxi site and certain related assets to Harrah’s. Our insurance policies permit a “replacement facility” to be built anywhere in the United States. Finally, the suit seeks unspecified punitive damages for the improper actions of the defendants in connection with our claim.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We anticipate that any negotiated or litigated resolution of our insurance claim will be protracted. Although the River City Project is expected to cost more than it would have to repair/ rebuild Casino Magic Biloxi, recovery under the policies is nevertheless limited to the lesser of what would have been the cost to repair/ rebuild Casino Magic or the actual cost incurred in constructing the River City Project.

 

Other: We are party to a number of other pending legal proceedings, Management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on our financial position, cash flows or results of operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 10—Consolidating Condensed Financial Information

 

Our subsidiaries (excluding Casino Magic Argentina and certain non-material subsidiaries) have fully and unconditionally and jointly and severally guaranteed the payment of all obligations under the 8.25% Notes and 8.75% Notes. Separate financial statements and other disclosures regarding the subsidiary guarantors are not included herein. In lieu thereof we include the following:

 

    Pinnacle
Entertainment,
Inc.


    Wholly Owned
Guarantor
Subsidiaries(a)


    Wholly Owned
Non-
Guarantor
Subsidiaries(b)


    Consolidating
and
Eliminating
Entries


    Pinnacle
Entertainment,
Inc.
Consolidated


 

As of June 30, 2006

                                       

Balance Sheet

                                       

Current assets

  $ 309,324     $ 149,706     $ 4,549     $ 0     $ 463,579  

Property and equipment, net

    72,469       791,126       17,156       0       880,751  

Other non-current assets

    56,338       84,860       1,169       10,851       153,218  

Investment in subsidiaries

    522,401       12,552       0       (534,953 )     0  

Inter-company

    474,061       7,875       0       (481,936 )     0  
   


 


 


 


 


    $ 1,434,593     $ 1,046,119     $ 22,874     $ (1,006,038 )   $ 1,497,548  
   


 


 


 


 


Current liabilities

  $ 59,530     $ 76,285     $ 3,303     $ 0     $ 139,118  

Notes payable, long term

    636,251       1,089       0       0       637,340  

Other non-current liabilities

    61,575       (160 )     0       (12,206 )     49,209  

Inter-company

    5,284       469,633       7,019       (481,936 )     0  

Equity

    671,953       499,272       12,552       (511,896 )     671,881  
   


 


 


 


 


    $ 1,434,593     $ 1,046,119     $ 22,874     $ (1,006,038 )   $ 1,497,548  
   


 


 


 


 


For the three months ended June 30, 2006

                                       

Statement of Operations

                                       

Revenues:

                                       

Gaming

  $ 0     $ 188,802     $ 5,877     $ 0     $ 194,679  

Food and beverage

    0       11,187       606       0       11,793  

Equity in subsidiaries

    32,214       916       0       (33,130 )     0  

Other

    1       22,357       0       0       22,358  
   


 


 


 


 


      32,215       223,262       6,483       (33,130 )     228,830  
   


 


 


 


 


Expenses:

                                       

Gaming

    0       106,773       1,788       0       108,561  

Food and beverage

    0       10,173       873       0       11,046  

Administrative and other

    13,540       48,051       1,318       0       62,909  

Depreciation and amortization

    240       16,103       620       0       16,963  
   


 


 


 


 


      13,780       181,100       4,599       0       199,479  
   


 


 


 


 


Operating income (loss)

    18,435       42,162       1,884       (33,130 )     29,351  

Merger termination proceeds, net of expenses

    44,821       0       0       0       44,821  

Interest (expense) income, net

    (10,473 )     455       (69 )     0       (10,087 )
   


 


 


 


 


Income (loss) before inter-company activity, taxes and discontinued operations

    52,783       42,617       1,815       (33,130 )     64,085  

Management fee & inter-company interest (expense) income

    10,613       (10,522 )     (91 )     0       0  

Income tax (expense) benefit

    (24,596 )     15       (808 )     0       (25,389 )
   


 


 


 


 


Income (loss) from continuing operations

    38,800       32,110       916       (33,130 )     38,696  

Income from discontinued operations, net of taxes

    7,207       104       0       0       7,311  
   


 


 


 


 


Net income (loss)

  $ 46,007     $ 32,214     $ 916     $ (33,130 )   $ 46,007  
   


 


 


 


 


 

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PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    Pinnacle
Entertainment,
Inc.


    Wholly Owned
Guarantor
Subsidiaries(a)


    Wholly Owned
Non-
Guarantor
Subsidiaries(b)


    Consolidating
and
Eliminating
Entries


    Pinnacle
Entertainment,
Inc.
Consolidated


 

For the three months ended June 30, 2005

                                       

Statement of Operations

                                       

Revenues:

                                       

Gaming

  $ 0     $ 123,557     $ 4,369     $ 0     $ 127,926  

Food and beverage

    0       8,457       323       0       8,780  

Equity in subsidiaries

    5,983       664       0       (6,647 )     0  

Other

    0       14,837       0       0       14,837  
   


 


 


 


 


      5,983       147,515       4,692       (6,647 )     151,543  
   


 


 


 


 


Expenses:

                                       

Gaming

    0       73,042       1,268       0       74,310  

Food and beverage

    0       7,813       418       0       8,231  

Administrative and other

    7,652       47,430       1,054       0       56,136  

Depreciation and amortization

    199       11,520       133       0       11,852  
   


 


 


 


 


      7,851       139,805       2,873       0       150,529  
   


 


 


 


 


Operating income (loss)

    (1,868 )     7,710       1,819       (6,647 )     1,014  

Loss on early extinguishment of debt

    28       0       0       0       28  

Interest (expense) income, net

    (12,793 )     3,392       6       0       (9,395 )
   


 


 


 


 


Income (loss) before inter-company activity, taxes and discontinued operations

    (14,633 )     11,102       1,825       (6,647 )     (8,353 )

Management fee & inter-company interest (expense) income

    6,421       (6,331 )     (90 )     0       0  

Income tax (expense) benefit

    3,342       0       (1,071 )     0       2,271  
   


 


 


 


 


Income (loss) from continuing operations

    (4,870 )     4,771       664       (6,647 )     (6,082 )

Income from discontinued operations, net of taxes

    692       1,212       0       0       1,904  
   


 


 


 


 


Net income (loss)

  $ (4,178 )   $ 5,983     $ 664     $ (6,647 )   $ (4,178 )
   


 


 


 


 


For the six months ended June 30, 2006

                                       

Statement of Operations

                                       

Revenues:

                                       

Gaming

  $ 0     $ 388,393     $ 11,650     $ 0     $ 400,043  

Food and beverage

    0       21,309       1,124       0       22,433  

Equity in subsidiaries

    68,513       2,200       0       (70,713 )     0  

Other

    26       40,468       0       0       40,494  
   


 


 


 


 


      68,539       452,370       12,774       (70,713 )     462,970  
   


 


 


 


 


Expenses:

                                       

Gaming

    0       218,823       3,442       0       222,265  

Food and beverage

    0       19,629       1,745       0       21,374  

Administrative and other

    25,407       90,936       2,614       0       118,957  

Depreciation and amortization

    443       31,810       1,116       0       33,369  
   


 


 


 


 


      25,850       361,198       8,917       0       395,965  
   


 


 


 


 


Operating income (loss)

    42,689       91,172       3,857       (70,713 )     67,005  

Merger termination proceeds, net of expenses

    44,821       0       0       0       44,821  

Interest (expense) income, net

    (22,463 )     787       (41 )     0       (21,717 )
   


 


 


 


 


Income (loss) before inter-company activity, taxes and discontinued operations

    65,047       91,959       3,816       (70,713 )     90,109  

Management fee & inter-company interest (expense) income

    20,844       (20,667 )     (177 )     0       0  

Income tax (expense) benefit

    (34,577 )     28       (1,439 )     0       (35,988 )
   


 


 


 


 


Income (loss) from continuing operations

    51,314       71,320       2,200       (70,713 )     54,121  

Income from discontinued operations, net of taxes

    8,167       (2,807 )     0       0       5,360  
   


 


 


 


 


Net income (loss)

  $ 59,481     $ 68,513     $ 2,200     $ (70,713 )   $ 59,481  
   


 


 


 


 


 

24


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    Pinnacle
Entertainment,
Inc.


    Wholly Owned
Guarantor
Subsidiaries(a)


    Wholly Owned
Non-
Guarantor
Subsidiaries(b)


    Consolidating
and
Eliminating
Entries


    Pinnacle
Entertainment,
Inc.
Consolidated


 

For the six months ended June 30, 2005

                                       

Statement of Operations

                                       

Revenues:

                                       

Gaming

  $ 0     $ 219,311     $ 8,350     $ 0     $ 227,661  

Food and beverage

    0       14,272       642       0       14,914  

Equity in subsidiaries

    16,344       1,757       0       (18,101 )     0  

Other

    0       24,461       0       0       24,461  
   


 


 


 


 


      16,344       259,801       8,992       (18,101 )     267,036  
   


 


 


 


 


Expenses:

                                       

Gaming

    0       130,346       2,347       0       132,693  

Food and beverage

    0       13,177       780       0       13,957  

Administrative and other

    14,278       77,258       2,021       0       93,557  

Depreciation and amortization

    388       21,265       357       0       22,010  
   


 


 


 


 


      14,666       242,046       5,505       0       262,217  
   


 


 


 


 


Operating income (loss)

    1,678       17,755       3,487       (18,101 )     4,819  

Loss on early extinguishment of debt

    (1,419 )     0       0       0       (1,419 )

Interest (expense) income, net

    (25,322 )     6,629       8       0       (18,685 )
   


 


 


 


 


Income (loss) before inter-company activity, taxes and discontinued operations

    (25,063 )     24,384       3,495       (18,101 )     (15,285 )

Management fee & inter-company interest (expense) income

    10,903       (10,813 )     (90 )     0       0  

Income tax (expense) benefit

    6,376       0       (1,648 )     0       4,728  
   


 


 


 


 


Income (loss) from continuing operations

    (7,784 )     13,751       1,757       (18,101 )     (10,557 )

Income from discontinued operations, net of taxes

    1,375       2,773       0       0       4,148  
   


 


 


 


 


Net income (loss)

  $ (6,409 )   $ 16,344     $ 1,757     $ (18,101 )   $ (6,409 )
   


 


 


 


 


For the six months ended June 30, 2006

                                       

Statement of Cash Flows

                                       

Net cash provided by (used in) operating activities

  $ 103,392     $ (5,574 )   $ 2,210     $ 0     $ 100,028  

Net cash provided by (used in) investing activities

    (25,728 )     (8,820 )     (1,153 )     0       (35,701 )

Net cash provided by (used in) financing activities

    160,232       (67 )     0       0       160,165  

Effect of exchange rate changes on cash

    0       (13 )     149       0       136  

For the six months ended June 30, 2005

                                       

Statement of Cash Flows

                                       

Net cash provided by (used in) operating activities

  $ (150,496 )   $ 166,925     $ 4,146     $ 0     $ 20,575  

Net cash provided by (used in) investing activities

    75,668       (132,598 )     (6,851 )     0       (63,781 )

Net cash provided by financing activities

    2,836       39       0       0       2,875  

Effect of exchange rate changes on cash

    0       0       (134 )     0       (134 )

 

25


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    Pinnacle
Entertainment,
Inc.


  Wholly Owned
Guarantor
Subsidiaries(a)


  Wholly Owned
Non-
Guarantor
Subsidiaries(b)


  Consolidating
and
Eliminating
Entries


    Pinnacle
Entertainment,
Inc.
Consolidated


As of December 31, 2005

                               

Balance Sheet

                               

Current assets

  $ 65,092   $ 144,203   $ 4,685   $ 0     $ 213,980

Property and equipment, net

    33,758     838,942     17,618     0       890,318

Other non-current assets

    56,590     71,922     1,216     10,851       140,579

Investment in subsidiaries

    522,001     10,912     0     (532,913 )     0

Inter-company

    489,100     2,685     0     (491,785 )     0
   

 

 

 


 

    $ 1,166,541   $ 1,068,664   $ 23,519   $ (1,013,847 )   $ 1,244,877
   

 

 

 


 

Current liabilities

  $ 51,117   $ 87,035   $ 4,880   $ 0     $ 143,032

Notes payable, long term

    656,372     1,162     0     0       657,534

Other non-current liabilities

    28,553     150     0     (12,206 )     16,497

Inter-company

    2,685     481,373     7,727     (491,785 )     0

Equity

    427,814     498,944     10,912     (509,856 )     427,814
   

 

 

 


 

    $ 1,166,541   $ 1,068,664   $ 23,519   $ (1,013,847 )   $ 1,244,877
   

 

 

 


 


(a) The following material subsidiaries are treated as guarantors of the 8.25% Notes and 8.75% Notes: Belterra Resort Indiana LLC, Boomtown, LLC, PNK (Reno), LLC, Louisiana—I Gaming, PNK (Lake Charles), LLC, Casino Magic Corp., Biloxi Casino Corp., PNK (Bossier City), Inc. and Casino One Corporation. HP/Compton, Inc. and Crystal Park Hotel and Casino Development Company, LLC were guarantors through March 2006.
(b) Our only material non-guarantors of the 8.25% Notes and 8.75% Notes are Casino Magic Neuquen S.A. and its subsidiary Casino Magic Support Services.

 

26


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 11—Segment Information

 

As noted above, we opened The Casino at Emerald Bay in the Bahamas in May 2006. We have combined its operations, including its pre-opening and development costs, with the results of our other international operation, Casino Magic Argentina, and renamed the segment “International.”

 

The following table reconciles our segment activity to our condensed consolidated results of operations for the three and six months ended June 30, 2006 and 2005.

 

    

For the three months

ended June 30,


   

For the six months

ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands)  

Revenues and expenses

                                

Boomtown New Orleans

                                

Revenues

   $ 52,042     $ 28,601     $ 115,239     $ 58,608  

Expenses, excluding depreciation and amortization

     (30,425 )     (20,502 )     (63,924 )     (41,160 )

Depreciation and amortization

     (2,028 )     (1,733 )     (3,999 )     (3,442 )
    


 


 


 


Net operating income—Boomtown New Orleans

   $ 19,589     $ 6,366     $ 47,316     $ 14,006  
    


 


 


 


L’Auberge du Lac

                                

Revenues

   $ 77,594     $ 29,448     $ 157,266     $ 29,448  

Expenses, excluding pre-opening costs and depreciation and amortization

     (59,934 )     (21,587 )     (122,230 )     (21,587 )

Pre-opening costs

     0       (15,933 )     0       (21,081 )

Depreciation and amortization

     (6,295 )     (1,727 )     (12,546 )     (1,808 )
    


 


 


 


Net operating income (loss)—L’Auberge du Lac

   $ 11,365     $ (9,799 )   $ 22,490     $ (15,028 )
    


 


 


 


Belterra Casino Resort

                                

Revenues

   $ 42,901     $ 42,595     $ 83,257     $ 82,246  

Expenses, excluding depreciation and amortization

     (32,685 )     (31,925 )     (64,169 )     (62,855 )

Depreciation and amortization

     (3,610 )     (4,728 )     (7,165 )     (9,311 )
    


 


 


 


Net operating income—Belterra Casino Resort

   $ 6,606     $ 5,942     $ 11,923     $ 10,080  
    


 


 


 


Boomtown Bossier City

                                

Revenues

   $ 23,918     $ 23,528     $ 49,337     $ 48,233  

Expenses, excluding depreciation and amortization

     (17,872 )     (18,651 )     (35,858 )     (37,970 )

Depreciation and amortization

     (2,019 )     (1,756 )     (3,959 )     (3,508 )
    


 


 


 


Net operating income—Boomtown Bossier City

   $ 4,027     $ 3,121     $ 9,520     $ 6,755  
    


 


 


 


Boomtown Reno

                                

Revenues

   $ 22,520     $ 22,679     $ 39,398     $ 39,509  

Expenses, excluding depreciation and amortization

     (20,356 )     (19,857 )     (37,072 )     (36,298 )

Depreciation and amortization

     (1,592 )     (1,576 )     (3,129 )     (3,196 )
    


 


 


 


Net operating income (loss)—Boomtown Reno

   $ 572     $ 1,246     $ (803 )   $ 15  
    


 


 


 


International

                                

Revenues

   $ 6,609     $ 4,692     $ 12,900     $ 8,992  

Expenses, excluding pre-opening costs and depreciation and amortization

     (4,408 )     (2,613 )     (8,175 )     (5,021 )

Pre-opening costs

     (396 )     (129 )     (570 )     (177 )

Depreciation and amortization

     (726 )     (133 )     (1,222 )     (357 )
    


 


 


 


Net operating income—International

   $ 1,079     $ 1,817     $ 2,933     $ 3,437  
    


 


 


 


 

27


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    

For the three months

ended June 30,


   

For the six months

ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands)  

Embassy Suites and other

                                

Revenues

   $ 3,246     $ 0       5,573     $ 0  

Expenses, excluding depreciation and amortization

     (2,629 )     0       (4,841 )     0  

Depreciation and amortization

     (453 )     0       (906 )     0  
    


 


 


 


Net operating income (loss)—Embassy Suites

   $ 164     $ 0       (174 )   $ 0  
    


 


 


 


Total Reportable Segments

                                

Revenues

   $ 228,830     $ 151,543     $ 462,970     $ 267,036  

Expenses, excluding pre-opening costs and depreciation and amortization

     (168,309 )     (115,135 )     (336,269 )     (204,891 )

Segment pre-opening costs

     (396 )     (16,062 )     (570 )     (21,258 )

Depreciation and amortization

     (16,723 )     (11,653 )     (32,926 )     (21,622 )
    


 


 


 


Net operating income—Total Reportable Segments

   $ 43,402     $ 8,693     $ 93,205     $ 19,265  
    


 


 


 


Reconciliation to Income (Loss) from Continuing Operations Before Taxes

                                

Total net operating income for reportable segments

   $ 43,402     $ 8,693     $ 93,205     $ 19,265  

Unallocated income and expenses:

                                

Corporate expense

     (7,463 )     (6,374 )     (15,730 )     (11,737 )

Other pre-opening and development costs (a)

     (6,588 )     (1,305 )     (10,470 )     (2,709 )

Merger termination proceeds, net of expenses

     44,821       0       44,821       0  

Loss on early extinguishment of debt

     0       28       0       (1,419 )

Interest income

     3,463       742       5,968       1,938  

Interest expense, net of capitalized interest

     (13,550 )     (10,137 )     (27,685 )     (20,623 )
    


 


 


 


Income (loss) from continuing operations before income taxes

   $ 64,085     $ (8,353 )   $ 90,109     $ (15,285 )
    


 


 


 



(a) Includes St. Louis project pre-opening and development costs of approximately $4.7 million and $7.7 million for the three and six months ended June 30, 2006, respectively, and approximately $1.1 million and $2.4 million for the three and six months ended June 30, 2005, respectively.

 

     For the three months
ended June 30,


    For the six months
ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands)  

EBITDA (a)

                                

Boomtown New Orleans

   $ 21,617     $ 8,099     $ 51,315     $ 17,448  

L’Auberge du Lac (b)

     17,660       (8,072 )     35,036       (13,220 )

Belterra Casino Resort

     10,216       10,670       19,088       19,391  

Boomtown Bossier City

     6,046       4,877       13,479       10,263  

Boomtown Reno

     2,164       2,822       2,326       3,211  

International (c)

     1,805       1,950       4,155       3,794  

Embassy Suites and other

     617       0       732       0  

Corporate

     (7,223 )     (6,175 )     (15,287 )     (11,349 )

Other pre-opening and development costs

     (6,588 )     (1,305 )     (10,470 )     (2,709 )
    


 


 


 


     $ 46,314     $ 12,866     $ 100,374     $ 26,829  
    


 


 


 


 

28


Table of Contents

PINNACLE ENTERTAINMENT, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 


(a) We define EBITDA as earnings before interest expense and interest income, income taxes, depreciation, amortization, merger termination proceeds, discontinued operations and loss on early extinguishment of debt. We use EBITDA as a relevant and useful measure to compare operating results among its properties and between accounting periods. The presentation of EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business segments. EBITDA is specifically relevant in evaluating large, long-lived hotel casino projects because it provides a perspective on the current effects of operating decisions separated from the substantial, non-operational depreciation charges and financing costs of such projects. Management eliminates the results from discontinued operations as they are discontinued and also eliminates merger termination proceeds due to their non-recurring nature. Additionally, management believes some investors consider EBITDA to be a useful measure in determining a company’s ability to service or incur indebtedness and for estimating a company’s underlying cash flows from operations before capital costs, taxes and capital expenditures. EBITDA, subject to certain adjustments, is also a measure used in debt covenants in our debt agreements. Unlike net income, EBITDA does not include depreciation or interest expense and therefore does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using EBITDA as only one of several comparative tools, together with the common GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income (loss), net income (loss), cash flows from operations and cash flow data. EBITDA is not calculated in the same manner by all companies and accordingly, may not be an appropriate measure of comparing performance among different companies. The following table is a reconciliation of net income to EBITDA:

 

     For the three months
ended June 30,


    For the six months
ended June 30,


 
     2006

    2005

    2006

    2005

 
     (in thousands)  

Net income (loss)

   $ 46,007     $ (4,178 )   $ 59,481     $ (6,409 )

Income from discontinued operations, net of taxes

     (7,311 )     (1,904 )     (5,360 )     (4,148 )
    


 


 


 


Income (loss) from continuing operations

     38,696       (6,082 )     54,121       (10,557 )

Income tax expense (benefit)

     25,389       (2,271 )     35,988       (4,728 )
    


 


 


 


Income (loss) from continuing operations before income taxes

     64,085       (8,353 )     90,109       (15,285 )

Merger termination proceeds, net of expenses

     (44,821 )     0       (44,821 )     0  

Loss on early extinguishment of debt

     0       (28 )     0       1,419  

Interest expense, net of capitalized interest and interest income

     10,087       9,395       21,717       18,685  
    


 


 


 


Operating income

     29,351       1,014       67,005       4,819  

Depreciation and amortization

     16,963       11,852       33,369