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Pinnacle Entertainment, Inc. 10-Q 2010

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)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
     
o   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 or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
8918 Spanish Ridge Avenue
Las Vegas, NV 89148
(Address of principal executive offices) (Zip Code)
(702) 541-7777
(Registrant’s telephone number, including area code)
N/A
(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 such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
As of the close of business on November 5, 2010, the number of outstanding shares of the registrant’s common stock was 61,417,398.
 
 

 

 


 

PINNACLE ENTERTAINMENT, INC.
TABLE OF CONTENTS
         
PART I
 
       
    3  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    24  
 
       
    24  
 
       
    25  
 
       
    32  
 
       
    35  
 
       
    36  
 
       
    36  
 
       
    38  
 
       
    39  
 
       
PART II
 
       
    40  
 
       
    40  
 
       
    41  
 
       
    42  
 
       
 Exhibit 11
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

 


Table of Contents

PART I
Item 1. Financial Statements
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                                 
    For the three months     For the nine months  
    ended September 30,     ended September 30,  
    2010     2009     2010     2009  
    (in thousands, except per share data)  
Revenues:
                               
Gaming
  $ 246,776     $ 214,513     $ 713,640     $ 655,202  
Food and beverage
    18,764       15,221       51,851       44,636  
Lodging
    11,637       10,769       30,268       28,992  
Retail, entertainment and other
    10,614       10,050       28,161       27,265  
 
                       
 
    287,791       250,553       823,920       756,095  
 
                       
Expenses and other costs:
                               
Gaming
    139,944       130,177       405,336       386,210  
Food and beverage
    18,176       14,515       52,021       43,276  
Lodging
    6,324       6,185       17,370       17,836  
Retail, entertainment and other
    6,062       6,090       16,471       15,839  
General and administrative
    58,355       54,580       173,839       164,188  
Depreciation and amortization
    28,528       24,408       83,762       73,974  
Pre-opening and development costs
    1,201       5,863       12,171       12,851  
Impairment of indefinite-lived intangible assets
                11,500        
Impairment of land and construction costs
    4,773             23,164        
Write-downs, reserves and recoveries, net
    345       314       (4,033 )     1,069  
 
                       
 
    263,708       242,132       791,601       715,243  
 
                       
Operating income
    24,083       8,421       32,319       40,852  
Interest expense, net of capitalized interest
    (27,923 )     (18,656 )     (76,292 )     (51,146 )
Gain on sale of equity securities
                      12,914  
Loss on early extinguishment of debt
          (8,831 )     (1,852 )     (8,831 )
Other non-operating income
    68       18       227       166  
 
                       
Loss from continuing operations before income taxes
    (3,772 )     (19,048 )     (45,598 )     (6,045 )
Income tax benefit (expense)
    5,336       (461 )     7,387       (1,022 )
 
                       
Income (loss) from continuing operations
    1,564       (19,509 )     (38,211 )     (7,067 )
Income (loss) from discontinued operations, net of income taxes
    (2,330 )     (2,412 )     24,874       (9,215 )
 
                       
Net loss
  $ (766 )   $ (21,921 )   $ (13,337 )   $ (16,282 )
 
                       
Net loss per common share—basic
                               
Income (loss) from continuing operations
  $ 0.03     $ (0.33 )   $ (0.63 )   $ (0.12 )
Income (loss) from discontinued operations, net of income taxes
    (0.04 )     (0.04 )     0.41       (0.15 )
 
                       
Net loss per common share—basic
  $ (0.01 )   $ (0.37 )   $ (0.22 )   $ (0.27 )
 
                       
Net loss per common share—diluted
                               
Income (loss) from continuing operations
  $ 0.03     $ (0.33 )   $ (0.63 )   $ (0.12 )
Income (loss) from discontinued operations, net of income taxes
    (0.04 )     (0.04 )     0.41       (0.15 )
 
                       
Net loss per common share—diluted
  $ (0.01 )   $ (0.37 )   $ (0.22 )   $ (0.27 )
 
                       
Number of shares—basic
    61,128       60,070       60,654       60,048  
Number of shares—diluted
    61,128       60,070       60,654       60,048  
See accompanying notes to the unaudited Condensed Consolidated Financial Statements

 

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PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    September 30, 2010     December 31, 2009  
    (Unaudited)        
    (in thousands, except share data)  
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 228,440     $ 123,431  
Accounts receivable, net of allowance for doubtful accounts of $9,748 and $12,556
    15,700       13,756  
Inventories
    7,893       6,313  
Prepaid expenses and other assets
    19,117       15,412  
Assets of discontinued operations held for sale
    61,767       96,403  
 
           
Total current assets
    332,917       255,315  
Restricted cash
    6,452       7,149  
Land, buildings, riverboats and equipment: (Note 1)
               
Land and land improvements
    261,323       210,810  
Buildings, riverboats and improvements
    1,290,180       1,070,812  
Furniture, fixtures and equipment
    466,341       412,159  
Construction in progress
    23,985       304,353  
 
           
 
    2,041,829       1,998,134  
Less: accumulated depreciation
    (568,962 )     (498,159 )
 
           
 
    1,472,867       1,499,975  
Assets held for sale
          1,661  
Goodwill
    16,742       16,742  
Intangible assets, net (Note 1)
    18,517       30,017  
Other assets, net
    71,652       29,620  
Deferred taxes- non current
          3,377  
 
           
Total assets
  $ 1,919,147     $ 1,843,856  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 35,121     $ 71,987  
Accrued interest
    28,267       21,267  
Accrued compensation
    39,938       41,077  
Accrued taxes
    29,422       17,217  
Other accrued liabilities
    53,241       49,922  
Deferred income taxes
    1,274       1,274  
Current portion of long-term debt (Note 2)
    93       88  
Liabilities of discontinued operations held for sale
    6,490       36,754  
 
           
Total current liabilities
    193,846       239,586  
Long-term debt less current portion (Note 2)
    1,176,324       1,063,283  
Other long-term liabilities
    28,867       46,578  
Deferred income taxes
    5,913        
 
           
Total liabilities
    1,404,950       1,349,447  
Commitments and contingencies (Note 7)
               
Stockholders’ Equity
               
Preferred stock—$1.00 par value, 250,000 shares authorized, none issued or outstanding
           
Common stock—$0.10 par value, 61,417,398 and 60,079,686 shares outstanding, net of treasury shares
    6,343       6,209  
Additional paid in capital
    1,029,780       1,014,233  
Retained deficit
    (501,716 )     (488,379 )
Accumulated other comprehensive loss
    (120 )     (17,564 )
Treasury stock, at cost, for both periods 2,008,986 of treasury shares
    (20,090 )     (20,090 )
 
           
Total stockholders’ equity
    514,197       494,409  
 
           
 
  $ 1,919,147     $ 1,843,856  
 
           
See accompanying notes to the unaudited Condensed Consolidated Financial Statements

 

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PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                 
    For the nine months  
    ended September 30,  
    2010     2009  
    (in thousands)  
Cash flows from operating activities:
               
Net loss
  $ (13,337 )   $ (16,282 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    85,700       78,142  
Loss on disposal of assets
    1,619       595  
Impairment of indefinite-lived intangible assets
    11,500        
Impairment of land and construction costs
    23,164        
Impairment of buildings, riverboats, and equipment
    4,994       394  
Loss on early extinguishment of debt
          8,831  
Gain on sale of equity securities
          (12,914 )
Provision for bad debts
    83       1,431  
Amortization of debt issuance costs
    5,159       4,189  
Share-based compensation expense
    4,803       9,774  
Change in accrued taxes
    7,769       11,095  
Changes in operating assets and liabilities:
               
Receivables
    (418 )     2,954  
Prepaid expenses and other
    (5,174 )     (6,298 )
Other long-term assets
    (6,333 )     2,846  
Accounts payable
    (16,736 )     (2,330 )
Accrued compensation
    (903 )     2,442  
Accrued interest
    7,000       4,021  
Other accrued liabilities
    (1,565 )     3,315  
Other long-term liabilities
    (18,263 )     (769 )
 
           
Net cash provided by operating activities
    89,062       91,436  
 
           
Cash flows from investing activities:
               
Capital expenditures
    (123,509 )     (146,204 )
Change in restricted cash
    816       (52 )
Purchase of intangible assets
          (65 )
Proceeds from sale of equity securities
          23,674  
Proceeds from sale of property and equipment
    14,352       373  
Baton Rouge escrow deposit
    (25,000 )      
Net proceeds from sale of discontinued operations
    35,480        
 
           
Net cash used in investing activities
    (97,861 )     (122,274 )
 
           
Cash flows from financing activities:
               
Borrowings under credit facility
    165,379       80,299  
Repayments under credit facility
    (202,298 )     (232,066 )
Proceeds from issuance of 8.625% Notes
          443,687  
Proceeds from issuance of 8.75% Notes
    350,000        
Repayment of 8.75% Notes
          (129,438 )
Repayment of 8.25% Notes
    (200,000 )     (76,547 )
Payments on other secured and unsecured notes payable
    (9 )     (67 )
Proceeds from common stock options exercised
    9,627       553  
Proceeds from issuance of common stock
    1,068        
Debt issuance and other financing costs
    (15,169 )     (15,799 )
 
           
Net cash provided by financing activities
    108,598       70,622  
 
           
Effect of exchange rate changes on cash and cash equivalents
    (379 )     (575 )
 
           
Increase in cash and cash equivalents
    99,420       39,209  
Cash and cash equivalents at the beginning of the period
    129,576       115,712  
 
           
Cash and cash equivalents at the end of the period
  $ 228,996     $ 154,921  
 
           
Supplemental Cash Flow Information:
               
Cash paid for interest, net of amounts capitalized
  $ 63,940     $ 42,867  
Cash payments related to income taxes, net
    3,929       3,272  
Increase (decrease) in construction related deposits and liabilities
    (26,960 )     14,028  
See accompanying notes to the unaudited Condensed Consolidated Financial Statements

 

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PINNACLE ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Summary of Significant Accounting Policies
Basis of Presentation and Organization Pinnacle Entertainment, Inc. (“Pinnacle”) is an owner, operator and developer of casinos and related hospitality and entertainment facilities. We operate casinos 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); Reno, Nevada (“Boomtown Reno”) and St. Louis, Missouri (“River City Casino” and “Lumière Place Casino and Hotels”). We view each property as an operating segment, with the exception of our properties located in St. Louis, Missouri, which are aggregated into the “St. Louis” reporting segment. References in these footnotes to “Pinnacle,” the “Company,” “we,” “our” or “us” refer to Pinnacle Entertainment, Inc. and its subsidiaries, except where stated or the context otherwise indicates.
In the first quarter of 2010, we made the decision to sell our Argentina operations and our Atlantic City entities. In the second quarter of 2010, we completed the sale of our Argentina operations and closed our President Casino located in St. Louis, Missouri. We have classified the related assets and liabilities of all of these operations as held for sale in our unaudited Condensed Consolidated Balance Sheets and have included the results in discontinued operations. For further information, see Note 6, Discontinued Operations.
We are also developing a casino-hotel in Baton Rouge, Louisiana, which is subject to various regulatory approvals.
Principles of Consolidation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions of the Securities and Exchange Commission (“SEC”) to the Quarterly Report on Form 10-Q and, therefore, do not include all information and notes necessary for complete financial statements in conformity with the instructions for generally accepted accounting principles (“GAAP”) in the United States. The results for the periods indicated are unaudited, but reflect all adjustments that management considers necessary for a fair presentation of operating results. The unaudited Condensed Consolidated Financial Statements include the accounts of Pinnacle Entertainment, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for interim periods are not indicative of a full year of operations. These unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2009 and our Current Report on Form 8-K filed on June 21, 2010, including Exhibit 99.1 which was filed to update the historical financial statements included in the Company’s Form 10-K to reflect its Casino Magic Argentina operations and Atlantic City operations and related assets as held for sale for the year ended December 31, 2009 and the results of those operations as discontinued operations for all periods presented.
Use of Estimates The preparation of unaudited Condensed Consolidated Financial Statements in conformity with accounting principles used 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 consolidated financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Estimates used by us include, among other things, the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, estimated income tax provisions, the evaluation of the future realization of deferred tax assets, determining the adequacy of reserves for self-insured liabilities and mychoice customer rewards programs, estimated cash flows in assessing the recoverability of long-lived assets, asset impairments, goodwill and intangible assets, contingencies and litigation, and estimates of the forfeiture rate and expected life of share-based awards and stock price volatility when computing share-based compensation expense. Actual results may differ from those estimates.
Fair Value Effective January 1, 2008, we adopted the authoritative guidance for fair value measurements, which guidance provides companies the option to measure certain financial assets and liabilities at fair value with changes in fair value recognized in earnings each period. We have elected not to measure any financial assets and liabilities at fair value that were not previously required to be measured at fair value.

 

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Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
    Level 1: Quoted market prices in active markets for identical assets or liabilities.
    Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
    Level 3: Unobservable inputs that are not corroborated by market data.
We measure our liability for deferred compensation on a recurring basis. As of September 30, 2010, our liability had a balance of $1.7 million and was valued using Level 1 inputs.
Land, Buildings, Riverboats and Equipment Land, buildings, riverboats and equipment are stated at cost. Land includes land not currently being used in our operations, which totaled $45.9 million at September 30, 2010 and $45.3 million at December 31, 2009. We capitalize the costs of improvements that extend the life of the asset. Construction in progress at September 30, 2010 relates primarily to our Baton Rouge project. Interest expense is capitalized on internally constructed assets at our overall weighted average cost of borrowing.
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Depreciation expense
  $ 28.5     $ 24.4     $ 83.7     $ 74.0  
 
                               
Capitalized interest
  $ 0.1     $ 3.8     $ 3.6     $ 8.8  
In April 2010, we cancelled our planned Sugarcane Bay project in Lake Charles, Louisiana and surrendered the related gaming license to the Louisiana Gaming Control Board. In connection with this decision, we recorded an impairment charge of $18.6 million during the nine months ended September 30, 2010, which includes all previously capitalized construction in progress and costs to terminate the construction contract with the general contractor. We are still negotiating one additional contract and expect to incur additional contract termination costs, which amounts are not determinable as of September 30, 2010.
In September 2010, we expanded the scope and budget for our casino and hotel development currently under construction in Baton Rouge, Louisiana from $250 million to $357 million (excluding land acquisition costs and capitalized interest). As a result of the increased scope and budget of the Baton Rouge project, we incurred an impairment charge for certain of the previously capitalized design components of the project, totaling $4.6 million in the third quarter of 2010.
Goodwill and Other Intangible Assets Goodwill and other indefinite-lived intangible assets are subject to an annual assessment for impairment during the fourth quarter, or more frequently if there are indications of possible impairment, by applying a fair-value-based test. There were no impairments to goodwill during the three and nine months ended September 30, 2010 and 2009, respectively.
As the result of the cancellation of our planned Sugarcane Bay project in Lake Charles, Louisiana, we surrendered the related gaming license to the Louisiana Gaming Control Board. In connection with this decision, we fully impaired our gaming license by $11.5 million during the second quarter of 2010, which amount comprises impairment of indefinite-lived intangible assets in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010.

 

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Gaming Taxes We are subject to taxes based on gross gaming revenues in the jurisdictions in which we operate, subject to applicable jurisdictional adjustments. These gaming taxes are an assessment on our gaming revenues and are recorded as a gaming expense in the unaudited Condensed Consolidated Statements of Operations.
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Gaming taxes
  $ 73.2     $ 65.0     $ 212.2     $ 196.0  
Pre-opening and Development Costs Pre-opening and development costs are expensed as incurred, consistent with authoritative guidance. For the three and nine months ended September 30, 2010 and 2009, they consist of the following:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
River City
  $ 0.3     $ 2.1     $ 9.7     $ 4.9  
Baton Rouge
    0.3       2.8       0.7       5.5  
Sugarcane Bay (a)
    0.1       0.6       1.2       1.7  
Other
    0.5       0.4       0.6       0.8  
 
                       
Total pre-opening and development costs
  $ 1.2     $ 5.9     $ 12.2     $ 12.9  
 
                       
     
(a)   Sugarcane Bay expenses for the three months ended September 30, 2010 are related to the project termination.
Comprehensive Income (Loss) Our comprehensive income (loss) is as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
 
                               
Net loss
  $ (0.8 )   $ (21.9 )   $ (13.3 )   $ (16.3 )
Post-retirement plan benefit obligation, net of income taxes (a)
    0.2             0.4       0.9  
Foreign currency translation gain (loss) (b)
          (0.2 )     17.1       (2.4 )
 
                       
Comprehensive income (loss)
  $ (0.6 )   $ (22.1 )   $ 4.2     $ (17.8 )
 
                       
     
(a)   Included in the balance are benefit obligations related to both the executive deferred compensation plan and directors’ health and medical plan.
 
(b)   On June 30, 2010, we completed the sale of our Argentina operations.
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 issuance. We calculate the effect of dilutive securities using the treasury stock method. As of September 30, 2010 and 2009, our share-based awards issued under our stock option plans consisted primarily of common stock option grants. For the three and nine months ended September 30, 2010 and 2009, we recorded a net loss. Accordingly, the potential dilution from the assumed exercise of stock options is anti-dilutive. As a result, basic earnings per share is equal to diluted earnings per share.

 

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Recently Issued Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (the “FASB”) issued new authoritative guidance regarding disclosures about fair value measurements. An entity is now required to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements, and describe the reasons for the transfers and additional disclosure is required regarding purchases, sales, issuances and settlements of Level 3 measurements. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance did not have, and is not expected to have, a material effect on our unaudited Condensed Consolidated Financial Statements.
In April 2010, the FASB issued authoritative accounting guidance for companies that generate revenue from gaming activities that involve base jackpots, which guidance requires companies to accrue for a liability at the time the company has the obligation to pay the jackpot and record such obligation as a reduction of gaming revenue accordingly. The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2010. We are still assessing the impact this guidance will have on our unaudited Condensed Consolidated Financial Statements.
A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of any such proposed or revised standards would have on our unaudited Condensed Consolidated Financial Statements.
Note 2—Long-Term Debt
Long-term debt at September 30, 2010 and December 31, 2009 consists of the following:
                 
    September 30,     December 31,  
    2010     2009  
    (in millions)  
Senior Secured Credit Facility
  $     $ 36.9  
8.625% Senior Notes due 2017
    444.4       443.9  
8.25% Senior Subordinated Notes due 2012
          200.9  
7.50% Senior Subordinated Notes due 2015
    381.3       380.8  
8.75% Senior Subordinated Notes due 2020
    350.0        
Other secured and unsecured notes payable
    0.7       0.9  
 
           
 
    1,176.4       1,063.4  
Less current maturities
    (0.1 )     (0.1 )
 
           
 
  $ 1,176.3     $ 1,063.3  
 
           
Senior Secured Credit Facility: On February 5, 2010, we entered into an amended and restated credit agreement for a $375 million revolving credit facility (the “Credit Facility”), which matures on March 31, 2014. As of September 30, 2010, we had no borrowings outstanding under the Credit Facility, and had $9.6 million committed under letters of credit for various self-insurance programs.
In September 2010, we announced an expanded scope and budget for our Baton Rouge project. As a result of these revisions, on October 28, 2010, we amended our Credit Facility. We increased the capital expenditures limit for the Baton Rouge project from $235 million to $375 million. In addition, the definition of commencement of construction was amended, with respect to the Baton Rouge project, to provide the spending from and after January 1, 2010 of an amount greater than $100 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest). Prior to the amendment, the definition of commencement of construction for the Baton Rouge project provided the spending from and after January 1, 2010 of an amount greater than $25 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest).

 

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Loss on Early Extinguishment of Debt: During the nine months ended September 30, 2010, we incurred a loss on early extinguishment of debt of $1.9 million for the write off of unamortized debt issuance costs related to the modification of our Credit Facility and the early retirement of our 8.25% Senior Subordinated Notes due 2012 (the “8.25% Notes”).
8.75% Senior Subordinated Notes due 2020: On May 6, 2010, we closed an offering of $350 million in aggregate principal amount of new 8.75% senior subordinated notes due 2020 (the “8.75% Notes”). The 8.75% Notes were issued in a private offering conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, at a price equal to par. Net of the initial purchasers’ fees and various costs and expenses, proceeds from the offering were approximately $341.5 million. Using the net proceeds, we redeemed all of our then-existing 8.25% Notes, of which $200 million in aggregate principal amount was outstanding, and repaid $80 million in then-outstanding revolving credit borrowings under the Credit Facility. The remaining net proceeds from the offering are expected to be used for general corporate purposes, including the funding of our Baton Rouge project.
Interest expense, net of capitalized interest was as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Interest expense before capitalization of interest
  $ 28.0     $ 22.5     $ 79.9     $ 60.0  
Less: capitalized interest
    (0.1 )     (3.8 )     (3.6 )     (8.8 )
 
                       
Total interest expense, net of capitalized interest
  $ 27.9     $ 18.7     $ 76.3     $ 51.2  
 
                       
The increase in interest expense before capitalized interest for the three and nine months ended September 30, 2010 from the same 2009 periods was due to higher debt levels and the replacement of less expensive revolver borrowings with new, long-term notes. We believe the longer maturity, fixed interest rate and less-restrictive covenants of the new long-term notes warranted the higher interest rate. We stopped capitalizing interest on our River City Casino upon its opening in March 2010, contributing to the decrease in capitalized interest.
Fair Value of Financial Instruments: The estimated fair value of our long-term debt at September 30, 2010 was approximately $1.2 billion, versus its book value of $1.2 billion. At December 31, 2009, the estimated fair value was approximately $1.0 billion, versus its book value of $1.1 billion. The estimated fair value of our senior notes and senior subordinated notes was based on quoted market prices on or about September 30, 2010 and December 31, 2009 and the fair value of our credit facility was based on estimated fair values of comparable debt instruments on or about December 31, 2009.
Note 3—Income Taxes
Our effective income tax rates for continuing operations for the three and nine months ended September 30, 2010, were rate benefits of 141.4% and 16.2%, respectively, as compared to income tax expense rates of 2.4% and 16.9% for the same periods in 2009, respectively. Our effective tax rates in 2010 differ from the statutory rate due to the release of prior year reserves for uncertain tax benefits as a result of statute of limitation expiration and favorable resolution of a federal tax return examination, the effects of permanent items, and the recording of a valuation allowance against a portion of our deferred tax assets generated in the current year.
Note 4—Employee Benefit and Other Plans
Share-based Compensation: As of September 30, 2010, we had approximately 6.3 million share-based awards issued, 314,000 of which are restricted stock awards and the rest of which are common stock options, and approximately 1.8 million share-based awards available for grant.
Pursuant to authoritative guidance, we recorded share-based compensation expense as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Share-based compensation expense
  $ 1.3     $ 2.0     $ 4.8     $ 9.5  

 

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Theoretical compensation costs not yet amortized related to granted stock options totaled approximately $15.0 million and $15.4 million at September 30, 2010 and 2009, respectively, 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 is described below. The associated shares were newly issued common stock.
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Cash received from exercise of stock options
  $ 3.0     $ 0.1     $ 9.5     $ 0.6  
The following table summarizes information related to our common stock options under our stock option plans:
                 
    Number of     Weighted Average  
    Stock Options     Exercise Price  
Options outstanding at January 1, 2010
    6,342,007     $ 14.56  
Granted
    2,111,400     $ 9.62  
Exercised
    (1,202,712 )   $ 7.99  
Cancelled, Forfeited
    (949,108 )   $ 18.48  
 
             
Options outstanding at September 30, 2010
    6,301,587     $ 13.57  
 
             
Vested or expected to vest at a point in the future as of September 30, 2010
    6,070,117          
Options exercisable at September 30, 2010
    3,578,412     $ 15.21  
Weighted-average value per granted option calculated using the Black-Scholes option-pricing model for options granted during the nine months ended September 30, 2010
  $ 5.67          
Note 5—Write-downs, reserves and recoveries, net
Write-downs, reserves and recoveries, net consist of the following:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Impairment of assets
  $     $ 0.1     $ 0.5     $ 0.5  
Loss on disposal of assets
    0.4       0.2       2.0       0.6  
Legal settlement recoveries
                (6.5 )      
 
                       
Write-downs, reserves and recoveries, net
  $ 0.4     $ 0.3     $ (4.0 )   $ 1.1  
 
                       
Impairment of assets: In July 2006, we sold land to Cabela’s Retail, Inc. for the construction of a branded sporting goods store. Cabela’s Retail, Inc. financed its retail store construction and certain road access improvements (which also benefited our Boomtown Reno property) through the issuance of sales tax increment bonds through local or state governmental authorities. In April 2010, we purchased $5.3 million face amount of these bonds from Cabela’s Retail, Inc. for $5.0 million. During the second quarter of 2010, we recorded an impairment of $0.2 million related to these bonds.
We impaired the fair value of leasehold improvements related to vacated office space by $0.3 million during the second quarter of 2010.
Loss on disposal of assets: During the third quarter of 2010, we sold various slot equipment at our properties for a net loss of $0.4 million. During the second quarter of 2010, we sold our corporate jet, two seaplanes, a warehouse and slot equipment at our properties for a net loss of $1.6 million.

 

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Legal settlement recoveries: In March 2010, we received a $6.5 million legal settlement related to the recovery of legal fees.
Note 6—Discontinued Operations
Discontinued operations as of September 30, 2010 consist of our former Casino Magic Argentina operations, the Atlantic City operations, the former President Casino operations, former Casino Magic Biloxi operations and former operations at The Casino at Emerald Bay in The Bahamas.
Casino Magic Argentina: On April 29, 2010, we entered into an agreement to sell our Argentina operations. We had previously reflected the business as a discontinued operation and the related assets and liabilities as held for sale. On June 30, 2010, we completed the sale of our Argentina operations for approximately $40 million and recognized a loss on disposal of approximately $0.2 million, which amount has been included in income (loss) from discontinued operations, net of income taxes, in the unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2010.
Atlantic City: In the first quarter of 2010, we made the decision to sell our Atlantic City operations. We have reflected our Atlantic City entities as discontinued operations and the related assets and liabilities as held for sale.
President Casino: We closed the President Casino on June 24, 2010, and have reflected the entity in discontinued operations and the remaining assets and liabilities as held for sale. In October 2010, we sold The Admiral Riverboat, on which the President Casino formerly operated.
Casino Magic Biloxi: Casino Magic Biloxi closed after significant damage from Hurricane Katrina in 2005. In February 2010, we settled all remaining insurance claims in exchange for a final payment of approximately $23.4 million. We have received payments totaling approximately $215 million from our insurers related to this asset. Prior insurance advances that exceeded the book value of destroyed assets and certain insured expenses were recorded as a deferred gain of $18.3 million. As a result of this final settlement, we recognized this deferred gain in February 2010 in addition to the gain associated with the proceeds.
The Casino at Emerald Bay: The Casino at Emerald Bay in The Bahamas was closed during the first quarter of 2009. We are actively marketing one remaining asset associated with our former Bahamian operation; however, events and circumstances beyond our control have extended the period to complete the sale of this asset beyond a year. During the third quarter of 2010, we determined that a triggering event had occurred due to deteriorating local market conditions in The Bahamas. We reviewed the carrying value of our one remaining asset for recoverability and recorded an impairment charge of $0.8 million during the third quarter of 2010. The operation continues to be classified as a discontinued operation and the related assets as assets of discontinued operations held for sale.
Revenue, expense and net income for entities and operations included in discontinued operations are summarized as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Revenues
  $ 0.6     $ 14.8     $ 29.1     $ 44.5  
 
                       
Operating loss
    (2.0 )     (2.2 )     (11.7 )     (5.9 )
Non-operating income (loss)
                41.5       (0.2 )
 
                       
Income (loss) before income taxes
    (2.0 )     (2.2 )     29.8       (6.1 )
Income tax expense
    (0.3 )     (0.2 )     (4.9 )     (3.1 )
 
                       
Income (loss) from discontinued operations
  $ (2.3 )   $ (2.4 )   $ 24.9     $ (9.2 )
 
                       

 

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Net assets for entities and operations included in discontinued operations are summarized as follows:
                 
    September 30,     December 31,  
    2010     2009  
    (in millions)  
Assets:
               
Land, buildings, riverboats and equipment, net
  $ 38.0     $ 57.4  
Other assets, net
    23.8       39.0  
 
           
 
  $ 61.8     $ 96.4  
 
           
 
               
Liabilities:
               
Accounts payable and other accrued liabilities
  $ 6.2     $ 17.4  
Long term liabilities
    0.3       19.3  
 
           
 
    6.5       36.7  
 
           
Net Assets
  $ 55.3     $ 59.7  
 
           
Note 7—Commitments and Contingencies
Redevelopment Agreement for Lumière Place Casino and Hotels: In connection with our Lumière Place Casino and Hotel (“Lumière Place”), we have a redevelopment agreement which, among other things, commits us to oversee the investment of $50.0 million in residential housing, retail or mixed-use developments in the City of St. Louis within five years of the opening of the Lumière Place. Such investment can be made with partners and partner contributions and project debt financing, all of which count toward the $50.0 million investment commitment. We are also obligated to pay an annual fee of $1.0 million to the City of St. Louis, which obligation began after our River City Casino opened in March 2010. The redevelopment agreement also contains certain contingent payments in the event of certain defaults. If we and any development partners collectively fail to invest $50.0 million in residential housing, retail, or mixed-use developments within five years of the opening of the casino and hotel, we would be obligated to pay an additional annual service fee of $1.0 million in year six, $2.0 million in years seven and eight, and $2.0 million annually thereafter, adjusted by the change in the consumer price index.
Lease and Development Agreement for River City Casino: In connection with our River City Casino, we have a lease and development agreement with the St. Louis County Port Authority which, among other things, commits us to lease 56 acres for 99 years (subject to certain termination provisions). We are required to invest a minimum of $375 million to: (a) construct a gaming and multi-use facility, which has been completed and opened on March 4, 2010; (b) perform environmental remediation on the site of the project, which remediation has been completed; (c) contribute $5.1 million for the construction of community and recreational facilities, which amount has been paid; (d) develop and construct a hatch shell on the adjoining property within eighteen months of March 4, 2010; and (e) construct a roadway into the project, which construction is complete. We were required to pay rent in the amount of $2.5 million from May 1, 2009 to March 31, 2010, which amount has been paid. From April 1, 2010 through the expiration of the term of the lease and development agreement, we are required to pay to St. Louis County as annual rent the greater of (a) $4.0 million, or (b) 2.5% of annual adjusted gross receipts, as that term is defined in the lease and development agreement. We are also required to invest at least an additional $75 million into a second phase that would include a hotel with a minimum of 100 guestrooms and other amenities, to be mutually agreed upon by us and St. Louis County. The second phase must be opened within three years of March 4, 2010. In each of the five subsequent years that the second phase is not opened, the amount of liquidated damages begins at $2.0 million for the first year and increases by $1.0 million each subsequent year: hence, $3.0 million in year two, $4.0 million in year three, $5.0 million in year four and $6.0 million in year five. As a result, the maximum total amount of such liquidated damages that we would have to pay if the second phase is not completed is $20.0 million.
Self-Insurance: We self-insure various levels of general liability and workers’ compensation at all of our properties and medical coverage at some of our properties. 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 unaudited Condensed Consolidated Balance Sheets.

 

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Legal
Jebaco Litigation: On August 9, 2006, Jebaco, Inc. (“Jebaco”) filed suit in the U.S. District Court for the Eastern District of Louisiana against Harrah’s Operating Co., Inc., Harrah’s Lake Charles, LLC, Harrah’s Star Partnership, Players LC, LLC, Players Riverboat Management, LLC, Players Riverboat II, LLC, and Pinnacle Entertainment, Inc. The lawsuit arises out of an agreement between Jebaco and Harrah’s (as successor in interest to the various Players defendants) whereby Harrah’s was obligated to pay Jebaco a fee based on the number of patrons entering Harrah’s two Lake Charles, Louisiana riverboat casinos. In November 2006, we acquired the Harrah’s Lake Charles subsidiaries, including the two riverboats. The lawsuit filed by Jebaco asserts that Harrah’s, in ceasing gaming operations in Lake Charles and ceasing payments to Jebaco, breached its contractual obligations to Jebaco and asserts damages of approximately $34.0 million. Jebaco also asserts that our agreement with Harrah’s violates state and federal antitrust laws. The lawsuit seeks antitrust damages jointly and severally against both us and Harrah’s and seeks a trebling of the $34.0 million in damages Jebaco alleges it has suffered. The defendants answered the complaint, denying all claims and asserting that the lawsuit is barred, among other reasons, because of the approval of our transaction with Harrah’s by the Louisiana Gaming Control Board and the lack of antitrust injury to Jebaco. In January 2007, all of the defendants moved to dismiss all of the claims of the complaint, which motions were heard on July 18, 2007. The motions to dismiss were granted with prejudice as to the federal antitrust claims and the state-law claims were dismissed without prejudice. Judgment of dismissal was entered on March 5, 2008. Jebaco appealed the dismissal of the federal antitrust claims to the U.S. Court of Appeals for the Fifth Circuit. Further, on March 13, 2008, Jebaco filed a new lawsuit against the same parties in the Louisiana district civil court for Orleans Parish. This lawsuit seeks unspecified damages arising out of the same circumstances as the federal lawsuit based on claims for breach of the duty of good faith, negligent breach of contract, breach of contract, unfair trade practices, unjust enrichment, and subrogation to Harrah’s insurance proceeds. In May 2009, the Louisiana district civil court extended the stay of the state case indefinitely pending the decision of the Fifth Circuit on Jebaco’s appeal. On October 30, 2009, the Fifth Circuit affirmed the district court’s dismissal of the federal antitrust claims. Jebaco has not yet indicated if it intends to appeal the Fifth Circuit decision. We moved for dismissal of the state-court claims. On January 29, 2010, the state court judge dismissed Jebaco’s complaint in its entirety. On April 16, 2010, Jebaco moved the district civil court for leave to appeal the dismissal of its claims. On April 23, 2010, the district court granted Jebaco’s motion for an order of appeal. The parties have completed the briefing of Jebaco’s appeal, which will be decided on the briefs.
Madison House Litigation: On December 23, 2008, Madison House Group, L.P. (“Madison House”) filed suit in Superior Court of New Jersey, Chancery Division, Atlantic County against the Company, ACE Gaming, LLC, a wholly owned subsidiary of the Company (“ACE”), and one other defendant. We acquired ACE as part of our acquisition of the entities owning the former Sands Hotel & Casino (the “Sands”) in Atlantic City, New Jersey in November 2006. The lawsuit arises out of a lease dated December 18, 2000 between Madison House as landlord and ACE as tenant for the Madison House hotel in Atlantic City, New Jersey. The lawsuit alleges in part that ACE breached certain obligations under the lease, including, among other things, failure to operate and maintain the hotel as required by the lease, which was alleged to have resulted in substantial damages to the hotel. The lawsuit further alleges that the Company, as the ultimate parent entity of ACE, should be jointly and severally liable with ACE for the damages sought, and separately alleges independent actions against the Company as described more fully in the lawsuit. The lawsuit seeks specific performance of ACE’s obligations under the lease, including restoration of the hotel, as well as unspecified compensatory and exemplary damages, and attorneys’ fees, against the Company and ACE. ACE continues to make its payment obligations under the lease, which expires in December 2012.
On March 17, 2010, Madison House moved to dismiss its complaint and ACE’s counterclaim without prejudice, which motion was heard on April 28, 2010. The court ruled that it was granting the motion to dismiss Madison House’s complaint, without prejudice, but that it was denying the motion to dismiss ACE’s counterclaim. The court also ruled that the case would be moved from the Chancery Division to the Law Division. On September 20, 2010, Madison House moved to dismiss ACE’s counterclaim, which was heard on October 15, 2010. While the Company cannot predict the outcome of this litigation, it intends to pursue its counterclaim vigorously.
Collective Bargaining Agreements: On May 17, 2006, we entered into a Memorandum of Agreement (the “MOA”) with Unite HERE Local 74 (“Union”) commensurate with our obligations under a development agreement with the City of St. Louis that, among other things, provided union access to certain employees (“bargaining unit employees”) employed at our Lumière Place facility should the Union manifest its intent to organize those employees. Additionally, the MOA provided that we would recognize the Union as the exclusive bargaining representative of the bargaining unit employees if a majority of the employees (verified by a neutral arbitrator) indicated their desire to be represented by the Union by signing an authorization card.

 

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On November 20, 2008, an arbitrator conducted a review of the authorization cards submitted by the Union and determined that a majority of the bargaining unit employees had indicated their desire to be represented by the Union. Consistent with the MOA, we recognized the Union as the exclusive bargaining representative for the bargaining unit employees. We met with the Union three times to negotiate a collective bargaining agreement; the last meeting was on February 18, 2009.
During March and April 2009, we received competing claims from three unions, each claiming to be the exclusive collective bargaining representative of our St. Louis employees, including a claim from one union that they were the successor to the Union. In response to the competing claims for recognition, we withdrew recognition from the Union because of a lack of continuity of representation. In May 2009, we notified the Union that the collective bargaining agreement for HoteLumière, part of Lumière Place complex, was no longer in effect and that the collective bargaining agreement for the President Casino was being terminated. In May 2009, one of the unions claiming to be the successor to the Union filed unfair labor practice charges with the National Labor Relations Board (“NLRB”) alleging, among other things, that we refused to bargain in good faith by refusing to engage in collective bargaining negotiations, by refusing to negotiate over the discharge of employees, and by withdrawing recognition and abrogating the terms and conditions of employment. The NLRB dismissed the charge filed against HoteLumière.
In October 2009, the Union again changed its affiliation, and again requested recognition, which was denied. In December 2009, the Union filed charges with the NLRB alleging that Lumière Place and President Casino acted unlawfully when they refused to recognize and deal with the Union. In January 2010, the NLRB issued a Complaint and Notice of Hearing against Lumière Place and President Casino.
On April 13, 2010, following the resolution of the competing claims for recognition, Lumière Place and President Casino agreed to settle the NLRB matters by, among other things, agreeing to recognize the Union as the bargaining representative of bargaining units of Lumière Place and President Casino employees, bargaining with the Union upon request, and recognizing the validity of the collective bargaining agreement between President Casino and the Union. The settlement agreements with the NLRB specifically provide that neither Lumière Place nor President Casino admit to having violated the National Labor Relations Act. Pursuant to the settlement agreements, we have commenced bargaining in good faith with the Union.
On March 10, 2010, the Company announced its intention to close President Casino on or before July 1, 2010. On May 11, 2010, June 22, 2010, and July 27, 2010, President Casino engaged in effects bargaining with the Union. There are no further bargaining sessions scheduled regarding President Casino. On June 22, 2010; July 28, 2010; August 25 — 26, 2010; September 14 — 15 and 30, 2010, Lumière Place met with the Union in an effort to negotiate a collective bargaining agreement. Lumière Place will continue to meet with the Union in an effort to reach an agreement.
On October 15, 2010, the Union filed an unfair labor practice charge alleging that Lumière Place had failed and refused to bargain collectively with the Union. Further, on October 15, 2010, the Union filed two additional unfair labor practice charges, one alleging that Lumière Place had failed and refused to bargain in good faith for a collective bargaining agreement, and the other alleging that Lumière Place had discriminated against two employees in retaliation for their protected, concerted and union activities. The Company is in the process of responding to these charges. Despite the Union’s claims, Lumière Place is prepared to continue to meet with the Union in an effort to reach an agreement.

 

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Indiana Tax Dispute: In 2008, the Indiana Department of Revenue (“IDR”) commenced an income tax examination of the Company’s Indiana income tax filings for the 2005 to 2007 period. During June of 2009, the Company received an informal notification from the field agent for the IDR challenging whether income and gain from certain asset sales, including the sale of the Hollywood Park Racetrack in 1999, and other transactions outside of Indiana, such as the Aztar merger termination fee in 2006, which we reported on our Indiana state tax returns for the years 2000 through 2007, resulted in business income subject to apportionment, and proposed a potential assessment of approximately $11 million, excluding interest and penalties, of additional Indiana income taxes. During the fourth quarter of 2009, the Company submitted additional information to the IDR for consideration. On February 9, 2010, the Company received a revised proposed assessment in the amount of $7.3 million, excluding interest and penalties of $2.3 million. On March 17, 2010, the Company timely filed a protest with the IDR requesting abatement of all tax, interest and penalties. On September 14, 2010, a hearing was held with the IDR where the Company was given the opportunity to restate the facts and positions.
Indiana State Sales Tax Dispute: In 2002, following a sales and use tax audit of Belterra Casino Resort, we received a proposed assessment for approximately $3.1 million, including interest and penalties. We filed a protest in December 2002. In March 2006, the IDR conducted an administrative hearing of our protest and in April 2006, the IDR denied our protest with respect to nearly the entire assessment. In May 2006, we filed an appeal of the IDR’s findings with the Indiana Tax Court and conceded a portion, of which $0.8 million was paid in July 2006. In February 2009, the Indiana Tax Court issued its final determination and concluded that Belterra was not liable for the tax. In April 2009, the IDR filed a Petition to Review with the Indiana Supreme Court. The Indiana Supreme Court heard oral arguments on October 29, 2009. On October 5, 2010, the Indiana Supreme Court reversed the Tax Court’s ruling and ruled against the Company in a 3-2 decision. We are currently evaluating our options including preparing a petition for rehearing. As a result of this ruling, for financial reporting purposes we have accrued $3.2 million as of September 30, 2010, of which $1.9 million was capitalized to the book value of the riverboat.
Other: We are a 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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Note 8—Consolidating Condensed Financial Information
Our subsidiaries (excluding a subsidiary with approximately $10.5 million in cash and cash equivalents as of September 30, 2010; a subsidiary with approximately $66.3 million in cash and cash equivalents as of September 30, 2010; and certain non-material subsidiaries) have fully and unconditionally and jointly and severally guaranteed the payment of all obligations under the 7.50% Notes, 8.625% Notes and 8.75% Notes, as well as our Credit Facility. Our Atlantic City entities do not guarantee our Credit Facility. Separate financial statements and other disclosures regarding the subsidiary guarantors are not included herein because management has determined that such information is not material to investors. In lieu thereof, we include the following:
                                         
                    100% Owned     Consolidating     Pinnacle  
    Pinnacle     100% Owned     Non-     and     Entertainment,  
    Entertainment,     Guarantor     Guarantor     Eliminating     Inc.  
    Inc.     Subsidiaries(a)     Subsidiaries(b)     Entries     Consolidated  
    (in millions)  
For the three months ended September 30, 2010
                                       
Statement of Operations
                                       
Revenues:
                                       
Gaming
  $     $ 246.8     $     $     $ 246.8  
Food and beverage
          18.8                   18.8  
Other
          22.2                   22.2  
 
                             
 
          287.8                   287.8  
 
                             
 
                                       
Expenses:
                                       
Gaming
          140.0                   140.0  
Food and beverage
          18.2                   18.2  
General and administrative and other
    8.5       63.4                   71.9  
Depreciation and amortization
    1.2       27.3                   28.5  
Write-downs, reserves and recoveries
          5.1                   5.1  
 
                             
 
    9.7       254.0                   263.7  
 
                             
Operating income (loss)
    (9.7 )     33.8                   24.1  
Equity earnings of subsidiaries
    27.7                   (27.7 )      
Interest expense and non-operating income, net
    (27.0 )     (0.9 )                 (27.9 )
Loss on early extinguishment of debt
                             
 
                             
Income (loss) from continuing operations before inter-company activity and income taxes
    (9.0 )     32.9             (27.7 )     (3.8 )
Management fee & inter-company interest
    2.9       (2.9 )                  
Income tax benefit
    5.3                         5.3  
 
                             
Income (loss) from continuing operations
    (0.8 )     30.0             (27.7 )     1.5  
Loss from discontinued operations, net of taxes
          (1.6 )     (0.7 )           (2.3 )
 
                             
Net income (loss)
  $ (0.8 )   $ 28.4     $ (0.7 )   $ (27.7 )   $ (0.8 )
 
                             
 
                                       
For the nine months ended September 30, 2010
                                       
Statement of Operations
                                       
Revenues:
                                       
Gaming
  $     $ 713.7     $     $     $ 713.7  
Food and beverage
          51.8                   51.8  
Other
          58.4                   58.4  
 
                             
 
          823.9                   823.9  
 
                             
 
                                       
Expenses:
                                       
Gaming
          405.4                   405.4  
Food and beverage
          52.0                   52.0  
General and administrative and other
    30.5       189.9       (0.6 )           219.8  
Depreciation and amortization
    4.0       79.7       0.1             83.8  
Write-downs, reserves and recoveries
    (6.1 )     37.2       (0.5 )           30.6  
 
                             
 
    28.4       764.2       (1.0 )           791.6  
 
                             
Operating income (loss)
    (28.4 )     59.7       1.0             32.3  
Equity earnings of subsidiaries
    76.4       2.0             (78.4 )      
Interest (expense) and non-operating income, net
    (78.6 )     2.6                   (76.0 )
Loss on early extinguishment of debt
    (1.9 )                       (1.9 )
 
                             
Income (loss) from continuing operations before inter-company activity and income taxes
    (32.5 )     64.3       1.0       (78.4 )     (45.6 )
Management fee & inter-company interest
    11.8       (11.8 )                  
Income tax benefit
    7.4                         7.4  
 
                             
Income (loss) from continuing operations
    (13.3 )     52.5       1.0       (78.4 )     (38.2 )
Income from discontinued operations, net of taxes
          23.5       1.4             24.9  
 
                             
Net income (loss)
  $ (13.3 )   $ 76.0     $ 2.4     $ (78.4 )   $ (13.3 )
 
                             

 

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                    100% Owned     Consolidating     Pinnacle  
    Pinnacle     100% Owned     Non-     and     Entertainment,  
    Entertainment,     Guarantor     Guarantor     Eliminating     Inc.  
    Inc.     Subsidiaries(a)     Subsidiaries(b)     Entries     Consolidated  
    (in millions)  
For the three months ended September 30, 2009
                                       
Statement of Operations
                                       
Revenues:
                                       
Gaming
  $     $ 214.5     $     $     $ 214.5  
Food and beverage
          15.2                   15.2  
Other
          20.8                   20.8  
 
                             
 
          250.5                   250.5  
 
                             
 
                                       
Expenses:
                                       
Gaming
          130.2                   130.2  
Food and beverage
          14.5                   14.5  
General and administrative and other
    11.7       61.6       (0.6 )           72.7  
Depreciation and amortization
    1.4       22.7       0.3             24.4  
Write-downs, reserves and recoveries
          0.3                   0.3  
 
                             
 
    13.1       229.3       (0.3 )           242.1  
 
                             
Operating income (loss)
    (13.1 )     21.2       0.3             8.4  
Equity earnings of subsidiaries
    18.2       1.5             (19.7 )      
Interest (expense) and non-operating income, net
    (22.4 )     3.8                   (18.6 )
Loss on early extinguishment of debt
    (8.8 )                       (8.8 )
 
                             
Income (loss) from continuing operations before inter-company activity and income taxes
    (26.1 )     26.5       0.3       (19.7 )     (19.0 )
Management fee & inter-company interest
    4.7       (4.7 )                  
Income tax expense
    (0.5 )                       (0.5 )
 
                             
Income (loss) from continuing operations
    (21.9 )     21.8       0.3       (19.7 )     (19.5 )
Income (loss) from discontinued operations, net of taxes
          (3.9 )     1.5             (2.4 )
 
                             
Net income (loss)
  $ (21.9 )   $ 17.9     $ 1.8     $ (19.7 )   $ (21.9 )
 
                             
 
                                       
For the nine months ended September 30, 2009
                                       
Statement of Operations
                                       
Revenues:
                                       
Gaming
  $     $ 655.2     $     $     $ 655.2  
Food and beverage
          44.6                   44.6  
Other
    0.1       56.2                   56.3  
 
                             
 
    0.1       756.0                   756.1  
 
                             
Expenses:
                                       
Gaming
          386.2                   386.2  
Food and beverage
          43.3                   43.3  
General and administrative and other
    37.9       174.6       (1.9 )           210.6  
Depreciation and amortization
    4.1       69.0       0.9             74.0  
Write-downs, reserves and recoveries
          1.1                   1.1  
 
                             
 
    42.0       674.2       (1.0 )           715.2  
 
                             
Operating income (loss)
    (41.9 )     81.8       1.0             40.9  
Equity earnings of subsidiaries
    77.8       2.2             (80.0 )      
Interest (expense) and non-operating income, net
    (59.8 )     8.7                   (51.1 )
Loss on early extinguishment of debt
    (8.8 )                       (8.8 )
Gain on sale of equity securities
    6.0             6.9             12.9  
 
                             
Income (loss) from continuing operations before inter-company activity and income taxes
    (26.7 )     92.7       7.9       (80.0 )     (6.1 )
Management fee & inter-company interest
    11.4       (11.4 )                  
Income tax expense
    (1.0 )                       (1.0 )
 
                             
Income (loss) from continuing operations
    (16.3 )     81.3       7.9       (80.0 )     (7.1 )
Income (loss) from discontinued operations, net of taxes
          (11.3 )     2.1             (9.2 )
 
                             
Net income (loss)
  $ (16.3 )   $ 70.0     $ 10.0     $ (80.0 )   $ (16.3 )
 
                             

 

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                    100% Owned     Consolidating     Pinnacle  
    Pinnacle     100% Owned     Non-     and     Entertainment,  
    Entertainment,     Guarantor     Guarantor     Eliminating     Inc.  
    Inc.     Subsidiaries(a)     Subsidiaries(b)     Entries     Consolidated  
    (in millions)  
As of September 30, 2010
                                       
Balance Sheet
                                       
Current assets
  $ 106.5     $ 87.7     $ 76.9     $     $ 271.1  
Property and equipment, net
    13.6       1,458.8       0.5             1,472.9  
Other non-current assets
    60.6       52.7                   113.3  
Investment in subsidiaries
    1,575.5       (0.6 )           (1,574.9 )      
Assets of discontinued operations held for sale
          62.1       (0.3 )           61.8  
Inter-company
    1.2                   (1.2 )      
 
                             
 
  $ 1,757.4     $ 1,660.7     $ 77.1     $ (1,576.1 )   $ 1,919.1  
 
                             
Current liabilities
    45.5       140.4       0.1             186.0  
Notes payable, long term
    1,175.6       0.7                   1,176.3  
Other non-current liabilities
    22.1       14.0                   36.1  
Liabilities of discontinued operations held for sale
          6.5                   6.5  
Inter-company
                1.2       (1.2 )      
Equity
    514.2       1,499.1       75.8       (1,574.9 )     514.2  
 
                             
 
  $ 1,757.4     $ 1,660.7     $ 77.1     $ (1,576.1 )   $ 1,919.1  
 
                             
 
                                       
As of December 31, 2009
                                       
Balance Sheet
                                       
Current assets
  $ 5.2     $ 86.9     $ 66.8     $     $ 158.9  
Property and equipment, net
    16.9       1,472.6       10.5             1,500.0  
Other non-current assets
    50.6       39.1       (1.2 )           88.5  
Investment in subsidiaries
    1,576.5       23.3             (1,599.8 )      
Assets of discontinued operations held for sale
          67.8       28.6             96.4  
Inter-company
                1.2       (1.2 )      
 
                             
 
  $ 1,649.2     $ 1,689.7     $ 105.9     $ (1,601.0 )   $ 1,843.8  
 
                             
Current liabilities
    63.4       139.3                   202.7  
Notes payable, long term
    1,062.5       0.8                   1,063.3  
Other non-current liabilities
    28.9       17.7                   46.6  
Liabilities of discontinued operations held for sale
          32.4       4.4             36.8  
Inter-company
                1.2       (1.2 )      
Equity
    494.4       1,499.5       100.3       (1,599.8 )     494.4  
 
                             
 
  $ 1,649.2     $ 1,689.7     $ 105.9     $ (1,601.0 )   $ 1,843.8  
 
                             

 

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                    100% Owned     Consolidating     Pinnacle  
    Pinnacle     100% Owned     Non-     and     Entertainment,  
    Entertainment,     Guarantor     Guarantor     Eliminating     Inc.  
    Inc.     Subsidiaries(a)     Subsidiaries(b)     Entries     Consolidated  
    (in millions)  
For the nine months ended September 30, 2010
                                       
Statement of Cash Flows
                                       
Cash provided by (used in) operating activities
  $ (6.8 )   $ 135.9     $ (40.0 )   $     $ 89.1  
 
                             
Cash provided by (used in) investing activities Capital expenditures and other
    (0.6 )     (143.2 )     45.9             (97.9 )
 
                             
Cash provided by (used in) investing activities
    (0.6 )     (143.2 )     45.9             (97.9 )
 
                             
Cash provided by financing activities Change in notes payable and other
    108.6                         108.6  
 
                             
Cash provided by financing activities
    108.6                         108.6  
 
                             
Effect of exchange rate changes on cash
                (0.4 )           (0.4 )
Increase (decrease) in cash and cash equivalents
    101.2       (7.3 )     5.5             99.4  
Cash and cash equivalents, beginning of period
    1.5       56.7       71.4             129.6  
 
                             
Cash and cash equivalents, end of period
  $ 102.7     $ 49.4     $ 76.9     $     $ 229.0  
 
                             
 
                                       
For the nine months ended September 30, 2009
                                       
Statement of Cash Flows
                                       
Cash provided by (used in) operating activities
  $ (60.2 )   $ 150.9     $ 0.7     $     $ 91.4  
 
                             
Cash provided by (used in) investing activities Capital expenditure and other
    (2.5 )     (143.0 )     (0.7 )           (146.2 )
Proceeds from sale of equity securities
    10.1             13.6             23.7  
Other
    (0.1 )     0.3                   0.2  
 
                             
Cash provided by (used in) investing activities
    7.5       (142.7 )     12.9             (122.3 )
 
                             
Cash provided by financing activities Change in notes payable
    70.6                         70.6  
 
                             
Cash provided by financing activities
    70.6                         70.6  
 
                             
Effect of exchange rate changes on cash
                (0.5 )           (0.5 )
Increase in cash and cash equivalents
    17.9       8.2       13.1             39.2  
Cash and cash equivalents, beginning of period
    6.7       51.0       58.0             115.7  
 
                             
Cash and cash equivalents, end of period
  $ 24.6     $ 59.2     $ 71.1     $     $ 154.9  
 
                             
 
     
(a)   The following material subsidiaries are identified as guarantors of the 7.50% Notes, 8.625% Notes and 8.75% Notes: Belterra Resort Indiana, LLC; Boomtown, LLC; PNK (RENO), LLC; Louisiana—I Gaming; PNK (LAKE CHARLES), L.L.C.; Casino Magic Corp.; Biloxi Casino Corp.; PNK (BOSSIER CITY), Inc.; Casino One Corporation; PNK (ES), LLC; PNK (ST. LOUIS RE), LLC; AREP Boardwalk Properties LLC; PNK (Baton Rouge) Partnership; PNK (River City), LLC, PNK (SCB), L.L.C.; PNK Development 7, LLC; PNK Development 8, LLC; PNK Development 9, LLC; PNK Development 13, LLC; President Riverboat Casino-Missouri, Inc.; and ACE Gaming, LLC. In addition, certain other immaterial subsidiaries are also guarantors of the 7.50% Notes, 8.625% Notes and 8.75% Notes.
 
(b)   PNK Development 11, LLC, which as of September 30, 2010 held approximately $66.3 million in cash and cash equivalents, is our only material non-guarantor of the 7.50% Notes, 8.625% Notes and 8.75% Notes. Other non-guarantor subsidiaries include, but are not limited to, a subsidiary with $10.5 million in cash and cash equivalents as of September 30, 2010.

 

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Note 9—Segment Information
We use Adjusted EBITDA (as defined below) to compare operating results among our segments and allocate resources. The following table highlights our Adjusted EBITDA and reconciles Adjusted EBITDA to income (loss) from continuing operations for the three and nine months ended September 30, 2010 and 2009.
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Revenues:
                               
L’Auberge du Lac
  $ 87.1     $ 85.8     $ 257.1     $ 260.8  
St. Louis (a)
    92.3       55.6       249.5       162.9  
Boomtown New Orleans
    34.2       32.6       103.2       106.4  
Belterra Casino Resort
    40.6       41.7       115.8       125.4  
Boomtown Bossier City
    21.7       23.3       67.2       70.8  
Boomtown Reno
    11.9       11.5       31.1       29.7  
 
                       
Total Revenue
  $ 287.8     $ 250.5     $ 823.9     $ 756.0  
 
                       
 
                               
Adjusted EBITDA (b):
                               
L’Auberge du Lac
  $ 23.9     $ 19.2     $ 70.0     $ 64.2  
St. Louis (a)
    17.2       11.0       46.8       31.5  
Boomtown New Orleans
    10.6       7.8       31.7       32.0  
Belterra Casino Resort
    9.5       7.2       23.7       23.2  
Boomtown Bossier City
    5.0       5.0       16.3       15.9  
Boomtown Reno
    1.2       (0.1 )     0.7       (1.4 )
 
                       
 
    67.4       50.1       189.2       165.4  
Corporate expenses (c)
    (7.2 )     (9.0 )     (25.4 )     (27.1 )
 
                       
 
    60.2       41.1       163.8       138.3  
 
                               
Other benefits (costs):
                               
Depreciation and amortization
    (28.5 )     (24.4 )     (83.8 )     (74.0 )
Pre-opening and development costs
    (1.2 )     (5.9 )     (12.2 )     (12.8 )
Non-cash share-based compensation
    (1.3 )     (2.0 )     (4.8 )     (9.5 )
Impairment of indefinite-lived intangible assets
                (11.5 )      
Impairment of land and construction costs
    (4.7 )           (23.1 )      
Write-downs, reserves and recoveries, net
    (0.3 )     (0.3 )     4.0       (1.1 )
Interest expense, net of capitalized interest
    (27.9 )     (18.7 )     (76.3 )     (51.2 )
Gain on sale of equity securities
                      12.9  
Loss on early extinguishment of debt
          (8.8 )     (1.9 )     (8.8 )
Other non-operating income
                0.2       0.1  
Income tax benefit (expense)
    5.3       (0.5 )     7.4       (1.0 )
 
                       
Income (loss) from continuing operations
  $ 1.6     $ (19.5 )   $ (38.2 )   $ (7.1 )
 
                       

 

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    For the nine months ended  
    September 30,  
    2010     2009  
    (in millions)  
Capital expenditures:
               
L’Auberge du Lac
  $ 9.1     $ 3.9  
St. Louis (a)
    71.9       8.2  
Boomtown New Orleans
    2.1       3.2  
Belterra Casino Resort
    6.5       5.0  
Boomtown Bossier City
    3.7       2.6  
Boomtown Reno
    0.3       1.6  
Corporate and other, including properties under development (d)
    29.9       121.7  
 
           
 
  $ 123.5     $ 146.2  
 
           
                 
    September 30,     December 31,  
    2010     2009  
    (in millions)  
Assets
               
L’Auberge du Lac
  $ 314.5     $ 331.0  
St. Louis (a)
    817.6       806.7  
Boomtown New Orleans
    66.1       74.3  
Belterra Casino Resort
    186.9       193.6  
Boomtown Bossier City
    89.8       92.1  
Boomtown Reno
    41.6       41.9  
Corporate and other, including current development projects and discontinued operations
    402.6       304.2  
 
           
 
  $ 1,919.1     $ 1,843.8  
 
           
     
(a)   Our St. Louis segment consists of Lumière Place (which includes the Lumière Place Casino, the Pinnacle-owned Four Seasons Hotel St. Louis and HoteLumière) and River City.
 
(b)   We define Adjusted EBITDA for each segment as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, gain (loss) on sale of certain assets, loss on early extinguishment of debt, loss on sale of discontinued operations, and discontinued operations. We use Adjusted EBITDA to compare operating results among our properties and between accounting periods.
 
(c)   Corporate expenses represent unallocated payroll, professional fees, travel expenses and other general and administrative expenses not directly related to our casino and hotel operations.
 
(d)   Includes capital expenditures for our various development projects not yet reflected as operating segments, including the following:
                 
    For the nine months ended  
    September 30,  
    2010     2009  
    (in millions)  
Sugarcane Bay
  $ 14.3     $ 10.4  
Baton Rouge
    11.3        

 

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Note 10—Subsequent Events
In September 2010, we announced an expanded scope and budget for our Baton Rouge project. As a result of these revisions, on October 28, 2010, we amended our Credit Facility. We increased the capital expenditures limit for the Baton Rouge project from $235 million to $375 million. In addition, the definition of commencement of construction was amended, with respect to the Baton Rouge project, to provide the spending from and after January 1, 2010 of an amount greater than $100 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest). Prior to the amendment, the definition of commencement of construction for the Baton Rouge project provided the spending from and after January 1, 2010 of an amount greater than $25 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest).

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and our Current Report on Form 8-K filed on June 21, 2010, including Exhibit 99.1, which was filed to update the historical financial statements included in the Company’s Form 10-K to reflect its Casino Magic Argentina operations and Atlantic City operations and related assets as held for sale for the year ended December 31, 2009 and the results of those operations as discontinued operations for all periods presented.
EXECUTIVE OVERVIEW
Pinnacle Entertainment, Inc. is an owner, operator and developer of casinos and related hospitality and entertainment facilities. We operate seven casinos: L’Auberge du Lac in Lake Charles, Louisiana; River City and Lumière Place in St. Louis, Missouri; Boomtown New Orleans in New Orleans, Louisiana; Belterra Casino Resort in Vevay, Indiana; Boomtown Bossier City in Bossier City, Louisiana; and Boomtown Reno in Reno, Nevada. Our River City Casino opened on March 4, 2010. In April 2010, we cancelled our Sugarcane Bay project in Lake Charles, Louisiana. On June 24, 2010, we closed our President Casino facility in St. Louis, Missouri, and on June 30, 2010, we completed the sale of our Argentina operations for approximately $40 million.
In Louisiana, we have commenced foundation work on our Baton Rouge project, which is subject to various regulatory approvals. In addition, the hulls for the barge are currently under construction. In September 2010, we expanded the scope and budget of the Baton Rouge project from $250 million to $357 million (excluding land acquisition costs and capitalized interest).
We operate casino properties, all of which include gaming, dining, retail and other amenities, and some of which include hotel operations. Our operating results are highly dependent on the volume of customers at our properties, which in turn affects the price we can charge for our hotel rooms and other amenities. While we do provide casino credit in several gaming jurisdictions, most of our revenue is cash-based, with customers wagering with cash or paying for non-gaming services with cash or credit cards. Our properties generate significant operating cash flow. Our industry is capital intensive and we rely on the ability of our resorts to generate operating cash flow to pay interest, repay debt and fund maintenance capital expenditures.
Our mission is to increase stockholder value. We intend to accomplish this through our long-term strategy of providing our guests with their favorite games in attractive surroundings with high-quality guest service, maintaining and improving each of our existing properties, and building or acquiring new casinos or resorts that are expected to produce favorable returns above our cost of capital. Hence, we continually focus on customer service; we are maintaining and improving our existing properties with disciplined capital expenditures; we are developing a new, high-quality gaming property in an attractive gaming market; and we may make strategic acquisitions, either alone or with third parties, when and if available, on terms we believe are reasonable.

 

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RESULTS OF OPERATIONS
The following table highlights our results of operations for the three and nine months ended September 30, 2010 and 2009. As discussed in Note 8 to our unaudited Condensed Consolidated Financial Statements, we report segment operating results based on revenues and Adjusted EBITDA. Such segment reporting is on a consistent basis with how we measure our business and allocate resources internally. See Note 8 to our unaudited Condensed Consolidated Financial Statements for more information regarding our segment information.
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Revenues:
                               
L’Auberge du Lac
  $ 87.1     $ 85.8     $ 257.1     $ 260.8  
St. Louis (a)
    92.3       55.6       249.5       162.9  
Boomtown New Orleans
    34.2       32.6       103.2       106.4  
Belterra Casino Resort
    40.6       41.7       115.8       125.4  
Boomtown Bossier City
    21.7       23.3       67.2       70.8  
Boomtown Reno
    11.9       11.5       31.1       29.7  
 
                       
Total Revenue
  $ 287.8     $ 250.5     $ 823.9     $ 756.0  
 
                       
Operating income
  $ 24.1     $ 8.4     $ 32.3     $ 40.9  
 
                       
Income (loss) from continuing operations
  $ 1.6     $ (19.5 )   $ (38.2 )   $ (7.1 )
 
                       
Adjusted EBITDA (loss): (b)
                               
L’Auberge du Lac
  $ 23.9     $ 19.2     $ 70.0     $ 64.2  
St. Louis (a)
    17.2       11.0       46.8       31.5  
Boomtown New Orleans
    10.6       7.8       31.7       32.0  
Belterra Casino Resort
    9.5       7.2       23.7       23.2  
Boomtown Bossier City
    5.0       5.0       16.3       15.9  
Boomtown Reno
    1.2       (0.1 )     0.7       (1.4 )
 
     
(a)   Our St. Louis segment consists of Lumière Place and River City.
 
(b)   We define Adjusted EBITDA for each segment as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, gain (loss) on sale of certain assets, loss on early extinguishment of debt, loss on sale of discontinued operations, and discontinued operations.

 

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Segment comparison of the three and nine months ended September 30, 2010 and 2009
L’Auberge du Lac
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2010 vs. 2009  
    (in millions)             (in millions)          
Gaming revenues
  $ 75.7     $ 75.1       0.8 %   $ 225.3     $ 228.8       (1.5 )%
Total revenues
    87.1       85.8       1.5 %     257.1       260.8       (1.4 )%
Operating income
    18.0       11.9       51.3 %     49.7       42.5       16.9 %
Adjusted EBITDA
    23.9       19.2       24.5 %     70.0       64.2       9.0 %
L’Auberge du Lac, our largest property, achieved meaningful increases to Adjusted EBITDA despite modest revenue growth for the three months, and revenue declines for the nine months, ended September 30, 2010 as compared to the prior-year period. This reflects the initial benefits of a heightened focus on operating efficiencies and effective marketing spend.
St. Louis
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2010 vs. 2009  
    (in millions)             (in millions)          
Gaming revenues
  $ 77.7     $ 44.4       75.0 %   $ 210.7     $ 133.0       58.4 %
Total revenues
    92.3       55.6       66.0 %     249.5       162.9       53.2 %
Operating income (loss)
    2.6       0.0     NM       (1.5 )     0.6     NM  
Adjusted EBITDA
    17.2       11.0       56.4 %     46.8       31.5       48.6 %
     
NM — Not Meaningful
The St. Louis segment consists of River City and the Lumière Place complex, which includes Lumière Place Casino, the Pinnacle-owned Four Seasons Hotel St. Louis and HoteLumière. Significant revenue and Adjusted EBITDA growth was due to the opening of River City on March 4, 2010, which generated positive Adjusted EBITDA for both the three and nine months ended September 30, 2010. Consistent with most property openings, River City experienced higher expenses than are expected in the long-term.
Boomtown New Orleans
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2010 vs. 2009  
    (in millions)             (in millions)          
Gaming revenues
  $ 32.7     $ 31.2       4.8 %   $ 98.8     $ 101.7       (2.9 )%
Total revenues
    34.2       32.6       4.9 %     103.2       106.4       (3.0 )%
Operating income
    8.8       6.1       44.3 %     26.0       26.4       (1.5 )%
Adjusted EBITDA
    10.6       7.8       35.9 %     31.7       32.0       (0.9 )%
In the third quarter of 2009 and continuing into the fourth quarter of 2009, significantly heightened marketing levels affected Boomtown New Orleans and its competitors, resulting in elevated costs and Adjusted EBITDA margins below our historical average. Due to an improved marketing focus in the 2010 third quarter, Adjusted EBITDA increased significantly versus the prior-year period despite modest revenue growth. For the nine months ended September 30, 2010, results at Boomtown New Orleans reflect heightened competition in the area, principally from the Mississippi Gulf Coast, as well as general economic conditions.

 

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Belterra Casino Resort
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2010 vs. 2009  
    (in millions)             (in millions)          
Gaming revenues
  $ 33.9     $ 35.2       (3.7 )%   $ 98.8     $ 107.8       (8.3 )%
Total revenues
    40.6       41.7       (2.6 )%     115.8       125.4       (7.7 )%
Operating income
    5.5       3.9       41.0 %     11.8       13.1       (9.9 )%
Adjusted EBITDA
    9.5       7.2       31.9 %     23.7       23.2       2.2 %
Results during 2010 at Belterra reflect soft general economic conditions and increased competition in Belterra’s market area, as well as the negative impact of decreased customer traffic due to record snowfall during the first quarter of 2010. During mid-2008, two racetrack casinos opened in the Indianapolis metropolitan area, each of which operates approximately 2,000 slot machines. One of these racetrack casinos replaced its temporary casino with a significantly nicer permanent facility in March 2009, and another competitor replaced a smaller facility with a new, larger casino in Lawrenceburg, Indiana in June 2009. Despite a decline in revenues for the three and nine month periods ended September 30, 2010 as compared to the prior year period, Belterra was able to improve Adjusted EBIDTA as a percentage of revenues through operating efficiencies.
In November 2009, Ohio voters passed a constitutional amendment which allows one casino to be developed in each of Cincinnati, Columbus, Cleveland and Toledo. Casinos are expected to open in the first half of 2012, and will likely provide additional competition to Belterra.
Boomtown Bossier City
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2009 vs. 2008  
    (in millions)             (in millions)          
Gaming revenues
  $ 20.3     $ 22.0       (7.7 )%   $ 63.0     $ 66.7       (5.5 )%
Total revenues
    21.7       23.3       (6.9 )%     67.2       70.8       (5.1 )%
Operating income
    3.4       3.4             11.4       11.0       3.6 %
Adjusted EBITDA
    5.0       5.0             16.3       15.9       2.5 %
Boomtown Bossier City improved Adjusted EBITDA for the nine months ended September 30, 2010 despite the competitive Bossier City/Shreveport gaming market through a refinement of the property’s marketing efforts and certain cost-cutting measures. Boomtown Bossier City competes with four dockside riverboat casino-hotels and a racetrack operation. In addition, the Bossier City/Shreveport gaming market, which is approximately 188 miles east of Dallas/Fort Worth, competes with Native American gaming properties in southern Oklahoma located approximately 60 miles north of Dallas/Fort Worth.
Boomtown Reno
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2010 vs. 2009  
    (in millions)             (in millions)          
Gaming revenues
  $ 6.4     $ 6.6       (3.0 )%   $ 17.0     $ 17.2       (1.2 )%
Total revenues
    11.9       11.5       3.5 %     31.1       29.7       4.7 %
Operating loss
    0.6       (0.8 )   NM       (1.2 )     (4.5 )     (73.3 )%
Adjusted EBITDA (loss)
    1.2       (0.1 )   NM       0.7       (1.4 )   NM  
     
NM — Not Meaningful
Boomtown Reno increased its Adjusted EBITDA for the nine months ended September 30, 2010 despite flat revenues as a result of heightened focus on operational efficiencies. The Reno market continues to be adversely affected by significant competition from the northern California Native American gaming market, as well as soft economic conditions in both the Reno and northern California markets.

 

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Other factors affecting income from continuing operations
The following is a description of the other costs and benefits for the three and nine months ended September 30, 2010 and 2009, respectively:
                                                 
                    Percentage                     Percentage  
    For the three months     Increase/     For the nine months     Increase/  
    ended September 30,     (Decrease)     ended September 30,     (Decrease)  
    2010     2009     2010 vs. 2009     2010     2009     2010 vs. 2009  
    (in millions)             (in millions)          
Other benefits (costs):
                                               
Corporate expenses
  $ (7.2 )   $ (9.0 )     (20.0 )%   $ (25.4 )   $ (27.1 )     (6.3 )%
Depreciation and amortization
    (28.5 )     (24.4 )     16.8 %     (83.8 )     (74.0 )     13.2 %
Pre-opening and development costs
    (1.2 )     (5.9 )     (79.7 )%     (12.2 )     (12.8 )     (4.7 )%
Non-cash share-based compensation
    (1.3 )     (2.0 )     (35.0 )%     (4.8 )     (9.5 )     (49.5 )%
Impairment of indefinite-lived intangible assets
              NM       (11.5 )         NM  
Impairment of land and construction costs
    (4.7 )         NM       (23.1 )         NM  
Write-downs, reserves and recoveries, net
    (0.3 )     (0.3 )           4.0       (1.1 )   NM  
Other non-operating income
                      0.2       0.1       100 %
Gain on sale of equity securities
                            12.9     NM  
Loss on early extinguishment of debt
          (8.8 )   NM       (1.9 )     (8.8 )     (78.4 )%
Interest expense, net of capitalized interest
    (27.9 )     (18.7 )     49.2 %     (76.3 )     (51.2 )     49.0 %
Income tax benefit (expense)
    5.3       (0.5 )   NM       7.4       (1.0 )   NM  
NM — Not Meaningful
Corporate expenses represent unallocated payroll, professional service fees, rent, travel expenses and other general and administrative expenses not directly incurred by our casino and hotel operations. Such expenses decreased during the third quarter of 2010 compared to the same period in 2009 due to reduced headcount, the elimination of our aviation department upon the sale of our corporate jet earlier in 2010, and the consolidation of all corporate offices to one location.
Depreciation and amortization expense increased during the three and nine months ended September 30, 2010 compared to the same periods in 2009 due to the increase in fixed assets related to the opening of River City Casino on March 4, 2010.
Pre-opening and Development Costs for the three and nine months ended September 30, 2010 and 2009 consist of the following:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
River City
    0.3       2.1       9.7       4.9  
Baton Rouge
    0.3       2.8       0.7       5.5  
Sugarcane Bay (a)
    0.1       0.6       1.2       1.7  
Other
    0.5       0.4       0.6       0.7  
 
                       
Total pre-opening and development costs
  $ 1.2     $ 5.9     $ 12.2     $ 12.8  
 
                       
     
(a)   Sugarcane Bay expenses during the three months ended September 30, 2010 are related to the project termination.

 

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Non-cash Share-based Compensation Expense was $1.3 million and $4.8 million for the three and nine months ended September 30, 2010, respectively, and $2.0 million and $9.5 million for the three and nine months ended September 30, 2009, respectively. Non-cash share-based compensation expense relates to the theoretical value of options on the date of issuance and is not related to actual stock price performance. The expense has decreased due to the acceleration of and cancellation of options in connection with the resignation of our former Chief Executive Officer during the fourth quarter of 2009, as well as the acceleration of vesting of stock options held by our board members during the second quarter of 2009, resulting in no on-going expense for these options.
Impairment of Indefinite-lived Intangible Assets As the result of the cancellation of our planned Sugarcane Bay project in Lake Charles, Louisiana, we surrendered the related gaming license to the Louisiana Gaming Control Board. In connection with this decision, we fully impaired our gaming license by $11.5 million during the second quarter of 2010, which amount comprises impairment of indefinite-lived intangible assets in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010.
Impairment of Land and Construction Costs In April 2010, we cancelled our planned Sugarcane Bay project in Lake Charles, Louisiana and surrendered the related gaming license to the Louisiana Gaming Control Board. In connection with this decision, we recorded impairment charges of $18.6 million during the nine months ended September 30, 2010, which includes all previously capitalized construction in progress and costs to terminate the construction contract with the general contractor. We are still negotiating one additional contract and expect to incur additional contract termination costs, which amounts are not determinable as of September 30, 2010.
In September 2010, we expanded the scope and budget for our casino and hotel development currently under construction in Baton Rouge, Louisiana from $250 million to $357 million (excluding land acquisition costs and capitalized interest). As a result of the increased scope and budget of the Baton Rouge project, we incurred an impairment charge for certain of the previously capitalized design components of the project, totaling $4.6 million in the third quarter of 2010.
Write-downs, reserves and recoveries, net consist of the following:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Impairment of assets
  $     $ 0.1     $ 0.5     $ 0.5  
Loss on disposal of assets
    0.4       0.2       2.0       0.6  
Legal settlement recoveries
                (6.5 )      
 
                       
Write-downs, reserves and recoveries, net
  $ 0.4     $ 0.3     $ (4.0 )   $ 1.1  
 
                       
Impairment of assets: In July 2006, we sold land to Cabela’s Retail, Inc. for the construction of a branded sporting goods store. Cabela’s Retail, Inc. financed its retail store construction and certain road access improvements (which also benefited our Boomtown Reno property) through the issuance of sales tax increment bonds through local or state governmental authorities. In April 2010, we purchased $5.3 million face amount of these bonds from Cabela’s Retail, Inc. for $5.0 million. During the second quarter of 2010, we recorded an impairment of $0.2 million related to these bonds.
We impaired the fair value of leasehold improvements related to vacated office space by $0.3 million during the second quarter of 2010.
Loss on disposal of assets: During the third quarter of 2010, we sold various slot equipment at our properties for a net loss of $0.4 million. During the second quarter of 2010, we sold our corporate jet, two seaplanes, a warehouse and slot equipment at our properties for a net loss of $1.6 million.
Legal settlement recoveries: In March 2010, we received a $6.5 million legal settlement related to the recovery of legal fees.

 

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Interest expense was as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Interest expense before capitalization of interest
  $ 28.0     $ 22.5     $ 79.9     $ 60.0  
Less: capitalized interest
    (0.1 )     (3.8 )     (3.6 )     (8.8 )
 
                       
Total interest expense, net of capitalized interest
  $ 27.9     $ 18.7     $ 76.3     $ 51.2  
 
                       
The increase in interest expense before capitalized interest for the nine months ended September 30, 2010 from the same 2009 period was due to higher debt levels and the replacement of less expensive revolver borrowings with new, long-term notes. We believe the longer maturity, fixed interest rate and less-restrictive covenants of the new, long-term notes warranted the higher debt levels and interest rate. We stopped capitalizing interest on our River City Casino upon its opening in March 2010, contributing to the decrease in capitalized interest.
Loss on early extinguishment of debt: During the nine months ended September 30, 2010, we incurred a loss on early extinguishment of debt of $1.9 million for the write off of unamortized debt issuance costs related to the modification of our Credit Facility and the early retirement of our 8.25% Notes.
Income Tax Benefit (Expense) During the three months ended September 30, 2010, the Internal Revenue Service (“IRS”) concluded its examination of our income tax returns for the years ended December 31, 2006, 2007 and 2008 with no adjustment. In addition, the statute of limitations for making an assessment expired for certain prior-year state income tax returns. As a result, we reevaluated our unrecognized tax benefits (“UTBs”) and recognized $15.7 million of previous UTBs in the current period. Most of these UTBs had no effect on our effective tax rate as they were temporary differences only. In addition, we also reversed accruals of $3.4 million related to federal and state interest and penalties on the UTBs, which affected our effective tax rate for the three and nine months ended September 30, 2010.
Discontinued Operations Discontinued operations as of September 30, 2010 consist of our former Casino Magic Argentina operations, the Atlantic City operations, the former President Casino operations, former Casino Magic Biloxi operations and former operations at The Casino at Emerald Bay in The Bahamas.
Casino Magic Argentina: On April 29, 2010, we entered into an agreement to sell our Argentina operations. We had previously reflected the business as a discontinued operation and the related assets and liabilities as held for sale. On June 30, 2010, we completed the sale of our Argentina operations for approximately $40 million and recognized a loss on disposal of approximately $0.2 million, which amount has been included in income (loss) from discontinued operations, net of income taxes, in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010.
Atlantic City: In the first quarter of 2010, we made the decision to sell our Atlantic City operations. We have reflected our Atlantic City entities as discontinued operations and the related assets and liabilities as held for sale.
President Casino: We closed the President Casino on June 24, 2010, and have reflected the entity in discontinued operations and the remaining assets and liabilities as held for sale. In October 2010, The Admiral Riverboat, on which the President Casino formerly operated, was sold.
Casino Magic Biloxi: Casino Magic Biloxi closed after significant damage from Hurricane Katrina in 2005. In February 2010, we settled all remaining insurance claims in exchange for a final payment of approximately $23.4 million. We have received payments totaling approximately $215 million from our insurers related to this asset. Prior insurance advances that exceeded the book value of destroyed assets and certain insured expenses were recorded as a deferred gain of $18.3 million. As a result of this final settlement, we recognized this deferred gain in February 2010 in addition to the gain associated with the proceeds.

 

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The Casino at Emerald Bay: The Casino at Emerald Bay in The Bahamas was closed during the first quarter of 2009. We are actively marketing one remaining asset associated with our former Bahamian operation; however, events and circumstances beyond our control have extended the period to complete the sale of this asset beyond a year. During the third quarter of 2010, we determined that a triggering event had occurred due to deteriorating local market conditions in The Bahamas. We reviewed the carrying value of our one remaining asset for recoverability, and recorded an impairment charge of $0.8 million during the third quarter of 2010. The operation continues to be classified as a discontinued operation and the related assets as discontinued operations held for sale.
Revenue, expense and net income for entities and operations included in discontinued operations are summarized as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Revenues
  $ 0.6     $ 14.8     $ 29.1     $ 44.5  
 
                       
Operating loss
    (2.0 )     (2.2 )     (11.7 )     (5.9 )
Non-operating income (loss)
                41.5       (0.2 )
 
                       
Income (loss) before income taxes
    (2.0 )     (2.2 )     29.8       (6.1 )
Income tax expense
    (0.3 )     (0.2 )     (4.9 )     (3.1 )
 
                       
Income (loss) from discontinued operations
  $ (2.3 )   $ (2.4 )   $ 24.9     $ (9.2 )
 
                       
Net income for entities and operations included in discontinued operations are broken out as follows:
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in millions)  
Casino Magic Argentina
  $     $ 1.7     $ 3.4     $ 5.1  
Atlantic City
    (1.7 )     (2.4 )     (8.6 )     (7.4 )
President Casino
    (0.7 )     (1.4 )     (6.1 )     (3.4 )
The Casino at Emerald Bay in The Bahamas
    (0.8 )     (0.0 )     (0.8 )     (0.1 )
Casino Magic Biloxi
    1.2       (0.1 )     41.9       (0.3 )
Income taxes
    (0.3 )     (0.2 )     (4.9 )     (3.1 )
 
                       
Income (loss) from discontinued operations
  $ (2.3 )   $ (2.4 )   $ 24.9     $ (9.2 )
 
                       
Net assets for entities and operations included in discontinued operations are summarized as follows:
                 
    September 30,     December 31,  
    2010     2009  
    (in millions)  
Assets:
               
Land, buildings, riverboats and equipment, net
  $ 38.0     $ 57.4  
Other assets, net
    23.8       39.0  
 
           
 
  $ 61.8     $ 96.4  
 
           
 
               
Liabilities:
               
Accounts payable and other accrued liabilities
  $ 6.2     $ 17.4  
Long term liabilities
    0.3       19.3  
 
           
 
    6.5       36.7  
 
           
Net Assets
  $ 55.3     $ 59.7  
 
           

 

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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2010, we held $228.4 million of cash and cash equivalents. We estimate that approximately $70 million is needed to fund our casino cages, slot machines and day-to-day operating and corporate accounts. On February 5, 2010, we entered into a $375 million amended and restated credit facility, which facility matures in March 2014 (the “Credit Facility”). As of September 30, 2010, we had no borrowings under the Credit Facility and had $9.6 million committed under various letters of credit. We anticipate additional borrowings in the future to fund development and expansion projects and other general corporate needs. On May 6, 2010, the Company closed an offering of $350 million in aggregate principal amount of new 8.75% senior subordinated notes due 2020.
We generally produce significant cash flows from operations, though this is not always reflected in our reported net income due to large non-cash charges such as depreciation. However, our ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, funding of construction of our development projects and our compliance with covenants contained in the Credit Facility and bond indentures.
                         
    For the nine months ended     Percentage  
    September 30,     Increase/(Decrease)  
    2010     2009     2010 vs. 2009  
    (in millions)          
Net cash provided by operating activities
  $ 89.1     $ 91.4       (2.5 )%
Net cash used in investing activities
  $ (97.9 )   $ (122.3 )     (20.0 )%
Net cash provided by financing activities
  $ 108.6     $ 70.6       53.8 %
Operating Cash Flow
Our cash provided by operating activities in the nine months ended September 30, 2010 as compared to the prior-year period decreased slightly. This slight decrease resulted from improved operating margins and insurance claim proceeds received during 2010 related to property damages caused by Hurricane Katrina, the positive impacts of which were more than offset by significant reductions in certain liabilities.
Investing Cash Flow
Investing cash flows include capital expenditures offset by the sale of property and equipment. During the nine months ended September 30, 2010, capital expenditures were offset by $14.4 million in proceeds from the sale of our corporate jet, two seaplanes, and gaming equipment. In addition, we received cash proceeds of $35.5 million due to the sale of our Argentina operations. Also, we deposited $25 million into an escrow account pursuant to an agreement with the State of Louisiana and the Louisiana Gaming Control Board with respect to the establishment, maintenance and operation of our Baton Rouge project, which will be returned in accordance with the terms of the escrow account. The following is a summary of our capital expenditures for the nine months ended September 30, 2010 and 2009:
                 
    For the nine months ended  
    September 30,  
    2010     2009  
    (in millions)  
River City
  $ 69.6     $ 108.0  
Sugarcane Bay
    14.3       10.4  
Baton Rouge
    11.3        
Belterra Casino Resort
    6.5       5.0  
L’Auberge du Lac
    9.1       3.9  
Boomtown New Orleans
    2.1       3.2  
Lumière Place Casino
    2.3       8.2  
Boomtown Reno
    0.3       1.6  
Atlantic City
    0.1       1.0  
Boomtown Bossier City
    3.7       2.6  
Other
    4.2       2.3  
 
           
Total capital expenditures
  $ 123.5     $ 146.2  
 
           

 

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In April 2010, we cancelled our planned Sugarcane Bay project and surrendered the related gaming license to the Louisiana Gaming Control Board. In connection with this decision, we recorded impairment charges primarily related to construction costs and the gaming license of approximately $30.1 million during the nine months ended September 30, 2010. We are still negotiating one additional contract and expect to incur additional contract termination costs, which amounts are not determinable as of September 30, 2010.
In September 2010, we expanded the scope and budget of our Baton Rouge project from $250 million to $357 million (exclusive of land costs and capitalized interest). Of this amount, $343 million remains to be spent of the overall Baton Rouge project budget as of September 30, 2010. In connection with the expanded scope and budget of our Baton Rouge project, we incurred an impairment charge for certain of the previously capitalized design components of the project, totaling $4.6 million in the third quarter of 2010.
Our intention is to use existing cash resources, expected cash flows from operations and funds available under our Credit Facility to fund operations, maintain existing properties, make necessary debt service payments and fund the development of our Baton Rouge project. In the event that our future cash flows from operations do not match the levels we currently anticipate, whether due to downturns in the economy or otherwise, we may need to raise funds through the capital markets.
Our ability to borrow under our Credit Facility is contingent upon, among other things, meeting customary financial and other covenants. If we are unable to borrow under our Credit Facility, or if our operating results are adversely affected because of a reduction in consumer spending, or for any other reason, our ability to maintain our existing properties or complete our Baton Rouge project may be affected unless we sell assets, enter into leasing arrangements, or take other measures to find additional resources. There is no certainty that we will be able to do so on terms that are favorable to the Company or at all.
In addition to the effect that the global financial crisis has already had on us, we may face significant challenges if conditions in the economy and financial markets worsen. The credit crisis has adversely affected overall consumer demand, which has had a negative effect on our revenues. Furthermore, the effects of the recent disruption to the overall economy could adversely affect consumer confidence and the willingness of consumers to spend money on leisure activities. Because of the current economic environment, certain of our customers may curtail the frequency of their visits to our casinos and may reduce the amounts they wager and spend when compared to similar statistics in better economic times. All of these effects could have a material adverse effect on our liquidity.
For further discussion of our projects and associated capital needs, see the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” within our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and within our Current Report on Form 8-K filed on June 21, 2010.
Financing Cash Flow
Credit Facility
On February 5, 2010, we amended and restated our Credit Facility, which reduced our revolving credit facility from $531 million to $375 million. As of September 30, 2010, we had no outstanding borrowings and had $9.6 million committed under various letters of credit under our Credit Facility. The Credit Facility matures on March 31, 2014.
The Credit Facility permits us, in the future, to increase the commitments under the revolving credit facility and to obtain term loan commitments, in each case from existing or new lenders that are willing to commit to such an increase so long as we are in pro forma compliance with a consolidated senior secured debt ratio and a consolidated total leverage ratio.
The proceeds of the Credit Facility may be used for general corporate purposes, including the payment of certain expenditures associated with the construction and development of our Baton Rouge project.

 

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The Credit Facility does not have any debt repayment obligations prior to 2014. We are obligated to make mandatory prepayments of indebtedness under the Credit Facility from the net proceeds of certain debt offerings, certain asset sales and dispositions and certain casualty events, subject in certain cases to our right to reinvest proceeds. In addition, we will be required to prepay borrowings under the Credit Facility with a percentage of our “excess cash flow” (as defined in the Credit Facility, and reduced for cash flow applied to permitted capital spending). We do not believe such payments will be required in the foreseeable future. We have the option to prepay all or any portion of the indebtedness under the Credit Facility at any time without premium or penalty.
The interest rate margins for revolving credit loans under the Credit Facility depend on our consolidated total leverage ratio, which in general is the ratio of consolidated total debt (less excess cash, as defined in the Credit Facility) to annualized adjusted EBITDA, as defined in the Credit Facility. The Credit Facility bears interest, at our option, at either a LIBOR rate plus a margin ranging from 3.00% to 4.75% or at a base rate plus a margin ranging from 1.50% to 3.25%, in either case based on our consolidated total leverage ratio. The undrawn revolver facility bears a commitment fee for un-borrowed amounts of 0.25% to 0.75% per annum based on our consolidated total leverage ratio.
The Credit Facility has, among other things, financial covenants, capital spending limits and other affirmative and negative covenants, including a required minimum consolidated interest coverage ratio, a maximum permitted consolidated total leverage ratio and a maximum permitted consolidated senior secured leverage ratio. The Credit Facility also has certain covenants regarding construction projects, including, among other requirements for the Baton Rouge project, a requirement that an “in-balance” test be satisfied prior to the spending of $25 million after January 1, 2010. In October 2010, we amended our Credit Facility, as discussed below, to increase this $25 million limit to $100 million.
On October 28, 2010, we amended the Credit Facility in connection with the expanded scope and budget of our Baton Rouge project. The amendment to the Credit Facility increased the capital expenditures limit for the Baton Rouge project from $235 million to $375 million. In addition, the definition of commencement of construction was amended, with respect to the Baton Rouge project, to provide the spending from and after January 1, 2010 of an amount greater than $100 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest). Prior to this amendment, the definition of commencement of construction for the Baton Rouge project provided the spending from and after January 1, 2010 of an amount greater than $25 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest).
In addition, there is a provision in the Credit Facility that we cannot spend more than $25 million on the Baton Rouge project after January 1, 2010 unless we have received at least $40 million in the aggregate from various non-debt capital sources. The Company has the funds to meet this requirement.
The obligations under the Credit Facility are secured by most of our assets and our domestic restricted subsidiaries, including a pledge of the equity interests in our domestic subsidiaries and, if and when formed or acquired, by a pledge of up to 66% of the then-outstanding equity interests of our foreign restricted subsidiaries. Our obligations under the Credit Facility are also guaranteed by our domestic restricted subsidiaries and are required to be guaranteed by our foreign restricted subsidiaries, if and when such foreign restricted subsidiaries are formed or acquired, unless such guarantee causes material adverse tax, foreign gaming or foreign law consequences. The subsidiaries that own our Atlantic City site, a subsidiary that holds approximately $10.5 million in cash and cash equivalents, and a subsidiary that holds approximately $66 million in cash and cash equivalents are currently unrestricted subsidiaries for purposes of the Credit Facility.
Senior and Senior Subordinated Indebtedness
As of September 30, 2010, we had outstanding $450 million aggregate principal amount of 8.625% senior notes due 2017 (“8.625% Notes”), $385 million aggregate principal amount of 7.50% senior subordinated notes due 2015 (“7.50% Notes”) and $350 million aggregate principal amount of 8.75% senior subordinated notes due 2020 (“8.75% Notes”).

 

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On May 6, 2010, we closed the offering of the 8.75% Notes. The 8.75% Notes were issued in a private offering conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, at a price equal to par. Net of the initial purchasers’ fees and various costs and expenses, proceeds from the offering were approximately $341.5 million. Using the net proceeds, we redeemed all of our then-existing 8.25% senior subordinated notes due 2012 at par, of which $200 million in aggregate principal amount was outstanding, and repaid $80 million in then-outstanding revolving credit borrowings under the Credit Facility. The remaining net proceeds from the offering are expected to be used for general corporate purposes, including the funding of our Baton Rouge project.
The 8.625% Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future senior debt, including debt under our Credit Facility. The 8.625% Notes are, however, effectively subordinated to our Credit Facility, which is secured by a first priority lien, as well as any other secured debt which may be issued in the future. The 8.625% Notes are guaranteed on a senior basis by certain of our current and future domestic restricted subsidiaries. The 8.625% Notes rank senior to our existing 7.50% Notes and 8.75% Notes.
The 7.50% Notes and 8.75% Notes are unsecured senior subordinated obligations and rank subordinate in right of payment to all of our and our subsidiary guarantors’ existing and future indebtedness, except indebtedness that expressly provides that it ranks equal or subordinate in right of payment to the 7.50% Notes and 8.75% Notes. The 7.50% Notes and 8.75% Notes are guaranteed on a senior subordinated basis by certain of our current and future domestic restricted subsidiaries. The 7.50% Notes and the 8.75% Notes are subordinated to our 8.625% Notes and to our Credit Facility.
Under the indenture governing the 8.625% Notes, among other debt baskets, we are permitted to incur the greater of $750 million or 3.5x Consolidated EBITDA (as defined in the Indenture) in senior indebtedness and secured indebtedness, which debt basket excludes the 8.625% Notes. Under the indentures governing the 7.50% Notes and 8.75% Notes, we are permitted to incur the greater of $1.5 billion or 2.5x Adjusted EBITDA (as defined in the indentures) in senior indebtedness. Under these senior secured indebtedness baskets, we are permitted in certain circumstances to incur senior unsecured indebtedness. In addition, the indentures governing the 8.625% Notes, the 7.50% Notes and the 8.75% Notes include other debt incurrence baskets, including a permitted refinancing basket and a general debt basket, the most restrictive of which permits the greater of $250 million or 5% of Consolidated Total Assets (as defined in the indentures). Under all three indentures, we may also incur additional indebtedness if, after giving effect to the indebtedness proposed to be incurred, our Consolidated Coverage Ratio (essentially, a ratio of adjusted EBITDA to interest) for a trailing four-quarter period on a pro forma basis (as defined in our indentures) would be at least 2.0 to 1.0. Our Consolidated Coverage Ratio under all three currently existing indentures was below 2.0 to 1.0 as of September 30, 2010.
The 7.50% Notes, 8.625% Notes and 8.75% Notes become callable at a premium over their face amount on June 15, 2011, August 1, 2013 and May 15, 2015, respectively. Such premiums decline periodically as the notes progress towards their respective maturities. All of our notes are redeemable prior to such times at a price that reflects a yield to the first call that is equivalent to the applicable Treasury bond yield plus 0.5 percentage points.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
During the three months ended September 30, 2010, there were no material changes to our contractual obligations and commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
On October 28, 2010, we entered into a Second Amendment to the Third Amended and Restated Credit Agreement with Barclays Bank PLC, as the administrative agent and the lenders party thereto (the “Second Amendment”), which amends our Third Amended and Restated Credit Agreement dated as of February 5, 2010, as previously amended (the “Credit Facility”). The purpose of the Second Amendment was to modify our Credit Facility in connection with the expanded scope and budget of our Baton Rouge project from $250 million to $357 million (exclusive of land acquisition costs and capitalized interest). Specifically, the Second Amendment increased the capital expenditures limit for the Company’s Baton Rouge project from $235 million to $375 million. In addition, pursuant to the Second Amendment, the definition of commencement of construction was amended, with respect to the Company’s Baton Rouge project, to provide the spending from and after January 1, 2010 of an amount greater than $100 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest). Prior to the Second Amendment, the definition of commencement of construction for the Company’s Baton Rouge project provided the spending from and after January 1, 2010 of an amount greater than $25 million (excluding certain costs such as land acquisition costs, costs to obtain a gaming license and capitalized interest).

 

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CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies and estimates can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. For a more extensive discussion of our accounting policies, see Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There were no newly identified significant changes in the third quarter of 2010, nor were there any material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and in our Current Report on Form 8-K filed on June 21, 2010.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q, as well as in other reports filed with or furnished to the SEC or statements made by us, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, we may provide oral or written forward-looking statements in our other periodic reports on Form 10-K and Form 8-K, press releases and other materials released to the public. All forward-looking statements made in this Quarterly Report on Form 10-Q and any documents we incorporate by reference are made pursuant to the Act. Words such as, but not limited to, “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “could,” “may,” “will,” “should,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements, which may include, without limitation, expected results of operations, adequacy and sufficiency of resources to fund our development projects, liquidity, the state of the credit markets, the state of the economy, anticipated completion and opening schedules of the Company’s Baton Rouge project, anticipated results for the Baton Rouge project and continued results of the Company’s River City casino, expansion plans, construction schedules, cash needs, cash reserves, operating and capital expenses, expense reductions, the sufficiency of insurance coverage, anticipated marketing costs at various projects, the future outlook of Pinnacle and the gaming industry, our pending regulatory and legal matters, are all subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by us. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Factors that may cause our actual performance to differ materially from that contemplated by such forward-looking statements include, among others:
    our business may be sensitive to reductions in consumers’ discretionary spending as a result of recent downturns in the economy;
    our present indebtedness and projected future borrowings could have adverse consequences to us; future cash flows may not be sufficient to meet our obligations and we might have difficulty obtaining additional financing; we may experience adverse effects of interest-rate and exchange-rate fluctuations;
    insufficient or lower-than-expected results generated from our new developments and any acquired properties may negatively affect the market for our securities;
    many factors could prevent us from completing our Baton Rouge project as planned, including the escalation of construction or other costs beyond increments anticipated in our construction budget;
    our operations are largely dependent on the skill and experience of our management and key personnel. The loss of management and other key personnel could significantly harm our business and we may not be able to effectively replace members of management who have left the company;

 

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    the gaming industry is very competitive and increased competition, including by Native American gaming facilities and the recent expansion of gaming in Ohio, could adversely affect our profitability;
    our industry is highly regulated, which makes us dependent on obtaining and maintaining gaming licenses and subjects us to potentially significant fines and penalties. Potential changes in the regulatory environment could harm our business;
    we may not meet the conditions for the maintenance of the license that we plan to utilize for our Baton Rouge project;
    we operate in a highly taxed industry and may be subject to higher taxes in the future;
    the global financial crisis and recession may have an effect on our business and financial condition in ways that we currently cannot accurately predict;
    subsequent phases to certain of our existing projects and potential enhancements at our properties may require us to raise additional capital;
    natural disasters have made it more challenging for us to obtain similar levels of Weather Catastrophe Occurrence/Named Windstorm, Flood and Earthquake insurance coverage for our properties compared to the levels before the 2005 hurricane;
    state legislatures from time to time consider legislation that could increase our competition or taxes; and
    our results of operations and financial condition could be materially adversely affected by the occurrence of natural disasters, such as hurricanes, or other catastrophic events, including war and terrorism.
For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, please see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in this Quarterly Report on Form 10-Q, as well as the “Risk Factors” and “Management Discussion and Analysis of Financial Condition and Results of Operations” sections contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and our Current Report on Form 8-K filed on June 21, 2010 and review our other filings (other than any portion of such filings that are furnished under applicable SEC Rules rather than filed) with the SEC, which are hereby incorporated by reference into this Quarterly Report on Form 10-Q. All forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
At times, we are exposed to market risk from adverse changes in interest rates with respect to the short-term floating interest rate on borrowings under our Credit Facility. As of September 30, 2010, we had $9.6 million committed under various letters of credit. As of September 30, 2010, if LIBOR rates were to increase or decrease by one percentage point, our interest expense would not increase or decrease, assuming constant debt levels. Under our Credit Facility, any borrowings outstanding accrue interest at LIBOR plus a margin determined by our current consolidated leverage ratio, which margin was 4.0% as of September 30, 2010.
The table below provides the principal cash flows and related weighted average interest rates by contractual maturity dates for our debt obligations at September 30, 2010. At September 30, 2010, we did not hold any material investments in market-risk-sensitive instruments of the type described in Item 305 of Regulation S-K.
                                                                 
Liabilities   2010     2011     2012     2013     2014     Thereafter     Total     Fair Value  
    (in thousands)  
7.50% Notes
                                $ 385,000     $ 385,000     $ 371,525  
Fixed Rate
    7.50 %     7.50 %     7.50 %     7.50 %     7.50 %     7.50 %     7.50 %        
8.625% Notes
                                $ 450,000     $ 450,000     $ 477,000  
Fixed Rate
    8.625 %     8.625 %     8.625 %     8.625 %     8.625 %     8.625 %     8.625 %        
8.75% Notes
                                $ 350,000     $ 350,000     $ 341,250  
Fixed Rate
    8.75 %     8.75 %     8.75 %     8.75 %     8.75 %     8.75 %     8.75 %        
All Other
  $ 23     $ 95     $ 102     $ 110     $ 118     $ 325     $ 773     $ 773  
Avg. Interest Rate
    7.25 %     7.25 %     7.25 %     7.25 %     7.25 %     7.25 %     7.25 %        

 

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Item 4. Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010. Based on this evaluation, the Company’s management, including the CEO and the CFO, concluded that, as of September 30, 2010, the Company’s disclosure controls and procedures were effective, in that they provide a reasonable level of assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.
No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II
Item 1. Legal Proceedings
During the three months ended September 30, 2010, there were no material developments with respect to the litigation described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, under the heading “Legal Proceedings” and to which reference should be made.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

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Item 6. Exhibits
                 
Exhibit            
Number   Description of Exhibit
  3.1     Restated Certificate of Incorporation of Pinnacle Entertainment, Inc., as amended, is hereby incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on May 9, 2005. (SEC File No. 001-13641).
       
 
       
  3.2     Restated Bylaws of Pinnacle Entertainment, Inc., as amended, are hereby incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 2, 2010. (SEC File No. 001-13641).
       
 
       
  10.1   First Amendment to Amended and Restated Employment Agreement, dated September 23, 2010, between Pinnacle Entertainment, Inc. and John A. Godfrey is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 24, 2010. (SEC File No. 001-13641).
       
 
       
  10.2   First Amendment to Amended and Restated Employment Agreement, dated September 23, 2010, between Pinnacle Entertainment, Inc. and Carlos Ruisanchez is hereby incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 24, 2010. (SEC File No. 001-13641).
       
 
       
  10.3     Second Amendment to Third Amended and Restated Credit Agreement, dated as of October 28, 2010, by and between Pinnacle Entertainment, Inc., Barclays Bank PLC, as the administrative agent, and the Required Lenders is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2010. (SEC File No. 001-13641).
       
 
       
  11 *   Statement re: Computation of Earnings Per Share.
       
 
       
  31.1 *   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
       
 
       
  31.2 *   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
       
 
       
  32 **   Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
       
 
       
  101 **   The following financial statements from Pinnacle Entertainment, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, formatted in XBRL (eXtensible Business Reporting Language):
       
 
       
       
 
  (i)   unaudited Condensed Consolidated Balance Sheets — September 30, 2010 and December 31, 2009.
       
 
       
       
 
  (ii)   unaudited Condensed Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2010 and 2009.
       
 
       
       
 
  (iii)   unaudited Condensed Consolidated Statements of Cash Flows —Nine Months Ended September 30, 2010 and 2009.
       
 
       
       
 
  (iv)   Notes to unaudited Condensed Consolidated Financial Statements — September 30, 2010.
 
     
*   Filed herewith.
 
**   Furnished herewith.
 
  Management contract or compensatory plan or arrangement.

 

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Pinnacle Entertainment, Inc.
(Registrant)
 
 
Date: November 5, 2010  By:   /s/ Stephen H. Capp    
    Stephen H. Capp   
    Executive Vice President and Chief Financial Officer
(Authorized Officer, Principal Financial Officer)
 
 
 

 

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EXHIBIT INDEX
                 
Exhibit            
Number   Description of Exhibit
  3.1     Restated Certificate of Incorporation of Pinnacle Entertainment, Inc., as amended, is hereby incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on May 9, 2005. (SEC File No. 001-13641).
       
 
       
  3.2     Restated Bylaws of Pinnacle Entertainment, Inc., as amended, are hereby incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 2, 2010. (SEC File No. 001-13641).
       
 
       
  10.1   First Amendment to Amended and Restated Employment Agreement, dated September 23, 2010, between Pinnacle Entertainment, Inc. and John A. Godfrey is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 24, 2010. (SEC File No. 001-13641).
       
 
       
  10.2   First Amendment to Amended and Restated Employment Agreement, dated September 23, 2010, between Pinnacle Entertainment, Inc. and Carlos Ruisanchez is hereby incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 24, 2010. (SEC File No. 001-13641).
       
 
       
  10.3     Second Amendment to Third Amended and Restated Credit Agreement, dated as of October 28, 2010, by and between Pinnacle Entertainment, Inc., Barclays Bank PLC, as the administrative agent, and the Required Lenders is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2010. (SEC File No. 001-13641).
       
 
       
  11 *   Statement re: Computation of Earnings Per Share.
       
 
       
  31.1 *   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
       
 
       
  31.2 *   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
       
 
       
  32 **   Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
       
 
       
  101 **   The following financial statements from Pinnacle Entertainment, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, formatted in XBRL (eXtensible Business Reporting Language):
       
 
       
       
 
  (i)   unaudited Condensed Consolidated Balance Sheets — September 30, 2010 and December 31, 2009.
       
 
       
       
 
  (ii)   unaudited Condensed Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2010 and 2009.
       
 
       
       
 
  (iii)   unaudited Condensed Consolidated Statements of Cash Flows —Nine Months Ended September 30, 2010 and 2009.
       
 
       
       
 
  (iv)   Notes to unaudited Condensed Consolidated Financial Statements — September 30, 2010.
 
     
*   Filed herewith.
 
**   Furnished herewith.
 
  Management contract or compensatory plan or arrangement.

 

43

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