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Pinnacle Entertainment, Inc. 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-2.5
  3. Ex-11
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32
  7. Ex-32
SEC Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________ 
FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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: 001-37666
____________________________
PINNACLE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
47-4668380
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3980 Howard Hughes Parkway
Las Vegas, NV 89169
(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 o NO x*
* The Company became subject to the requirements on April 12, 2016.
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 x 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 o
Accelerated filer o
Non-accelerated filer x
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 x
As of the close of business on May 9, 2016, the number of outstanding shares of the registrant’s common stock was 61,054,313.



PINNACLE ENTERTAINMENT, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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




PART I
Item 1. Financial Statements
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share data)
 
For the three months ended March 31,
 
2016
 
2015
Revenues:
 
 
 
Gaming
$
520,841

 
$
514,347

Food and beverage
31,995

 
32,030

Lodging
11,247

 
11,495

Retail, entertainment and other
15,942

 
14,967

Total revenues
580,025

 
572,839

Expenses and other costs:
 
 
 
Gaming
267,133

 
264,885

Food and beverage
29,910

 
29,167

Lodging
5,608

 
5,788

Retail, entertainment and other
4,513

 
5,090

General and administrative
104,862

 
102,290

Depreciation and amortization
54,096

 
67,831

Pre-opening, development and other costs
5,329

 
1,567

Write-downs, reserves and recoveries, net
2,890

 
3,144

Total expenses and other costs
474,341

 
479,762

Operating income
105,684

 
93,077

Interest expense, net
(59,793
)
 
(61,083
)
Loss from equity method investment

 
(83
)
Income from continuing operations before income taxes
45,891

 
31,911

Income tax expense
(4,998
)
 
(4,832
)
Income from continuing operations
40,893

 
27,079

Income from discontinued operations, net of income taxes
125

 
217

Net income
41,018

 
27,296

Net loss attributable to non-controlling interest
(8
)
 
(10
)
Net income attributable to Pinnacle Entertainment, Inc.
$
41,026

 
$
27,306

Net income per common share—basic
 
 
 
Income from continuing operations
$
0.67

 
$
0.45

Income from discontinued operations, net of income taxes
0.00

 
0.00

Net income per common share—basic
$
0.67

 
$
0.45

Net income per common share—diluted
 
 
 
Income from continuing operations
$
0.65

 
$
0.44

Income from discontinued operations, net of income taxes
0.00

 
0.00

Net income per common share—diluted
$
0.65

 
$
0.44

Number of shares—basic
61,362

 
60,508

Number of shares—diluted
63,571

 
62,396

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

3



PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(amounts in thousands)
 
For the three months ended March 31,
 
2016
 
2015
Net income
$
41,018

 
$
27,296

Comprehensive income
41,018

 
27,296

Comprehensive loss attributable to non-controlling interest
(8
)
 
(10
)
Comprehensive income attributable to Pinnacle Entertainment, Inc.
$
41,026

 
$
27,306

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.


4



PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
121,317

 
$
164,034

Accounts receivable, net of allowance for doubtful accounts of $9,736 and $9,445
25,195

 
33,594

Inventories
9,662

 
10,309

Income tax receivable, net

 
1,133

Prepaid expenses and other assets
24,566

 
14,624

Assets held for sale and assets of discontinued operations
9,780

 
9,938

Total current assets
190,520

 
233,632

Land, buildings, vessels and equipment, net
2,823,364

 
2,856,011

Goodwill
914,525

 
914,525

Intangible assets, net
476,573

 
479,543

Other assets, net
46,274

 
47,200

Total assets
$
4,451,256

 
$
4,530,911

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
35,733

 
$
67,297

Accrued interest
69,787

 
50,091

Accrued compensation
55,073

 
74,069

Accrued taxes
38,704

 
38,910

Other accrued liabilities
92,875

 
84,872

Current portion of long-term debt
11,006

 
11,006

Total current liabilities
303,178

 
326,245

Long-term debt less current portion
3,514,731

 
3,616,729

Other long-term liabilities
33,139

 
36,605

Deferred income taxes
191,340

 
187,823

Total liabilities
4,042,388

 
4,167,402

Commitments and contingencies (Note 8)

 

Stockholders’ Equity:
 
 
 
Preferred stock—$1.00 par value, 250,000 shares authorized, none issued or outstanding

 

Common stock—$0.10 par value, 150,000,000 authorized, 61,074,913 and 60,870,749 shares issued and outstanding, net of treasury shares
6,745

 
6,724

Additional paid-in capital
1,126,981

 
1,122,661

Accumulated deficit
(664,293
)
 
(705,319
)
Accumulated other comprehensive income
408

 
408

Treasury stock, at cost, 6,374,882 of treasury shares for both periods
(71,090
)
 
(71,090
)
Total Pinnacle stockholders’ equity
398,751

 
353,384

Non-controlling interest
10,117

 
10,125

Total stockholders’ equity
408,868

 
363,509

Total liabilities and stockholders’ equity
$
4,451,256

 
$
4,530,911

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

5



PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(amounts in thousands)
 
Capital Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Total Pinnacle Stockholders’ Equity
 
Non-Controlling Interest
 
Total
Stockholders’
Equity
Balance as of January 1, 2016
60,871

 
$
6,724

 
$
1,122,661

 
$
(705,319
)
 
$
408

 
$
(71,090
)
 
$
353,384

 
$
10,125

 
$
363,509

Net income (loss)

 

 

 
41,026

 

 

 
41,026

 
(8
)
 
41,018

Share-based compensation

 

 
4,351

 

 

 

 
4,351

 

 
4,351

Common stock issuance and option exercises
204

 
21

 
808

 

 

 

 
829

 

 
829

Tax withholding related to vesting of restricted stock units

 

 
(839
)
 

 

 

 
(839
)
 

 
(839
)
Balance as of March 31, 2016
61,075

 
$
6,745

 
$
1,126,981

 
$
(664,293
)
 
$
408

 
$
(71,090
)
 
$
398,751

 
$
10,117

 
$
408,868


See accompanying notes to the unaudited Condensed Consolidated Financial Statements.


6



PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
 
For the three months ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
41,018

 
$
27,296

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
54,096

 
67,831

Loss on sales or disposals of long-lived assets, net
2,716

 
383

Loss from equity method investment

 
83

Impairment of land, buildings, vessels and equipment
174

 
2,769

Amortization of debt issuance costs and debt discounts/premiums
4,143

 
1,608

Share-based compensation expense
4,351

 
4,145

Change in income taxes
4,990

 
23,351

Changes in operating assets and liabilities:
 
 
 
Receivables, net
8,232

 
(1,328
)
Prepaid expenses and other
(8,266
)
 
12

Accounts payable, accrued expenses and other
(25,986
)
 
(13,053
)
Net cash provided by operating activities
85,468

 
113,097

Cash flows from investing activities:
 
 
 
Capital expenditures
(21,884
)
 
(21,118
)
Net proceeds from disposition of asset held for sale
325

 

Proceeds from sales of property and equipment

 
294

Loans receivable
(750
)
 
(750
)
Net cash used in investing activities
(22,309
)
 
(21,574
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facility
64,000

 
35,000

Repayments under credit facility
(169,250
)
 
(137,750
)
Proceeds from common stock options exercised
215

 
6,146

Other
(841
)
 
(252
)
Net cash used in financing activities
(105,876
)
 
(96,856
)
Change in cash and cash equivalents
(42,717
)
 
(5,333
)
Cash and cash equivalents at the beginning of the period
164,034

 
164,654

Cash and cash equivalents at the end of the period
$
121,317

 
$
159,321

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
36,011

 
$
39,465

Cash payments (refunds) related to income taxes, net
14

 
(17,379
)
Decrease in construction-related deposits and liabilities
(491
)
 
(5,617
)
Non-cash issuance of common stock
614

 
260


See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

7



PINNACLE ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1—Organization and Summary of Significant Accounting Policies

Organization. Pinnacle Entertainment, Inc., is an owner, operator and developer of casinos and related hospitality and entertainment businesses. References in these footnotes to “Pinnacle,” “OpCo,” the “Company,” “we,” “our” or “us” refer to Pinnacle Entertainment, Inc. and its subsidiaries, except where stated or the context otherwise indicates. References to “Former Pinnacle” refer to Pinnacle Entertainment, Inc. prior to the Spin-Off and Merger (as such terms are defined below).

We own and operate 15 gaming businesses, located in Colorado, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada, and Ohio. We also hold a majority interest in the racing license owner, and we are a party to a management contract, for Retama Park Racetrack located outside of San Antonio, Texas. In addition to these properties, we own and operate a live and televised poker tournament series under the trade name Heartland Poker Tour. We view each of our operating properties as an operating segment with the exception of our two properties in Jackpot, Nevada, which we view as one operating segment. For financial reporting purposes, we aggregate our operating segments into the following reportable segments:
Midwest segment, which includes:
Location
Ameristar Council Bluffs
Council Bluffs, Iowa
Ameristar East Chicago
East Chicago, Indiana
Ameristar Kansas City
Kansas City, Missouri
Ameristar St. Charles
St. Charles, Missouri
River City
St. Louis, Missouri
Belterra
Florence, Indiana
Belterra Park
Cincinnati, Ohio
 
 
South segment, which includes:
Location
Ameristar Vicksburg
Vicksburg, Mississippi
Boomtown Bossier City
Bossier City, Louisiana
Boomtown New Orleans
New Orleans, Louisiana
L’Auberge Baton Rouge
Baton Rouge, Louisiana
L’Auberge Lake Charles
Lake Charles, Louisiana
 
 
West segment, which includes:
Location
Ameristar Black Hawk
Black Hawk, Colorado
Cactus Petes and Horseshu
Jackpot, Nevada

On April 28, 2016, we completed the transactions under the terms of a definitive agreement (the “Merger Agreement”) with Gaming and Leisure Properties, Inc. (“GLPI”), a real estate investment trust. Pursuant to the terms of the Merger Agreement, Former Pinnacle separated its operating assets and liabilities (and its Belterra Park property and excess land at certain locations) into a newly formed subsidiary named PNK Entertainment, Inc. (“OpCo”) and distributed to its stockholders, on a pro rata basis, all of the issued and outstanding shares of common stock of OpCo (such distribution referred to as the “Spin-Off”). As a result, its stockholders received one share of OpCo common stock, with a par value of $0.01 per share, for each share of Former Pinnacle common stock that they owned. Gold Merger Sub, LLC, a wholly owned subsidiary of GLPI (“Merger Sub”), then merged with and into Former Pinnacle (the “Merger”), with Merger Sub surviving the Merger as a wholly owned subsidiary of GLPI. Following the Merger, OpCo was renamed Pinnacle Entertainment, Inc., and is now the operator of the gaming facilities acquired by GLPI under a triple-net master lease agreement (the “Master Lease”). For more information regarding the Spin-Off and Merger, see Note 6, “Investment, Restructuring and Acquisition Activities.”

Former Pinnacle’s historical Consolidated Financial Statements and accompanying notes thereto have been determined to represent OpCo based on the conclusion that, for accounting purposes, the Spin-Off should be evaluated as the reverse of its legal form under the requirements of Accounting Standards Codification (“ASC”) Subtopic 505-60, Spinoffs and Reverse Spinoffs, resulting in OpCo being considered the accounting spinnor. In addition, the Master Lease of the gaming facilities acquired by GLPI will not qualify for sale-leaseback accounting pursuant to ASC Topic 840, Leases. Therefore, the Master Lease will be accounted for as a financing obligation and the gaming facilities will remain on OpCo’s Consolidated Financial

8



Statements. The effect of the Spin-Off and Merger on our unaudited Condensed Consolidated Financial Statements and notes thereto will be recognized in the second quarter of 2016.

Basis of Presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions of the Securities and Exchange Commission (the “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 generally accepted accounting principles in the United States (“GAAP”). The results for the periods indicated are unaudited, but reflect all adjustments, which are of a normal recurring nature, that management considers necessary for a fair presentation of operating results. 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 Information Statement included as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC in final form on April 11, 2016.

Principles of Consolidation. The unaudited Condensed Consolidated Financial Statements include the accounts of Pinnacle Entertainment, Inc. and its subsidiaries. Investments in the common stock of unconsolidated affiliates in which we have the ability to exercise significant influence are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of unaudited Condensed Consolidated Financial Statements in conformity with GAAP 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 our customer loyalty 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. Fair value measurements affect our accounting and impairment assessments of our long-lived assets, investments in unconsolidated affiliates, assets acquired in an acquisition, goodwill, and other intangible assets. Fair value measurements also affect our accounting for certain financial assets and liabilities. Fair value is defined 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 and is measured according to a hierarchy that includes: “Level 1” inputs, such as quoted prices in an active market for identical assets or liabilities; “Level 2” inputs, which are observable inputs for similar assets; or “Level 3” inputs, which are unobservable inputs.

The following table presents a summary of fair value measurements by level for certain liabilities measured at fair value on a recurring basis in the unaudited Condensed Consolidated Balance Sheets:
 
 
 
Fair Value Measurements Using:
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
As of March 31, 2016
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation
$
0.4

 
$
0.4

 
$

 
$

As of December 31, 2015
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation
$
0.4

 
$
0.4

 
$

 
$



9



The following table presents a summary of fair value measurements by level for certain financial instruments not measured at fair value on a recurring basis in the unaudited Condensed Consolidated Balance Sheets for which it is practicable to estimate fair value:
 
 
 
 
 
Fair Value Measurements Using:
 
Total Carrying Amount
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
As of March 31, 2016
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Held-to-maturity securities
$
14.4

 
$
15.5

 
$

 
$
12.4

 
$
3.1

Promissory notes
$
14.9

 
$
19.4

 
$

 
$
19.4

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
$
3,525.7

 
$
3,673.0

 
$

 
$
3,673.0

 
$

As of December 31, 2015
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Held-to-maturity securities
$
14.4

 
$
15.2

 
$

 
$
12.1

 
$
3.1

Promissory notes
$
14.1

 
$
19.2

 
$

 
$
19.2

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
$
3,627.7

 
$
3,740.6

 
$

 
$
3,740.6

 
$


The estimated fair values for certain of our long-term held-to-maturity securities and our long-term promissory notes were based on Level 2 inputs using observable market data for comparable instruments in establishing prices.

The estimated fair values for certain of our long-term held-to-maturity securities were based on Level 3 inputs using a present value of future cash flow valuation technique that relies on management assumptions and qualitative observations. Key significant unobservable inputs in this technique include discount rate risk premiums and probability-weighted cash flow scenarios.

The estimated fair values of our long-term debt, which includes the fair value of our senior notes, senior subordinated notes, senior secured credit facility and term loans, were based on Level 2 inputs of observable market data on comparable debt instruments on or about March 31, 2016 and December 31, 2015.

The fair values of our short-term financial instruments approximate the carrying amounts due to their short-term nature.

Land, Buildings, Vessels and Equipment. Land, buildings, vessels and equipment are stated at cost. Land includes land not currently being used in our operations, which totaled $35.8 million as of March 31, 2016. We capitalize the costs of improvements that extend the life of the asset. We expense repair and maintenance costs as incurred. Gains or losses on the disposition of land, buildings, vessels and equipment are included in the determination of income.

We review the carrying amounts of our land, buildings, vessels and equipment used in our operations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from estimated future undiscounted cash flows expected to result from its use and eventual disposition. If the undiscounted cash flows exceed the carrying amount, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying amount, then an impairment charge is recorded based on the fair value of the asset.

Development costs directly associated with the acquisition, development, and construction of a project are capitalized as a cost of the project during the periods in which activities necessary to get the property ready for its intended use are in progress. The costs incurred for development projects are carried at cost. Interest costs associated with development projects are capitalized as part of the cost of the constructed asset. When no debt is incurred specifically for a project, interest is capitalized on amounts expended for the project using our weighted-average cost of borrowing. Capitalization of interest ceases when the project, or discernible portion of the project, is substantially complete. If substantially all of the construction activities of a project are suspended, capitalization of interest will cease until such activities are resumed.


10



The following table presents a summary of our land, buildings, vessels and equipment:
 
March 31,
2016
 
December 31,
2015
 
(in millions)
Land, buildings, vessels and equipment:
 

 
 

Land and land improvements
$
424.6

 
$
422.8

Buildings, vessels and improvements
2,675.3

 
2,674.6

Furniture, fixtures and equipment
767.5

 
763.8

Construction in progress
37.2

 
33.2

Land, buildings, vessels and equipment, gross
3,904.6

 
3,894.4

Less: accumulated depreciation
(1,081.3
)
 
(1,038.4
)
Land, buildings, vessels and equipment, net
$
2,823.3

 
$
2,856.0


Goodwill and Other Intangible Assets. Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations. Indefinite-lived intangible assets include gaming licenses and trade names for which it is reasonably assured that we will continue to renew indefinitely. Goodwill and other indefinite-lived intangible assets are subject to an annual assessment for impairment during the fourth quarter (October 1st test date), or more frequently if there are indications of possible impairment. Amortizing intangible assets include player relationships and favorable leasehold interests. We review amortizing intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

As a result of the Spin-Off and Merger, we will test our reporting unit goodwill and other indefinite-lived intangible assets for impairment. This testing may result in a significant non-cash impairment charge to our goodwill or our other indefinite-lived intangible assets, which would be recognized during the second quarter of 2016.

Customer Loyalty Programs. We offer incentives to our customers through our mychoice customer loyalty program. Under the mychoice customer loyalty program, customers earn points based on their level of play that may be redeemed for various benefits, such as cash back, dining, or hotel stays, among others. The reward credit balance under the plan will be forfeited if the customer does not earn or use any reward credits over the prior six-month period. In addition, based on their level of play, customers can earn additional benefits without redeeming points, such as a car lease, among other items.
We accrue a liability for the estimated cost of providing these benefits as the benefits are earned. Estimates and assumptions are made regarding cost of providing the benefits, breakage rates, and the combination of goods and services customers will choose. We use historical data to assist in the determination of estimated accruals. Changes in estimates or customer redemption habits could produce different results. As of March 31, 2016 and December 31, 2015, we had accrued $27.0 million and $25.4 million, respectively, for the estimated cost of providing these benefits, which are included in “Other accrued liabilities” in our unaudited Condensed Consolidated Balance Sheets.

Revenue Recognition. Gaming revenues consist of the net win from gaming activities, which is the difference between amounts wagered and amounts paid to winning patrons. Cash discounts and other cash incentives to customers related to gaming play are recorded as a reduction to gaming revenue. Food and beverage, lodging, retail, entertainment, and other operating revenues are recognized as products are delivered or services are performed. Advance deposits on lodging are recorded as accrued liabilities until services are provided to the customer.

The retail value of food and beverage, lodging and other services furnished to guests on a complimentary basis is included in revenues and then deducted as promotional allowances in calculating total revenues. The estimated cost of providing such promotional allowances is primarily included in gaming expenses. Complimentary revenues that have been excluded from the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:


11



 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Food and beverage
$
33.8

 
$
35.2

Lodging
15.8

 
15.2

Other
3.7

 
4.4

Total promotional allowances
$
53.3

 
$
54.8


The costs to provide such complimentary benefits were as follows:
 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Promotional allowance costs included in gaming expense
$
38.2

 
$
39.3


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 our unaudited Condensed Consolidated Statements of Operations. These taxes were as follows:
 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Gaming taxes
$
145.8

 
$
144.7

Pre-opening, Development and Other Costs. Pre-opening, development and other costs consist of payroll costs to hire, employ and train the workforce prior to opening an operating facility; marketing campaigns prior to and in connection with the opening; legal and professional fees related to the project but not otherwise attributable to depreciable assets; lease payments; real estate taxes; acquisition costs; restructuring costs; and other costs prior to the opening of an operating facility. Pre-opening, development and other costs are expensed as incurred. Pre-opening, development and other costs consist of the following:
 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Restructuring costs (1)
$
3.5

 
$
0.7

Meadows acquisition costs (2)
1.7

 

Other
0.1

 
0.9

Total pre-opening, development and other costs
$
5.3

 
$
1.6

(1)
Amounts comprised of costs associated with the separation of Former Pinnacle’s real estate assets from its operating assets. See Note 6, “Investment, Restructuring and Acquisition Activities.”
(2)
Amount comprised of costs associated with the Company’s acquisition of The Meadows Racetrack and Casino (“Meadows”) business. See Note 6, “Investment, Restructuring and Acquisition Activities.”

Earnings Per Share. The computation of basic and diluted earnings per share is based on net income attributable to Pinnacle Entertainment, Inc. divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively. Diluted earnings per share reflect the addition of potentially dilutive securities, which include in-the-money share-based awards. We calculate the effect of dilutive securities using the treasury stock method. A total of 1.1 million and 1.4 million out-of-the-money share-based awards were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2016, and 2015, respectively, because including them would have been anti-dilutive.

Reclassifications. The unaudited Condensed Consolidated Financial Statements reflect certain reclassifications to prior year amounts to conform to classification in the current period. These reclassifications had no effect on the previously reported net income.

12




Recently Issued Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which is a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defers the implementation of this new standard to be effective for fiscal years beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which amend certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are currently evaluating which transition approach we will utilize and the impact of adopting this accounting standard on our unaudited Condensed Consolidated Financial Statements.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period or periods for which the requisite service has already been rendered. We adopted this guidance during the first quarter of 2016 using a prospective transition approach and it did not have a material impact on our unaudited Condensed Consolidated Financial Statements.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which amends 1) the assessment of whether a limited partnership is a variable interest entity; 2) the effect that fees paid to a decision maker have on the consolidation analysis; 3) how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion; and 4) for entities other than limited partnerships, clarifies how to determine whether the equity holders as a group have power over an entity. We adopted this guidance during the first quarter of 2016 and it did not have a material impact on our unaudited Condensed Consolidated Financial Statements.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. We adopted this guidance during the first quarter of 2016 and it did not have a material impact on our unaudited Condensed Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for the annual and interim periods beginning after December 15, 2017, with early adoption not permitted. We are currently evaluating the impact of adopting this accounting standard on our unaudited Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Recognition and Measurement of Leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off balance sheet financing. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of adopting this accounting standard on our unaudited Condensed Consolidated Financial Statements.


13



In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, which clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The effective date for this update is for the annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of adopting this accounting standard on our unaudited Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which, among other things, eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The effective date for this update is for the annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of adopting this accounting standard on our unaudited Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The effective date for this update is for the annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of adopting this accounting standard 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. Given 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.

14



Note 2—Long-Term Debt

Long-term debt consisted of the following:
 
March 31, 2016
 
Outstanding Principal
 
Unamortized (Discount) Premium
 
Unamortized Debt Issuance Costs
 
Long-Term Debt, Net
 
(in millions)
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving Credit Facility due 2018
$
750.1

 
$

 
$

 
$
750.1

B-2 Term Loans due 2020
197.0

 
(7.4
)
 
(1.7
)
 
187.9

6.375% Senior Notes due 2021
850.0

 

 
(12.5
)
 
837.5

7.50% Senior Notes due 2021
1,040.0

 
44.8

 

 
1,084.8

7.75% Senior Subordinated Notes due 2022
325.0

 

 
(4.6
)
 
320.4

8.75% Senior Subordinated Notes due 2020
350.0

 

 
(5.1
)
 
344.9

Other
0.1

 

 

 
0.1

Total debt including current maturities
3,512.2

 
37.4

 
(23.9
)
 
3,525.7

Less: current maturities
(11.0
)
 

 

 
(11.0
)
Total long-term debt
$
3,501.2

 
$
37.4

 
$
(23.9
)
 
$
3,514.7


 
December 31, 2015
 
Outstanding Principal
 
Unamortized (Discount) Premium
 
Unamortized Debt Issuance Costs
 
Long-Term Debt, Net
 
(in millions)
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving Credit Facility due 2018
$
750.1

 
$

 
$

 
$
750.1

B-2 Term Loans due 2020
302.2

 
(10.9
)
 
(2.4
)
 
288.9

6.375% Senior Notes due 2021
850.0

 

 
(13.0
)
 
837.0

7.50% Senior Notes due 2021
1,040.0

 
46.7

 

 
1,086.7

7.75% Senior Subordinated Notes due 2022
325.0

 

 
(4.7
)
 
320.3

8.75% Senior Subordinated Notes due 2020
350.0

 

 
(5.4
)
 
344.6

Other
0.1

 

 

 
0.1

Total debt including current maturities
3,617.4

 
35.8

 
(25.5
)
 
3,627.7

Less: current maturities
(11.0
)
 

 

 
(11.0
)
Total long-term debt
$
3,606.4

 
$
35.8

 
$
(25.5
)
 
$
3,616.7


Senior Secured Credit Facility: In August 2013, we entered into an Amended and Restated Credit Agreement (“Credit Facility”), which amended and restated our Fourth Amended and Restated Credit Agreement dated as of August 2, 2011, as amended. The Credit Facility consists of (i) $1.6 billion of term loans comprised of $500.0 million of Tranche B-1 term loans and $1.1 billion of Tranche B-2 term loans and (ii) a $1.0 billion revolving credit commitment. As of March 31, 2016, we had approximately $750.1 million drawn under the $1.0 billion revolving credit facility, approximately $197.0 million in outstanding principal balance of Tranche B-2 term loans, and approximately $12.0 million committed under various letters of credit under our Credit Facility. We fully repaid the principal balance of our Tranche B-1 term loans during 2014. The outstanding principal on the Tranche B-2 term loans was discounted on issuance for the reduction in the proceeds received when the transaction was consummated.

6.375% Senior Notes due 2021: In August 2013, we issued $850.0 million in aggregate principal amount of 6.375% senior notes due 2021 (“6.375% Notes”) to fund the acquisition of Ameristar Casinos, Inc. (“Ameristar”). The 6.375% Notes

15



bore interest at a rate of 6.375% per year, payable semi-annually in arrears on February 1st and August 1st of each year. Net of initial purchasers’ fees and various costs and expenses, proceeds from the offering were approximately $835.0 million.

7.50% Senior Notes due 2021: As part of the acquisition of Ameristar, we assumed $1.04 billion in aggregate principal amount of 7.50% Senior Notes due 2021 (“7.50% Notes”) that were originally issued by Ameristar. The 7.50% Notes bore interest at a rate of 7.50% per year, payable semi-annually in arrears on April 15th and October 15th of each year. The 7.50% Notes were recorded at fair value as part of the purchase price allocation with a premium of $72.8 million. In addition, a consent fee payment to the holders of the 7.50% Notes at acquisition was included as a discount component of the total carrying amount.

7.75% Senior Subordinated Notes due 2022: In March 2012, we issued $325.0 million in aggregate principal amount of 7.75% senior subordinated notes due 2022 (“7.75% Notes”). The 7.75% Notes were issued at par with interest payable on April 1st and October 1st of each year. Net of initial purchasers’ fees and various costs and expenses, proceeds from the offering were approximately $318.3 million.

8.75% Senior Subordinated Notes due 2020: In May 2010, we issued $350.0 million in aggregate principal amount of 8.75% senior subordinated notes due 2020 (“8.75% Notes”). The 8.75% Notes were issued at par with interest payable on May 15th and November 15th of each year. Net of the initial purchasers’ fees and various costs and expenses, proceeds from the offering were approximately $341.5 million.

Financing in Connection with the Spin-Off and Merger

In connection with the Spin-Off and Merger, the Company made a dividend to Former Pinnacle in the amount of $808.4 million (the “Cash Payment”), which was equal to the amount of existing debt outstanding of Former Pinnacle at the time of the closing of the Merger, less $2.7 billion that GLPI assumed pursuant to the Merger Agreement. Immediately prior to the consummation of the Spin-Off and Merger, Former Pinnacle’s Credit Facility was repaid in full and terminated and its 6.375% Notes, 7.50% Notes and 7.75% Notes were redeemed. Former Pinnacle’s indenture governing its 8.75% Notes will be redeemed on May 15, 2016. Following the consummation of the Spin-Off and Merger, the Company had no outstanding obligations under Former Pinnacle’s Credit Facility, the 6.375% Notes, the 7.50% Notes, the 7.75% Notes and the 8.75% Notes.

On April 28, 2016, the Company completed its debt financings in connection with the Merger, consisting of (i) $375.0 million aggregate principal amount of 5.625% senior notes due 2024 (the “5.625% Notes”) and (ii) the credit agreement among the Company and certain lenders thereto (the “Credit Agreement”), comprised of (x) a $185.0 million term loan A facility with a maturity of five years (the “Term Loan A Facility”), (y) a $300.0 million term loan B facility with a maturity of seven years (the “Term Loan B Facility”) and (z) a $400.0 million revolving credit facility with a maturity of five years (the “Revolving Credit Facility” and together with the Term Loan A Facility and the Term Loan B Facility, the “OpCo Credit Facilities”).

Loans under the Term Loan A Facility and Revolving Credit Facility will initially bear interest at a rate per annum equal to, at our option, LIBOR plus 2.00% or the base rate plus 1.00% and, after delivery of the Company’s financial statements for the first full fiscal quarter after the closing date, such loans will bear interest at a rate per annum equal to, at our option, LIBOR plus an applicable margin from 1.50% to 2.50% or the base rate plus an applicable margin from 0.50% to 1.50%, in each case, depending on the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) as of the most recent fiscal quarter. Loans under the Term Loan B Facility will bear interest at a rate per annum equal to, at our option, LIBOR plus 3.00% or the base rate plus 2.00%. In addition, we will pay a commitment fee on the unused portion of the commitments under the Revolving Credit Facility at a rate that will range from 0.30% to 0.50% per annum, depending on the Consolidated Total Net Leverage Ratio as of the most recent fiscal quarter.

The 5.625% Notes were issued at par, mature on May 1, 2024, and bear interest at the rate of 5.625% per annum. Interest on the 5.625% Notes is payable semi-annually on May 1st and November 1st of each year, commencing November 1, 2016. The net proceeds from the offering of the 5.625% Notes, after deducting the initial purchasers’ selling commissions and the estimated offering expenses, were approximately $369.4 million. The 5.625% Notes were issued pursuant to Rule 144A and Regulation S of the Securities Act of 1933. We are required to file a registration statement on Form S-4 to register the 5.625% Notes, which must be declared effective by the SEC by July 30, 2017.

The proceeds of the OpCo Credit Facilities, together with the proceeds of the 5.625% Notes were used on the closing date of the Spin-Off and Merger (i) to make the Cash Payment and (ii) to pay fees and expenses related to the issuance of the OpCo Credit Facilities and the 5.625% Notes. Proceeds from loans under the Revolving Credit Facility will be used for working capital, to fund permitted dividends, distributions and acquisitions, for general corporate purposes and for any other purpose

16



not prohibited by the Credit Agreement.

See Note 6, “Investments, Restructuring and Acquisition Activities,” for further discussion of the Spin-Off and Merger.
Interest expense, net, was as follows:
 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Interest expense
$
59.9

 
$
61.1

Interest income
(0.1
)
 

Interest expense, net
$
59.8

 
$
61.1

       
Note 3—Income Taxes

Our effective tax rate for continuing operations for the three months ended March 31, 2016, was 10.9%, or an expense of $5.0 million, as compared to an effective tax rate of 15.1%, or an expense of $4.8 million, for the corresponding prior year period. Our tax rate differs from the statutory rate of 35.0% due to the effects of permanent items, deferred tax expense on tax amortization of indefinite-lived intangible assets, state taxes, and a reserve for unrecognized tax benefits. Our state tax provision represents taxes in the jurisdictions of Indiana and Louisiana as well as the city jurisdictions in Missouri, where we have no valuation allowance.

Note 4—Employee Benefit Plans
Share-based Compensation: As of March 31, 2016, we had approximately 7.4 million share-based awards outstanding, including common stock options, restricted stock units, and performance stock units, which are detailed below. Our 2015 Equity and Performance Incentive Plan has approximately 0.2 million share-based awards available for grant as of March 31, 2016. We recorded share-based compensation expense as follows:
 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Share-based compensation expense
$
4.4

 
$
4.1

         
Stock options: The following table summarizes information related to our common stock options:
 
Number of
Stock Options
 
Weighted Average
Exercise Price
Options outstanding as of January 1, 2016
5,375,476

 
$
16.04

Granted

 
$

Exercised
(14,405
)
 
$
14.90

Canceled or forfeited
(2,675
)
 
$
23.23

Options outstanding as of March 31, 2016
5,358,396

 
$
16.04

Options exercisable as of March 31, 2016
3,766,337

 
$
13.13

Expected to vest as of March 31, 2016
1,301,667

 
$
23.09


The unamortized compensation costs not yet expensed related to stock options totaled approximately $11.3 million as of March 31, 2016. The weighted average period over which the costs are expected to be recognized is approximately one year. The aggregate amount of cash we received from the exercise of stock options was $0.2 million and $6.1 million for the three months ended March 31, 2016, and 2015, respectively. The associated shares were newly issued common stock. The following information is provided for our stock options:

17



 
For the three months ended March 31,
 
2016
 
2015
Weighted-average grant date fair value
$

 
$
9.44

Restricted Stock Units: The following table summarizes information related to our restricted stock units:
 
Number of
Units
 
Weighted Average
Grant Date Fair Value
Non-vested as of January 1, 2016
1,311,423

 
$
25.16

Granted
4,105

 
$
31.68

Vested
(44,579
)
 
$
26.50

Canceled or forfeited
(4,443
)
 
$
28.74

Non-vested as of March 31, 2016
1,266,506

 
$
25.12


The unamortized compensation costs not yet expensed related to non-vested restricted stock units, totaled approximately $23.4 million as of March 31, 2016. The weighted average period over which the costs are expected to be recognized is approximately one year.

Performance Stock Units: The following table summarizes information related to our performance stock units:
 
Number of
Units
 
Weighted Average
Grant Date Fair Value
Non-vested as of January 1, 2016
408,228

 
$
23.23

Granted

 
$

Canceled or forfeited

 
$

Non-vested as of March 31, 2016
408,228

 
$
23.23

Share-Based Awards After the Spin-Off and Merger: As a result of the Spin-Off and Merger, each vested and non-vested equity awards granted on or prior to July 16, 2015 were converted into a combination of (1) corresponding equity awards of OpCo which will continue to vest on the same schedule as Former Pinnacle’s outstanding equity and non-equity awards based on service with OpCo and (2) fully-vested shares of common stock of GLPI. The relative split of the value of equity awards between OpCo awards and GLPI shares was based on the relative values of OpCo and Former Pinnacle prior to the Merger. The strike prices of options were also proportionately adjusted.

Each of Former Pinnacle’s equity awards granted after July 16, 2015 were converted into OpCo equity awards with the same intrinsic value and will continue to vest on the same schedule as Former Pinnacle’s outstanding equity awards based on service with OpCo.


18



Note 5—Write-downs, Reserves and Recoveries, Net

Write-downs, reserves and recoveries, net consist of the following:
 
For the three months ended March 31,
 
2016
 
2015
 
(in millions)
Loss on disposals of long-lived assets, net
$
2.7

 
$
0.4

Impairment of long-lived assets
0.2

 
2.7

Write-downs, reserves and recoveries, net
$
2.9

 
$
3.1


Loss on disposals of long-lived assets, net: During the three months ended March 31, 2016 and 2015, we recorded net losses related primarily to disposals of furniture, fixtures and equipment at our properties in the normal course of business.

Impairment of long-lived assets: During the three months ended March 31, 2016 and 2015, we recorded non-cash impairments on slot and other equipment at our properties. Additionally, during the three months ended March 31, 2015, we recorded a $2.6 million non-cash impairment of our land in Central City, Colorado to reduce the carrying amount of the asset to its estimated fair value less cost to sell.

Note 6—Investment, Restructuring and Acquisition Activities

Merger Agreement with GLPI: On April 28, 2016, we completed the transactions contemplated under the terms of the Merger Agreement, dated as of July 20, 2015. The Merger Agreement effectuated the Spin-Off of Former Pinnacle’s operations (and Belterra Park property and excess land at certain locations) into OpCo, an independent publicly traded company, after which Former Pinnacle merged with and into Gold Merger Sub, with Gold Merger Sub surviving the Merger as a wholly-owned subsidiary of GLPI. Following the Merger, OpCo was renamed Pinnacle Entertainment, Inc., and is now the operator of the gaming facilities acquired by GLPI under the Master Lease. The Master Lease has an initial term of 10 years with five subsequent, five-year renewal periods at our option. The Company will pay initial annual rent of $377 million to GLPI.

In completing the Merger, each share of common stock, par value $0.10 per share, of Former Pinnacle (the “Former Pinnacle Common Stock”) issued and outstanding immediately prior to the effective time (other than shares of Former Pinnacle Common Stock (i) owned or held in treasury by Former Pinnacle or (ii) owned by GLPI, its subsidiaries or Merger Sub) were canceled and converted into the right to receive 0.85 shares of common stock, par value $0.01 per share, of GLPI.

As further described in Note 2, “Long-Term Debt,” in connection with the Spin-Off and Merger, the Company made a dividend to Former Pinnacle of $808.4 million, which was equal to the amount of debt outstanding at the time of the closing of the Merger, less $2.7 billion that GLPI assumed pursuant to the Merger Agreement. Following the consummation of the Spin-Off and Merger, the Company had no outstanding obligations under Former Pinnacle’s Credit Facility, the 6.375% Notes, the 7.50% Notes, the 7.75% Notes and the 8.75% Notes.

Acquisition of the Meadows Business: On March 29, 2016, we entered into a purchase agreement (the “Purchase Agreement”) with GLP Capital, L.P. (“GLPC”), a subsidiary of GLPI, pursuant to which we will acquire the Meadows located in Washington County, Pennsylvania for total consideration of approximately $138 million. Following the close of the transaction, we will own and operate the Meadows’ gaming entertainment and harness racing business subject to a triple-net lease of its underlying real property with GLPI (the “Meadows Lease”).

The Meadows Lease will provide for a 10-year initial term, including renewal terms at our option, up to a total of 29 years. The initial annual rent will be $25.5 million, comprised of a base rent of $14.0 million, which is subject to annual escalation in the future, and an initial percentage rent of $11.5 million, which will adjust every two years.
The completion of the transaction is subject to various closing conditions, including obtaining the approval of the Pennsylvania Gaming Control Board and the Pennsylvania Harness Racing Commission. The Company anticipates funding the acquisition with its Revolving Credit Facility. Subject to the satisfaction or waiver of conditions in the Purchase Agreement, we expect the transaction to close by the end of the third quarter of 2016.


19



Equity Method Investment: We have invested in a land re-vitalization project in downtown St. Louis, which is accounted for under the equity method and included in “Other assets, net” in our unaudited Condensed Consolidated Balance Sheets. As of both March 31, 2016, and December 31, 2015, the carrying amount of this investment was $1.7 million.

Retama Park Racetrack: We hold 75.5% of the equity of Pinnacle Retama Partners, LLC (“PRP”) and consolidate the accounts of PRP in our unaudited Condensed Consolidated Financial Statements. As of March 31, 2016, PRP held $14.9 million in promissory notes issued by Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, and $11.3 million in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and local government corporation bonds, which are included in “Other assets, net” in our unaudited Condensed Consolidated Balance Sheets, have long-term contractual maturities and are collateralized by the assets of the Retama Park Racetrack. The contractual terms of the promissory notes include interest payments due at maturity; however, we have not recorded accrued interest because uncertainty exists as to RDC’s ability to make the interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost basis is recovered.

Note 7—Discontinued Operations and Assets Held for Sale

Assets held for sale are measured at the lower of carrying amount or estimated fair value less cost to sell. The results of operations of a component or group of components that has either been disposed of or is classified as held for sale is included in discontinued operations when certain criteria are met. During the three months ended March 31, 2016 and 2015, income before income taxes reported in discontinued operations was $0.1 million and $0.2 million, respectively. The fair value of the assets to be sold was determined using a market approach using Level 2 inputs, as defined in Note 1, “Organization and Summary of Significant Accounting Policies.”

Central City, Colorado: In March 2016, we completed the sale of approximately two acres of land in Central City, Colorado, which had a carrying amount of $0.3 million, for cash consideration of $0.3 million. This land was classified as held for sale as of December 31, 2015. During the three months ended March 31, 2015, in order to reduce the carrying amount of this land to its estimated fair value less cost to sell, we recorded a $2.6 million non-cash impairment charge, which is included in “Write-downs, reserves and recoveries, net” in our unaudited Condensed Consolidated Statements of Operations.

Ameristar Lake Charles: In July 2013, we entered into an agreement to sell all of the equity interests of our subsidiary, which was constructing the Ameristar Lake Charles development project. In November 2013, we closed the sale of the equity interests of our subsidiary. We received approximately $209.8 million in cash consideration and $10.0 million in deferred consideration in the form of a note receivable from the buyer due in July 2016.
Total assets for entities and operations classified as held for sale are summarized as follows:
 
March 31,
2016
 
December 31,
2015
 
(in millions)
Assets:
 
 
 
Land, buildings, vessels and equipment, net
$

 
$
0.3

Other assets, net
9.8

 
9.6

Total assets
$
9.8

 
$
9.9



20



Note 8—Commitments and Contingencies

Self-Insurance: We self-insure various levels of general liability, workers’ compensation, and medical coverage at most of our properties. Insurance reserves include accruals for estimated settlements for known claims, as well as accruals for estimates of claims not yet made. As of March 31, 2016 and December 31, 2015, we had total self-insurance accruals of $25.6 million and $25.5 million, respectively, which are included in “Total current liabilities” in our unaudited Condensed Consolidated Balance Sheets.

Indiana Tax Dispute: In 2008, the Indiana Department of Revenue (the “IDR”) commenced an examination of our Indiana income tax filings for the years 2005, 2006, and 2007. In 2010, we received a proposed assessment in the amount of $7.3 million, excluding interest and penalties. We filed a protest requesting abatement of all taxes, interest and penalties and had two hearings with the IDR where we provided additional facts and support. At issue was whether income and gains 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. In April 2012, we received a supplemental letter of findings from the IDR that denied our protest on most counts. In the supplemental letter of findings, the IDR did not raise any new technical arguments or advance any new theory that would alter our judgment regarding the recognition or measurement of the unrecognized tax benefit related to this audit. In June 2012, we filed a tax appeal petition with the Indiana Tax Court (the “ITC”) to set aside the final assessment. In August 2013, we filed a motion for partial summary judgment on the 1999 Hollywood Park sale asking the court to grant summary judgment in our favor based on the technical merit of Indiana tax law. In January 2014, oral arguments were heard at the ITC regarding our motion for summary judgment. In June 2015, the ITC denied our motion for summary judgment and set the case for trial. In April 2016, we reached an agreement to settle with the IDR, which did not have a material effect on our unaudited Condensed Consolidated Financial Statements.

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.

21



Note 9—Consolidating Condensed Financial Information

Our subsidiaries (excluding subsidiaries with approximately $38.3 million in cash and other assets as of March 31, 2016, that include a majority interest in the licensee of Retama Park Racetrack and certain other subsidiaries) have fully, unconditionally, jointly, and severally guaranteed the payment of all obligations under our senior and senior subordinated notes and 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:
 
Pinnacle
Entertainment,
Inc.
 
100% Owned Guarantor
Subsidiaries(a)
 
Non-
Guarantor
Subsidiaries(b)
 
Consolidating
and
Eliminating
Entries
 
Pinnacle
Entertainment,
Inc.
Consolidated
 
(in millions)
Statements of Operations
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2016
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Gaming
$

 
$
520.8

 
$

 
$

 
$
520.8

Food and beverage

 
32.0

 

 

 
32.0

Lodging

 
11.3

 

 

 
11.3

Retail, entertainment and other

 
15.9

 

 

 
15.9

 

 
580.0

 

 

 
580.0

Expenses and other costs:
 
 
 
 
 
 
 
 
 
Gaming

 
267.1

 

 

 
267.1

Food and beverage

 
29.9

 

 

 
29.9

Lodging

 
5.6

 

 

 
5.6

Retail, entertainment and other

 
4.5

 

 

 
4.5

General and administrative
23.3

 
81.6

 

 

 
104.9

Depreciation and amortization
2.0

 
52.1

 

 

 
54.1

Pre-opening, development and other costs
5.3

 

 

 

 
5.3

Write-downs, reserves and recoveries, net

 
2.9

 

 

 
2.9

 
30.6

 
443.7

 

 

 
474.3

Operating income (loss)
(30.6
)
 
136.3

 

 

 
105.7

Equity in earnings of subsidiaries
102.7

 

 

 
(102.7
)
 

Interest expense, net
(59.8
)
 

 

 

 
(59.8
)
Income (loss) from continuing operations before inter-company activity and income taxes
12.3

 
136.3

 

 
(102.7
)
 
45.9

Management fee and inter-company interest
33.7

 
(33.7
)
 

 

 

Income tax expense
(5.0
)
 

 

 

 
(5.0
)
Income (loss) from continuing operations
41.0

 
102.6

 

 
(102.7
)
 
40.9

Income from discontinued operations, net of income taxes

 
0.1

 

 

 
0.1

Net income (loss)
$
41.0

 
$
102.7

 
$

 
$
(102.7
)
 
$
41.0


22



<
 
Pinnacle
Entertainment,
Inc.
 
100% Owned Guarantor
Subsidiaries(a)
 
Non-
Guarantor
Subsidiaries(b)
 
Consolidating
and
Eliminating
Entries
 
Pinnacle
Entertainment,
Inc.
Consolidated
 
(in millions)
For the three months ended March 31, 2015
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Gaming
$

 
$
514.4

 
$

 
$

 
$
514.4

Food and beverage

 
32.0

 

 

 
32.0

Lodging

 
11.5

 

 

 
11.5

Retail, entertainment and other

 
14.9

 

 

 
14.9

 

 
572.8

 

 

 
572.8

Expenses and other costs:
 
 
 
 
 
 
 
 
 
Gaming

 
264.9

 

 

 
264.9

Food and beverage

 
29.2

 

 

 
29.2

Lodging

 
5.8

 

 

 
5.8

Retail, entertainment and other

 
5.1

 

 

 
5.1

General and administrative
22.3

 
79.9

 

 

 
102.2

Depreciation and amortization
4.3

 
63.5

 

 

 
67.8

Pre-opening, development and other costs
1.4

 
0.1

 

 

 
1.5

Write-downs, reserves and recoveries, net
3.0

 
0.2

 

 

 
3.2

 
31.0

 
448.7

 

 

 
479.7

Operating income (loss)
(31.0
)
 
124.1

 

 

 
93.1

Equity in earnings of subsidiaries
88.3

 

 

 
(88.3
)
 

Interest expense, net
(61.1
)