UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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PINNACLE ENTERTAINMENT, INC.

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 24, 2011

 

 

TO THE STOCKHOLDERS OF PINNACLE ENTERTAINMENT, INC.:

 

NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Pinnacle Entertainment, Inc., a Delaware corporation (the “Company”), will be held on Tuesday, May 24, 2011, at 9:00 a.m., local time, at the Four Seasons Hotel St. Louis, 999 North Second Street, St. Louis, Missouri 63102, and at any adjournments or postponements thereof (the “Annual Meeting”), for the following purposes, as more fully described in the accompanying Proxy Statement:

 

1. To elect seven directors to serve on the Company’s Board of Directors for the coming year, each to hold office until the next annual meeting of stockholders (and until each such director’s successor shall have been duly elected and qualified);

 

2. To ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for the 2011 fiscal year;

 

3. To approve amendments to the Company’s 2005 Equity and Performance Incentive Plan, as amended (the “2005 Plan”), to permit a one-time value-for-value stock option exchange program for employees other than the Company’s directors and executive officers (the “Amendments to the 2005 Plan”);

 

4. To approve an advisory resolution regarding the compensation of the Company’s named executive officers;

 

5. To act upon an advisory vote on the frequency of future advisory votes on the compensation of the Company’s named executive officers; and

 

6. To act upon such other business as may properly come before the Annual Meeting or before any adjournments or postponements thereof.

 

We are taking advantage of Securities and Exchange Commission rules that allow us to furnish proxy materials to you via the Internet. Unless you have already requested to receive a printed set of proxy materials, you will receive a Notice Regarding the Availability of Proxy Material, or Notice. The Notice contains instructions on how to access proxy materials and vote your shares via the Internet or, if you prefer, to request a printed set of proxy materials at no additional cost to you. We believe that this approach provides a convenient way for you to access your proxy materials and vote your shares, while lowering our printing and delivery costs and reducing the environmental impact associated with our Annual Meeting.

 

Important Change:  Due to a change in the New York Stock Exchange rules, your broker cannot vote your shares without your instructions for the election of directors, for the Amendments to the 2005 Plan, for the advisory resolution regarding the compensation of the Company’s named executive officers, or for the advisory vote on the frequency of future advisory votes on the compensation of the Company’s named executive officers. If you do not provide voting instructions to your broker, your shares will not be voted or counted for the election of directors, for the Amendments to the 2005 Plan, for the advisory resolution regarding the compensation of the Company’s named executive officers, or for the advisory vote on the frequency of future advisory votes on the compensation of the Company’s named executive officers. It is, therefore, important that beneficial owners instruct their brokers how they wish to vote their shares.

 

Stockholders of record as of March 28, 2011 can vote at the Annual Meeting. On or about April 12, 2011, we will mail the Notice or, for stockholders who have already requested to receive a printed set of proxy materials, this proxy statement, the accompanying proxy card and annual report. Please vote before the Annual Meeting in one of the following ways:

 

1. By Internet — You can vote over the Internet at www.proxyvote.com by entering the control number found on your Notice or proxy card;

 

2. By Telephone — You can vote by telephone by calling 1-800-690-6903 and entering the control number found on your Notice or proxy card; or

 

3. By Mail — If you received your proxy materials by mail, you can vote by signing, dating and mailing the proxy card in the pre-paid enclosed envelope.

 

Your vote is very important. Please vote before the meeting using one of the methods above to ensure that your vote will be counted. Your proxy may be revoked at any time before the vote at the Annual Meeting by following the procedures outlined in the accompanying proxy statement.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

John A. Godfrey

Secretary

 

Las Vegas, Nevada

April 12, 2011

 

PINNACLE ENTERTAINMENT, INC.
8918 SPANISH RIDGE AVENUE
LAS VEGAS, NEVADA 89148

 

 

 

 

PROXY STATEMENT RELATING TO
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 24, 2011

 

 

 

 

This Proxy Statement is being furnished to the stockholders of Pinnacle Entertainment, Inc., a Delaware corporation (“Pinnacle” or the “Company”), in connection with the solicitation of proxies by the Company’s Board of Directors (the “Board of Directors” or the “Board”) for use at the Annual Meeting of the Company’s stockholders to be held on Tuesday, May 24, 2011, at 9:00 a.m., local time, at the Four Seasons Hotel St. Louis, 999 North Second Street, St. Louis, Missouri 63102, and at any adjournments or postponements thereof (the “Annual Meeting”).

 

At the Annual Meeting, holders of the Company’s Common Stock, $0.10 par value per share (“Pinnacle Common Stock”), will be asked to vote upon:

 

(i) the election of seven directors to serve on the Company’s Board of Directors for the coming year, each to hold office until the next annual meeting of stockholders (and until each such director’s successor shall have been duly elected and qualified);

 

(ii) the ratification of the appointment of Ernst & Young LLP as our independent auditors for the 2011 fiscal year;

 

(iii) the approval of amendments to the Company’s 2005 Equity and Performance Incentive Plan, as amended (the “2005 Plan”), to permit a one-time value-for-value stock option exchange program for employees other than the Company’s directors and executive officers (the “Amendments to the 2005 Plan”);

 

(iv) the approval of an advisory resolution regarding the compensation of the Company’s named executive officers;

 

(v) to act upon an advisory vote on the frequency of future advisory votes on the compensation of the Company’s named executive officers; and

 

(vi) any other business that properly comes before the Annual Meeting.

 

This Proxy Statement, the accompanying Proxy Card and the Notice Regarding the Availability of Proxy Material are first being mailed to the Company’s stockholders on or about April 12, 2011. The address of the principal executive offices of the Company is 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148.

 

ANNUAL MEETING

 

Record Date; Outstanding Shares; Quorum

 

Only holders of record of Pinnacle Common Stock at the close of business on March 28, 2011 (the “Record Date”) will be entitled to receive notice of and to vote at the Annual Meeting. As of the close of business on the Record Date, there were 61,895,179 shares of Pinnacle Common Stock outstanding and entitled to vote, held of record by 2,297 stockholders. A majority, or 30,947,590 of these shares, present in person or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting. Each of the Company’s stockholders is entitled to one vote for each share of Pinnacle Common Stock held as of the Record Date.

 

Voting of Proxies; Votes Required

 

All properly executed, returned and unrevoked Proxy Cards will be voted in accordance with the instructions indicated thereon. Executed but unmarked Proxy Cards will be voted: (i) “FOR” the election of each director nominee listed on the Proxy Card; (ii) “FOR” the ratification of the appointment of independent auditors for the 2011 fiscal year; (iii) “FOR” the approval of the Amendments to the 2005 Plan; (iv) “FOR” the approval of the

advisory resolution on the compensation of the Company’s named executive officers; and (v) for “1 YEAR” for the frequency vote on the compensation of the Company’s named executive officers. The Company’s Board of Directors does not presently intend to bring any business before the Annual Meeting other than that referred to in this Proxy Statement and specified in the Notice of the Annual Meeting. By signing the Proxy Cards, stockholders confer discretionary authority on the proxies (who are persons designated by the Board of Directors) to vote all shares covered by the Proxy Cards in their discretion on any other matter that may properly come before the Annual Meeting or any adjournment or postponement thereof, including any motion made for adjournment of the Annual Meeting.

 

You may submit your proxy by mail, telephone or the internet. Proxies submitted by any of those methods will be treated in the same manner. If you are a stockholder of record, you may submit your proxy by signing and returning the enclosed Proxy Card by mail, telephone at 1-800-690-6903 or on the internet at http://www.proxyvote.com/. If you hold your shares in street name, please follow the voting instructions forwarded to you by your bank, broker or other nominee.

 

Whether the proxy is submitted by mail, telephone or the internet, any stockholder who has given a proxy may revoke it at any time before it is exercised at the Annual Meeting by (i) delivering a written revocation to, or delivering a duly executed proxy bearing a later date to, the Secretary of the Company, at 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148, or (ii) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not, by itself, revoke a proxy). If you voted by telephone or the Internet and wish to change your vote, you may call the toll-free number or go to the Internet site, as may be applicable in the case of your earlier vote, and follow the directions for changing your vote.

 

The Company has adopted a majority vote standard in uncontested director elections. To be elected, each director nominee must receive more “FOR” votes than “AGAINST” votes. Abstentions and “broker non-votes” will have no effect on the election of directors because only votes “FOR” or “AGAINST” a nominee will be counted.

 

The proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for the 2011 fiscal year requires approval by the affirmative vote of a majority of the votes cast “FOR” or “AGAINST” with respect to such proposal.

 

The proposal to approve the Amendments to the 2005 Plan requires the approval by the affirmative vote of a majority of the votes cast “FOR,” “AGAINST” or “ABSTAIN” with respect to such proposal, provided that the total votes so cast on the proposal represent more than 50% of all shares entitled to vote on the proposal.

 

The proposal to approve an advisory resolution regarding the compensation of the Company’s named executive officers requires approval by the affirmative vote of a majority of the votes cast “FOR” or “AGAINST” with respect to such proposal.

 

For the proposal to act upon an advisory vote on the frequency of future advisory votes on the compensation of the Company’s named executive officers, the frequency of every year, two years, or three years that receives the affirmative vote of a majority of the votes cast will be the frequency recommended by our stockholders for future advisory votes on the compensation of the Company’s named executive officers.

 

Abstentions and Broker Non-Votes

 

A stockholder may “ABSTAIN” on any proposal that may properly come before the Annual Meeting. If a stockholder chooses to “ABSTAIN,” such stockholder’s shares will be considered present at the Annual Meeting for purposes of determining a quorum on all matters and will be considered entitled to vote, but will have no effect with respect to the outcome of the vote to elect directors, to ratify the appointment of the Company’s independent auditors, to adopt the advisory resolution on the compensation of the Company’s named executive officers, or to recommend, on an advisory basis, the frequency of the advisory vote on the compensation of the Company’s named executive officers. However, according to the New York Stock Exchange, or the NYSE, rules, a vote to “ABSTAIN” on the proposal to approve the Amendments to the 2005 Plan will be considered as a vote cast with respect to such matter, and will have the same effect as a vote “AGAINST” such proposal.

Under the rules of the NYSE, if a broker or other financial institution holds a client’s shares in its name and the client does not provide voting instructions to them, that firm has discretion to vote such shares for certain routine matters. Proposal No. 2, the ratification of the appointment of our independent auditor, is a routine matter. On the other hand, the broker or other financial institution that holds a client’s shares in its name does not have discretion to vote such shares for non-routine matters. Proposals Nos. 1, 3, 4, and 5 are non-routine matters, and the firm that holds shares in its name may not vote on those items absent instruction from the client. When a firm votes a client’s shares on some but not all of the proposals at the Annual Meeting, the missing votes are referred to as “broker non-votes.” Those shares will be included in determining the presence of a quorum at the Annual Meeting but are not considered voting power for purposes of voting on the non-routine items. Accordingly, broker non-votes will have no effect on any proposals, except that, with respect to the Amendments to the 2005 Plan, broker non-votes will not count toward the requirement that the total number of votes cast on the proposal, including abstentions, represent over 50% of the total shares entitled to vote on the proposal.

 

Appraisal and Dissenters’ Rights

 

Under Delaware law, stockholders are not entitled to appraisal or dissenters’ rights with respect to the proposals presented in this Proxy Statement.

 

Solicitation of Proxies and Expenses

 

Proxies are being solicited by the Company. The Company will bear the cost of the solicitation of proxies from its stockholders, although stockholders who vote by telephone or the internet may incur telephone or internet access charges. The directors, executive officers and employees of the Company may solicit proxies by mail, telephone, telegram, letter, facsimile, e-mail or in person. Such directors, executive officers and employees will not be specifically compensated for such services. Arrangements may also be made with brokers, custodians, nominees, and other record holders to forward proxy solicitation materials to the beneficial owners of shares of Pinnacle Common Stock held of record by such brokers, custodians, nominees and other record holders, and the Company may reimburse them for their reasonable out-of-pocket expenses incurred in connection therewith.

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

(Item No. 1 on Proxy Card)

 

At the Annual Meeting, holders of Pinnacle Common Stock will be asked to vote on the election of seven directors who will constitute the full Board of Directors of the Company. The Board of Directors has adopted a majority vote standard in uncontested director elections. Because we did not receive advance notice under our Bylaws of any stockholder nominees for director, the 2011 election of directors is an uncontested election. To be elected in an uncontested election, a director nominee must receive more “FOR” votes than “AGAINST” votes. Abstentions and “broker non-votes” will have no effect on the election of directors because only votes “FOR” or “AGAINST” a nominee will be counted. Your brokerage firm or other nominee may not vote your shares with respect to the election of directors without specific instructions from you as to how to vote with respect to the election of each of the seven nominees for director, because the election of directors is not considered a “routine” matter under the NYSE rules.

 

Each director elected will hold office until the next annual meeting of stockholders (and until his successor shall have been duly elected and qualified). The Company is a Delaware corporation and, under Delaware law, if an incumbent director is not elected, that director remains in office until the director’s successor is duly elected and qualified or until the director’s earlier resignation or removal. To address this potential outcome, the Board has adopted a director resignation and recusal policy in our Corporate Governance Guidelines. Under this policy, the Board of Directors will nominate for re-election only those incumbent candidates who tender irrevocable resignations. The Board of Directors has obtained such resignations from each director nominee for election at the Annual Meeting. The irrevocable resignations will be effective upon (1) the failure to receive the required vote at any annual meeting at which directors are nominated for re-election and (2) Board acceptance of the resignations. In the event that a director nominee does not receive the required vote at the Annual Meeting, the Corporate

Governance and Nominating Committee will recommend to the Board of Directors whether to accept or reject a tendered resignation. The Board of Directors will publicly disclose its decision within 90 days following certification of the stockholder vote. In addition, the Board of Directors expects the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation. If the Board of Directors does not accept the resignation, the director will continue to serve until the next annual meeting and until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. If the Board of Directors accepts the resignation, then the Board of Directors, in its sole discretion, may fill any resulting vacancy or may decrease the size of the Board of Directors.

 

On March 1, 2011, the Board of Directors reduced the size of the Board to seven members effective immediately prior to the Annual Meeting. On March 10, 2011, Michael Ornest retired from the Board. Following the Annual Meeting, our Board of Directors may increase the size of our Board of Directors and fill any resulting vacancy or vacancies, but the Board of Directors has no present intention to do so. If our Board of Directors increases the size of our Board of Directors and elects a new director to fill the resulting vacancy or vacancies, the new director or directors must stand for election at the next year’s annual meeting of stockholders. All of the nominees listed below currently serve on the Board of Directors of the Company.

 

General

 

Each proxy received will be voted for the election of the persons named below, unless the stockholder signing such proxy abstains with respect to one or more of these nominees in the manner described in the proxy. Although it is not contemplated that any nominee named below will decline or be unable to serve as a director, in the event any nominee declines or is unable to serve as a director, the proxies will be voted by the proxy holders for a substitute nominee as directed by the Board of Directors.

 

There are no family relationships between any director, nominee or executive officer and any other director, nominee or executive officer of the Company. There are no arrangements or understandings between any director, nominee or executive officer and any other person pursuant to which he has been or will be selected as a director, nominee and/or executive officer of the Company other than arrangements or understandings with any such director, nominee and/or executive officer acting in his capacity as such. See “— Information Regarding the Director Nominees.”

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” ELECTION OF ALL OF THE NOMINEES LISTED BELOW.

 

Selection of Nominees for Director

 

It is the policy of the Board, as set forth in the Company’s Corporate Governance Guidelines, to select director nominees who have achieved success in their personal fields and who demonstrate integrity and high personal and professional ethics, sound business judgment, and willingness to devote the requisite time to their duties as director, and who will contribute to the Company’s overall corporate goals. Board members are evaluated and selected based on their individual merit, as well as in the context of the needs of the Board as a whole.

 

The Corporate Governance and Nominating Committee is responsible for identifying, recruiting, reviewing, and recommending to the Board qualified individuals to be nominated for election or reelection as directors, consistent with the criteria set forth in the Company’s Corporate Governance Guidelines. Depending on the circumstances, the Corporate Governance and Nominating Committee considers candidates recommended by Board members, third parties and, to the extent deemed appropriate, director search firms.

 

Before recommending to the Board a new or incumbent director for election or reelection, the Corporate Governance and Nominating Committee reviews his or her qualifications, including capability, availability to serve, conflicts of interest, understanding of the gaming industry, finance and other elements relevant to the Company’s business, educational, business and professional background, age and past performance as a Board member (including past attendance at, and participation in, meetings of the Board and its committees and contributions to their activities). The Corporate Governance and Nominating Committee, in conducting such evaluation, may also take into account such other factors as it deems relevant. The Corporate Governance and Nominating Committee

also receives disclosures relating to a director’s independence and assists the Board in making determinations as to the independence of the directors. The Corporate Governance and Nominating Committee also conducts an annual review of the composition of the Board as a whole, including whether the Board reflects the appropriate degree of independence, sound judgment, business specialization, technical skills, diversity and other desired qualities, and satisfies the other requirements set forth in the Company’s Corporate Governance Guidelines.

 

In particular, the Corporate Governance and Nominating Committee seeks directors with established strong professional reputations and expertise in areas relevant to the strategy and operations of the Company’s business. While the Company’s Corporate Governance Guidelines do not prescribe diversity standards, as a matter of practice, the Corporate Governance and Nominating Committee considers diversity in the context of the Board as a whole and takes into account the personal characteristics (gender, ethnicity, age) and experience (industry, professional, public service) of current and prospective directors to facilitate Board deliberations that reflect a broad range of perspectives. The Corporate Governance and Nominating Committee considers the effectiveness of those efforts as part of its annual self-evaluation process.

 

The Corporate Governance and Nominating Committee will consider Board nominee recommendations by stockholders who have beneficially owned more than five percent of the Company’s then-outstanding shares of Pinnacle Common Stock for at least two consecutive years as of the date of making the proposal and who submit in writing the names and supporting information to the Chair of the Corporate Governance and Nominating Committee at the address of the Company’s principal executive offices. A stockholder recommendation must contain: (a) the name and address of the stockholder making the recommendation, the class and number of shares of the Company’s capital stock owned beneficially by such stockholder, and documentary support that such stockholder satisfies the requisite stock ownership threshold and holding period; and (b) as to the proposed nominee, the name, age, business and residence addresses, principal occupation or employment, number of shares of Pinnacle Common Stock held by the nominee, a résumé of his or her business and educational background, information that would be required in a proxy statement soliciting proxies for the election of such nominee, and a signed consent of the nominee to serve as a director, if nominated and elected. In order to be considered, a stockholder recommendation for nomination with respect to an upcoming annual meeting of stockholders must be received by the Chair of the Corporate Governance and Nominating Committee no later than the 120th calendar day before the first anniversary of the date of the Company’s proxy statement released to stockholders in connection with the previous year’s annual meeting, with certain exceptions that are set forth in the Company’s Corporate Governance Guidelines.

 

The Company’s policies and procedures regarding the selection of director nominees are described in greater detail in the Company’s Corporate Governance Guidelines and the Charter of the Corporate Governance and Nominating Committee, which are available on the Company’s website at www.pnkinc.com and which charter is attached to this Proxy Statement as Attachment 3. In addition, printed copies of such Corporate Governance Guidelines and Charter are available upon written request to Investor Relations, Pinnacle Entertainment, Inc., 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148.

 

As contrasted to a stockholder recommendation of a nominee for consideration by the Company’s Corporate Governance and Nominating Committee, stockholders who wish to nominate directors at future annual meetings must comply with the applicable provisions of the Company’s Bylaws, as described in this Proxy Statement under the caption “Stockholder Proposals for the Next Annual Meeting.”

Information Regarding the Director Nominees

 

Set forth below is information with respect to the nominees, including their recent employment or principal occupation, a summary of their specific experience, qualifications, attributes or skills that led to the conclusion that they are qualified to serve as a director, the names of other public companies for which they currently serve as a director or have served as a director within the past five years, their period of service as a Pinnacle’s director and their age. All of the nominees have consented to being named in this Proxy Statement and have agreed to serve on the Board of Directors, if elected.

 

 

 

 

Mr. Comer has been one of the Company’s directors since July 2007. Mr. Comer brings substantial accounting expertise to the Company. Mr. Comer serves as a Director of Southwest Gas Corporation and has served that in that role since January 2007. In addition, Mr. Comer served as Managing Partner of Deloitte & Touche LLP (Nevada operations) from 2002 to 2006; as Managing Partner and other positions, Arthur Andersen (Los Angeles and Nevada operations) from 1972 to 2002; and as Member of the American Institute of Certified Public Accountants and Nevada Society of Certified Public Accountants. Mr. Comer’s over 35 years of accounting experience and expertise and his integral involvement in other public gaming companies’ auditing practices provide our Board with invaluable expertise in these areas. In addition, Mr. Comer provides an important perspective as the Company addresses its capital and liquidity needs.

 

Mr. Giovenco has been one of the Company’s directors since February 2003 and lead director of the Company from February 2008 until May 2009 and Interim Chief Executive Officer from November 2009 to March 2010; Director, Great Western Financial Corporation from 1979 to 1993; President and Chief Operating Officer, Sheraton Hotels Corporation during 1993; Director, Hilton Hotels Corporation from 1980 to 1992; President and Chief Operating Officer, Hilton Gaming Corporation from 1985 to 1993; Executive Vice President-Finance, Hilton Hotels Corporation from 1980 to 1993; Chief Financial Officer, Hilton Hotels Corporation from 1974 to 1985; Chief Financial Officer, Hilton Gaming Corporation from 1972 to 1974; and Partner, Harris, Kerr, Forster, Certified Public Accountants (predecessor firm to PKF International) from 1967 to 1971. Mr. Giovenco brings over 40 years of broad ranging business and financial experience and expertise to the Company. His 20-year tenure at Hilton Hotels Corporation, including his services as Chief Financial Officer of Hilton Hotels and as President and Chief Operating Officer of Hilton Gaming Corporation, as well as his recent service as Interim Chief Executive Officer of the Company, brings to the Board extensive leadership and management experience and expertise, as well as unique and invaluable perspectives on all aspects of the Company’s business.

 

Mr. Goeglein has been one of the Company’s directors since December 2003. Mr. Goeglein brings more than 32 years of experience in the hospitality and gaming industry. In addition to his position as director of the Company,

Mr. Goeglein has served as the Chairman of the Board of the Company since March 2010, lead director of the Company from May 2009 to November 2009, Interim Nonexecutive Chairman of the Board from November 2009 to March 2010; and was also a Director of the Company from 1997 to 1998; Owner and Managing Member, Evening Star Holdings, LLC (Business Consulting Firm) since mid-2005; Owner and Managing Member, Evening Star Hospitality, LLC (acquirer, developer and operator of non-gaming resort properties) from 2003 to early 2005; President and Chief Operating Officer, Holiday Corporation (the parent company of Holiday Inn, Harrah’s Hotels and Casinos, Hampton Inns and Embassy Suites) from 1984 to 1987; Executive Vice President and Director, Holiday Corporation from 1978 to 1984; President and Chief Executive Officer, Harrah’s Hotels and Casinos from 1980 to 1984; and Director, Boomtown, Inc. from 1993 to 1997. Mr. Goeglein served as President from 1997 and Chief Executive Officer from 2000 of Aladdin Gaming, LLC and Aladdin Gaming Holdings, LLC (developer and operator of the Aladdin Resort & Casino in Las Vegas, Nevada), in each case until September 21, 2001. Aladdin Gaming, LLC filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code on September 28, 2001. Mr. Goeglein’s extensive experience as a senior executive in the hospitality industry, including his service as chief executive officer of Harrah’s Hotels and Casinos and Aladdin Gaming LLC, provide significant insight and expertise to our Board in all facets of the Company’s operations and in its financing activities.

 

Mr. Leslie has been one of the Company’s directors since October 2002; Partner, Armstrong Teasdale LLP (law firm) from January 2008; Of Counsel, Beckley, Singleton (law firm) from 2003 to 2008; Partner, Leslie & Campbell (law firm) from 2001 to 2003; Partner, Bernhard & Leslie (law firm) from 1996 to 2001; Partner, Beckley, Singleton from 1986 to 1996; and Partner, Vargas & Bartlett (law firm) from 1979 to 1986. Mr. Leslie is an honorary citizen of the City of New Orleans. Mr. Leslie’s extensive legal career, including his representation of various clients on gaming industry issues, gives him the leadership and consensus building skills to guide our Board on a variety of matters, including risk management and litigation oversight.

 

Mr. Martineau has been one of the Company’s directors since 1999 and is currently a business advisor and private investor; Chairman, Genesis Portfolio Partners, LLC (start-up company development) since 1998 to 2009; Director, Apogee Enterprises, Inc. since 1973 to June 2010; Director, Borgen Systems from 1994 to 2005; Director, Northstar Photonics (telecommunications business) from 1998 to 2002; Executive Vice President, Apogee Enterprises, Inc. (a glass design and development corporation that acquired Viracon, Inc. in 1973) from 1996 to 1998; President and Founder, Viracon, Inc. (flat glass fabricator) from 1970 to 1996; and Trustee, Owatonna Foundation since 1973. Mr. Martineau’s background as an entrepreneur and as a businessman has been very valuable to the Board both in an operational context and in terms of evaluating its various development projects. Mr. Martineau’s service on several other boards of directors provides him with insights that are valuable to the Board in the areas of corporate governance and other Board functions.

 

Mr. Reitnouer has been one of the Company’s directors since 1991; Director, Hollywood Park Operating Company from September 1991 to January 1992; Partner, Crowell Weedon & Co. (stock brokerage) since 1969; Director and Chairman of the Board, COHR, Inc. from 1986 to 1999; Director and Chairman of the Board, Forest Lawn Memorial Parks Association from 1975 to 2006; and Trustee, University of California Santa Barbara Foundation (and former Chairman) since 1992. Mr. Reitnouer has served as a member of our Board for more than 19 years and brings to the Board an in-depth understanding of the Company’s business, history and organization. In addition, Mr. Reitnouer’s career in the brokerage industry provides the Board with valuable insights as the Company deals with its financing requirements.

 

Mr. Sanfilippo joined us as President, Chief Executive Officer and a director in March 2010. Prior to joining Pinnacle Entertainment, Mr. Sanfilippo was the President and Chief Executive Officer of Multimedia Games, Inc. from June 2008 until March 2010. Mr. Sanfilippo also served as a director of Multimedia Games from June 2008 until March 2011. Prior to joining Multimedia Games, Mr. Sanfilippo was employed with Harrah’s Entertainment, Inc. (Harrah’s), the world’s largest casino company and a provider of branded casino entertainment. While at Harrah’s, Mr. Sanfilippo served as President of both the Western Division (2003 — 2004) and the Central Division (1997 — 2002 and 2004 — 2007), overseeing the operations of more than two dozen casino and casino-hotel destinations. Mr. Sanfilippo was also part of the senior management team that led the successful integration of numerous gaming companies acquired by Harrah’s, including Jack Binion’s Horseshoe Casinos, the Grand Casino & Hotel brand, Players International, and Louisiana Downs Racetrack. In addition to his duties as divisional President, Mr. Sanfilippo was also President and Chief Operating Officer for Harrah’s New Orleans and a member

of the Board of Directors of Jazz Casino Corporation prior to its acquisition by Harrah’s. Mr. Sanfilippo has directed tribal gaming operations in Arizona, California and Kansas, and has held gaming licenses in most states that offer legalized gambling. Mr. Sanfilippo brings to the Company and our Board more than 25 years of industry experience, including managing and developing gaming operations in diverse jurisdictions, including Louisiana, Missouri, Indiana and Nevada. Mr. Sanfilippo’s extensive experience as a senior executive in the gaming industry and gaming manufacturing industry provide our Board with invaluable expertise in these areas.

 

Director Independence

 

The Board of Directors has determined that, other than Anthony M. Sanfilippo, who is the President and Chief Executive Officer of the Company, each nominee is an independent director, as defined by the Corporate Governance Rules of the NYSE and the categorical independence standards adopted by the Board of Directors. The Board of Directors considered all relationships between the independent directors and the Company and determined that each such director either had no relationship with the Company (except as director and stockholder) or only had relationships that fall within the Company’s categorical independence standards. A copy of the categorical independence standards are attached as Appendix A to this Proxy Statement and are available on the Company’s website at www.pnkinc.com. The Board of Directors has also determined that all members of the Audit, Corporate Governance and Nominating, and Compensation Committees are independent directors, as defined by the Corporate Governance Rules of the NYSE and the categorical independence standards adopted by the Board of Directors. The directors nominated by the Board of Directors for election at the Annual Meeting were recommended by the Corporate Governance and Nominating Committee.

 

Communications with Directors

 

Stockholders and interested parties wishing to communicate directly with the Board of Directors, the Chairman of the Board, the Chair of any committee, or the non-management directors as a group or any of the individual directors about matters of general interest to stockholders are welcome to do so by writing the Company’s Secretary at 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148. The Secretary will forward these communications as directed by the stockholders and interested parties.

 

Executive Sessions of the Board and Leadership Structure

 

The Company’s non-management directors meet periodically in executive session, as required by the Company’s Corporate Governance Guidelines. Richard Goeglein, the Company’s Chairman of the Board, presides at these executive sessions. If the non-management directors were to include directors who are not independent pursuant to the NYSE rules, then the independent directors will meet in executive session at least once a year. Any non-management director may request that an executive session of the non-management members of the Board be scheduled.

 

The Company’s Bylaws mandate that the Chairman of the Board be a director who is not the current Chief Executive Officer or current employee of the Company. The Company believes that this structure ensures a greater role for the non-employee directors in the oversight of the Company and active participation of the non-employee directors in setting agendas and establishing priorities and procedures for the work of the Board. The Company believes that this leadership structure also is preferred by a significant number of the Company’s institutional stockholders.

 

Pursuant to the Company’s Bylaws, the Chairman of the Board may call special meetings of stockholders, and the Board of Directors and may act as Chairman of the meeting of stockholders and presides at all meetings of the Board of Directors and stockholders at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board of Directors, the Company’s Bylaws or as may be provided by law.

 

Code of Ethical Business Conduct

 

The Company has adopted a Code of Ethical Business Conduct, a code of ethics that applies to all of the Company’s directors, officers and employees. Any substantive amendments to the provisions of the Code of Ethical Business Conduct that apply to the Chief Executive Officer or the Chief Financial Officer and any waiver from a

provision of the Code of Ethical Business Conduct to the Chief Executive Officer or the Chief Financial Officer will be disclosed on the Company’s website or in a Current Report on Form 8-K filed with the SEC. The Code of Ethical Business Conduct is publicly available on the Company’s website at www.pnkinc.com and in print upon written request to Investor Relations, Pinnacle Entertainment, Inc., 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148.

 

Board Meetings and Board Committees

 

The full Board of Directors of the Company had 17 meetings in 2010. During 2010, each incumbent director of the Company during his term attended at least 75% of the meetings of the Board of Directors and the committees of the Board on which he served, except for Mr. Sanfilippo who was appointed as a director in March 2010.

 

Although the Company has no formal policy with regard to Board members’ attendance at its annual meetings of stockholders, all of the Company’s directors then serving attended the Company’s 2010 Annual Meeting of Stockholders, except for Mr. Reitnouer.

 

The Company has an Executive Committee, which is currently chaired by Mr. Sanfilippo and consists of Messrs. Landau, Leslie, Goeglein and Sanfilippo. The Executive Committee may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company to the fullest extent authorized by Delaware law. During 2010, the Executive Committee had four meetings and acted by unanimous written consent on nine occasions.

 

The Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s Audit Committee is currently chaired by Mr. Landau and consists of Messrs. Landau, Comer and Leslie. Among its functions, the Committee is:

 

 

Messrs. Landau, Comer and Leslie are independent as that term is defined in Rule 303A.02 of the NYSE listing standards and Rule 10A-3(b)(1)(ii) of the Exchange Act. The Board has determined that Messrs. Landau and Comer are each an “audit committee financial expert” as defined by SEC rules, based upon, among other things, their accounting backgrounds and, in the case of Mr. Landau, his having served as the chief financial officer of a large public company involved in the gaming industry, and, in the case of Mr. Comer, his having served as a partner of a major accounting firm. The Audit Committee met eight times in 2010. Following the Annual Meeting, the composition of the Audit Committee will change.

 

The Company has a Compensation Committee, which is currently chaired by Mr. Reitnouer and consists of Messrs. Reitnouer, Martineau and Comer. Among its functions, the Compensation Committee is:

 

 

The Compensation Committee met twenty times in 2010 and acted by unanimous written consent on two occasions. The Compensation Committee may, to the extent permitted by applicable laws and regulations, form and delegate any of its responsibilities to a subcommittee so long as such subcommittee consists of at least two members of the Compensation Committee. In carrying out its purposes and responsibilities, the Compensation Committee has authority to retain outside counsel or other experts or consultants, as it deems appropriate. For a discussion regarding the Compensation Committee’s use of outside advisors and the role of executives officers in compensation matters, see “Executive Compensation — Compensation Discussion and Analysis — Role of Management in Compensation Process and Role of Outside Consultants” below.

 

The Company has a Corporate Governance and Nominating Committee, which is currently chaired by Mr. Martineau and consists of Messrs. Martineau, Giovenco and Landau. Among its functions, the Corporate Governance and Nominating Committee is:

 

 

The Corporate Governance and Nominating Committee met four times in 2010.

 

The Board of Directors has adopted a written charter for each of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee, which are attached to this Proxy Statement as Attachments 1, 2 and 3, respectively, and are available on the Company’s website at www.pnkinc.com. Printed copies of these documents are also available upon written request to Investor Relations, Pinnacle Entertainment, Inc., 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148.

 

The Company has a Compliance Committee that monitors the Company’s compliance with gaming laws in the jurisdictions in which it operates. Messrs. Leslie, Landau and Reitnouer currently serve on the Company’s Compliance Committee with other Compliance Committee members who are not directors, and on the Compliance Subcommittee of the Board of Directors. The Compliance Subcommittee was instituted to ensure timely notification to the Board of Directors of any material compliance issues, assist the Compliance Committee in performing its duties and to supervise the Company’s actions in response to reports received from the Company’s employee hotline.

 

The Company has a Risk Management Oversight Committee, which is currently chaired by its sole member, Mr. Leslie. The purpose of the Risk Management Oversight Committee is to oversee the risk management activities of the Company. Among its functions, the Risk Management Oversight Committee is:

 

 

It is not the duty of the Risk Management Oversight Committee to determine the Company’s insurance policies and programs, but simply to consult with and review the determinations made by the responsible members of management with respect to such matters. Each director holds office until the next annual meeting of stockholders and until his successor is duly elected and qualified, or until his resignation or removal from office.

 

During 2010, the Company had an Executive Search Committee, which was chaired by Mr. Martineau and consisted of Messrs. Martineau, Comer, Leslie and Ornest. The Executive Search Committee was a special committee whose function was to identify and recommend a new Chief Executive Officer to the Board of Directors.

This special committee was dissolved upon the appointment of Mr. Sanfilippo as the Company’s President and Chief Executive Officer.

 

In January 2011, the Board of Directors established an Advisory Committee consisting of Messrs. Sanfilippo, Goeglein and Giovenco. The Advisory Committee is a special committee whose functions are to evaluate potential acquisitions and other transactions and make recommendations with regard thereto to the full Board.

 

The Board’s Role in Risk Oversight

 

The Board of Directors and each of the committees of the Board of Directors indentifies, prioritizes and evaluates various risks that are in the purview of their charters. Management also independently identifies, prioritizes and evaluates enterprise risks. Management regularly reports on such risks to the Board of Directors. Particular financial risks are overseen by the Audit Committee of the Board; compliance and reputational risks are typically overseen by the Compliance Committee of the Board and a compliance subcommittee. The enterprise risk management program as a whole is reviewed annually by the Board. Additional review or reporting on enterprise risks is conducted as needed or as requested by the Board or any Committee. Also, the Compensation Committee periodically reviews the most important enterprise risks to ensure that compensation programs do not encourage excessive risk-taking. The Board’s administration of its risk oversight function has not affected the Board’s leadership structure.

 

Director Compensation

 

Director Fees

 

The compensation of the Company’s non-employee directors is paid in the form of an annual retainer, meeting and chair fees and stock-based awards. The fees that each non-employee director, Chairman of the Board, Interim Chairman of the Board, or committee chair, received for his service during 2010 are the following:

 

 

In March 2010, after the appointment of Mr. Sanfilippo as the Company’s President and Chief Executive Officer, bonuses were awarded to each member of the Executive Search Committee: $35,000 for the Chair and $10,000 for each other member. In addition, in January 2011, the Board of Directors formed an Advisory Committee and members of such committee (other than Mr. Sanfilippo) are paid an attendance fee of $2,000 per meeting or per day of service.

 

Equity Grants

 

In 2010, Pinnacle granted to each non-employee director who was then serving 9,000 options, which were granted on the date of the 2010 Annual Meeting of Stockholders. The exercise price for each option was the closing price of Pinnacle Common Stock on the date of grant. All of the options vested immediately upon the date of grant.

In addition, Pinnacle granted to each non-employee director who was then serving 4,500 restricted stock units, which vested on March 31, 2011, and were granted on the date of the 2010 Annual Meeting of Stockholders.

 

Directors Health Plan

 

On February 27, 2007, the Board of Directors approved the Directors Health and Medical Insurance Plan, or the Directors Health Plan. Pursuant to the terms of the Directors Health Plan and before December 31, 2010, members of the Board of Directors, their spouses and minor children, including full-time students up to age 24, were eligible to participate in the health and medical insurance plans applicable to the Company’s corporate executives, which was the Executive Health Plan. Prior to the amendments to the Directors Health Plan described below, directors who were in office at age 70 and directors who were in office at the time of a change of control, as defined in the Directors Health Plan, were entitled, along with their spouses and minor children, including full-time students up to age 24, to a continuation of health and medical coverage for five years, or, in the case of spouses or minor children, until they were no longer eligible for coverage. If at any time during this extended coverage period, the eligible director, or his spouse or minor children, is insured under another health plan or Medicare, the Company’s health plans will provide secondary coverage to the extent permitted by law. Upon a change in control, the Company will use its best efforts to provide continuation of health insurance under individual policies provided to the directors.

 

In December 2010, the Board of Directors terminated the Executive Health Plan effective January 1, 2011, so that coverage for directors and their dependents is now provided pursuant to the Company’s group health plan. Directors are entitled to receive the same coverage as the Company’s employees. In March 2011, the Directors Health Plan was further amended to provide coverage for current members of the Board of Directors, their spouses and children up to age 26 under the Company’s group health plan, and upon cessation of the services of a member who is in office on January 1, 2011, a continuation of health and medical coverage under the Company’s group health plans for the member, his spouse and children up to age 26 for a period, for one year for every two years of service, up to a maximum of five years of extended medical coverage. Any new director who joins our Board after January 1, 2011 will not be entitled to extended coverage following cessation of service as a director, but may be eligible to elect continuation coverage as provided by law under the Company’s group health plan. The Directors Health Plan further provides that, to the extent that a director receives coverage outside of the Company’s group health plan network, the director will be responsible for paying the first $5,000 of any co-payments or co-deductibles, and the Company will be responsible for any amount that exceeds $5,000.

 

Amended and Restated Directors Deferred Compensation Plan

 

Participation in the Company’s Amended and Restated Directors Deferred Compensation Plan, or the Directors Plan, is limited to directors of Pinnacle, and each eligible director may elect to defer all or a portion of his annual retainer and any fees for meetings attended. Any such deferred compensation is credited to a deferred compensation account, either in cash or in shares of Pinnacle Common Stock, at each director’s election. The only condition to each director’s receipt of shares credited to his deferred compensation account is cessation of such director’s service as a director of Pinnacle.

 

As of the date the director’s compensation would otherwise have been paid, and depending on the director’s election, the director’s deferred compensation account will be credited with either:

 

 

If a director elects to defer compensation in cash, all such amounts credited to the director’s deferred compensation account will bear interest at an amount to be determined from time to time by the Board of Directors. No current director has deferred compensation in cash.

If a director has elected to receive shares of Pinnacle Common Stock in lieu of his retainer, and we declare a dividend, such director’s deferred compensation account is credited at the end of each calendar quarter with the number of full and/or fractional shares of Pinnacle Common Stock obtained by dividing the dividends which would have been paid on the shares credited to the director’s deferred compensation account by the closing price of Pinnacle Common Stock on the NYSE on the date such dividend was paid. In addition, if we declare a dividend payable in shares of Pinnacle Common Stock, the director’s deferred compensation account is credited at the end of each calendar quarter with the number of full and/or fractional shares of Pinnacle Common Stock for such stock dividend.

 

Participating directors do not have any interest in the cash and/or Pinnacle Common Stock credited to their deferred compensation accounts until distributed in accordance with the Directors Plan, nor do they have any voting rights with respect to such shares until shares credited to their deferred compensation accounts are distributed. The rights of a director to receive payments under the Directors Plan are no greater than the rights of an unsecured general creditor of Pinnacle.

 

Each participating director may elect to have the aggregate amount of cash and shares credited to his deferred compensation account distributed to him in one lump sum payment or in a number of approximately equal annual installments over a period of time not to exceed fifteen years. The lump sum payment or the first installment will be paid as of the first business day of the calendar quarter immediately following the cessation of the director’s service as a director. Before the beginning of any calendar year, a director may elect to change the method of distribution of any future interests in cash and/or Pinnacle Common Stock credited to his deferred compensation account in such calendar year.

 

The maximum number of shares of Pinnacle Common Stock that can be issued pursuant to the Directors Plan is 375,000 shares, of which 42,804 shares are available for issuance under the Directors Plan as of March 28, 2011. The shares of Pinnacle Common Stock to be issued under the Directors Plan may be either authorized and unissued shares or reacquired shares. Messrs. Leslie and Comer are the only directors that currently participate in the Directors Plan.

 

Director Summary Compensation Table

 

The following table sets forth certain information regarding the compensation earned by or paid to each non-employee director who served on the Board of Directors in 2010, except for John V. Giovenco who was Interim Chief Executive Officer from November 2009 through March 2010. For details regarding the compensation Mr. Giovenco received as a non-employee director and as an Interim Chief Executive Officer, please see the Summary Compensation Table for the named executive officers.

 

 

 

 

Compensation Committee Interlocks and Insider Participation

 

During 2010, Messrs. Comer, Goeglein, Reitnouer and Martineau served on the Compensation Committee. On March 3, 2010, when he was appointed as Chairman of the Board, Mr. Goeglein was removed from the Compensation Committee. In addition, on May 11, 2010, Mr. Comer was appointed as a member of the Compensation Committee. None of the members of the Compensation Committee was an officer or employee or former officer or employee of Pinnacle or its subsidiaries or had a relationship requiring disclosure under the “Transactions with Related Persons, Promoters and Certain Control Persons” heading below, and no such member has any interlocking relationships with Pinnacle that are subject to disclosure under the rules of the SEC relating to compensation committees.

 

Executive Officers

 

Executive officers serve at the discretion of the Board of Directors, subject to rights, if any, under contracts of employment. See “Executive Compensation — Compensation Discussion and Analysis” below. The current executive officers are as follows:

 

 

For biographical information for Mr. Sanfilippo, see “— Information Regarding the Director Nominees” above.

 

Mr. Ruisanchez was appointed as the Company’s Executive Vice President and Chief Financial Officer on April 1, 2011. Mr. Ruisanchez replaced Stephen H. Capp, the Company’s former Executive Vice President and Chief Financial Officer, who left the Company on March 31, 2011. Prior to serving as the Company’s Executive Vice President and Chief Financial Officer, Mr. Ruisanchez served as Executive Vice President of Strategic Planning and Development from August 2008 until March 31, 2011. Prior to joining the Company, Mr. Ruisanchez

was Senior Managing Director at Bear, Stearns & Co. Inc. where he held various positions starting from 1997 to 2008. As Senior Managing Director of Bear, Stearns & Co., Mr. Ruisanchez was responsible for corporate clients in the gaming, lodging and leisure industries, as well as financial sponsor banking relationships.

 

Mr. Godfrey has served as the Company’s Executive Vice President since February 2005 and as Secretary and General Counsel since August 2002; Senior Vice President of the Company from August 2002 to February 2005; Partner, Schreck Brignone Godfrey (law firm) from January 1997 to August 2002; Partner, Schreck, Jones, Bernhard, Woloson & Godfrey (law firm) from June 1984 to December 1996; Chief Deputy Attorney General, Nevada Attorney General’s Office, Gaming Division, from 1983 to 1984; Deputy Attorney General, Nevada Attorney General’s Office, Gaming Division, from 1980 to 1983; Deputy State Industrial Attorney for the State of Nevada from 1977 to 1980; Trustee, International Association of Gaming Attorneys (and former President) from October 2000 to October 2006; and Member, Executive Committee of the Nevada State Bar’s Gaming Law Section since June 2002.

 

Ms. Shanks has served as the Company’s Executive Vice President and Chief Marketing Officer since October 2010. Prior to joining the Company, Ms. Shanks served as the Senior Vice President and Chief Marketing Officer of Multimedia Games, Inc. from July 2008 until October 2010. Ms. Shanks brings to the Company more than 25 years of marketing experience in gaming entertainment, most recently as Senior Vice President of Brand Management for Harrah’s Entertainment, Inc., the world’s largest casino company and provider of branded casino entertainment. During her time with Harrah’s Entertainment, Ms. Shanks was responsible for maximizing the value of the company’s key strategic brands — Caesars, Harrah’s, and Horseshoe Casinos; the Total Rewards player loyalty program; and the World Series of Poker.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Based solely upon a review of Forms 3, 4 and 5 filed by the Company on behalf of its directors and officers, or furnished to the Company by its stockholders holding more than 10% of Pinnacle Common Stock, during or with respect to the year ended December 31, 2010 pursuant to Rule 16a-3(e) of the Exchange Act, all required reports on such forms were timely filed, except for an amended Form 3 filed on March 24, 2010, for Clifford D. Kortman to reflect shares purchased in the Company’s 401(k) Plan, a Form 4 filed on May 10, 2010 for Stephen H. Capp, an amended Form 4 filed on May 20, 2010, for Stephen C. Comer to reflect shares held indirectly by the Comer Family Trust, and an amended Form 4 filed on August 3, 2010, for Anthony M. Sanfilippo to reflect shares purchased in the Company’s 401(k) Plan.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth the name, number of shares and percent of the outstanding Pinnacle Common Stock beneficially owned as of March 28, 2011 (except where a different date is indicated below) by each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Pinnacle Common Stock, each director, each named executive officer (as defined in the SEC rules), and all directors and executive officers as a group. In each instance, except as otherwise indicated, information as to the number of shares owned

and the nature of ownership has been provided by the individuals or entities identified or described and is not within the direct knowledge of the Company.

 

 

 

 

Compensation Policies and Programs As They Relate to the Company’s Risk Management

 

The Compensation Committee has also reviewed the Company’s compensation policies and programs for employees, including executive officers, and has concluded that these programs do not create risks that are reasonably likely to have a material adverse effect on the Company. The Compensation Committee believes that the design of the Company’s annual cash and long-term equity incentives provide an effective and appropriate mix of incentives to help ensure that the Company’s performance is focused on long-term stockholder value creation and does not encourage the taking of short-term risks at the expense of long-term results. In general, bonus opportunities for Company employees are capped, and the Company has discretion to reduce bonus payments (or pay no bonus) based on individual performance and any other factors it may determine to be appropriate in the circumstances. As with the compensation of the Company’s executive officers, a substantial portion of the compensation for employees generally is delivered in the form of equity awards that help further align the interests of employees with those of stockholders.

 

Transactions with Related Persons, Promoters and Certain Control Persons

 

The Company’s Audit Committee charter requires that the Audit Committee review on an ongoing basis and approve or disapprove all related party transactions that are required to be disclosed by Item 404 of Regulation S-K.

 

On March 13, 2010, the Company and Anthony M. Sanfilippo, the Company’s President, Chief Executive Officer and a director, entered into a Common Stock Purchase Agreement regarding the purchase by Mr. Sanfilippo from the Company of 125,000 shares of Pinnacle Common Stock (the “Stock Purchase Agreement”). Pursuant to the terms of the Stock Purchase Agreement, Mr. Sanfilippo paid a total of $1,080,000 for such common stock on March 15, 2010, which was based on the closing price of Pinnacle Common Stock the last trading day (March 12, 2010) before the Stock Purchase Agreement was signed, or $8.64 per share. The Stock Purchase Agreement was entered into prior to Mr. Sanfilippo being appointed as President, Chief Executive Officer, and a director of the Company. All of the members of the Board of Directors of the Company unanimously approved of the terms of the Stock Purchase Agreement and therefore, a separate approval was not required by the Audit Committee.

 

PROPOSAL 2

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

(Item No. 2 on Proxy Card)

 

The Audit Committee has appointed Ernst & Young LLP to audit the Company’s consolidated financial statements for the 2011 fiscal year and to audit the Company’s effectiveness of internal control over financial reporting as of December 31, 2011. This appointment is being presented to stockholders for ratification at the Annual Meeting. Stockholder ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors is not required by the Company’s Bylaws or otherwise. The Company is submitting the appointment of Ernst & Young LLP to stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether to retain Ernst & Young LLP. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent audit firm at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting. They will have an opportunity to make statements if they desire and will be available to respond to appropriate questions.

 

Change in Accountants

 

On May 15, 2009, the Audit Committee of the Board of Directors engaged Ernst & Young LLP as the Company’s independent registered public accounting firm for the 2009 fiscal year. During the years ended December 31, 2008 and 2007, and the subsequent interim period through May 15, 2009, neither the Company nor anyone on its behalf has consulted with Ernst & Young LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements (consequently, no written report to the Company or oral advice was provided that Ernst & Young LLP concluded was an important factor considered by the Company in reaching a

decision as to an accounting, auditing or financial reporting issue); or (ii) any matter that was the subject of a disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).

 

In March 2009, the Audit Committee of the Board of Directors engaged Deloitte & Touche LLP to be the Company’s independent auditors for the 2009 fiscal year. In April 2009, the Audit Committee of the Board of Directors determined that it was in the best interests of the Company to request proposals from nationally recognized accounting firms, including Deloitte & Touche LLP, to audit the financial statements for the 2009 fiscal year. On April 24, 2009, Deloitte & Touche LLP notified the Company that it would resign as the Company’s principal independent public accounting firm upon the filing of the Company’s quarterly report on Form 10-Q for the period ended March 31, 2009, which was filed with the SEC on May 11, 2009. Deloitte & Touche LLP’s reports on the Company’s consolidated financial statements for each of the years ended December 31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principle.

 

During the years ended December 31, 2008 and 2007, and the subsequent interim period through May 11, 2009, there were no disagreements between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Deloitte & Touche LLP’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its reports on the financial statements of the Company for such years.

 

None of the reportable events described in Item 304(a)(1)(v) of Regulation S-K occurred during the years ended December 31, 2008 and 2007 or during the subsequent interim period through May 11, 2009.

 

The Company provided Deloitte & Touche LLP with a copy of this disclosure and requested that Deloitte & Touche LLP furnish it with letters addressed to the Securities and Exchange Commission stating whether or not Deloitte & Touche LLP agrees with the above statements. A copy of such letters dated April 30, 2009 and May 12, 2009 from Deloitte & Touche LLP are filed as Exhibit 16.1 to our Current Reports on Form 8-K filed with the Securities and Exchange Commission on April 30, 2009 and May 13, 2009, respectively.

 

Required Vote

 

The action of the Audit Committee in appointing of Ernst & Young LLP as the Company’s independent auditors for the 2011 fiscal year will be ratified upon the approval by the affirmative vote of a majority of the votes cast “FOR” or “AGAINST” the proposal. Abstentions and broker non-votes will have no effect on the outcome of the vote on this proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE 2011 FISCAL YEAR.

Audit and Related Fees

 

Fees Paid to Independent Auditors

 

Ernst & Young LLP served as our independent auditor for the fiscal year ended December 31, 2010 and was appointed to serve as our independent auditor for the fiscal year ending December 31, 2009 and to review the financial statements included in our Quarterly Reports on Form 10-Q beginning with the quarter ending June 30, 2009. Deloitte & Touche LLP reviewed the financial statements included in our Quarterly Report on Form 10-Q for the quarter ending March 31, 2009. The following table sets forth the fees billed to us for professional audit services rendered by Ernst & Young LLP and Deloitte & Touche LLP for the years ended December 31, 2010, and December 31, 2009.

 

 

Audit Fees

 

Audit Fees relate to professional services rendered by Ernst & Young LLP and Deloitte & Touche LLP for 2010 and 2009, in connection with reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q, certain procedures in connection with registration statements and prospectus supplements and other offering documents, and the audit of the Company’s financial statements and effectiveness of internal control over financial reporting (as required by the Sarbanes-Oxley Act). The amounts shown above in the table are the aggregate amounts of Audit Fees billed by Ernst & Young LLP and Deloitte & Touche LLP in 2010 and 2009. Ernst & Young LLP charged us Audit Fees of $1,213,701 for 2010 and $1,145,628 for 2009. Deloitte & Touche LLP charged us Audit Fees of $174,200 for 2010 and $293,169 for 2009.

 

Audit-Related Fees

 

Audit-Related Fees relate to professional services rendered by Ernst & Young LLP in connection with assurance or related services (such as employee benefit plan audits, internal control reviews, attest services that are not required by statute or regulation) rendered in 2010 that are reasonably related to the performance of the audit or review of the Company’s financial statements. Ernst & Young LLP charged us Audit-Related Fees of $63,221 for 2010. Ernst & Young LLP did not render any Audit-Related Fees to the Company in 2009, and Deloitte & Touche LLP did not render any Audit-Related Fees to the Company in 2010 and 2009.

 

Tax Fees

 

Fees billed for 2010 relate to tax compliance and tax advice and planning service rendered by Ernst & Young LLP. Fees billed for 2009 relate to tax compliance and tax advice and planning services rendered by Deloitte & Touche LLP. Deloitte & Touche LLP did not bill the Company any Tax Fees for 2010 and Ernst & Young LLP did not bill the Company for any Tax Fees for 2009.

 

All Other Fees

 

Except as described above, Ernst & Young LLP and Deloitte & Touche LLP did not bill the Company for any fees for, or deliver or render to the Company, any other products or services in 2010 or 2009.

 

Audit Committee Pre-Approval Policies and Procedures

 

The Audit Committee has adopted formal policies and procedures with regard to the approval of all professional services provided to the Company by Ernst & Young LLP and Deloitte & Touche LLP. All of the fees described in the table above were pre-approved by the Audit Committee in 2010. The Audit Committee pre-

approves services either by: (1) approving a request from management describing a specific project at a specific fee or rate, or (2) by pre-approving certain types of services that would comprise the fees within each of the above categories at usual and customary rates. The percentage of hours expended to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than Ernst & Young LLP’s full time, permanent employees was 0%.

 

Audit Committee Report

 

The following is the report of the Audit Committee with respect to the Company’s audited financial statements for the fiscal year ended December 31, 2010, and the notes thereto.

 

Review with Management

 

Management is responsible for preparing the Company’s financial statements and the reporting process, including the system of internal control. The Audit Committee, in its oversight role, has reviewed and discussed with management the Company’s audited financial statements for the fiscal year ended December 31, 2010 and the notes thereto.

 

Review and Discussions with Independent Accountants

 

The Audit Committee has discussed with Ernst & Young LLP (“E&Y”), the Company’s independent auditors, the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

 

The Audit Committee has received the written disclosures and the letter from E&Y required by applicable requirements of the Public Company Accounting Oversight Board regarding E&Y’s communications with the Audit Committee concerning independence, and has discussed with E&Y its independence.

 

Conclusion

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Company’s Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, for filing with the Securities and Exchange Commission.

 

SUBMITTED BY THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS

 

Ellis Landau
Bruce A. Leslie
Stephen C. Comer

 

PROPOSAL 3

 

APPROVAL OF AN AMENDMENT TO 2005 EQUITY AND PERFORMANCE INCENTIVE PLAN TO PERMIT A ONE-TIME VALUE-FOR-VALUE STOCK OPTION EXCHANGE PROGRAM

(Item No. 3 on Proxy Card)

 

The following is a discussion of our proposal to amend Company’s 2005 Equity and Performance Incentive Plan, as such plan has been or may be amended (the “2005 Plan”) to provide for the one-time, value-for-value exchange of certain outstanding employee stock options (the “Option Exchange Program”). Our Board of Directors authorized the Option Exchange Program subject to stockholder approval of the amendment of the 2005 Plan to permit the Option Exchange Program. If implemented, the Option Exchange Program would permit some of our employees, excluding our directors and executive officers, to surrender for cancellation certain outstanding stock options with an exercise price substantially greater than our current trading price in exchange for a lesser number of stock options. You are urged to read this detailed discussion in considering our proposal.

 

Background and Reason for the Option Exchange Program

 

It has been our long-standing practice to grant stock options from time to time as a substantial component of our employees’ at — risk compensation in order to motivate them to achieve key business objectives that we believe create long-term stockholder value. As an award of equity, stock options allow our employees to benefit from our success and the increase in share value, thereby aligning their interests with those of our stockholders. Our stock option awards also provide an incentive for our highly experienced employees to continue their employment with us to further our growth in a highly competitive industry.

 

The decline in our stock price of several years ago, however, has impinged on our goal of utilizing stock options to retain and motivate employees in these challenging times. This is because many of our stock options now have exercise prices that substantially exceed not only the current market price but also the 104-week (or 2 years) high price of our shares.

 

As with so many other companies, the steep reduction in our stock price was significantly impacted by the global financial and economic crisis. This decline mirrors the decline in the stock prices of other companies in the casino industry, as well as other industries. There is no sign that that our stock price (or the stock prices of other companies in our industry) will soon return to historical levels. Job losses and other factors contributing to less discretionary income have deeply affected our industry.

 

We have taken significant steps toward strategically expanding our business in our key markets in an effort to increase our stock price. In addition, we have taken steps to improve operating cash flow and reduce our cost structure by eliminating non-core operations. Our actions to date include, but are not limited to, acquiring the River Downs racetrack in Cincinnati, Ohio in January 2011; constructing and opening our River City casino in south St. Louis County, which we opened on March 4, 2010; constructing our casino and hotel development in Baton Rouge, Louisiana, which we expect to open in the first quarter of 2012; cancelling our planned Sugarcane Bay casino development in Lake Charles, Louisiana in April 2010; selling our Argentina operations in June 2010; and closing our President Casino in St. Louis, Missouri in June 2010. These, and other actions, have achieved increases in revenue and reductions in operating expenses and non-essential capital spending.

 

Despite our efforts to reinvigorate our business and improve our performance, our stock price has remained at a relatively low level. Additionally, despite our continued efforts, the economic recession, increased market volatility and other factors, some of which are beyond our control, could prevent significant near-term increases in stock price.

 

Similarly, our employees’ stock options have decreased in perceived and actual current and potential economic value. This in turn means that their outstanding stock options are failing to provide adequate performance and retention incentives for our experienced employees and therefore do not achieve our goal of aligning our employees’ interests with that of our stockholders. At a time when we need our employees’ motivation to be at its peak, the stock options that have comprised a significant portion of their compensation are no longer motivating. We have designed the proposed Option Exchange Program to revive the retention and motivational value of stock option awards held by our employees with a goal of improving the long-term value of our stock for

our stockholders. The material principles of the Option Exchange Program, such as the program eligibility criteria for employees and options, the exchange ratios for replacement options, and the vesting and expiration terms of the replacement options, reflect our sensitivity toward protecting stockholder interests in the implementation of such a program. In particular, the Option Exchange Program would:

 

 

Based on the assumptions described below, if all eligible options are exchanged as of March 21, 2011, options to purchase approximately 397,500 shares of Pinnacle Common Stock would be surrendered and canceled, while replacement options covering approximately 198,750 shares of Pinnacle Common Stock would be granted, resulting in a net reduction in the equity award overhang by approximately 198,750 shares of Pinnacle Common Stock. As of March 21, 2011, the total number of shares of Pinnacle Common Stock outstanding was 61,895,179 and the closing price of our common stock was $12.74 per share.

 

The following information as of March 21, 2011 with respect to the Company’s shares available for issuance under the 2005 Plan and issued pursuant to all of the Company’s equity incentive plans:

 

 

 

 

If our stockholders do not approve the Amendments to the 2005 Plan authorizing the Option Exchange Program, eligible stock options will remain outstanding and in effect in accordance with their existing terms, and we may be forced to issue additional options to our employees at current market prices, increasing our overhang. These grants would more quickly exhaust our current pool of options available for future grant. Similarly, if this Proposal No. 3 is not approved, then this may result in employee turnover and may require the Company to issue more options to new employees than the options previously granted to former employees, which will exhaust the options available for future grant under the 2005 Plan. This may affect the Company’s ability to attract qualified employees.

 

Alternatives Considered

 

We believe the Option Exchange Program is a more cost-effective way of motivating and retaining key contributors than several other alternatives available, which we considered and rejected as described below:

 

 

 

Basic Structure of the Option Exchange Program

 

Our proposed Option Exchange Program has the following material features:

 

 

Following is the status of our outstanding underwater stock options as of March 21, 2011 that would be eligible for the Option Exchange Program based on a then-applicable 52-week high stock price of $15.33 and a then-current fair market value of our shares of $12.74:

 

 

Implementation of the Option Exchange Program

 

On March 1, 2011 our Board of Directors, upon recommendation of the Compensation Committee and subject to stockholder approval, authorized the Option Exchange Program. We are seeking stockholder approval in order to satisfy the listing rules of the NYSE, to comply with the terms of Section 12.1 of the 2005 Plan and as a matter of good corporate governance. Stockholder approval of this proposal would apply to this Option Exchange Program only and would not result in amendment of any other terms of the 2005 Plan, except for conforming changes and for the changes provided in this Proposal No. 3. If we were to implement another stock option exchange program in the future, we would be required to seek separate stockholder approval of that subsequent program.

 

If approved by our stockholders, we would commence the Option Exchange Program within 12 months, providing eligible employees a written offer to exchange specified eligible stock options, which we refer to in this Proxy Statement as the “Offer,” which would be filed with the SEC. The Offer would set forth the precise terms, process and timing of the Offer. Employees would be given at least 20 business days to consider whether they wish

to surrender their existing eligible stock options, and if so how many, on a grant-by-grant basis in exchange for new stock options.

 

Once the Offer is closed, eligible options that were surrendered would be cancelled, and the Compensation Committee would approve grants of new stock options to the applicable employees in accordance with the applicable exchange ratios. All new options would be non-statutory stock options granted under the 2005 Plan and would be subject to the terms of such plan and an award agreement entered into between the Company and each participating employee. The new stock options would be issued effective the trading day immediately after the end of the Offer.

 

Details of Option Exchange Program

 

Eligible Options.  The options eligible for exchange in the Option Exchange Program would be those:

 

 

Eligible Employees.  The Option Exchange Program would be open to all U.S. employees as of the date that the Option Exchange Program commenced who were still employed as of the grant date of the replacement options and who hold eligible options, except our executive officers. Former employees, whether retired or otherwise, and members of our Board of Directors are not eligible. As of March 21, 2011, there were 45 employees eligible to participate in the Option Exchange Program based on the assumptions above.

 

Exchange Ratios.  The exchange ratio would be used to determine how many options an employee must surrender in order to receive a replacement option. The use of a ratio is intended to result in the issuance of new stock options that have a fair value approximately equal to the fair value of the surrendered eligible stock options they replace.

 

The actual exchange ratios would be determined by the Compensation Committee shortly before the beginning of the Option Exchange Program. However, we have determined that the exchange ratios would be based on the fair value of the eligible options using the Black-Scholes option pricing model, consistent with our past methodologies and based on reasonable assumptions about factors such as the volatility of our stock, the holding period and expected term of an option.

 

We cannot determine the exact exchange ratios until the beginning of the Offer, but we have provided the following example for illustration purposes, based on the following assumptions:

 

If we assume that all eligible options in the above example were surrendered in the Option Exchange Program, following is additional information for the eligible options and the replacement options that would be granted in the exchange:

 

 

Following the exchange in the example above (excluding any grants after March 21, 2011) with respect to the 2005 Plan, there would be 2,263,108 shares of common stock available for grant under the 2005 Plan, 5,242,997 options outstanding and 299,914 restricted stock units and restricted stock awards outstanding under the 2005 Plan and other equity incentive plans and nonqualified stock option agreements. These outstanding options would have a weighted average exercise price of $12.70 and a weighted average remaining term of 6.5 years.

 

Exercise Price of Replacement Options.  The exercise price of the replacement option would be equal to the closing price of our shares on the replacement option grant date.

 

Vesting Provisions.  The replacement options will not be vested or exercisable within one year after the date of the exchange. Upon the passage of one year from the date of the exchange, the replacement options will be vested and exercisable to the extent that the exchanged options would have been vested and exercisable at that date.

 

Term.  Any replacement option issued pursuant to the Option Exchange Program shall have the remaining term of the exchanged underwater option.

 

Other Terms And Conditions Of The Replacement Options.  The other terms of the replacement options will be governed by the terms of the 2005 Plan.

 

Return Of Eligible Options Surrendered.  In accordance with the terms of the 2005 Plan, the eligible options surrendered for exchange will be cancelled and all shares of Pinnacle Common Stock that were subject to such surrendered options will again become available for future awards under the 2005 Plan.

 

Accounting Treatment

 

Under applicable guidance, the exchange of options under an Option Exchange Program is treated as a modification of the existing options for accounting purposes. Accordingly, we will treat the modification as an exchange of the existing option for a new replacement option with total compensation costs equal to the unamortized compensation cost of the existing option, plus the incremental value of the modification to the award, which will be recognized ratably over the vesting period of the replacement options. The incremental compensation cost will be measured as the excess, if any, of the fair value of each replacement option, measured as of the date the replacement options are granted, over the fair value of the surrendered underwater options, measured immediately before their surrender and cancellation. Because the exchange is intended to be no more than a value-for-value exchange, the exchange ratios will be calculated as of either the start of the exchange offer or the date of the exchange to result in the fair value of the surrendered underwater options being no more than the fair value of the replacement options. We would therefore not expect to recognize any significant incremental compensation expense for financial reporting purposes as a result of the Option Exchange Program. In the event that any of the replacement options are forfeited before their vesting due to termination of service, the incremental compensation cost for the forfeited replacement options will not be recognized; however, we would recognize any unamortized compensation expense from the surrendered underwater options which would have been recognized under their original vesting schedule.

 

Effect on Stockholders

 

We are unable to predict the impact of the Option Exchange Program on your interests as a stockholder because we are unable to predict how many eligible employees would exchange their eligible stock options or what the

future market price of our shares would be on the date that the new stock options are granted. It is our goal that the increase in motivational value associated with the exchange to new options with a higher intrinsic value would result in increased long-term share value. In addition, the Option Exchange Program would reduce the need to issue supplemental stock options to remain competitive with other employers and/or seek to authorization of additional shares under the 2005 Plan in the future.

 

U.S. Federal Income Tax Consequences of the Option Exchange Program

 

The following is a summary of the anticipated material U.S. federal income tax consequences of participating in the Option Exchange Program. A more detailed summary of the applicable tax consequences to participating employees will be provided in the offer to exchange. We believe that the exchange of eligible underwater options for replacement options pursuant to the Exchange Program should be treated as a non-taxable exchange, so that neither we nor our employees should recognize any income for U.S. federal income tax purposes upon the surrender of eligible underwater options and the grant of replacement options. However, the tax consequences of the exchange program are not entirely certain, and the Internal Revenue Service is not precluded from adopting a contrary position. Therefore, all holders of eligible underwater options are urged to consult their own tax advisors regarding the tax treatment of participating in the exchange program under all applicable laws before participating in the exchange program.

 

Text of Amendments to the 2005 Plan

 

Stockholder approval of the Option Exchange Program is required by the terms of certain of our 2005 Plan and by the listing qualifications of the New York Stock Exchange. Therefore, we are asking our stockholders pursuant to this Proposal No. 3 to approve amendments to the 2005 Plan to permit the one-time Option Exchange Program. The 2005 Plan would be amended by this Proposal No. 3.

 

The amendments to 2005 Plan would read substantially as follows:

 

ARTICLE XIV

 

OPTION EXCHANGE PROGRAM

 

14.1 Establishment of Option Exchange Program.  Notwithstanding any other provision of the Plan to the contrary, the Company, by action of the Compensation Committee of the Board, may effect an option exchange program (the “Option Exchange Program”), through one or more option exchange offers to be commenced within 12 months of the approval by the stockholders of the Option Exchange Program; provided, however, that in no event may more than one offer to exchange be made for any outstanding option.

 

14.2 Procedure for Exchanging Options.   Under the Option Exchange Program, Eligible Employees will be offered the opportunity to exchange Eligible Options for new grants of options (each an “Exchange Grant”), as follows:

 

(a) the Compensation Committee shall determine the exchange ratio for an exchange of Eligible Options for Exchange Grants; provided, however, that the ratio shall be such that the fair value as of either the start of the exchange offer or the date of the exchange (for financial accounting purposes) of an Exchange Grant shall be no more than the fair value (for financial accounting purposes) of the Eligible Options for which the Exchange Grant is exchanged,

 

(b) the per share exercise price of each Exchange Grant that is a stock option shall not be less than the fair market value of a Share on the date of issuance of the Exchange Grant,

 

(c) an Exchange Grant shall not be vested or exercisable within one year after the date of the exchange, and

 

(d) the expiration of the Exchange Grant will be the same as its corresponding Eligible Option.

 

All other terms of the Exchange Grants shall be governed by the provisions of this Plan. Any Eligible Employee may receive Exchange Grants where the Shares underlying such Exchange Grants exceed either one

percent of the number of Shares or one percent of the voting power outstanding before the issuance of such Exchange Grants.

 

14.3 Definitions.  For purposes of this Article,

 

(a) “Eligible Employees” means employees of the Company other than the members of the Company’s Board of Directors and executive officers (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended).

 

(b) “Eligible Option” means any option granted under this Plan where, as of the date specified by the terms of the Exchange Offer (which date shall be not more than ten business days prior to any exchange offer), the per share exercise price of such option is greater than the higher of (i) the then-current 52-week high trading price of the Shares and (ii) 150% of the then-current price of the Shares.

 

14.4 Additional Terms.   Subject to the foregoing, the Compensation Committee of the Board of Directors shall be permitted to determine additional terms, restrictions or requirements relating to the Option Exchange Program that they deem necessary or advisable, consistent with the terms of this Plan.

 

Background of the 2005 Plan

 

In 2005, our Board of Directors adopted and our stockholders approved the 2005 Plan. The original 2005 Plan authorized for issuance up to an aggregate of 3,000,000 shares of Pinnacle Common Stock, plus any shares subject to awards granted under the 1996, 2001 and 2002 Stock Option Plans (the “Prior Plans”) and Individual Arrangements (defined below) which are forfeited, expire or otherwise terminate without the issuance of shares, or are settled for cash or otherwise do not result in the issuance of shares, on or after the effective date of the 2005 Plan. In 2008, our Board of Directors adopted, and our stockholders approved an amendment to the 2005 Plan to increase the number of shares that may be issued upon exercise of awards granted under the 2005 Plan by 1,750,000 and to increase the maximum number of awards under the 2005 Plan that may be issued as incentive stock options from 3,000,000 to 4,750,000 shares. In 2010, our Board of Directors adopted, and our stockholders approved, an amendment to the 2005 Plan to increase the number of shares that may be issued upon exercise of awards granted under the 2005 Plan by 1,100,000 and to increase the maximum number of awards under the 2005 Plan that may be issued as incentive stock options from 4,750,000 to 5,850,000 shares. As of March 21, 2011, 2,064,358 shares of Pinnacle Common Stock remained available for future grants of awards under the 2005 Plan (excluding any additional shares available under the 2005 Plan as a result of future forfeiture, expiration or other termination of awards under the Prior Plans and Individual Arrangements after such date). “Individual Arrangements” means the Nonqualified Stock Option Agreement dated as of January 11, 2003 by and between the Company and Stephen H. Capp, and the Nonqualified Stock Option Agreements dated as of April 10, 2002 by and between the Company and Daniel R. Lee, the Nonqualified Stock Option Agreement dated as of August 1, 2008 by and between the Company and Carlos A. Ruisanchez, and the Nonqualified Stock Option Agreement dated as of March 14, 2010 by and between the Company and Anthony M. Sanfilippo.

 

Summary of the 2005 Plan

 

The following is a summary of the key provisions of the 2005 Plan, assuming that stockholders approve this Proposal No. 3. All replacement options issued in the option exchange program will be granted under the 2005 Plan. We have summarized below the principal features of the 2005 Plan. This summary does not purport to be a complete description of all the provisions of the 2005 Plan, and it is qualified in its entirety by reference to the full text of the 2005 Plan, which is marked to show the changes to the 2005 Plan. A copy of the 2005 Plan is attached as Appendix B to this Proxy Statement. Any stockholder who desires to obtain a copy of the 2005 Plan may do so by written request to the Secretary of the Company, at 8918 Spanish Ridge Avenue, Las Vegas, Nevada 89148.

 

Shares Subject to the 2005 Plan

 

Up to an aggregate of 5,850,000 shares of Pinnacle Common Stock, plus any shares subject to awards granted under the Prior Plans and Individual Arrangements which are forfeited, expire or otherwise terminate without issuance of Shares, or are settled for cash or otherwise do not result in the issuance of Shares, on or after the effective

date of the 2005 Plan, are authorized for issuance under the 2005 Plan. However, the maximum number of awards under the 2005 Plan that may be issued as ISOs (as defined below) will be 5,850,000 shares. Any shares that are subject to awards of options or stock appreciation rights shall be counted against this limit as one share for every one share granted. Any shares that are subject to awards other than options or stock appreciation rights (including shares delivered on the settlement of dividend equivalents) shall be counted against this limit as 1.4 shares for every one share granted. The aggregate number of shares available under the 2005 Plan and the number of shares subject to outstanding options will be increased or decreased to reflect any changes in the outstanding Pinnacle Common Stock by reason of any recapitalization, spin-off, reorganization, reclassification, stock dividend, stock split, reverse stock split or similar transaction.

 

If any shares subject to an award under the 2005 Plan or to an award under the Prior Plans or Individual Arrangements are forfeited, expire or are terminated without issuance of such shares, or are settled for cash or otherwise do not result in the issuance of such shares, the shares shall again be available for awards under the 2005 Plan. Any shares that again become available for grant shall be added back as one share if such shares were subject to options or stock appreciation rights granted under the 2005 Plan or options or stock appreciation rights granted under the Prior Plans or Individual Arrangements, and as 1.4 shares if such shares were subject to awards other than options or stock appreciation rights granted under the 2005 Plan. Shares which are received or withheld by the Company to satisfy tax liabilities arising from the grant or exercise of an option or award, or as a result of the use of shares to pay the option price, shall not again be available to awards under the 2005 Plan.

 

In assessing compensation and establishing the Company’s equity and performance-based plans, the Compensation Committee will take into account measures used within the industry that it finds to be in the best interests of the Company. The Compensation Committee will also consider guidance regarding compensation that is or becomes available from stockholder rights organizations and similar external sources.

 

Eligibility and Participation

 

All employees (including officers), directors, and consultants of the Company or any subsidiary are eligible for selection to receive awards under the 2005 Plan, subject to certain restrictions, including restrictions regarding the maximum number of awards and maximum dollar value of awards that each participant may receive in any given 12-month period.

 

Administration of the 2005 Plan

 

The 2005 Plan shall be administered by the Compensation Committee of the Board of Directors, which consists of at least two directors who are “non-employee directors” as defined in Rule 16b-3 of the Exchange Act and who are “outside directors” as defined in Section 162(m) of the Code. The Compensation Committee has full authority and discretion to (a) select participants, (b) determine the type, size, and conditions applicable to awards, (c) determine to what extent awards may be settled in cash, shares, or other property, (d) interpret and administer the Plan and any agreement, and (e) establish rules, appoint agents, and take any other action necessary or desirable for the administration of the Plan. The Compensation Committee may delegate all or any part of its authority under the Plan to any employee or committee, except that it may not delegate any action related to grants of awards to individuals who are subject to Section 16 of the Exchange Act or who are “covered employees” as defined by Code Section 162(m)(3).

 

Types of Awards

 

The Compensation Committee, in its discretion, may issue options, stock appreciation rights, restricted stock, other stock unit awards, performance awards or dividend equivalents to employees, consultants and directors of the Company. The nature of each type of award is discussed below. Each award will be made by an award agreement for which the form and content shall be determined by the Compensation Committee in its discretion, consistent with the provisions of the 2005 Plan. The terms of award agreements for a particular type of award need not be uniform.

 

Stock Options.  Two types of options may be granted under the 2005 Plan: options intended to qualify as incentive stock options (“ISOs”) under Section 422 of the Code, and options not so qualified for favorable federal income tax treatment (“NSOs”). The purchase price for shares covered by each option shall not be less than 100% of

the fair market value of such shares on the date of grant, but if an ISO is granted to a 10% stockholder of the Company or its subsidiaries (measured by ownership of voting power), the purchase price of an ISO shall not be less than 110% of the fair market value of such shares on the date of grant.

 

Stock Appreciation Rights.  A stock appreciation right (“SAR”) gives a participant the right to receive, for each SAR exercised, an amount equal to the excess of the fair market value of a share of common stock on the date the SAR is exercised and the fair market value of a share on the date the SAR was granted. SARs may have terms up to ten years, may be settled in cash or in stock, as determined by the Compensation Committee, and are subject to the terms and conditions expressed in the Award document. We currently do not grant SARs.

 

Restricted Stock.  Restricted stock shall be shares granted or sold to a participant that are subject to vesting restrictions based on continued employment or attainment of performance goals. The Compensation Committee, in its discretion, may determine the purchase price, if any, for restricted stock.

 

Other Stock Unit Awards.  Other stock unit awards are awards valued in whole or part by reference to, or otherwise based on, shares. Other stock unit awards shall be subject to such conditions and restrictions as may be determined by the Compensation Committee, and may be payable in the form of cash or shares.

 

Dividend Equivalents.  Dividend equivalents are amounts equivalent to stock or other property dividends on shares with respect to the number of shares covered by the award, paid currently or on a deferred basis in cash or stock.

 

Performance Awards and Code Section 162(m) Provisions

 

Performance awards are awards of cash, shares of common stock, or a combination of cash and shares of common stock, which become vested or payable upon the satisfaction of pre-determined performance goals over the pre-determined performance period established by the Compensation Committee. The performance goals will be based on one or more criteria such as the following: net sales; pretax income before allocation of corporate overhead and bonus; earnings per share; net income; division, group or corporate financial goals; return on stockholders’ equity; return on assets; attainment of strategic and operational initiatives; appreciation in and/or maintenance of the price of the shares or any other publicly-traded securities of the Company; market share; gross profits; earnings before taxes; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; economic value-added models; comparisons with various stock market indices; reductions in costs; return on invested capital of the Company or any affiliate, division or business unit of the Company for or within which the participant is primarily employed; the Company’s performance or the performance of an affiliate, division or business unit of the Company, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies. The performance period may be six months to five years. Upon completion of a performance period, the Compensation Committee will determine whether the performance goals have been met within the established performance period, and certify in writing to the extent such goals have been satisfied.

 

The performance-based award provisions of the 2005 Plan permit the Company to grant performance awards to executive officers of the Company whose compensation is subject to the deductibility limit of Section 162(m) of the Code that will qualify as “performance based” compensation and that will thus be deductible without regard to the deductibility limit. Similarly, these provisions of the 2005 Plan permit the Company to provide that the vesting of restricted stock, and the vesting or payment of any other stock unit award, granted to such an executive officer will be subject to the achievement of the objective performance goals over a performance period, and thus satisfy the requirements to be “performance based” compensation which is deductible without regard to the deductibility limit. The Compensation Committee may also grant awards that are not “performance based,” and that will be subject to the deductibility limit of Section 162(m), if it determines that such awards are in the best interests of the Company.

 

Before the vesting, payment, settlement or lapsing of any restrictions with respect to any award that is intended to constitute “performance based” compensation under Section 162(m), the Compensation Committee shall certify in writing that the applicable performance criteria have been achieved to the extent necessary for such award to qualify as “performance based” compensation within the meaning of Section 162(m). Performance awards will

generally be paid only after the end of the relevant performance period, and may be paid in cash, shares, other property, or any combination thereof, in the sole discretion of the Compensation Committee at the time of payment. Performance awards shall be subject to such conditions and restrictions as may be determined by the Compensation Committee, and may be payable in the form of cash or shares.

 

Exercisability and Vesting of Awards

 

The Compensation Committee shall determine when and under what terms and conditions any award shall become exercisable or vested. However, the options that become exercisable for the first time in any year that can be treated as ISOs is limited to the first $100,000 of shares of common stock (valued as of the date of grant). Any options that first become exercisable in the year in excess of this limit shall be treated as NSOs. The Compensation Committee shall determine, in its discretion, the form of any payment for stock options, restricted stock, other stock unit awards and performance shares.

 

Transferability of Awards

 

In general, no award under the 2005 Plan may be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind, other than by will or by the laws of descent and distribution.

 

Duration of Options and Stock Appreciation Rights

 

Each option or SAR shall expire on the date specified by the Compensation Committee, but not later than 10 years from the date of grant. ISOs granted to 10% stockholders of the Company (measured by ownership of voting power) shall expire not later than five years from the date of grant.

 

Certain Corporate Transactions; Adjustments

 

Upon the happening of a merger, reorganization or sale of substantially all of the assets of the Company or other change of control events specified in the 2005 Plan, the Compensation Committee may, in its sole discretion, do one or more of the following: (a) shorten the period during which options and SARs are exercisable (provided they remain exercisable for at least 30 days after the date notice of such shortening is given to the participants); (b) accelerate any vesting schedule to which an option, SAR, restricted stock, other stock unit award or performance award is subject; (c) arrange to have the surviving or successor entity or any parent entity thereof assume the options, SARs, restricted stock, other stock unit awards or grant replacement options or SARs with appropriate adjustments in the option prices and adjustments in the number and kind of securities issuable upon exercise; (d) cancel options upon payment to the participants in cash of an amount that is the equivalent of the excess of the fair market value of the Pinnacle Common Stock (at the effective time of the merger, reorganization, sale or other event) over the exercise price of the option to the extent the options are vested and exercisable, and cancel SARs by paying the value thereof; or (e) make any other modification or adjustment that the Compensation Committee deems appropriate and fair in its discretion. The Compensation Committee may also provide for one or more of the foregoing alternatives in any particular award agreement.

 

In the event of a recapitalization, reorganization, spin-off, reclassification, stock dividend, stock split, reverse stock split or similar transaction, awards shall be adjusted appropriately, or in the case of dividend equivalents, the Compensation Committee may in its discretion make an appropriate adjustment.

 

Amendment and Termination of the 2005 Plan

 

The Board may terminate, amend or modify the 2005 Plan or any portion thereof at any time; provided, however, that without approval of our stockholders, no such amendment or modification will be made that (a) increases the total number of shares of common stock that may be granted under the 2005 Plan, in the aggregate, with respect to any type of award, or with respect to any individual during any one calendar year (except in each case for adjustments to common stock for corporate transactions or other events such as stock splits, reverse stock splits and stock dividends, as provided in the 2005 Plan) or (b) is required to be submitted to stockholders for approval under applicable law or the rules of the SEC and/or NYSE (or other principal securities exchange on which shares of

our common stock are then listed). Except as otherwise determined by the Board, termination of the 2005 Plan will not affect the Compensation Committee’s ability to exercise the powers granted to it hereunder with respect to awards granted under the Plan prior to the date of such termination. The Compensation Committee may take such actions as it deems appropriate to ensure that the 2005 Plan and awards comply with any tax, securities or other applicable laws. In general, no amendment or termination of the 2005 Plan will adversely affect the rights of a participant that has been established prior to such amendment or termination absent the written consent of the affected participant.

 

Federal Income Tax Matters

 

The following discussion of federal income tax consequences does not purport to be a complete analysis of all of the potential tax effects of the 2005 Plan. It is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. No information is provided with respect to persons who are not citizens or residents of the United States, or foreign, state or local tax laws, or estate and gift tax considerations. In addition, the tax consequences to a particular participant may be affected by matters not discussed above. ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT HIS OR HER TAX ADVISOR CONCERNING THE TAX CONSEQUENCES TO HIM OR HER OF THE 2005 PLAN, INCLUDING THE EFFECTS OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND OF CHANGES IN THE TAX LAWS. The 2005 Plan is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) and is not qualified under Section 401(a) of the Code.

 

Non-Qualified Stock Options and Stock Appreciation Rights

 

A recipient recognizes no taxable income upon the grant of an NSO or SAR. Upon exercise of either, a participant will recognize taxable ordinary income equal to the difference between the fair market value of Company stock on the exercise date and the exercise price. Any additional gain or loss recognized upon the subsequent sale or exchange of the stock will be taxed as a short-term or long-term capital gain or loss, as the case may be.

 

Incentive Stock Options

 

A participant recognizes no taxable income upon the grant or exercise of an ISO (except for purposes of the alternative minimum tax, in which case income recognition is the same as for NSOs). If a participant exercises an option and sells the shares more than two years after the grant date and more than one year after the exercise date, the participant will recognize a long-term capital gain or loss equal to the difference between the sale price and the exercise price. If a participant exercises an option and sells the shares before the end of the 2-year or 1-year holding periods, the participant will generally recognize: (a) taxable ordinary income equal to the difference between (i) the fair market value of the shares at exercise (or at sale, if less) and (ii) the exercise price of the option, plus (b) short-term capital gain on any excess of the sale price over the exercise price.

 

Restricted Stock, Stock Unit and Performance Awards

 

A participant who receives restricted stock, stock units, performance awards or other awards that are subject to forfeiture prior to vesting generally will recognize no taxable income at the time of grant. When the restrictions have lapsed or the performance criteria have been met (i.e., upon vesting), the participant will recognize taxable ordinary income equal to the difference between the fair market value of the Company’s stock on the vesting date less the amount paid, if any, for the shares. For restricted stock, a participant may elect to be taxed based on the fair market value of the award at the time of grant.

 

Tax Consequences to the Company.

 

In the foregoing cases, the Company generally will be entitled to a deduction at the same time and in the same amount as a participant recognizes ordinary income, subject to the limitations imposed under the Code.

$1,000,000 Limit on Deductible Non-Performance Based Compensation.

 

Section 162(m) of the Code provides that any publicly-traded corporation will be denied a deduction for compensation paid to certain executive officers to the extent that the compensation exceeds $1,000,000 per officer per year. However, as discussed above, the deduction limit does not apply to “performance based” compensation, as defined in Section 162(m). See “— Performance Awards and Code Section 162(m) Provisions”.

 

Excess Parachute Payments

 

Under Section 4999 of the Code, certain officers, stockholders, or highly-compensated individuals (“Disqualified Individuals”) will be subject to an excise tax (in addition to federal income taxes) of 20% of the amount of certain “excess parachute payments” which they receive as a result of a change in control of the Company. Furthermore, Section 280G of the Code prevents the Company from taking a deduction for any “excess parachute payments.”

 

Section 409A Considerations

 

Section 409A of the Code imposes certain additional taxes on an employee or service provider who receives “deferred compensation” that does not comply with the requirements of Section 409A. The Company believes that stock options, SARs and restricted stock granted under the 2005 Plan will not constitute “deferred compensation” within the meaning of Section 409A and that other awards under the 2005 Plan that are payable within a limited period of time after vesting will not constitute “deferred compensation” within the meaning of Section 409A.

 

Special Rules; Withholding of Taxes

 

Special tax rules may apply to a participant who is subject to Section 16 of the Exchange Act. Other special tax rules will apply if a participant exercises a stock option by delivering shares of Pinnacle Common Stock which he or she already owns, or through a “broker’s exercise.”

 

The Company may take whatever steps the Compensation Committee deems appropriate to comply with any applicable withholding tax obligation in connection with the exercise of an option or stock appreciation right or the grant or vesting of restricted stock, other stock unit awards, or performance awards, including requiring any participant to pay the amount of any applicable withholding tax to the Company in cash. The Compensation Committee may, in its discretion, authorize “cashless withholding.”

 

Potential Modification of Option Exchange Program Terms

 

While we expect that the terms of the Option Exchange Program, if approved by stockholders, would be materially similar to those set forth in this discussion, we may find it necessary or appropriate to change the terms of the Option Exchange Program to take into account accounting rules, changed circumstances, Company policy decisions or administrative needs. Further, even if the amendment to the 2005 Plan is approved by our stockholders, we retain the discretion to amend non-material terms, postpone or not proceed with the commencement of the Options Exchange Program or under certain circumstances cancel the Option Exchange Program once it has commenced.

 

Required Vote

 

Approval of Proposal No. 3 requires the approval by the affirmative vote of a majority of the votes cast “FOR,” “AGAINST” or “ABSTAIN” with respect to such proposal, provided that the total votes so cast on the proposal represent more than 50% of all shares entitled to vote on the proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR AN AMENDMENT TO 2005 EQUITY AND PERFORMANCE INCENTIVE PLAN IN THIS PROPOSAL NO. 3.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis provides narrative disclosure regarding the compensation plans, programs and arrangements we employed for individuals serving as our President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, our three other most highly compensated executive officers and up to one additional individual for whom disclosure would have been provided as among the three other most highly compensation executive officers had he been employed on December 31, 2010, as determined under the rules of the SEC (collectively, called our “named executive officers”).

 

During fiscal 2010, our named executive officers were:

 

 

Philosophy and Objectives

 

Pinnacle Entertainment, Inc. is an owner, operator and developer of casinos and related hospitality and entertainment facilities. Our current properties include:

 

 

As a discretionary consumer entertainment and leisure product, our business is particularly sensitive to economic cycles and consumer sentiment, and, therefore, results from year to year can be volatile and somewhat unpredictable. Our business operations are also generally susceptible to changes in the competitive and legislative environment which can have an unanticipated impact on our operating results.

 

In developing compensation plans for our named executive officers, the Compensation Committee seeks to balance all of these business characteristics and create a program which will motivate and reward executives for their performance and for creating value for our stockholders over time. The Compensation Committee regularly evaluates and revises, as necessary, our compensation programs to ensure that they support our business objectives and provide competitive compensation levels for our executives. As both an owner-operator of existing casino

properties and developer of new properties, the business objectives that need to be recognized in our compensation programs include:

 

 

More specifically, our compensation programs strive to support our business needs by meeting the following objectives:

 

 

Although we reference the market medians for competitive pay practices in setting overall target pay levels for our executives, we do not define a specific percentile of market for targeting executive pay. We consider many factors, including the actual performance and contribution of our executives, and internal pay comparisons between our executives, when determining individual executive pay, as discussed in more detail below.

 

Fiscal 2010 Performance Context for Compensation Decisions

 

During 2010, we continued our ongoing execution of operational excellence initiatives which continue to drive improved financial results. During 2010, the Company’s revenues rose 11.2% to $1.1 billion from $988 million in 2009 and Adjusted EBITDA (as defined below and used for calculating bonuses) increased 27.5% to $214.1 million in 2010 from $160.6 million in 2009. These successful financial results were achieved despite the global economic slowdown which began in late 2008 and the difficult business environment for casino operations in general due to continued weakness in consumer spending. Our executive team has demonstrated exceptional focus and perseverance in this difficult environment, as demonstrated by the Company’s increases in revenues and Adjusted EBITDA. The Compensation Committee has taken specific and targeted actions to help ensure continued focus on our business and our stockholders throughout the current period of business and leadership transition, as discussed in more detail below.

 

In addition, other accomplishments for the year include the following:

 

 

 

2010 and 2011 Executive Management Changes and Impact on Compensation

 

On November 7, 2009, Mr. Giovenco was appointed to serve as Interim Chief Executive Officer of the Company. Mr. Giovenco continued in this role until March 14, 2010, when Anthony M. Sanfilippo was appointed as President, Chief Executive Officer and a director of the Company. For his service as the Interim Chief Executive Officer from November 7, 2009 until March 14, 2010, Mr. Giovenco received $75,000 per month. In addition, Mr. Giovenco received two fully vested options covering 50,000 shares each of the Company’s common stock, which were granted in November 2009 and February 2010, respectively, for options covering a total of 100,000 shares. Mr. Giovenco also was awarded a discretionary bonus of $125,000 after the completion of his service as Interim Chief Executive Officer.

 

On March 13, 2010, the Company entered into an Employment Agreement with Mr. Sanfilippo, effective as of March 14, 2010. The Employment Agreement provides that Mr. Sanfilippo will earn an annual base salary of $840,000. Mr. Sanfilippo is also entitled to earn bonuses with a targeted bonus of 100% of his annual salary based upon meeting performance targets developed by the Compensation Committee of the Board. The parties contemplate that the setting of the targets and goals and the payment of bonuses will be done in such a manner as to qualify such bonuses as “performance based” compensation under Section 162(m) of the Internal Revenue Code. In some circumstances, a portion of the annual bonus may be paid in restricted stock. Mr. Sanfilippo may also receive special bonuses, in addition to his annual bonus eligibility, at the discretion of the Board or the Compensation Committee. Mr. Sanfilippo does not receive any compensation for services as a member of the Board. On May 14, 2010, Mr. Sanfilippo was granted an option to purchase 650,000 shares of the Company’s common stock as an inducement to employment with the Company. In addition, on March 13, 2010, Mr. Sanfilippo entered into a stock purchase agreement with the Company to purchase 125,000 shares of the Company’s common stock directly from the Company.

 

On March 28, 2011, the Company entered into an Employment Agreement, effective as of April 1, 2011, with Carlos A. Ruisanchez for his new role as the Company’s Executive Vice President and Chief Financial Officer. The Employment Agreement provides that Mr. Ruisanchez will earn an annual base salary of $580,000. Prior to his position as Executive vice President and Chief Financial Officer, Mr. Ruisanchez was the Company’s Executive Vice President of Strategic Planning and Development. Mr. Ruisanchez is also entitled to earn bonuses with a targeted bonus of 80% of his annual salary based upon meeting performance targets developed by the Compensation Committee of the Board. The parties contemplate that the setting of the targets and goals and the payment of bonuses under the Bonus Plan will be done in such a manner as to qualify such bonuses as “performance based” compensation under Section 162(m) of the Internal Revenue Code. Mr. Ruisanchez may also receive special bonuses in addition to his annual bonus eligibility at the discretion of the Board or the Committee. Any bonus paid to Mr. Ruisanchez may be in cash or restricted stock units, as determined at the discretion of the Board or the Compensation Committee. On March 28, 2011, Mr. Ruisanchez was granted an option to purchase 240,000 shares of the Company’s common stock for his new role as Executive Vice President and Chief Financial Officer.

 

On March 3, 2011, the Company entered into a Separation Agreement with Stephen H. Capp in connection with his separation from the Company effective as of March 31, 2011. The Separation Agreement provides that Mr. Capp’s separation will be treated as a termination by the Company without cause other than in connection with a change of control for all purposes under his employment agreement with the Company, except with respect to a covenant not to compete and certain other provisions. Under the Separation Agreement, Mr. Capp is entitled to receive (i) cash severance payments equal to $500,000, payable in semimonthly installments over twelve months; (ii) accrued salary through the date of separation; (iii) health benefits coverage and disability insurance coverage for twelve months; and (iv) an annual bonus for the 2010 fiscal year of $730,000. Mr. Capp has until June 29, 2012 to exercise his stock options vested as of the separation date and will be issued 18,750 shares of the Company’s

common stock, in settlement of his vested restricted stock units as of the separation date within ninety days of March 1, 2012.

 

On March 3, 2011, the Company entered into a Separation Agreement with Clifford D. Kortman in connection with Mr. Kortman’s separation from the Company effective as of March 11, 2011. The Separation Agreement provides that Mr. Kortman’s separation will be treated as a termination by the Company without cause other than in connection with a change of control for all purposes under his employment agreement with the Company, except with respect to a covenant not to compete and certain other provisions. Under the Separation Agreement, Mr. Kortman shall be entitled to receive (i) cash severance payments equal to $425,000, payable in semimonthly installments over twelve months; (ii) accrued salary through the date of separation; (iii) health benefits coverage and disability insurance coverage for twelve months; and (iv) an annual bonus for the 2010 fiscal year of $524,000. Mr. Kortman has until June 8, 2012 to exercise his stock options vested as of the separation date and will be issued 11,250 shares of the Company’s common stock, in settlement of his vested restricted stock units as of the separation date within ninety days of March 1, 2012.

 

On December 8, 2010, the Company entered into a Separation Agreement with Alain J. Uboldi in connection with his retirement from the Company effective as of December 29, 2010. The Separation Agreement provides that Mr. Uboldi’s retirement will be treated as a termination by the Company without cause other than in connection with a change of control for all purposes under his employment agreement with the Company, except with respect to a covenant not to compete and certain other provisions. Under the Separation Agreement, Mr. Uboldi is entitled to receive (i) cash severance payments equal to $425,000, payable in monthly installments over twelve months; (ii) accrued salary through the date of retirement; (iii) health benefits coverage and disability insurance coverage for twelve months; and (iv) an annual bonus for the 2010 fiscal year, which was determined by the Compensation Committee to be $525,000 in March 2011. In addition, Mr. Uboldi has until March 29, 2012 to exercise his vested stock options as of the separation date.

 

Oversight of Executive Compensation

 

Role of Compensation Committee

 

The Compensation Committee has overall responsibility for the compensation programs and policies pertaining to our executives, including our named executive officers. The specific responsibilities of the Compensation Committee related to executive compensation include:

 

 

The Compensation Committee is also responsible for reviewing and submitting to the Board recommendations concerning compensation for our non-employee directors.

 

Role of Management in Compensation Process

 

The Compensation Committee relies significantly on the input and recommendations of our Chief Executive Officer when evaluating factors relative to the compensation of our named executive officers. Our Chief Executive

Officer provides the Compensation Committee with his assessment of the performance of each named executive officer and his perspective on the factors described above in developing his recommendations for each named executive officer’s compensation, including salary adjustments, equity grants and incentive bonuses, which are largely formulaic based on the design of 2010 Annual Incentive Plan. The Compensation Committee discusses our Chief Executive Officer’s recommendations, consults with its independent advisor, and then approves or modifies the recommendations in collaboration with the Chief Executive Officer, other than for his own compensation.

 

Our Chief Executive Officer’s compensation is determined solely by the Compensation Committee (subject to ratification by our full Board) which approves any adjustments to his base salary, performance incentive compensation and equity awards from year to year. The Compensation Committee solicits our Chief Executive Officer’s perspective on his own compensation, but makes determinations regarding his compensation independently and without him present. Our Chief Executive Officer attends portions of the Compensation Committee meetings, but does not attend portions of those meetings related to making specific decisions on his own compensation.

 

In addition to recommendations put forth by our Chief Executive Officer, other members of our executive team are involved in the compensation process by assembling data to present to the Compensation Committee and by working with the outside independent compensation consultants to give them the information necessary to enable them to complete their reports. Other members of our executive management team also occasionally attend portions of the Compensation Committee meetings.

 

Role of Outside Consultants

 

The Compensation Committee retains the services of executive compensation consultants to assess the competitiveness of our compensation programs, conduct other research as directed by the Compensation Committee, and support the Compensation Committee in the design of executive and Board of Director compensation. From fiscal 2008 through 2010, the Compensation Committee has retained Farient Advisors to assist the Compensation Committee in the review and assessment of our compensation programs. During fiscal 2010, Farient’s support included conducting a complete competitive assessment of pay levels pertaining to the Chief Executive Officer and the other named executive officers, review and recommendations regarding the terms of the Chief Executive Officer’s employment agreement, assessment and recommendations regarding Board of Directors compensation levels and practices, and review and recommendation regarding annual and long-term incentive plan designs. This included a substantial review and revision of our compensation plan designs for senior executives and for the broader corporate staff to create a compensation program tailored to the Company’s current strategies.

 

Although Farient Advisors works with management to develop programs that support our business needs, Farient Advisors is retained by and reports directly to the Compensation Committee for its work related to our executive compensation programs. During late 2009 and early 2010, Farient Advisors also completed work directly for management, with the approval of the Chairman of the Compensation Committee. This additional work was related to supporting management to implement a new compensation program for the Company. The fees for these additional services did not exceed $120,000 during 2010.

 

Competitive Pay Comparisons

 

When determining the compensation opportunity for individual named executive officers, including salaries, bonuses, and equity grants, the Compensation Committee takes many factors into account, including the officer’s experience, responsibilities, management abilities, job performance, performance of the Company as a whole, current market conditions, competitive pay for similar positions at comparable companies and at companies in other industries that could recruit Pinnacle executives, and pay relative to other executives at Pinnacle. These factors are considered by the Compensation Committee in a subjective manner without any specific formula or weighting. The Company does not set compensation at a specific percentile of market comparisons. However, the Compensation Committee references the median pay levels for executives at similar companies from time to time to assess the overall competitiveness and reasonableness of pay.

 

More specifically, with the assistance of outside advisors, the Compensation Committee periodically considers information on the executive compensation from a peer group of publicly traded companies and from compensation surveys which include data from companies in other industries that could recruit Pinnacle executives.

In late 2009, Farient conducted a competitive compensation analysis for the Compensation Committee. These pay comparisons were used to develop pay level and program design recommendations for fiscal 2010. For the late 2009 study, the peer group consisted of the following publicly-traded gaming companies:

 

 

Farient collected data for Chief Executive Officer and Chief Financial Officer compensation from these public peers and utilized broader compensation survey data, covering general industry and the hospitality and leisure industry, to validate this data and to develop comparative data.

 

The 2009 analyses indicated that the majority of the named executive officers, including pay for our prior Chief Executive Officer and Chief Financial Officer, were positioned at or near the market medians for total compensation (base salary, target or actual historical bonuses, and equity grant values). Pay for other executives exceeded the market medians, driven by a desire for greater consistency in pay for the executive officers at the Company compared to typical market practices, where pay for senior executives is more differentiated. The Compensation Committee believes that our executive team has unique skills and experience that, in some cases, limit the direct comparability of market data. Therefore, the Committee believes that these differences from market medians are acceptable and appropriate for our senior leadership.

 

Elements of Compensation

 

Overview of Compensation Elements

 

During fiscal 2010, our executive compensation and benefits consisted of the components listed in the table below, which provides a brief description of the principal types of compensation, how performance is factored into each type of compensation, and the objectives served by each element. A description of each of these elements is discussed in more detail following the table.

 

Fiscal 2010 Principal Elements of Executive Compensation

 

 

Base Salary

 

We intend the base salaries of our named executive officers to provide a minimum level of compensation for highly qualified executives. The base salaries of our named executive officers were determined in the course of negotiations with the Company and are subject to occasional modification based on a subjective evaluation of each executive’s contribution, experience, and responsibilities, as well as the relative pay between senior executives at the Company. Each factor is considered on a discretionary basis without formulas or weights. We consider relative pay between executives because our perspective is that some consistency in pay emphasizes teamwork across the senior leadership level. On September 23, 2010, the Company entered into amendments to the employment agreements effective as of September 21, 2010 with Messrs. Godfrey and Ruisanchez (collectively, the “Amendments to the Employment Agreements”). Pursuant to the Amendments to the Employment Agreements, the annual base salaries of Messrs. Godfrey and Ruisanchez were increased from $425,000 to $475,000 effective as of September 21, 2010. On March 28, 2011, the Company entered into a new employment agreement with Mr. Ruisanchez in his role as Executive Vice President and Chief Financial Officer and his annual base salary is $580,000, effective as of April 1, 2011.

The table below shows the salaries for each of the named executive officers during 2010.

 

 

 

 

Bonuses

 

We intend that bonuses paid to our named executive officers will reward them for the achievement of successful financial, strategic, and operational performance over a short period of time. Beginning in fiscal 2010, we substantially revised our incentive plan designs and developed a more formulaic approach to measuring and rewarding all of our named executive officers based on a formula directly linked to the annual financial results of the Company, as measured by Adjusted EBITDA and Free Cash Flow (which is defined below), which provides a highly operational focus and aligns the pay for our top executives directly with the short-term results delivered to our stockholders. It is the perspective of the Company and Compensation Committee that a more formula-driven annual incentive system will provide greater clarity for the senior executive team regarding their focus and rewards and encourage the attainment of “stretch” performance objectives by providing a clearly defined upside in the incentive plan design. It is the perspective of the Company that such formula-driven bonus plans are also more common and consistent with external market practices and therefore appropriate from a competitive standpoint. The specific decisions related to 2010 are described in more detail below.

 

For fiscal 2010, the annual bonus program approved by the Compensation Committee established a more clearly defined annual incentive opportunity for all of our named executive officers (other than Mr. Giovenco). The objectives of these changes include:

 

 

Specifically, our annual bonuses for all named executive officers (other than Mr. Giovenco) for 2010 were based on a formula, with quantitative short-term and intermediate-term financial targets set at the beginning of the year. Each executive had a defined bonus target as a percentage of salary, and the final bonus payable at the end of the year was determined based on the quantitative financial results at year end compared to the targets set at the beginning of the year, along with a small portion (10% for 2010) linked to and subject to reduction for individual performance and contribution measured in a more subjective fashion. The upside potential for the quantitative

performance goals was up to 180% of the target award for superior performance, with the potential to earn zero for underperformance relative to the stated performance objective. The individual performance factor was up to 10% of the total individual target bonus opportunity for the year, subject to achievement of the minimum EBITDA threshold and potential downward discretion of the Compensation Committee if individual and team subjective goals were not fully met. Therefore, the total potential upside opportunity was up to 190% of the target bonus for each named executive officer.

 

For 2010, the specific award opportunities at target and maximum performance for each of the named executive officers (other than Mr. Giovenco) was as follows:

 

 

 

 

To measure performance, the Compensation Committee selected a combination of Adjusted EBITDA and Free Cash Flow to measure success in order to balance near term operational performance with delivering sustained improvements in cash flow from investment and financing activities. The Team and Individual Objectives were set to provide a subjective evaluation of each executive based on individual performance and contribution. The weighting of each factor, the performance goal range, performance outcomes, and the payout as a percentage of the target bonus were as follows:

 

Performance Factors for Determining Bonus for 2010

 

 

 

 

Based on the factors described in the table above, the Compensation Committee approved the following bonuses for our named executive officers in 2010 (other than Mr. Giovenco who was paid a $125,000 cash bonus after completion of his service as Interim Chief Executive Officer):

 

 

 

 

Equity Awards

 

We believe that awards of equity to our named executive officers provide a valuable incentive for them and helps align their interests with that of our stockholders for periods of time longer than one fiscal year. Stock options are an important part of our philosophy for aligning pay for performance, as executives can realize value on their stock options only if the stock price increases on a sustained basis. Restricted stock awards or restricted stock unit awards also help align pay with performance as their value fluctuates with changes in the share price over time. However, restricted stock awards and restricted stock unit awards also maintain some value in difficult economic environments and, therefore, meet our objectives of retaining executive talent and maintaining effective incentives

during different economic environments. Both stock options and restricted stock or restricted stock units are typically subject to vesting and require each executive to remain employed with the Company for a period of time or risk forfeiting the award.

 

Beginning with fiscal 2010, the Company began making executive incentive grants annually (except as otherwise agreed for new hires as part of any inducement grants to join the Company). It is our perspective that frequent grants of stock options allow us to provide stock option grants with exercise prices throughout the economic and business cycle, with executives receiving both high and low-priced options over time. Such pricing provides more consistent incentives to the executives receiving such options to continually grow the share price and maximize gains across all of their equity incentives in the Company.

 

The Compensation Committee has adopted a policy of granting options and restricted stock units on an annual basis. On March 14, 2010, Mr. Sanfilippo was awarded an option covering 650,000 shares of Pinnacle Common Stock, which vests over five years and was granted outside the 2005 Plan as an inducement to employment. This will be the only equity grant to Mr. Sanfilippo during the first two years of his employment. In addition, on March 28, 2011, the Compensation Committee granted to Mr. Ruisanchez for his new role as Executive Vice President and Chief Financial Officer an option to purchase 240,000 shares of Pinnacle Common Stock, which vest over four years. This will be the only equity grant to Mr. Ruisanchez during the first two years as the Company’s Executive Vice President and Chief Financial Officer.

 

In early 2010, the Compensation Committee approved equity grants for each of our named executive officers (other than Messrs. Giovenco and Sanfilippo) that included both stock options and restricted stock unit grants. The Compensation Committee took into consideration the guidelines it established for annual stock option grants when determining the size of these awards for 2010, but it also considered the need to retain the senior leadership team through the current period of leadership transition and made grants above the guideline levels for Messrs. Godfrey and Ruisanchez. In addition, the Compensation Committee granted restricted stock units as part of this package to further enhance retention, in recognition of the fact that most historical stock option grants were largely underwater and that the new bonus plan, which will include restricted stock unit awards, will not result in any payouts until the beginning of 2011.

 

As a result of these considerations, the Compensation Committee approved the following equity grants for the following named executive officers effective on March 1, 2010:

 

 

The stock option grants vest in five equal annual installments beginning on March 1, 2011 and have 10-year terms. The restricted stock units vest in two equal annual installments beginning on March 1, 2011. Stock representing the vested portion of the restricted stock units will be transferred to the executive within 90 days after the second anniversary of the date of grant, or, if earlier, within 90 days after the Company’s dismissal of the executive for “cause” or the executive’s quitting for “good reason,” as such terms are defined in his employment agreement.

 

As discussed above, the Compensation Committee granted to Messrs. Godfrey and Ruisanchez 22,160 restricted stock units on March 1, 2011 that they earned as part of their annual bonuses, which vest in three equal annual installments beginning on March 1, 2012. Stock representing the vested portion of the restricted stock units will be transferred to the executive within 90 days after the third anniversary of the date of grant, or, if earlier, within 90 days after the Company’s dismissal of the executive for “cause” or the executive’s quitting for “good reason,” as such terms are defined in his employment agreement. These grants of restricted stock units which is performance based are deductible under Section 162(m) of the Internal Revenue Code.

The exercise price of each stock option is the closing price of our common stock on the date of grant. The Compensation Committee does not delegate to management or others its decisions regarding stock options granted to named executive officers.

 

Retirement and Welfare Benefits

 

The named executive officers are eligible to participate in all of the Company’s normal retirement, and welfare programs on the same terms as generally available to substantially all of our full-time employees. These include a 401(k) plan and matching contributions, health and disability insurance coverage, and group life insurance programs.

 

In addition to these standard retirement and welfare benefits, the Company provides certain additional savings and benefit programs available to our senior management, which we believe are in the best interest of our stockholders, as they enable us to attract and retain high quality executives and help those executives maintain their focus on the business needs of the Company rather than their own personal financial considerations. During 2010, these additional executive benefits included:

 

 

The Executive Deferred Compensation Plan, or the Executive Plan, allows executive officers to elect to defer a portion of their salary and bonuses each year into a non-qualified deferred compensation account, which is an unsecured obligation of the Company to pay compensation at a later date. This allows the executives to receive a tax-deferred savings and appreciation to support their individual retirement needs.

 

The Compensation Committee has the discretion to change the floating crediting rate for deferrals under the Executive Plan on a prospective basis as of the beginning of any quarter. Until the second quarter of 2010, amounts deferred into the Executive Plan will be credited with a floating rate of interest tied to the yields on 30-year U.S. treasury bonds, plus five percentage points, compounded quarterly. Beginning the second quarter of 2010, the Compensation Committee approved a change in the rate to be the yield on 30-year U.S. Treasury Bonds, plus two percentage points, not to exceed 8% per annum, compounded quarterly. Deferrals that were deducted from salaries and bonuses in 2004 and earlier years will not be subject to a floating rate going forward. Instead, each participating executive may select from a list of hypothetical investment funds among which deferred contributions shall be allocated. Although a participating executive’s deferred compensation will not be invested directly in the selected hypothetical investment funds (and will be an unsecured obligation of the Company), his deferral compensation account attributable to deferrals of salary and bonus in 2004 and earlier years shall be adjusted according to the performance of such funds.

 

During 2010, the Executive Plan included a feature that allows each senior executive to use deferred salary and bonuses to “fund” his own retirement benefit, payable as an annuity by the Company upon retirement if elected by December 31, 2010. This annuity election, added to the deferred compensation plan beginning in 2008, provided our senior executives with benefit opportunities similar to what they could receive under a more traditional defined benefit pension, but based on their own savings rather than being paid for by the Company. The annuity option also provided for a tax gross-up in the event of a distribution upon a change in control. The tax gross-up was intended to provide a payment for taxes required to be paid on the full value of the annuity upon its distribution in the event of a change in control, while making up for the loss of tax advantages the annuity would otherwise provide if amounts became taxable only in the small increments paid over the life of the annuity. On December 6, 2010, the Executive Plan was amended effective as of January 1, 2011, to eliminate the ability of executives to elect the annuity form of distribution under the Executive Plan and to eliminate any tax gross-up.

 

On March 1, 2011, the Board approved certain amendments to the Executive Plan effective as of January 1, 2011. The amendments to the Plan provide for the deferral of a portion of a Plan participant’s compensation in the form of restricted stock units, defined as “Other Stock Unit Awards,” in coordination with the 2005 Plan. The restricted stock units deferred under the Executive Plan are credited to the participant’s stock unit account under the

Executive Plan and are credited on the last day of each quarter with market-level investment earnings of the Company’s common stock. On the date of distribution, the restricted stock units are settled in an equal number of shares of the Company’s common stock.

 

On December 6, 2010, the Board of Directors approved of the termination of the Executive Health Plan effective January 1, 2011. Prior to January 1, 2011, named executive officers did not have to pay any co-pays or co-deductibles. Beginning January 1, 2011, the Company’s named executive officers are covered by the Company’s general health plan applicable to all of the Company’s employees.

 

Executive Perquisites

 

Historically, we had allowed named executive officers and their families to use the corporate aircraft to attend Pinnacle meetings or other Pinnacle business events, but in general only when the aircraft is otherwise traveling for business purposes and there are empty seats. As of March 13, 2010, the Company ceased using the corporate aircraft for travel by named executive officers of the Company. In April 2010, we sold the corporate aircraft.

 

During Mr. Giovenco’s service as Interim Chief Executive Officer, the Company provided him with temporary housing costs, car rental and paid for certain relocation costs. In addition, the Company paid on Mr. Sanfilippo’s behalf, or reimbursed him, for legal fees associated with his employment agreement with the Company, relocation expenses, temporary housing costs and moving expenses.

 

Other Considerations

 

Impact of Section 162(m)

 

Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation over $1,000,000 paid to each of the company’s chief executive officer and the four other most highly compensated officers, except for compensation that is “performance based.” Our general intent is to provide compensation awards to our named executive officers so that most, if not all, awards will be deductible without limitation. However, we may make compensation awards that are not deductible if our best interests so require. In addition, in recent years, we have not had to pay income tax due to loss carry-forwards, tax depreciation (particularly from new properties) and financial leverage. We believe that our new properties and the financial leverage resulting from their construction will result in much of our cash flow from operations not being subject to current income taxation over the next few years, limiting the impact of Section 162(m) as it related to current compensation practices.

 

Stock Ownership Guidelines

 

In December 2010, the Board of Directors of the Company approved of stock ownership guidelines for each of the Company’s executive officers and directors. Pursuant to the Company’s stock ownership guidelines, the Company’s executive officers are required to own the following shares of the Company’s common stock within five years of January 1, 2011 or by December 31, 2016: President and Chief Executive Officer, 300,000 shares of common stock, Executive Vice Presidents, 50,000 shares of common stock, and directors, 20,000 shares of common stock. The following count toward the targeted ownership: (1) shares of the Company’s common stock owned outright; (2) shares of the Company’s common stock held in benefit plans (e.g., 401(k) Plan); (3) vested and/or unvested restricted stock; (4) vested and/or unvested restricted stock units; and (5) phantom stock units. Unexercised options do not count toward the targeted ownership.

 

Hedging Policy

 

The Company’s insider trading plan prohibits executive officers and directors from hedging their ownership of Pinnacle Common Stock, including puts, calls, or other derivative instruments related to Pinnacle Common Stock.

 

Risk Assessments

 

With respect to risk related to compensation matters, the Compensation Committee considers, in establishing and reviewing the Company’s executive compensation program, whether the program encourages unnecessary or excessive risk taking and has concluded that it does not. Executives’ base salaries are fixed in amount and thus do

not encourage risk-taking. Bonuses are capped and are tied to overall corporate performance. A portion of compensation provided to the executive officers is in the form of restricted stock units that are important to help further align executives’ interests with those of the Company’s stockholders. The Compensation Committee believes that these awards do not encourage unnecessary or excessive risk-taking since the value of the restricted stock awards fluctuate dollar for dollar with the Company’s stock price and do not represent significant downward/upward risk and reward.

 

Recovery of Incentive Compensation Policy

 

In March 2011, the Company’s Board of Directors adopted a policy on recovery of incentive compensation in the event of a financial restatement, also known as a “clawback policy.” The policy provides that the Compensation Committee may take any action to recover all or a portion of any excess bonus paid to an executive officer provided that (1) there is a restatement of the Company’s financial statements for the fiscal year for which a bonus is paid, other than a restatement due to changes in accounting principles or applicable law, and (2) the Compensation Committee determines that the executive officer has received an “excess bonus” for the relevant fiscal year. The amount of the excess bonus shall be equal to the difference between the bonus paid to the executive officer and the payment or grant that would have been made based on the restated financial results. The requirement of an executive officer to repay all or a portion of the excess bonus as determined by the Compensation Committee shall only exist if the Audit Committee has taken steps to consider restating the financials prior to the end of the third year following the year in question.

 

The Compensation Committee may take such action in its discretion that it determines appropriate to recover all or a portion of the excess bonus if it deems such action appropriate under the facts and circumstances. Such actions may include recovery of all or a portion of such amount from the executive officer from any of the following sources: prior incentive compensation payments, future payments of incentive compensation, cancellation of outstanding equity awards, future equity awards, gains realized on the exercise of stock options, and direct repayment by the executive officer.

 

Compensation Committee Report

 

The Compensation Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with the Company’s management and, based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement.

 

Compensation Committee

 

Lynn P. Reitnouer (Chairman)
Stephen C. Comer
James L. Martineau

 

Summary Compensation Table

 

The following table sets forth the compensation paid to each of the Company’s named executive officers for the fiscal years ended December 31, 2010, 2009 and 2008. In March 2010, the Company appointed Anthony M. Sanfilippo as the President, Chief Executive Officer and a director of the Company. Prior to Mr. Sanfilippo’s appointment, John V. Giovenco served as the Company’s Interim Chief Executive Officer from November 2009 to March 2010. The Summary Compensation Table provides the compensation received by Messrs. Giovenco and Sanfilippo during the 2010 fiscal year.

 

 

 

 

 

Employment Agreements and Other Change in Control Provisions

 

Employment Agreement with Anthony M. Sanfilippo

 

On March 13, 2010, the Company entered into an Employment Agreement, effective as of March 14, 2010, with Anthony M. Sanfilippo, the Company’s President and Chief Executive Officer (the “Employment Agreement”). On March 1, 2011, the Company entered into an amended and restated employment agreement with Mr. Sanfilippo and the discussion below identifies the changes to Mr. Sanfilippo’s Employment Agreement.

The Employment Agreement provides that Mr. Sanfilippo will earn an annual base salary of $840,000. Mr. Sanfilippo is also entitled to earn bonuses with respect to each year of the term with a targeted bonus of 100% of his annual salary based upon meeting performance targets developed by the Compensation Committee (the “Committee”) of the Board.

 

Mr. Sanfilippo is also entitled to an upside potential for his bonus of 150% of his annual base salary, although, as previously discussed, his maximum bonus for 2010 was 190% of his annual base salary. The parties contemplate that the setting of the targets and goals and the payment of bonuses will be done in such a manner as to qualify such bonuses as “performance based” compensation under Section 162(m) of the Internal Revenue Code. In some circumstances, a portion of the annual bonus may be paid in restricted stock. Mr. Sanfilippo may also receive special bonuses in addition to his annual bonus eligibility at the discretion of the Board or the Compensation Committee. Mr. Sanfilippo shall not receive any compensation for services as a member of the Board.

 

The Employment Agreement provides for an initial term ending March 13, 2014; provided that commencing on November 14, 2013 and as of November 14 of each year thereafter (each a “Renewal Date”), the Employment Agreement will automatically renew for successive one-year periods, unless notice of non-renewal is provided in writing by either party at least one hundred and twenty days (120) days before the Renewal Date.

 

If Mr. Sanfilippo’s employment terminates for any reason other than dismissal for “cause” (as defined in the Employment Agreement), Mr. Sanfilippo would receive an annual bonus for the year of termination based on the actual financial results for the full year in which the termination occurred, prorated for the portion of the year before the termination.

 

If Mr. Sanfilippo’s employment is terminated by the Company without cause or by Mr. Sanfilippo for “good reason” (as defined in the Employment Agreement) other than within 18 months following a “change of control” (as defined in the Employment Agreement), Mr. Sanfilippo would be entitled to certain payments equal to 150% of the sum of his salary then in effect and the average annual bonus paid to Mr. Sanfilippo for the past three consecutive years (or such shorter period during which Mr. Sanfilippo is employed, with the bonus for any period of less than a full year being annualized). The salary component would be paid in monthly installments over 18 months, and the bonus component would be paid in two equal annual installments on the first and second anniversaries of the termination of employment. Mr. Sanfilippo would also be entitled to receive continuation of health benefits coverage for Mr. Sanfilippo and his dependents and disability insurance coverage for Mr. Sanfilippo for 18 months following termination.

 

Pursuant to Mr. Sanfilippo’s amended and restated employment agreement, effective March 1, 2011, in the event the Company terminates Mr. Sanfilippo without cause or he terminates for good reason other than in connection with a change of control, any outstanding unvested stock options, restricted stock or restricted stock units (the “Equity Grants”) at the date of termination which would otherwise vest during the twelve (12) months following termination shall immediately become vested and may be exercised by Mr. Sanfilippo until the earlier of the expiration of their stated terms or within one (1) year after termination. The remaining unvested Equity Grants shall immediately terminate.

 

If Mr. Sanfilippo’s employment is terminated by the Company without cause or he terminates for “good reason” on or within 18 months after a “change of control” (as such terms are defined in the Employment Agreement), Mr. Sanfilippo would be entitled to a lump sum payment of 150% of the sum of his salary then in effect and the average annual bonus paid to Mr. Sanfilippo for the past three consecutive years (or such shorter period during which Mr. Sanfilippo is employed, with the bonus for any period of less than a full year being annualized). Mr. Sanfilippo would also be entitled to receive continuation of health benefits coverage for Mr. Sanfilippo and his dependents and disability insurance coverage for Mr. Sanfilippo for 18 months following termination.

 

Pursuant to Mr. Sanfilippo’s amended and restated employment agreement, effective March 1, 2011, in the event the Company terminates Mr. Sanfilippo without cause or he terminates for good reason in connection with or within eighteen (18) months after a change of control, all unvested Equity Grants, including any unvested replacement Equity Grants that may have been granted to him to replace unvested Equity Grants that expired by their terms in connection with a change of control, shall immediately become vested and may be exercised in accordance with their terms or within one (1) year after termination. To the extent that any unvested Equity Grants

terminate by their terms at the time of or in connection with a change of control and replacement Equity Grants of at least equivalent value are not granted to Mr. Sanfilippo, then he shall receive as additional cash severance at the time of termination the consideration paid for the securities underlying the unvested expired Equity Grants at the time of the change of control less, to the extent applicable, (a) the exercise price or other consideration payable by him for the Equity Grants; and (b) the value of any replacement Equity Grants realized by him through or as a result of such termination.

 

In addition, pursuant to Mr. Sanfilippo’s amended and restated employment agreement, effective March 1, 2011, in the event of Mr. Sanfilippo’s termination due to death or disability, he and his dependents, as the case may be, shall be entitled to receive health benefits coverage for eighteen (18) months and disability insurance coverage. The Company shall pay any applicable insurance premiums and reimburse him or his estate, as the case may be, for any taxes payable.

 

Any payment on account of termination of Mr. Sanfilippo which is deemed to be “deferred compensation” under Internal Revenue Code Section 409A will be delayed for six months after the termination of employment, except in the case of Mr. Sanfilippo’s death.

 

Certain non-competition, no-hire-away, and non-solicitation covenants apply to Mr. Sanfilippo for specified periods following the termination of his employment under certain circumstances.

 

Employment Agreements with Other Named Executive Officers

 

On December 22, 2008, we entered into Amended and Restated Employment Agreements with Stephen H. Capp, John A. Godfrey, Carlos A. Ruisanchez, Alain J. Uboldi and Clifford D. Kortman (collectively, the “Executives”). In addition, on September 23, 2010, the Company entered into an amendment with Messrs. Godfrey and Ruisanchez and increased their salaries from $425,000 to $475,000 effective September 21, 2010. As discussed above in the “Compensation Discussion and Analysis” section, on March 1, 2011, we entered into separation agreements with Messrs. Capp and Kortman and on December 8, 2010, we entered into a separation agreement with Mr. Uboldi. In addition, on March 28, 2011, we entered into a new employment agreement with Mr. Ruisanchez for his new role as Executive Vice President and Chief Financial Officer.

 

We refer to the employment agreements with the Executives, collectively as the “Employment Agreements.” The discussion below provides a summary of the Employment Agreements before the Company entered into separation agreements with Messrs. Capp, Kortman and Uboldi and the new employment agreement with Mr. Ruisanchez.

 

The annual base salaries of the Executives under the Employment Agreements for 2010 were as follows:

 

 

The Employment Agreements provide that the Executives will be entitled to earn bonuses with respect to each year of the term, the amount of which will be determined in the sole discretion of the Compensation Committee, based on consultations with, and recommendations of, our Chief Executive Officer.

 

The Employment Agreements provide for an initial term of three years ending June 13, 2009 (August 1, 2011 in the case of Mr. Ruisanchez) and will automatically renew for successive one-year periods thereafter unless notice of non-renewal is provided in writing by either party at least 90 days before the end of the then-current term. In May 2010, Mr. Godfrey received a notice that his Employment Agreement would not be renewed in its current form. Currently, Mr. Godfrey’s employment agreement terminates on June 13, 2012. The employment agreements for

Messrs. Capp, Uboldi and Kortman were terminated pursuant to their separation agreements with the Company. Mr. Ruisanchez entered into a new employment agreement on March 28, 2011.

 

The Employment Agreements provide for severance payments with and without a change in control event. Specifically, if any Executive’s employment is terminated by us without “cause” or he terminates for “good reason,” as defined in the Employment Agreements, on or within 24 months following a “change of control,” as defined in the Employment Agreements, this is considered a “Change of Control Termination,” the terms of which are described below. If any Executive’s employment is terminated by us without cause or by the Executive for “good reason” prior to a “change of control” or after 24 months following a “change of control,” or if the Executive is terminated due to death or disability, this is considered a “Non-Change of Control Termination.” If an Executive’s employment is terminated by us without cause or by the Executive for “good reason” prior to a “change of control,” and a change of control occurs within six months thereafter, the Executive becomes entitled to receive the payments for a Change of Control Termination, offset by the Non-Change of Control benefits he has already received.

 

For a Non-Change of Control Termination, the Executive is entitled to certain payments, including:

 

 

For a Change-of-Control Termination, the Executive is entitled to:

 

 

All amounts payable under this severance benefit shall be paid in a lump sum within 30 days after termination. However, no payments under the Employment Agreements shall be made to any Executive at a time (i.e., within six months following termination) or in a form that would subject such Executive to a 409A Tax. If any payment would, because of its timing or form, subject any Executive to the 409A Tax, such payment shall instead be paid at the earliest time that it could be paid without subjecting the Executive to the 409A Tax, and shall be paid in a form that would not subject the Executive to the 409A Tax. We will place an amount in a “rabbi trust” with an independent trustee reasonably acceptable to the Executive equal to the Deferred Amount plus the simple interest at the prime rate that will accrue thereon.

 

Pursuant to their separation agreements, Messrs. Capp, Kortman and Uboldi will not receive tax gross-up payments from Pinnacle. In addition, Messrs. Sanfilippo’s and Ruisanchez’s employment agreements do not have tax gross-up provisions. Pursuant to Mr. Godfrey’s employment agreement, he is still entitled to tax gross-up payments. However, the Company will no longer provide tax gross-up provisions in future employment agreements, including any future employment agreement entered into between the Company and Mr. Godfrey.

Certain non-competition, no-hire-away, and non-solicitation covenants apply to each Executive for specified periods following the termination of his employment under certain circumstances. In the event of a Non-Change of Control Termination, the covenant not to compete shall not apply. In the event of a Change of Control Termination, the covenant not to compete shall not apply and the term of the no-hire-away policy shall be limited to six months from the date of termination.

 

Employment Agreement with Carlos A. Ruisanchez

 

On March 28, 2011, the Company entered into an employment agreement, effective as of April 1, 2011, with Mr. Ruisanchez as the Company’s Executive Vice President and Chief Financial Officer. The employment agreement replaces the Amended and Restated Employment Agreement between the Company and Mr. Ruisanchez, dated December 22, 2008, as amended.

 

The employment agreement provides that Mr. Ruisanchez will earn an annual base salary of $580,000. Mr. Ruisanchez is also entitled to earn bonuses with respect to each year of the term with a targeted bonus of 80% of his annual salary determined under the 2005 Plan for Executive Officers as established by the Compensation Committee. The parties contemplate that the setting of the targets and goals and the payment of bonuses under the 2005 Plan will be done in such a manner as to qualify such bonuses as “performance based” compensation under Section 162(m) of the Internal Revenue Code. Mr. Ruisanchez may also receive special bonuses in addition to his annual bonus eligibility at the discretion of the Board or the Compensation Committee. Any bonus paid to Mr. Ruisanchez may be in cash or restricted stock, as determined in the Company’s discretion.

 

In addition, the employment agreement provides that on March 28, 2011, Mr. Ruisanchez shall receive an option to purchase 240,000 shares of the Company’s common stock, which option vests in four equal annual installments with a seven year term, with an exercise price equal to the closing price of the Company’s common stock on the date of grant. The grant of options shall be made pursuant to the 2005 Plan.

 

The employment agreement provides for an initial term ending March 31, 2014; provided that commencing on November 30, 2013 and as of November 30 of each year thereafter (each a “renewal date”), the employment agreement will automatically renew for successive one-year periods, unless notice of non-renewal is provided in writing by either party at least one hundred and twenty days (120) days before the renewal date.

 

If Mr. Ruisanchez’s employment terminates for any reason other than dismissal for “cause” (as defined in the employment agreement), Mr. Ruisanchez would receive an annual bonus for the year of termination based on the actual financial results for the full year in which the termination occurred, prorated for the portion of the year before the termination.

 

If Mr. Ruisanchez’s employment is terminated by the Company without cause or by Mr. Ruisanchez for “good reason” (as defined in the employment agreement) other than within 18 months following a “change of control” (as defined in the employment agreement), Mr. Ruisanchez would be entitled to certain payments equal to 150% of the sum of his salary then in effect and the average annual bonus paid to Mr. Ruisanchez for the past three consecutive years (or such shorter period during which Mr. Ruisanchez is employed, with the bonus for any period of less than a full year being annualized). The salary component would be paid in monthly installments over 18 months, and the bonus component would be paid in two equal annual installments on the first and second anniversaries of the termination of employment. In addition, Mr. Ruisanchez would be entitled to receive any unpaid salary and a pro-rated bonus for the year of termination. Also, any outstanding unvested stock options, restricted stock or restricted stock units (the “Equity Grants”) at the date of termination which would otherwise vest during the twelve (12) months following termination shall immediately become vested and may be exercised by Mr. Ruisanchez until the earlier of the expiration of their stated terms or within one (1) year after termination. The remaining unvested Equity Grants shall immediately terminate. Further, Mr. Ruisanchez would also be entitled to receive continuation of health benefits coverage for himself and his dependents and disability insurance coverage for 18 months following termination.

 

If Mr. Ruisanchez’s employment is terminated by the Company without cause or he terminates for “good reason” on or in connection with a “change of control” (as such terms are defined in the employment agreement), Mr. Ruisanchez would be entitled to a lump sum payment of 150% of the sum of his salary then in effect and the

average annual bonus paid to Mr. Ruisanchez for the past three consecutive years (or such shorter period during which Mr. Ruisanchez is employed, with the bonus for any period of less than a full year being annualized). In addition, Mr. Ruisanchez would be entitled to receive any unpaid salary and a pro-rated bonus for the year of termination. Also, all unvested Equity Grants, including any unvested replacement Equity Grants that may have been granted to him to replace unvested Equity Grants that expired by their terms in connection with a change of control, shall immediately become vested and may be exercised in accordance with their terms or within one (1) year after termination. To the extent that any unvested Equity Grants terminate by their terms at the time of or in connection with a change of control and replacement Equity Grants of at least equivalent value are not granted to Mr. Ruisanchez, then he shall receive as additional cash severance at the time of termination the consideration paid for the securities underlying the unvested expired Equity Grants at the time of the change of control less, to the extent applicable, (a) the exercise price or other consideration payable by him for the Equity Grants; and (b) the value of any replacement Equity Grants realized by him through or as a result of such termination. Further, Mr. Ruisanchez would also be entitled to receive continuation of health benefits coverage for himself and his dependents and disability insurance coverage for 18 months following termination.

 

Any payment on account of termination of Mr. Ruisanchez which is deemed to be “deferred compensation” under Internal Revenue Code Section 409A will be delayed for six months after the termination of employment, except in the case of Mr. Ruisanchez’s death.

 

Certain non-competition, no-hire-away, and non-solicitation covenants apply to Mr. Ruisanchez for specified periods following the termination of his employment under certain circumstances.

 

Other Change in Control Provisions

 

In addition to the Employment Agreements, our Executive Deferred Compensation Plan, or the Executive Plan, provides certain benefits upon a change in control. Effective January 1, 2008, we amended the Company’s Executive Plan to provide certain benefits and tax gross-ups upon a change in control for senior executives who elect to use deferrals of salary and bonuses to fund an annuity benefit under the Executive Plan. The amended provisions of the Executive Plan limit the cumulative payments that we would be obligated to make to the participants as a whole following a change in control under the Executive Plan, as described more fully below under “Executive Deferred Compensation Plan.” Effective January 1, 2011, the Company amended the Executive Plan to eliminate the annuity option under the Executive Plan and thereby eliminated the annuity tax gross-ups. Pursuant to the restricted stock agreements governing the grants of restricted stock to all of our named executive officers (other than Mr. Ruisanchez) in October 2006, in the event of a termination of such named executive officer’s employment for any reason, with or without cause, including as a result of death or disability, the shares of restricted stock shall vest or be terminated and canceled on the same basis as provided for unvested stock options in such named executive officer’s applicable employment agreement. If employment is terminated for cause, all of the shares of restricted stock of such named executive officer may be immediately terminated and canceled, in the Compensation Committee’s discretion.

 

Benefits Upon Termination due to Death or Disability

 

The following table sets forth the amounts payable under the employment agreements of each of the named executive officers in the event of a termination due to death or disability. The amounts in the table assume that the termination took place on December 31, 2010. Information regarding Mr. Giovenco is omitted from the table because he did not have an employment agreement with the Company. In addition, information regarding

Mr. Uboldi is omitted from the table because he was not employed by the Company on December 31, 2010. The closing price of Pinnacle Common Stock on such date was $14.02.

 

 

 

 

Benefits Upon Termination Without Cause or by Good Reason other than in Connection with a Change in Control

 

The following table sets forth the amounts payable under the employment agreements of each of the named executive officers in the event of a termination without cause or by the executive for good reason other than in connection with a change in control. Information regarding Mr. Giovenco is omitted from the table because he does not have an employment agreement with the Company. The closing price of Pinnacle Common Stock on such date was $14.02.

 

 

 

 

On December 8, 2010, the Company entered into a Separation Agreement with Alain J. Uboldi in connection with his retirement from the Company effective as of December 29, 2010. The Separation Agreement provides that Mr. Uboldi’s retirement will be treated as a termination by the Company without cause other than in connection with a change of control for all purposes under his employment agreement with the Company, except with respect to a covenant not to compete and certain other provisions. Under the Separation Agreement, Mr. Uboldi is entitled to receive (i) cash severance payments equal to $425,000, payable in monthly installments over twelve months; (ii) accrued salary through the date of retirement; (iii) health benefits coverage and disability insurance coverage for twelve months, which is equal to $21,439; and (iv) an annual bonus for the 2010 fiscal year, which was determined by the Compensation Committee to be $525,000 in March 2011. In addition, Mr. Uboldi has until March 29, 2012 to exercise his vested stock options as of the separation date.

Benefits Upon Change in Control

 

The following table sets forth the amounts payable under the employment agreements of each of the named executive officers in the event of a termination in connection with a change in control event and, where applicable, a second triggering event. The amounts in the table assume that the triggering event took place on December 31, 2010. Information regarding Mr. Giovenco is omitted from the table because he does not have an employment agreement with the Company. In addition, information regarding Mr. Uboldi is omitted from the table because he was not employed by the Company on December 31, 2010. The closing price of Pinnacle Common Stock on such date was $14.02.

 

 

 

 

Executive Deferred Compensation Plan

 

In 2000, we adopted the Executive Deferred Compensation Plan, or the Executive Plan, which allows certain of our highly compensated employees to defer, on a pre-tax basis, a portion of their base annual salaries and bonuses. The Executive Plan is administered by the Compensation Committee and participation in the Executive Plan is limited to employees who are (i) determined by us to be includable within a select group of employees, (ii) subsequently chosen from the select group, and (iii) approved by the Compensation Committee.

 

Under the Executive Plan, a participating employee may elect in December of each year to defer up to 75% of his or her salary for the next year, and up to 90% of his or her bonus for the next year. Any such deferred compensation is credited to a deferral contribution account. A participating employee is at all times fully vested in his or her deferred contributions, as well as any appreciation or depreciation attributable thereto. Amounts that a participating employee elected to defer under the Executive Plan are credited with interest, which was set at 3% per annum unless a higher percentage was applied if participating employee died, became disabled, or retired or unless it was determined by the Compensation Committee in its sole discretion to use the 10% rate. Effective December 31, 2007, we amended the Executive Plan to provide that amounts deferred for 2008 and later periods will be credited with a floating rate of interest based on average yields on 30-year U.S. treasury bonds plus five percentage points, compounded quarterly and that existing participants will receive 10% interest per annum. We believe that these rates approximate our long-term borrowing costs for unsecured, subordinated and covenant-light obligations. The Compensation Committee has the discretion to change the crediting rate for deferrals under the Executive Plan on a prospective basis as of the beginning of any quarter.

 

In general, distributions under the Executive Plan (other than the annuity option described below) are payable upon death, disability and upon the occurrence of a financial emergency. The Executive Plan was amended and restated effective December 27, 2004 and December 31, 2007 to cause these distribution terms and other plan

provisions to comply with Section 409A of the Internal Revenue Code (“Section 409A”), and to make certain other changes in the Executive Plan. A participating employee will also receive distributions upon a change in control of the Company, to the extent permitted under Section 409A. When making an election to defer salary and bonus, a participating employee can specify that the amounts deferred will be paid on certain dates at least two years after the amounts are deferred. Also, a participant will receive an immediate payment of his or her deferred amounts (other than deferred amounts used to fund the annuity benefit) with interest on a change in control of the Company.

 

Effective January 1, 2008, an optional annuity form of benefit was added to the Plan for selected senior executives (not limited to named executive officers), for which interest rates were determined before any deferral elections were made. New and previously-deferred amounts were permitted to be rolled into an annuity account, up to certain limits, that accrued interest at a floating rate equivalent to five percentage points over yield of the 30-year U.S. treasury bonds, compounded and calculated quarterly. Amounts that could be rolled into the annuity account include previously-deferred amounts for 2005, 2006 or 2007, and limits for were the lesser of the equivalent of an executive’s 2006 bonus, $500,000 and an amount that would result in an annuity at age 65 greater than 50% of his “final average compensation” as computed in 2008. Upon attaining age 65, the executive would receive distribution of his annuity account in the form of an annuity providing fixed monthly payments until the executive’s death, or, if a joint and survivorship feature applied, the later of the executive’s death or the death of the executive’s designated beneficiary, as calculated based on the applicable actuarial life expectancies and interest rate. The annuity option also provided for a tax gross-up in the event of a distribution upon a change in control. The tax gross-up was intended to provide a payment for taxes required to be paid on the full value of the annuity upon its distribution in the event of a change in control, while making up for the loss of tax deferral the annuity would otherwise provide if amounts became taxable only by the incremental amounts paid over the life of the annuity. On December 6, 2010, the Executive Plan was amended effective as of January 1, 2011, to eliminate the ability of executives to elect the annuity form of distribution under the Executive Plan and to eliminate any tax gross-up.

 

The Executive Plan was further amended March 1, 2011, effective January 1, 2011, to permit the deferral of compensation in the form of restricted stock units, to be distributed upon the elected or predetermined distribution date in the form of a whole number of shares, with any fractional unit to be paid in cash. These provisions coordinate with the Company’s 2005 Equity and Incentive Performance Plan to allow for the payment of annual bonuses in the form of restricted stock units, which are deferred under the Executive Plan, and vested and distributed on such dates as determined by the Compensation Committee on the date of grant.

 

The provisions of the Executive Plan before its amendment effective December 27, 2004 will remain in effect for any deferrals that were deducted from salaries and bonuses in 2004 or in earlier years, including, but not limited to, the following provisions: (a) for purposes of determining the rate of return credited on such deferrals, each participating employee may select from a list of hypothetical investment funds; and (b) a participating employee may receive at any time 90% of his or her account balance attributable to such deferrals subject to forfeiture of 10% of such account balance.

 

Non-Qualified Deferred Compensation Table

 

The following table shows the deferred compensation activity for our named executive officers for the Executive Plan during the fiscal year ended December 31, 2010, except for Messrs. Giovenco, Sanfilippo, Capp and Ruisanchez who do not participate in the Executive Plan.

 

 

 

 

 

2005 Equity and Performance Incentive Plan

 

We adopted our 2005 Equity and Performance Incentive Plan, or the 2005 Plan, in April 2005, and our stockholders approved the 2005 Plan at our annual meeting on May 3, 2005. On May 20, 2008, our stockholders approved an amendment to the 2005 Plan to increase the aggregate number of shares available for awards under the 2005 Plan from 3,000,000 to 4,750,000, and to reapprove the “performance based” compensation provisions of the 2005 Plan. In December 2008, our Board of Directors further amended the 2005 Plan to address certain technical matters, including compliance with Section 409A; the December 2008 amendment does not materially or substantively increase the benefits available under the 2005 Plan. In May 2010, our stockholders approved an amendment to the 2005 Plan to increase the aggregate number of shares available for awards under the 2005 Plan from 4,750,000 to 5,850,000. The 2005 Plan is administered by our Compensation Committee. The Compensation Committee has broad discretion and power in operating the 2005 Plan, in determining which of our employees, directors, and consultants shall participate, and the terms of individual awards.

 

Awards under the 2005 Plan may consist of options, stock appreciation rights, restricted stock, other stock unit awards, performance awards, dividend equivalents or any combination of the foregoing.

 

The shares authorized under the 2005 Plan are governed by the following principles:

 

 

Under the 2005 Plan, no participant may be granted in any 12-month period:

 

 

Under the 2005 Plan, the exercise price for an option or stock appreciation right cannot be less than 100% of the fair market value of the underlying shares on the grant date. The 2005 Plan does not permit the repricing of options or stock appreciation rights. An option exchange program will be permitted, however, if Proposal No. 3 is approved by the stockholders.

 

Performance awards under the 2005 Plan are awards that provide payments determined by the achievement of performance goals over a performance period. The Compensation Committee determines the relevant performance goals and the performance period. The performance goals will be based on the attainment of specified levels of, or growth of, one or any combination of (or a formula based on) modified calculations of certain specified factors. The eligible factors include: net sales; pretax income before or after allocation of corporate overhead and bonus; earnings per share; net income; division, group or corporate financial goals; return on stockholders’ equity; return on assets; attainment of strategic and operational initiatives; appreciation in and/or maintenance of the price of the shares or any of our other publicly-traded securities; market share; gross profits; earnings before taxes; earnings before interest and taxes; EBITDA; an adjusted formula of EBITDA; economic value-added models; comparisons with various stock market indices; reductions in costs, and/or return on invested capital of Pinnacle or any affiliate, division or business unit of Pinnacle for or within which the participant is primarily employed. Such performance goals also may be based solely by reference to our performance or the performance of an affiliate, division or business unit of Pinnacle, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies. We intend that bonuses received by each of our named executive officers under their employment agreement will be performance awards under the 2005 Plan.

 

The 2005 Plan provides that it is not the only plan or arrangement under which we may compensate officers, and we reserve the right to pay bonuses or other compensation to our named executive officers in addition to their bonuses or other awards under the 2005 Plan.

 

Grant of Plan-Based Awards

 

The following table provides information regarding our grant of plan-based awards made in 2010.