UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No.    )

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þ		Definitive Proxy Statement
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PINNACLE ENTERTAINMENT, INC.

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PINNACLE ENTERTAINMENT, INC.
3800 HOWARD HUGHES PARKWAY
LAS VEGAS, NV 89169

 

April 15, 2009

 

Dear Fellow Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Pinnacle Entertainment, Inc. (referred to as the “Company”), to be held at the Renaissance Las Vegas Hotel, 3400 Paradise Road, Las Vegas, Nevada 89169 on Tuesday, May 5, 2009, at 10:00 a.m. local time.

 

At the annual meeting, you will be asked to consider and vote upon the following matters:

 

 

Accompanying this letter is the formal Notice of Annual Meeting, Proxy Statement and Proxy Card relating to the annual meeting. The Proxy Statement contains important information concerning the directors to be elected at the annual meeting, the proposed amendments to the existing equity plans and inducement option grants and the ratification of auditors, all of which we would like you to approve.

 

Your vote is very important regardless of how many shares you own. We hope you can attend the annual meeting in person. However, whether or not you plan to attend the annual meeting, please complete, sign, date and return the Proxy Card in the enclosed envelope. If you attend the annual meeting, you may vote in person if you wish, even though you may have previously returned your Proxy Card.

 

Sincerely,

 

Daniel R. Lee

Chairman of the Board of Directors

and Chief Executive Officer

 

PINNACLE ENTERTAINMENT, INC.
3800 HOWARD HUGHES PARKWAY
LAS VEGAS, NEVADA 89169

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 2009

 

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 5, 2009, at 10:00 a.m. local time, at the Renaissance Las Vegas Hotel, 3400 Paradise Road, Las Vegas, Nevada 89169, and at any adjournments or postponements thereof (the “Annual Meeting”). At the Annual Meeting, the Company’s stockholders will be asked to consider and vote upon:

 

1. The election of nine 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. The approval of amendments to the Company’s existing equity plans and inducement option grants to permit a one-time value-for-value stock option exchange program;

 

3. The ratification of the appointment of the Company’s independent auditors for the 2009 fiscal year; and

 

4. Such other business as may properly come before the Annual Meeting or before any adjournments or postponements thereof.

 

Information regarding the nine board nominees, the proposed amendments to the Company’s existing equity plans and the inducement option grants, and the ratification of the appointment of independent auditors is contained in the accompanying Proxy Statement, which you are urged to read carefully.

 

Only holders of record of the Company’s Common Stock at the close of business on March 10, 2009 are entitled to notice of and to vote at the Annual Meeting or any adjournments or postponements thereof.

 

YOUR VOTE IS VERY IMPORTANT. TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED OR SUBMIT YOUR PROXY VIA TELEPHONE OR THE INTERNET AS PROVIDED FOR IN THE PROXY CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

John A. Godfrey
Secretary

 

Las Vegas, Nevada

April 15, 2009

 

PINNACLE ENTERTAINMENT, INC.
3800 HOWARD HUGHES PARKWAY
LAS VEGAS, NEVADA 89169

 

 

 

 

PROXY STATEMENT RELATING TO
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 2009

 

 

 

 

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 for use at the Annual Meeting of the Company’s stockholders to be held on Tuesday, May 5, 2009, at 10:00 a.m. local time, at the Renaissance Las Vegas Hotel, 3400 Paradise Road, Las Vegas, Nevada 89169, 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 nine 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 approval of amendments to the Company’s existing equity plans and inducement option grants to permit a one-time value-for-value stock option exchange program (the “Amendments to the Existing Equity Plans and Grants”);

 

(iii) the ratification of the appointment of the Company’s independent auditors for the 2009 fiscal year; and

 

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

 

This Proxy Statement and the accompanying Proxy Card are first being mailed to the Company’s stockholders on or about April 15, 2009. The address of the principal executive offices of the Company is 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169.

 

ANNUAL MEETING

 

Record Date; Outstanding Shares; Quorum

 

Only holders of record of Pinnacle Common Stock at the close of business on March 10, 2009 (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 60,063,181 shares of Pinnacle Common Stock outstanding and entitled to vote, held of record by 2,408 stockholders. A majority, or 30,031,591, 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 approval of the Amendments to the Existing Equity Plans and Grants; and (iii) “FOR” the ratification of the appointment of independent auditors for the 2009 fiscal year. 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, 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/.

 

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) filing a written revocation with, or delivering a duly executed proxy bearing a later date to, the Secretary of the Company, at 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169, 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.

 

Elections of directors are determined by a plurality of the votes cast at the Annual Meeting. The proposal to approve the Amendments to the Existing Equity Plans and Grants requires the approval by the affirmative vote of a majority of the votes cast “FOR,” “AGAINST” or “ABSTAIN” with respect to such proposal in person or by proxy and entitled to vote at the Annual Meeting, provided that the total votes so cast on such proposal represents more than 50% of all shares entitled to vote on that proposal. The proposal to ratify the appointment of the Company’s independent auditors for the 2009 fiscal year requires approval by the affirmative vote of a majority of the votes cast “FOR” or “AGAINST.”

 

Abstentions; Withheld Votes; Broker Non-Votes

 

A stockholder may vote to “ABSTAIN” on any proposal that may properly come before the Annual Meeting other than the election of directors. If a stockholder votes 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 or to ratify the appointment of the Company’s independent auditors. According to the New York Stock Exchange, or the NYSE, rules, a vote to “ABSTAIN” on the proposals to approve the Amendments to the Existing Equity Plans and Grants will be considered as a vote cast with respect to such matter, and will have the same effect as a vote “AGAINST” such proposal. In addition, in the election of directors, a stockholder may withhold such stockholder’s vote. Withheld votes will be excluded from the vote and will have no effect on the outcome of such election.

 

If an executed proxy is returned by a broker holding shares in street name that indicates that the broker does not have discretionary authority as to certain shares to vote on one or more matters, such shares will be considered present at the meeting for the purposes of determining a quorum, but will not be considered entitled to vote on such matter or matters. As such, broker non-votes will be counted for purposes of determining whether there is a quorum at the Annual Meeting and will have no effect on the proposal to approve the Amendments to the Existing Equity Plans and Grants. However, even if a quorum is present, broker non-votes will not count toward the requirement that the total votes cast on the proposal to amend the Existing Equity Plans and Grants represent over 50% of all shares entitled to vote for that proposal. In addition, while broker non-votes will be counted for purposes of determining whether there is a quorum, broker non-votes will have no effect on the outcome of the election of directors or the ratification of independent auditors because the broker non-votes are not counted for purposes of those proposals.

 

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

 

The Company will bear the cost of the solicitation of proxies from its stockholders. The directors, officers and employees of the Company may solicit proxies by mail, telephone, telegram, letter, facsimile or in person. In addition to the solicitation of proxies by mail, the Company will request that brokers, custodians, nominees and other record holders forward copies of the Proxy Statement and other soliciting materials to persons for whom they hold shares of Pinnacle Common Stock and request authority for the exercise of proxies. In such cases, the Company will reimburse such record holders for their reasonable expenses. The estimated total cost for such record holder and broker expenses is $60,000.

 

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 nine directors who will constitute the full Board of Directors of the Company. The nine nominees receiving the highest number of votes from holders of shares of Pinnacle Common Stock represented and voting at the Annual Meeting will be elected to the Board of Directors. For the election of directors, broker non-votes will not be counted as voting at the meeting and therefore will not have an effect on the election of the nominees listed below. Withheld votes will also have no effect on the election of the nominees.

 

Each director elected will hold office until the next annual meeting of stockholders (and until his successor shall have been duly elected and qualified). 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 withholds authority to vote for 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 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.

 

Information Regarding the Director Nominees

 

The following table lists the persons nominated by the Board of Directors for election as directors of the Company and provides their ages and current positions with the Company. Each of the nominees named below is currently a director of the Company and each was elected at last year’s annual meeting of stockholders. Biographical information for each nominee is provided below.

 

 

 

 

 

Mr. Lee has been the Company’s Chairman of the Board of Directors and Chief Executive Officer since April 2002; owner of LVMR, LLC (developer of casino hotels) from 2000 to 2002; Chief Financial Officer and Senior Vice President of HomeGrocer.Com, Inc. (internet grocery service) from 1999 until the sale of the company in 2000; Chief Financial Officer, Treasurer and Senior Vice President of Finance and Development of Mirage Resorts, Incorporated (major operator and developer of casino resorts) from 1992 to 1999; Director-Equity Research of CS First Boston from 1990 to 1992; and held various positions to Managing Director of Drexel Burham Lambert from 1980 to 1990.

 

Mr. Comer has been one of the Company’s directors since July 2007; Director, Southwest Gas Corporation from January 2007 to present; Managing Partner, Deloitte & Touche LLP (Nevada operations) from 2002 to 2006; Managing Partner and other positions, Arthur Andersen (Los Angeles and Nevada operations) from 1972 to 2002; and Member of the American Institute of Certified Public Accountants and Nevada Society of Certified Public Accountants.

 

Mr. Giovenco has been lead director of the Company since February 2008 and one of the Company’s directors since February 2003; 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. Goeglein has been one of the Company’s directors since December 2003 and was also a Director of the Company from 1997 to 1998; Owner and Managing Member, Evening Star Holdings, LLC (acquirer and operator of non-gaming resort properties) 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.

 

Mr. Landau has been one of the Company’s directors since January 2007; Executive Vice President and Chief Financial Officer of Boyd Gaming Corporation from 1990 through 2006; Vice President and Treasurer of Aztar Corporation (formerly Ramada Inc.) from 1971 to early 1990; Assistant Treasurer of U-Haul International from 1969 to 1971; Financial Analyst at the Securities and Exchange Commission from 1968 to 1969; Treasurer and Director of Temple Beth Sholom since mid-2006; and Chairman of the Board of the Anti-Defamation League Nevada Chapter since late 2006.

 

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. Martineau has been one of the Company’s directors since May 1999; Chairman, Genesis Portfolio Partners, LLC (start-up company development) since July 1998; Director, Apogee Enterprises, Inc. since 1978; 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. Ornest has been one of the Company’s directors since October 1998; private investor since 1983; Director of the Ornest Family Partnership since 1983; Director of the Ornest Family Foundation since 1993; Director of the

Toronto Argonauts Football Club from 1988 to 1991; President of the St. Louis Arena and Vice President of the St. Louis Blues Hockey Club from 1983 to 1986; and Managing Director of the Vancouver Canadians Baseball Club, Pacific Coast League from 1979 to 1980.

 

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.

 

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 and 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.

 

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. In addition, printed copies of such Corporate Governance Guidelines and Charter are available upon written request to Investor Relations, Pinnacle Entertainment, Inc., 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169.

 

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. In addition, stockholders who wish to nominate directors at future annual meetings must comply with Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), if such stockholders desire to have their proposed nominee included in the Company’s proxy statement and proxy card, as described in this Proxy Statement under the caption “Stockholder Proposals for the Next Annual Meeting.”

 

Director Independence

 

The Board of Directors has determined that, other than Mr. Lee, who is the 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. A copy of the categorical independence standards are attached as Attachment 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 about matters of general interest to stockholders are welcome to do so by writing the Company’s Secretary at 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169. The Secretary will forward these communications as directed.

 

Executive Sessions of the Board and the Lead Director

 

The Company’s non-management directors meet periodically in executive session, as required by the Company’s Corporate Governance Guidelines. John V. Giovenco, the Company’s lead director, 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. In February 2008, the Board of Directors created the position of lead director who is responsible for coordinating communications from the executive sessions, as well as other communications, between the Board of Directors and the Chief Executive Officer. As the initial lead director, the Board of Directors appointed Mr. Giovenco who will serve until the Board of Directors elects a new lead director.

 

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 waiver of the Code of Ethical Business Conduct for executive officers or directors will be disclosed to the stockholders of the Company. 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., 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169. Any substantive amendments to the Code of Ethical Business Conduct or grant of any waiver to the Chief Executive Officer or the Chief Financial Officer from any provision of the code will be disclosed on the Company’s website and in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”).

Board Meetings and Board Committees

 

The full Board of Directors of the Company had 12 meetings in 2008. During 2008, each incumbent director of the Company during their term attended at least 75% of the meetings of the Board of Directors and the committees of the Board on which he served.

 

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 2008 Annual Meeting of Stockholders.

 

The Company has an Executive Committee, which is currently chaired by Mr. Lee and consists of Messrs. Lee, Comer, Goeglein and Reitnouer. 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 2008, the Executive Committee had two meetings and acted by unanimous written consent on one occasion.

 

The Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Company’s Audit Committee is currently chaired by Mr. Landau and consists of Messrs. Landau, Comer, Leslie, and Ornest. The composition of the Audit Committee was changed on May 20, 2008 at a regular meeting of the Board of Directors with Mr. Landau replacing John V. Giovenco as Chairman of the Audit Committee. Among its functions, the Committee is:

 

 

Messrs. Landau, Comer, Leslie and Ornest 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, 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 10 times in 2008.

 

The Company has a Compensation Committee, which is currently chaired by Mr. Reitnouer and consists of Messrs. Reitnouer, Goeglein, Giovenco and Martineau. Mr. Giovenco was nominated to the Compensation Committee on May 20, 2008, at a regular meeting of the Board of Directors. Among its functions, the Compensation Committee is:

 

 

The Compensation Committee met 18 times in 2008. 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 Executive Officers and Outside Advisors in Compensation Decisions” below.

 

The Company has a Corporate Governance and Nominating Committee, which is currently chaired by Mr. Martineau and consists of Messrs. Martineau, Giovenco, Landau and Ornest. Mr. Ornest was nominated to the Corporate Governance and Nominating Committee on May 20, 2008, at a regular meeting of the Board of Directors. Among its functions, the Corporate Governance and Nominating Committee is:

 

 

The Corporate Governance and Nominating Committee met five times in 2008.

 

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 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., 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169.

 

The Company has a Compliance Committee which 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 Mr. Leslie and consists of Messrs. Leslie and Lee. 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.

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. During 2008, the fees that each non-employee director, lead director, or committee chair, was entitled to receive are the following:

 

 

Mr. Lee does not receive any fees or retainer for his services as director. The Board of Directors set these fees based on advice from outside consultants and review of publicly-available information about what other companies in Pinnacle’s peer group pay their outside directors. On May 20, 2008, at a regular meeting of the Board of Directors, the annual retainer for each non-employee director was increased to $70,000 (which consists of $10,000 in phantom stock units) from $60,000, and the annual retainer for the Chair of the Compensation Committee was increased to $10,000 from $7,500. In addition, on May 20, 2008, the amount of retainer for the lead director was determined to be $15,000. To the extent that any director was a Chair of a Committee or lead director for a period less than the full year, he was paid a pro rata amount of his annual retainer.

 

Each director may elect to receive the retainer (other than the $10,000 in phantom stock units) and any fees for meetings attended in cash or in deferred compensation (as cash or stock) under the Directors Plan as outlined below. As part of his annual retainer, each director receives $10,000 worth of phantom stock units on the date of the annual meeting of stockholders. Each phantom stock unit is the economic equivalent of one share of the issuer’s common stock. Units of phantom stock are payable in common stock following the director’s cessation of service as a director for any reason.

 

Option Grants

 

In the past, Pinnacle has granted 10,000 options to each director at or about the time the new director joins the Board of Directors. In 2008, Pinnacle granted to each director who was then serving 15,000 options, which were granted on the date of the 2008 Annual Meeting of Stockholders. The exercise price for each option was the closing price of Pinnacle Common Stock on the date of grant. The options granted in 2008 vest over a four-year period. Vesting accelerates upon termination of director status due to death or disability or upon a director retiring after age 70.

 

Director Perquisites

 

Pinnacle allows the directors 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. The aggregate incremental cost for these trips to the Company when the aircraft is otherwise traveling for business purposes is a de minimis amount.

Directors’ Health Plan

 

On February 27, 2007, the Board of Directors approved the Directors Health and Medical Insurance Plan, or the Directors’ Health Plan. The Directors’ Health Plan provides that members of the Board of Directors, their spouses and minor children, including full time students up to age 24, are eligible to participate in the health and medical insurance plans applicable to the Company’s corporate executives. In addition, directors who are in office at age 70 and directors who are in office at the time of a change of control, as defined in the Directors’ Health Plan, are 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 are 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 shall provide secondary coverage to the extent permitted by law. Directors are indemnified on a grossed-up basis against certain tax liabilities, including excise taxes on benefits following a change in control. In December 2008, the Board of Directors amended the Directors’ Health Plan to address certain technical matters, including compliance with Section 409A of the Internal Revenue Code; the amendment did not materially increase the substantive rights of the directors under the Directors’ Health Plan.

 

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 (other then the $10,000 in phantom stock units) 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 297,408 have been credited as of April 6, 2009. The shares of Pinnacle Common Stock to be issued under the Directors Plan may be either authorized and unissued shares or reacquired shares. Mr. Leslie is the only director that currently participates in the Directors Plan.

 

In December 2008, the Board of Directors amended the Directors Plan to address certain technical matters, including compliance with Section 409A of the Internal Revenue Code; the amendment did not materially increase the substantive rights of the directors under 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 2008. As Chief Executive Officer, Daniel R. Lee does not receive any compensation as a director.

 

 

 

 

 

Compensation Committee Interlocks and Insider Participation

 

Messrs. Goeglein, Giovenco, Reitnouer and Martineau served on the Compensation Committee in 2008. None of the four 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. Lee, see “— Information Regarding the Director Nominees of the Company” above.

 

Mr. Capp has served as the Company’s Executive Vice President and Chief Financial Officer since January 2003; Managing Director, Bear, Stearns & Co. Inc. from 1999 to January 2003; Group Head, BancAmerica Securities’ Latin America debt distribution business from 1997 to 1999; Managing Director, BancAmerica Securities from 1992 to 1997; and Finance Associate followed by Vice President, Security Pacific Merchant Bank from 1989 to 1992.

 

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.

 

Mr. Uboldi has served as the Company’s Chief Operating Officer since February 2005; Regional Vice President and General Manager of the Company’s L’Auberge du Lac Casino Resort from February 2004 to February 2005; Vice President and General Manager of the Company’s Belterra Casino Resort from November 2001 to January 2004; President of A Winning Solution (gaming consulting company) in 2001; and President and Chief Operating Officer of Lady Luck Gaming Corporation (casino gaming company) from 1993 to 2000.

Mr. Ruisanchez has served as the Company’s Executive Vice President of Strategic Planning and Development since August 2008; Senior Managing Director, Bear, Stearns & Co. Inc. from June 1997 to June 2008.

 

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, 2008, 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, 2008 and the notes thereto.

 

Review and Discussions with Independent Accountants

 

The Audit Committee has discussed with Deloitte & Touche LLP (“Deloitte”), 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 Deloitte required by applicable requirements of the Public Company Accounting Oversight Board regarding Deloitte’s communications with the Audit Committee concerning independence, and has discussed with Deloitte its independence from the Company.

 

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, 2008, for filing with the Securities and Exchange Commission.

 

SUBMITTED BY THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS

 

Ellis Landau (Chairman)
Michael Ornest
Bruce A. Leslie
Stephen C. Comer

 

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 the Company’s Common Stock, during or with respect to the year ended December 31, 2008 pursuant to Rule 16a-3(e) of the Exchange Act, all required reports on such forms were timely filed, except for an amended Form 4 filed on July 1, 2008 on behalf of Mr. Leslie to reflect additional compensation earned and deferred by Mr. Leslie pursuant to the Directors Plan, but not included in the original Form 4 filed on April 2, 2008.

 

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 10, 2009 (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 named

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. Unless otherwise indicated below, the address of each person or entity listed below is c/o Pinnacle Entertainment, Inc., 3800 Howard Hughes Parkway, Las Vegas, NV 89169.

 

 

 

 

 

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.

 

Daniel R. Lee, the Company’s Chairman and Chief Executive Officer, holds $1 million in aggregate principal amount of the Company’s 8.25% senior subordinated notes due 2012, which he acquired in periods prior to 2006. As a holder of the notes, Mr. Lee is entitled to receive semi-annual interest payments on the notes. In March 2004, the Executive Committee of the Company’s board of directors approved Mr. Lee’s acquisition of $500,000 in principal amount of the notes he holds, since those notes were acquired directly from the Company. In November 2005, Mr. Lee acquired the other $500,000 in principal amount of notes in the open market. Such open market purchase did not require either the Executive Committee’s or Audit Committee’s approval. Mr. Lee’s acquisition of such portion of the notes and the receipt of interest payments thereon were acquired in the open market and any benefits he received in respect of the notes were afforded to all holders of the notes on a pro rata basis.

 

PROPOSAL 2

 

APPROVAL OF AMENDMENTS TO EXISTING EQUITY PLANS AND INDUCEMENT OPTIONS TO PERMIT A ONE-TIME VALUE-FOR-VALUE STOCK OPTION EXCHANGE PROGRAM

(Item No. 2 on Proxy Card)

 

Background

 

Our stock price has experienced a significant decline during the past two years, due in large part to the continued weak economy, the effect of reduced discretionary consumer spending on the casino industry generally and other factors beyond our control. This decline mirrors the decline in the stock prices of other companies in the casino industry as well as other industries. We believe our Company and our stock price have performed better than many casino companies and gaming stocks, but the value of stock options is driven by absolute rather than relative performance. There is no sign that economic conditions will soon change, or that our stock price (or the stock prices of other companies in our industry) will soon return to recent historical levels. This decline in our stock price means that many of the stock options we have granted to our employees have no value to the employees because their exercise prices are greater than our current stock price. In other words, the options are “underwater.” Underwater options are not an effective retention tool for employees, nor do they result in the alignment of employees’ interests with the interests of our stockholders. We believe we can again achieve these goals — without a significant economic cost to our stockholders — by permitting employees who hold underwater options to exchange them in a value-for-value exchange offer for a smaller number of options that will have an exercise price equal to our stock price on the date of the exchange. A value-for-value exchange offer means that the employee can choose to exchange existing underwater options for new options that have the same calculated value, based on the commonly used Black-Scholes model or similar model, as the options being exchanged. The number of new options will therefore be smaller than the number of options being exchanged to offset the lower exercise price. Because of the newly extended vesting periods, the new options, when vesting is considered, will be somewhat more favorable for the Company and less favorable to the employee than an exchange offer that did not change vesting. The employee need not accept the Company’s exchange offer.

 

The Board of Directors has therefore determined that it would be in the best interests of the Company to seek stockholder approval of amendments to the Company’s existing equity plans to allow the Company to implement a one-time stock option exchange program (the “Option Exchange Program”) for all current employees of the Company (including executive officers of the Company) who hold stock options, but not including non-employee Directors. The options subject to the Option Exchange Program were granted under the Company’s 2005 Equity and Performance Incentive Plan, as amended (the “2005 Plan”), 1996 Stock Option Plan, 2001 Stock Option Plan, and 2002 Stock Option Plan, as such plans have been or may be amended (the “Prior Plans” and, collectively with the 2005 Plan, the “Plans”), and also include inducement grants granted outside the Plans pursuant to the Nonqualified Stock Option Agreements dated as of April 10, 2002 between the Company and Daniel R. Lee, the Nonqualified Stock Option Agreement dated as of January 11, 2003 between the Company and Stephen H. Capp, and the Nonqualified Stock Option Agreement dated as of August 1, 2008 between the Company and Carlos Ruisanchez (collectively, such inducement grants are referred to as the “Inducement Options”). The Option Exchange Program will give employees the opportunity to voluntarily exchange outstanding options under the Plans and Inducement Options for new options under the 2005 Plan.

 

If the Option Exchange Program is implemented, each employee who holds an “underwater” option (meaning that the exercise price of the option is greater than our current stock price) will be able to voluntarily exchange the option for a new option under the 2005 Plan whose exercise price will equal the fair market value of our common stock on the date of grant. The Option Exchange Program may be implemented by one or more separate exchange offers commenced before November 5, 2009, in the discretion of our Compensation Committee, but not more than one offer to exchange may be made for any one outstanding option.

 

The terms of several of the Plans, including the 2005 Plan, and NYSE Listing Requirements require stockholder approval before we can implement the Option Exchange Program. If our stockholders do not approve this proposal, we will not implement the Option Exchange Program. For information on the vote required for this proposal to be approved, see “— Vote Required.”

Reasons for the Option Exchange Program

 

The purposes for which we have granted stock options are to provide long-term incentive to our employees, align employee and stockholder interests, attract new employees and promote the retention of our employees. Our stock price has experienced a significant decline during the past two years, due in large part to the continued weak economy, the effect of reduced discretionary consumer spending on the casino industry generally and other factors beyond our control. This decline mirrors the decline in the stock prices of other companies in our industry and in fact has been less of a decline than many of those companies. As a result, approximately 72% of the outstanding options as of April 6, 2009 have exercise prices that are higher than the trading price of our common stock; i.e., the options are underwater. As of April 6, 2009, employees held stock options to purchase 4,641,200 shares of our common stock with exercise prices above the fair market value of our common stock on that date ($8.64 per share). The weighted average exercise price of these underwater options is $17.38 per share. Of these underwater options, our executive officers held options to purchase 1,960,000 shares, with a weighted average exercise price of $14.55. The following table summarizes information about stock options held by employees and executives outstanding at April 6, 2009, and includes information about the Inducement Options:

 

The following table summarizes information about outstanding stock options held by executive officers at April 6, 2009, and includes information about the Inducement Options:

 

Outstanding Options Granted to Executive Officers

 

 

 

 

The Company granted Inducement Options to Daniel R. Lee, the Company’s Chief Executive Officer and Chairman, Stephen H. Capp, the Company’s Executive Vice President and Chief Financial Officer and Carlos Ruisanchez, the Company’s Executive Vice President of Strategic Planning and Development in connection with their commencement of employment.

 

For Mr. Lee, his Inducement Options, which were granted effective April 10, 2002 and represent the right to purchase a total of 765,801 shares of Pinnacle Common Stock at a price of $8.45 per share and which vested over a four-year period, were granted as an inducement award outside of the Company’s then-existing stockholder-approved equity compensation plans (the “Lee Inducement Options”). The terms of the Lee Inducement Options are set forth in two Nonqualified Stock Option Agreements each dated as of April 10, 2002, and do not expressly permit a repricing of the award without stockholder approval.

For Mr. Capp, his Inducement Option, which was granted effective as of January 11, 2003 and represents the right to purchase a total of 86,739 shares of Pinnacle Common Stock at a price of $6.05 per share and which vested over a five-year period, was granted as an inducement award outside of the Company’s then-existing stockholder-approved equity compensation plans (the “Capp Inducement Options”). The terms of the Capp Inducement Option are set forth in the Nonqualified Stock Option Agreement dated as of January 11, 2003, and do not expressly permit a repricing of the award without stockholder approval.

 

For Mr. Ruisanchez, his Inducement Option, which was granted effective as of August 1, 2008, represents the right to purchase a total of 200,000 shares of Pinnacle Common Stock at a price of $11.35 per share and which vests over a four-year period, was granted as an inducement award outside of the Company’s existing stockholder-approved equity compensation plans (the “Ruisanchez Inducement Option”). The terms of the Ruisanchez Inducement Option are set forth in the Nonqualified Stock Option Agreement dated as of August 1, 2008, and do not expressly permit a repricing of the award without stockholder approval.

 

In the case of the Ruisanchez Inducement Option, the exercise price is more than 31% higher than the trading price of Pinnacle Common Stock as of April 6, 2009. The Lee Inducement Options and the Capp Inducement Option, while in-the-money as of April 6, 2009, have an exercise price close to the trading price of Pinnacle Common Stock and could be underwater if the value of Pinnacle Common Stock declines prior to the exchange offer.

 

There can be no assurance that economic conditions will soon change, or that our stock price (or the stock prices of other companies in our industry) will soon increase. Therefore, the Board and the Compensation Committee believe that these underwater options no longer serve the long-term incentive and retention objectives they were meant to serve. By permitting employees to exchange these underwater options for new options, an Option Exchange Program will enable us to enhance long-term stockholder value by retaining experienced and productive employees, improving the morale of our employees generally, and aligning the interests of our employees more fully with the interests of our stockholders.

 

We rely on highly skilled employees with casino experience to develop and operate our business, including to manage the challenges of our development pipeline. If we are not successful in retaining our current best employees, we could experience employee turnover which is disruptive and expensive. Several major casino companies have been the subject of leveraged buyouts in recent years, with much of the senior management of the acquired company choosing to retire or leave the industry. Other companies have attempted aggressive development programs and have a need for both capital and the expertise to obtain capital and oversee development. Tribal gaming has grown significantly in recent years and now accounts for an estimated 50% of all domestic casino revenues. Finally, the legalization of casino gaming in Atlantic City in 1976 (the first legalized gaming jurisdiction in the U.S. outside of Nevada) attracted many individuals to the industry, including many of the industry’s senior executives. Many of these people are now reaching retirement age. Because of all of these factors and others, there is significant demand for qualified industry executives, despite the challenging economy and particularly for executives from companies that have been successful operationally, that have developed and built successful casinos, and that have demonstrated prudent financial management. We believe that stock options are an important component in our employees’ total compensation and that the Company benefits when employees’ interests are aligned with those of our stockholders. We believe that the failure to address the underwater option issue in the near term may make it more difficult for us to retain our key employees.

 

If we need to hire replacement employees, such employees will generally demand stock option packages with exercise prices equal to the current market price. New employees do not have the same background knowledge and expertise with our Company as our existing employees and it often requires an extended period of time for new employees to become fully productive. Finally, new employees often result in recruitment fees and relocation expenses and, despite our best efforts at employment screening, some portion of our new hires do not become as productive as we require, resulting in additional turnover. In general, it is better for the Company to retain its employees than seek new employees, especially since the Company can and does occasionally dismiss those employees who are, in management’s judgment, less productive.

 

Furthermore, we already are incurring substantial compensation costs with respect to the outstanding underwater stock options. These options were granted with exercise prices at the then fair market value of our common stock. Under applicable accounting rules, we have recognized a total of approximately $23.4 million in compensation expense related to stock options as of December 31, 2008, of which outstanding stock options totaling approximately 72% are

underwater as of April 6, 2009. We will continue to be obligated to recognize such compensation expense, even if these options are never exercised because they remain underwater and they expire worthless to the employee. We believe it is not an efficient use of our resources to recognize compensation expense for options that are not perceived by our employees as providing value to them and that may expire worthless to the employee. By exchanging options that have little or no retention or incentive value for options that will provide both retention and incentive value, we will be making more efficient use of our resources. Since the exchange will be no more favorable to participants as of either the start of the exchange offer or the date of the exchange than a value-for-value exchange (as discussed below), this can be accomplished without creating additional compensation expense, other than an immaterial expense that might result from fluctuations in our stock price after the exchange ratios have been set but before the exchange actually occurs.

 

In 1996, our Board of Directors adopted a policy concerning repricing stock options that would apply to all then-existing stock option plans and all future stock option plans (the “Repricing Policy”). The Repricing Policy expressly permits the issuance of new lower priced options to persons holding higher priced options in lieu of such higher priced options, but unless this Proposal 2 is approved by the stockholders, the shares covered by such higher priced options so cancelled or surrendered shall not be available for regrant under such stock option plans. In connection with the approval of the amendments to the Plans and the Inducement Options to allow the Company to implement the Option Exchange Program, our Board of Directors is seeking stockholder approval to permit the eligible options surrendered for exchange in the Option Exchange Program, including the Inducement Options (except for the Inducement Options held by Mr. Ruisanchez which are treated as described below), to be cancelled and all shares of Pinnacle Common Stock that were subject to such surrendered options to again become available for future awards under the 2005 Plan in accordance with the operative provisions of the 2005 Plan. In all other respects, the Company’s Repricing Policy will remain unchanged, if the stockholders approve this Proposal 2.

 

The Option Exchange Program will meaningfully reduce our total number of outstanding stock options or “overhang” represented by outstanding options that have high exercise prices and may no longer provide adequate incentives or retention inducement to our employees. These underwater stock options held by employees and executives currently create an equity award overhang to our stockholders of approximately 4,641,200 shares (based on $8.64 closing price of our common stock on April 6, 2009). As of April 6, 2009, the total number of shares of our outstanding common stock was 60,063,181. In the Option Exchange Program, these underwater options may be replaced with a smaller number of options with a lower exercise price, thereby decreasing the overhang. Based on the share price of $8.64 as of April 6, 2009, and other key assumptions used in the Black-Scholes option pricing model, and assuming that all eligible options are exchanged, the Company estimates that 3,530,027 new options would be issued in exchange for underwater options.

 

If we are unable to conduct a program in which underwater options with low incentive value may be exchanged for options with higher incentive value, 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 2 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 quickly exhaust the options available for future grant under the 2005 Plan. This may affect the Company’s ability to attract qualified employees.

 

Summary of the Option Exchange Program

 

Offer To Exchange Options.  Under the proposed Option Exchange Program, employees will be given the opportunity to exchange their underwater options for new stock options issued under the 2005 Plan. Such new stock options are referred to as the “Exchange Grants.”

 

Eligible Employees.  The Option Exchange Program will be open to all employees (including executive officers) who hold underwater options. Non-employee members of the Board of Directors will not be permitted to participate in the Option Exchange Program. As of April 6, 2009, approximately 145 employees would have been eligible to participate in the Option Exchange Program, including five executive officers. If this Proposal 2 is approved, stockholders are, in effect, approving each of the Exchange Grants that will be made pursuant to the Option Exchange Program, including grants to any executive officer of the Company of Exchange Grant(s) where the number of shares of Pinnacle Common Stock for which such Exchange Grant(s) are exercisable may exceed

either one percent of the number of shares of Pinnacle Common Stock or one percent of the voting power outstanding before the issuance of such Exchange Grants.

 

Eligible Options. The options eligible for exchange under the Option Exchange Program will be the outstanding non-qualified and incentive stock options granted to employees under the Plans and under the Inducement Options that are underwater options, based on the fair market value of our common stock as of the date specified by the terms of the Option Exchange Program, which shall not be more than 10 business days before the exchange offer. The exercise price of the new options will be equal to the price of Pinnacle Common Stock on the date of the exchange. This is complicated by the volatility of the stock price and the rules of the Securities and Exchange Commission, which require that such exchange offers remain outstanding for 20 business days. As one way to resolve such issue, among other things, the Compensation Committee shall have the power, in its discretion, to limit the options eligible for exchange to those which are underwater by at least a specified amount (i.e., those whose exercise prices exceed the fair market value of our common stock by at least a specified amount), but is not required to set such limits.

 

Exchange Ratio.  The exchange will be no more favorable to participants as of either the start of the exchange offer or the date of the exchange than a value-for-value exchange. That is, the ratio of the number of shares covered by each underwater option to the number of shares covered by each Exchange Grant for which it is exchanged will be designed to result in the Exchange Grants having a fair value, for accounting purposes, that will be no more than the fair value of the options that are surrendered in the exchange (based on appropriate valuation assumptions made when the offer to exchange commences and using an option pricing model such as the Black-Scholes option pricing model). In a value-for-value exchange, these ratios will be designed to make the grant of Exchange Grants accounting expense neutral, thus tending to eliminate additional compensation cost that we must recognize on the Exchange Grants, other than immaterial compensation expense that might result from fluctuations in our stock price after the exchange ratios have been set but before the exchange actually occurs. More specifically, before the beginning of the exchange offer, the Compensation Committee will either set the exchange ratio for each option eligible to be exchanged, or set a formula that will be applied at the end of the exchange offer period to determine the exchange ratio for each option that is exchanged. The calculation of fair value using the Black-Scholes or other option pricing model takes into account many variables, such as the volatility of our stock and the expected term of an option. As a result, the exchange ratios do not necessarily increase as the exercise price of the option increases. In any event, the exchange will maintain a value-for-value relationship.

 

Exercise Price of New Options.  Any new option issued pursuant to the Option Exchange Program as an Exchange Grant will have an exercise price not less than the fair market value of our common stock as of the new grant date.

 

Vesting Of Exchange Grants.  The Exchange Grants will generally 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 Exchange Grants will generally be vested and exercisable to the extent that the exchanged underwater options would have been vested and exercisable at that date. However, if an Exchange Grant would expire within one year after the date of the exchange (for example, because the Compensation Committee determines that the term of the Exchange Grant shall be the remaining term of the exchanged underwater option, and the exchanged underwater option has a remaining term of less than one year), the Compensation Committee will provide that the Exchange Grant will become exercisable for six months before its expiration.

 

Term Of New Options.  Any new option issued pursuant to the Option Exchange Program as an Exchange Grant will have an option expiration date determined by the Compensation Committee in its discretion. For example, the Compensation Committee may determine that the term of the Exchange Grant shall be the remaining term of the exchanged underwater option, or that the term of the Exchange Grant shall be a fixed period after the exchange occurs. If the term of the Exchange Grant is extended beyond the remaining term of the exchanged underwater option, the value-for-value exchange would result in fewer shares being covered by the Exchange Grant.

 

Other Terms And Conditions Of The Exchange Grant.  The other terms of each new Exchange Grant 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, including the Inducement Options, will be cancelled and all shares of Pinnacle Common

Stock that were subject to such surrendered options (except for the Ruisanchez Inducement Option) will again become available for future awards under the 2005 Plan. The proposed amendment to the 2005 Plan will clarify the treatment of surrendered Lee Inducement Options and surrendered Capp Inducement Option, and will add a provision that, upon the surrender of the Ruisanchez Inducement Option, a number of shares will become available for future grant under the 2005 Plan equal to the number of shares covered by the Exchange Grant for the Ruisanchez Inducement Option. This provision is designed to prevent depletion of the number of shares available for future grant under the 2005 Plan by the shares covered by Mr. Ruisanchez’s Exchange Grant.

 

Implementation Of The Option Exchange Program.  We have not commenced the Option Exchange Program and will not do so unless our stockholders approve this proposal. If we receive stockholder approval of the amendments to the Plans and the Inducement Options permitting the Option Exchange Program, the Option Exchange Program may commence at a time determined by the Compensation Committee, but not later than November 5, 2009. Before the beginning of an exchange offer, we will file the offer to exchange and other related documents with the SEC as part of a tender offer statement on Schedule TO. The Schedule TO and written materials furnished to all eligible employees holding underwater options will contain a description of the precise terms and timing of the exchange offer. Employees would be given at least 20 business days (or such longer period as the Compensation Committee elects to keep the exchange open) to elect to exchange their eligible options for Exchange Grants. Although we do not anticipate that the SEC would require us to modify the terms materially, it is possible that we will need to alter the terms of the Option Exchange Program to comply with comments from the SEC. We will also reserve the right to alter the terms of, or to revoke, an option exchange offer at any time before the actual exchange for other reasons, such as a large unexpected change in the trading value of our stock during the offer period. After the offer to exchange is closed, the eligible options surrendered for exchange would be cancelled, and the Compensation Committee would approve the making of the Exchange Grants in accordance with the applicable exchange ratios and other terms determined by the Compensation Committee. However, no option eligible for exchange under a consummated offer to exchange may be tendered pursuant to any later offer to exchange made pursuant to the Option Exchange Program. Employees, as well as stockholders and members of the public, will be able to access the Schedule TO and other documents we file with the SEC free of charge from the SEC’s website at www.SEC.gov or on our Investor Relations website, www.pnkinc.com.

 

Accounting Treatment

 

Under SFAS 123(R), 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 Exchange Grant 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 Exchange Grants. The incremental compensation cost will be measured as the excess, if any, of the fair value of each Exchange Grant, measured as of the date the Exchange Grants 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 Exchange Grants. 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 Exchange Grants are forfeited before their vesting due to termination of service, the incremental compensation cost for the forfeited Exchange Grants 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.

 

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 the exchange of eligible underwater options for Exchange Grants 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 Exchange Grants. 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.

 

Plan Benefits Relating to the Option Exchange Program

 

Because participation in the Option Exchange Program is voluntary, the benefits or amounts that will be received by any employee, if this proposal is approved and the Option Exchange Program is implemented, are not currently determinable; we are not able to predict who or how many employees will elect to participate, how many options will be surrendered or the number of Exchange Grants that may be granted. Based on an assumed $8.64 trading value per share on April 6, 2009, the maximum estimated net reduction in the number of shares underlying outstanding options following the implementation of the Option Exchange Program (based on various key assumptions used in the Black-Scholes option pricing model) would be 1,111,173 shares.

 

Effect on Stockholders

 

We are unable to predict the precise impact of the Option Exchange Program on our stockholders because we are unable to predict how many or which employees will exchange their eligible underwater options. We believe that the indirect impacts, from reduced turnover and better alignment of objectives, to be positive.

 

Amendments to the Plans and Inducement Options

 

In order to permit us to implement the Option Exchange Program in compliance with applicable NYSE rules and the provisions of the Plans, subject to approval of the amendments by our stockholders at the Annual Meeting, Section 3.1(b) of the 2005 Plan will be amended by the addition of the following language:

 

“Without limiting the generality of the foregoing, all Shares subject to options granted under this Plan, the Prior Plans, or Individual Arrangements that are cancelled or surrendered under the Option Exchange Program shall again be available for Awards under the Plan. If any options granted to Carlos Ruisanchez under the Nonqualified Stock Option Agreement dated as of August 1, 2008 are cancelled or surrendered under the Option Exchange Program, the number of Shares available for grant under this Plan shall be increased by the number of Shares subject to the Exchange Grant issued in exchange for such options.”

 

In order to permit us to implement the Option Exchange Program in compliance with applicable NYSE rules and the provisions of the Plans, subject to approval of the amendments by our stockholders at the Annual Meeting, each Plan will be amended by the addition of the following language as a new section at the end of each Plan:

 

“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 before November 5, 2009; provided, however, that in no event may more than one offer to exchange be made for any outstanding option. Under the Option Exchange Program, Eligible Employees will be offered the opportunity to exchange Eligible Options for new grants of options (the “Exchange Grants”), as follows: (1) 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, (2) 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 of Common Stock on the date of issuance of the Exchange Grant, (3) an Exchange Grant shall not be vested or exercisable within one year after the date of the exchange, except in a case in which the Exchange Grant would expire within such one year period, in which case the Compensation Committee may provide that the Exchange Grant becomes vested and exercisable within six months before its expiration, and (4) the Compensation Committee shall determine the expiration date of any Exchange Grants. All other terms of the Exchange Grants shall be governed by the provisions of the Company’s 2005 Equity and Performance Incentive Plan, as amended (the “2005 Plan”). Any Eligible Employee may receive Exchange Grants where the shares of Common Stock underlying such Exchange Grants exceed either one percent of the number of shares of Pinnacle Common Stock or one percent of the voting power outstanding before the issuance of such Exchange Grants. “Eligible

Employees” means employees of the Company including executive officers (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended). “Eligible Options” means any option granted under the 2005 Plan or the Company’s 1996, 2001 and 2002 Stock Option Plans, as amended, the Nonqualified Stock Option Agreement dated as of January 11, 2003 by and between the Company and Stephen H. Capp, the Nonqualified Stock Option Agreements dated as of April 10, 2002 by and between the Company and Daniel R. Lee, and the Nonqualified Stock Option Agreement dated as of August 1, 2008 by and between the Company and Carlos Ruisanchez, where, as of the date specified by the terms of any exchange offer (which date shall not be more than 10 business days before the exchange offer), the fair market value per share of the shares of Common Stock underlying the Eligible Option is less than the per share exercise price of the Eligible Option; provided, however, that the Compensation Committee may, in its discretion, specify more restrictive criteria for determining which options are “Eligible Options.” 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 the 2005 Plan.”

 

In order to permit us to implement the Option Exchange Program in compliance with applicable NYSE rules, subject to approval of the amendments by our stockholders at the Annual Meeting, each Nonqualified Stock Option Agreement governing the Inducement Options will be amended by the addition of the following language:

 

“8. Permitted Option Exchange.  The Committee shall have the authority to include the Optionee in any option exchange program, through one or more option exchange offers to be commenced before November 5, 2009; provided, however, that in no event may more than one offer to exchange be made for the Option. Under such an option exchange program, if the Option is eligible for participation in such program, Optionee will be offered the opportunity to exchange the Option for new grants (the “Exchange Grants”) of options under the Company’s 2005 Equity and Performance Incentive Plan, as amended (the “2005 Plan”) as follows: (1) the Committee shall determine the exchange ratio for an exchange of the Option for Exchange Grants; provided 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, (2) 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 of Common Stock on the date of issuance of the Exchange Grant, (3) an Exchange Grant shall not be vested or exercisable within one year after the date of the exchange, except in a case in which the Exchange Grant would expire within such one year period, in which case the Compensation Committee may provide that the Exchange Grant becomes vested and exercisable within six months before its expiration, and (4) the Committee shall determine the expiration date of any Exchange Grants. All other terms of the Exchange Grants shall be governed by the provisions of the 2005 Plan. The Option is eligible for participation in such an option exchange program where, as of the date specified by the terms of any exchange offer (which date shall not be more than 10 business days before the exchange offer), the fair market value per share of the shares of Common Stock underlying the Option is less than the per share exercise price of the Option; provided, however, that the Committee may, in its discretion, specify more restrictive criteria for determining which options are eligible to participate in such an option exchange program. Subject to the foregoing, the Committee shall be permitted to determine additional terms, restrictions or requirements relating to such an option exchange program that they deem necessary or advisable, consistent with the terms of the 2005 Plan.”

 

Vote Required

 

Affirmative votes representing a majority of the votes cast “FOR,” “AGAINST” or “ABSTAIN” with respect to the proposal in person or by proxy and entitled to vote at the Annual Meeting will be required to approve this proposal, provided that the total votes cast on the proposal represent more than 50% of all shares entitled to vote on the proposal. According to NYSE rules, a vote to “ABSTAIN” on the proposal will be considered as a vote cast with respect to such matter, and will have the same effect as a vote “AGAINST” the proposal. Broker non-votes will have no effect on the proposal, unless the votes otherwise cast constitute less than over 50% of all shares entitled to vote on the proposal. If you are both a stockholder and an employee holding eligible options, please note that voting to approve the amendments to the Plans and the Inducement Options authorizing the Option Exchange Program, does not constitute an election to participate in the Option Exchange Program.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF AMENDMENTS TO EXISTING EQUITY PLANS AND INDUCEMENT OPTION GRANTS TO PERMIT A STOCK OPTION EXCHANGE PROGRAM.

 

Summary of the 2005 Plan, As Amended

 

The following is a summary of the key provisions 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. A copy of the 2005 Plan is attached as Attachment B to this Proxy Statement and reflects the proposed amendment to the 2005 Plan. 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 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169.

 

Shares Subject to the 2005 Plan

 

Up to an aggregate of 4,750,000 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 4,750,000 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. Without limiting the generality of the foregoing, all Shares subject to options granted under the 2005 Plan, the Prior Plans, or Individual Arrangements that are cancelled or surrendered under the Option Exchange Program shall again be available for awards under the 2005 Plan. If this proposal is approved by the stockholders and if any options granted to Carlos Ruisanchez under the Nonqualified Stock Option Agreement dated as of August 1, 2008 are cancelled or surrendered under the Option Exchange Program, the number of Shares available for grant under the 2005 Plan shall be increased by the number of Shares subject to the Exchange Grant issued in exchange for such options. 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.

 

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 consisting of two or more directors of the Company who are both (a) “non-employee directors” within the meaning of Rule 16b-3 of the Exchange Act, and (b) “outside directors” within the meaning of Section 162(m) of the Code. The Compensation Committee has full power and authority to determine when and to whom awards will be granted, including the type, amount, form of payment and other terms and conditions of each award, consistent with the provisions of the 2005 Plan. In addition the Compensation Committee has the authority to interpret the 2005 Plan and the awards granted under the plan, and establish rules and regulations for the administration of the plan. To the

extent permitted by applicable law, the Compensation Committee may delegate the administration of the plan to one or more directors or officers.

 

Types of Awards

 

Awards under the 2005 Plan may consist of options, stock appreciation rights, restricted stock, other stock unit awards, performance awards or dividend equivalents. The nature of each of such types of awards is discussed below. Each award will be made by an award agreement whose 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.

 

Type of 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”).

 

Stock Appreciation Rights.  Eligible participants may also receive stock appreciation rights. A stock appreciation right is a right to receive a payment based on the increase in the fair market value of a share after the date of grant. A stock appreciation right may be paid out in cash or in shares on its exercise in the Compensation Committee’s discretion.

 

Restricted Stock.  The Compensation Committee, in its discretion, may also grant awards of restricted stock to participants. 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.

 

Other Stock Unit Awards.  The Compensation Committee, in its discretion, may grant other stock unit awards, which are awards valued in whole or part by reference to, or otherwise based on, shares, and may be payable in the form of cash or shares.

 

Performance Awards and Code Section 162(m) Provisions

 

The Compensation Committee, in its discretion, may issue performance awards to participants, the payment of which will be determined by the achievement of performance goals over a performance period. Upon the grant of a performance award, the Compensation Committee shall determine the relevant performance goals and the performance period. 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.

 

The performance goals shall be based on the attainment of specified levels, or growth, of one or any combination of 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; and/or 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. Such performance goals also may be based solely by reference to 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. In setting performance goals, the Compensation Committee may specify objective adjustments to any of the foregoing measures for items that it determines will not properly reflect the Company’s financial performance for these

purposes, such as the write-off of debt issuance costs, pre-opening and development costs, gain or loss from asset dispositions, asset or other impairment charges, litigation settlement costs, and other non-routine items that the Compensation Committee foresees may occur during the performance period. The Compensation Committee may also exclude the impact of an event or occurrence which the Compensation Committee determines should appropriately be excluded, including (a) restructurings, discontinued operations, and charges for extraordinary items, (b) an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management, or (c) a change in accounting standards required or recommended by generally accepted accounting principles.

 

Dividend Equivalents

 

The Compensation Committee, in its sole discretion, may determine that a participant who receives an award will also be entitled to receive dividend equivalents with respect to the number of shares covered by the award.

 

Option and Other Award Price

 

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. The base price for a stock appreciation right shall not be less than 100% of the fair market value of shares as of the date of grant. The Compensation Committee, in its discretion, may determine the purchase price, if any, for restricted stock, other stock unit awards, and performance awards.

 

Exercisability of Options and Stock Appreciation Rights; Vesting of Restricted Stock and Other Awards

 

The Compensation Committee shall determine when and under what conditions any option or stock appreciation right shall become exercisable and when restricted stock, other stock unit awards, and performance awards shall become vested subject to certain restrictions.

 

Duration of Options and Stock Appreciation Rights

 

Each option or stock appreciation right 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.

 

Termination of Employment; Death or Disability

 

If a participant ceases to be employed by the Company or any of its subsidiaries for any reason other than termination for cause, death or permanent disability, the participant’s options that were vested and exercisable shall remain exercisable until the end of the original term or for a maximum period of 90 days after the termination of employment, whichever is earlier (unless otherwise determined by the Compensation Committee in an individual option agreement or otherwise). If a participant dies or becomes permanently disabled, the participant’s vested and unvested options shall be exercisable for the remainder of their original term or for 36 months after the date of death or permanent disability, whichever is earlier (unless otherwise determined by the Compensation Committee in an individual award agreement or otherwise). After a participant’s death, options may be exercised by the person or persons to whom the participant’s rights pass by will or the laws of descent and distribution. Unless the Compensation Committee determines otherwise in its discretion, similar rules shall apply to stock appreciation rights. The treatment of each award of restricted stock, other stock unit award, or performance award on the termination of employment, death, or disability of the participant shall be determined by the Compensation Committee in its discretion. If a participant’s employment is terminated for cause, all of his or her awards may be immediately terminated and canceled, in the Compensation Committee’s discretion.

 

Certain Corporate Transactions

 

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: (i) shorten the period during which options and stock appreciation rights are

exercisable (provided they remain exercisable for at least 30 days after the date notice of such shortening is given to the participants); (ii) accelerate any vesting schedule to which an option, stock appreciation right, restricted stock, other stock unit award or performance award is subject; (iii) arrange to have the surviving or successor entity or any parent entity thereof assume the restricted stock, other stock unit awards, stock appreciation rights or options or grant replacement options or stock appreciation rights with appropriate adjustments in the option prices and adjustments in the number and kind of securities issuable upon exercise; (iv) 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 stock appreciation rights by paying the value thereof; or (v) 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.

 

Assignability of Options, Stock Appreciation Rights and Other Awards

 

Unless otherwise provided by the Compensation Committee, awards under the 2005 Plan may only be transferred by will or the laws of descent and distribution. The Compensation Committee may permit further transfer by gift pursuant to conditions and limitations that it may impose.

 

Duration, Termination and Amendment of the 2005 Plan

 

The 2005 Plan became effective on the date of its adoption by the Board on April 1, 2005. The 2005 Plan shall continue in effect for 10 years thereafter. The Board of Directors, however, may suspend or terminate the 2005 Plan at any time, which will not generally affect the validity of any outstanding award on the date of suspension.

 

The Board of Directors may also amend the 2005 Plan at any time, except that the Board of Directors will not amend the 2005 Plan in a way which violates Rule 16b-3 of the Exchange Act. The Board of Directors will not amend the 2005 Plan without obtaining stockholder approval to (a) increase the number of shares that may be the subject of awards under the 2005 Plan, (b) expand the types of awards available under the 2005 Plan, (c) materially expand the class of persons eligible to participate in the 2005 Plan, (d) amend any provision prohibiting the Compensation Committee from repricing options or taking similar action, (e) increase the maximum permissible term of any option, (f) amend the limits on grants of awards to any participant during a 12-month period, or (g) make any modification that requires stockholder approval under applicable law. Furthermore, no amendment of the 2005 Plan shall amend or impair any rights or obligations under any award theretofore granted under the 2005 Plan without the written consent of the holder of the affected award.

 

Notwithstanding anything to the contrary herein, if this proposal is approved by the stockholders, the Company may implement the Option Exchange Program.

 

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 below. 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.  Under current federal income tax law, the grant of an NSO has no tax effect on the Company or the participant. If the shares of Pinnacle Common Stock received on the exercise of an NSO are not subject to restrictions on transfer or risk of forfeiture, the exercise of the NSO will result in ordinary income to the participant equal to the excess of the fair market value of the shares at the time of exercise over the option price. The

participant’s tax basis in the shares will be equal to the option price plus the amount of ordinary income recognized upon the exercise of the option. Upon any subsequent disposition of the shares, any gain or loss recognized by the participant will be treated as capital gain or loss and will be long-term capital gain or loss if the shares are held for more than one year after exercise.

 

Incentive Stock Options.  Under current federal income tax law, the grant of an ISO does not result in income to the participant or in a deduction for the Company at the time of the grant. Generally, the exercise of an ISO will not result in income for the participant if the participant does not dispose of the shares within two years after the date of grant or within one year after the date of exercise. If these requirements are met, the basis of the shares of Pinnacle Common Stock upon a later disposition will be the option price, any gain on the later disposition will be taxed to the participant as long-term capital gain, and the Company will not be entitled to a deduction. The excess of the market value on the exercise date over the option price is an adjustment to regular taxable income in determining alternative minimum taxable income, which could cause the participant to be subject to the alternative minimum tax, thereby in effect depriving the participant of the tax benefits of ISO treatment. If the participant disposes of the shares before the expiration of either of the holding periods described above (a “Disqualifying Disposition”), the participant will have compensation taxable as ordinary income. If the price realized in any such Disqualifying Disposition of the shares exceeds the fair market value of the shares on the exercise date, the excess will be treated as long-term or short-term capital gain, depending on the participant’s holding period for the shares.

 

With respect to both nonqualified stock options and incentive stock options, special rules apply if an optionee uses shares already held by the optionee to pay the exercise price or if the shares received upon exercise of the option are subject to a substantial risk of forfeiture by the optionee.

 

Stock Appreciation Rights.  A participant holding a stock appreciation right will recognize ordinary income on the exercise of the stock appreciation right equal to the amount of cash or the fair market value of the shares he or she receives on the exercise. Upon disposition of the shares acquired, the participant will recognize the appreciation or depreciation on the shares after the date of grant as either short-term or long-term capital gain or loss, depending on how long the shares have been held.

 

Other Awards.  The taxation of an award other than an option or a stock appreciation right depends on whether or not it consists of restricted stock (i.e., stock subject to a vesting restriction based on continued employment or attainment of performance goals). If any other stock unit award or a performance award does not consist of restricted stock, and is not settled in restricted stock, the participant will recognize ordinary income on the receipt of cash or shares equal to the amount of cash, or the excess of the fair market value of the shares over the amount (if any) that the participant pays for the shares. Upon disposition of the shares acquired, the participant will recognize the appreciation or depreciation on the shares after the date of grant as either short-term or long-term capital gain or loss, depending on how long the shares have been held.

 

In general, no taxable income will be recognized by a participant at the time restricted stock is granted. Generally, on the date the restricted stock becomes vested, the participant will recognize ordinary income in an amount equal to the difference between the fair market value of the shares on the date the shares vest and the purchase price, and the Company will receive a tax deduction for the same amount. Upon disposition of the shares acquired, the participant will recognize the appreciation or depreciation on the shares after the date of vesting as either short-term or long-term capital gain or loss, depending on how long the shares have been held.

 

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, stock appreciation rights, 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.”

 

Summary of the Prior Plans

 

The following is a summary of the key provisions of the Prior Plans. This summary does not purport to be a complete description of all the provisions of the Prior Plans, and it is qualified in its entirety by reference to the full text of the Prior Plans. A copy of the 1996 Stock Option Plan has been filed with the SEC as Appendix 1 to this Proxy Statement and reflects the proposed amendment to the 1996 Stock Option Plan. A copy of the 2001 Stock Option Plan, as amended, has been filed with the SEC as Appendix 2 to this Proxy Statement and reflects the proposed amendment to the 2001 Stock Option Plan. A copy of the 2002 Stock Option Plan, as amended, has been filed with the SEC as Appendix 3 to this Proxy Statement and reflects the proposed amendment to the 2002 Stock Option Plan. Any stockholder who desires to obtain a copy of any of the Prior Plans may do so by written request to the Secretary of the Company, at 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169.

 

The Company’s 1996 Stock Option Plan, 2001 Stock Option Plan, and 2002 Stock Option Plan provided for the issuance of up to 900,000, 900,000 and 2,000,000 shares of Pinnacle Common Stock upon exercise of Pinnacle Stock Options, respectively. Except for the provisions governing the number of shares issuable under the Stock Option Plans, the provisions of the Stock Option Plans are substantially similar. The most important differences between the Prior Plans are (i) the 1996 Stock Option Plan, but not the 2001 and 2002 Stock Option Plans, permit the granting of stock appreciation rights coupled with the grants of Pinnacle Stock Options, (ii) under the 2001 and 2002 Stock Option Plans, but not the 1996 Stock Option Plan, an optionee whose employment is terminated for “cause” cannot exercise any Pinnacle Stock Options, even if they are vested (unless, with respect to the 2002 Stock Option Plan, but not with respect to the 2001 Stock Option Plan, otherwise determined by the Compensation Committee or set forth in an individual option agreement or otherwise), (iii) the 2001 and 2002 Stock Option Plans permit more forms of payment of the option exercise price than the 1996 Stock Option Plan, and (iv) a number of technical changes have been made in the later stock option plans comprising the Prior Plans, many of which reflect changes in tax and securities laws.

 

The Prior Plans are administered and terms of option grants are established by the Compensation Committee. Under the Prior Plans, Pinnacle stock options alone or (under the 1996 Stock Option Plans) coupled with stock appreciation rights may be granted to selected employees, directors, consultants and advisors of the Company.

 

Pinnacle stock options granted under the 1996 and 2001 Stock Option Plans become exercisable according to a vesting period as determined by the Compensation Committee and, unless otherwise determined by the Compensation Committee, vested and exercisable options expire on the earlier of one month after termination of employment (three months in the case of an incentive stock option) of the optionee, six months after the death or permanent disability (one year in the case of an incentive stock option) of the optionee, or the expiration of the fixed option term set by the

Compensation Committee at the grant date (not to exceed ten years from the grant date, or five years from the grant date in the case of an incentive stock option granted to a holder of more than ten percent of the outstanding Pinnacle Common Stock). Pinnacle stock options granted under the 2002 Stock Option Plan become exercisable according to a vesting period as determined by the Compensation Committee and, unless otherwise determined by the Compensation Committee in an individual option agreement or otherwise, vested and exercisable options expire on the earlier of 90 days after the termination of employment of the optionee, 12 months after the death or permanent disability of the optionee or the expiration of the fixed option term set by the Compensation Committee at the grant date (not to exceed ten years from the grant date, or five years from the grant date in the case of an incentive stock option granted to a holder of more than ten percent of the outstanding Pinnacle Common Stock).

 

The exercise prices of all Pinnacle stock options granted under the Prior Plans are determined by the Compensation Committee on the grant date, except that the exercise price of an incentive stock option may not be less than the fair market value of Pinnacle Common Stock at the date of the grant (or not less than 110% of the fair market value of Pinnacle Common Stock at the date of the grant of an incentive stock option granted to a holder of more than ten percent of the outstanding shares of Pinnacle Common Stock).

 

If this proposal is passed, the provision permitting the Option Exchange Program will be added to the Prior Plans.

 

Upon the approval of the 2005 Plan at the 2005 Annual Meeting of the Company, the Prior Plans were cancelled, so that no further grants or awards were made under the Prior Plans. However, any shares subject to awards under the Prior Plans which were or are forfeited, expired or cancelled after the effective date of the 2005 Plan are authorized for issuance under the 2005 Plan. In addition, grants and awards made under the Prior Plans before their cancellation continued in effect.

 

Summary of the Inducement Options

 

The following is a summary of the key provisions of the Nonqualified Stock Option Agreements pursuant to which the Inducement Options were granted. This summary does not purport to be a complete description of all the provisions of the Nonqualified Stock Option Agreements, and it is qualified in its entirety by reference to the full text of the Nonqualified Stock Option Agreements. Copies of the Nonqualified Stock Option Agreements relating to the Lee Inducement Options have been filed with the SEC as Appendices 4 and 5 to this Proxy Statement and reflect the proposed amendments to such Nonqualified Stock Option Agreements. A copy of the Nonqualified Stock Option Agreement relating to the Capp Inducement Option has been filed with the SEC as Appendix 6 to this Proxy Statement and reflects the proposed amendment to such Nonqualified Stock Option Agreement. A copy of the Nonqualified Stock Option Agreement relating to the Ruisanchez Inducement Option has been filed with the SEC as Appendix 7 to this Proxy Statement and reflects the proposed amendment to such Nonqualified Stock Option Agreement. Any stockholder who desires to obtain a copy of any of the Nonqualified Stock Option Agreements may do so by written request to the Secretary of the Company, at 3800 Howard Hughes Parkway, Las Vegas, Nevada 89169.

 

Information regarding the types of awards granted by the Inducement Options, the amount of shares of Pinnacle’s Common Stock underlying the Inducement Options, the vesting of the Inducement Options and the exercise price of the Inducement Options can be found in “— Background” above. All of the Inducement Options have a term of ten years from the date of grant. In the event of termination of the executive’s employment by or cessation of executive’s services to the Company or any of its subsidiaries for any reason, with or without cause, including as a result of death or disability, the portion of the Inducement Option that is not vested and exercisable as of the date of termination or cessation, and that does not become vested by reason of such termination or cessation, shall be immediately cancelled and terminated. If this proposal passes, the provision permitting the Option Exchange Program will be added to the Nonqualified Stock Option Agreements that govern the Inducement Options. In addition, the portion of the Inducement Option that is vested and exercisable as of the date of termination of executive’s employment by or cessation of executive’s services to the Company or any of its subsidiaries shall terminate and be cancelled as provided in the Employment Agreement for such executive, which terms are described in greater detail in “Executive Compensation — Employment Agreements and Other Change in Control Provisions” below. For a discussion regarding the federal income tax consequences of holding nonqualified stock options see “Federal Income Tax Matters — Non-Qualified Stock Options” in the summary of the 2005 Plan above.

 

PROPOSAL 3

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

(Item No. 3 on Proxy Card)

 

The Audit Committee has appointed Deloitte & Touche LLP to audit the Company’s consolidated financial statements for the 2009 fiscal year and to audit the Company’s effectiveness of internal control over financial reporting as of December 31, 2009. This appointment is being presented to stockholders for ratification at the Annual Meeting. Stockholder ratification of the appointment of Deloitte & Touche LLP as the Company’s independent auditors is not required by the Company’s Restated Bylaws or otherwise. The Company is submitting the appointment of Deloitte & Touche 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 Deloitte & Touche LLP.

 

As a matter of good corporate governance, the Audit Committee periodically reviews its outside auditor relationship. Accordingly, notwithstanding the selection of Deloitte & Touche LLP as the Company’s auditors for the 2009 fiscal year, the Audit Committee may, in its discretion, direct the appointment of a different audit firm if it determines that such a change would be in the best interests of the Company and its stockholders. If the Audit Committee decides to appoint a different audit firm during the year, the audit firm chosen is likely to be a nationally recognized audit firm. The firms, Ernst & Young LLP and PricewaterhouseCoopers LLP, for example, have expressed an interest in providing such services.

 

Representatives of Deloitte & Touche 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.

 

Required Vote

 

The action of the Audit Committee in appointing of Deloitte & Touche LLP as the Company’s independent auditors for the 2009 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 DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE 2009 FISCAL YEAR.

 

Audit and Related Fees

 

Fees Paid to Independent Auditor

 

The following table shows fees that the Company paid (or accrued) for professional services rendered by Deloitte & Touche LLP for fiscal years 2008, 2007 and 2006.

 

 

Audit Fees

 

Audit fees for 2008, 2007 and 2006 relate to professional services rendered by Deloitte & Touche LLP 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).

Audit-Related Fees

 

Except as described above, Deloitte & Touche LLP did not bill any fees for, or provide to the Company, any 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 2008, 2007 or 2006 that are reasonably related to the performance of the audit or review of the Company’s financial statements.

 

Tax Fees

 

Fees billed for 2008, 2007 and 2006 relate to tax compliance and tax advice and planning services rendered by Deloitte & Touche LLP.

 

All Other Fees

 

Except as described above, 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 2008, 2007 or 2006.

 

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 Deloitte & Touche LLP. Below is a summary of the 2008 policies and procedures.

 

With regard to “Audit” services, in 2008, the Audit Committee pre-approved the proposed budget for Deloitte & Touche LLP’s audit and Sarbanes-Oxley attestation of the Company’s financial statements, plus up to an additional amount for audit services not included in the budget.

 

With regard to “Audit-Related” services, in 2008, the Audit Committee pre-approved the expenditure of up to a certain amount for services included on a pre-approved list. The Audit Committee’s policy is to use our independent auditing firm only if these services more logically can be performed by such auditing firm than by other qualified accounting firms.

 

With regard to “Tax” services, in 2008, the Audit Committee pre-approved the expenditure of up to a certain amount for services included on a pre-approved list. The Audit Committee’s policy is to use our independent auditing firm only if these services more logically can be performed by such auditing firm than by other qualified accounting firms. During the fiscal year ended December 31, 2008, 100% of the “Tax” services were pre-approved by the Audit Committee. The percentage of hours expended on Deloitte & Touche LLP’s engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than Deloitte & Touche LLP’s full time, permanent employees was 0%.

 

With regard to “Other” services, in 2008, the Audit Committee pre-approved the expenditure of up to a certain amount for services included on a pre-approved list. The Audit Committee’s policy is to use Deloitte & Touche LLP for such services only if it has been determined that (a) Deloitte & Touche LLP’s services are “synergistic” and utilizing Deloitte & Touche LLP creates efficiencies, minimizes disruption or preserves confidentiality or (b) Deloitte & Touche LLP possesses unique or superior qualifications to provide such services. The Audit Committee is able to pre-approve exceptions to this policy.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis provides narrative disclosure regarding the compensation plans, programs and arrangements we employed for our Chief Executive Officer, our Chief Financial Officer, Wade W. Hundley, formerly our President, who resigned as an officer of the Company effective June 5, 2008, and our three other most highly compensated executive officers during our 2008 fiscal year, as determined under the rules of the SEC (collectively called our “named executive officers”).

 

Philosophy and Objectives

 

The key objectives of our compensation programs are to attract, retain and motivate well-qualified executives who will support the rapid growth and development of our Company in a dynamic industry. We assembled our current team of key executives several years ago (other than Mr. Ruisanchez who we hired in August 2008) and, under their leadership, we have experienced significant profit improvement from our existing operations. We have also completed or are undertaking major projects in St. Louis county, Missouri; Lake Charles, Louisiana; and Baton Rouge, Louisiana, involving significant capital expenditures over the next several years. We believe that continuity of our management team is important to ensure the successful completion of these projects and for our Company to continue to seek, obtain, finance, design, build, open and operate other successful properties. It is therefore important to motivate, retain, and reward our executives commensurate with their success.

 

More specifically, our programs are designed to:

 

 

We do not allocate between cash versus non-cash compensation and short-term versus long-term compensation based on specific percentages. Instead, we believe that the compensation opportunity for executives should be generally in line with the prevailing market when evaluated over the long-term, and that performance incentives should be more heavily weighted than base salaries and other fixed components of compensation.

 

Role of Executive Officers and Outside Advisors in Compensation Decisions

 

Our compensation decisions on senior executive and director compensation are made by the Compensation Committee, which is composed entirely of independent outside members of our Board of Directors, and Compensation Committee decisions are generally ratified by our full Board of Directors, with Mr. Lee abstaining as to his compensation. The Compensation Committee periodically receives recommendations from our principal executive officer, Mr. Lee, and consults with outside, nationally-recognized independent compensation consultants, as it deems appropriate. The Compensation Committee uses the independent compensation consultants to help evaluate proposed changes in the types and levels of compensation paid to our named executive officers.

 

During 2007 and 2008, the Compensation Committee engaged two separate compensation consultants: Mercer Human Resource Consulting (“Mercer”) was engaged in early 2007 to assess executive pay levels relative to market practices and develop recommendations regarding the Company’s executive deferred compensation and retirement

plans. In late fiscal 2007 and during fiscal 2008, the Compensation Committee engaged Farient Advisors LLC (“Farient”) to assess executive pay levels relative to market practices and develop recommendations regarding the Company’s executive compensation plans, including assisting the Compensation Committee in assessing specific recommendations regarding deferred compensation and retirement plans put forth by management. Farient serves at the discretion of the Compensation Committee and does no other work for the Company other than that authorized by the Compensation Committee.

 

In addition to recommendations put forth by Mr. Lee, 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.

 

Competitive Pay Comparisons

 

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 compensation surveys. The Compensation Committee uses the data available from these sources to assess the reasonableness of the Company’s compensation practices over time and to test the alignment of pay with performance.

 

In late fiscal 2007, the Compensation Committee completed such a review of competitive market practices which was used to evaluate pay decision in fiscal 2008. The peer group used to assess these practices consisted of Ameristar Casinos, Inc., Boyd Gaming Corp., Isle of Capri Casinos, Inc., Las Vegas Sands Corp., MGM Mirage, Wynn Resorts, Ltd., Aztar Corp., Harrah’s Entertainment, Inc., Penn National Gaming, Inc. and Station Casinos, Inc., all of which are in the gaming and hospitality industry. In addition, with the assistance of Farient, the Compensation Committee reviewed broader market data from compensation surveys with a focus on the hospitality and leisure industry. Farient’s analysis determined that the pay practices for executives in these related industries was largely consistent with Pinnacle’s more targeted peers, and therefore this survey data was also included in the review of competitive pay practices.

 

Elements Of Compensation

 

For the fiscal years ended December 31, 2008, 2007 and 2006, the principal components of compensation for named executive officers were:

 

 

In addition, each of our named executive officers is eligible for certain change in control payments and related tax gross ups. The role of these elements in promoting the objectives of our compensation program is explained below.

 

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 over their employment agreements; in those employment agreements, we were assisted by counsel and, where appropriate, qualified compensation consultants. We believe that the base salaries of our named executive officers in total approximate the market median for salaries that peer group companies pay to similar officers and that this positioning is appropriate to support our objective of aligning pay with performance.

Bonuses

 

We intend that bonuses paid to our named executive officers will reward them for the achievement of successful financial performance over a relatively short period of time. In addition, for executives other than the Chief Executive Officer, it is important that we recognize and reward executives for successfully supporting the development of our long-term property development projects. To this end, executives other than the Chief Executive Officer are evaluated on a subjective as well as a quantitative basis, with the input of the Chief Executive Officer, taking into consideration the Company’s financial results, progress on long-term developments, and each executive’s specific area of responsibility and contributions to overall success. Successful short-term financial performance and progress on long-term project development are important to our business and to the creation of stockholder value.

 

As the principal executive officer of the Company, bonuses paid to Mr. Lee are evaluated based on financial performance alone, although the Committee reserves the right to pay discretionary bonuses outside of any formal incentive plan as warranted. The parameters for Mr. Lee’s bonuses under Section 162(m) of the Code are set forth in his employment agreement, which was the subject of negotiation between Mr. Lee and the Company. Mr. Lee can earn annual bonuses of up to 150% of his annual salary, with a targeted bonus of 75% of his annual salary, based on meeting certain performance targets with respect to our earnings before interest, taxes, depreciation and amortization (“EBITDA”).

 

The Compensation Committee establishes EBITDA-based targets annually near the beginning of each year. The Compensation Committee generally sets the EBITDA-based targets so as to fit into the Company’s overall budget, and so that Mr. Lee’s total cash compensation will be competitive with the cash compensation of successful chief executive officers of peer group companies if the targets are met.

 

The EBITDA target is typically based on our total EBITDA with certain adjustments determined at the beginning of the year, which we refer to as adjusted EBITDA. Adjusted EBITDA for 2008 was defined as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development costs, non-cash share-based compensation, merger termination proceeds, asset impairment costs and write-downs, corporate level litigation settlement costs, gain (loss) on sale of certain assets, gain (loss) on sale of marketable securities, minority interest, loss on early extinguishment of debt and discontinued operations. Furthermore, in computing adjusted EBITDA for its operating segments, the impact of the following items was excluded: (a) restructurings, discontinued operations and charges for extraordinary items, (b) any event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management, or (c) a change in accounting standards required by generally accepted accounting principles.

 

For 2008, the adjusted EBITDA threshold was $160 million, at which Mr. Lee would receive a bonus of 37.5% of his base salary. If the adjusted EBITDA was below $160 million, Mr. Lee would receive no bonus. The adjusted EBITDA target was $184 million, at which Mr. Lee would receive a bonus of 75% of his base salary. The adjusted EBITDA maximum was $190 million, at which Mr. Lee would receive the maximum bonus of 150% of his base salary. These targets compared with our actual adjusted EBITDA calculated on the same basis for 2007 and 2006 of approximately $169 million and $162 million, respectively. The Compensation Committee certifies in writing that the targets have been met before the bonus is paid. Since Pinnacle achieved an adjusted EBITDA of approximately $160 million for the 2008 fiscal year, as reported in our earnings release furnished in a Current Report on Form 8-K filed on March 3, 2009, and positive adjustments were made of $7.6 million for the impact of extraordinary expenses and uninsured lost revenues due to hurricane activity, $4.8 million for the impact of extraordinary expenses and uninsured lost revenues due to the flooding of The Admiral Riverboat Casino, and $3.6 million for expenses to institute the company-wide MyChoice Player Card, Mr. Lee received a bonus of 60% of his base salary.

 

The Compensation Committee may defer payment of a portion of the bonus until a later date in order to encourage executive retention. The Compensation Committee has deferred 30% of Mr. Lee’s bonus for 2008; the deferred portion of the bonus does not accrue interest, is an unsecured obligation of the Company, and will be paid in three equal installments in January of 2010, 2011 and 2012. Mr. Lee will receive the deferred portions of his bonus only if he is employed on the scheduled payment date, dies, or becomes “Permanently Disabled” or there is a “Change of Control” as such terms are defined in the Company’s Deferred Bonus Plan. To the extent necessary to

prevent Mr. Lee from being subject to a penalty tax under Section 409A of the Code, payment of the deferred amounts will be delayed six months after his termination of employment.

 

The bonuses of our other named executive officers are determined in the sole discretion of the Compensation Committee, based on consultations with, and recommendations of, Mr. Lee. The factors that determine the bonus of each of our other named executive officers are the individual contribution of the named executive officer to the success of our business for the year, and fairness and proportionality of the named executive officer’s compensation for the year when compared with the compensation for the year of our Chief Executive Officer and the other named executive officers, and the Company’s overall financial performance for the year, each considered in the Compensation Committee’s discretion and upon the Chief Executive Officer’s recommendation. The Chief Executive Officer and the Compensation Committee apply these factors subjectively in setting the bonus of each of the other named executive officers. In 2008, the Compensation Committee awarded the following bonuses to our other named executive officers: Stephen H. Capp-$375,000, John A. Godfrey-$300,000, Alain Uboldi-$330,000 and Carlos Ruisanchez-$75,000. Pursuant to his separation agreement with the Company, Wade W. Hundley received a pro rata bonus of approximately $215,000 for 2008. The Compensation Committee may decide to defer a portion of each of such bonus to each named executive officer. The Compensation Committee deferred 30% of the 2008 bonuses (other than the pro rata bonus received by Mr. Hundley). The 2008 deferred bonuses do not accrue interest and are an unsecured obligation of Pinnacle. The 2008 deferred bonuses will be paid in three equal annual installments in December of 2010, 2011, and 2012. To receive the deferred bonus, each named executive officer must continue to be employed by us on the deferred payment date, unless he dies, or becomes “Permanently Disabled” or there is a “Change of Control” as such terms are defined in the Company’s Deferred Bonus Plan. To the extent necessary to prevent the executive officer from being subject to a penalty tax under Section 409A of the Code, payment of the deferred amounts will be delayed six months after his termination of employment.

 

We believe that the base salary and bonuses (taken together and disregarding the deferral aspects) paid to our named executive officers for 2008 are competitive with the opportunities provided by our peers in the gaming and hospitality industry and commensurate with performance. In addition, our peers do not generally require the mandatory deferral of annual incentives paid to their executives, which further reduces the current value of our compensation relative to peers while simultaneously enhancing the retention elements of our pay programs.

 

We also consider, and may award, special bonuses when one or more named executive officers has or have made significant contributions to our achievement of important goals. No such special bonuses were awarded for fiscal 2008 to any of our named executive officers.

 

Stock Options

 

We believe that awards of stock options 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 a few fiscal years. We believe that stock options are a vital component of our philosophy of compensating named executive officers for successful results, as they can realize value on their stock options only if the stock price increases on a sustained basis. However, our stock price has experienced a significant decline during the past two years, due in large part to the continued weak economy, the effect of reduced discretionary consumer spending on the casino industry generally and other factors beyond our control. This decline mirrors the decline in the stock prices of other companies in our industry. As a result, approximately 72% of our outstanding options as of April 6, 2009 have exercise prices that are higher than the trading price of our common stock; i.e., the options are underwater. We have, therefore, submitted Proposal 2 for approval by our stockholders, which proposal would permit amendments to our Existing Equity Plans and Inducement Options so that our options can continue to provide a valuable incentive to our employees.

 

We also believe that unvested options are a significant tool to encourage retention. We favor longer vesting periods, usually four to five years, than is common at many other companies. The longer vesting period encourages our named executive officers to think about our long-term development. It also creates greater likelihood of in-the-money, unvested options, which will encourage a named executive officer to remain with us rather than exploring other promising opportunities. Unlike many companies, we have generally not awarded options every year to each

named executive officer, but usually consider each named executive officer for new grants every two or three years while prior grants remain partially unvested.

 

In 2008, we made grants of options to each of our named executive officers in the following aggregate amounts: Daniel R. Lee-550,000; Stephen H. Capp-100,000; John A. Godfrey-90,000; Alain Uboldi-90,000, Carlos Ruisanchez-200,000; and Wade W. Hundley-100,000. The size of these grants, with the exception of Mr. Ruisanchez, were determined by reference of competitive pay practices and the desire to award approximately two-years of equity value to our executives in 2008. The grant for Mr. Lee also took into consideration Mr. Lee’s past performance and contribution to the Company. Mr. Ruisanchez’s options were granted outside of the 2005 Plan as an inducement to employment.

 

Pursuant to his separation agreement, vesting of Mr. Hundley’s stock options that vested over the next 18 months following the date of the separation agreement was accelerated to June 5, 2008 and all remaining unvested stock options immediately terminated. For those stock options granted prior to the date of his employment agreement, Mr. Hundley had until March 5, 2009 to exercise those stock options. For those stock options granted on or after the date of his employment agreement, Mr. Hundley has until June 5, 2009 to exercise those stock options. As of March 10, 2009, Mr. Hundley had 25,000 stock options, which expire on June 5, 2009.

 

Historically, because we have not granted stock options every year, the relative value of each grant of options to our named executive officers is often greater than the value of annual grants to similar officers of companies in our peer group. However, in subsequent years, no grants are made, and we believe that, on an annualized basis, the value of the option grants to our named executive officers is smaller than the value of option grants to similar officers of our peer companies. Our Compensation Committee determines the size of each grant, after receiving advice from Mr. Lee and, where appropriate, from outside consultants. Our Compensation Committee generally considers option grants when a named executive officer is hired. Stock option grants are awarded as of the date of the Compensation Committee’s meeting.

 

The exercise price of each stock option is the closing price of our stock on the day of the Compensation Committee’s meeting. The Compensation Committee does not delegate to management or others its decisions regarding stock options granted to named executive officers. The granting of stock options usually occurs on an employee’s date of hire, anniversary date or the date of a regularly scheduled board meeting. The Compensation Committee may or may not have non-public information on that date, which some may deem as material, and generally does not take this into consideration in determining whether or not to grant options.

 

Restricted Stock

 

In 2006, to recognize the extraordinary efforts of our named executive officers (other than Mr. Ruisanchez) in that year, we granted certain amounts of restricted stock to them. To encourage our named executive officers to remain with us, the restricted stock is subject to a five-year vesting schedule. We granted restricted stock in that year as a further enhancement to retention, as restricted stock maintains its value even during short-term cyclical downturns in our stock price or our industry overall. We believe that, even with the grants of restricted stock, the value of our equity awards on an annualized basis to our named executive officers is less than the value of equity awards to similar named executive officers of our peer companies. We note that the grant of restricted stock is a trend among public companies. We may accordingly make similar grants of restricted stock in the future, although we did not do so in any year prior to 2006 or during 2008 or 2007. Pursuant to Mr. Hundley’s separation agreement, 4,000 shares of his restricted stock vested on June 5, 2008 and 4,000 shares of his restricted stock were immediately terminated.

 

Executive Deferred Compensation

 

In addition to the deferral of bonuses that may be mandated by the Compensation Committee, we offer an elective deferred compensation program for our senior executives under the Executive Deferred Compensation Plan, or the Executive Plan. The objectives of the deferred compensation plan are to help attract and retain highly-qualified executives by providing an attractive tax deferred savings opportunity. As explained more fully below, executive officers may 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. In the

current economic environment, the Executive Plan is not an attractive opportunity for our senior executives. In fact, none of the named executive officers currently participate in the Executive Plan. The Executive Plan may, however, present a valuable opportunity for our senior executives if and when economic conditions improve.

 

During 2007, we conducted a comprehensive review of our long-term savings and retirement benefits for executive officers. The purpose of this review was to ensure that our top executive team would have an appropriate and competitive opportunity to provide for income in their retirement, supported by the Company, thereby allowing them to focus maximum time and attention on the long-term needs of the Company and its businesses without facing the distraction of their own financial planning.

 

The Compensation Committee determined that it would be appropriate to amend the Executive Plan, effective January 1, 2008, so that a senior executive could elect to use deferred salary and bonuses to “fund” his own retirement benefit, payable as an annuity by the Company upon retirement. As with all deferrals, such funding is hypothetical only, and the annuity option remains an unsecured obligation of the Company. The annuity election added to the deferred compensation plan beginning in 2008 provides our 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. This executive-paid annuity option helps support executive retirement planning and provides an attractive, tax efficient savings vehicle consistent with our pay for performance approach to compensation.

 

The option to use deferred salary and bonuses to fund a retirement annuity benefit was limited to a select group of top senior executives whose attention and dedication the Company’s business is most critical and who we believe would be most likely to participate in, and benefit more from, the annuity option.

 

The amended Executive Plan provided that a participant could elect during 2008 to have the non-annuity portion of his benefit distributed on January 15, 2009 or on any later January 15. During 2008, we further amended the Executive Plan to permit a participant to make this election with respect to the annuity portion of his benefit as well. Any participant who elected during 2008 to receive his benefit on January 15, 2009 was excluded from electing to defer salary and bonuses earned in 2009.

 

In addition to reviewing the payout options under the Executive Plan, we also evaluated the interest rates applied to deferrals under the Executive Plan. Accordingly, for 2008 and later periods, we amended the Executive Plan so that amounts deferred into the Executive Plan will be credited with a floating rate of interest. For deferrals made in 2008, this floating rate will be tied to the yields on 30-year U.S. treasury bonds, plus five percentage points, compounded quarterly. We believe that this rate will more closely approximate our very long term borrowing costs for unsecured, subordinated and covenant-light obligations. 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 except for deferrals allocated to the executive’s annuity payout option.

 

For deferrals into the annuity option, the Compensation Committee has the discretion to set the floating rates for new deferrals at the time that the elections to defer are made, but cannot change the interest rate formula prospectively on these deferral amounts once an election is made. The rationale for this fixed-formula approach for the annuity election is that the deferral period for the annuity option is typically much longer than for other deferral elections, and executives will not be able to plan for a targeted amount of annuity payments in retirement if the Compensation Committee can change the rates of return at any time between now and an executive’s retirement.

 

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, 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.

 

Change In Control Payments And Related Tax Gross-Ups

 

Our employment agreements with our named executive officers provide that they will receive certain payments, including tax “gross-up” payments, if we undergo a change in control. The Compensation Committee

and our Board of Directors believe that the prospect of such a change in control would likely result in our named executive officers facing personal uncertainties and distractions from how a change in control might affect them. The objective of providing pre-defined change in control benefits is to allow the named executive officers to focus solely on the best interests of our stockholders in the event of a possible, threatened or pending change in control, and encourage them to remain with the Company during any transition period following a change in control. This change in control plan therefore serves as an important retention tool during any period of uncertainty to ensure that personal interests do not dilute our named executive officers’ complete focus on promoting stockholder value. The details of such arrangements are discussed more fully in the section entitled “Employment Agreements and Change in Control Provisions” below.

 

Our employment agreements with our named executive officers provide that they will receive certain payments if we undergo a change in control. The employment agreements of our named executive officers, other than Mr. Lee, essentially provide for “double trigger” change in control payments; i.e., the named executive officer does not receive his payments automatically on the occurrence of a change in control, but must either be discharged by the Company without “Cause” or quit the Company for “Good Reason” (e.g., because he is demoted), within 24 months after the occurrence of a change in control; if the named executive officer is discharged by the Company without “Cause” or quits the Company for “Good Reason” (e.g., because he is demoted), and a change in control occurs within six months thereafter, he will receive his change in control payments offset by the severance benefits he has already received. Thus, the change in control payments are essentially compensation for being fired or forced out of a job in connection with a change in control. However, the named executive officers, other than Mr. Lee, can receive change in control payments if they quit the employ of the Company for any reason at least 12 months but not later than 24 months after the occurrence of a change in control. This provision essentially compensates the named executive officers for remaining during a 12-month transition period after the occurrence of a change in control, but permits them to receive the compensation if, at the end of that time, they find that the Company is now an undesirable place to work. Thus, this provision functions as a retention bonus to assist in an orderly transition in the event of a change in control by giving our named executive officers an incentive to remain employed during the 12 months after a change in control.

 

The change in control provision in Mr. Lee’s employment agreement permits him to receive the change in control payments if he is terminated or if he leaves for any reason within 24 months after the change in control; if he is discharged by the Company without “Cause” or quits the Company for “Good Reason” (e.g., because he is demoted), and a change in control occurs within six months thereafter, he will receive his change in control payments offset by the severance benefits he has already received. Mr. Lee must resign to receive the change in control benefits. The reason for this provision for Mr. Lee is that, for the Chief Executive Officer of a publicly-traded company, a change in control will almost invariably affect the powers, role and reporting relationship of the executive. To the extent that a change in control occurs, the employment agreement gives Mr. Lee the right to depart the Company and receive the change in control benefits if he deems his position to have been negatively affected by the change without the need to demonstrate an objective, adverse effect such as a reduction in compensation. If the change is not negative, the employment agreement allows Mr. Lee to stay with the Company and no severance payments will be made.

 

As discussed more fully below, effective January 1, 2008, we amended our Executive Plan to provide certain benefits upon a change in control for senior executives who elect to use deferrals of salary and bonuses to fund an annuity benefit under the Plan. These benefits include an obligation to purchase a commercial annuity on behalf of each executive upon a change in control and pay certain tax obligations associated with the transfer of the annuity to the executive. The amended provisions of the Executive Plan limit participation in the plan so that the cumulative payments that we would be obligated to make under the Plan will be limited.

 

We believe that the gross-up provisions are necessary to enable our named executive officers to realize the full benefit of their change in control payments. These provisions also enable named executive officers to assist the Board of Directors in analyzing any offers that might be made for acquisition of control of the Company without the distraction of worrying about the negative tax consequences that they might otherwise incur. Approximately half of the companies in our peer group provide such gross-up payments to their named executive officers.

All Other Compensation

 

All Other Compensation for our named executive officers includes, among other things, matching contributions to our 401(k) plan, perquisites and related tax gross ups.

 

We allow 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. At times, such as New Year’s Eve or other casino player events, it is to Pinnacle’s benefit to invite spouses to such events, even though such spouses generally are not employees or officers of Pinnacle. If a named executive officer must recognize taxable income on such air travel, we make a cash payment to him to gross him up for the income tax liability. Messrs. Lee’s and Uboldi’s families traveled with them on 10 and two trips, respectively, for Pinnacle business events during late 2007 and 2008 on our aircraft. This resulted in taxable income to Messrs. Lee and Uboldi during 2008, which taxes Pinnacle paid on their behalf. This resulted in $17,902 and $140 of income for Messrs. Lee and Uboldi, respectively, in 2008. These “gross-up” payments are included in the “All Other Compensation” column in the Summary Compensation Table below.

 

In addition, pursuant to his separation agreement with the Company, Mr. Hundley received accrued unpaid vacation of $17,888, a severance payment of $1,387,500, unpaid deferred bonuses for 2006 and 2007 of $205,000, and $372,974 representing amounts Mr. Hundley elected to defer plus earnings under the Company’s Executive Deferred Compensation Plan. The amounts payable to Mr. Hundley pursuant to his separation agreement are included in the “All Other Compensation” column in the Summary Compensation Table below.

 

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.

 

Summary Compensation Table

 

The following table sets forth the compensation paid to our Chief Executive Officer, Chief Financial Officer, Wade Hundley, formerly our President, who resigned effective June 5, 2008, and each of the three highest paid executive officers of Pinnacle other than the Chief Executive Officer and Chief Financial Officer for the fiscal years ended December 31, 2008, 2007 and 2006.

 

 

 

 

 

Employment Agreements and Other Change in Control Provisions

 

Daniel R. Lee’s Employment Agreement

 

On December 21, 2006, we entered into a Second Amended and Restated Employment Agreement effective as of October 31, 2006, with Daniel R. Lee, our Chief Executive Officer and Chairman of the Board of Directors, which amended and restated the prior employment agreement between the Company and Mr. Lee for the primary purpose of amending the termination provisions, including the vesting of options and the availability of other benefits upon termination, to conform those provisions more closely to similar provisions in the employment agreements of the other named executive officers. In December 2008, we entered into a Third Amended and Restated Employment Agreement with Mr. Lee for the purpose of complying with the provisions of Internal Revenue Code Section 409A and addressing certain technical matters, or the “Lee Employment Agreement.” The Lee Employment Agreement also conformed the base salary amount to his actual base salary, which had been

increased in 2007. The Lee Employment Agreement did not confer upon Mr. Lee any material substantive rights that were not conferred under the Second Amended and Restated Employment Agreement.

 

Mr. Lee’s salary and bonus are as follows:

 

 

The provisions of the Lee Employment Agreement relating to the May 2005 grant to Mr. Lee of an option to purchase 600,000 shares of Pinnacle Common Stock remain unchanged, except for the provisions relating to acceleration of vesting. Such stock option, which consists in part of an incentive stock option and a non-qualified stock option, vests in five equal annual installments beginning on May 3, 2006 and is subject to accelerated vesting in certain circumstances.

 

In addition, before the May 1, 2009 renewal date and at appropriate times thereafter, but no less frequently than within 40 months of the prior review, the Compensation Committee will review Mr. Lee’s long-term compensation and, in consultation with Mr. Lee, shall consider granting additional stock options and/or other long term incentive compensation to Mr. Lee.

 

The Lee Employment Agreement provides for an initial term ending on April 30, 2009 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.

 

The Lee Employment Agreement provides for severance payments with and without a change in control event. Specifically, if Mr. Lee’s employment is terminated by us without “cause” or he terminates for “good reason,” as defined in the Lee Employment Agreement, on or within 24 months following a “change of control,” as defined in the Lee Employment Agreement, this is considered a “Change of Control Termination,” the terms of which are described below. If Mr. Lee’s employment is terminated by us without cause or by Mr. Lee for “good reason” prior to a “change of control” or after 24 months following a “change of control,” or if Mr. Lee is terminated due to death or disability, this is considered a “Non-Change of Control Termination.” If Mr. Lee’s employment is terminated by us without cause or by Mr. Lee for “good reason” prior to a “change of control,” and a change of control occurs with six months thereafter, Mr. Lee 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, Mr. Lee is entitled to certain payments including:

 

 

 

In the case of death or disability, such payments are made in a lump sum.

 

For a Non-Change of Control Termination, the acceleration of the vesting of Mr. Lee’s outstanding stock options will be based on the following schedule:

 

 

For a Change of Control Termination, Mr. Lee is entitled to:

 

 

Because “good reason” under the Lee Employment Agreement is defined to include the occurrence of a “change of control,” Mr. Lee will receive his change of control benefits if he voluntarily terminates his employment for any reason within 24 months following the occurrence of a change of control.

 

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

 

If any such payment would subject Mr. Lee to an excise tax under Section 4999 of the Code, he will generally be entitled to receive an additional tax gross-up payment from Pinnacle.

 

Certain non-competition, no-hire-away, and non-solicitation covenants apply to Mr. Lee for specified periods following the termination of his employment under certain circumstances. In the event of a Non-Change of Control Termination or 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 6 months from the date of termination.

 

Employment Agreements with Other Named Executive Officers

 

On October 6, 2006, we entered into employment agreements effective as of June 13, 2006, with each of: Stephen H. Capp, our Executive Vice President and Chief Financial Officer; John A. Godfrey, our Executive Vice President, General Counsel and Secretary; Alain Uboldi, our Chief Operating Officer; and Wade W. Hundley, our former President. On June 5, 2008, we entered into a separation agreement with Mr. Hundley. On August 19, 2008,

we entered into an employment agreement, effective as of August 1, 2008, with Carlos A. Ruisanchez, our Executive Vice President of Strategic Planning and Development.

 

On December 22, 2008, we entered into Amended and Restated Employment Agreements with Stephen H. Capp, John A. Godfrey, Alain Uboldi and Carlos Ruisanchez (collectively, the “Executives”) for the purpose of complying with the provisions of Internal Revenue Code Section 409A and addressing certain technical matters. The Amended and Restated Employment Agreements did not confer upon the Executives any material substantive rights that were not conferred under their prior employment agreements. We refer to these agreements collectively as the “Employment Agreements.”

 

Our Executives’ annual base salaries under their respective Employment Agreements, which are subject to increases from time to time in the sole discretion of our Compensation Committee, are:

 

 

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.

 

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 of 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.

 

If any such payment would subject the Executive to an excise tax under Section 4999 of the Code, he will generally be entitled to receive an additional tax gross-up payment from Pinnacle.

 

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 6 months from the date of termination.

 

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 Plan, as described more fully below under “Executive Deferred Compensation Plan”. 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.

 

Table Showing Benefits of a Termination due to Death or Disability

 

The following table sets forth the amounts payable under the employment agreements and the 2008 Deferred Bonus Plan of each of the executive officers in the event of a termination due to death or disability. Information regarding Mr. Hundley is not presented in the table below because he was no longer an executive officer at the end of

the 2008 fiscal year. The amounts in the table assume that the termination took place on December 31, 2008. The closing price of Pinnacle Common Stock on such date was $7.68.

 

 

 

 

Table Showing Benefits of a 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 executive officers named in the Summary Compensation Table in the event of a termination without cause or by the employee for good reason other than in connection with a change in control. Information regarding Mr. Hundley is not presented in the table below because he was no longer an executive officer at the end of the 2008 fiscal year. The amounts in the table assume that the termination took place on December 31, 2008. The closing price of Pinnacle Common Stock on such date was $7.68.

 

 

 

 

Table Showing Benefits of a Change in Control

 

The following table sets forth the amounts payable under the employment agreements, the 2008 Deferred Bonus Plan and the Executive Deferred Compensation Plan of each of the executive officers in the event of a termination in connection with a change in control event and, where applicable, a second triggering event. Information regarding Mr. Hundley is not presented in the table below because he was no longer an executive officer at the end of the 2008 fiscal year. The amounts in the table assume that the triggering event took place on December 31, 2008. The closing price of Pinnacle Common Stock on such date was $7.68.

 

 

 

 

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 a committee appointed by the Board of Directors, referred to as the Executive Plan’s committee, which at present is the Compensation Committee of the Board of Directors, 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.

 

We may terminate, amend or modify the Executive Plan with respect to its participating employees at any time, subject to certain limitations set forth in the Executive Plan. Effective December 27, 2004, we amended and restated

the Executive Plan to comply with the provisions of Section 409A of the Internal Revenue Code (“Section 409A”), and to make certain other changes in the Executive Plan. Effective January 1, 2008, we again amended and restated the Executive Plan to change the interest rates credited on deferrals of salaries and bonuses, to add an optional annuity form of benefit for selected senior executives, and to comply with the final regulations under Section 409A.

 

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.

 

We do not make contributions to the Executive Plan for the benefit of employees. Amounts that a participating employee elected to defer under the Executive Plan for 2005, 2006, and 2007 were credited with interest at 3% per annum. However, if a participating employee died, became disabled, or retired, such participant’s benefits would be recalculated with an interest rate of 10% per annum. If employment terminated for any other reason, the Compensation Committee, in its sole discretion, could decide to use the 10% rate to determine the amount that should be credited to such participating employee’s account. The intent of such discretion by the Compensation Committee was to allow the Compensation Committee to distinguish between employees who may leave to pursue interests unrelated to the Company’s activities and employees who may leave to pursue activities that might be at odds with the Company’s interests, such as working for a competitor.

 

In 2007, however, the Compensation Committee determined, with the advice of independent compensation consultants, that the 3% or 10% interest rate structure had not helped us achieve our objectives of providing an attractive tax-deferred savings benefit to our executives and enhancing executive retention, but had merely discouraged participation in the Executive Plan. Accordingly, for 2008 and later periods, we amended the Executive Plan so that amounts deferred into the Executive Plan will be credited with a floating rate of interest of the average of the yields on 30-year U.S. treasury bonds, measured over the business days of the last month of the preceding quarter of the Executive Plan year, plus five percentage points, compounded quarterly. We believe that this rate will approximate our very 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, except for deferrals associated with the annuity payout option, for which the interest rates, including any floating rate formula, must be determined before any deferral elections are made and such interest rates cannot be changed thereafter. Because 10% approximated the yields on 30-year U.S. treasury bonds, plus five percentage points, as of December 2007, and because the prior 3% or 10% interest rate rule was considered punitive for a long-term creditor to the Company, we vested each participant in the Executive Plan in the 10% interest factor on his or her account balance under the Executive Plan as of December 31, 2007 and eliminated the possibility that participants would only receive 3% on their prior savings.

 

Distributions under the Executive Plan (other than the annuity benefit described below) are payable upon death, disability and upon the occurrence of a financial emergency, as defined in Section 409A. A participating employee will also receive distributions upon a change in control of the Company, to the extent permitted in Internal Revenue Service guidance 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.

 

We amended the Executive Plan, effective January 1, 2008, so that selected senior executives (not limited to named executive officers) could elect to use their deferred salary and bonuses to fund their own retirement annuity benefit. A designated senior executive may elect to have his or her deferral contributions to the Executive Plan contributed to an “Annuity Account” in the Executive Plan as “Annuity Deferral Contributions.” A designated senior executive will also be permitted to roll over his or her previously-deferred contributions for 2005, 2006 and 2007 to the Executive Plan into the Annuity Account. The Annuity Account will accrue interest at a floating rate equivalent to five percentage points over yield of 30-year U.S. treasury bonds, compounded and calculated quarterly. The Compensation Committee believes that this rate will approximate Pinnacle’s very long term borrowing costs for unsecured, subordinated and covenant-light obligations. The Compensation Committee may change the method for determining the floating interest rate, but any change in method will apply only to

Annuity Deferral Contributions made in years after the change. At the designated executive’s 65th birthday, the executive’s Annuity Account balance will be used to pay an annuity, providing fixed monthly payments until the executive’s death, or, if a joint and survivorship feature applies, the later of the executive’s death or the death of the executive’s designated beneficiary. The amount of the fixed monthly payments is calculated based on the executive’s actuarial life expectancy (and, if applicable, the actuarial life expectancy of his designated beneficiary) and the rate of interest mentioned above. Therefore, if the executive lives beyond his or her actuarial life expectancy, the executive will essentially receive a higher return on his or her Actuarial Account balance as of his or her 65th birthday, but if the executive dies before reaching his or her actuarial life expectancy, the executive will receive a lower return and may not even receive his or her full account balance.

 

If the designated executive is married, the annuity beginning when the executive reaches age 65 will normally be paid in the form of a joint and survivor annuity with his or her spouse as beneficiary. In other words, the monthly payments would be computed based on the actuarial lives of both the designated executive and spouse and the payments would continue until the later death of the two individuals. If the executive is not married, the annuity will normally be paid in the form of a life annuity for his or her life. If a designated executive designates a beneficiary other than his or her spouse, the designation will require the approval of the Compensation Committee, and, if the executive is married, the approval of his or her spouse.

 

If a joint and survivor annuity form applies, and the designated executive dies before reaching age 65, the executive’s Annuity Account balance will be used to pay an annuity to his or her designated beneficiary beginning when the executive would otherwise have reached age 65. If the executive dies before reaching age 65 and the executive has no designated beneficiary, the executive’s Annuity Account balance will be payable to his or her estate in one lump sum.

 

On a change in control of the Company, the Company is required to purchase an annuity contract from a qualified annuity company that will give each designated executive an annuity providing the same after-tax benefits as the after-tax benefits the executive would have received from his or her Annuity Account if the change in control had not occurred. The interest rate for determining his or her benefits under the annuity contract will be the average of the floating rates in effect for the eight calendar quarters preceding the change in control. The purchase of such an annuity contract will accelerate the taxes that the executive would owe on benefits from the Annuity Account; the Company will pay such taxes on a “grossed-up” basis. Because the purchase of the annuity contract will be a taxable transaction (even though the Company will pay his taxes on the purchase on a “grossed-up” basis), the executive will have a tax basis in the annuity contract, so that a portion of each monthly annuity payment will be a tax-free return of basis to him. Therefore, the pre-tax monthly payments under the annuity contract will be less than the pre-tax monthly payments the executive would have received if no change in control had occurred, although the after-tax payments will be the same.

 

There are certain limits on the ability of a designated executive to make Annuity Deferral Contributions to the Annuity Account. The limits for 2008 are the lesser of (1) an amount equal to his 2006 bonus, (2) $500,000, and (3) an amount that would result in an annuity at age 65 greater than 50% of his “final average compensation” as computed in 2008. Limits (1) and (2) are not applicable to previously-deferred amounts for 2005, 2006 or 2007 that the designated executive elects to roll over into the Annuity Account. In addition, the Annuity Deferral Contributions for all designated executives in 2008 are limited so that, if a change in control occurred during 2008, the amount that the Company would be obligated to pay to purchase annuity contracts and to pay taxes on a “grossed-up” basis for all designated executives would not exceed the aggregate Annuity Account balances of all designated executives by more than $10,000,000. If the Annuity Deferral Contributions of all designated executives were to exceed this $10,000,000 limit, then the Annuity Deferral Contributions of all designated executives would be reduced ratably.

 

The Compensation Committee has reserved the right to alter the limits, participation and interest rate accruals in future periods as to future contributions.

 

The amended Executive Plan provided that a participant could elect during 2008 to have the non-annuity portion of his benefit distributed on January 15, 2009 or on any later January 15. During 2008, we further amended the Executive Plan to permit a participant to make this election with respect to the annuity portion of his benefit as well. Any participant who elected during 2008 to receive his benefit on January 15, 2009 was excluded from electing to defer salary and bonuses earned in 2009.

The provisions of the Executive Plan before its amendment effective January 1, 2005 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 any deferrals that were deducted from salaries and bonuses in 2004 or in earlier years, each participating employee may select from a list of hypothetical investment funds among which deferred contributions shall be allocated. Although a participating employee’s deferred compensation will not be invested directly in the selected hypothetical investment funds, his or her deferral compensation account shall be adjusted according to the performance of such funds. Although the fund investment alternatives under the Executive Plan are different from those under our 401(k) plan, we do not believe the participants in the Executive Plan are entitled to a preferential return on amounts deferred in relation to the return available to employees generally under the 401(k) plan. We are not obligated to acquire or hold any investment fund assets; and

 

(b) a participating employee may receive at any time 90% of his or her account balance attributable to deferrals that were deducted from salaries and bonuses in 2004 or in earlier years, subject to forfeiture of 10% of the account balance.

 

As with all non-qualified deferred compensation plans, a participating employee’s rights against us to receive the deferred amounts are limited to the rights of an unsecured general creditor. Our obligation to pay benefits under the Executive Plan, both before and after its amendment, is not backed by any security interest in our assets to assure payment of the deferred amounts.

 

Non-Qualified Deferred Compensation Table

 

The following table shows the deferred compensation activity for our named executive officers for the Executive Plan, except for Stephen H. Capp and Carlos Ruisanchez who do not participate in the Executive Plan. All executive nonqualified and Pinnacle contributions to each plan are also included in current year compensation presented in the Summary Compensation Table.

 

 

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. 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 2 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 Mr. Lee’s bonuses under his 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 2008.