SecProbe.io

CORRESP
1
filename1.htm

SEC Response Letter

 [LETTERHEAD OF PINNACLE ENTERTAINMENT, INC.]

 May 24, 2005

 VIA EDGAR & FEDEX

 Mr. Michael Fay

 Branch Chief Accountant

 U.S. Securities and Exchange Commission

 Mail Stop 03-05

 450 Fifth Street, N.W.

 Washington, D.C. 20549

Re:
Pinnacle Entertainment, Inc.

 Form 10-K for the
year ended December 31, 2004

 File No. 1-13641

 Filed March 16, 2005

 Dear Mr. Fay:

 This letter is in response to the comment letter dated April
13, 2005 (the “Comment Letter”) received from the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), relating to the Form 10-K for the year ended December 31, 2004 of Pinnacle
Entertainment, Inc. (the “Company”). The numbered paragraphs and headings below correspond to the numbering and headings set forth in the Comment Letter. To assist in your review, the Staff’s comments are highlighted in bold below and
are followed by the responses of the Company.

 Form 10-K for the year
ended December 31, 2004

 Consolidated Statements of Operations,
page 50

1.
It is not apparent from Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 19 what type of revenue is included in
“Other operating income” in the statements of operations. Please tell us what type of revenue is included and revise future discussions to disclose the nature of amounts included in this section of the statement of operations.

 Mr. Michael Fay

 May
24, 2005

  Page
 2

 Response:

 Other operating income consists primarily of card club lease income, retail sales, cash advance commissions and arcade revenue from the casino facilities.
No individual category exceeded 1.25% of revenues in any of the years shown in the Consolidated Statements of Operations. In accordance with the Staff’s comment, the Company expanded its disclosure of the principal components of operating
income in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in its Form 10-Q for the quarter ended March 31, 2005 (see below) and will continue to include this expanded disclosure in
future filings. The relevant language from the results of operations section of MD&A page 23 of the Company’s Form 10-Q for the quarter ended March 31, 2005 reads as follows:

 Operating Results Revenues increased 4.1% to $139,811,000 for the three months ended March 31,
2005 from $134,357,000 in the 2004 three-month period. Gaming revenue represented a majority of the increase, or $4,588,000, primarily due to growth at Belterra. Food and beverage revenue declined in the 2005 quarterly period by $251,000, as
increased revenue at Belterra was offset by reduced revenue at Bossier City and Reno. Hotel revenue increased by $275,000, due to a substantial increase at Belterra that was largely offset by a decline at Casino Magic Biloxi. Other income (comprised
primarily of card club lease income, retail sales and arcade revenue from the casino facilities) increased by $443,000, of which $250,000 resulted from increased card club lease rent (see “Card Clubs” below) and $166,000 resulted
from increased amenity revenues at Belterra.

 Note 8 – Lease
Obligations, page 72

2.
It is not apparent from your disclosure how you are accounting for the lease agreement related to the 227 acres for the L’Auberge du Lac Hotel and Casino. It appears you
have taken possession of the land related to this property in order to perform construction activities. Under guidance in paragraph 2 of FASB Technical Bulletin 88-1 (FTB 88-1), the rental period should include the period of time when the lessee
takes possession or controls the physical use of the property and lease payments should be expensed straight line over the entire term, including the construction period. Please explain how you have considered guidance in FTB 88-1 in relation to
your lease agreements for L’Auberge du Lac, St. Louis County and any other properties that would involve a similar arrangement. For additional guidance, refer to FTB 85-3 and FAS 13.

 Response:

 The Company acknowledges the Staff’s comment and respectfully advises the Staff that it has considered the guidance in
FASB Technical Bulletin No. 88-1, FASB Technical Bulletin No. 85-3, the Statement of Financial Accounting Standards No. 13 and EITF 01-8 (collectively,

 Mr. Michael Fay

 May
24, 2005

  Page
 3

 the “Guidance”). Under paragraph 15 of SFAS 13, rent on an operating lease “shall be charged to
expense over the lease term as it becomes payable.” (emphasis added) SFAS 13 requires that rental expense be recognized on a straight-line basis “unless another systematic and rational basis is more representative of the time
pattern in which use benefit is derived from the leased property, in which case that basis shall be used.” (emphasis added) Under FTB 88-1, if “the lessee takes possession of or controls the physical use of the property at the
beginning of the lease term, all rental payments, including the escalated rents, should be recognized as rental expense or rental revenue on a straight-line basis in accordance with paragraph 15 of Statement 13 and Technical Bulletin 85-3
starting with the beginning of the lease term.” (Emphasis added)

 In the case of each of the Company’s agreements for the development and lease of the property in St. Louis County (the “St. Louis County Property”) and for the ground lease of L’Auberge du Lac
(“L’Auberge”),1 the lease term has not commenced because significant, stipulated contractual
conditions for commencement of the lease term have not yet been met. Because of the highly regulated nature of the gaming industry, these conditions include discretionary third party governmental approvals. Accordingly, until the lease term
commences, the Company does not believe that it has the “ability or right to control physical access to the underlying property” under paragraph 12(b) of EITF 01-8 since until those conditions are satisfied the Company does not have the
right to use the property for its intended use: the ownership and operation of a large scale casino resort. The Company respectfully submits that this approach is consistent with the notion that, under SFAS 13, one looks to the time at which
“use benefit is derived from the property.” Furthermore, neither agreement has a determinable rent escalator.

 Due to these conditions and approvals, the Company’s occupancy of the premises is unlike the possession or control that a lessee has under a typical
operating lease where the lease term commences upon execution of the lease and the lessee is granted a rent abatement or delayed rent commencement date for purposes of construction or other activities related to the preparation of the premises for
business. In the typical operating lease, the rent commencement date is usually the date that the tenant completes renovations of the space and opens for business, subject to an outside date. Although the commencement of rent may be delayed until
after construction under such typical operating leases, the lessee is unconditionally obligated to pay rent once the rent commencement date arrives and there are generally no material conditions to the outside rent commencement date other than
the passage of time. Except for routine building permits, licenses and the like, the rent commencement date in the typical operating lease is not subject to uncertain third-party approvals. That is not the case with both the St. Louis County
Property and L’Auberge.

1
Both agreements in question have been filed with the Commission by the Company as exhibits to
periodic reports. The Lease and Development Agreement relating to the St. Louis County Property was filed as Exhibit 10.1 to the Company's Form 10-Q filed on November 9, 2004. The Ground Lease Agreement relating to L'Auberge was filed as Exhibit
10.1 to the Company's Form 8-K filed on September 19, 2003.

 Mr. Michael Fay

 May
24, 2005

  Page
 4

 St. Louis County Property

 The Lease and Development Agreement for the St. Louis County Property covers both development of the $300 million casino
resort project and a lease. The structure of the agreement makes it clear that the continuing effectiveness of the lease is subject to the satisfaction of certain development conditions and the occurrence of the “commencement date” (the
date the property is open to the public for gaming). The development conditions include a title and survey condition, a rezoning condition, a significant environmental remediation condition, a soil and engineering suitability condition, receipt of
all permits, and the occurrence of the “Commission Acceptance Date” (which is described below). Satisfaction of these conditions involves obtaining discretionary approvals from third-party governmental entities with respect to both the
construction of the project improvements and a four-lane roadway extending approximately one mile from the existing road to the St. Louis County Property. The completion of these improvements is a required step in the licensing process of the
Missouri Gaming Commission. Moreover, even after those approvals have been obtained, the Company has the right to terminate the agreement prior to the commencement of the lease term if a significant environmental condition is not satisfied and site
permits are not obtained.

 The “Commission Acceptance
Date” is defined as the date following when (i) the Missouri Gaming Commission has selected the Company for a suitability investigation for licensure and (ii) the Missouri Gaming Commission has approved the Company’s preliminary site plan
and permanent docking plan, and compliance with the Missouri Gaming Commission’s rules on riverboat gaming history and distance from the Mississippi River has occurred. The Commission Acceptance Date is expected to occur on or about May 25,
2005.

 If the Commission Acceptance Date occurs, the lease term
commences on the date any part of the casino opens to the public for gaming, provided that the “commencement date” shall occur no later than 36 months after the later of (i) the Commission Acceptance Date or (ii) the date when the Company
has received all of the land use, construction and operational permits or licenses necessary for the Company to construct and operate its facilities on the leased property (the “Site Permits”). The provisions of the agreement governing the
Company’s obligation to seek the Site Permits are not triggered until the Commission Acceptance Date. Therefore, the Commission Acceptance Date is the first of several significant milestone conditions that have to be satisfied before the
Company could be deemed to have possession or control over the property such that rent should be recognized. Since the Commission Acceptance Date had not occurred as of the May 10, 2005 filing date of the Company’s latest Form 10-Q, there has
been no accounting event in any circumstance that would have affected prior period financial statements.

 Under the agreement, even after the Commission Acceptance Date, the Company has the right to terminate the lease for failure to obtain Site Permits. This
period can be up to 24 months from the Commission Acceptance Date as long as the Company is diligently pursuing the permits. The permits at issue are quite significant and, because the project includes the roadway extension, there are numerous
approvals, permits and consents required from local, state and federal governmental entities for the project including design and alignment of the road, drainage

 Mr. Michael Fay

 May
24, 2005

  Page
 5

 issues and soil disturbance. In the event the Company is unable to obtain the Site Permits, it can terminate the
lease and the lease term does not begin.

 In addition, even if
the Site Permit condition is satisfied, unlike the typical operating lease, a supervening condition relating to the environmental remediation of the property can prevent the lease term from commencing. Significant environmental remediation of the
property is needed before construction of the project can begin. Under the agreement, the Company has 180 days following the Commission Acceptance Date to inspect and evaluate the St. Louis County Property to determine whether certain pollutants or
hazardous materials exist on, or have been released from, the St. Louis County Property and to determine the estimated cost to the Company for environmental remediation related to the property. Although the 180-day environmental remediation
evaluation period has not yet begun, based on preliminary information the Company believes that the estimated remediation costs will be significant. If the cost of remediation is in excess of an agreed-upon budgeted amount, the Company may terminate
the lease and development agreement and the lease term will not begin. Additionally, even after this 180-day period, once environmental remediation efforts have commenced the Company may terminate the lease and the lease term will not begin if there
is a determination that the environmental remediation will likely not be accomplished within the agreed-upon budgeted amount. The environmental remediation condition is so significant to the terms of the agreement that until such condition has been
satisfied, the Company should not be deemed to have possession or control over the property for purposes of rent recognition.

 The Company therefore believes that, for purposes of determining when it has the type of possession or control of the St. Louis County Property sufficient
to trigger recognition of rent, that point in time will not occur until the latest of (i) the Commission Acceptance Date, (ii) the time at which the Company has obtained all Site Permits or no longer has the right to terminate the lease for failure
to obtain Site Permits and (iii) the time at which the Company has completed environmental remediation or no longer has the right to terminate the lease on the basis that the cost of the environmental remediation will likely exceed the budgeted
amount. Until all three of these events occur, the Company does not believe it should be treated as having possession or control of the property since until these events occur the Company cannot derive the benefit of its intended use of the
property. At the point when the latest of the events described in (i), (ii) and (iii) has occurred, the Company expects to begin recognizing rent obligations under the Guidelines.

 L’Auberge

 The L’Auberge lease agreement provides that the term of such lease shall not commence until and unless the Company obtains the gaming operations
certificate from the Louisiana Gaming Control Board that is required to operate the facilities on such leased property, which would only be issued if and when the Company is issued a Louisiana gaming license for the property. If the Company does not
receive the required gaming operations certificate for the facility, the lease term will not commence and the Company has no obligation to pay any rent under the lease. The Company believes recognition of rent during the construction period would

 Mr. Michael Fay

 May
24, 2005

  Page
 6

 not accurately reflect its current or future rent obligations until the time that the condition has occurred to
trigger the commencement of the lease term.

 The L’Auberge
property is scheduled to open to the public on May 26, 2005. While the Company expects to receive the gaming operations certificate from the Louisiana Gaming Control Board that is required for the opening and operation of L’Auberge, the
commencement of the lease term is conditioned upon the discretionary third-party governmental approval required for the gaming operations certificate. As to periods prior to the receipt of the gaming operations certificate, the Company
believes it would have been premature to recognize rent obligations before they existed given the existence of a supervening third-party condition to the rent obligation and the commenc