2007 Annual Report - Ameristar Casinos, Inc.

Operating IncomeIn 2006, consolidated operating income increased $2.8 million, or 1.7%, over 2005, while consolidated operatingincome margin decreased by 0.4 percentage point from the prior year. The growth in operating income wassubstantially attributable to Ameristar Black Hawk’s and Ameristar Vicksburg’s strong financial performance.Ameristar Black Hawk’s 2006 financial results included $1.7 million in rebranding costs. The financial performanceof our Black Hawk and Vicksburg properties was partially offset by the results of our Council Bluffs property,which experienced declines in operating income and the related margin from the prior year as a result of enhancedcompetition.Consolidated operating income was adversely affected by the $7.8 million in stock-based compensation expensewe were required to recognize beginning in 2006. Consolidated operating income was also impacted by an $8.5million (10.0%) increase in depreciation and amortization expense over 2005, primarily due to $5.3 million indepreciation expense from the capital improvements placed in service as part of the Ameristar Black Hawkexpansion. We anticipate that depreciation expense will continue to rise as a result of our ongoing major capitalprojects at St. Charles, Black Hawk and Vicksburg. Finally, health benefit costs in 2006 decreased by $2.9 million(9.7%) compared to the prior year.Interest ExpenseThe following table summarizes information related to interest on our long-term debt:Years ended December 31,2006 2005(Dollars in Thousands)Interest cost................................................................................................................... $ 58,411 $ 65,956Less: Capitalized interest.............................................................................................. (8,120) (5,043)Interest expense, net.................................................................................................. $ 50,291 $ 60,913Cash paid for interest, net of amounts capitalized ........................................................ $ 65,675 $ 54,015Weighted-average total debt balance outstanding ........................................................ $ 838,256 $ 755,343Weighted-average interest rate ..................................................................................... 6.8% 8.6%For the year ended December 31, 2006, consolidated interest expense, net of amounts capitalized, decreased$10.6 million (17.4%) from 2005. The decrease is due primarily to a reduced average interest rate resulting from aNovember 2005 refinancing of our senior secured credit facility and a February 2006 redemption of our seniorsubordinated notes with borrowings under our new credit facility at substantially lower interest rates. The interestsavings resulting from the lower interest rates were partially offset by an increase from 2005 of $82.9 million in theweighted-average total debt balance outstanding.Income Tax ExpenseOur effective income tax rate was 39.5% in 2006 and 36.8% in 2005. The federal income tax statutory rate was35.0% in both years. The rise in our effective tax rate is mostly attributable to increased pre-tax income generated byour properties located in states with higher income tax rates.Net IncomeFor the year ended December 31, 2006, consolidated net income decreased $6.7 million, or 10.1%, from the yearended December 31, 2005. We incurred a pre-tax charge in the first quarter of 2006 relating to the loss onredemption of our senior subordinated notes of approximately $26.3 million that adversely impacted dilutedearnings per share by $0.30. Additionally, diluted earnings per share for 2006 were negatively impacted by $0.09 bythe adoption of SFAS No. 123(R).45