Edgar Filing: PENN NATIONAL GAMING INC

penn_Current folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-24206

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2234473
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

610-373-2400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ◻Non-accelerated filer ◻ (Do not check if a smaller reporting company)

Smaller reporting company ◻ Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title		Outstanding as of October 27, 2017
Common Stock, par value $.01 per share		91,095,622 (includes 278,559 shares of restricted stock)

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This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “seeks,” “may,” “will,” “should” or “anticipates” or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties. Specifically, forward-looking statements may include, among others, statements concerning: our expectations of future results of operations and financial condition; expectations for our properties or our development projects; the timing, cost and expected impact of planned capital expenditures on our results of operations; our expectations with regard to the impact of competition; our expectations with regard to acquisitions and development opportunities, as well as the integration of any companies we have acquired or may acquire; the outcome and financial impact of the litigation in which we are or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions, including the recent changes to Pennsylvania gaming laws which permit additional gaming facilities in the state; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; our expectations relative to margin improvement initiatives; our expectations regarding economic and consumer conditions; and our expectations for the continued availability and cost of capital. As a result, actual results may vary materially from expectations. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business, there can be no assurance that actual results will not differ materially from our expectations. Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: the assumptions included in our financial guidance; the ability of our operating teams to drive revenue ; the impact of significant competition from other gaming and entertainment operations; our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays, approvals or impediments to completing our planned acquisitions or projects, construction factors, including delays, and increased costs; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities or the award of additional gaming licenses proximate to our facilities ); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors and the rapid emergence of new competitors (traditional, internet, social, sweepstakes based and VGTs in bars and truck stops); increases in the effective rate of taxation for any of our operations or at the corporate level; our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; the finite and unpredictable stream of revenue from management agreements, our ability to maintain market share in established markets and to continue to ramp up operations at our recently opened facilities; our expectations for the continued availability and cost of capital; the impact of weather; changes in accounting standards; the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data; factors which may cause the Company to curtail or suspend the share repurchase program; with respect to Hollywood Casino Jamul-San Diego, particular risks associated with the repayment, default or subordination of our loans to the Jamul Indian Village Development Corporation (“JIV”), the subordination of our management and intellectual property license fees (including the prohibition on payment of those fees during any default under JIV’s credit facilities), sovereign immunity, local opposition (including several pending lawsuits), access, and the impact of well-established regional competition on property performance; with respect to our Plainridge Park Casino in Massachusetts, the ultimate location and timing of the other gaming facilities in the state and the region; with respect to our social and other interactive gaming endeavors, including our acquisition of Rocket Speed, Inc., risks related to the social gaming industry, employee retention, cyber-security, data privacy, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop innovative new games that attract and retain a significant number of players in order to grow our revenues and earnings; with respect to Illinois Gaming Investors, LLC, d/b/a Prairie State Gaming, risks relating to recent acquisitions of additional assets and the integration of such acquisitions, potential changes in the VGT laws, our ability to successfully compete in the VGT market, our ability to retain existing customers and secure new customers, risks relating to municipal authorization of VGT operations and the implementation and the ultimate success of the products and services being offered; with respect to our recent acquisitions in Tunica, risks related to the successful integration of such acquisitions and our ability to realize potential synergies or projected financial results from such acquisitions; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the United States Securities and Exchange Commission. The Company does not intend to update publicly any forward-looking statements except as required by law.

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

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PART I.	FINANCIAL INFORMATION	4

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	4
	Condensed Consolidated Balance Sheets – September 30, 2017 and December 31, 2016	4
	Condensed Consolidated Statements of Income —Three and Nine Months Ended September 30, 2017 and 2016	5
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2017 and 2016	6
	Condensed Consolidated Statements of Changes in Shareholders’ (Deficit) Equity — Nine Months Ended September 30, 2017 and 2016	7
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2017 and 2016	8
	Notes to the Condensed Consolidated Financial Statements	10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49

ITEM 4.	CONTROLS AND PROCEDURES	50

PART II.	OTHER INFORMATION	51

ITEM 1.	LEGAL PROCEEDINGS	51

ITEM 1A.	RISK FACTORS	51

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	51

ITEM 4.	MINE SAFETY DISCLOSURES	51

ITEM 5.	OTHER INFORMATION	51

ITEM 6.	EXHIBITS	51

SIGNATURES		53

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	September 30,		December 31,
	2017		2016
Assets
Current assets
Cash and cash equivalents	$	264,907	$	229,510
Receivables, net of allowance for doubtful accounts of $3,093 and $3,180 at September 30, 2017 and December 31, 2016, respectively		54,081		61,855
Prepaid expenses		54,965		59,707
Other current assets		28,375		48,193
Total current assets		402,328		399,265
Property and equipment, net		2,785,958		2,820,383
Other assets
Investment in and advances to unconsolidated affiliates		149,570		156,176
Goodwill		1,007,701		989,685
Other intangible assets, net		426,350		435,494
Deferred income taxes		635,864		—
Loans to the Jamul Tribe, net of reserves of $11,926 at September 30, 2017 and $0 at December 31, 2016		75,478		91,401
Other assets		86,152		82,080
Total other assets		2,381,115		1,754,836
Total assets	$	5,569,401	$	4,974,484

Liabilities
Current liabilities
Current portion of financing obligation to GLPI	$	62,783	$	56,595
Current maturities of long-term debt		36,235		85,595
Accounts payable		24,104		35,091
Accrued expenses		110,725		101,906
Accrued interest		5,856		6,345
Accrued salaries and wages		94,158		92,238
Gaming, pari-mutuel, property, and other taxes		72,187		60,384
Insurance financing		—		2,636
Other current liabilities		86,155		95,526
Total current liabilities		492,203		536,316

Long-term liabilities
Long-term financing obligation to GLPI, net of current portion		3,490,476		3,457,485
Long-term debt, net of current maturities and debt issuance costs		1,282,456		1,329,939
Deferred income taxes		—		126,924
Noncurrent tax liabilities		28,995		26,791
Other noncurrent liabilities		15,259		40,349
Total long-term liabilities		4,817,186		4,981,488

Shareholders' equity (deficit)
Series B Preferred stock ($.01 par value, 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2017 and December 31, 2016)		—		—
Series C Preferred stock ($.01 par value, 18,500 shares authorized, no shares issued and outstanding at September 30, 2017 and December 31, 2016)		—		—
Common stock ($.01 par value, 200,000,000 shares authorized, 93,053,901 and 93,289,701 shares issued, and 90,886,508 and 91,122,308 shares outstanding at September 30, 2017 and December 31, 2016, respectively)		929		932
Treasury stock, at cost (2,167,393 shares held at September 30, 2017 and December 31, 2016)		(28,414)		(28,414)
Additional paid-in capital		1,002,440		1,014,119
Retained deficit		(713,758)		(1,525,281)
Accumulated other comprehensive loss		(1,185)		(4,676)
Total shareholders' equity (deficit)		260,012		(543,320)
Total liabilities and shareholders' equity (deficit)	$	5,569,401	$	4,974,484

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016

Revenues
Gaming	$	691,028	$	654,591	$	2,033,263	$	1,974,618
Food, beverage, hotel and other		153,833		147,554		453,722		429,792
Management service and licensing fees		3,550		3,130		8,809		8,567
Reimbursable management costs		6,679		5,965		19,824		8,820
Revenues		855,090		811,240		2,515,618		2,421,797
Less promotional allowances		(48,843)		(45,643)		(136,684)		(130,327)
Net revenues		806,247		765,597		2,378,934		2,291,470

Operating expenses
Gaming		350,847		336,669		1,028,056		1,011,187
Food, beverage, hotel and other		107,057		102,110		313,363		302,062
General and administrative		107,201		114,376		363,112		340,854
Reimbursable management costs		6,679		5,965		19,824		8,820
Depreciation and amortization		66,483		67,903		205,688		200,105
Impairment losses		24,317		—		29,952		—
Insurance recoveries		—		(726)		—		(726)
Total operating expenses		662,584		626,297		1,959,995		1,862,302
Income from operations		143,663		139,300		418,939		429,168

Other income (expenses)
Interest expense		(118,236)		(114,349)		(350,000)		(345,548)
Interest income		304		8,202		3,185		20,039
Income from unconsolidated affiliates		4,781		3,505		14,350		11,662
Loss on early extinguishment of debt		—		—		(23,390)		—
Other		(236)		404		(2,202)		(1,978)
Total other expenses		(113,387)		(102,238)		(358,057)		(315,825)

Income from operations before income taxes		30,276		37,062		60,882		113,343
Income tax (benefit) provision		(759,064)		(9,473)		(750,641)		9,065
Net income	$	789,340	$	46,535	$	811,523	$	104,278

Earnings per common share:
Basic earnings per common share	$	8.68	$	0.52	$	8.93	$	1.16
Diluted earnings per common share	$	8.43	$	0.51	$	8.74	$	1.14

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Net income	$	789,340	$	46,535	$	811,523	$	104,278
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment during the period		1,836		(212)		3,491		1,060
Other comprehensive income (loss)		1,836		(212)		3,491		1,060
Comprehensive income	$	791,176	$	46,323	$	815,014	$	105,338

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ (Deficit) Equity

(in thousands, except share data) (unaudited)


													Accumulated
									Additional				Other		Total
	Preferred Stock			Common Stock			Treasury		Paid-In		Retained		Comprehensive		Shareholders’
	Shares	Amount		Shares	Amount		Stock		Capital		(Deficit)		(Loss)		(Deficit) Equity
Balance, December 31, 2015	8,624	$	—	80,889,275	$	830	$	(28,414)	$	988,686	$	(1,634,591)	$	(4,554)	$	(678,043)
Share-based compensation arrangements, net of tax benefits of $8,510	—		—	859,560		8		—		18,835		—		—		18,843
Foreign currency translation adjustment	—		—	—		—		—		—		—		1,060		1,060
Conversion of preferred stock	(1,693)		—	1,693,000		17		—		(17)		—		—		—
Net income	—		—	—		—		—		—		104,278		—		104,278
Balance, September 30, 2016	6,931	$	—	83,441,835	$	855	$	(28,414)	$	1,007,504	$	(1,530,313)	$	(3,494)	$	(553,862)

Balance, December 31, 2016	—	$	—	91,122,308	$	932	$	(28,414)	$	1,014,119	$	(1,525,281)	$	(4,676)	$	(543,320)
Share repurchases	—		—	(1,264,149)		(13)		—		(24,783)		—		—		(24,796)
Share-based compensation arrangements	—		—	1,028,349		10		—		13,104		—		—		13,114
Foreign currency translation adjustment	—		—	—		—		—		—		—		3,491		3,491
Net income	—		—	—		—		—		—		811,523		—		811,523
Balance, September 30, 2017	—	$	—	90,886,508	$	929	$	(28,414)	$	1,002,440	$	(713,758)	$	(1,185)	$	260,012

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)


Nine Months Ended September 30,	2017		2016

Operating activities
Net income	$	811,523	$	104,278
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		205,688		200,105
Amortization of items charged to interest expense and interest income		5,333		5,523
Change in fair values of contingent purchase price		(16,794)		(1,111)
Loss/(gain) on sale of property and equipment and assets held for sale		103		(3,440)
Income from unconsolidated affiliates		(14,350)		(11,662)
Distributions from unconsolidated affiliates		21,200		21,500
Deferred income taxes		(762,788)		2,059
Charge for stock-based compensation		5,827		4,554
Impairment losses on Loans to the Jamul Tribe and Goodwill		29,952		—
Write off of debt issuance costs and discounts		5,377		—
Decrease (increase), net of businesses acquired
Accounts receivable		2,334		5,305
Prepaid expenses and other current assets		(6,632)		(4,231)
Other assets		1,316		(1,157)
(Decrease) increase, net of businesses acquired
Accounts payable		(1,753)		(8,492)
Accrued expenses		7,270		(2,489)
Accrued interest		(489)		1,611
Accrued salaries and wages		(1,311)		(18,262)
Gaming, pari-mutuel, property and other taxes		11,433		5,499
Income taxes		6,818		31,221
Other current and noncurrent liabilities		27,272		(10,780)
Net cash provided by operating activities		337,329		320,031
Investing activities
Project capital expenditures		(23,611)		(14,482)
Maintenance capital expenditures		(46,631)		(51,431)
Proceeds for insurance claim		577		—
Loans to the Jamul Tribe		(739)		(167,863)
Principal and interest receipts applied against Loans to the Jamul Tribe		5,472		—
Proceeds from sale of property and equipment and assets held for sale		762		13,212
Investment in joint ventures		(250)		—
Consideration paid for acquisitions of businesses and other property and equipment, net of cash acquired		(128,032)		(56,748)
Net cash used in investing activities		(192,452)		(277,312)
Financing activities
Proceeds from exercise of options		7,230		5,654
Repurchase of common stock		(24,796)		—
Principal payments on financing obligation with GLPI		(43,421)		(37,920)
Proceeds from issuance of long-term debt, net of issuance costs		1,418,797		74,170
Increase to financing obligation in connection with acquisition		82,600		—
Principal payments on long-term debt		(1,492,490)		(102,234)
Payments of other long-term obligations		(35,227)		(13,387)
Payments of contingent purchase price		(19,537)		(1,793)
Proceeds from insurance financing		8,768		9,614
Payments on insurance financing		(11,404)		(12,064)
Net cash used in financing activities		(109,480)		(77,960)
Net increase (decrease) in cash and cash equivalents		35,397		(35,241)
Cash and cash equivalents at beginning of year		229,510		237,009
Cash and cash equivalents at end of period	$	264,907	$	201,768

Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	345,460	$	339,211
Income tax refunds received	$	(21,452)	$	(11,720)

Non-cash investing activities
Accrued capital expenditures	$	2,493	$	4,846
Accrued advances to Jamul Tribe	$	1,329	$	34,978

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Non-cash transactions: In conjunction with the purchase of Rocket Speed on August 1, 2016, the Company increased its acquired assets and other current and noncurrent liabilities by $34.4 million for the fair value of the contingent purchase price consideration at the time of acquisition. The remaining portion of the purchase price was paid in cash.

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company”, “we”, “our”, or “us”) is a diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. We have also expanded into social online gaming offerings via our Penn Interactive Ventures, LLC (“Penn Interactive Ventures”) division and our acquisition of Rocket Speed, Inc. (“Rocket Speed”) and into retail gaming with our Prairie State Gaming subsidiary. On May 1, 2017, we completed our acquisition of 1st Jackpot Casino Tunica (formerly known as Bally’s Casino Tunica, (“1st Jackpot”)) and Resorts Casino Tunica (“Resorts”). In the first half of 2017, our subsidiary, Prairie State Gaming acquired the assets of two smaller video gaming terminal operators in Illinois. As of September 30, 2017, the Company owned, managed, or had ownership interests in twenty-nine facilities in the following seventeen jurisdictions: California, Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia and Ontario, Canada.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The condensed consolidated financial statements include the accounts of Penn and its subsidiaries. Investment in and advances to unconsolidated affiliates, that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIE”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.

Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016 should be read in conjunction with these condensed consolidated financial statements. The December 31, 2016 financial information has been derived from the Company’s audited consolidated financial statements.

2. Summary of Significant Accounting Policies

Revenue Recognition and Promotional Allowances

Gaming revenue consists mainly of slot and video lottery gaming machine revenue as well as to a lesser extent table game and poker revenue. Gaming revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs, for "ticket-in, ticket-out" coupons in the customers' possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged against revenue as the amount of the jackpots increases. Table game revenue is the aggregate of table drop adjusted for the change in aggregate table chip inventory. Table drop is the total dollar amount of the currency, coins, chips, tokens and outstanding markers (credit instruments) that are removed from the live gaming tables.

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Food, beverage, hotel and other revenue, including racing revenue, is recognized as services are performed. Racing revenue includes the Company’s share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, its share of wagering from import and export simulcasting, and its share of wagering from its off-track wagering facilities (“OTWs’).

Revenue from our management service contracts for Casino Rama and Hollywood Casino Jamul – San Diego are based upon contracted terms and are recognized when services are performed and collection is reasonably assured.

The Company records revenues generated from its management service contract and licensing contract with an affiliate of the Jamul Indian Village of California (the “Jamul Tribe”) in accordance with ASC 605-25 “Multiple Element Arrangements.” The fair value of each arrangement element is based on the separate standalone selling price determined by either vendor-specific objective evidence (“VSOE”), if available, or third-party evidence ("TPE") if VSOE is not available. We concluded revenues generated with respect to each element contained within the arrangement is representative of the separate standalone selling price which is reflective of fair value.

Revenues include reimbursable costs associated with the Company’s management contract with the Jamul Tribe, which represent amounts received or due pursuant to the Company’s management agreement for the reimbursement of expenses, primarily payroll costs, incurred on their behalf. The Company recognizes the reimbursable costs associated with this contract as revenue on a gross basis, with an offsetting amount charged to operating expense as it is the primary obligor for these costs.

Revenues are recognized net of certain sales incentives in accordance with ASC 605-50, “Revenue Recognition—Customer Payments and Incentives.” The Company records certain sales incentives and points earned in point-loyalty programs as a reduction of revenue.

The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such promotional allowances is primarily included in food, beverage and other expense.

The amounts included in promotional allowances for the three and nine months ended September 30, 2017 and 2016 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)
Rooms	$	11,076	$	10,257	$	30,570	$	29,477
Food and beverage		35,293		32,977		99,245		94,295
Other		2,474		2,409		6,869		6,555
Total promotional allowances	$	48,843	$	45,643	$	136,684	$	130,327

The estimated cost of providing such complimentary services for the three and nine months ended September 30, 2017 and 2016 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)
Rooms	$	1,528	$	1,419	$	4,264	$	3,954
Food and beverage		13,691		12,488		38,312		36,212
Other		805		909		2,605		2,563
Total cost of complimentary services	$	16,024	$	14,816	$	45,181	$	42,729

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Gaming and Racing Taxes

The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. For the three and nine months ended September 30, 2017, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $252.9 million and $751.8 million, as compared to $245.0 million and $739.5 million for the three and nine months ended September 30, 2016.

Long-term asset related to the Jamul Tribe

The Company is accounting for its term loan C and related $30 million delayed draw and completion guarantee commitments with the Jamul Tribe as loans (the “Loan”) in accordance with ASC 310, “Receivables.” The Loan represents advances made by the Company to the Jamul Tribe for the development and construction of Hollywood Casino Jamul-San Diego for the Jamul Tribe on reservation land. As such, the Jamul Tribe owns the casino and its related assets and liabilities. Repayment of the Loan is primarily predicated on cash flows from the operations of the facility.

Although Hollywood Casino Jamul San-Diego opened to strong business and earnings volumes in October 2016, which met our expectations, results began to soften earlier and with a steeper drop-off than anticipated. As a result, we concluded the Loan was impaired at December 31, 2016. A loan is considered impaired when, based on current information, events and projections, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when contractually due under the terms of the loan agreement. The fair value of the Loan is not observable, nor secured by any significant levels of collateral. Therefore, the Loan is not measured using a practical expedient (observable market rate of interest or fair value of collateral) under ASC 310-10. As such, an impairment charge is being recorded to the extent the present value of expected future cash flows discounted at the loan’s effective interest rate exceeds the carrying amount of the loan. The Company records interest income on a cash basis to the extent a reserve is not required for the impaired loan.

At June 30, 2017, the Jamul Tribe was effectively in breach of a financial covenant requirement with respect to debt to earnings ratios. At September 30, 2017, the Jamul Tribe is in active negotiations with its lenders to modify certain terms of its loan agreements including the elimination of its June 30, 2017 financial covenant requirement. We anticipate that we will grant certain concessions on our Loan in connection with the negotiations. We also anticipate our Loan will be fully subordinated to the other lenders that have extended credit to the Jamul Tribe.

The Company performed a comprehensive analysis of the future cash flows that we will receive on the Loan based upon our best estimates of the operations of the facility and the concessions we will grant to the Jamul Tribe. The expected cash flows to be received by the Company on the Loan were then discounted at the Loan’s effective interest rate in accordance with ASC 310 which was less than its carrying value at September 30, 2017. Therefore, the Company recorded a charge of $6.3 million and $11.9 million in the condensed consolidated statements of income for the three and nine months ended September 30, 2017. If the concessions granted on our Loan are more severe than anticipated or if the Jamul Tribe and its lenders are not able to reach an agreement, additional charges may be required, which could be material to the Company’s condensed consolidated statements of income. The unpaid principal balance of the Loan at September 30, 2017 and December 31, 2016 was $98.2 million and $98.0 million, respectively. The carrying value of the Loan totaled $75.5 million and $92.1 million at September 30, 2017 and December 31, 2016, respectively.

Earnings Per Share

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of

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common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.

As of September 30, 2017, there were no outstanding shares of Series C Preferred Stock. At September 30, 2016, the Company had outstanding 6,931 shares of Series C Convertible Preferred Stock. The Company determined that the preferred stock qualified as a participating security as defined in ASC 260 since these securities participate in dividends with the Company’s common stock. In accordance with ASC 260, a company is required to use the two-class method for computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.

The following table sets forth the allocation of net income for the three and nine months ended September 30, 2017 and 2016 under the two-class method:


	Three Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,		Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)				(in thousands)

Net income	$	789,340	$	46,535	$	811,523	$	104,278
Net income applicable to preferred stock		—		3,658		—		9,268
Net income applicable to common stock	$	789,340	$	42,877	$	811,523	$	95,010

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and nine months ended September 30, 2017 and 2016:


	Three Months Ended September 30,	Three Months Ended September 30,	Nine Months Ended September 30,	Nine Months Ended September 30,
	2017	2016	2017	2016
	(in thousands)		(in thousands)
Determination of shares:
Weighted-average common shares outstanding	90,913	83,065	90,865	81,917
Assumed conversion of dilutive employee stock-based awards	2,582	1,233