Edgar Filing: PENN NATIONAL GAMING INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

o	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 x No o

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 x No o

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

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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 April 27, 2011
Common Stock, par value $.01 per share		78,823,600 (includes 435,027 shares of restricted stock)

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This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from expectations. Although Penn National Gaming, Inc. and its subsidiaries (collectively, the “Company”) believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, 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: our ability to receive, or delays in obtaining, the regulatory approvals required to own, develop and/or operate our facilities, or other delays or impediments to completing our planned acquisitions or projects, including favorable resolution of any related litigation; our ability to secure state and local permits and approvals necessary for construction; construction factors, including delays, unexpected remediation costs, local opposition and increased cost of labor and materials; 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 business (such as a smoking ban at any of our facilities) or in jurisdictions where we seek to do business; 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 emergence of new competitors; increases in the effective rate of taxation at any of our properties or at the corporate level; our ability to recover proceeds on significant insurance claims; our ability to identify attractive acquisition and development opportunities and to agree to terms with partners 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; our expectations for the continued availability and cost of capital; the maintenance of agreements with our horsemen, pari-mutuel clerks and other organized labor groups; the outcome of pending legal proceedings; changes in accounting standards; our dependence on key personnel; the impact of terrorism and other international hostilities; the impact of weather; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K 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

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION		4

ITEM 1.	FINANCIAL STATEMENTS		4
	Consolidated Balance Sheets — March 31, 2011 and December 31, 2010		4
	Consolidated Statements of Income — Three Months Ended March 31, 2011 and 2010		5
	Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2011 and 2010		6
	Consolidated Statements of Cash Flows — Three Months Ended March 31, 2011 and 2010		7
	Notes to the Consolidated Financial Statements		8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)		24

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		35

ITEM 4.	CONTROLS AND PROCEDURES		35

PART II.	OTHER INFORMATION		36

ITEM 1.	LEGAL PROCEEDINGS		36

ITEM 1A.	RISK FACTORS		36

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		36

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		36

ITEM 5.	OTHER INFORMATION		36

ITEM 6.	EXHIBITS		37

SIGNATURES		38

EXHIBIT INDEX		39

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Penn National Gaming, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

	March 31,			December 31,
	2011			2010
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	234,478		$	246,385
Receivables, net of allowance for doubtful accounts of $3,838 and $3,332 at March 31, 2011 and December 31, 2010, respectively	41,512			44,463
Prepaid expenses	45,813			72,393
Deferred income taxes	21,624			25,206
Other current assets	77,727			77,506
Total current assets	421,154			465,953
Property and equipment, net	1,974,705			1,965,774
Other assets
Investment in and advances to unconsolidated affiliates	72,006			64,120
Goodwill	1,184,418			1,185,756
Other intangible assets	418,050			415,152
Debt issuance costs, net of accumulated amortization of $48,275 and $45,234 at March 31, 2011 and December 31, 2010, respectively	24,701			27,742
Loan receivable	230,500			230,500
Other assets	109,253			107,882
Total other assets	2,038,928			2,031,152
Total assets	$	4,434,787		$	4,462,879

Liabilities
Current liabilities
Current maturities of long-term debt	$	745,680		$	357,927
Accounts payable	14,174			17,312
Accrued expenses	73,806			101,447
Accrued interest	18,757			36,597
Accrued salaries and wages	56,029			73,432
Gaming, pari-mutuel, property, and other taxes	41,243			46,449
Insurance financing	8,130			11,602
Other current liabilities	52,267			46,763
Total current liabilities	1,010,086			691,529

Long-term liabilities
Long-term debt, net of current maturities	1,389,458			1,813,196
Deferred income taxes	141,562			134,572
Noncurrent tax liabilities	36,634			36,846
Other noncurrent liabilities	8,970			8,970
Total long-term liabilities	1,576,624			1,993,584

Shareholders’ equity
Preferred stock ($.01 par value, 1,000,000 shares authorized, 12,275 shares issued and outstanding at March 31, 2011 and December 31, 2010)	—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 78,595,745 and 78,414,022 shares issued at March 31, 2011 and December 31, 2010, respectively)	781			779
Additional paid-in capital	1,458,052			1,446,932
Retained earnings	392,512			337,940
Accumulated other comprehensive loss	(3,268		)	(7,885		)
Total shareholders’ equity	1,848,077			1,777,766
Total liabilities and shareholders’ equity	$	4,434,787		$	4,462,879

See accompanying notes to the consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

	Three Months Ended March 31,
	2011			2010

Revenues
Gaming	$	609,111		$	543,373
Food, beverage and other	85,289			80,432
Management service fee	3,317			3,194
Revenues	697,717			626,999
Less promotional allowances	(30,694		)	(34,676		)
Net revenues	667,023			592,323

Operating expenses
Gaming	320,756			290,861
Food, beverage and other	68,592			63,220
General and administrative	103,476			94,516
Depreciation and amortization	53,158			51,180
Impairment losses	—			136
Hollywood Casino Joliet fire (gain) loss	(1,694		)	59
Total operating expenses	544,288			499,972
Income from operations	122,735			92,351

Other income (expenses)
Interest expense	(29,026		)	(34,292		)
Interest income	53			730
Loss from unconsolidated affiliates	(2,354		)	(1,412		)
Other	(1,643		)	(1,321		)
Total other expenses	(32,970		)	(36,295		)

Income from operations before income taxes	89,765			56,056
Taxes on income	38,237			19,901
Net income including noncontrolling interests	51,528			36,155
Less: Net loss attributable to noncontrolling interests	—			(9		)
Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries	$	51,528		$	36,164

Earnings per common share attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries:
Basic earnings per common share	$	0.53		$	0.37
Diluted earnings per common share	$	0.48		$	0.34

See accompanying notes to the consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

(in thousands, except share data) (unaudited)

	Penn National Gaming, Inc. shareholders
								Additional					Accumulated Other						Total
	Preferred Stock				Common Stock			Paid-In			Retained		Comprehensive			Noncontrolling			Shareholders'			Comprehensive
	Shares		Amount		Shares	Amount		Capital			Earnings		(Loss) Income			Interests			Equity			Income (Loss)
Balance, December 31, 2009	12,500		$	—	78,972,256	$	786	$	1,480,476		$	397,407	$	(26,028	)	$	(565	)	$	1,852,076
Repurchase of preferred stock	(225	)	—		—	—		(11,200		)	—		—			—			(11,200		)	$	—
Stock option activity, including tax expense of $660	—		—		65,444	1		4,881			—		—			—			4,882			—
Restricted stock activity	—		—		165,110	—		1,996			—		—			—			1,996			—
Change in fair value of interest rate swap contracts, net of income taxes of $1,369	—		—		—	—		—			—		1,987			—			1,987			1,987
Change in fair value of corporate debt securities	—		—		—	—		—			—		(8		)	—			(8		)	(8		)
Foreign currency translation adjustment	—		—		—	—		—			—		341			—			341			341
Net income (loss)	—		—		—	—		—			36,164		—			(9		)	36,155			36,155
Balance, March 31, 2010	12,275		$	—	79,202,810	$	787	$	1,476,153		$	433,571	$	(23,708	)	$	(574	)	$	1,886,229		$	38,475

Balance, December 31, 2010	12,275		$	—	78,414,022	$	779	$	1,446,932		$	337,940	$	(7,885	)	$	—		$	1,777,766
Stock option activity, including tax benefit of $1,576	—		—		181,723	2		10,035			—		—			—			10,037			$	—
Restricted stock activity	—		—		—	—		1,085			—		—			—			1,085			—
Change in fair value of interest rate swap contracts, net of income taxes of $2,184	—		—		—	—		—			—		3,910			—			3,910			3,910
Change in fair value of corporate debt securities	—		—		—	—		—			—		332			—			332			332
Foreign currency translation adjustment	—		—		—	—		—			—		375			—			375			375
Cumulative-effect of adoption of amendments to ASC 924 regarding jackpot liabilities, net of income taxes of $1,166	—		—		—	—		—			3,044		—			—			3,044			—
Net income	—		—		—	—		—			51,528		—			—			51,528			51,528
Balance, March 31, 2011	12,275		$	—	78,595,745	$	781	$	1,458,052		$	392,512	$	(3,268	)	$	—		$	1,848,077		$	56,145

See accompanying notes to the consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

	Three Months Ended March 31,
	2011			2010
Operating activities
Net income including noncontrolling interests	$	51,528		$	36,155
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization	53,158			51,180
Amortization of items charged to interest expense and interest income	3,100			3,309
(Gain) loss on sale of fixed assets	(35		)	64
Loss from unconsolidated affiliates	2,354			1,412
Hollywood Casino Joliet fire	—			59
Deferred income taxes	7,842			4,782
Charge for stock-based compensation	6,225			6,384
Impairment losses	—			136
Decrease, net of businesses acquired
Accounts receivable	2,951			6,654
Insurance receivable	—			15,019
Prepaid expenses and other current assets	25,083			16,636
Other assets	561			9,590
Increase (decrease), net of businesses acquired
Accounts payable	1,124			1,476
Accrued expenses	(23,431		)	(26,167		)
Accrued interest	(11,746		)	(11,350		)
Accrued salaries and wages	(17,403		)	(14,420		)
Gaming, pari-mutuel, property and other taxes	(5,206		)	791
Other current and noncurrent liabilities	5,503			1,646
Other noncurrent tax liabilities	682			(9,620		)
Net cash provided by operating activities	102,290			93,736
Investing activities
Expenditures for property and equipment	(54,524		)	(120,385		)
Proceeds from sale of property and equipment	158			1,103
Proceeds from Hollywood Casino Joliet fire	—			4,821
Investment in Kansas Entertainment	(10,200		)	(13,550		)
Decrease in cash in escrow	—			10,982
Acquisition of businesses and licenses	(15,012		)	—
Net cash used in investing activities	(79,578		)	(117,029		)
Financing activities
Proceeds from exercise of options	3,321			746
Repurchase of preferred stock	—			(11,200		)
Proceeds from issuance of long-term debt, net of issuance costs	30,000			33,885
Principal payments on long-term debt	(66,044		)	(65,874		)
Payments on insurance financing	(3,472		)	(4,215		)
Tax impact from stock options exercised	1,576			(660		)
Net cash used in financing activities	(34,619		)	(47,318		)
Net decrease in cash and cash equivalents	(11,907		)	(70,611		)
Cash and cash equivalents at beginning of year	246,385			713,118
Cash and cash equivalents at end of period	$	234,478		$	642,507

Supplemental disclosure
Interest expense paid	$	38,357		$	43,234
Income taxes paid	$	1,166		$	7,271

See accompanying notes to the consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

1. Organization and Basis of Presentation

Penn National Gaming, Inc. (“Penn”) and subsidiaries (collectively, the “Company”) is a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of March 31, 2011, the Company owns, manages, or has ownership interests in twenty-three facilities in the following sixteen jurisdictions: Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario.

The accompanying unaudited 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 consolidated financial statements include the accounts of Penn and its subsidiaries. Investment in and advances to unconsolidated affiliates that are 50% or less owned are accounted for under the equity method. All significant 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. For purposes of comparability, certain prior year amounts have been reclassified to conform to the current year presentation.

Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2010 should be read in conjunction with these consolidated financial statements.

2. Summary of Significant Accounting Policies

Revenue Recognition and Promotional Allowances

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 chips and “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 to revenue as the amount of the jackpots increase.

Food, beverage 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.

Revenue from the management service contract for Casino Rama is based upon contracted terms and is recognized when services are performed.

Revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 605-50, “Revenue Recognition—Customer Payments and Incentives.” The Company records 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 months ended March 31, 2011 and 2010 are as follows:

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	Three Months Ended March 31,
	2011		2010
	(in thousands)
Rooms	$	5,211	$	5,970
Food and beverage	23,228		26,104
Other	2,255		2,602
Total promotional allowances	$	30,694	$	34,676

The estimated cost of providing such complimentary services for the three months ended March 31, 2011 and 2010 are as follows:

	Three Months Ended March 31,
	2011		2010
	(in thousands)
Rooms	$	2,014	$	2,284
Food and beverage	17,619		19,194
Other	1,354		1,729
Total cost of complimentary services	$	20,987	$	23,207

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, excluding net income attributable to noncontrolling interests, by the weighted-average number of 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.

The Company has issued 12,500 shares of Series B Redeemable Preferred Stock (the “Preferred Stock”), which the Company determined qualified as a participating security as defined in ASC 260. Under ASC 260, a security is considered a participating security if the security may participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not. In accordance with ASC 260, a company is required to use the two-class method when 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 attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries 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 attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries for the three months ended March 31, 2011 and 2010 under the two-class method:

	Three Months Ended March 31,
	2011		2010
	(in thousands)
Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries	$	51,528	$	36,164
Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries applicable to preferred stock	9,785		6,931
Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries applicable to common stock	$	41,743	$	29,233

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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 months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011	2010
	(in thousands)
Determination of shares:
Weighted-average common shares outstanding	78,162	78,563
Assumed conversion of dilutive employee stock-based awards	1,479	741
Assumed conversion of preferred stock	27,278	27,733
Diluted weighted-average common shares outstanding	106,919	107,037

Reflecting the issuance of the Preferred Stock and the repurchase of 225 shares of Preferred Stock during the year ended December 31, 2010, the Company is required to adjust its diluted weighted-average common shares outstanding for the purpose of calculating diluted EPS as follows: 1) when the price of the Company’s Common Stock is less than $45, the diluted weighted-average common shares outstanding is increased by 27,277,778 shares (regardless of how much the stock price is below $45); 2) when the price of the Company’s Common Stock is between $45 and $67, the diluted weighted-average common shares outstanding is increased by an amount which can be calculated by dividing $1.23 billion (face value) by the current price per share of the Company’s Common Stock, which will result in an increase in the diluted weighted-average common shares outstanding of between 18,320,896 shares and 27,277,778 shares; and 3) when the price of the Company’s Common Stock is above $67, the diluted weighted-average common shares outstanding is increased by 18,320,896 shares (regardless of how much the stock price exceeds $67).

Options to purchase 3,734,446 shares and 10,167,592 shares were outstanding during the three months ended March 31, 2011 and 2010, respectively, but were not included in the computation of diluted EPS because they were antidilutive.

The following table presents the calculation of basic and diluted EPS for the Company’s Common Stock:

	Three Months Ended March 31,
	2011		2010
	(in thousands, except per share data)
Calculation of basic EPS attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries:
Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries applicable to common stock	$	41,743	$	29,233
Weighted-average common shares outstanding	78,162		78,563
Basic EPS	$	0.53	$	0.37

Calculation of diluted EPS attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries:
Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries	$	51,528	$	36,164
Diluted weighted-average common shares outstanding	106,919		107,037
Diluted EPS	$	0.48	$	0.34

Stock-Based Compensation

The Company accounts for stock compensation under ASC 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant.

The fair value for stock options was estimated at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The risk-free interest rate was based on the U.S. Treasury spot rate with a term equal to the expected life assumed at the date of grant. Expected volatility was estimated based on the historical volatility of the Company’s stock price over a period of 5.73 years, in order to match the expected life of the options at the grant date. There is no expected dividend yield since the Company has not paid any cash dividends on its Common Stock since its initial public offering in

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May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees. Forfeitures are estimated at the date of grant based on historical experience. The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011		2010

Risk-free interest rate	2.27	%	2.80	%
Expected volatility	48.02	%	49.68	%
Dividend yield	—		—
Weighted-average expected life (years)	5.73		5.32
Forfeiture rate	5.00	%	5.00	%

Beginning in the fourth quarter of 2010, the Company issued cash-settled phantom stock unit awards which vest over a period of five years. Cash-settled phantom stock unit awards entitle employees to receive cash based on the fair value of the Company’s Common Stock on the vesting date. These phantom stock unit awards are accounted for as liability awards and are remeasured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period in accordance with ASC 718-30 “Compensation—Stock Compensation, Awards Classified as Liabilities.” As of March 31, 2011, there was $7.4 million of total unrecognized compensation cost that will be recognized over the grants remaining vesting period. For the three months ended March 31, 2011, the Company recognized $0.4 million of compensation expense associated with these awards.

Additionally, in the first quarter of 2011, the Company issued stock appreciation rights to certain employees which vest over a period of 4 years. The Company’s stock appreciation rights are accounted for as liability awards since they will be settled in cash. The fair value of these awards is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed previously. As of March 31, 2011, there was $5.0 million of total unrecognized compensation cost that will be recognized over the awards remaining weighted average vesting period of 3.75 years. For the three months ended March 31, 2011, the Company recognized $0.3 million of compensation expense associated with these awards.

Accounting for Derivatives and Hedging Activities

The Company uses fixed and variable-rate debt to finance its operations. Both funding sources have associated risks and opportunities, such as interest rate exposure, and the Company’s risk management policy permits the use of derivatives to manage this exposure. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Thus, uses of derivatives are strictly limited to hedging and risk management purposes in connection with managing interest rate exposure. Acceptable derivatives for this purpose include interest rate swap contracts, futures, options, caps, and similar instruments.

When using derivatives, the Company’s intent is to obtain hedge accounting, which is conditional upon satisfying specific documentation and performance criteria. In particular, the underlying hedged item must expose the Company to risks associated with market fluctuations and the instrument used as the hedging derivative must generate offsetting effects in prescribed magnitudes. If these criteria are not met, a change in the market value of the financial instrument and all associated settlements would be recognized as gains or losses in the period of change.

Currently, the Company has a number of interest rate swap contracts in place. These contracts serve to mitigate income volatility for a portion of its variable-rate funding. In effect, these swap contracts synthetically convert the portion of variable-rate debt being hedged to the equivalent of fixed-rate funding. Under the terms of the swap contracts, the Company receives cash flows from the swap contract counterparties to offset the benchmark interest rate component of variable interest payments on the hedged financings, in exchange for paying cash flows based on the swap contracts’ fixed rates. These two respective obligations are net-settled periodically. The Company accounts for these swap contracts as cash flow hedges, which requires determining a division of hedge results deemed effective and deemed ineffective. However, most of the Company’s hedges were designed in such a way so as to perfectly offset specifically-defined interest payments, such that no ineffectiveness has occurred—nor would any ineffectiveness occur, as long as the forecasted cash flows of the designated hedged items and the associated swap contracts remain unchanged. The notional value of the Company’s cash flow hedges totaled $840.0 million at March 31, 2011.

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The fair value of the Company’s interest rate swap contracts is measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation, subject to a credit adjustment to the LIBOR-based yield curve’s implied discount rates. The credit adjustment reflects the Company’s best estimate as to the Company’s credit quality at March 31, 2011.

Under cash flow hedge accounting, effective derivative results are initially recorded in other comprehensive income (“OCI”) and later reclassified to earnings, coinciding with the income recognition relating to the variable interest payments being hedged (i.e., when the interest expense on the variable-rate liability is recorded in earnings). Any hedge ineffectiveness (which represents the amount by which hedge results exceed the variability in the cash flows of the forecasted transaction due to the risk being hedged) is recorded in current period earnings.

Under cash flow hedge accounting, derivatives are included in the consolidated balance sheets as assets or liabilities at fair value. The interest rate swap contract liabilities are included in accrued interest within the consolidated balance sheets at March 31, 2011 and December 31, 2010.

In addition, the Company has certain derivative instruments that were not designated to qualify for hedge accounting. The periodic change in the mark-to-market of these derivative instruments is recorded in current period earnings in interest expense in the consolidated statements of income. The notional value of these derivatives was $400.0 million at March 31, 2011.

Credit risk relating to derivative counterparties is mitigated by using multiple, highly rated counterparties, and the credit quality of each is monitored on an ongoing basis.

3. New Accounting Pronouncements

In April 2010, the FASB issued guidance on accruing for jackpot liabilities. The guidance clarifies that an entity should not accrue jackpot liabilities (or portions thereof) before a jackpot is won if the entity can legally avoid paying that jackpot (for example, by removing the gaming machine from the casino floor). Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot. This guidance applies to both base jackpots and the incremental portion of progressive jackpots. However, the guidance only affected the accounting for base jackpots, as the guidance uses the same principle that is applied by the Company to the incremental portion of progressive jackpots. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. This guidance was applied by recording a cumulative-effect adjustment to opening retained earnings in the period of adoption. The Company adopted the guidance as of January 1, 2011, and as such, recorded a cumulative-effect adjustment, which increased retained earnings by $3.0 million.

4. Acquisition and Other Recent Business Ventures

On February 28, 2011, the Company completed its acquisition of Rosecroft Raceway in Oxon Hill, Maryland following the completion of a bankruptcy auction and approval of the purchase by a U.S. Bankruptcy Court judge. The Company intends to work with the legislature, local officials and Maryland horsemen to develop a financially viable long-term model for operating the track. Rosecroft Raceway, located approximately 13 miles south of Washington, D.C., is situated on approximately 125 acres just outside the Washington I-495 Beltway in Prince George’s county. The Rosecroft facility features a 5/8-mile standardbred racing oval track with a seven race paddock, a 53,000 square foot grandstand building, and a 96,000 square foot three story clubhouse building with dining facilities. The last live racing meet at Rosecroft Raceway was in 2008 and the facility ceased all pari-mutuel operations in June 2010.

In September 2010, the Company announced an agreement to enter into a joint venture that will own and operate the Sam Houston Race Park in Houston, Texas, the Valley Race Park in Harlingen, Texas, and a planned racetrack in Laredo, Texas. Under the terms of the joint venture, the Company will secure a 50% interest in the joint venture, which will have sole ownership of the above entities including interests in 323 acres at Sam Houston Race Park, 80 acres at Valley Race Park and an option to purchase 135 acres for the planned racetrack in Laredo, Texas. Sam Houston Race Park, opened in April 1994, is located in Northwest Houston along Beltway 8 near the intersection of Highway 249. Sam Houston Race Park hosts thoroughbred and quarter horse racing and offers daily simulcast operations, as well as hosts various special events, private parties and meetings, concerts and national touring festivals throughout the year. Valley Race Park, which was opened in 1990 and acquired by Sam Houston Race Park in 2000, is a 91,000 square foot dog racing and simulcasting facility located in Harlingen, Texas. The Company closed this venture on April 8, 2011 following final approval by the Texas Racing Commission. See Note 13 for further information.

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5. Property and Equipment

Property and equipment, net, consists of the following:

	March 31,			December 31,
	2011			2010
	(in thousands)

Land and improvements	$	310,135		$	298,482
Building and improvements	1,591,484			1,534,117
Furniture, fixtures, and equipment	962,685			938,443
Leasehold improvements	17,151			17,089
Construction in progress	72,514			106,963
Total property and equipment	2,953,969			2,895,094
Less accumulated depreciation	(979,264		)	(929,320		)
Property and equipment, net	$	1,974,705		$	1,965,774

Depreciation expense, for property and equipment, totaled $52.4 million and $49.5 million for the three months ended March 31, 2011 and 2010, respectively. Interest capitalized in connection with major construction projects was $0.8 million and $1.1 million for the three months ended March 31, 2011 and 2010, respectively.

6. Goodwill and Other Intangible Assets

In accordance with ASC 350, “Intangibles-Goodwill and Other,” the Company does not amortize goodwill, rather it is tested annually, or more frequently if indicators of impairment exist, for impairment by comparing the fair value of the reporting units to their carrying amount. If the carrying amount of a reporting unit exceeds its fair value in step 1 of the impairment test, then step 2 of the impairment test is performed to determine the implied value of goodwill for that reporting unit. If the implied value of goodwill is less than the goodwill allocated for that reporting unit, an impairment loss is recognized. Additionally, the Company considers its gaming license, racing permit and trademark intangible assets as indefinite-life intangible assets that do not require amortization based on the Company’s future expectations to operate its gaming facilities indefinitely as well as the Company’s historical experience in renewing these intangible assets at minimal cost with various state gaming commissions.

A reconciliation of goodwill and accumulated goodwill impairment losses is as follows (in thousands):

Balance at December 31, 2010:
Goodwill	$	2,019,613
Accumulated goodwill impairment losses	(833,857		)
Goodwill, net	$	1,185,756
Other	(1,338		)
Balance at March 31, 2011:
Goodwill	$	2,018,275
Accumulated goodwill impairment losses	(833,857		)
Goodwill, net	$	1,184,418

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The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of intangible asset at March 31, 2011 and December 31, 2010:

	March 31, 2011						December 31, 2010
	(in thousands)
	Gross						Gross
	Carrying		Accumulated		Net Book		Carrying		Accumulated		Net Book
	Value		Amortization		Value		Value		Amortization		Value
Indefinite-life intangible assets	$	416,383	$	—	$	416,383	$	412,686	$	—	$	412,686
Other intangible assets	49,600		47,933		1,667		49,600		47,134		2,466
Total	$	465,983	$	47,933	$	418,050	$	462,286	$	47,134	$	415,152

The Company’s intangible asset amortization expense was $0.8 million and $1.7 million for the three months ended March 31, 2011 and 2010, respectively.

The following table presents expected intangible asset amortization expense based on existing intangible assets at March 31, 2011 (in thousands):

Remainder of 2011	$	1,335
2012	237
2013	38
2014	38
2015	19
Total	$	1,667

The Company’s remaining goodwill and other intangible assets by reporting unit at March 31, 2011 is shown below (in thousands):

	Remaining Goodwill and
	other intangible assets
Reporting Unit	at March 31, 2011
Hollywood Casino Lawrenceburg	$	362,491
Hollywood Casino Joliet	214,218
Hollywood Casino Aurora	207,207
Argosy Casino Riverside	159,296
Black Gold Casino at Zia Park	146,256
Argosy Casino Alton	135,511
Argosy Casino Sioux City	92,795
Hollywood Casino Baton Rouge	75,521
Others	209,173
Total	$	1,602,468

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7. Long-term Debt and Derivatives

Long-term debt, net of current maturities, is as follows:

	March 31,			December 31,
	2011			2010
	(in thousands)

Senior secured credit facility due October 2012	$	1,553,125		$	1,589,125
$250 million 6 ¾% senior subordinated notes due March 2015	250,000			250,000
$325 million 8 ¾% senior subordinated notes due August 2019	325,000			325,000
Other long-term obligations	3,840			3,782
Capital leases	3,173			3,216
	2,135,138			2,171,123
Less current maturities of long-term debt	(745,680		)	(357,927		)
	$	1,389,458		$	1,813,196

The following is a schedule of future minimum repayments of long-term debt as of March 31, 2011 (in thousands):

Within one year	$	745,680
1-3 years	812,641
3-5 years	250,190
Over 5 years	326,627
Total minimum payments	$	2,135,138

Senior Secured Credit Facility

The Company’s senior secured credit facility had an outstanding balance of $1,553.1 million at March 31, 2011, consisting of a term loan of $1,518.1 million and an outstanding balance of $35.0 million under the revolving credit facility. Additionally, at March 31, 2011, the Company was contingently obligated under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $35.3 million, resulting in $570.3 million of available borrowing capacity as of March 31, 2011. The term loan has a quarterly principal payment of $354.9 million in December 2011, followed by payments of $387.8 million in March 2012, June 2012 and October 2012. The revolving credit facility matures on July 3, 2012.

During the three months ended March 31, 2011, the senior secured credit facility amount outstanding decreased by $36.0 million primarily due to repayments on the revolving credit facility using available cash.

Covenants

The Company’s senior secured credit facility and $325 million 83/4% and $250 million 63/4% senior subordinated notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $325 million 83/4% and $250 million 63/4% senior subordinated notes restrict, among other things, the Company’s ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, make acquisitions, engage in mergers or consolidations, make capital expenditures, or engage in certain transactions with subsidiaries and affiliates and otherwise restricts corporate activities.

At March 31, 2011, the Company was in compliance with all required financial covenants.

Interest Rate Swap Contracts

In accordance with the terms of its senior secured credit facility, the Company was required to enter into fixed-rate debt or interest rate swap agreements in an amount equal to 50% of the Company’s consolidated indebtedness, excluding the revolving credit facility, within 100 days of the closing date of the senior secured credit facility.

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The effect of derivative instruments on the consolidated statement of income for the three months ended March 31, 2011 was as follows (in thousands):

	Gain (Loss)			Location of Gain (Loss)	Gain (Loss)
	Recognized in			Reclassified from	Reclassified from			Location of Gain (Loss)	Gain (Loss)
Derivatives in a	OCI on Derivative			AOCI into Income	AOCI into Income			Recognized in Income on	Recognized in Income on
Cash Flow Hedging Relationship	(Effective Portion)			(Effective Portion)	(Effective Portion)			Derivative (Ineffective Portion)	Derivative (Ineffective Portion)

Interest rate swap contracts	$	(340	)	Interest expense	$	(4,548	)	None	$	—
Total	$	(340	)		$	(4,548	)		$	—

	Location of Gain (Loss)
Derivatives Not Designated as	Recognized in Income	Gain (Loss) Recognized
Hedging Instruments	on Derivative	in Income on Derivative

Interest rate swap contracts	Interest expense	$	(3	)
Total		$	(3	)

The effect of derivative instruments on the consolidated statement of income for the three months ended March 31, 2010 was as follows (in thousands):

	Gain (Loss)			Location of Gain (Loss)	Gain (Loss)
	Recognized in			Reclassified from	Reclassified from			Location of Gain (Loss)	Gain (Loss)
Derivatives in a	OCI on Derivative			AOCI into Income	AOCI into Income			Recognized in Income on	Recognized in Income on
Cash Flow Hedging Relationship	(Effective Portion)			(Effective Portion)	(Effective Portion)			Derivative (Ineffective Portion)	Derivative (Ineffective Portion)

Interest rate swap contracts	$	(7,386	)	Interest expense	$	(6,496	)	None	$	—
Total	$	(7,386	)		$	(6,496	)		$	—

	Location of Gain (Loss)
Derivatives Not Designated as	Recognized in Income	Gain (Loss) Recognized
Hedging Instruments	on Derivative	in Income on Derivative

Interest rate swap contracts	Interest expense	$	(34	)
Total		$	(34	)

In addition, during the three months ended March 31, 2011 and 2010, the Company amortized $1.9 million and $4.2 million, respectively, in OCI related to the derivatives that were de-designated as hedging instruments under ASC 815, “Derivatives and Hedging.”

In the coming twelve months, the Company anticipates that losses of approximately $8.7 million will be reclassified from OCI to earnings, as part of interest expense. As this amount represents effective hedge results, a comparable offsetting amount of incrementally lower interest expense will be realized in connection with the variable funding being hedged.

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The following table sets forth the fair value of the interest rate swap contract liabilities included in accrued interest within the consolidated balance sheets at March 31, 2011 and December 31, 2010:

	March 31, 2011			December 31, 2010
	(in thousands)
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
Derivatives designated as hedging instruments
Interest rate swap contracts	Accrued interest	$	8,780	Accrued interest	$	13,034
Total derivatives designated as hedging instruments		$	8,780		$	13,034

Derivatives not designated as hedging instruments
Interest rate swap contracts	Accrued interest	$	1,837	Accrued interest	$	3,712
Total derivatives not designated as hedging instruments		$	1,837		$	3,712

Total derivatives		$	10,617		$	16,746

8. Commitments and Contingencies

Litigation

The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming and unpredictable and, therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Company’s consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

The following proceedings could result in costs, settlements, damages, or rulings that materially impact the Company’s consolidated financial condition or operating results. In each instance, the Company believes that it has meritorious defenses, claims and/or counter-claims, and intends to vigorously defend itself or pursue its claim.

The Illinois Legislature passed into law House Bill 1918, effective May 26, 2006, which singled out four of the nine Illinois casinos, including the Company’s Hollywood Casino Joliet and Hollywood Casino Aurora, for a 3% tax surcharge to subsidize local horse racing interests. On May 30, 2006, Hollywood Casino Joliet and Hollywood Casino Aurora joined with the two other riverboats affected by the law, Harrah’s Joliet and the Grand Victoria Casino in Elgin (collectively, the “Four Casinos”), and filed suit in the Circuit Court of the Twelfth Judicial District in Will County, Illinois (the “Court”), asking the Court to declare the law unconstitutional. Hollywood Casino Joliet and Hollywood Casino Aurora began paying the 3% tax surcharge into a protest fund which accrues interest during the pendency of the lawsuit. In two orders dated March 29, 2007 and April 20, 2007, the Court declared the law unconstitutional under the Uniformity Clause of the Illinois Constitution and enjoined the collection of this tax surcharge. The State of Illinois requested, and was granted, a stay of this ruling. As a result, Hollywood Casino Joliet and Hollywood Casino Aurora continued paying the 3% tax surcharge into the protest fund until May 25, 2008, when the 3% tax surcharge expired. The State of Illinois appealed the ruling to the Illinois Supreme Court. On June 5, 2008, the Illinois Supreme Court reversed the trial court’s ruling and issued a decision upholding the constitutionality of the 3% tax surcharge. On January 21, 2009, the Four Casinos filed a petition for certiorari, requesting the U.S. Supreme Court to hear the case. Seven amicus curiae briefs supporting the plaintiffs’ request were also filed. On June 8, 2009, the U.S. Supreme Court decided not to hear the case. On June 10, 2009, the Four Casinos filed a petition with the Court to open the judgment based on new evidence that came to light during the investigation of former Illinois Governor Rod Blagojevich that the 2006 law was procured by corruption. On August 17, 2009, the Court dismissed the Four Casinos’ petition to reopen the case, and the Four Casinos decided not to pursue an appeal of the dismissal. The monies paid into the protest fund have

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been transferred by the State of Illinois to the racetracks. However, the racetracks have been temporarily restrained from disbursing any funds pursuant to an order of the Seventh Circuit Court of Appeals issued in connection with the lawsuit described below.

On December 15, 2008, former Illinois Governor Rod Blagojevich signed Public Act No. 95-1008 requiring the Four Casinos to continue paying the 3% tax surcharge to subsidize Illinois horse racing interests. On January 8, 2009, the Four Casinos filed suit in the Court, asking it to declare the law unconstitutional. The 3% tax surcharge being paid pursuant to Public Act No. 95-1008 was being paid into a protest fund where it accrued interest. The defendants filed a motion to dismiss, which was granted on August 17, 2009. The Four Casinos appealed the dismissal and filed motions to keep the payments in the protest fund while the appeal is being litigated. The motion to keep the monies in the protest fund was denied and the funds were released to the racetracks, however, the funds are subject to the order issued by the Seventh Circuit Court of Appeals described below. On January 27, 2011, the Illinois appellate court affirmed the trial court’s dismissal of this case. Hollywood Casino Joliet and Hollywood Casino Aurora have asked the Illinois Supreme Court to hear an appeal of this dismissal and this request is pending.

On June 12, 2009, the Four Casinos filed a lawsuit in Illinois Federal Court naming former Illinois Governor Rod Blagojevich, his campaign fund, racetrack owner John Johnston, and his two racetracks as defendants alleging a civil conspiracy in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1962(c),(d) (“RICO”), based on an illegal scheme to secure the enactment of the 3% tax surcharge legislation in exchange for the payment of money by Johnston and entities controlled by him. The Four Casinos also seek to impose a constructive trust over all funds paid under the tax surcharge, and therefore all of the Illinois racetracks are named as parties to the lawsuit. The defendants in the RICO case filed motions to dismiss. On December 7, 2009, the district court denied the motions to dismiss the RICO count, but it granted the motion to dismiss the constructive trust count, stating that it did not have jurisdiction in this case to impose the constructive trust. The Four Casinos have appealed this dismissal to the Seventh Circuit Court of Appeals. The appellate court has ordered that any monies disbursed to the tracks be maintained by the tracks in a constructive trust until the appeal has been decided. Since the passing of House Bill 1918 into law, Hollywood Casino Joliet and Hollywood Casino Aurora have recognized approximately $52.2 million in expense as a result of the 3% tax surcharge, including $2.5 million during the three months ended March 31, 2011. The 3% tax surcharge is included in gaming expense within the consolidated statements of income.

On July 16, 2008, the Company was served with a purported class action lawsuit brought by plaintiffs seeking to represent a class of shareholders who purchased shares of the Company’s Common Stock between March 20, 2008 and July 2, 2008. The lawsuit alleges that the Company’s disclosure practices relative to the proposed transaction with Fortress Investment Group LLC and Centerbridge Partners, L.P. and the eventual termination of that transaction were misleading and deficient in violation of the Securities Exchange Act of 1934. The complaint, which seeks class certification and unspecified damages, was filed in federal court in Maryland. The complaint was amended, among other things, to add three new named plaintiffs and to name Peter M. Carlino, Chairman and Chief Executive Officer, and William J. Clifford, Senior Vice President and Chief Financial Officer, as additional defendants. The Company filed a motion to dismiss the complaint in November 2008, and the court granted the motion and dismissed the complaint with prejudice. The plaintiffs filed a motion for reconsideration, which was denied on October 21, 2009. The plaintiffs subsequently appealed the dismissal to the Fourth Circuit Court of Appeals and an oral argument was heard on October 26, 2010. On March 14, 2011, the Fourth Circuit Court of Appeals affirmed the decision of the lower court.

On September 11, 2008, the Board of County Commissioners of Cherokee County, Kansas (the “County”) filed suit against Kansas Penn Gaming, LLC (“KPG,” a wholly-owned subsidiary of Penn created to pursue a development project in Cherokee County, Kansas) and the Company in the District Court of Shawnee County, Kansas. The petition alleges that KPG breached its pre-development agreement with the County when KPG withdrew its application to manage a lottery gaming facility in Cherokee County and currently seeks in excess of $50 million in damages. In connection with their petition, the County obtained an ex-parte order attaching the $25 million privilege fee paid to the Kansas Lottery Commission in conjunction with the gaming application for the Cherokee County zone. The defendants have filed motions to dissolve and reduce the attachment. Those motions were denied. Discovery is now underway.

On September 23, 2008, KPG filed an action against HV Properties of Kansas, LLC (“HV”) in the U.S. District Court for the District of Kansas seeking a declaratory judgment from the U.S. District Court finding that KPG has no further obligations to HV under a Real Estate Sale Contract (the “Contract”) that KPG and HV entered into on September 6, 2007, and that KPG properly terminated this Contract under the terms of the Repurchase Agreement entered into between the parties effective September 28, 2007. HV filed a counterclaim claiming KPG breached the Contract, and seeks $37.5 million in damages. On October 7, 2008, HV filed suit against the Company claiming the Company is liable to HV for KPG’s alleged breach based on a Guaranty Agreement signed by the Company. Both cases were consolidated. Following extensive discovery and briefings, on July 23, 2010, the court granted KPG’s motion for summary judgment and dismissed HV’s claim. KPG has filed a motion requesting reimbursement of the attorney’s fees and costs incurred in litigating this case pursuant to the terms of the Contract. HV has opposed this motion and is appealing the ruling of the district court.

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On March 11, 2011, CD Gaming Ventures, LLC, a wholly-owned subsidiary of the Company and developer of the Columbus casino, filed suit in U.S. District Court against the City of Columbus, Columbus officials, Franklin County and County officials. The lawsuit alleges that the city of Columbus, Franklin County and various city and county officials violated the Company’s rights under the U.S. and Ohio Constitutions, principally by removing preexisting sewer and water service in an effort to force annexation of the constitutionally-authorized casino site into the city of Columbus. CD Gaming Ventures, LLC, asked the court for an injunction preventing the city and the county from denying water and sewer service to the casino site and also seeks monetary damages. CD Gaming Ventures, LLC has subsequently amended its complaint, requested injunctive relief and requested expedited discovery. The court has granted CD Gaming Ventures, LLC’s request for expedited discovery and has tentatively set a hearing date for late May 2011.

9. Subsidiary Guarantors

Under the terms of the senior secured credit facility, many of Penn’s subsidiaries are guarantors under the agreement. Each of the subsidiary guarantors is directly or indirectly 100% owned by Penn. In addition, the guarantees provided by such subsidiaries under the terms of the senior secured credit facility are full and unconditional, joint and several. There are no significant restrictions within the senior secured credit facility on the Company’s ability to obtain funds from its subsidiaries by dividend or loan. However, in certain jurisdictions, the gaming authorities may impose restrictions pursuant to the authority granted to them with regard to Penn’s ability to obtain funds from its subsidiaries.

Condensed consolidating balance sheets at March 31, 2011 and December 31, 2010 and condensed consolidating statements of income and cash flows for the three months ended March 31, 2011 and 2010 for Penn, the subsidiary guarantors of the senior secured credit facility and the subsidiary non-guarantors are presented below.

The Company’s $250 million 63/4% senior subordinated notes and $325 million 83/4% senior subordinated notes are not guaranteed by the Company’s subsidiaries.

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							Subsidiary
				Subsidiary			Non-
Senior Secured Credit Facility	Penn			Guarantors			Guarantors			Eliminations			Consolidated
	(in thousands)
At March 31, 2011
Condensed Consolidating Balance Sheet
Total current assets	$	38,863		$	258,913		$	110,117		$	13,261		$	421,154
Property and equipment, net	14,769			1,763,683			196,253			—			1,974,705
Total other assets	3,914,636			5,032,606			181,628			(7,089,942		)	2,038,928
Total assets	$	3,968,268		$	7,055,202		$	487,998		$	(7,076,681	)	$	4,434,787
Total current liabilities	$	781,088		$	201,246		$	14,493		$	13,259		$	1,010,086
Total long-term liabilities	1,339,102			3,153,902			47,036			(2,963,416		)	1,576,624
Total shareholders' equity	1,848,078			3,700,054			426,469			(4,126,524		)	1,848,077
Total liabilities and shareholders' equity	$	3,968,268		$	7,055,202		$	487,998		$	(7,076,681	)	$	4,434,787
Three Months Ended March 31, 2011
Condensed Consolidating Statement of Income
Net revenues	$	—		$	628,989		$	38,034		$	—		$	667,023
Total operating expenses	26,012			482,242			36,034			—			544,288
(Loss) income from operations	(26,012		)	146,747			2,000			—			122,735
Other income (expenses)	8,906			(39,101		)	(2,775		)	—			(32,970		)
(Loss) income from operations before income taxes	(17,106		)	107,646			(775		)	—			89,765
Taxes on income	(9,376		)	47,339			274			—			38,237
Net (loss) income	$	(7,730	)	$	60,307		$	(1,049	)	$	—		$	51,528
Three Months Ended March 31, 2011
Condensed Consolidating Statement of Cash Flows
Net cash provided by operating activities	$	47,103		$	35,294		$	19,893		$	—		$	102,290
Net cash used in investing activities	(535		)	(41,579		)	(37,464		)	—			(79,578		)
Net cash used in financing activities	(34,575		)	(21		)	(23		)	—			(34,619		)
Net increase (decrease) in cash and cash equivalents	11,993			(6,306		)	(17,594		)	—			(11,907		)
Cash and cash equivalents at beginning of year	6,276			157,992			82,117			—			246,385
Cash and cash equivalents at end of period	$	18,269		$	151,686		$	64,523		$	—		$	234,478

							Subsidiary
				Subsidiary			Non-
Senior Secured Credit Facility	Penn			Guarantors			Guarantors			Eliminations			Consolidated
	(in thousands)
At December 31, 2010
Condensed Consolidating Balance Sheet
Total current assets	$	31,422		$	261,768		$	131,204		$	41,559		$	465,953
Property and equipment, net	15,328			1,775,913			174,533			—			1,965,774
Total other assets	3,848,412			5,042,516			167,466			(7,027,242		)	2,031,152
Total assets	$	3,895,162		$	7,080,197		$	473,203		$	(6,985,683	)	$	4,462,879
Total current liabilities	$	355,018		$	293,588		$	1,370		$	41,553		$	691,529
Total long-term liabilities	1,762,379			3,159,736			45,024			(2,973,555		)	1,993,584
Total shareholders' equity	1,777,765			3,626,873			426,809			(4,053,681		)	1,777,766
Total liabilities and shareholders' equity	$	3,895,162		$	7,080,197		$	473,203		$	(6,985,683	)	$	4,462,879
Three Months Ended March 31, 2010
Condensed Consolidating Statement of Income
Net revenues	$	—		$	585,378		$	6,945		$	—		$	592,323
Total operating expenses	22,878			470,833			6,261			—			499,972
(Loss) income from operations	(22,878		)	114,545			684			—			92,351
Other income (expenses)	11,407			(46,873		)	(829		)	—			(36,295		)
(Loss) income from operations before income taxes	(11,471		)	67,672			(145		)	—			56,056
Taxes on income	(9,902		)	33,627			(3,824		)	—			19,901
Net (loss) income including noncontrolling interests	(1,569		)	34,045			3,679			—			36,155
Less: Net loss attributable to noncontrolling interests	—			—			(9		)	—			(9		)
Net (loss) income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries	$	(1,569	)	$	34,045		$	3,688		$	—		$	36,164
Three Months Ended March 31, 2010
Condensed Consolidating Statement of Cash Flows
Net cash provided by (used in) operating activities	$	68,158		$	33,155		$	(7,577	)	$	—		$	93,736
Net cash used in investing activities	(792		)	(36,644		)	(79,593		)	—			(117,029		)
Net cash used in financing activities	(47,299		)	(19		)	—			—			(47,318		)
Net increase (decrease) in cash and cash equivalents	20,067			(3,508		)	(87,170		)	—			(70,611		)
Cash and cash equivalents at beginning of year	6,385			145,519			561,214			—			713,118
Cash and cash equivalents at end of period	$	26,452		$	142,011		$	474,044		$	—		$	642,507

Table of Contents

10. Fair Value of Financial Instruments

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:

Cash and Cash Equivalents

The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.

Investment in Corporate Debt Securities

The fair value of the investment in corporate debt securities is estimated based on quoted prices in active markets for identical investments. The investment in corporate debt securities is measured at fair value on a recurring basis.

Loan Receivable

In 2010, the Company acquired all of the outstanding bank and subordinated debt of The M Resorts LLC for $230.5 million. The Company does not anticipate receiving cash proceeds on the loan but rather intends to convert the loan into ownership of The M Resorts LLC, a casino located approximately ten miles from the Las Vegas strip in Henderson, Nevada. The fair value of the loan approximates its carrying amount.

Long-term Debt

The fair value of the Company’s senior secured credit facility approximates its carrying value, as it is variable-rate debt. The fair value of the Company’s senior subordinated notes is estimated based on quoted prices in active markets for identical instruments. The fair value of the Company’s other long-term obligations approximates its carrying value.

Interest Rate Swap Contracts

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

March 31, 2011

December 31, 2010

Carrying