Edgar Filing: PENN NATIONAL GAMING INC

Table of Contents

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 September 30, 2015

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 March 2, 2016
Common Stock, par value $.01 per share		81,220,032 (includes 227,846 shares of restricted stock)

Table of Contents

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 “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” or the negative or other variation of these or similar words, or by discussions of future events, strategies, or risks and uncertainties. Actual results may vary materially from expectations. Although Penn National Gaming, Inc. (“Penn”) and its subsidiaries (together with Penn, collectively, the “Company”) believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our 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: our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays or impediments to completing our planned acquisitions or projects; our ability to secure federal, state and local permits and approvals necessary for our construction projects; construction factors, including delays, unexpected remediation costs, local opposition, organized labor, and increased cost of labor and materials; our ability to maintain agreements with our horsemen, pari-mutuel clerks and other organized labor groups; 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); 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 and sweepstakes based and taverns); increases in the effective rate of taxation at any of our properties 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; our expectations for the continued availability and cost of capital; the outcome of pending legal proceedings, including the ongoing appeal by the Ohio Roundtable addressing the legality of video lottery terminals in Ohio; changes in accounting standards; the impact of weather; the remediation of any material weaknesses and the costs to strengthen its internal control structure, potential investigations, litigation, or other proceedings by governmental authorities, stockholders or other parties, and risks related to the impact of the restatement on the Company’s reputation, development projects, joint ventures and other commercial contracts; the ability of the Company to generate sufficient future taxable income to realize its deferred tax assets; with respect to the proposed Jamul project near San Diego, California, particular risks associated with financing a project of this type, sovereign immunity, local opposition (including several pending lawsuits), and building a complex project on a relatively small parcel; with respect to our Massachusetts project, the ultimate location of the other gaming facilities in the state; with respect to our acquisition of Tropicana Las Vegas Hotel and Casino, risks relating to higher leverage, the successful integration of the acquisition, our ability to successfully leverage our player database, market conditions affecting the Las Vegas Strip, ongoing litigation, labor relations, future capital expenditures, the risks associated with construction projects (such as delays and unexpected costs); with respect to our social and other interactive gaming endeavors, risks related to ultimate profitability, cyber-security, data privacy, intellectual property and legal and regulatory challenges; with respect to our PSG acquisition, risks relating to our ability to successfully compete in the video gaming terminal (“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; and other factors as discussed in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2014, subsequent Quarterly Report on Form 10-Q/A 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.

Table of Contents

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	4

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	4
	Condensed Consolidated Balance Sheets — September 30, 2015 and December 31, 2014	4
	Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2015 and 2014	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended September 30, 2015 and 2014	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) — Nine Months Ended September 30, 2015 and 2014	7
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2015 and 2014	8
	Notes to the Condensed Consolidated Financial Statements	10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48

ITEM 4.	CONTROLS AND PROCEDURES	48

PART II.	OTHER INFORMATION	49

ITEM 1.	LEGAL PROCEEDINGS	49

ITEM 1A.	RISK FACTORS	49

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	50

ITEM 4.	MINE SAFETY DISCLOSURES	50

ITEM 5.	OTHER INFORMATION	50

ITEM 6.	EXHIBITS	51

SIGNATURES		52

EXHIBIT INDEX		53

Table of Contents

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,
	2015			2014
	(unaudited)			(restated)
Assets
Current assets
Cash and cash equivalents	$	223,489		$	208,673
Receivables, net of allowance for doubtful accounts of $2,633 and $2,004 at September 30, 2015 and December 31, 2014, respectively	40,929			41,618
Prepaid expenses	66,150			70,785
Deferred income taxes	30,267			40,343
Other current assets	12,819			11,189
Total current assets	373,654			372,608
Property and equipment, net	3,029,375			2,669,732
Other assets
Investment in and advances to unconsolidated affiliates	171,904			179,551
Goodwill	911,923			874,184
Other intangible assets, net	431,876			419,453
Advances to the Jamul Tribe	143,866			62,048
Other assets	79,408			87,318
Total other assets	1,738,977			1,622,554
Total assets	$	5,142,006		$	4,664,894

Liabilities
Current liabilities
Current portion of financing obligation to GLPI	$	49,352		$	46,884
Current maturities of long-term debt	87,801			30,853
Accounts payable	68,190			43,136
Accrued expenses	87,671			133,092
Accrued interest	8,861			5,163
Accrued salaries and wages	89,355			84,034
Gaming, pari-mutuel, property, and other taxes	68,594			51,972
Insurance financing	2,353			13,680
Other current liabilities	72,677			75,773
Total current liabilities	534,854			484,587

Long-term liabilities
Long-term financing obligation to GLPI, net of current portion	3,526,709			3,564,629
Long-term debt, net of current maturities and debt issuance costs	1,598,813			1,210,577
Deferred income taxes	131,092			78,633
Noncurrent tax liabilities	8,907			7,035
Other noncurrent liabilities	17,833			27,447
Total long-term liabilities	5,283,354			4,888,321

Shareholders’ equity (deficit)
Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued and outstanding at September 30, 2015 and December 31, 2014)	—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 82,682,474 and 81,329,210 shares issued and 80,515,081 and 79,161,817 shares outstanding, at September 30, 2015 and December 31, 2014, respectively)	826			813
Treasury stock, at cost (2,167,393 shares held at September 30, 2015 and December 31, 2014)	(28,414		)	(28,414		)
Additional paid-in capital	980,857			956,146
Retained deficit	(1,625,525		)	(1,635,277		)
Accumulated other comprehensive loss	(3,946		)	(1,282		)
Total shareholders’ equity (deficit)	(676,202		)	(708,014		)
Total liabilities and shareholders’ equity (deficit)	$	5,142,006		$	4,664,894

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
				(restated)						(restated)
Revenues
Gaming	$	651,284		$	573,216		$	1,861,539		$	1,720,057
Food, beverage and other	124,721			107,266			350,905			322,710
Management service fee	2,871			3,240			7,614			8,803
Revenues	778,876			683,722			2,220,058			2,051,570
Less promotional allowances	(39,579		)	(37,782		)	(115,667		)	(112,404		)
Net revenues	739,297			645,940			2,104,391			1,939,166

Operating expenses
Gaming	334,219			288,355			942,730			855,730
Food, beverage and other	89,151			79,040			249,883			236,981
General and administrative	107,614			116,345			342,771			331,655
Depreciation and amortization	66,141			62,021			191,785			202,080
Impairment losses	—			—			—			4,560
Insurance recoveries	—			(5,674		)	—			(5,674		)
Total operating expenses	597,125			540,087			1,727,169			1,625,332
Income from operations	142,172			105,853			377,222			313,834

Other income (expenses)
Interest expense	(111,406		)	(105,933		)	(329,550		)	(315,516		)
Interest income	3,083			1,025			7,396			2,282
Income from unconsolidated affiliates	3,759			2,291			11,895			6,247
Other	2,672			1,583			4,805			1,391
Total other expenses	(101,892		)	(101,034		)	(305,454		)	(305,596		)

Income from operations before income taxes	40,280			4,819			71,768			8,238
Income tax provision	35,380			20,167			62,016			42,279
Net income (loss)	$	4,900		$	(15,348	)	$	9,752		$	(34,041	)

Earnings per common share:
Basic earnings (loss) per common share	$	0.06		$	(0.20	)	$	0.11		$	(0.43	)
Diluted earnings (loss) per common share	$	0.05		$	(0.20	)	$	0.11		$	(0.43	)

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (loss)

(in thousands) (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
				(restated)						(restated)
Net income (loss)	$	4,900		$	(15,348	)	$	9,752		$	(34,041	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment during the period	(1,487		)	(876		)	(2,664		)	(957		)
Other comprehensive loss	(1,487		)	(876		)	(2,664		)	(957		)
Comprehensive income (loss)	$	3,413		$	(16,224	)	$	7,088		$	(34,998	)

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

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

(in thousands, except share data) (unaudited)

	Preferred Stock			Common Stock			Treasury			Additional Paid-In		Retained			Accumulated Other Comprehensive			Total Shareholders’
	Shares	Amount		Shares	Amount		Stock			Capital		Deficit			Loss			Equity (Deficit)
Balance, December 31, 2013, as restated	8,624	$	—	77,788,393	$	799	$	(28,414	)	$	925,335	$	(1,448,955	)	$	383		$	(550,852	)
Share-based compensation arrangements, net of tax benefits of $9,830	—	—		865,138	9		—			24,059		—			—			24,068
Impact of Spin-Off to Gaming and Leisure Properties, Inc	—	—		—	—		—			—		(482		)	—			(482		)
Foreign currency translation adjustment	—	—		—	—		—			—		—			(957		)	(957		)
Net loss, as restated	—	—		—	—		—			—		(34,041		)	—			(34,041		)
Balance, September 30, 2014, as restated	8,624	$	—	78,653,531	$	808	$	(28,414	)	$	949,394	$	(1,483,478	)	$	(574	)	$	(562,264	)

Balance, December 31, 2014, as restated	8,624	$	—	79,161,817	$	813	$	(28,414	)	$	956,146	$	(1,635,277	)	$	(1,282	)	$	(708,014	)
Share-based compensation arrangements, net of tax benefits of $10,143	—	—		1,353,264	13		—			24,711		—			—			24,724
Foreign currency translation adjustment	—	—		—	—		—			—		—			(2,664		)	(2,664		)
Net income	—	—		—	—		—			—		9,752			—			9,752
Balance, September 30, 2015	8,624	$	—	80,515,081	$	826	$	(28,414	)	$	980,857	$	(1,625,525	)	$	(3,946	)	$	(676,202	)

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

Nine Months Ended September 30,	2015			2014
				(restated)
Operating activities
Net income (loss)	$	9,752		$	(34,041	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	191,785			202,080
Amortization of items charged to interest expense	4,730			4,532
Accretion of settlement value on other noncurrent liabilities	(5,944		)	—
Loss on sale of fixed assets	801			98
Income from unconsolidated affiliates	(11,895		)	(6,247		)
Distributions of earnings from unconsolidated affiliates	22,050			17,500
Deferred income taxes	50,460			(870		)
Charge for stock-based compensation	6,446			8,012
Impairment losses and writedowns	—			7,860
(Increase) decrease, net of businesses acquired
Accounts receivable	5,015			9,469
Prepaid expenses and other current assets	6,288			(4,457		)
Other assets	8,869			4,315
Increase (decrease), net of businesses acquired
Accounts payable	4,763			4,019
Accrued expenses	1,248			(14,447		)
Accrued interest	3,680			2,886
Accrued salaries and wages	(862		)	(3,059		)
Gaming, pari-mutuel, property and other taxes	15,041			13,298
Income taxes	1,666			23,717
Other current and noncurrent liabilities	(11,756		)	5,065
Other noncurrent tax liabilities	4,008			(3,147		)
Net cash provided by operating activities	306,145			236,583
Investing activities
Capital project expenditures, net of reimbursements	(125,169		)	(95,568		)
Capital maintenance expenditures	(41,866		)	(65,699		)
Advances to the Jamul Tribe	(64,228		)	(30,499		)
Proceeds from sale of property and equipment	389			1,172
Investment in joint ventures	(2,799		)	(1,000		)
Decrease in cash in escrow	—			18,000
Acquisition of businesses and gaming and other licenses, net of cash acquired	(450,170		)	(118,678		)
Net cash used in investing activities	(683,843		)	(292,272		)
Financing activities
Proceeds from exercise of options	8,069			6,223
Proceeds from issuance of long-term debt, net of issuance costs	517,290			64,935
Principal payments on financing obligation with GLPI	(35,452		)	(31,899		)
Principal payments on long-term debt	(92,885		)	(40,703		)
Principal payments on long-term obligations	(3,307		)	(15,000		)
Proceeds from insurance financing	885			14,816
Payments on insurance financing	(12,212		)	(14,801		)
Tax benefit from stock options exercised	10,126			9,830
Net cash provided by (used in) financing activities	392,514			(6,599		)
Net increase (decrease) in cash and cash equivalents	14,816			(62,288		)
Cash and cash equivalents at beginning of year	208,673			292,995
Cash and cash equivalents at end of period	$	223,489		$	230,707

Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	321,276		$	308,886
Income taxes paid	$	879		$	11,247

See accompanying notes to the condensed consolidated financial statements.

Non-cash transactions: In January 2015, a repayment obligation for a hotel and event center near Hollywood Casino Lawrenceburg was assumed by a subsidiary of the Company, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment. This non-cash transaction increased property and equipment, net and total debt by $15.3 million. See Note 7 for further detail.

Table of Contents

For the nine months ending September 30, 2014, the Company recognized an increase to the financing obligation and real property assets of $118.9 million related to the remaining real estate construction costs that were funded by Gaming and Leisure Properties, Inc. for the Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course facilities which opened in the third quarter of 2014. In addition during this same period, the Company recognized an increase to other intangible assets and debt of $150.0 million related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course (see Note 7). Lastly, the Company increased other intangible assets and accrued expenses for $50.0 million related to the unpaid gaming license fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course. In conjunction with the purchase of Plainridge Racecourse in April 2014, the Company increased its acquired assets and other noncurrent liabilities by $18.5 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.

Table of Contents

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”) 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. As of September 30, 2015, the Company owned, managed, or had ownership interests in twenty-seven facilities in the following seventeen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Maryland, 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 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 period amounts have been reclassified to conform to the current year presentation.

Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K/A for the year ended December 31, 2014 should be read in conjunction with these condensed consolidated financial statements. As described in Note 2, the Company restated its financial statements for the years ended December 31, 2014 and 2013. The 10-K/A was filed concurrently with this Form 10-Q. The December 31, 2014 financial information has been derived from the Company’s audited consolidated financial statements.

2. Restatement

The restatement of the Company’s financial statements primarily results from the Company’s accounting for its November 1, 2013 distribution of real estate assets to Gaming and Leisure Properties, Inc. (GLPI) under the Master Lease Agreement, was previously recognized as a sale-leaseback. Upon further consideration, the Company did not meet all of the requirements for sale-leaseback accounting under Accounting Standards Codification (“ASC”) 840, “Leases”, and therefore the transaction should be accounted for as a financing obligation rather than a distribution of assets followed by an operating lease. Specifically, the lease contains provisions that would indicate that the Company has prohibited forms of continuing involvement in the leased property such that sale-leaseback accounting would not be permitted. As a result, the Company is precluded from derecognizing the real estate assets and is instead required to recognize a financing obligation for the minimum lease payments due under the Master Lease. The restated condensed consolidated balance sheets therefore include an adjustment to property and equipment, net for the carrying value of the real property of $2.04 billion at December 31, 2014, and additional liabilities of $3.61 billion at December 31, 2014, representing the present value of the future minimum lease payments due to GLPI under the Master Lease and the funded construction of certain leased real estate assets in development at the date of the Spin-Off. Consequently, the restated condensed consolidated statements of operations no longer report rent expense for the obligations under the Master Lease, but rather include interest expense associated with the financing obligation and depreciation expense related to the real estate assets. The lease payment amounts previously recorded as rent expense were $104.6 million and $313.5 million for the three and nine months ended September 30, 2014, respectively. The increases to interest expense and depreciation expense as a result of the correction of the accounting for the Master Lease are $94.5 million and $22.2 million for the three months ended September 30, 2014, respectively, and $281.6 million and $66.7 million for the nine months ended September 30, 2014, respectively.

Table of Contents

This change in accounting treatment also resulted in adjustments to the carrying amounts of the Company’s reporting units as well as differences in the allocation of the GLPI rental obligation to the impacted reporting units, which changed each reporting unit’s fair value. The resultant changes to impairment charges are described below.

As part of its restatement, the Company also identified certain other errors affecting the condensed consolidated financial statements as of December 31, 2014 and for the three and nine months ended September 30, 2014:

· The Company had originally recorded goodwill and other intangible asset impairment charges of $312.5 million and $745.9 million at October 1, 2013, the date of its annual impairment test, and November 1, 2013 (the Spin-Off date), respectively, and impairment charges of $316.5 million at October 1, 2014. The Company corrected certain errors in its goodwill and indefinite-lived gaming license intangible asset impairment analyses which incorporated the adjustments to the carrying amounts and estimated fair values of the Company’s reporting units mentioned above as well as the impact of its deferred tax valuation allowance. This resulted in a decrease to the Company’s previously recognized impairment charges of $161.2 million and $334.1 million for the years ended December 31, 2014 and 2013, respectively, which along with the relocation fee accounting error described below, resulted in a significant increase to the Company’s goodwill and other intangible assets at December 31, 2014.

· During 2014, the Company incurred an aggregate liability of $150 million to State of Ohio in return for the right to locate its racing operations from Toledo, Ohio to Dayton, Ohio (Hollywood Gaming at Dayton Raceway) and from Grove City, Ohio to Austintown, Ohio (Hollywood Gaming at Mahoning Valley). The Company originally accounted for these amounts as a cost of the real estate was therefore including them in property and equipment, net and was amortizing them over the fifteen year base lease term of the Master Lease. The Company has now concluded that these costs should have been recognized as an additional cost incurred for obtaining the gaming licenses for these two properties and capitalized as other intangible assets that are not amortized, but are considered for impairment on an annual basis or more frequently if impairment indicators exist. This resulted in a decrease to depreciation expense of $0.9 million for the three and nine months ended September 30, 2014.

· The Company corrected the classification of a corporate airplane lease that had previously been accounted for as an operating lease but upon review should have been accounted for as a capital lease. This resulted in an increase to net property and equipment of $7.0 million at December 31, 2014, as well as an increase to long term debt of $24.9 million at December 31, 2014. It also resulted in an increase to interest expense, with an offsetting decrease to general and administrative costs of $0.2 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, as well as an increase to depreciation expense of $0.5 million and $1.5 million for the three and nine months ended September 30, 2014, respectively.

· The Company reclassified a contingent earn-out liability from long-term debt to other liabilities which totaled $19.2 million at December 31, 2014.

· The Company concluded that as a result of the failed spin-off-leaseback accounting treatment which resulted in a significant increase to our deferred tax assets, a valuation allowance should be recorded on the Company’s deferred tax assets given the significant negative evidence associated with being in a three year cumulative pre-tax loss position and the insufficient objectively verifiable positive evidence to support the realization of the Company’s deferred tax assets. This resulted in an increase to the Company’s income tax provision of $17.8 million and $34.5 million for the three and nine months ended September 30, 2014, respectively.

· The Company concluded that the Carlino exchange transaction should have been accounted for as a treasury stock transaction that is measured using the fair value of the exchanged instruments. See Note 3 in the Company’s Form 10-K/A for additional information.

· The Company corrected the income tax provision and related income tax balances on the condensed consolidated balance sheet and condensed consolidated statements of cash flows for each of the previously identified errors.

· The Company corrected certain other errors that were not individually material to the condensed consolidated financial statements.

The effect of the restatement on previously issued interim financial information as of and for the three and nine months ended September 30, 2014 is set forth in this footnote.

Table of Contents

The condensed consolidated financial statements for 2014 included in this Form 10-Q have been restated to reflect the adjustments described above. The following is a summary of the effect of the restatement on (i) the Company’s condensed consolidated balance sheets at December 31, 2014 (ii) the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and (iii) the Company’s condensed consolidated statements of cash flows for the nine months ended September 30, 2014. The Company did not present a summary of the effect of the restatement on the condensed consolidated statement of changes in shareholders’ equity (deficit) for any of the above referenced periods because the impact to retained earnings on the condensed consolidated statement of changes in shareholders’ equity (deficit) is reflected below in the balance sheet summary. The Company did not present a summary of the effect of the restatement on the condensed consolidated statement of comprehensive income (loss) for any of the above referenced periods because the impact to net income (loss) is reflected below in the restated condensed consolidated statement of operations and the restatement adjustments did not affect any other component of comprehensive income (loss).

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

The following table presents the condensed consolidated balance sheet as previously reported, restatement adjustments and the condensed consolidated balance sheet as restated at December 31, 2014:

	As Previously			Restatement
	Reported			Adjustments			As Restated

Assets
Current assets
Cash and cash equivalents	$	208,673		$	—		$	208,673
Receivables, net of allowance for doubtful accounts of $2,004	41,618			—			41,618
Prepaid expenses	68,947			1,838			70,785
Deferred income taxes	55,579			(15,236		)	40,343
Other current assets	11,189			—			11,189
Total current assets	386,006			(13,398		)	372,608
Property and equipment, net	769,145			1,900,587			2,669,732

Other assets
Investment in and advances to unconsolidated affiliates	179,551			—			179,551
Goodwill	277,582			596,602			874,184
Other intangible assets, net	370,562			48,891			419,453
Deferred income taxes	79,067			(79,067		)	—
Advances to Jamul Tribe	62,048			—			62,048
Other assets	87,318			—			87,318
Total other assets	1,056,128			566,426			1,622,554
Total assets	$	2,211,279		$	2,453,615		$	4,664,894

Liabilities
Current liabilities
Current portion of financing obligation to GLPI	—			46,884			46,884
Current maturities of long-term debt	30,853			—			30,853
Accounts payable	43,136			—			43,136
Accrued expenses	130,818			2,274			133,092
Accrued interest	5,163			—			5,163
Accrued salaries and wages	84,034			—			84,034
Gaming, pari-mutuel, property, and other taxes	52,132			(160		)	51,972
Insurance financing	13,680			—			13,680
Other current liabilities	75,703			70			75,773
Total current liabilities	435,519			49,068			484,587

Long-term liabilities
Long-term financing obligation to GLPI, net of current portion	—			3,564,629			3,564,629
Long-term debt, net of current maturities and debt issuance costs	1,204,828			5,749			1,210,577
Deferred income taxes	—			78,633			78,633
Noncurrent tax liabilities	8,188			(1,153		)	7,035
Other noncurrent liabilities	8,258			19,189			27,447
Total long-term liabilities	1,221,274			3,667,047			4,888,321

Shareholders’ equity (deficit)
Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued and outstanding at December 31, 2014)	—			—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 81,329,210 shares issued and 79,161,817 shares outstanding, at December 31, 2014)	786			27			813
Treasury stock, at cost (2,167,393 shares held at December 31, 2014)	—			(28,414		)	(28,414		)
Additional paid-in capital	918,370			37,776			956,146
Retained deficit	(363,388		)	(1,271,889		)	(1,635,277		)
Accumulated other comprehensive (loss) income	(1,282		)	—			(1,282		)
Total shareholders’ equity (deficit)	554,486			(1,262,500		)	(708,014		)
Total liabilities and shareholders’ equity (deficit)	$	2,211,279		$	2,453,615		$	4,664,894

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

The following table presents the condensed consolidated statement of operations as previously reported, restatement adjustments and the condensed consolidated statement of operations as restated for the three months ended September 30, 2014:

	As Previously			Restatement
	Reported			Adjustments			As Restated

Revenues
Gaming	$	573,216		$	—		$	573,216
Food, beverage and other	107,266			—			107,266
Management service fee	3,240			—			3,240
Revenues	683,722			—			683,722
Less promotional allowances	(37,782		)	—			(37,782		)
Net revenues	645,940			—			645,940

Operating expenses
Gaming	288,355			—			288,355
Food, beverage and other	79,040			—			79,040
General and administrative	116,510			(165		)	116,345
Rental expense related to Master Lease	104,625			(104,625		)	—
Depreciation and amortization	40,253			21,768			62,021
Insurance (recoveries) deductible charges	(5,674		)	—			(5,674		)
Total operating expenses	623,109			(83,022		)	540,087
Income from operations	22,831			83,022			105,853

Other income (expenses)
Interest expense	(11,189		)	(94,744		)	(105,933		)
Interest income	1,025			—			1,025
Income from unconsolidated affiliates	2,291			—			2,291
Other	1,583			—			1,583
Total other expenses	(6,290		)	(94,744		)	(101,034		)

Income from operations before income taxes	16,541			(11,722		)	4,819
Income tax provision	8,042			12,125			20,167
Net income (loss)	$	8,499		$	(23,847	)	$	(15,348	)

Earnings (loss) per common share:
Basic earnings (loss) per common share	$	0.10		$	(0.30	)	$	(0.20	)
Diluted earnings (loss) per common share	$	0.10		$	(0.30	)	$	(0.20	)

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

	As Previously			Restatement
	Reported			Adjustments			As Restated

Revenues
Gaming	$	1,720,057		$	—		$	1,720,057
Food, beverage and other	322,710			—			322,710
Management service fee	8,803			—			8,803
Revenues	2,051,570			—			2,051,570
Less promotional allowances	(112,404		)	—			(112,404		)
Net revenues	1,939,166			—			1,939,166

Operating expenses
Gaming	858,539			(2,809		)	855,730
Food, beverage and other	236,981			—			236,981
General and administrative	332,147			(492		)	331,655
Rental expense related to Master Lease	313,547			(313,547		)	—
Depreciation and amortization	134,802			67,278			202,080
Impairment losses	4,560			—			4,560
Insurance (recoveries) deductible charges	(5,674		)	—			(5,674		)
Total operating expenses	1,874,902			(249,570		)	1,625,332
Income from operations	64,264			249,570			313,834

Other income (expenses)
Interest expense	(33,376		)	(282,140		)	(315,516		)
Interest income	2,282			—			2,282
Income from unconsolidated affiliates	6,247			—			6,247
Other	1,391			—			1,391
Total other expenses	(23,456		)	(282,140		)	(305,596		)

Income from operations before income taxes	40,808			(32,570		)	8,238
Income tax provision	23,596			18,683			42,279
Net income (loss)	$	17,212		$	(51,253	)	$	(34,041	)

Earnings (loss) per common share:
Basic earnings (loss) per common share	$	0.20		$	(0.63	)	$	(0.43	)
Diluted earnings (loss) per common share	$	0.19		$	(0.62	)	$	(0.43	)

Table of Contents

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands)

The following table presents the condensed consolidated statement of cash flow as previously reported, restatement adjustments and the condensed consolidated statement of cash flows as restated for the nine months ended September 30, 2014:

	As Previously			Restatement
	Reported			Adjustments			As Restated

Operating activities
Net income (loss)	$	17,212		$	(51,253	)	$	(34,041	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	134,802			67,278			202,080
Amortization of items charged to interest expense	4,532			—			4,532
Accretion of settlement value on other noncurrent liabilities	456			(456		)	—
Gain on sale of fixed assets	98			—			98
Income from unconsolidated affiliates	(6,247		)	—			(6,247		)
Distributions of earnings from unconsolidated affiliates	17,500			—			17,500
Deferred income taxes	(24,972		)	24,102			(870		)
Charge for stock-based compensation	8,012			—			8,012
Impairment losses and write downs	7,860			—			7,860
Decrease (increase), net of businesses acquired
Accounts receivable	9,469			—			9,469
Prepaid expenses and other current assets	(4,467		)	10			(4,457		)
Other assets	4,325			(10		)	4,315
Increase (decrease), net of businesses acquired
Accounts payable	4,019			—			4,019
Accrued expenses	(11,427		)	(3,020		)	(14,447		)
Accrued interest	2,430			456			2,886
Accrued salaries and wages	(2,993		)	(66		)	(3,059		)
Gaming, pari-mutuel, property and other taxes	13,237			61			13,298
Income taxes	25,205			(1,488		)	23,717
Other current and noncurrent liabilities	4,856			209			5,065
Other noncurrent tax liabilities	777			(3,924		)	(3,147		)
Net cash provided by operating activities	204,684			31,899			236,583
Investing activities
Capital project expenditures, net of reimbursements	(95,568		)	—			(95,568		)
Capital maintenance expenditures	(65,699		)	—			(65,699		)
Advances to Jamul Tribe	(30,499		)	—			(30,499		)
Proceeds from sale of property and equipment	1,172			—			1,172
Investment in joint ventures	(1,000		)	—			(1,000		)
Decrease in cash in escrow	18,000			—			18,000
Acquisitions of businesses and gaming and other licenses, net of cash acquired	(118,678		)	—			(118,678		)
Net cash used in investing activities	(292,272		)	—			(292,272		)
Financing activities
Proceeds from exercise of options	6,223			—			6,223
Proceeds from issuance of long-term debt, net of issuance costs	64,935			—			64,935
Principal payments on financing obligation with GLPI	—			(31,899		)	(31,899		)
Principal payments on long-term debt	(40,703		)	—			(40,703		)
Principal payments on long-term obligations	(15,000		)	—			(15,000		)
Proceeds from insurance financing	14,816			—			14,816
Payments on insurance financing	(14,801		)	—			(14,801		)
Tax benefit from stock options exercised	9,830			—			9,830
Net cash provided (used) by financing activities	25,300			(31,899		)	(6,599		)
Net (decrease) in cash and cash equivalents	(62,288		)	—			(62,288		)
Cash and cash equivalents at beginning of year	292,995						292,995
Cash and cash equivalents at end of year	$	230,707		$	—		$	230,707

Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	25,946		$	282,940		$	308,886
Income taxes paid	$	11,247		$	—		$	11,247

Table of Contents

3. 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 to 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.

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 (“FASB”) Accounting Standards Codification (“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, 2015 and 2014 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Rooms	$	8,649	$	8,644	$	25,888	$	25,140
Food and beverage	28,245		26,518		82,896		79,907
Other	2,685		2,620		6,883		7,357
Total promotional allowances	$	39,579	$	37,782	$	115,667	$	112,404

The estimated cost of providing such complimentary services for the three and nine months ended September 30, 2015 and 2014 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Rooms	$	1,085	$	930	$	2,999	$	2,690
Food and beverage	11,280		10,945		32,761		33,161
Other	881		900		2,605		2,661
Total cost of complimentary services	$	13,246	$	12,775	$	38,365	$	38,512

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. Finally, the Company recognizes purse expense

Table of Contents

based on the statutorily required percentage of revenue that is required to be paid out in the form of purses to the winning owners of horse races run at the Company’s racetracks in the period in which wagering occurs. For the three and nine months ended September 30, 2015, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $259.4 million and $730.9 million, as compared to $221.5 million and $661.5 million for the three and nine months ended September 30, 2014, respectively.

Failed Spin-Off-Leaseback Financing Obligation

The Company’s spin-off of real property assets and corresponding Master Lease Agreement with GLPI on November 1, 2013 did not meet all of the requirements for sale-leaseback accounting treatment under Accounting Standards Codification (ASC) 840 “Leases” and therefore is accounted for as a financing obligation rather than a distribution of assets followed by an operating lease. Specifically, the Master Lease contains provisions that would indicate the Company has prohibited forms of continuing involvement in the leased assets which are not a normal leaseback. As a result of the failed spin-off-leaseback accounting, the Company calculated a financing obligation at the inception of the Master Lease based on the future minimum lease payments discounted at 9.70%. The discount rate represents the estimated incremental borrowing rate over the lease term of 35 years, which included renewal options that were reasonably assured of being exercised given the high percentage of the Company’s earnings that are derived from the Master Lease properties operations to the Company and the lack of alternative economically feasible leasing options for such real estate. The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the financing obligation. Contingent rentals are recorded as additional interest expense. The real property assets in the transaction remain on the consolidated balance sheets and continue to be depreciated over the remaining useful lives.

Payments Related to the Master Lease

As of September 30, 2015, the Company financed with Gaming and Leisure Properties, Inc. (“GLPI”) real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations.

The rent structure under the Master Lease, which became effective November 1, 2013, includes a fixed component, a portion of which is subject to an annual escalator of up to 2% if certain rent coverage ratio thresholds are met, and a variable component that is based on the performance of the facilities, which is prospectively adjusted, subject to a floor of zero (i) every five years by an amount equal to 4% of the average change to net revenues of all facilities under the Master Lease (other than Hollywood Casino Columbus and Hollywood Casino Toledo) during the preceding five years, and (ii) monthly by an amount equal to 20% of the change in net revenues of Hollywood Casino Columbus and Hollywood Casino Toledo during the preceding month. In addition, with the openings of Hollywood Gaming at Mahoning Valley Race Course and Hollywood Gaming at Dayton Raceway in the third quarter of 2014, these properties began paying rent subject to the terms of the Master Lease, for which the annual rental obligation is calculated as 10% of the real estate construction costs paid for by GLPI related to these facilities.

The Master Lease is commonly known as a triple-net lease. Accordingly, in addition to rent, the Company is required to pay the following, among other things: (1) all facility maintenance; (2) all insurance required in connection with the leased properties and the business conducted on the leased properties; (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. At the Company’s option, the Master Lease may be extended for up to four five-year renewal terms beyond the initial fifteen-year term, on the same terms and conditions.

Total payments under the Master Lease for the three and nine months ended September 30, 2015 was $108.9 million and $327.3 million, as compared to $104.6 million and $313.5 million for the three and nine months ended September 30, 2014, respectively.

Long-term asset related to the Jamul Tribe

On April 5, 2013, the Company announced that, subject to final National Indian Gaming Commission approval, it and the Jamul Indian Village of California (the “Jamul Tribe”) had entered into definitive agreements to jointly develop a Hollywood Casino branded gaming facility on the Jamul Tribe’s trust land in San Diego County, California. The definitive agreements were entered into to: (i) secure the development, management, and branding services of the Company to assist the Jamul Tribe during the pre-development and entitlement phase of the project; (ii) set forth the terms and conditions under which the Company will provide a loan or loans to the Jamul Tribe to fund certain development costs; and (iii) create an exclusive arrangement between the parties.

The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possesses certain inherent powers of self-government. The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”). The Jamul Tribe exercises jurisdiction over the Property

Table of Contents

pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe. The arrangement between the Jamul Tribe and the Company provides the Jamul Tribe with the expertise, knowledge and capacity of a proven developer and operator of gaming facilities and provides the Company with the exclusive right to administer and oversee planning, designing, development, construction management, and coordination during the development and construction of the project as well as the management of a gaming facility on the Property.

The proposed $390 million development project will include a three-story gaming and entertainment facility of approximately 200,000 square feet featuring over 1,700 slot machines, 43 live table games, including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces. In mid-January 2014, the Company announced the commencement of construction activities at the site and it is anticipated that the facility will open in mid-2016. The Company may, under certain circumstances, provide backstop financing to the Jamul Tribe in connection with the project and, upon opening, will manage and provide branding for the casino. The Company has a conditional loan commitment to the Jamul Tribe (that can be terminated under certain circumstances) for up to $400 million and anticipates it will fund approximately $390 million related to this development.

The Company is accounting for the development agreement and related loan commitment letter with the Jamul Tribe as a loan (note receivable) with accrued interest in accordance with ASC 310 “Receivables.” The loan represents advances made by the Company to the Jamul Tribe for the development and construction of a gaming facility for the Jamul Tribe on reservation land. As such, the Jamul Tribe will own the casino and its related assets and liabilities. San Diego Gaming Ventures, LLC (a wholly owned subsidiary of the Company) is a separate legal entity established to account for the loan and, upon completion of the project and subsequent commencement of gaming operations on the Property, will be the Penn entity which receives management and licensing fees from the Jamul Tribe. The Company has a note receivable with the Jamul Tribe for $143.9 million and $62.0 million, which includes accrued interest of $10.1 million and $3.3 million, at September 30, 2015 and December 31, 2014, respectively. Collectability of the note receivable will be derived from the revenues of the casino operations once the project is completed. Based on the Company’s current progress with this project, the Company believes collectability of the note is highly certain. However, in the event that the Company’s internal projections related to the profitability of this project and/or the timing of the opening are inaccurate, the Company may be required to record a reserve related to the collectability of this note receivable.

The Company considered whether the arrangement with the Jamul Tribe represents a variable interest that should be accounted for pursuant to the VIE Subsections of ASC 810 “Consolidation” (“ASC 810”). The Company noted that the scope and scope exceptions of ASC 810-10-15-12(e) states that a reporting entity shall not consolidate a government organization or financing entity established by a government organization (other than certain financing entities established to circumvent the provisions of the VIE Subsections of ASC 810). Based on the status of the Jamul Tribe as a government organization, the Company believes its arrangement with the Jamul Tribe is not within the scope defined by ASC 810.

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 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.

At September 30, 2015 and 2014, the Company had outstanding 8,624 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 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 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.

Since the Company’s preferred shareholders are not obligated to fund the losses of the Company nor is the contractual principal of the Series C Preferred Stock reduced as a result of losses incurred by the Company, no allocation of the Company’s undistributed losses resulting from the net loss for the three and nine months ended September 30, 2014 is required. As such, since the Company reported a net loss for the three and nine months ended September 30, 2014, it was required by ASC 260 to use basic weighted-average common shares outstanding, rather than diluted weighted-average common shares outstanding, when calculating diluted EPS.

Table of Contents

The following table sets forth the allocation of net income for the three and nine months ended September 30, 2015 under the two-class method:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2015		2015
	(in thousands)

Net income	$	4,900	$	9,752
Net income applicable to preferred stock	476		951
Net income applicable to common stock	$	4,424	$	8,801

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, 2015:

	Three Months Ended September 30,	Nine Months Ended September 30,
	2015	2015
	(in thousands)

Determination of shares:
Weighted-average common shares outstanding	80,243	79,803
Assumed conversion of dilutive employee stock-based awards	2,355	2,307
Assumed conversion of restricted stock	58	60
Diluted weighted-average common shares outstanding before participating security	82,656	82,170
Assumed conversion of preferred stock	8,624	8,624
Diluted weighted-average common shares outstanding	91,280	90,794

Options to purchase 1,621,219 shares and 7,195,937 shares were outstanding during the nine months ended September 30, 2015 and 2014, respectively, but were not included in the computation of diluted EPS because they were antidilutive.

The following tables present the calculation of basic and diluted EPS for the Company’s common stock for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per share data):

	Three Months Ended September		Nine Months Ended September
	2015		2015

Calculation of basic EPS:
Net income applicable to common stock	$	4,424	$	8,801
Weighted-average common shares outstanding	80,243		79,803
Basic EPS	$	0.06	$	0.11

Calculation of diluted EPS using two-class method:
Net income applicable to common stock	$	4,424	$	8,801
Diluted weighted-average common shares outstanding before participating security	82,656		82,170
Diluted EPS	$	0.05	$	0.11

Table of Contents

	Three months ended September 30,			Nine months ended September 30,
	2014			2014
	(As Restated)			(As Restated)

Calculation of basic and diluted EPS:
Net loss	$	(15,348	)	$	(34,041	)
Weighted-average common shares outstanding	78,510			78,297
Basic and Diluted EPS	$	(0.20	)	$	(0.43	)

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 5.45 years, in order to match the expected life of the options at the grant date. Historically, at the grant date, there has been no expected dividend yield assumption since the Company has not paid any cash dividends on its common stock since its initial public offering in 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. The Company granted 1,696,653 stock options during the nine months ended September 30, 2015.

Stock-based compensation expense for the three and nine months ended September 30, 2015 was $2.0 million and $6.4 million, as compared to $2.9 million and $8.0 million for the three and nine months ended September 30, 2014, respectively, and is included within the condensed consolidated statements of income under general and administrative expense.

The Company’s cash-settled phantom stock unit awards (“PSUs”), which vest over a period of three to five years, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date. The PSUs are accounted for as liability awards and are re-measured 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.” The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its PSUs of $6.0 million and $8.2 million at September 30, 2015 and December 31, 2014, respectively. For PSUs held by Penn employees, there was $20.5 million of total unrecognized compensation cost at September 30, 2015 that will be recognized over the grants remaining weighted average vesting period of 1.9 years. For the three and nine months ended September 30, 2015, the Company recognized $1.9 million and $11.4 million of compensation expense associated with these awards, as compared to $2.1 million and $4.7 million for the three and nine months ended September 30, 2014. The increase was primarily due to the stock price increase for both Penn and GLPI awards held by Penn employees in the current year compared with stock price declines in the prior year. Amounts paid by the Company for the three and nine months ended September 30, 2015 on these cash-settled awards totaled $7.6 million and $12.9 million, as compared $6.0 million for the nine months ended September 30, 2014, respectively. The increase was primarily due to one-time Transition Award Program awards granted on July 23, 2014, related to the Spin-Off (see Note 3 in the Company’s Form 10-K/A), of $5.7 million.

For the Company’s stock appreciation rights (“SARs”), the fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed below. The Company’s SARs, which vest over a period of four years, are accounted for as liability awards since they will be settled in cash. The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its SARs of $7.7 million and $6.3 million at September 30, 2015 and December 31, 2014, respectively. For SARs held by Penn employees, there was $6.6 million of total unrecognized compensation cost at September 30, 2015 that will be recognized over the awards remaining weighted average vesting period of 2.73 years. For the three and nine months ended September 30, 2015, the Company recognized ($3.0) million and $4.1 million of compensation expense associated with these awards, as compared to $0.1 million and $0.2 million for the three and nine months ended September 30, 2014, respectively. The decrease for the three months ending September 30, 2015 was primarily due to the stock price declines for both Penn and GLPI awards held by Penn employees. The increase for the nine months ended September 30, 2015 was primarily due to the stock price increase for both Penn and GLPI awards held by Penn employees in the current year compared with stock price declines in the prior year. Amounts paid by the Company for the three and nine months ended September 30, 2015 on these cash-settled awards totaled $0.3 million and $2.6 million, as compared to $0.4 million and $1.6 million for the three and nine months ended September 30, 2014, respectively.

Table of Contents

The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at September 30, 2015 and 2014:

	2015		2014

Risk-free interest rate	1.55	%	1.68	%
Expected volatility	31.86	%	44.80	%
Dividend yield	—		—
Weighted-average expected life (years)	5.45		5.45

Segment Information

The Company’s Chief Executive Officer and President, who is the Company’s Chief Operating Decision Maker, as that term is defined in ASC 280, “Segment Reporting” (“ASC 280”), measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations. The Company’s reportable segments are: (i) East/Midwest, (ii) West, and (iii) Southern Plains.

The East/Midwest reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Lawrenceburg, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014, and Plainridge Park Casino, which opened on June 24, 2015. It also includes the Company’s Casino Rama management service contract.

The West reportable segment consists of the following properties: Zia Park Casino, the M Resort, and Tropicana Las Vegas, which was acquired on August 25, 2015, as well as the Hollywood Casino Jamul — San Diego project with the Jamul Indian Village, which the Company anticipates completing in mid-2016.

The Southern Plains reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, Hollywood Casino St. Louis, and Prairie State Gaming, which was acquired on September 1, 2015, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway. On July 30, 2014, the Company closed Argosy Casino Sioux City.

The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway, as well as the Company’s 50% joint venture with the Cordish Companies in New York (which is in the process of being dissolved). If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280 and Penn Interactive Ventures, LLC, the Company’s wholly-owned subsidiary which represents its social online gaming initiatives, which would meet the definition of an operating segment under ASC 280, however is immaterial to the Company’s operations.

See Note 10 — “Segment Information” for further information with respect to the Company’s segments.

Other Comprehensive Income

The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income,” which establishes standards for the reporting and presentation of comprehensive income in the consolidated financial statements. The Company presents comprehensive income in two separate but consecutive statements. For the three and nine months ended September 30, 2015 and 2014, the only component of accumulated other comprehensive income was foreign currency translation adjustments.

4. New Accounting Pronouncements

In February 2016, the FASB issued its new lease accounting guidance. Under the new guidance, ASU 2016-02, Leases, lessor accounting is largely unchanged. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Under the new guidance, lessees will be required to recognize a lease liability, which is a lessor’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control use of, a specified asset for the lease term for all leases (with the exception of short-term leases) at the adoption date. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, ending after December 15, 2018. Early adoption is permitted for any interim or annual

Table of Contents

financial statements net yet issued. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently assessing the impact the new lease guidance will have on the consolidated financial statements.

In November 2015, the FASB issued guidance that requires entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet. The amended guidance simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. For public entities, the amendments are effective after December 15, 2016, and interim periods within those years with early adoption permitted for any interim or annual financial statements not yet issued. Entities are permitted to apply the amendment either prospectively or retrospectively. The Company plans to early adopt FASB accounting standard ASU 2015-17 on a retrospective basis as of December 31, 2015 in order to simplify the presentation of deferred taxes.

In April 2015, the FASB issued revised guidance to simplify the presentation of debt issuance costs in the balance sheet. The revised guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the existing presentation of debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this revised guidance, and therefore there is no impact to the statement of income. The revised guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this revised guidance is permitted for financial statements that have not been previously issued. An entity should apply the revised guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the revised guidance. The Company has elected to early adopt the revised guidance and as such debt issuance costs are now presented as a direct reduction of long-term debt on the Company’s condensed consolidated balance sheets. See Note 7 for further information regarding debt issuance costs.

In February 2015, the FASB issued new consolidation guidance to modify the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The main provisions of the new guidance include modifying the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, and the effect of fee arrangements and related parties on the primary beneficiary determination, as well as provides a scope exception for certain investment funds. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. A reporting entity may apply the new guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the new guidance retrospectively. Management is in the process of assessing the impact of the new guidance on existing consolidation conclusions and equity method investments, but does not anticipate any change.

In May 2014, the FASB issued new revenue recognition guidance, which will supersede nearly all existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. This new guidance was originally to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is prohibited. In April 2015, the FASB issued a one-year deferral of the effective date of this new guidance resulting in it now being effective for the Company beginning in fiscal year 2018. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the new revenue recognition guidance will have on the consolidated financial statements.

5. Acquisitions

Tropicana Las Vegas Hotel and Casino Acquisition

On August 25, 2015, the Company acquired 100% of Tropicana Las Vegas Hotel and Casino in Las Vegas, Nevada from Trilliant Gaming Nevada, Inc. for a purchase price of $357.7 million. The purchase price for this cash transaction was funded by revolving commitments under the Company’s existing senior secured credit facility and approximately $280 million of incremental commitments under an amended senior secured credit facility. The preliminary purchase price allocation resulted in an increase to property and equipment, net, current assets, goodwill, other assets, current liabilities and other liabilities, of $365.5 million, $16.0 million, $14.8 million, $4.6 million, $25.8 million, and $17.4 million, respectively based on their estimated fair values at August 25,

Table of Contents

2015. The results of the Tropicana Las Vegas facility have been included in the Company’s consolidated financial statements since the acquisition date.

The Tropicana Las Vegas facility is situated on 35 acres of land located on the Las Vegas Strip with 1,470 remodeled guest rooms and suites, a 50,000 square foot casino gaming floor featuring 775 slot and video poker machines and 36 table games including blackjack, mini-baccarat, craps and roulette, three full-service restaurants, a 1,200 seat performance theater, a 300 seat comedy club, a nightclub, beach club and 2,095 parking spaces. We believe this acquisition fulfills our strategic objectives of obtaining a presence on the Las Vegas Strip.

Prairie State Gaming Acquisition

On September 1, 2015, the Company acquired 100% of Prairie State Gaming (“PSG”) from The Robert H. Miller Trust and Illinois Funding, LLC in an all cash transaction. The transaction was funded by revolving commitments under the Company’s amended senior secured credit facility. The results of Prairie State Gaming have been included in the Company’s consolidated financial statements since the acquisition date.

PSG is one of the largest slot-route operators in Illinois with operations including more than 1,100 video gaming terminals across a network of 270 bar and retail gaming establishments throughout Illinois. We intend to leverage our gaming experience, relationships and purchasing power to improve its PSG’s performance and expand its network.

Table of Contents

6. Property and Equipment

Property and equipment, net, consists of the following:

	September 30,			December 31,
	2015			2014
	(in thousands)

Property and equipment - non-leased
Land and improvements	$	297,580		$	42,350
Building and improvements	398,207			173,043
Furniture, fixtures, and equipment	1,308,349			1,213,143
Leasehold improvements	126,442			120,984
Construction in progress	11,699			69,367
	2,142,277			1,618,887
Less accumulated depreciation	(1,082,611		)	(988,490		)
	1,059,666			630,397

Property and equipment - leased
Land and improvements	382,536			382,702
Building and improvements	2,219,018			2,219,018
	2,601,554			2,601,720
Less accumulated depreciation	(631,845		)	(562,385		)
	1,969,709			2,039,335
Property and equipment, net	$	3,029,375		$	2,669,732

Property and equipment, net increased by $359.6 million for the nine months ended September 30, 2015 primarily due to the acquisitions of Tropicana Las Vegas Hotel and Casino and Prairie State Gaming on August 25, 2015 and September 1, 2015, respectively and construction costs for the development of Plainridge Park Casino as well as normal capital maintenance expenditures, all of which were partially offset by depreciation expense for the nine months ended September 30, 2015.

Depreciation expense totaled $66.0 million and $191.7 million for the three and nine months ended September 30, 2015, of which $23.1 million and $69.5 million related to assets under the Master Lease, as compared to $61.4 million and $190.9 million for the three and nine months ended September 30, 2014, of which $22.2 million and $66.7 million related to assets under the Master Lease, respectively. Interest capitalized in connection with major construction projects was $0 and $1.8 million for the three and nine months ended September 30, 2015, as compared to $0.3 million and $0.5 million for the three and nine months ended September 30, 2014, respectively.

Table of Contents

7. Long-term Debt

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

	September 30,			December 31,
	2015			2014
				(Restated)
	(in thousands)

Senior secured credit facility	$	1,236,597		$	807,500
$300 million 5.875% senior unsecured notes due November 1, 2021	300,000			300,000
Other long term obligations	146,992			135,000
Capital leases	28,897			25,137
	1,712,486			1,267,637
Less current maturities of long-term debt	(87,801		)	(30,853		)
Less discount on senior secured credit facility Term Loan B	(928		)	(1,056		)
Less debt issuance costs, net of accumulated amortization of $11.4 million and $6.8 million, respectively	(24,944		)	(25,151		)
	$	1,598,813		$	1,210,577

The following is a schedule of future minimum repayments of long-term debt as of September 30, 2015 (in thousands):

Within one year	$	87,801
1-3 years	163,388
3-5 years	854,794
Over 5 years	606,275
Total minimum payments	$	1,712,258

Senior Secured Credit Facility

On April 28, 2015, the Company entered into an agreement to amend its senior secured credit facility. In August 2015, the amendment to the senior secured credit facility went into effect increasing the capacity under an existing five year revolver from $500 million to $633.2 million and increased the existing five year $500 million Term Loan A facility by $146.7 million. The seven year $250 million Term Loan B facility remained unchanged. At September 30, 2015, the Company’s senior secured credit facility had a gross outstanding balance of $1,236.6 million, consisting of a $601.0 million Term Loan A facility, a $245.6 million Term Loan B facility, and $390.0 million outstanding on the revolving credit facility. Additionally, at September 30, 2015, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $23.2 million, resulting in $220.0 million of available borrowing capacity as of September 30, 2015 under the revolving credit facility.

Other Long Term Obligations

Other long term obligations at September 30, 2015 of $147.0 million included $131.7 million related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, and $15.3 million related to the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg; all of which are more fully described below.

Ohio Relocation Fees