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 September 30, 2013

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 November 6, 2013
Common Stock, par value $.01 per share		77,346,817 (includes 291,811 shares of restricted stock)

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This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as “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 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: the separation from the Company of Gaming and Leisure Properties, Inc. (“GLPI”) a newly formed publicly traded entity that intends to qualify as a real estate investment trust, (the “Spin-Off”), including the expected tax treatment of the transaction, the ability of the Company to conduct and expand its business following the Spin-Off, the Company’s ability to pay a significant portion of its cash flows as rent payments to GLPI and the diversion of management’s attention from traditional business concerns; 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, including favorable resolution of any related litigation, including the ongoing appeal by the Ohio Roundtable addressing the legality of video lottery terminals in Ohio and litigation against the Ohio Racing Commission concerning opposition to relocating Penn’s Toledo racetrack to the Dayton area; our ability to secure federal, 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; our ability to reach agreements with the thoroughbred and harness horseman in Ohio in connection with the proposed relocations and to otherwise maintain agreements with our horseman, pari-mutuel clerks and other organized labor groups; with respect to the proposed Jamul, CA project, particular risks associated with securing financing, local opposition, and building a complex project on a relatively small parcel; 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); with respect to our proposed Massachusetts project, the ability to execute surrounding community agreements and the ultimate location of the various gaming facilities in the state; 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); 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 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 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, 2012, 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

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PART I.	FINANCIAL INFORMATION	4

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	4
	Condensed Consolidated Balance Sheets — September 30, 2013 and December 31, 2012	4
	Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2013 and 2012	5
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2013 and 2012	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity — Nine Months Ended September 30, 2013 and 2012	7
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2013 and 2012	8
	Notes to the Condensed Consolidated Financial Statements	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4.	CONTROLS AND PROCEDURES	42

PART II.	OTHER INFORMATION	42

ITEM 1.	LEGAL PROCEEDINGS	42

ITEM 1A.	RISK FACTORS	42

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	MINE SAFETY DISCLOSURES	47

ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	47

SIGNATURES		49

EXHIBIT INDEX		50

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

	September 30,		December 31,
	2013		2012
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	267,871	$	260,467
Receivables, net of allowance for doubtful accounts of $4,004 and $3,901 at September 30, 2013 and December 31, 2012, respectively	42,453		53,720
Insurance receivable	729		—
Prepaid expenses	37,306		94,620
Deferred income taxes	38,987		39,793
Other current assets	13,889		38,540
Total current assets	401,235		487,140
Property and equipment, net	2,642,297		2,730,797
Other assets
Investment in and advances to unconsolidated affiliates	195,825		204,506
Goodwill	1,308,079		1,380,689
Other intangible assets, net	693,932		706,477
Debt issuance costs, net of accumulated amortization of $17,721 and $11,462 at September 30, 2013 and December 31, 2012, respectively	29,676		35,999
Other assets	125,694		98,449
Total other assets	2,353,206		2,426,120
Total assets	$	5,396,738	$	5,644,057

Liabilities
Current liabilities
Current maturities of long-term debt	$	100,688	$	81,497
Accounts payable	28,317		38,268
Accrued expenses	102,604		133,316
Accrued interest	12,584		21,872
Accrued salaries and wages	84,984		96,426
Gaming, pari-mutuel, property, and other taxes	71,883		55,610
Insurance financing	2,906		3,856
Other current liabilities	74,197		68,774
Total current liabilities	478,163		499,619

Long-term liabilities
Long-term debt, net of current maturities	2,299,929		2,649,073
Deferred income taxes	197,552		216,357
Noncurrent tax liabilities	21,819		20,393
Other noncurrent liabilities	7,050		7,686
Total long-term liabilities	2,526,350		2,893,509

Shareholders’ equity
Preferred stock ($.01 par value, 1,000,000 shares authorized, 12,050 and 12,275 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively)	—		—
Common stock ($.01 par value, 200,000,000 shares authorized, 79,284,528 and 77,446,601 shares issued at September 30, 2013 and December 31, 2012, respectively)	785		769
Additional paid-in capital	1,500,928		1,451,965
Retained earnings	889,581		795,173
Accumulated other comprehensive income	931		3,022
Total shareholders’ equity	2,392,225		2,250,929
Total liabilities and shareholders’ equity	$	5,396,738	$	5,644,057

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Revenues
Gaming	$	641,777		$	633,836		$	2,039,531		$	1,924,759
Food, beverage and other	112,687			103,735			355,591			326,598
Management service fee	3,685			4,347			10,399			11,404
Revenues	758,149			741,918			2,405,521			2,262,761
Less promotional allowances	(43,714		)	(34,874		)	(131,469		)	(107,107		)
Net revenues	714,435			707,044			2,274,052			2,155,654
Operating expenses
Gaming	325,576			327,489			1,029,483			998,533
Food, beverage and other	84,471			80,875			263,646			253,664
General and administrative	131,140			137,615			395,447			368,863
Depreciation and amortization	79,968			62,399			237,654			172,527
Impairment losses	—			—			71,846			—
Insurance deductible charges (recoveries), net	—			—			2,500			(7,229		)
Total operating expenses	621,155			608,378			2,000,576			1,786,358
Income from operations	93,280			98,666			273,476			369,296

Other income (expenses)
Interest expense	(25,060		)	(19,953		)	(80,044		)	(55,819		)
Interest income	369			218			974			683
Gain from unconsolidated affiliates	2,296			807			7,838			3,546
Other	(436		)	(1,954		)	2,630			(1,483		)
Total other expenses	(22,831		)	(20,882		)	(68,602		)	(53,073		)

Income from operations before income taxes	70,449			77,784			204,874			316,223
Taxes on income	29,132			31,338			110,466			124,491
Net income	$	41,317		$	46,446		$	94,408		$	191,732

Earnings per common share:
Basic earnings per common share	$	0.43		$	0.49		$	0.98		$	2.03
Diluted earnings per common share	$	0.40		$	0.44		$	0.92		$	1.81

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012

Net income	$	41,317	$	46,446	$	94,408		$	191,732
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment during the period	302		732		(697		)	565
Change in fair value of corporate debt securities
Unrealized holding gains (losses) on corporate debt securities arising during the period	—		49		(98		)	134
Less: Reclassification adjustments for gains included in net income	—		—		(1,296		)	—
Change in fair value of corporate debt securities, net	—		49		(1,394		)	134
Other comprehensive income (loss)	302		781		(2,091		)	699
Comprehensive income	$	41,619	$	47,227	$	92,317		$	192,431

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(in thousands, except share data) (unaudited)

	Preferred Stock				Common Stock				Additional Paid-In			Retained		Accumulated Other Comprehensive			Total Shareholders’
	Shares		Amount		Shares		Amount		Capital			Earnings		Income			Equity
Balance, December 31, 2011	12,275		$	—	76,213,126		$	756	$	1,385,355		$	583,202	$	2,318		$	1,971,631
Stock option activity, including tax benefit of $2,534	—		—		452,636		5		31,465			—		—			31,470
Restricted stock activity, including tax benefit of $398	—		—		(4,076	)	—		3,349			—		—			3,349
Change in fair value of corporate debt securities	—		—		—		—		—			—		134			134
Foreign currency translation adjustment	—		—		—		—		—			—		565			565
Net income	—		—		—		—		—			191,732		—			191,732
Balance, September 30, 2012	12,275		$	—	76,661,686		$	761	$	1,420,169		$	774,934	$	3,017		$	2,198,881

Balance, December 31, 2012	12,275		$	—	77,446,601		$	769	$	1,451,965		$	795,173	$	3,022		$	2,250,929
Repurchase of preferred stock	(225	)	—		—		—		(22,275		)	—		—			(22,275		)
Stock option activity, including tax benefit of $6,965	—		—		1,588,164		16		68,054			—		—			68,070
Restricted stock activity, including tax benefit of $840	—		—		249,763		—		3,184			—		—			3,184
Change in fair value of corporate debt securities	—		—		—		—		—			—		(1,394		)	(1,394		)
Foreign currency translation adjustment	—		—		—		—		—			—		(697		)	(697		)
Net income	—		—		—		—		—			94,408		—			94,408
Balance,September 30, 2013	12,050		$	—	79,284,528		$	785	$	1,500,928		$	889,581	$	931		$	2,392,225

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

Nine Months Ended September 30,	2013			2012
Operating activities
Net income	$	94,408		$	191,732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	237,654			172,527
Amortization of items charged to interest expense	6,450			4,904
Accretion of settlement value on long term obligation	1,217			—
Loss (gain) on sale of fixed assets	2,833			(1,206		)
Hollywood St. Louis tornado deductible charges	2,500			—
Gain from unconsolidated affiliates	(7,838		)	(3,546		)
Distributions of earnings from unconsolidated affiliates	17,000			8,500
Deferred income taxes	(16,567		)	4,447
Charge for stock-based compensation	18,070			22,195
Impairment losses	71,846			—
Gain on investment in corporate debt securities	(1,325		)	—
Gain on sale of Bullwhackers	(444		)	—
Decrease (increase), net of businesses acquired
Accounts receivable	9,443			(3,754		)
Insurance receivable	(1,062		)	1,072
Prepaid expenses and other current assets	58,245			12,002
Other assets	(35,391		)	(7,714		)
(Decrease) increase, net of businesses acquired
Accounts payable	(2,672		)	(2,269		)
Accrued expenses	(30,700		)	(5,111		)
Accrued interest	(9,288		)	(6,538		)
Accrued salaries and wages	(11,124		)	2,876
Gaming, pari-mutuel, property and other taxes	16,472			9,921
Income taxes	—			(56,533		)
Other current and noncurrent liabilities	5,777			7,525
Other noncurrent tax liabilities	2,454			(13,270		)
Net cash provided by operating activities	427,958			337,760
Investing activities
Capital project expenditures, net of reimbursements	(96,967		)	(298,625		)
Capital maintenance expenditures	(62,106		)	(66,327		)
Proceeds from sale of property and equipment	3,272			3,144
Proceeds from investment in corporate debt securities	6,679			—
Proceeds from sale of Bullwhackers, net of cash on hand	4,996			—
Investment in joint ventures	(500		)	(39,600		)
Decrease in cash in escrow	26,000			15,800
Acquisition of businesses and gaming licenses, net of cash acquired	(590		)	(105,016		)
Net cash used in investing activities	(119,216		)	(490,624		)
Financing activities
Proceeds from exercise of options	45,379			9,692
Repurchase of preferred stock	(22,275		)	—
Proceeds from issuance of long-term debt, net of issuance costs	20,064			256,984
Principal payments on long-term debt	(351,361		)	(133,950		)
Increase in other long-term obligations	—			10,000
Proceeds from insurance financing	15,306			—
Payments on insurance financing	(16,256		)	(13,802		)
Tax benefit from stock options exercised	7,805			2,932
Net cash (used in) provided by financing activities	(301,338		)	131,856
Net increase (decrease) in cash and cash equivalents	7,404			(21,008		)
Cash and cash equivalents at beginning of year	260,467			238,440
Cash and cash equivalents at end of period	$	267,871		$	217,432

Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	82,296		$	57,200
Income taxes paid	$	58,349		$	186,436

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company”) is a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of September 30, 2013, the Company owned, managed, or had ownership interests in twenty-eight facilities in the following eighteen jurisdictions: Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia and Ontario. On July 1, 2013, the Company sold its Bullwhackers property located in Colorado and no longer has any operations in the state.

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 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 nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2012 should be read in conjunction with these condensed consolidated financial statements. The December 31, 2012 financial information has been derived from the Company’s audited consolidated financial statements.

2. Spin-Off of Real Estate Assets through a Real Estate Investment Trust

On November 15, 2012, the Company announced that it intended to pursue a plan to separate the majority of its operating assets and real property assets into two publicly traded companies including an operating entity, Penn and, through a tax-free spin-off of the Company’s real estate assets to holders of its common and preferred stock, a newly formed publicly traded entity that intends to qualify as a real estate investment trust (“REIT”) named Gaming and Leisure Properties, Inc. (“GLPI”) (the “Spin-Off”). On September 26, 2013, the Company announced that its Board of Directors had approved, subject to certain terms and conditions, the Spin-Off.

On November 1, 2013, Penn effected the Spin-Off by distributing one share of common stock of GLPI to the holders of Penn common stock and Series C Convertible Preferred Stock (“Series C Preferred Stock”) for every share of Penn common stock and every 1/1000th of a share of Series C Preferred Stock that they held at the close of business on October 16, 2013, the record date for the Spin-Off. See Note 11 for further information on the Series C Preferred Stock. Peter M. Carlino and the PMC Delaware Dynasty Trust dated September 25, 2013, a trust for the benefit of Mr. Carlino’s children, also received additional shares of GLPI common stock, in exchange for shares of Penn common stock that they transferred to Penn immediately prior to the Spin-Off, and Mr. Carlino exchanged certain options to acquire Penn common stock for options to acquire GLPI common stock having the same aggregate intrinsic value. Penn engaged in these exchanges with Mr. Carlino and his related trust to ensure that each member of the Carlino family beneficially owns 9.9% or less of the outstanding shares of Penn common stock for certain federal tax purposes following the Spin-Off, so that GLPI can qualify to be taxed as a REIT for U.S. federal income tax purposes.

In addition, the Company contributed to GLPI through a series of internal corporate restructurings substantially all of the assets and liabilities associated with Penn’s real property interests and real estate development business, as well as the assets and liabilities of Hollywood Casino Baton Rouge and Hollywood Casino Perryville, which are referred to as the “TRS Properties.” As a result of the Spin-Off, GLPI owns substantially all of Penn’s former real property assets and leases back most of those assets to Penn

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for use by its subsidiaries, under a “triple net” 15 year Master Lease agreement (the “Master Lease”) (that includes four 5 year renewals, which are at Penn’s option) as well as owns and operates the TRS Properties through its Taxable REIT Subsidiaries (“TRS”). Penn continues to operate the leased gaming facilities, hold the associated gaming licenses and own and operate other assets, including the Casino Rama casino management contract, the 50% joint venture interest in Hollywood Casino at Kansas Speedway, seven non-casino racetracks and gaming equipment.

The Company has received a private letter ruling from the Internal Revenue Service relating to the tax treatment of the separation and the qualification of GLPI as a REIT. The private letter ruling is subject to certain qualifications and based on certain representations and statements made by the Company and certain of its shareholders. If such representations and statements are untrue or incomplete in any material respect (including as a result of a material change in the transaction or other relevant facts), the Company may not be able to rely on the private letter ruling. The Company has received opinions from outside counsel regarding certain aspects of the transaction that are not covered by the private letter ruling.

3. 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 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, 2013 and 2012 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)
Rooms	$	9,639	$	6,535	$	27,951	$	19,094
Food and beverage	31,327		26,089		95,049		80,804
Other	2,748		2,250		8,469		7,209
Total promotional allowances	$	43,714	$	34,874	$	131,469	$	107,107

The estimated cost of providing such complimentary services for the three and nine months ended September 30, 2013 and 2012 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)
Rooms	$	3,223	$	2,337	$	9,583	$	7,000
Food and beverage	21,883		18,095		64,981		54,750
Other	1,909		1,393		4,936		4,344
Total cost of complimentary services	$	27,015	$	21,825	$	79,500	$	66,094

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Gaming and Racing Taxes

The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. Finally, the Company recognizes purse expense 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, 2013, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $251.2 million and $800.2 million, respectively, as compared to $258.1 million and $801.6 million for the three and nine months ended September 30, 2012, respectively.

Earnings Per Share

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of 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, 2013, the Company had outstanding 12,050 shares of Series B Redeemable Preferred Stock (the “Series B 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 applicable to common stock by the weighted-average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.

The following table sets forth the allocation of net income for the three and nine months ended September 30, 2013 and 2012 under the two-class method:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)

Net income	$	41,317	$	46,446	$	94,408	$	191,732
Net income applicable to preferred stock	7,691		8,990		17,692		37,165
Net income applicable to common stock	$	33,626	$	37,456	$	76,716	$	154,567

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, 2013 and 2012:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012
	(in thousands)
Determination of shares:
Weighted-average common shares outstanding	78,635	76,336	78,169	76,196
Assumed conversion of dilutive employee stock-based awards	2,929	2,059	3,020	2,243
Assumed conversion of restricted stock	111	168	101	157
Assumed conversion of preferred stock	21,767	27,278	21,817	27,278
Diluted weighted-average common shares outstanding	103,442	105,841	103,107	105,874

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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 at the end of the reporting period is less than $45, the diluted weighted-average common shares outstanding is increased by 26,777,778 shares (regardless of how much the stock price is below $45); 2) when the price of the Company’s common stock at the end of the reporting period is between $45 and $67, the diluted weighted-average common shares outstanding is increased by an amount which can be calculated by dividing $1.205 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 17,985,075 shares and 26,777,778 shares; and 3) when the price of the Company’s common stock at the end of the reporting period is above $67, the diluted weighted-average common shares outstanding is increased by 17,985,075 shares (regardless of how much the stock price exceeds $67). See Note 15 for discussion of the Spin-Off’s future impact on the calculation of diluted weighted-average common shares outstanding.

Options to purchase 20,625 shares and 30,625 shares were outstanding during the three and nine months ended September 30, 2013, respectively, but were not included in the computation of diluted EPS because they were antidilutive. Options to purchase 4,353,529 shares and 3,132,000 shares were outstanding during the three and nine months ended September 30, 2012, 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 September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands, except per share data)

Calculation of basic EPS:
Net income applicable to common stock	$	33,626	$	37,456	$	76,716	$	154,567
Weighted-average common shares outstanding	78,635		76,336		78,169		76,196
Basic EPS	$	0.43	$	0.49	$	0.98	$	2.03

Calculation of diluted EPS:
Net income	$	41,317	$	46,446	$	94,408	$	191,732
Diluted weighted-average common shares outstanding	103,442		105,841		103,107		105,874
Diluted EPS	$	0.40	$	0.44	$	0.92	$	1.81

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. Stock based compensation expense for the three and nine months ended September 30, 2013 was $6.4 million and $18.1 million, respectively, as compared to $6.9 million and $22.2 million for the three and nine months ended September 30, 2012, respectively. 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 6.57 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. No stock options were granted by the Company during the nine months ended September 30, 2013, however, the Company granted 257,500 shares of restricted stock during this same time period.

The Company has also issued cash-settled phantom stock unit awards, which vest over a period of four to five years. Cash-settled phantom stock unit awards entitle employees and directors 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 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.” As of September 30, 2013, there was $25.7 million of total unrecognized compensation cost that will be recognized over the grants remaining weighted average vesting period of 2.86 years. For the three and nine months ended September 30, 2013, the Company recognized $3.3 million and $8.3 million

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of compensation expense associated with these awards, respectively, as compared to $1.0 million and $3.5 million for the three and nine months ended September 30, 2012, respectively.

Additionally, the Company has issued stock appreciation rights to certain employees, which vest over a period of four 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 below. As of September 30, 2013, there was $8.9 million of total unrecognized compensation cost that will be recognized over the awards remaining weighted average vesting period of 2.07 years. For the three and nine months ended September 30, 2013, the Company recognized $0.4 million and $4.1 million of compensation expense associated with these awards, respectively, as compared to $0.5 million and $3.0 million for the three and nine months ended September 30, 2012, respectively.

The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at September 30, 2013 and 2012:

	2013		2012

Risk-free interest rate	1.08	%	0.84	%
Expected volatility	46.27	%	45.78	%
Dividend yield	—		—
Weighted-average expected life (years)	6.57		6.64

4. New Accounting Pronouncements

In July 2013, the FASB issued explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. The Company currently has unrecognized tax benefits, however, this guidance will not have a material impact on the Company’s condensed consolidated financial statements.

In February 2013, the FASB finalized the disclosure requirements on how entities should present financial information about reclassification adjustments from accumulated other comprehensive income. The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. The disclosures required by this amendment are effective for public entities for annual and interim reporting periods beginning after December 15, 2012. The Company adopted the guidance as of January 1, 2013. Other than the additional disclosure requirements shown below, the adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

The net of tax changes in accumulated other comprehensive income by component were as follows (in thousands):

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	Foreign Currency			Available for sale securities			Total

Balance at December 31, 2011	$	1,203		$	1,115		$	2,318
Other comprehensive income:
Foreign currency translation adjustment	565			—			565
Unrealized holding gains on corporate debt securities	—			134			134
Ending balance at September 30, 2012	$	1,768		$	1,249		$	3,017

Balance at December 31, 2012	$	1,628		$	1,394		$	3,022
Other comprehensive (loss) income:
Foreign currency translation adjustment	(697		)	—			(697		)
Unrealized holding losses on corporate debt securities	—			(98		)	(98		)
Realized gain on redemption of corporate debt securities	—			(1,296		)	(1,296		)
Ending balance at September 30, 2013	$	931		$	—		$	931

5. Property and Equipment

	September 30,			December 31,
	2013			2012
	(in thousands)

Land and improvements	$	435,724		$	442,882
Building and improvements	2,327,419			2,283,230
Furniture, fixtures, and equipment	1,278,591			1,240,898
Leasehold improvements	15,395			17,229
Construction in progress	62,833			30,531
Total property and equipment	4,119,962			4,014,770
Less accumulated depreciation	(1,477,665		)	(1,283,973		)
Property and equipment, net	$	2,642,297		$	2,730,797

Depreciation expense, for property and equipment, totaled $74.9 million and $226.6 million for the three and nine months ended September 30, 2013, respectively, as compared to $62.4 million and $172.3 million for the three and nine months ended September 30, 2012, respectively. Interest capitalized in connection with major construction projects was $0.5 million and $0.9 million for the three and nine months ended September 30, 2013, respectively, as compared to $2.4 million and $8.3 million for the three and nine months ended September 30, 2012, respectively.

See Note 15 for a discussion on the Spin-Off’s impact to the Company’s property and equipment balance subsequent to September 30, 2013.

6. Goodwill and Other Intangible Assets

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

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Balance at December 31, 2012:
Goodwill	$	2,214,546
Accumulated goodwill impairment losses	(833,857		)
Goodwill, net	$	1,380,689
Goodwill impairment losses	(68,727		)
Other	(3,883		)
Balance at September 30, 2013:
Goodwill	$	2,210,663
Accumulated goodwill impairment losses	(902,584		)
Goodwill, net	$	1,308,079

The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of other intangible assets at September 30, 2013 and December 31, 2012:

	September 30, 2013						December 31, 2012
	(in thousands)
	Gross Carrying Value		Accumulated Amortization		Net Book Value		Gross Carrying Value		Accumulated Amortization		Net Book Value
Indefinite-life intangible assets	$	677,507	$	—	$	677,507	$	675,901	$	—	$	675,901
Argosy Casino Sioux City gaming license	20,949		8,380		12,569		24,068		—		24,068
Other intangible assets	56,661		52,805		3,856		56,661		50,153		6,508
Total	$	755,117	$	61,185	$	693,932	$	756,630	$	50,153	$	706,477

As a result of a new gaming license being awarded for the development of a new casino in Sioux City, Iowa to another applicant in April 2013 (see Note 9 for further details), the Company recorded a pre-tax goodwill and other intangible asset impairment charge of $68.7 million ($68.6 million, net of taxes) and $3.1 million ($1.9 million, net of taxes), respectively, for Argosy Casino Sioux City during the nine months ended September 30, 2013, as the Company determined that the fair value of its Sioux City reporting unit was less than its carrying amount based on the Company’s analysis of the estimated future expected cash flows the Company anticipates receiving from the operations of the Sioux City facility. Furthermore, the remaining gaming license for Argosy Casino Sioux City of $20.9 million at time of the impairment is now accounted for as a definite lived intangible asset and will be amortized on a straight line basis through June 2014, which is the anticipated opening date of the new facility.

The Company’s intangible asset amortization expense was $5.1 million and $11.0 million for the three and nine months ended September 30, 2013, respectively, as compared to $14 thousand and $0.2 million for the three and nine months ended September 30, 2012, respectively.

The following table presents expected intangible asset amortization expense based on existing intangible assets at September 30, 2013 (in thousands):

Remainder of 2013	$	5,074
2014	11,332
2015	19
Total	$	16,425

7. Investment in Corporate Securities

In 2008, the Company made an investment in the corporate debt securities of another gaming company which had a maturity date of November 1, 2012. This investment was accounted for as an available-for-sale investment and was included in other assets within the consolidated balance sheet. During 2010, the issuer of the security went into default on its obligations as it ceased making interest payments and the security was downgraded by certain rating agencies. As a result, in 2010, the Company wrote down the investment to its fair value, which was based on the transaction prices of the security subsequent to when the issuer defaulted on its obligations. In April 2011, the issuer of the security declared bankruptcy. In the second quarter of 2013, the Company received a distribution of $6.7 million from the finalization of bankruptcy proceedings, which resulted in the recognition of a $1.3 million

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realized gain included in other income (expenses) within the condensed consolidated statements of income for the nine months ended September 30, 2013.

8. Long-term Debt

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

	September 30,			December 31,
	2013			2012
	(in thousands)

Senior secured credit facility	$	2,063,675		$	2,394,963
$325 million 8 ¾% senior subordinated notes due August 2019	325,000			325,000
Other long-term obligations	11,217			10,000
Capital leases	2,038			2,111
	2,401,930			2,732,074
Less current maturities of long-term debt	(100,688		)	(81,497		)
Less discount on senior secured credit facility Term Loan B	(1,313		)	(1,504		)
	$	2,299,929		$	2,649,073

On October 15, 2013, the Company commenced a cash tender offer (the “Tender Offer”) and consent solicitation (the “Consent Solicitation”) for any and all of its outstanding $325 million 8 ¾% senior subordinated notes due 2019 (“8 ¾% Notes”). On October 30, 2013, the Company purchased $292.7 million aggregate principal amount of 8 ¾% Notes pursuant to an early settlement of the Tender Offer at an aggregate price of $329.4 million, called for redemption the remaining outstanding 8 ¾% Notes and effected the satisfaction and discharge of the indenture governing the 8 ¾% Notes. Additionally, in October 2013, the Company issued $300 million of senior unsecured notes and entered into a new senior secured credit facility. See Note 15 for further details.

Senior Secured Credit Facility

The Company’s previous senior secured credit facility had a gross outstanding balance of $2,063.7 million at September 30, 2013, consisting of a $994.4 million Term Loan A facility and a $1,069.3 million Term Loan B facility. No balances were outstanding on the revolving credit facility at September 30, 2013. Additionally, at September 30, 2013, the Company was contingently obligated under letters of credit issued pursuant to the previous senior secured credit facility with face amounts aggregating $22.8 million, resulting in $762.2 million of available borrowing capacity as of September 30, 2013 under the revolving credit facility. The Company made prepayments of $180.0 million against its Term Loan B facility during the nine months ended September 30, 2013.

Other Long-Term Obligations

In September 2012, the Company received $10 million under a subscription agreement entered into between A3 Gaming Investments, LLC, an investment vehicle owned by the previous owner of the M Resort (“A3 Gaming Investments”), and LV Gaming Ventures, LLC, a wholly-owned subsidiary of the Company and holder of the assets of the M Resort (“LV Gaming Ventures”). The subscription agreement entitles A3 Gaming Investments to invest in a limited liability membership interest in LV Gaming Ventures that matures on October 1, 2016. The investment entitles A3 Gaming Investments to annual payments and a settlement value based on the earnings levels of the M Resort. In accordance with ASC 480, “Distinguishing Liabilities from Equity,” the Company determined that this obligation is a financial instrument and as such should be recorded as a liability within debt. Changes in the settlement value, if any, will be accreted to interest expense through the maturity date of the instrument. In September 2013, the Company entered into an agreement to terminate the subscription agreement, which was repaid on October 22, 2013. As such, the settlement value was reclassed to current maturities of long-term debt in the condensed consolidated balance sheet at September 30, 2013. During the nine months ended September 30, 2013, the Company recorded $1.2 million in accretion on this instrument.

Covenants

The Company’s previous senior secured credit facility and the indenture governing the 8 ¾% Notes required it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s previous senior secured credit facility and the indenture governing the 8 ¾% Notes restricted, among other things, the Company’s ability to incur additional indebtedness, incur guarantee

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obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.

At September 30, 2013, the Company was in compliance with all required covenants under the Company’s previous senior secured credit facility and the 8 ¾% Notes.

9. 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. The Company believes that it has meritorious defenses, claims and/or counter-claims with respect to these proceedings, and intends to vigorously defend itself or pursue its claims.

Gaming licenses in Iowa are typically issued jointly to a gaming operator and a local charitable organization known as a QSO. The agreement between the Company’s gaming operator subsidiary in Iowa, Belle of Sioux City, L.P. (“Belle”), and its QSO, Missouri River Historical Development, Inc. (“MRHD”), expired in early July 2012. On July 12, 2012, when presented with an extension of the Company’s QSO/operating agreement for the Sioux City facility through March 2015, the Iowa Racing and Gaming Commission (“IRGC”) failed to approve the extension and urged a shorter extension. In mid-August 2012, MRHD offered a revised contract to the Company that would require a yearly renewal from the IRGC and stated that MRHD would be able to continue searching for an operator for a new land-based casino. The Company rejected this contract offer and, at the August 23, 2012 IRGC meeting, urged the IRGC to reconsider the original extension agreement through March 2015. The IRGC did not act on this request and concluded that the casino could continue to operate without an effective operating agreement. The IRGC also announced at the July 12, 2012 meeting the schedule for requests for proposals for a new land-based Woodbury County casino. Applications and financing proposals were due by November 5, 2012. The Company submitted two proposals for a new gaming and entertainment destination in Woodbury County for the IRGC’s consideration. On April 18, 2013, the IRGC awarded the license to another gaming operator. In August 2013, the IRGC formally denied the Company’s application for a standard, one-year renewal of its state license; however, the IRGC affirmed its intention to permit the Company to continue operations at its Sioux City facility until such time as the new casino opens to the public, but not beyond. The Belle has filed four petitions challenging the IRGC’s actions, namely its refusing to consider the Belle’s request to replace MRHD with another non-profit partner and opening up the gaming license to bidding for a land-based casino, its failure to approve the 2015 extension agreement and any extension, its announcing a process would be instituted to revoke the Belle’s license, and its selection of another gaming operator. The four separate petitions, filed on July 6, 2012, August 10, 2012, September 21, 2012 and May 17, 2013, are pending in the Iowa District Court in Polk County, Iowa and have now been consolidated into one proceeding. The Company contends that the IRGC violated the Belle’s constitutional rights, Iowa State law, and its own rules and regulations in the actions the IRGC has taken against the Belle and its license.

In addition, on September 26, 2013, the Belle requested an administrative proceeding to contest the IRGC’s decision not to renew the Belle’s license. This contested case proceeding will be heard by the IRGC or by an administrative law judge. The Belle’s grounds for contesting revocation are that an operating agreement is not required in order to continue gaming operations and, even if one were required, the Belle has a valid extension agreement with MRHD in place that the IRGC has refused to approve, and, additionally, the Belle has a second operating agreement with another QSO that the IRGC has refused to approve.

Also, on September 21, 2013, the Company filed a motion against the IRGC asking the court to stay development of the new casino, which started construction in July 2013, until the Company’s litigation against the IRGC is resolved. The stay motion was argued on October 10, 2013 and is likely to be decided in the fourth quarter of 2013. In addition, the Belle filed suit against MRHD for breach of contract, seeking to enjoin MRHD from disavowing the 2015 extension agreement it signed and seeking to enforce the exclusivity obligations in the agreement. A request for a preliminary injunction was denied on October 29, 2012. A trial is scheduled to begin in April 2014. In June 2013, the Company filed a petition to request the appointment of a third party to receive and hold or distribute the funds to be paid to MRHD (for which oral argument was held in July 2013).

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,

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Kansas) and the Company in the District Court of Shawnee County, Kansas. The petition alleged 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 sought in excess of $50 million in damages. In connection with its petition, the County obtained an ex-parte order attaching the $25 million privilege fee (which was included in current assets at December 31, 2012) paid to the Kansas Lottery Commission in conjunction with the gaming application for the Cherokee County zone. The defendants filed motions to dissolve and reduce the attachment. Those motions were denied. Following discovery, both parties filed dispositive motions and the motions were argued on April 20, 2012. In September 2012, the judge ruled in favor of the County on its motion for summary judgment. At December 31, 2012, the Company accrued $6.4 million, which was included in accrued expenses within the consolidated balance sheet, based on settlement discussions that took place in January 2013. In February 2013, the Company finalized the settlement with the County and the $25 million privilege fee was returned to the Company, net of the amount previously accrued.

On June 13, 2013, the Company finalized an agreement to the terms of its previous non-binding memorandum of understanding with the State of Ohio. The Company has agreed to pay $110 million over a ten year period commencing in July 2013 for certain clarifications from the State of Ohio with respect to various financial matters and limits on competition within the ten year time period. Additionally, in return for being able to relocate its existing racetracks in Toledo and Grove City to Dayton and Austintown (located in the Mahoning Valley), respectively, the Company agreed to pay the state $7.5 million upon the opening of each facility, as well as eighteen semi-annual installment payments of approximately $4.8 million beginning one year after the opening of each facility.

10. Income Taxes

A reconciliation of the liability for unrecognized tax benefits is as follows:

	Noncurrent tax liabilities
	(in thousands)
Balance at January 1, 2013	$	20,393
Additions based on current year positions	3,053
Reductions based on prior year positions	(599		)
Currency translation adjustments	(1,028		)
Balance at September 30, 2013	$	21,819

The increase in the Company’s liability for unrecognized tax benefits during the nine months ended September 30, 2013 was primarily due to recording additional tax reserves and interest expense accruals for previously recorded unrecognized tax benefits.

The Company’s effective tax rate (income taxes as a percentage of income from operations before income taxes) increased to 41.4% for the three months ended September 30, 2013, as compared to 40.3% for the three months ended September 30, 2012, primarily due to the deferred tax write-off of $3.8 million related to the sale of Bullwhackers partially offset by reversals of previously recorded tax reserves and interest on uncertain tax positions where the statute of limitations has expired. The Company’s effective tax rate increased to 53.9% for the nine months ended September 30, 2013, as compared to 39.4% for the nine months ended September 30, 2012, primarily due to the non-deductible portion of the Company’s goodwill impairment charge related to Argosy Casino Sioux City and a deferred tax write-off of $3.8 million related to the sale of Bullwhackers, partially offset by reversals of previously recorded tax reserves and interest on uncertain tax positions where the statute of limitations has expired.

At September 30, 2013 and December 31, 2012, prepaid expenses within the condensed consolidated balance sheets included prepaid income taxes of $4.9 million and $68.4 million, respectively.

11. Shareholders’ Equity

Impact of Spin-Off on Preferred Equity Investment

As part of the Spin-Off described further in Note 2, the Company entered into an agreement (the “Exchange Agreement”) with FIF V PFD LLC, an affiliate of Fortress Investment Group LLC (“Fortress”), providing for the exchange of shares of the Company’s Series B Preferred Stock for shares of a new class of preferred stock, Series C Preferred Stock, in contemplation of the Spin-Off.

The Exchange Agreement provided Fortress with the right to exchange its 9,750 shares of Series B Preferred Stock for fractional shares of Series C Preferred Stock at an exchange ratio that treated each such fractional share (and therefore each share of common stock into which such fractional share was convertible) as worth $67 per share, which was the “ceiling price” at which the

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shares of Series B Preferred Stock were redeemable by the Company at maturity. Any shares of Series B Preferred Stock that were not exchanged for shares of Series C Preferred Stock prior to the second business day before October 16, 2013, the record date established for the distribution of GLPI common stock in the Spin-Off, was automatically exchanged for shares of Series C Preferred Stock on such date. Subsequently, the Company had the right to purchase from Fortress, prior to the record date for the Spin-Off, a number of shares of Series C Preferred Stock, at a price of $67 per fractional share of Series C Preferred Stock, such that, immediately following the consummation of the Spin-Off, Fortress would not own more than 9.9% of GLPI’s common stock.

Under the terms of the Statement with Respect to Shares of Series C Convertible Preferred Stock of the Company (the “Series C Designation”), the Series C Preferred Stock is nonvoting stock, provided, however, that the Series C Designation cannot be altered or amended so as to adversely affect any right or privilege held by the holders of Series C shares without the consent of a majority of the shares of Series C then outstanding. Holders of Series C shares will participate in dividends paid to the holders of common stock of the Company on an as-converted basis. Each share of Series C will automatically convert into 1,000 shares of common stock upon sale to a third party not affiliated with the original holder.

On October 11, 2013, the Company completed its exchange and repurchase transactions with Fortress and repurchased all of the 2,300 shares of Series B Preferred Stock held by Centerbridge Capital Partners, L.P. (collectively, “Centerbridge”) at par. Additionally, in February 2013, the Company repurchased 225 shares of Series B Preferred Stock from WF Investment Holdings, LLC at a slight discount to par. As a result of these transactions, there are currently no outstanding shares of Series B Preferred Stock and Fortress holds 8,624 shares of Series C Preferred Stock. See Note 15 for further details.

12. Segment Information

The Company has aggregated its properties into three reportable segments: (i) Midwest, (ii) East/West, and (iii) Southern Plains, which is consistent with how the Company’s Chief Operating Decision Maker reviews and assesses the Company’s financial performance.

The Midwest reportable segment consists of the following properties: Hollywood Casino Lawrenceburg, Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Hollywood Casino Toledo, which opened on May 29, 2012, and Hollywood Casino Columbus, which opened on October 8, 2012. It also includes the Company’s Casino Rama management service contract and the Mahoning Valley and Dayton Raceway projects in Ohio which the Company anticipates completing in 2014.

The East/West reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Perryville, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Zia Park Casino, and the M Resort.

The Southern Plains reportable segment consists of the following properties: Argosy Casino Riverside, Argosy Casino Sioux City, Hollywood Casino Baton Rouge, Hollywood Casino Tunica, Hollywood Casino Bay St. Louis, Boomtown Biloxi, Hollywood Casino St. Louis (formerly Harrah’s St. Louis which was acquired from Caesars Entertainment on November 2, 2012), and includes the Company’s 50% investment in Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway that opened on February 3, 2012.

The Other category consists of the Company’s standalone racing operations, namely Beulah Park, Raceway Park, Rosecroft Raceway, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park and Freehold Raceway. 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, “Segment Reporting.” The Other category also included our Bullwhackers property which was sold on July 1, 2013.

The following tables present certain information with respect to the Company’s segments. Intersegment revenues between the Company’s segments were not material in any of the periods presented below.

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	Midwest		East/West		Southern Plains		Other			Total
	(in thousands)
Three months ended September 30, 2013
Net revenues	$	244,011	$	294,816	$	168,979	$	6,629		$	714,435
Income (loss) from operations	48,349		59,416		19,975		(34,460		)	93,280
Depreciation and amortization	32,352		18,813		24,760		4,043			79,968
Gain (loss) from unconsolidated affiliates	—		—		2,599		(303		)	2,296
Capital expenditures	22,404		6,448		13,705		(101		)	42,456

Three months ended September 30, 2012
Net revenues	247,287		324,603		128,604		6,550			707,044
Income (loss) from operations	55,088		68,078		26,496		(50,996		)	98,666
Depreciation and amortization	24,791		22,430		11,028		4,150			62,399
Gain (loss) from unconsolidated affiliates	—		—		1,036		(229		)	807
Capital expenditures	94,562		8,376		6,770		1,066			110,774

Nine months ended September 30, 2013
Net revenues	789,502		928,934		529,560		26,056			2,274,052
Income (loss) from operations	165,214		204,478		9,419		(105,635		)	273,476
Depreciation and amortization	97,182		58,938		69,304		12,230			237,654
Gain (loss) from unconsolidated affiliates	—		—		8,383		(545		)	7,838
Impairment losses	—		—		71,846		—			71,846
Capital expenditures	83,650		20,508		50,487		4,428			159,073

Nine months ended September 30, 2012
Net revenues	670,373		1,043,884		415,729		25,668			2,155,654
Income (loss) from operations	148,509		228,700		108,739		(116,652		)	369,296
Depreciation and amortization	61,989		66,455		33,627		10,456			172,527
Gain (loss) from unconsolidated affiliates	—		—		3,991		(445		)	3,546
Capital expenditures	305,521		34,917		19,583		4,931			364,952

Balance sheet at September 30, 2013
Total assets	2,268,140		1,158,411		1,578,476		391,711			5,396,738
Investment in and advances to unconsolidated affiliates	—		79		129,897		65,849			195,825
Goodwill and other intangible assets, net	1,023,108		226,047		697,057		55,799			2,002,011

Balance sheet at December 31, 2012
Total assets	2,318,283		1,198,391		1,680,773		446,610			5,644,057
Investment in and advances to unconsolidated affiliates	—		87		138,514		65,905			204,506
Goodwill and other intangible assets, net	1,025,505		226,047		779,787		55,827			2,087,166

13. 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 was estimated based on a third party broker quote and as such was a Level 2 measurement as defined under ASC 820, “Fair Value Measurements and Disclosures.” The investment in corporate debt securities was measured at fair value on a recurring basis using the market approach. As described in Note 7, a distribution for the redemption of the investment in corporate debt securities was received in the second quarter of 2013.

Long-term Debt

The fair value of the Company’s Term Loan B component of the previous senior secured credit facility and the 8 ¾% Notes is estimated based on quoted prices in active markets and as such is a Level 1 measurement. The fair value of the remainder of the

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Company’s previous senior secured credit facility approximates its carrying value as it is variable rate debt. The fair value of the Company’s other long-term obligations approximates its carrying value.

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

	September 30, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	267,871	$	267,871	$	260,467	$	260,467
Investment in corporate debt securities	—		—		6,790		6,790
Financial liabilities:
Long-term debt
Senior secured credit facility	2,062,362		2,062,392		2,393,459		2,401,225
Senior subordinated notes	325,000		355,875		325,000		368,875
Other long-term obligations	11,217		11,217		10,000		10,000

14. Insurance Deductibles

Hollywood Casino St. Louis Tornado

On May 31, 2013, Hollywood Casino St. Louis sustained minor damage as a result of a tornado and was forced to close for approximately fourteen hours. At the time of the tornado, the Company carried property insurance coverage with a limit of $600 million for both property damage and business interruption applicable to this event. This coverage included a $2.5 million property damage deductible and two days of business interruption deductible for the peril of a tornado. During the nine months ended September 30, 2013, the Company recorded a $2.5 million pre-tax loss for the property damage insurance deductible.

15. Subsequent Events

As disclosed in Note 2, on November 1, 2013, Penn effected the Spin-Off by distributing one share of common stock of GLPI to the holders of Penn common stock and Series C Preferred Stock for every share of Penn common stock and every 1/1000th of a share of Series C Preferred Stock that they held at the close of business on October 16, 2013, the record date for the Spin-Off. In addition, the Company contributed substantially all of the assets and liabilities associated with Penn’s real property interests and real estate development business, as well as the assets and liabilities of the TRS Properties that will be operated by its TRSs, to GLPI through a series of internal corporate restructurings.

As mentioned above in Note 11, on October 11, 2013, the Company completed its previously disclosed exchange and repurchase transactions with an affiliate of Fortress and Centerbridge. In the transactions, the Company paid a total of $627.2 million, which was primarily funded by borrowings under the revolving credit facility, to the affiliates of Fortress and Centerbridge and issued to the affiliate of Fortress 8,624 shares of non-voting Series C Preferred Stock in order to redeem at par all of the previously outstanding shares of Series B Preferred Stock. Each share of Series C Preferred Stock will automatically convert into 1,000 shares of common stock upon a sale to a third party not affiliated with Fortress, and holders of Series C Preferred Stock will participate in dividends paid to the holders of common stock on an as-converted basis. The redemption of the Series B Preferred Stock will impact the Company’s shares outstanding by reducing the Company’s diluted share count by approximately 13.1 million (based on the actual dilutive impact of the securities in the third quarter 2013 EPS calculation, see Note 3).

On October 15, 2013, the Company commenced the Tender Offer and consent solicitation for any and all of its outstanding $325 million 8¾% Notes. The Consent Solicitation expired on October 28, 2013, and the Tender Offer will expire on November 13, 2013 (the “Expiration Date”) unless the Tender Offer is extended or earlier terminated. In the Consent Solicitation, the Company received valid consents from holders of $292.7 million aggregate principal amount of the 8 ¾% Notes. Based on the receipt of such consents on October 29, 2013, the Company executed a supplemental indenture to the indenture governing the 8¾% Notes to eliminate substantially all of the restrictive covenants and the related events of default in such indenture. On October 30, 2013, the Company purchased such $292.7 million aggregate principal amount of 8 ¾% Notes, and the amendments effected by such supplemental indenture became operative. Such 8 ¾% Notes were purchased for “Total Consideration” of $1,107.24 per $1,000 principal amount of tendered 8 ¾% Notes, which is equal to the “Tender Offer Consideration” of $1,087.24 per $1,000 principal amount of tendered 8 ¾% Notes plus a consent payment of $20.00 per $1,000 principal amount of tendered 8 ¾% Notes, plus accrued and unpaid interest up to, but excluding, the date of purchase. Holders of 8 ¾% Notes who validly tender their 8 ¾% Notes after October 29, 2013 but at or prior to the Expiration Date, and whose 8 ¾% Notes are accepted for purchase, will receive only the Tender

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Offer Consideration, plus accrued and unpaid interest up to, but excluding, the applicable settlement date. On October 30, 2013, the Company also effected the satisfaction and discharge of the indenture governing the 8 ¾% Notes and called the remaining outstanding 8 ¾% Notes for redemption. Any 8 ¾% Notes not purchased in the Tender Offer will be redeemed on November 29, 2013. We anticipate recording a debt extinguishment charge of $34.7 million related to the purchase of 8 ¾% Notes in the Tender Offer and the redemption of the remaining 8 ¾% Notes in the fourth quarter of 2013.

On October 30, 2013, the Company completed an offering of $300 million 5.875% senior unsecured notes that mature on November 1, 2021 (the “5.875% Notes”) at a price of par. Interest on the 5.875% Notes is payable on May 1 and November 1 of each year. The 5.875% Notes are senior unsecured obligations of the Company. The 5.875% Notes will not be guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary-guaranteed debt securities. The Company may redeem the 5.875% Notes at any time, and from time to time, on or after November 1, 2016, at the declining redemption premiums set forth in the indenture governing the 5.875% Notes, together with accrued and unpaid interest to, but not including, the redemption date. Prior to November 1, 2016, the Company may redeem the 5.875% Notes at any time, and from time to time, at a redemption price equal to 100% of the principal amount of the 5.875% Notes redeemed plus a “make-whole” redemption premium described in the indenture governing the 5.875% Notes, together with accrued and unpaid interest to, but not including, the redemption date. In addition, the 5.875% Notes may be redeemed prior to November 1, 2016 from net proceeds raised in connection with an equity offering as long as the Company pays 105.875% of the principal amount of the 5.875% Notes, redeems the 5.875% Notes within 180 days of completing the equity offering, and at least 60% of the 5.875% Notes originally issued remains outstanding.

In addition, on October 30, 2013, the Company entered into a new senior secured credit facility. The new senior secured credit facility consists of a five year $500 million revolver, a five year $500 million Term Loan A facility, and a seven year $250 million Term Loan B facility. The Term Loan A facility was priced at LIBOR plus a spread (ranging from 2.75% to 1.25%) based on the Company’s consolidated total net leverage ratio as defined in the new senior secured credit facility. The Term Loan B facility was priced at LIBOR plus 2.50%, with a 0.75% LIBOR floor. The Company used the proceeds of the new senior secured credit facility, new 5.875% Notes, and cash on hand, to repay its previous senior secured credit facility, to fund the cash tender offer to purchase any and all of its 8 ¾% Notes and the related consent solicitation to make certain amendments to the indenture governing the 8 ¾% Notes, to satisfy and discharge such indenture, to pay related fees and expenses and for working capital purposes.

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

Our Operations

We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of September 30, 2013, we owned, managed, or had ownership interests in twenty-eight facilities in the following eighteen jurisdictions: Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario. On July 1, 2013, we sold our Bullwhackers property located in Colorado and no longer have any operations in the state.

We have made significant acquisitions in the past and expect to continue to pursue additional acquisition and development opportunities in the future. In 1997, we began our transition from a pari-mutuel company to a diversified gaming company with the acquisition of the Charles Town property and the introduction of video lottery terminals in West Virginia. Since 1997, we have continued to expand our gaming operations through strategic acquisitions (including the acquisitions of Hollywood Casino Bay St. Louis and Boomtown Biloxi, CRC Holdings, Inc., Hollywood Casino Corporation, Argosy Gaming Company, Zia Park Casino, Sanford-Orlando Kennel Club and M Resorts), greenfield projects (such as Hollywood Casino at Penn National Race Course, Hollywood Casino Bangor and Hollywood Casino Perryville), and property expansions (such as Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). In 2012, we, along with our joint venture partner, opened Hollywood Casino at Kansas Speedway on February 3, 2012, and in Ohio, we opened our Hollywood Casino Toledo facility on May 29, 2012 and our Hollywood Casino Columbus facility on October 8, 2012. Finally, on November 2, 2012, we acquired Harrah’s St. Louis facility, which we are in the process of renovating and rebranding to Hollywood Casino St. Louis.

The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines and to a lesser extent, table games, which are highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fee from Casino Rama, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities.

Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and “win” or “hold” percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 12% to 25% of table game drop.

Slot handle is the gross amount wagered for the period cited. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Our slot hold percentages have consistently been in the 6% to 10% range over the past several years. Given the stability in our slot hold percentages, we have not experienced significant impacts to earnings from changes in these percentages.

For table games, customers usually purchase cash chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table’s drop box. Table game win is the amount of drop that is retained and recorded as casino gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are focused on regional gaming markets, our table win percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically have a material impact to our earnings.

Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to repay debt, fund capital maintenance expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.

We continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and the development of new gaming properties, particularly in attractive regional markets. Current capital projects are ongoing at several of our properties. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.

Spin-Off of Real Estate Assets through a Real Estate Investment Trust

On November 15, 2012, we announced that we intended to pursue a plan to separate the majority of our operating assets and real property assets into two publicly traded companies, including an operating entity, Penn, and, through a tax-free Spin-Off of our

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real estate assets to holders of our common and preferred stock, a newly formed publicly traded entity that intends to qualify as a REIT, GLPI. On September 26, 2013, the Company announced that its Board of Directors had approved, subject to certain terms and conditions, the Spin-Off.

On November 1, 2013, Penn effected the Spin-Off by distributing one share of common stock of GLPI to the holders of Penn common stock and Series C Preferred Stock for every share of Penn common stock and every 1/1000th of a share of Series C Preferred Stock that they held at the close of business on October 16, 2013, the record date for the Spin-Off. Additionally, Peter M. Carlino and the PMC Delaware Dynasty Trust dated September 25, 2013, a trust for the benefit of Mr. Carlino’s children, also received additional shares of GLPI common stock, in exchange for shares of Penn common stock that they transferred to Penn immediately prior to the Spin-Off, and Mr. Carlino exchanged certain options to acquire Penn common stock for options to acquire GLPI common stock having the same aggregate intrinsic value. Penn engaged in these exchanges with Mr. Carlino and his related trust to ensure that each member of the Carlino family beneficially owns 9.9% or less of the outstanding shares of Penn common stock for certain federal tax purposes following the Spin-Off, so that GLPI can qualify to be taxed as a REIT for U.S. federal income tax purposes.

In addition, the Company contributed substantially all of the assets and liabilities associated with Penn’s real property interests and real estate development business, as well as the assets and liabilities of the TRS Properties that will be operated by its TRSs, to GLPI through a series of internal corporate restructurings. As a result of the Spin-Off, GLPI owns substantially all of Penn’s former real property assets and leases back most of those assets to Penn for use by its subsidiaries, under the Master Lease (that includes four 5 year renewals, which are at Penn’s option). Penn continues to operate the leased gaming facilities, hold the associated gaming licenses and own and operate other assets, including the Casino Rama casino management contract, the 50% joint venture interest in Hollywood Casino at Kansas Speedway, seven non-casino racetracks and gaming equipment.

As a result of the Spin-off, we will incur various significant charges in the fourth quarter of 2013, including but not limited to debt extinguishment charges, goodwill and other intangible asset impairment losses, as well as transaction costs.

Segment Information

We have aggregated our properties into three reportable segments: (i) Midwest, (ii) East/West, and (iii) Southern Plains, which is consistent with how our Chief Operating Decision Maker reviews and assesses our financial performance.

The Midwest reportable segment consists of the following properties: Hollywood Casino Lawrenceburg, Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Hollywood Casino Toledo, which opened on May 29, 2012, and Hollywood Casino Columbus, which opened on October 8, 2012. It also includes our Casino Rama management service contract and the Mahoning Valley and Dayton Raceway projects in Ohio which we anticipate completing in 2014.

The Southern Plains reportable segment consists of the following properties: Argosy Casino Riverside, Argosy Casino Sioux City, Hollywood Casino Baton Rouge, Hollywood Casino Tunica, Hollywood Casino Bay St. Louis, Boomtown Biloxi, Hollywood Casino St. Louis (formerly Harrah’s St. Louis which was acquired from Caesars Entertainment on November 2, 2012), and includes our 50% investment in Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway that opened on February 3, 2012.

The Other category consists of our standalone racing operations, namely Beulah Park, Raceway Park, Rosecroft Raceway, Sanford-Orlando Kennel Club, and our joint venture interests in Sam Houston Race Park, Valley Race Park and Freehold Raceway. If we are successful in obtaining gaming operations at these locations, they would be assigned to one of our regional executives and reported in their respective reportable segment. The Other category also includes our corporate overhead operations which does not meet the definition of an operating segment under Accounting Standards Codification 280, “Segment Reporting.” The Other category also included our Bullwhackers property which was sold on July 1, 2013.

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Executive Summary

Economic conditions and the expansion of newly constructed gaming facilities continue to impact the overall domestic gaming industry as well as our operating results. We believe that current economic conditions, including, but not limited to, high unemployment levels, low levels of consumer confidence, and higher taxes, have resulted in reduced levels of discretionary consumer spending compared to historical levels. Additionally, the expansion of newly constructed gaming facilities has increased competition in many of our regional markets.

We believe our strengths include our relatively low leverage ratios compared to the regional casino companies that we directly compete against and the ability of our operations to generate positive cash flow. These two factors have allowed us to develop what we believe to be attractive future growth opportunities. We have also made investments in joint ventures that we believe may allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee.

Financial Highlights:

We reported net revenues and income from operations of $714.4 million and $93.3 million, respectively, for the three months ended September 30, 2013 compared to $707.0 million and $98.7 million, respectively, for the corresponding period in the prior year and net revenues and income from operations of $2,274.1 million and $273.5 million, respectively, for the nine months ended September 30, 2013 compared to $2,155.7 million and $369.3 million, respectively, for the corresponding period in the prior year. The major factors affecting our results for the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, were:

· A pre-tax goodwill and other intangible asset impairment charge of $71.8 million for Argosy Casino Sioux City in our Southern Plains segment during the nine months ended September 30, 2013.

· The partial opening of a casino complex at the Arundel Mills mall in Maryland in June 2012 and its second phase opening in mid-September 2012, which negatively impacted Hollywood Casino at Charles Town Races and Hollywood Casino Perryville.

· The opening of Hollywood Casino Columbus on October 8, 2012, which generated $53.8 million and $172.7 million of net revenues for the three and nine months ended September 30, 2013, respectively.

· The opening of Hollywood Casino Toledo on May 29, 2012, which generated $48.9 million and $151.1 million of net revenues for the three and nine months ended September 30, 2013, respectively, as compared to $57.5 million and $82.8 million for the corresponding period in the prior year, respectively.

· New competition in our Midwest segment for Hollywood Casino Lawrenceburg, namely the March 4, 2013 opening of a casino in Cincinnati, Ohio, the opening on June 1, 2012 of a new racino in Columbus, Ohio, as well as our Columbus casino.

· The acquisition of Harrah’s St. Louis facility, now known as Hollywood Casino St. Louis, on November 2, 2012, which contributed $54.4 million and $166.4 million of net revenues for the three and nine months ended September 30, 2013, respectively.

· The opening of a new riverboat casino and hotel in Baton Rouge, Louisiana on September 1, 2012, which negatively impacted Hollywood Casino Baton Rouge in our Southern Plains segment.

· The February 3, 2012 opening of our joint venture, Hollywood Casino at Kansas Speedway, which negatively impacted the results at our Argosy Casino Riverside property in our Southern Plains segment.

· A pre-tax insurance loss of $2.5 million at Hollywood Casino St. Louis during the nine months ended September 30, 2013, as compared to a pre-tax insurance gain of $7.2 million at Hollywood Casino Tunica during the nine months ended September 30, 2012.

· Lobbying efforts in Maryland related to our opposition of the November 2012 gaming referendum for $19.2 million for the three months ended September 30, 2012, which is included in Other.

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· Higher legal, consulting and other fees related to the pursuit of potential opportunities, including the Spin-Off transaction, of $6.9 million and $13.7 million for the three and nine months ended September 30, 2013, as compared to the corresponding period in the prior year, which are included in Other.

· Net income decreased by $5.1 million and $97.3 million for the three and nine months ended September 30, 2013, respectively, as compared to the three and nine months ended September 30, 2012, primarily due to the variances explained above, as well as increased interest expense offset by decreased income taxes.

Segment Developments:

The following are recent developments that have had or will have an impact on us by segment:

Midwest

· In March 2012, we announced that we had entered into a non-binding memorandum of understanding (“MOU”) with the State of Ohio that establishes a framework for relocating our existing racetracks in Toledo and Grove City to Dayton and Austintown (located in the Mahoning Valley), respectively, where we intend to develop new integrated racing and gaming facilities, budgeted at approximately $254 million and $261 million, respectively, inclusive of $50 million in license fees and $75 million in relocation fees for each facility. Pursuant to this arrangement, the Ohio Lottery Commission would retain 33.5% of video lottery terminal revenues (exclusive of the horsemen’s share). In addition, the MOU restricts any other gaming facility from being located within 50 miles of our Columbus and Toledo casinos, as well as our relocated racetracks, with certain exceptions. In mid-June 2013, the definitive agreement between the Company and the State of Ohio was signed. In June 2012, we announced that we had filed applications with the Ohio Lottery Commission for Video Lottery Sales Agent Licenses for our Ohio racetracks, and with the Ohio State Racing Commission for permission to relocate the racetracks. The new Austintown facility, which will be a thoroughbred track and feature up to 1,000 video lottery terminals, will be located on 184 acres in Austintown’s Centrepointe Business Park near the intersection of Interstate 80 and Ohio Route 46. The Dayton facility, which will be a standardbred track and feature up to 1,500 video lottery terminals, will be located on 125 acres on the site of an abandoned Delphi Automotive plant near Wagner Ford and Needmore roads in North Dayton. On May 1, 2013, the Company received approval from the Ohio Racing Commission for our relocation plans for each new racetrack and video lottery terminal facility and expects both to open in the second half of 2014. The opening of our Dayton facility may have an adverse impact on our Hollywood Casino Columbus facility. Additionally, as part of the Spin-Off, GLPI will be responsible for certain real estate related construction costs for the Austintown facility and the Dayton facility, which we estimate will total approximately $100.0 million and $88.8 million, respectively.

· On October 21, 2011, the Ohio Roundtable filed a complaint in the Court of Common Pleas in Franklin County, Ohio against a number of defendants, including the Governor, the Ohio Lottery Commission and the Ohio Casino Control Commission. The complaint alleges a variety of substantive and procedural defects relative to the approval and implementation of video lottery terminals as well as several counts dealing with the taxation of standalone casinos. We, along with the other two casinos in Ohio, filed motions for judgment on the pleadings. In May 2012, the complaint was dismissed; however, the plaintiffs filed an appeal and oral arguments were held on January 17, 2013. In March 2013, the Ohio appeals court upheld the ruling. The decision of the appeals court was appealed to the Ohio Supreme Court by the plaintiffs on April 30, 2013 and the Ohio Supreme Court has elected to accept the appeal. In addition, the Ohio Racing Commission’s decision to permit Penn to relocate their Toledo racetrack to Dayton has been challenged in the Franklin County Court of Common Pleas.

· On March 4, 2013, a new casino in Cincinnati, Ohio opened, which has had and will continue to have a negative impact on Hollywood Casino Lawrenceburg’s financial results. In addition, on June 1, 2012, a new racino at Scioto Downs in Columbus, Ohio opened, which competes aggressively in the same market as Hollywood Casino Columbus and has also negatively impacted Hollywood Casino Lawrenceburg. Additionally, new racinos in Ohio are planned at Lebanon Raceway and River Downs, both of which are anticipated to be completed in early 2014. We anticipate the opening of these new racinos will have a further adverse impact on Hollywood Casino Lawrenceburg and we anticipate that the Lebanon Raceway facility will have a negative impact on Hollywood Casino Columbus.

East/West

· Hollywood Casino at Charles Town Races, Hollywood Casino Perryville (which we contributed to GLPI in connection with the Spin-Off) and, to a lesser extent, Hollywood Casino at Penn National Race Course faced increased competition and their results have been negatively impacted by the opening of a casino complex, Maryland Live!, at the Arundel Mills mall in Anne Arundel, Maryland. The casino opened on June 6, 2012 with approximately 3,200 slot machines and significantly increased its slot machine offerings by mid-September 2012 to approximately 4,750 slot machines. In addition, the Anne Arundel facility opened

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table games on April 11, 2013, which has negatively impacted Hollywood Casino at Charles Town Races, Hollywood Casino Perryville and Hollywood Casino at Penn National Race Course.

· In November 2012, voters approved legislation authorizing a sixth Maryland casino in Prince George’s County and the ability to add table games to Maryland’s five existing and planned casinos. On March 5, 2013, table games were opened at Hollywood Casino Perryville. The new law also changes the tax rate casino operators pay the state, varying from casino to casino, allows all casinos in Maryland to be open 24 hours per day for the entire year, and permits casinos to directly purchase slot machines in exchange for gaming tax reductions. For our Hollywood Casino Perryville facility, the tax rate would decrease upon the opening of the Prince George casino from 67 percent to 61 percent with an option for an additional 5 percent reduction if an independent commission agrees. In May 2013, three different bidders, including the Company, submitted proposals for a Prince George casino. Our proposal includes a $700 million casino resort, which would be constructed at our Rosecroft Raceway facility, with 3,000 video lottery terminals, 100 table games and 40 poker tables, as well as a hotel, variety of food and beverage options, an entertainment and multi-purpose event center, a new grandstand facility, and structured and surface parking. Though we are participating in the bidding process, if another applicant is selected, our financial results would be adversely impacted as it would create additional competition for Hollywood Casino at Charles Town Races.

· On April 5, 2013, we announced that we and the Jamul Indian Village (“the Tribe”) have entered into definitive agreements to jointly develop a Hollywood-branded casino and resort on the Tribe’s trust land in San Diego County, California. The proposed facility is located approximately 20 miles east of downtown San Diego. The proposed $360 million development will include a three-story gaming and entertainment facility of approximately 200,000 square feet featuring at least 1,700 slot machines, 50 live table games including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,900 spaces. It is anticipated that site preparation could commence in the next six months with an expected construction period of approximately 24 months. We may, under certain circumstances, provide backstop financing to the Tribe in connection with the project and, upon opening, we will manage the casino and resort.

Southern Plains

· Gaming licenses in Iowa are typically issued jointly to a gaming operator and a local charitable organization known as a QSO. The agreement between the Company’s gaming operator subsidiary in Iowa, Belle, and its QSO, MRHD, expired in early July 2012. On July 12, 2012, when presented with an extension of the Company’s QSO/operating agreement for the Sioux City facility through March 2015, the IRGC failed to approve the extension and urged a shorter extension. In mid-August 2012, MRHD offered a revised contract to the Company that would require a yearly renewal from the IRGC and stated that MRHD would be able to continue searching for an operator for a new land-based casino. The Company rejected this contract offer and at the August 23, 2012 IRGC meeting urged the IRGC to reconsider the original extension agreement through March 2015. The IRGC did not act on this request and, concluded that the casino could continue to operate without an effective operating agreement. The IRGC also announced at the July 12, 2012 meeting the schedule for requests for proposals for a new land-based Woodbury County casino. Applications and financing proposals were due by November 5, 2012. We submitted two proposals for a new gaming and entertainment destination in Woodbury County for the IRGC’s consideration. On April 18, 2013, the IRGC awarded the license to another gaming operator. In August 2013, the IRGC formally denied the Company’s application for a standard, one-year renewal of its state license; however, the IRGC affirmed its intention to permit the Company to continue operations at its Sioux City facility until such time as the new casino opens to the public, but not beyond. The Belle has filed four petitions challenging the IRGC’s actions, namely its refusing to consider the Belle’s request to replace MRHD with another non-profit partner and opening up the gaming license to bidding for a land-based casino, its failure to approve the 2015 extension agreement and any extension, its announcing a process would be instituted to revoke the Belle’s license, and its selection of another gaming operator. The four separate petitions, filed on July 6, 2012, August 10, 2012, September 21, 2012 and May 17, 2013, are pending in the Iowa District Court in Polk County, Iowa and have now been consolidated into one proceeding. The Company contends that the IRGC violated the Belle’s constitutional rights, Iowa State law, and its own rules and regulations in the actions the IRGC has taken against the Belle and its license. In addition, on September 26, 2013, the Belle requested an administrative proceeding to contest the IRGC’s decision not to renew the Belle’s license. This contested case proceeding will be heard by the IRGC or by an administrative law judge. The Belle’s grounds for contesting revocation are that an operating agreement is not required in order to continue gaming operations and, even if one were required, the Belle has a valid extension agreement with MRHD in place that the IRGC has refused to approve, and, additionally, the Belle has a second operating agreement with another QSO that the IRGC has refused to approve. Also, on September 21, 2013, the Company filed a motion against the IRGC asking the court to stay development of the new casino, which started construction in July 2013, until the Company’s litigation against the IRGC is resolved. The stay motion was argued on October 10, 2013 and is likely to be decided in the fourth quarter of 2013. In addition, the Belle filed suit against MRHD for breach of contract, seeking to enjoin MRHD from disavowing the 2015 extension agreement it signed, and seeking to enforce the exclusivity obligations in the agreement. A request for a preliminary injunction was denied on October 29, 2012. A trial is scheduled to begin in April 2014.In June 2013, the Company filed a petition to request the appointment of a third party to receive and hold or distribute the funds to be paid to MRHD (for which oral argument was held in July 2013).

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· A new riverboat casino and hotel in Baton Rouge, Louisiana opened on September 1, 2012. The opening of this riverboat casino has and will continue to have an adverse effect on the financial results of Hollywood Casino Baton Rouge, which we contributed to GLPI in connection with the Spin-Off. In addition, a casino in Biloxi opened in late May 2012, which has had an adverse effect on the financial results of our Boomtown Biloxi property.

Other

· On July 1, 2013, we sold our Bullwhackers property. The Bullwhackers casino, which is located in Black Hawk, Colorado, included 10,425 square feet of gaming space with approximately 280 slot machines. The property also included a gas station/convenience store located approximately 7 miles east of the Bullwhackers casino on Highway 119.

Critical Accounting Estimates

We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for long-lived assets, goodwill and other intangible assets, income taxes and litigation, claims and assessments as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.

We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.

For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. There has been no material change to these estimates for the nine months ended September 30, 2013.

Results of Operations

The following are the most important factors and trends that contribute to our operating performance:

· The fact that most of our properties operate in mature competitive markets. As a result, we expect a majority of our future growth to come from prudent acquisitions of gaming properties (such as our acquisition of Harrah’s St. Louis gaming and lodging facility from Caesars Entertainment which closed on November 2, 2012), jurisdictional expansions (such as the February 2012 opening of a casino through a joint venture in Kansas, the May 2012 opening of Hollywood Casino Toledo, the October 2012 opening of Hollywood Casino Columbus, and the opening of video lottery terminal facilities at two racetracks in Ohio which are expected to commence operations in 2014), expansions of gaming in existing jurisdictions (such as the introduction of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, Hollywood Casino Bangor in March 2012, and more recently at Hollywood Casino Perryville in March 2013) and expansions/improvements of existing properties.

· The fact that a number of states (such as Massachusetts and New York) are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties (for example, in Kansas where we opened a casino through a joint venture in February 2012, in Ohio where we opened a casino in Toledo in May 2012 and in Columbus in October 2012, and in Maryland where we opened Hollywood Casino Perryville on September 27, 2010) and increased competitive threats to business at our existing properties (such as the introduction/expansion of commercial casinos in Kansas, Maryland, Ohio, and potentially Kentucky, a new riverboat casino and hotel in Baton Rouge, Louisiana which opened on September 1, 2012, a new casino in Biloxi, Mississippi, which opened in late May 2012, a new casino that opened in Oxford, Maine on June 5, 2012, and the introduction of tavern licenses in several states).

· The actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes, or via an expansion of gaming. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as the implementation of smoking bans).

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· The continued demand for, and our emphasis on, slot wagering entertainment at our properties.

· The successful execution of the development and construction activities currently underway at a number of our facilities, as well as the risks associated with the costs, regulatory approval and the timing of these activities.

· The risks related to economic conditions and the effect of such conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to continue to access financing at favorable terms.

· Although not material to our operating results in the periods presented in this report, the Spin-Off will result in a significant reduction in the Adjusted EBITDA we generate from our operations, primarily as a result of the payments we will be required to make to GLPI pursuant to the Master Lease. See “Spin-Off of Real Estate Assets through a Real Estate Investment Trust” and “Item 1A — Risk Factors” of this report.

The consolidated results of operations for the three and nine months ended September 30, 2013 and 2012 are summarized below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in thousands)
Revenues:
Gaming	$	641,777		$	633,836		$	2,039,531		$	1,924,759
Food, beverage and other	112,687			103,735			355,591			326,598
Management service fee	3,685			4,347			10,399			11,404
Revenues	758,149			741,918			2,405,521			2,262,761
Less promotional allowances	(43,714		)	(34,874		)	(131,469		)	(107,107		)
Net revenues	714,435			707,044			2,274,052			2,155,654

Operating expenses:
Gaming	325,576			327,489			1,029,483			998,533
Food, beverage and other	84,471			80,875			263,646			253,664
General and administrative	131,140			137,615			395,447			368,863
Depreciation and amortization	79,968			62,399			237,654			172,527
Impairment losses	—			—			71,846			—
Insurance deductible charges, net of recoveries	—			—			2,500			(7,229		)
Total operating expenses	621,155			608,378			2,000,576			1,786,358
Income from operations	$	93,280		$	98,666		$	273,476		$	369,296

Certain information regarding our results of operations by segment for the three and nine months ended September 30, 2013 and 2012 is summarized below:

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	Net Revenues				Income (loss) from Operations
Three Months Ended September 30,	2013		2012		2013		2012
	(in thousands)

Midwest	$	244,011	$	247,287	$	48,349	$	55,088
East/West