News Column

PENN NATIONAL GAMING INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 1, 2014

During the time between the issuance of our second quarter 2014 earnings release and the finalization of results for the second quarter 2014 Form 10-Q, the Company identified an adjustment was necessary to decrease its income tax provision resulting in the recognition of a $1.4 million increase in net income for the three and six months ending June 30, 2014. As such, our Net Income and Income Tax Provision for the three and six months ended June 30, 2014 are $4.2 million and $8.7 million and $8.7 million and $15.6 million, respectively, compared to $2.8 million and $10.1 million and $7.3 million and $17.0 million, respectively, as presented in the earnings release and corresponding Form 8-K provided on July 24, 2014. In addition, basic and diluted EPS for the three and six months ended June 30, 2014 changed from $0.03 and $0.08 to $0.05 and $0.10, respectively. Our Operations We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of June 30, 2014, we owned, managed, or had ownership interests in twenty-seven facilities in the following eighteen jurisdictions: Florida, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario. We believe that our portfolio of assets provides us with geographically diversified cash flow from operations. On July 30, 2014, the Company closed its facility in Sioux City, Iowa. 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, greenfield projects, and property expansions. We are in the process of constructing two facilities in Dayton and Austintown, Ohio that will feature approximately 1,000 and 850 video lottery terminals, respectively, as well as various restaurants, bars, and other amenities. We expect to open these facilities in the third quarter of 2014. In addition, we are in the process of constructing an integrated racing and gaming facility in Plainville, Massachusetts, which we expect to open in June 2015, as well as the Jamul development project, which the Company anticipates completing in mid-2016. The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 83% and 84% of our gaming revenue in 2013 and 2012, respectively) and to a lesser extent, table games, which is 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 transition service fees from GLPI, 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 pay rent to GLPI under the Master Lease, 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

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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 1, 2013, we completed our plan to separate our gaming operating assets from our real property assets by creating a newly formed, publicly traded REIT, known as GLPI, through a tax free Spin-Off. 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, through a series of internal corporate restructurings, Penn contributed to GLPI substantially all of the assets and liabilities associated with Penn's real property interests and real estate development business, as well as all of 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 those assets (other than the TRS Properties) to Penn for use by its subsidiaries, under a "triple net" Master Lease (which has a 15-year initial term that can be extended at Penn's option for up to four five-year renewal terms), as well as owns and operates the TRS Properties. Penn continues to operate the leased gaming facilities and hold the associated gaming licenses with these facilities. Segment Information The Company's Chief Executive Officer, who is the Company's Chief Operating Decision Maker as that term is defined in ASC 280, measures and assesses the Company's business performance based on regional operations of various properties grouped together based primarily on their geographic locations. In January 2014, the Company named Jay Snowden as its Chief Operating Officer and the Company decided in connection with this announcement to re-align its reporting structure. Starting in January 2014, the Company's reportable segments are: (i) East/Midwest, (ii) West, and (iii) Southern Plains. The prior year amounts were reclassified to conform to the Company's new reporting structure in accordance with ASC 280. The East/Midwest reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Lawrenceburg, Hollywood Casino Toledo and Hollywood Casino Columbus. 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 the third quarter of 2014, as well as the Plainville project in Massachusetts, which we expect to open in June 2015. It also previously included Hollywood Casino Perryville, which was contributed to GLPI on November 1, 2013.



The West reportable segment consists of the following properties: Zia Park Casino and the M Resort, as well as the Jamul development project, which we anticipate completing in mid 2016.

The Southern Plains reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Argosy Casino Sioux City, Hollywood Casino Tunica, Hollywood Casino Bay St. Louis, Boomtown Biloxi, and Hollywood Casino St. Louis, and includes our 50% investment in Kansas Entertainment, which owns the Hollywood Casinoat Kansas Speedway. It also previously included Hollywood Casino Baton Rouge, which was contributed to GLPI on November 1, 2013. 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, Freehold Raceway, as well as the Company's 50% joint venture with the Cordish Companies in New York. It also previously included the Company's Bullwhackers property which was sold in July 2013. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company's reportable segments. The Other category also includes the Company's corporate overhead operations which does not meet the definition of an operating segment under ASC 280. Executive Summary Continued sluggish 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, a weak economic recovery, low levels of consumer confidence, and higher taxes paid by individuals, have resulted in reduced levels of discretionary consumer spending compared to historical levels. Additionally, the expansion of newly constructed gaming facilities has substantially increased competition in many of our regional markets (including some of our larger facilities). We operate a geographically diversified portfolio comprised largely of new and well maintained regional gaming facilities. This has allowed us to develop what we believe to be a solid base for future growth opportunities. We have also made investments in 23

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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 $652.1 million and $23.4 million, respectively, for the three months ended June 30, 2014, compared to $761.4 million and $46.9 million, respectively, for the corresponding period in the prior year and net revenues and income from operations of $1,293.2 million and $41.4 million, respectively, for the six months ended June 30, 2014 compared to $1,559.6 million and $180.2 million, respectively for the corresponding period in the prior year. The major factors affecting our results for the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, were:



Rental expense for real property assets leased from GLPI of $104.6 million and $208.9 million for the three and six months ended June 30, 2014, respectively.

A pre-tax impairment charge of $4.6 million for Hollywood Casino Lawrenceburg in our East/Midwest segment during the three and six months ended June 30, 2014, as compared to 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 three and six months ended June 30, 2013.



New competition in our East/Midwest segment for Hollywood Casino Lawrenceburg, namely the March 4, 2013 opening of Horseshoe Casino in Cincinnati, Ohio, as well as the openings of a racino at Lebanon Raceway in mid-December 2013 and a racino at Belterra Park on May 1, 2014.

The continued impact of the opening of a casino complex at the Arundel Mills mall in Maryland in 2012, which added table games in April 2013 and a 52 table poker room in late August 2013, which has negatively impacted Hollywood Casino at Charles Town Races in our East/Midwest segment.



Contribution of Hollywood Casino Perryville and Hollywood Casino Baton Rouge to GLPI on November 1, 2013.

A pre-tax insurance loss of $2.5 million at Hollywood Casino St. Louis during the three and six months ended June 30, 2013.

Lower general and administrative expenses for Other of $13.8 million and $27.1 million for the three and six months ended June 30, 2014, respectively, compared to the corresponding period in the prior year, primarily due to lower liability based stock compensation charges of $1.9 million and $5.9 million and lower stock-based compensation costs of $2.9 million and $6.6 million primarily due to lower aggregate executive compensation following the Spin-Off to GLPI, lower Spin-Off transaction costs and development costs of $4.3 million and $7.8 million, lower lobbying costs of $1.3 million and $1.8 million, and a reduction in various other items due to cost containment measures, for the three and six months ended June 30, 2014, as compared to the corresponding period in the prior year. Depreciation and amortization expense decreased by $33.4 million and $63.1 million for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the contribution of real estate assets to GLPI on November 1, 2013. Net income increased by $16.4 million and decreased by $44.4 million for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the variances explained above, as well as decreased interest expense primarily due to our lower levels of indebtedness subsequent to the Spin-Off, and decreased income taxes. Segment Developments:



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

East/Midwest 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 approximately 850 video lottery terminals, will be located on 193 acres in Austintown'sCentrepointe Business Park near the intersection of Interstate 80 and Ohio Route 46. The Dayton 24 --------------------------------------------------------------------------------



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facility, which will be a standardbred track and feature approximately 1,000 video lottery terminals, will be located on 119 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 to open both in the third quarter of 2014. The opening of our Dayton facility may have an adverse impact on our Hollywood Casino Columbus facility. See the section entitled "Liquidity and Capital Resources-Capital Expenditures" below for further details. 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. As intervenors, we, along with the other two casinos in Ohio, filed motions for judgment on the pleadings to supplement the position of the Racing Commission. In May 2012, the complaint was dismissed, and in March 2013, the Ohio appeals court upheld the ruling. On April 30, 2013, plaintiffs requested the Ohio Supreme Court to hear an appeal of the decision, and the Ohio Supreme Court elected to accept the appeal; however, the court has stayed the appeal until it first rules in another matter with related issues. Oral arguments in the other matter were heard on November 6, 2013, and on June 10, 2014, the Ohio Supreme Court ruled the plaintiff in the pending matter lacked standing. As a result, we requested the court dismiss the current appeal as moot. In addition, the OhioRacing Commission's decision to permit Raceway Park to relocate its Toledo racetrack to Dayton was challenged in the Franklin County Court of Common Pleas by Lebanon Trotting Club, Inc., the prior owner of a neighboring racetrack. The Ohio Racing Commission and Raceway Park filed briefs requesting the Franklin County Court to uphold the Ohio Racing Commission's decision. In July 2014, the lawsuit was dismissed by the court. It is currently unknown if Lebanon Trotting Club, Inc will take further action. On March 4, 2013, the Horseshoe Casino in Cincinnati, Ohio opened, which has had and will continue to have a negative impact on Hollywood Casino Lawrenceburg's financial results. Additionally, a racino at Lebanon Raceway opened in mid-December 2013, which has had and will continue to have an adverse impact on Hollywood Casino Lawrenceburg and Hollywood Casino Columbus. Furthermore, a racino at Belterra Park opened on May 1, 2014, which has had and will continue to have an adverse impact on Hollywood Casino Lawrenceburg. Hollywood Casino at Charles Town Races 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 table games on April 11, 2013 and opened a 52 table poker room in late August 2013. Additionally, the anticipated August 26, 2014 opening of a $400 million casino in Baltimore City County, Maryland will also negatively impact our operations at Charles Town and, to a lesser extent, Hollywood Casino at Penn National Race Course. On February 28, 2014, the Massachusetts Gaming Commission awarded the Company a Category Two slots-only gaming license for its planned $225 million (including licensing fees) Plainridge Park Casino in Plainville, Massachusetts. On March 14, 2014, the Company broke ground on the 106,000 square foot facility, which will feature live harness racing and simulcasting, along with 1,250 slot machines, various dining options, structured and surface parking, a 26,000 square foot grandstand, and a 13,000 square foot clubhouse. In June 2014, the Massachusetts Supreme Judicial Court ruled to permit a referendum to repeal the enabling legislation in Massachusetts to be included in the November 2014 general election ballot. The Company intends to campaign against the referendum that would repeal the gaming legislation in Massachusetts and continue construction on Plainridge Park Casino, which is expected to open in June 2015. See Item 1A "Risk Factors." Through CHC Casinos Canada Limited ("CHC Casinos"), our indirectly wholly-owned subsidiary, we manage Casino Rama, a full service gaming and entertainment facility, on behalf of the Ontario Lottery and Gaming Corporation. The Development and Operating Agreement (the "Agreement"), which we refer to as the management service contract for Casino Rama, sets out the duties, rights and obligations of CHC Casinos and our indirectly wholly-owned subsidiary, CRC Holdings, Inc. In June 2014, we signed an agreement to extend the Casino Rama Agreement, which was to expire on September 30, 2014, on a month-to-month basis with a 60-day notice period for up to a maximum period of forty-eight months. West On April 5, 2013, we announced that, subject to final National Indian Gaming Commission approval, we and the Jamul Indian Village (the "Jamul Tribe") had entered into definitive agreements (including management, development, branding and lending arrangements), to jointly develop a Hollywood Casino-branded casino and resort on the Jamul 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 project will include a three-story gaming and entertainment facility of approximately 200,000 square 25

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feet featuring over 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. In mid-January 2014, we announced the commencement of construction activities at the site and it is anticipated that the facility will open in mid-2016. We may, under certain circumstances, provide backstop financing to the Jamul Tribe in connection with the project and, upon opening, we will manage and provide branding for the casino and resort. Southern Plains As discussed in Note 8 to the condensed consolidated financial statements, the IRGC ruled on April 17, 2014 that Argosy Casino Sioux City must cease operations by July 1, 2014. In response, the Company filed a petition for judicial review to vacate or reverse the IRGC's April 17, 2014 order. This petition was dismissed by the court; however, on July 18, 2014, the Iowa Supreme Court granted a motion for an emergency stay until the Iowa Supreme Court considers whether to hear the appeal of the court's decision to dismiss the petition. On July 25, 2014, the Iowa Supreme Court denied the request to hear the appeal. Therefore, on July 30, 2014, Argosy Casino Sioux City ceased its operations.



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, 2013. There has been no material change to these estimates for the six months ended June 30, 2014. 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 November 2, 2012 acquisition of Harrah's St. Louis gaming and lodging facility from Caesars Entertainment), jurisdictional expansions (such as our planned second quarter 2015 opening of a slots-only gaming facility in Massachusetts, 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 the third quarter of 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, and at Hollywood Casino Bangor in March 2012) and expansions/improvements of existing properties (such as a hotel at Zia Park expected to open on August 28, 2014). The fact that a number of states (such as 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 Massachusetts, where we were awarded the slots-only gaming license on February 28, 2014, in Kansas, where we opened a casino through a joint venture in February 2012, and in Ohio, where we opened casinos in Toledo and Columbus in May 2012 and October 2012, respectively, and are opening video lottery terminal facilities at two racetracks in Dayton and Austintown that are expected to commence operations in the third quarter of 2014) 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, Nebraska and Illinois, and the introduction of tavern licenses in several states, most significantly in Illinois). 26 --------------------------------------------------------------------------------



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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).



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 prolonged sluggish 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.



The consolidated results of operations for the three and six months ended June 30, 2014 and 2013 are summarized below:

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands) Revenues: Gaming $ 576,158$ 679,829$ 1,146,841$ 1,397,754 Food, beverage and other 110,574 121,044 215,444 242,904 Management service fee 3,105 3,667 5,563 6,714 Revenues 689,837 804,540 1,367,848 1,647,372 Less promotional allowances (37,691 ) (43,169 ) (74,622 ) (87,755 ) Net revenues 652,146 761,371 1,293,226 1,559,617 Operating expenses: Gaming 284,107 341,889 570,184 703,907 Food, beverage and other 80,403 88,910 157,941 179,175 General and administrative 107,898 128,730 215,637 264,307 Rental expense related to the Master Lease 104,613 - 208,922 - Depreciation and amortization 47,183 80,615 94,549 157,686 Impairment losses 4,560 71,846 4,560 71,846 Insurance deductible charges - 2,500 - 2,500 Total operating expenses 628,764 714,490 1,251,793 1,379,421 Income from operations $ 23,382$ 46,881$ 41,433$ 180,196 27

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Certain information regarding our results of operations by segment for the three and six months ended June 30, 2014 and 2013 is summarized below:

Net Revenues Income (loss) from



Operations

Three Months Ended June 30, 2014 2013 2014 2013 (in thousands) East/Midwest $ 361,357$ 430,943$ 17,003$ 97,819 West 59,033 61,442 7,426 14,260 Southern Plains 224,726 258,761 17,970 (30,619 ) Other 7,030 10,225 (19,017 ) (34,579 ) Total $ 652,146$ 761,371$ 23,382$ 46,881 Net Revenues Income (loss) from Operations Six Months Ended June 30, 2014 2013 2014 2013 (in thousands) East/Midwest $ 710,805$ 889,492$ 26,605$ 203,646 West 119,953 123,594 15,482 26,307 Southern Plains 448,483 527,105 39,197 21,419 Other 13,985 19,426 (39,851 ) (71,176 ) Total $ 1,293,226$ 1,559,617$ 41,433$ 180,196



Adjusted EBITDA and adjusted EBITDAR

Adjusted EBITDA and adjusted EBITDAR are used by management as the primary measure of the Company's operating performance. We define adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDAR is adjusted EBITDA excluding rent expense associated with our Master Lease agreement with GLPI. Adjusted EBITDA and adjusted EBITDAR have economic substance because they are used by management as a performance measure to analyze the performance of our business, and are especially relevant in evaluating large, long-lived casino projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We also present adjusted EBITDA and adjusted EBITDAR because they are used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In addition, gaming companies have historically reported adjusted EBITDA as a supplement to financial measures in accordance with GAAP. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their adjusted EBITDA calculations certain corporate expenses that do not relate to the management of specific casino properties. However, adjusted EBITDA and adjusted EBITDAR are not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA and adjusted EBITDAR information is presented as a supplemental disclosure, as management believes that it is a widely used measure of performance in the gaming industry, is the principal basis for the valuation of gaming companies, and that it is considered by many to be a better indicator of the Company's operating results than net income (loss) per GAAP. Management uses adjusted EBITDA and adjusted EBITDAR as the primary measures of the operating performance of its segments, including the evaluation of operating personnel. Adjusted EBITDA and adjusted EBITDAR should not be construed as alternatives to operating income, as indicators of the Company's operating performance, as alternatives to cash flows from operating activities, as measures of liquidity, or as any other measures of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA and adjusted EBITDAR. It should also be noted that other gaming companies that report adjusted EBITDA information may calculate adjusted EBITDA in a different manner than the Company and therefore, comparability may be limited. A reconciliation of the Company's net income (loss) per GAAP to adjusted EBITDA and adjusted EBITDAR, as well as the Company's income (loss) from operations per GAAP to adjusted EBITDA and adjusted EBITDAR, is included below. Additionally, a reconciliation of each segment's income (loss) from operations to adjusted EBITDA and adjusted EBITDAR is also included below. On a segment level, income (loss) from operations per GAAP, rather than net income (loss) per GAAP, is reconciled to adjusted 28

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EBITDA and adjusted EBITDAR due to, among other things, the impracticability of allocating interest expense, interest income, income taxes and certain other items to the Company's segments on a segment by segment basis. Management believes that this presentation is more meaningful to investors in evaluating the performance of the Company's segments and is consistent with the reporting of other gaming companies. The reconciliation of the Company's income (loss) from operations per GAAP to adjusted EBITDA and adjusted EBITDAR, as well as the Company's net income (loss) per GAAP to adjusted EBITDA and adjusted EBITDAR, for the three and six months ended June 30, 2014 and 2013 was as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income (loss) $ 4,176$ (12,180 )$ 8,713$ 53,091 Income tax provision 8,754 38,567 15,554 81,334 Other 1,823 (2,402 ) 192 (3,066 ) Income from unconsolidated affiliates (1,473 ) (3,821 ) (3,956 ) (5,542 ) Interest income (790 ) (343 ) (1,257 ) (605 ) Interest expense 10,892 27,060 22,187 54,984 Income from operations $ 23,382$ 46,881$ 41,433$ 180,196 Loss (gain) on disposal of assets 3 285 (47 ) 2,675 Insurance deductible charges - 2,500 - 2,500 Impairment losses 4,560 71,846 4,560 71,846 Charge for stock compensation 2,517 5,450 5,096 11,701 Depreciation and amortization 47,183 80,615 94,549 157,686



Income from unconsolidated affiliates 1,473 3,821 3,956

5,542

Non-operating items for Kansas JV (1) 2,939 2,922 5,860

5,781

Adjusted EBITDA 82,057 214,320 155,407



437,927

Rental expense related to Master Lease 104,613 - 208,922 - Adjusted EBITDAR $ 186,670$ 214,320$ 364,329$ 437,927

-------------------------------------------------------------------------------- (1) Starting with the second quarter of 2014, adjusted EBITDA and adjusted EBITDAR from our joint venture in Kansas Entertainment exclude our share of the impact of non-operating items (such as depreciation and amortization expense). Prior periods were restated to conform to this new presentation. 29 --------------------------------------------------------------------------------



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The reconciliation of each segment's income (loss) from operations to adjusted EBITDA and adjusted EBITDAR for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):



Three months ended June 30, 2014 East/Midwest West Southern Plains Other Total Income (loss) from operations $ 17,003$ 7,426 $

17,970 $ (19,017 )$ 23,382 Charge for stock compensation - - - 2,517 2,517 Impairment losses 4,560 - - - 4,560 Depreciation and amortization 25,911 1,692 17,573 2,007 47,183 (Gain) loss on disposal of assets (30 ) - 39 (6 ) 3 Income (losses) from unconsolidated affiliates - - 2,621 (1,148 ) 1,473 Non-operating items for Kansas JV - - 2,939 - 2,939 Adjusted EBITDA $ 47,444$ 9,118 $ 41,142 $ (15,647 )$ 82,057 Rental Expense related to Master Lease 64,865 7,882 31,866 - 104,613 Adjusted EBITDAR $ 112,309$ 17,000 $ 73,008 $ (15,647 )$ 186,670



Three months ended June 30, 2013 East/Midwest West Southern Plains Other Total Income (loss) from operations $ 97,819$ 14,260 $

(30,619 ) $ (34,579 )$ 46,881 Charge for stock compensation - - - 5,450 5,450 Impairment losses - - 71,846 - 71,846 Insurance deductible charges - - 2,500 - 2,500 Depreciation and amortization 40,469 3,321 32,730 4,095 80,615 Loss (gain) on disposal of assets 106 10 180 (11 ) 285 Income (loss) from unconsolidated affiliates - - 4,047 (226 ) 3,821 Non-operating items for Kansas JV - - 2,922 - 2,922 Adjusted EBITDA $ 138,394$ 17,591 $ 83,606 $ (25,271 )$ 214,320 Six months ended June 30, 2014 East/Midwest West Southern Plains Other Total Income (loss) from operations $ 26,605$ 15,482 $ 39,197 $ (39,851 )$ 41,433 Charge for stock compensation - - - 5,096 5,096 Impairment losses 4,560 - - - 4,560 Depreciation and amortization 52,734 3,241 34,824 3,750 94,549 (Gain) loss on disposal of assets (117 ) 65 17 (12 ) (47 ) Income (losses) from unconsolidated affiliates - - 5,074 (1,118 ) 3,956 Non-operating items for Kansas JV - - 5,860 - 5,860 Adjusted EBITDA $ 83,782$ 18,788 $ 84,972 $ (32,135 )$ 155,407 Rental Expense related to Master Lease 130,177 16,768 61,977 - 208,922 Adjusted EBITDAR $ 213,959$ 35,556 $



146,949 $ (32,135 )$ 364,329

Six months ended June 30, 2013 East/Midwest West Southern Plains Other Total Income (loss) from operations $ 203,646$ 26,307 $ 21,419 $ (71,176 )$ 180,196 Charge for stock compensation - - - 11,701 11,701 Impairment losses - - 71,846 - 71,846 Insurance deductible charges - - 2,500 - 2,500 Depreciation and amortization 82,157 6,627 60,714 8,188 157,686 Loss (gain) on disposal of assets 136 2,580 268 (309 ) 2,675 Income (loss) from unconsolidated affiliates - - 5,784 (242 ) 5,542 Non-operating items for Kansas JV - - 5,781 - 5,781 Adjusted EBITDA $ 285,939$ 35,514 $ 168,312 $ (51,838 )$ 437,927 Adjusted EBITDAR for our East/Midwest segment decreased by $26.1 million, or 18.8%, and $72.0 million, or 25.2%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to competition discussed below, which impacted Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg, weakened regional economic conditions for Hollywood Casino at Penn National Race Course, and the contribution of Hollywood Casino Perryville to GLPI on November 1, 2013, which had adjusted EBITDAR of $5.9 million and $9.4 million for the three and six months ended June 30, 2013, respectively. Adjusted EBITDAR for our Southern Plains segment decreased by $10.6 million, or 12.7%, and $21.4 million, or 12.7%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013, which had adjusted EBITDAR of $6.8 30 --------------------------------------------------------------------------------



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million and $13.7 million for the three and six months ended June 30, 2013, respectively, and decreased adjusted EBITDAR for Argosy Casino Sioux City primarily due to additional legal fees of $1.4 million during the three and six months ended June 30, 2014 compared to the corresponding period in the prior year in an attempt to prevent its closure. Adjusted EBITDAR for Other improved by $9.6 million, or 38.1%, and $19.7 million, or 38.0% for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to lower payroll costs of $4.0 million and $8.9 million primarily attributed to lower liability based stock compensation charges of $1.9 million and $5.9 million, as well as decreased compensation costs due to the fact that certain members of Penn's executive management team transferred their employment to GLPI as part of the spin-off, lower spin-off transaction costs and development costs of $4.3 million and $7.8 million, lower lobbying costs of $1.3 million and $1.8 million, transition service fees received from GLPI of $0.4 million and $1.2 million, and a reduction in various other items due to cost containment measures, for the three and six months ended June 30, 2014, compared to the corresponding period in the prior year. Additionally, Other includes $0.9 million for the three and six months ended June 30, 2014 in costs from our joint venture in New York. Revenues Revenues for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands): Percentage Three Months Ended June 30, 2014 2013 Variance Variance Gaming $ 576,158$ 679,829$ (103,671 ) (15.2 )% Food, beverage and other 110,574 121,044 (10,470 ) (8.6 )% Management service fee 3,105 3,667 (562 ) (15.3 )% Revenues 689,837 804,540 (114,703 ) (14.3 )% Less promotional allowances (37,691 ) (43,169 ) 5,478 (12.7 )% Net revenues $ 652,146$ 761,371$ (109,225 ) (14.3 )% Six Months Ended June 30, 2014 2013 Variance Variance Gaming $ 1,146,841$ 1,397,754$ (250,913 ) (18.0 )% Food, beverage and other 215,444 242,904 (27,460 ) (11.3 )% Management service fee 5,563 6,714 (1,151 ) (17.1 )% Revenues 1,367,848 1,647,372 (279,524 ) (17.0 )% Less promotional allowances (74,622 ) (87,755 ) 13,133 (15.0 )% Net revenues $ 1,293,226$ 1,559,617$ (266,391 ) (17.1 )% In our business, revenue is driven by discretionary consumer spending, which has been impacted by a slow economic recovery which has resulted in declines in the labor force participation rate, higher taxes, and increased stock market volatility. The expansion of newly constructed gaming facilities has also increased competition in many regional markets (including at some of our key facilities). We have no certain mechanism for determining why consumers choose to spend more or less money at our properties from period to period and as such cannot quantify a dollar amount for each factor that impacts our customers' spending behaviors. However, based on our experience, we can generally offer some insight into the factors that we believe were likely to account for such changes. In instances where we believe one factor may have had a significantly greater impact than the other factors, we have noted that as well. However, in all instances, such insights are based only on our reasonable judgment and professional experience, and no assurance can be given as to the accuracy of our judgments. Gaming revenue Gaming revenue decreased by $103.7 million, or 15.2%, and $250.9 million, or 18.0%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the variances explained below. Gaming revenue for our East/Midwest segment decreased by $66.5 million, or 17.1%, and $167.1 million, or 20.7%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to decreased gaming revenue at Hollywood Casino at Charles Town Races of $17.4 million and $47.3 million, respectively, primarily due to the continued impact of the opening of a casino complex at the Arundel Mills mall in Maryland in 2012, which added table 31 --------------------------------------------------------------------------------



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games in April 2013 and a 52 table poker room in late August 2013, decreased gaming revenue at Hollywood Casino Lawrenceburg of $17.1 million and $50.6 million, respectively, primarily due to new competition, namely a new casino that opened on March 4, 2013 in Cincinnati, Ohio and to a lesser extent the openings of our own Columbus casino, a racino at Lebanon Raceway that opened in mid-December 2013 and a racino at Belterra Park that opened May 1, 2014, the contribution of Hollywood Casino Perryville to GLPI on November 1, 2013, which had $24.9 million and $45.8 million of gaming revenue, respectively, and to a lesser extent, decreased gaming revenue at Hollywood Casino at Penn National Race Course of $7.1 million and $15.6 million, respectively, primarily due to regional economic conditions. The first quarter of 2014 was also impacted by a more severe winter compared to the prior year at all of our properties in the East/Midwest segment. Gaming revenue for our Southern Plains segment decreased by $33.8 million, or 14.0%, and $77.5 million, or 15.7%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013, which had $19.4 million and $39.6 million of gaming revenue for the three and six months ended June 30, 2013, respectively, and to a lesser extent, general softness in the regional markets in which our Southern Plains properties compete, as well as additional competition from video lottery terminals in Illinois. Additionally, the first quarter of 2014 was impacted by a more severe winter compared to the prior year.



Food, beverage and other revenue

Food, beverage and other revenue decreased by $10.5 million, or 8.6%, and $27.5 million, or 11.3%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the variances explained below.

Food, beverage and other revenue for our East/Midwest segment decreased by $4.1 million, or 7.9%, and $13.7 million, or 12.9%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to decreased food, beverage and other revenue at Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg due to the competition mentioned above, and the contribution of Hollywood Casino Perryville to GLPI on November 1, 2013, which had $1.4 million and $2.5 million of food, beverage and other revenue for the three and six months ended June 30, 2013, respectively, all of which were partially offset by the acquisition of Plainridge Racecourse in 2014, which had food, beverage and other revenue of $2.2 million and $3.9 million for the three and six months ended June 30, 2014, respectively. The first quarter of 2014 compared to the prior year was also impacted by adverse weather on racing for Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course. Food, beverage and other revenue for our Southern Plains segment decreased by $3.9 million, or 9.7%, and $10.6 million, or 13.0%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to decreased food, beverage and other revenue at Hollywood Casino St. Louis primarily due to reduced complimentaries offered to customers, and the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013, which had $2.0 million and $4.1 million of food, beverage and other revenue for the three and six months ended June 30, 2013, respectively. Promotional allowances



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." Our promotional allowance levels are determined based on various factors such as our marketing plans, competitive factors, economic conditions, and regulations.

Promotional allowances decreased by $5.5 million, or 12.7%, and $13.1 million, or 15.0%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to decreased promotional allowances at Hollywood Casino St. Louis primarily due to reduced complimentaries offered to customers, and to a lesser extent the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013. 32 --------------------------------------------------------------------------------

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Operating expenses for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

Percentage Three Months Ended June 30, 2014 2013 Variance Variance Gaming $ 284,107$ 341,889$ (57,782 ) (16.9 )% Food, beverage and other 80,403 88,910 (8,507 ) (9.6 )% General and administrative 107,898 128,730 (20,832 ) (16.2 )% Rental expense related to Master Lease 104,613 - 104,613 N/A Depreciation and amortization 47,183 80,615 (33,432 ) (41.5 )% Impairment losses 4,560 71,846 (67,286 ) (93.7 )% Insurance deductible charges - 2,500 (2,500 ) N/A Total operating expenses $ 628,764$ 714,490$ (85,726 ) (12.0 )% Six Months Ended June 30, 2014 2013 Variance Variance Gaming $ 570,184$ 703,907$ (133,723 ) (19.0 )% Food, beverage and other 157,941 179,175 (21,234 ) (11.9 )% General and administrative 215,637 264,307 (48,670 ) (18.4 )% Rental expense related to Master Lease 208,922 - 208,922 N/A Depreciation and amortization 94,549 157,686 (63,137 ) (40.0 )% Impairment losses 4,560 71,846 (67,286 ) (93.7 )% Insurance deductible charges - 2,500 (2,500 ) N/A Total operating expenses $ 1,251,793$ 1,379,421$ (127,628 ) (9.3 )% Gaming expense



Gaming expense decreased by $57.8 million, or 16.9%, and $133.7 million, or 19.0%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the variances explained below.

Gaming expense for our East/Midwest segment decreased by $39.7 million, or 18.3%, and $93.9 million, or 20.9%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to an overall decrease in gaming taxes resulting from decreased taxable gaming revenue mentioned above at our properties in the East/Midwest segment, in addition to decreased payroll and marketing costs at the majority of our East/Midwest properties, and the contribution of Hollywood Casino Perryville to GLPI on November 1, 2013, which had $16.8 million and $32.0 million of gaming expense for the three and six months ended June 30, 2013, respectively. Gaming expense for our Southern Plains segment decreased by $15.8 million, or 15.4%, and $35.3 million, or 16.8%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to an overall decrease in gaming taxes resulting from decreased taxable gaming revenue mentioned above at our properties in the Southern Plains segment, in addition to decreased payroll and/or marketing costs at the majority of our Southern Plains properties, and the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013, which had $7.6 million and $15.5 million of gaming expense for the three and six months ended June 30, 2013, respectively.



Food, beverage and other expense

Food, beverage and other expense decreased by $8.5 million, or 9.6%, and $21.2 million, or 11.9%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the variances explained below.

Food, beverage and other expense for our Southern Plains segment decreased by $4.4 million, or 13.6%, and $10.0 million, or 15.4%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to decreased food, beverage and other expense at Hollywood Casino St. Louis and Hollywood Casino Joliet primarily due to lower food and beverage costs as well as payroll costs, and the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013, which had $1.8 million and $3.7 million of food, beverage and other expense for the three and six months ended June 30, 2013, respectively. 33 --------------------------------------------------------------------------------



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Food, beverage and other expense for our East/Midwest segment decreased by $2.2 million, or 6.1%, and $7.7 million, or 10.5%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to decreased food, beverage and other expense at Hollywood Casino at Charles Town Races, Hollywood Casino Lawrenceburg and Hollywood Casino at Penn National Race Course primarily due to lower food and beverage costs and payroll costs, and the contribution of Hollywood Casino Perryville to GLPI on November 1, 2013, which had $1.0 million and $1.9 million of food, beverage and other expense for the three and six months ended June 30, 2013, respectively, all of which were partially offset by the acquisition of Plainridge Racecourse in 2014. The first quarter of 2014 compared to the corresponding period in the prior year was also impacted by reduced purse expense due to adverse weather conditions at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course.



General and administrative expenses

General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and certain housekeeping services, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include lobbying expenses.

General and administrative expenses decreased by $20.8 million, or 16.2%, and $48.7 million, or 18.4%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the variances explained below.

General and administrative expenses for Other decreased by $13.8 million, or 44.8%, and $27.1 million, or 42.7%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to lower liability based stock compensation charges of $1.9 million and $5.9 million and lower stock-based compensation costs of $2.9 million and $6.6 million primarily due to lower aggregate executive compensation following the Spin-Off to GLPI, lower Spin-Off transaction costs and development costs of $4.3 million and $7.8 million, lower lobbying costs of $1.3 million and $1.8 million, and a reduction in various other items due to cost containment measures, for the three and six months ended June 30, 2014, as compared to the corresponding period in the prior year. General and administrative expenses for our Southern Plains segment decreased by $4.8 million, or 10.1%, and $12.8 million or 13.4%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the contribution of Hollywood Casino Baton Rouge to GLPI on November 1, 2013, which had $4.0 million and $8.2 million of general and administrative expenses for the three and six months ended June 30, 2013, respectively. In addition, the majority of our Southern Plains properties had decreased payroll costs for the three and six months ended June 30, 2014, compared to the corresponding period in the prior year, which was partially offset by increased legal fees of $1.4 million at Argosy Casino Sioux City related to the ongoing litigation to remain open for the three and six months ended June 30, 2014, compared to the corresponding period in the prior year. General and administrative expenses for our East/Midwest segment decreased by $2.1 million, or 5.1%, and $6.2 million, or 7.2%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the contribution of Hollywood Casino Perryville to GLPI on November 1, 2013, which had $2.3 million and $4.4 million of general and administrative expenses for the three and six months ended June 30, 2013, respectively. In addition, the majority of our East/Midwest properties had decreased payroll costs for the three and six months ended June 30, 2014, compared to the corresponding period in the prior year.



Rental expense related to the Master Lease

The Company recognized rental expense related to the Master Lease, which totaled $104.6 million and $208.9 million for the three and six months ended June 30, 2014, respectively. The Company allocates the rental obligation to the leased properties on a monthly basis based on their proportionate share of the total EBITDAR generated by the leased properties. Additionally, the variable rent component attributable to our Hollywood Casinos in Columbus and Toledo, Ohio (which is reassessed on a monthly basis) are allocated directly to these properties.



Upon the closing of Argosy Casino Sioux City, the annual rental expense related to the Master Lease will decrease by $6.2 million (see Item 6.Exhibit 10.4).

In addition, upon the opening of the video lottery terminal facilities at our two racetracks in Ohio, which are expected to commence operations in the third quarter of 2014, the annual rental expense related to the Master Lease is anticipated to increase by 34

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approximately $19 million, which approximates ten percent of the real estate construction costs paid for by GLPI related to these facilities.

Depreciation and amortization expense

Depreciation and amortization expense decreased by $33.4 million, or 41.5%, and $63.1 million, or 40.0%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to the contribution of real estate assets to GLPI as well as Hollywood Casino Perryville and Hollywood Casino Baton Rouge on November 1, 2013, partially offset by increased amortization at Argosy Casino Sioux City due to the amortization of our gaming license, which began in April 2013 with the awarding of the gaming license to another gaming operator, on a straight line basis through June 2014 (see Note 8 to the condensed consolidated financial statements for further details). Impairment losses



During the three months ended June 30, 2014, the Company recorded a pre-tax impairment charge of $4.6 million ($2.8 million, net of taxes) in our East/Midwest segment to write-down certain idle assets to an estimated salvage value.

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, we recorded a pre-tax goodwill and other intangible asset impairment charge in our Southern Plains segment of $71.8 million ($70.5 million, net of taxes) for Argosy Casino Sioux City during the three months ended June 30, 2013, as we determined that the fair value of our Sioux City reporting unit was less than our carrying amount based on our analysis of the estimated future expected cash flows we anticipate receiving from the operations of our Sioux City facility.



Insurance deductible charges

Insurance deductible charges for the three and six months ended June 30, 2013 were related to a pre-tax insurance loss of $2.5 million for the three months ended June 30, 2013 for the tornado damage at Hollywood Casino St. Louis. Other income (expenses)



Other income (expenses) for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

Percentage Three Months Ended June 30, 2014 2013 Variance Variance Interest expense $ (10,892 )$ (27,060 )$ 16,168 (59.7 )% Interest income 790 343 447 130.3 % Income from unconsolidated affiliates 1,473 3,821 (2,348 ) (61.4 )% Other (1,823 ) 2,402 (4,225 ) (175.9 )% Total other expenses $ (10,452 )$ (20,494 )$ 10,042 (49.0 )% Percentage Six Months Ended June 30, 2014 2013 Variance Variance Interest expense $ (22,187 )$ (54,984 )$ 32,797 (59.6 )% Interest income 1,257 605 652 107.8 % Income from unconsolidated affiliates 3,956 5,542 (1,586 ) (28.6 )% Other (192 ) 3,066 (3,258 ) (106.3 )% Total other expenses $ (17,166 )$ (45,771 )$ 28,605 (62.5 )% Interest expense Interest expense decreased by $16.2 million, or 59.7%, and $32.8 million, or 59.6%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013. The decrease was primarily attributable to our lower levels of indebtedness subsequent to the Spin-Off. 35

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Income from unconsolidated affiliates

Income from unconsolidated affiliates decreased by $2.3 million, or 61.4%, and $1.6 million, or 28.6%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to a favorable property tax settlement of $1.5 million in the second quarter of 2013 for our joint venture in Kansas Entertainment, as well as $0.9 million for the three and six months ended June 30, 2014 in costs from our joint venture in New York. Other Other decreased by $4.2 million, or 175.9%, and $3.3 million, or 106.3%, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, primarily due to a gain on redemption of corporate debt securities of $1.3 million for the three months ended June 30, 2013, as well as increased foreign currency translation losses for the three and six months ended June 30, 2014. Taxes The Company's effective tax rate (income taxes as a percentage of income from operations before income taxes) was 67.7% and 64.1% for the three and six months ended June 30, 2014, respectively, primarily due to a significant year-over-year reduction in pre-tax earnings which has magnified the impact on non-deductible expenses such as lobbying, and increases in reserves for uncertain tax positions. The Company's effective tax rate was 146.2% and 60.5% for the three and six months ended June 30, 2013, respectively, primarily due to the non-deductible portion of the goodwill impairment charge at Argosy Casino Sioux City recorded during the three months ended June 30, 2013. The Company's annual effective tax rate can vary from period to period depending on the geographic mix of earnings, the level of tax credits and certain discretionary charges such as non-deductible lobbying and increases in reserves for uncertain tax positions. The combination of these and other factors, including the history of pre-tax earnings, are taken into consideration when assessing the realization of the net deferred tax assets (see Note 10 to the condensed consolidated financial statements).



Liquidity and Capital Resources

Historically and prospectively, our primary sources of liquidity and capital resources have been and will be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. Net cash provided by operating activities totaled $121.9 million and $291.4 million for the six months ended June 30, 2014 and 2013, respectively. The decrease in net cash provided by operating activities of $169.5 million for the six months ended June 30, 2014 compared to the corresponding period in the prior year was comprised primarily of a decrease in cash receipts from customers of $281.1 million and rental expense related to the Master Lease of $208.9 million for the six months ended June 30, 2014, all of which were partially offset by a decrease in cash paid to suppliers and vendors of $223.8 million, cash paid to employees of $51.9 million, interest payments of $30.8 million, and income tax payments of $25.2 million, as well as an increase in receipt of cash from earnings of our joint venture in Kansas for $2.0 million. The decrease in cash receipts collected from our customers and the decrease in cash payments for operating expenses and to employees for the six months ended June 30, 2014 compared to the prior year was primarily due to new and continued competition on our operations, in particular in our East/Midwest segment and Southern Plains segment, the contribution of Hollywood Casino Perryville and Hollywood Casino Baton Rouge to GLPI on November 1, 2013, lower payroll costs due to cost containment measures, and lower general and administrative expenses for Other of $27.1 million. The decrease in interest payments for the six months ended June 30, 2014 compared to the prior year was primarily due to lower levels of indebtedness subsequent to the Spin-Off. The decrease in income tax payments for the six months ended June 30, 2014 compared to the prior year was primarily due to a significant decline in pre-tax earnings. Net cash used in investing activities totaled $170.2 million and $81.7 million for the six months ended June 30, 2014 and 2013, respectively. The increase in net cash used in investing activities of $88.5 million for the six months ended June 30, 2014 compared to the corresponding period in the prior year was primarily due to our Massachusetts gaming license payment of $25.0 million in March 2014, the acquisition of Plainridge Racecourse in April 2014 for $42.0 million, $20.0 million in gaming license fees related to the new Ohio racinos, advances to the Jamul Tribe of $18.9 million (see Note 3 to the condensed consolidated financial statements), a decrease in cash in escrow of $8.0 million, and $6.7 million decrease in proceeds from sale of investment in corporate debt securities, partially offset by decreased capital project expenditures of $34.7 million primarily due to the residual payments made related to openings of Hollywood Casino Columbus and Hollywood Casino Toledo as well as the rebranding of our St. Louis facility in 2013. 36 --------------------------------------------------------------------------------



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Net cash provided by (used in) financing activities totaled $6.6 million and ($235.1) million for the six months ended June 30, 2014 and 2013, respectively. The increase in net cash provided by financing activities of $241.7 million for the six months ended June 30, 2014 compared to the corresponding period in the prior year was primarily due to lower net repayments on our long-term debt of $241.8 million, and repurchases of preferred stock of $22.3 million in 2013, partially offset by lower proceeds from the exercise of options of $26.8 million. Capital Expenditures Capital expenditures are accounted for as either capital project or capital maintenance (replacement) expenditures. Capital project expenditures are for fixed asset additions that expand an existing facility or create a new facility. Capital maintenance expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair.



The following table summarizes our expected capital project expenditures by segment for the fiscal year ending December 31, 2014, and actual expenditures for the six months ended June 30, 2014 (excluding licensing fees and net of reimbursements). The table below should not be utilized to predict future expected capital project expenditures subsequent to 2014.

Expected for Year Expenditures for Six Ending December Months Ended June Balance to Expend Property 31, 2014 30, 2014 in 2014 (in millions) East/Midwest $ 121.2 $ 13.6 $ 107.6 West 22.3 11.4 10.9 Southern Plains 10.3 8.8 1.5 Other 2.9 2.3 0.6 Total $ 156.7 $ 36.1 $ 120.6 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, Raceway Park and Beulah Park, and with the Ohio State Racing Commission for permission to relocate the racetracks to Dayton and Austintown, respectively. On May 1, 2013, we received approval from the Ohio Racing Commission for our relocation plans. Construction started in late May 2013 for the new Hollywood-themed facility in Austintown, with a $161 million budget, inclusive of a $75 million relocation fee and $50 million license fee, featuring a new thoroughbred racetrack and approximately 850 video lottery terminals, as well as various restaurants, bars and other amenities. The new Austintown facility will be located on 193 acres in Austintown'sCentrepointe Business Park near the intersection of Interstate 80 and Ohio Route 46. For Dayton, construction started in late May 2013 for the new Hollywood-themed facility, with a $165 million budget, inclusive of a $75 million relocation fee and $50 million license fee, featuring a new standardbred racetrack and approximately 1,000 video lottery terminals, as well as various restaurants, bars and other amenities. The Dayton facility will be located on 119 acres on the site of an abandoned Delphi Automotive plant near Wagner Ford and Needmore roads in North Dayton. The $75 million relocation fee for each Ohio racetrack is based on the present value of the contractual obligation, which is $7.5 million upon opening, with 18 additional semi-annual payments of $4.8 million beginning one year after opening. For the license fee for each Ohio racetrack, we paid $10 million in the second quarter of 2014, and anticipate paying the remaining license fee as follows: (i) $15 million upon opening, and (ii) $25 million on the one year anniversary of the commencement of gaming. As of June 30, 2014, Penn incurred cumulative costs of $15.9 million and $15.9 million for the Austintown facility and the Dayton facility, respectively, which includes the first payment of the license fee previously mentioned. The Company expects to open both in the third quarter of 2014. As part of the Spin-Off, GLPI is responsible for certain real estate related construction costs for the Austintown facility and the Dayton facility and, upon completion of the facilities, will become part of the Master Lease. On February 28, 2014, the Massachusetts Gaming Commission awarded the Company a Category Two slots-only gaming license, and on March 14, 2014, the Company broke ground on the development of Plainridge Park Casino in Plainville, Massachusetts. Plainridge Park Casino is anticipated to be a $225 million (including licensing fees) fully integrated racing and gaming facility featuring live harness racing and simulcasting with 1,250 slot machines, various dining options, structured and surface parking, a 26,000 square foot grandstand, and a 13,000 square foot clubhouse. We expect Plainridge Park Casino to open in June 2015. As of June 30, 2014, total cumulative costs were $69.3 million, which includes a $25 million gaming license fee, which was paid in March 2014, and the acquisition of Plainridge Racecourse for $42.4 million, which was paid in April 2014 (see Note 5 to the condensed consolidated financial statements). 37

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During the six months ended June 30, 2014, we spent approximately $44.3 million for capital maintenance expenditures, with $13.5 million at our East/Midwest segment, $4.7 million at our West segment, $24.5 million at our Southern Plains segment, and $1.6 million for Other. The majority of the capital maintenance expenditures were for slot machines and slot machine equipment. Jamul Tribe Note receivable to the Jamul Tribe, which totaled $29.5 million at June 30, 2014, is accounted for as a loan in Other Assets on the condensed consolidated balance sheet and as such is not included in the capital expenditures table presented above. The budget for this development project is $360 million. We expect the project to be completed in mid-2016 which will include the construction of a three-story gaming and entertainment facility of approximately 200,000 square feet featuring over 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. Cash generated from operations and cash available under the revolving credit facility portion of our senior secured credit facility funded our capital projects, capital maintenance expenditures and Jamul Tribe project in 2014 to date.



Senior Secured Credit Facility

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 Company's senior secured credit facility had a gross outstanding balance of $736.3 million at June 30, 2014, consisting of a $487.5 million Term Loan A facility and a $248.8 million Term Loan B facility. This compares with a $750 million gross outstanding balance at December 31, 2013 which consisted of a $500 million Term Loan A facility and a $250 million Term Loan B facility. No balances were outstanding on the revolving credit facility at June 30, 2014 and December 31, 2013. Additionally, at June 30, 2014 and December 31, 2013, the Company was contingently obligated under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.4 million and $22.1 million, respectively, resulting in $477.6 million and $477.9 million of available borrowing capacity as of June 30, 2014 and December 31, 2013, respectively, under the revolving credit facility. Other Long Term Obligations Other long term obligations represent contingent purchase price consideration related to the purchase of Plainridge Racecourse. This obligation is measured at its estimated fair value that will be paid over a ten year time period based on the annual earnings of the facility's operations. At each reporting period, the Company will assess the fair value of this obligation and changes in its value will be recorded in earnings. Covenants The Company's senior secured credit facility and $300 million 5.875% senior unsecured notes require us, 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 senior secured credit facility and $300 million 5.875% senior unsecured notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.



At June 30, 2014, the Company was in compliance with all required covenants.

Outlook The Spin-Off has had and will continue to have a material impact on our results of operations, capital structure and management. For a discussion of these impacts, see "Spin-Off of Real Estate Assets through a Real Estate Assets through a Real Estate Investment Trust" and "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our senior secured credit facility, will be adequate to meet our anticipated rental obligation, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, we cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings projections will be realized, or that future borrowings will be available under our senior secured credit facility or otherwise will be available to enable us to service our indebtedness, including the senior secured credit facility and the $300 million 5.875% senior unsecured notes, to retire or redeem the $300 million 5.875% senior unsecured notes when required or to make anticipated capital expenditures. In addition, we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions and property expansion in under-penetrated markets. If we consummate significant acquisitions in the future or undertake any significant 38

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property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See "Risk Factors-Risks Related to Our Capital Structure" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the risk related to our capital structure. We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace and in an effort to maximize our enterprise value for our shareholders. We expect to meet our debt obligations as they come due through internally generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity.


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