2.Restatement

The restatement of the Company’s financial statements primarily results from the Company’s accounting for its November 1, 2013 distribution of real estate assets to Gaming and Leisure Properties, Inc. (GLPI) under the Master Lease Agreement (the “Master Lease”), which was previously recognized as a sale-leaseback. Upon further consideration, the Company did not meet all of the requirements for sale-leaseback accounting under Accounting Standards Codification (“ASC”) 840, “Leases”, and therefore the transaction should be accounted for as a financing obligation rather than a distribution of assets followed by an operating lease. Specifically, the lease contains provisions that would indicate that the Company has prohibited forms of continuing involvement in the leased property such that sale-leaseback accounting would not be permitted. As a result, the Company is precluded from derecognizing the real estate assets and is instead required to recognize a financing obligation for the minimum lease payments due under the Master Lease. The restated condensed consolidated balance sheets therefore include an adjustment to property and equipment, net for the carrying value of the real property of $2.02 billion and $2.04 billion at March 31, 2015 and December 31, 2014, respectively, and additional liabilities of $3.60 billion and $3.61 billion at March 31, 2015 and December 31, 2014, respectively, representing the present value of the future minimum lease payments due to GLPI under the Master Lease and the funded construction of certain leased real assets in development at the date of the Spin-Off. Consequently, the condensed restated consolidated statements of operations no longer report rent expense for the obligations under the Master Lease, but rather include interest expense associated with the financing obligation and depreciation expense related to the real estate assets. The lease payment amounts previously recorded as rent expense were $108.8 million and $104.3 million for the three months ended March 31, 2015 and 2014, respectively. The increases to interest expense and depreciation expense as a result of the correction of the accounting for the Master Lease are $96.0 million and $22.7 million, respectively, for the three months ended March 31, 2015, and $93.1 million and $22.3 million, respectively, for the three months ended March 31, 2014.

This change in accounting treatment also resulted in adjustments to the carrying values of the Company’s reporting units as well as differences in the allocation of the GLPI rental obligation to the impacted reporting units, which altered each reporting unit’s fair value.

As part of its restatement, the Company also identified certain other errors affecting the condensed consolidated financial statements as of March 31, 2015 and December 31, 2014:

The Company had originally recorded goodwill and other intangible asset impairment charges of $312.5 million and $745.9 million at October 1, 2013, the date of its annual impairment test, and November 1, 2013 (the Spin-Off date), respectively, and impairment charges of $316.5 million at October 1, 2014. The Company corrected certain errors in its goodwill and indefinite-lived gaming license intangible asset impairment analyses which incorporated the adjustments to the carrying amounts and estimated fair values of the Company’s reporting units mentioned above as well as the impact of its deferred tax valuation allowance. This resulted in a decrease to the Company’s previously recognized impairment charges of $161.2 million and $334.1 million for the years ended December 31, 2014 and 2013, respectively, which along with the relocation fee accounting error described below, resulted in a significant increase to the Company’s goodwill and other intangible assets at both March 31, 2015 and December 31, 2014.

During 2014, the Company incurred an aggregate liability of $150 million to the State of Ohio in return for the right to locate its racing operations from Toledo, Ohio to Dayton, Ohio (Hollywood Gaming at Dayton Raceway) and from Grove City, Ohio to Austintown, Ohio (Hollywood Gaming at Mahoning Valley). The Company originally accounted for these amounts as a cost of the real estate and was therefore including them in property and equipment, net and was amortizing them over the fifteen year base lease term of the Master Lease. The Company has now concluded that these costs should have been recognized as an additional cost incurred for obtaining the gaming licenses for these two properties and capitalized as other intangible assets that are not amortized, but are considered for impairment on an annual basis or more frequently if impairment indicators exist. This resulted in a decrease to depreciation expense of $2.7 million for the three months ended March 31, 2015.

The Company corrected the classification of a corporate airplane lease that had previously been accounted for as an operating lease but upon review should have been accounted for as a capital lease. This resulted in an increase to net property and equipment of $6.5 million and $7.0 million at March 31, 2015 and December 31, 2014, respectively, as well as an increase to long term debt of $24.9 million at both March 31, 2015 and December 31, 2014, respectively. It also resulted in an increase to interest expense, with an offsetting decrease to general and administrative costs of $0.2 million for the three months ended March 31, 2015 and 2014 as well as an increase to depreciation expense of $0.5 million for the three months ended March 31, 2015 and 2014.

The Company concluded that as a result of the failed spin-off-leaseback accounting treatment which resulted in a significant increase to our deferred tax assets, a valuation allowance should be recorded on the Company’s deferred tax assets given the significant negative evidence associated with being in a three year cumulative pre-tax loss position and the insufficient objectively verifiable positive evidence to support the realization of the Company’s deferred tax assets. This resulted in an increase to the Company’s income tax provision of $5.1 million and $0.2 million for the three months ended March 31, 2015 and 2014, respectively.

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

The Company reclassified a contingent earn-out liability from long-term debt to other non-current liabilities which totaled $19.5 million and $19.2 million at March 31, 2015 and December 31, 2014, respectively. Additionally, changes in the fair value of this liability which totaled $0.3 million for the three months ended March 31, 2015, were reclassified from interest expense to general and administrative expenses.

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

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

The condensed consolidated financial statements included in this Form 10-Q/A have been restated to reflect the adjustments described above. The following is a summary of the effect of the restatement on (i) the Company’s condensed consolidated balance sheets at March 31, 2015 and December 31, 2014 (ii) the Company’s condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 and (iii) the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2015 and 2014. The Company did not present a summary of the effect of the restatement on the condensed consolidated statement of changes in shareholders’ equity (deficit) for any of the above referenced periods because the impact to retained earnings on the condensed consolidated statement of changes in shareholders’ equity (deficit) is reflected below in the balance sheet. The Company did not present a summary of the effect of the restatement on the condensed consolidated statement of comprehensive income (loss) for any of the above referenced periods because the impact to net income is reflected below in the restated condensed consolidated statement of income and the restatement adjustments did not affect any other component of comprehensive income (loss).

Penn National Gaming, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

The following table presents the condensed consolidated balance sheet as previously reported, restatement adjustments and the condensed consolidated balance sheet as restated at March 31, 2015:

	As Previously			Restatement
	Reported			Adjustments			As Restated

Assets
Current assets
Cash and cash equivalents	$	237,729		$	—		$	237,729
Receivables, net of allowance for doubtful accounts of $2,093	40,918			—			40,918
Prepaid expenses	82,381			4,039			86,420
Deferred income taxes	45,302			(11,395		)	33,907
Other current assets	10,913			—			10,913

Total current assets	417,243			(7,356		)	409,887

Property and equipment, net	802,520			1,880,141			2,682,661
Other assets
Investment in and advances to unconsolidated affiliates	175,574						175,574
Goodwill	276,173			598,011			874,184
Other intangible assets, net	370,602			47,503			418,105
Deferred income taxes	74,492			(74,492		)	—
Advances to the Jamul Tribe	86,443			—			86,443
Other assets	77,631			—			77,631

Total other assets	1,060,915			571,022			1,631,937

Total assets	$	2,280,678		$	2,443,807		$	4,724,485


Liabilities
Current liabilities
Current portion of financing obligation to GLPI	$	—		$	47,057		$	47,057
Current maturities of long-term debt	40,890			—			40,890
Accounts payable	66,587			—			66,587
Accrued expenses	135,518			2,221			137,739
Accrued interest	11,427			—			11,427
Accrued salaries and wages	69,671			—			69,671
Gaming, pari-mutuel, property, and other taxes	55,762			(36		)	55,726
Insurance financing	10,251			—			10,251
Other current liabilities	64,771			—			64,771

Total current liabilities	454,877			49,242			504,119


Long-term liabilities
Long-term financing obligation to GLPI, net of current portion	—			3,551,981			3,551,981
Long-term debt, net of current maturities and debt issuance costs	1,235,061			5,398			1,240,459
Deferred income taxes	—			90,336			90,336
Noncurrent tax liabilities	8,171			(1,063		)	7,108
Other noncurrent liabilities	7,570			19,540			27,110

Total long-term liabilities	1,250,802			3,666,192			4,916,994


Shareholders’ equity (deficit)
Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued and outstanding at March 31, 2015)	—			—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 81,873,026 shares issued and 79,705,633 shares outstanding, at March 31, 2015)	791			27			818
Treasury stock, at cost (2,167,393 shares issued and held at March 31, 2015)	—			(28,414		)	(28,414		)
Additional paid-in capital	929,598			37,776			967,374
Retained deficit	(352,392		)	(1,281,016		)	(1,633,408		)
Accumulated other comprehensive (loss) income	(2,998		)	—			(2,998		)

Total shareholders’ equity (deficit)	574,999			(1,271,627		)	(696,628		)

Total liabilities and shareholders’ equity (deficit)	$	2,280,678		$	2,443,807		$	4,724,485

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

	As Previously			Restatement
	Reported			Adjustments			As Restated

Assets
Current assets
Cash and cash equivalents	$	208,673		$	—		$	208,673
Receivables, net of allowance for doubtful accounts of $2,004	41,618			—			41,618
Prepaid expenses	68,947			1,838			70,785
Deferred income taxes	55,579			(15,236		)	40,343
Other current assets	11,189			—			11,189

Total current assets	386,006			(13,398		)	372,608

Property and equipment, net	769,145			1,900,587			2,669,732
Other assets
Investment in and advances to unconsolidated affiliates	179,551			—			179,551
Goodwill	277,582			596,602			874,184
Other intangible assets, net	370,562			48,891			419,453
Deferred income taxes	79,067			(79,067		)	—
Advances to Jamul Tribe	62,048						62,048
Other assets	87,318			—			87,318

Total other assets	1,056,128			566,426			1,622,554

Total assets	$	2,211,279		$	2,453,615		$	4,664,894


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

Total current liabilities	435,519			49,068			484,587


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

Total long-term liabilities	1,221,274			3,667,047			4,888,321


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

Total shareholders’ equity (deficit)	554,486			(1,262,500		)	(708,014		)

Total liabilities and shareholders’ equity (deficit)	$	2,211,279		$	2,453,615		$	4,664,894

The following table presents the condensed consolidated statement of income as previously reported, restatement adjustments and the condensed consolidated statement of income as restated for the three months ended March 31, 2015:

	As Previously			Restatement
	Reported			Adjustments			As Restated

Revenues
Gaming	$	591,336		$	—		$	591,336
Food, beverage and other	108,763			—			108,763
Management service fee	1,927			—			1,927

Revenues	702,026			—			702,026
Less promotional allowances	(37,888		)	—			(37,888		)

Net revenues	664,138			—			664,138

Operating expenses
Gaming expense	294,895			—			294,895
Food, beverage and other	77,929			—			77,929
General and administrative	116,069			187			116,256
Rental expense related to Master Lease	108,845			(108,845		)	—
Depreciation and amortization	42,922			20,447			63,369

Total operating expenses	640,660			(88,211		)	552,449

Income from operations	23,478			88,211			111,689


Other income (expenses)
Interest expense	(12,163		)	(96,183		)	(108,346		)
Interest income	1,870			—			1,870
Income from unconsolidated affiliates	3,982			—			3,982
Other	3,089			—			3,089

Total other expenses	(3,222		)	(96,183		)	(99,405		)


Income from operations before income taxes	20,256			(7,972		)	12,284
Income tax (benefit) provision	9,260			1,155			10,415

Net income	$	10,996		$	(9,127	)	$	1,869


Earnings per common share:
Basic earnings per common share	$	0.12		$	(0.10	)	$	0.02
Diluted earnings per common share	$	0.12		$	(0.10	)	$	0.02

	As Previously			Restatement
	Reported			Adjustments			As Restated

Revenues
Gaming	$	570,683		$	—		$	570,683
Food, beverage and other	104,870			—			104,870
Management service fee	2,458			—			2,458

Revenues	678,011			—			678,011
Less promotional allowances	(36,931		)	—			(36,931		)

Net revenues	641,080			—			641,080

Operating expenses
Gaming expense	286,077			(2,809		)	283,268
Food, beverage and other	77,538			—			77,538
General and administrative	107,739			(164		)	107,575
Rental expense related to Master Lease	104,309			(104,309		)	—
Depreciation and amortization	47,366			22,819			70,185

Total operating expenses	623,029			(84,463		)	538,566

Income from operations	18,051			84,463			102,514


Other income (expenses)
Interest expense	(11,295		)	(93,219		)	(104,514		)
Interest income	467			—			467
Income from unconsolidated affiliates	2,483			—			2,483
Other	1,631			—			1,631

Total other expenses	(6,714		)	(93,219		)	(99,933		)


Income from operations before income taxes	11,337			(8,756		)	2,581
Income tax (benefit) provision	6,800			(4,799		)	2,001

Net income	$	4,537		$	(3,957	)	$	580


Earnings per common share:
Basic earnings per common share	$	0.05		$	(0.04	)	$	0.01
Diluted earnings per common share	$	0.05		$	(0.04	)	$	0.01

The following table presents the condensed consolidated statement of cash flow as previously reported, restatement adjustments and the condensed consolidated statement of cash flows as restated for the three months ended March 31, 2015:

	As Previously			Restatement
	Reported			Adjustments			As Restated

Three Months Ended March 31, 2015:
Operating activities
Net income	$	10,996		$	(9,127	)	$	1,869
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	42,922			20,447			63,369
Amortization of items charged to interest expense	1,505			—			1,505
Accretion of settlement value on other noncurrent liabilities	351			—			351
Loss on sale of fixed assets	153			—			153
Income from unconsolidated affiliates	(3,982		)	—			(3,982		)
Distributions of earnings from unconsolidated affiliates	8,000			—			8,000
Deferred income taxes	15,374			3,274			18,648
Charge for stock-based compensation	2,084			—			2,084
Decrease (increase)
Accounts receivable	727			—			727
Prepaid expenses and other current assets	(2,742		)	—			(2,742		)
Other assets	6,400			—			6,400
Increase (decrease)
Accounts payable	2,887			—			2,887
Accrued expenses	4,985			(54		)	4,931
Accrued interest	6,264			—			6,264
Accrued salaries and wages	(14,363		)	—			(14,363		)
Gaming, pari-mutuel, property and other taxes	3,630			124			3,754
Income taxes	(9,529		)	(2,209		)	(11,738		)
Other current and noncurrent liabilities	(11,620		)	(70		)	(11,690		)
Other noncurrent tax liabilities	1,519			90			1,609

Net cash provided by operating activities	65,561			12,475			78,036

Investing activities
Capital project expenditures, net of reimbursements	(36,929		)	—			(36,929		)
Capital maintenance expenditures	(11,860		)	—			(11,860		)
Advances to Jamul Tribe	(16,341		)	—			(16,341		)
Proceeds from sale of property and equipment	146			—			146
Investment in joint ventures	(328		)	—			(328		)

Net cash used in investing activities	(65,312		)	—			(65,312		)

Financing activities
Proceeds from exercise of options	2,743						2,743
Principal payments on financing obligation with GLPI	—			(12,475		)	(12,475		)
Proceeds from issuance of long-term debt, net of issuance costs	45,000			—			45,000
Principal payments on long-term debt	(21,886		)	—			(21,886		)
Proceeds from insurance financing	885			—			885
Payments on insurance financing	(4,314		)	—			(4,314		)
Tax benefit from stock options exercised	6,379			—			6,379

Net cash provided by (used in) financing activities	28,807			(12,475		)	16,332

Net increase (decrease) in cash and cash equivalents	29,056			—			29,056
Cash and cash equivalents at beginning of year	208,673			—			208,673

Cash and cash equivalents at end of year	$	237,729		$	—		$	237,729


Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	4,036		$	96,143		$	100,179
Income taxes paid	$	226		$	—		$	226

	As Previously			Restatement
	Reported			Adjustments			As Restated

Three Months Ended March 31, 2014:
Operating activities
Net income	$	4,537		$	(3,957	)	$	580
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47,366			22,819			70,185
Amortization of items charged to interest expense	1,507			—			1,507
Gain on sale of fixed assets	(49		)	—			(49		)
Income from unconsolidated affiliates	(2,483		)	—			(2,483		)
Distributions of earnings from unconsolidated affiliates	5,500			—			5,500
Deferred income taxes	1,803			(1,515		)	288
Charge for stock-based compensation	2,579			—			2,579
Decrease (increase)
Accounts receivable	(599		)	—			(599		)
Prepaid expenses and other current assets	(12,739		)	(365		)	(13,104		)
Other assets	(1,854		)	8,941			7,087
Increase (decrease)
Accounts payable	2,186			—			2,186
Accrued expenses	(11,384		)	(2,882		)	(14,266		)
Accrued interest	2,484			—			2,484
Accrued salaries and wages	(15,590		)	(40		)	(15,630		)
Gaming, pari-mutuel, property and other taxes	2,768			(27		)	2,741
Income taxes	(7,582		)	—			(7,582		)
Other current and noncurrent liabilities	669			138			807
Other noncurrent tax liabilities	4,489			(3,284		)	1,205

Net cash provided by operating activities	23,608			19,828			43,436

Investing activities
Capital project expenditures, net of reimbursements	(12,957		)	—			(12,957		)
Capital maintenance expenditures	(24,084		)	—			(24,084		)
Advances to Jamul Tribe	—			(8,573		)	(8,573		)
Proceeds from sale of property and equipment	129			—			129
Decrease in cash in escrow	18,000			—			18,000
Acquisition of gaming license	(25,586		)	—			(25,586		)

Net cash used in investing activities	(44,498		)	(8,573		)	(53,071		)

Financing activities
Proceeds from exercise of options	5,581			—			5,581
Principal payments on financing obligation with GLPI	—			(11,255		)	(11,255		)
Proceeds from issuance of long-term debt, net of issuance costs	(327		)	—			(327		)
Principal payments on long-term debt	(6,898		)	—			(6,898		)
Proceeds from insurance financing	14,335			—			14,335
Payments on insurance financing	(4,853		)	—			(4,853		)
Tax benefit from stock options exercised	7,752			—			7,752

Net cash provided by (used in) financing activities	15,590			(11,255		)	4,335

Net increase (decrease) in cash and cash equivalents	(5,300		)	—			(5,300		)
Cash and cash equivalents at beginning of year	292,995			—			292,995

Cash and cash equivalents at end of year	$	287,695		$	—		$	287,695


Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	7,278		$	92,047		$	99,325
Income taxes paid	$	352		$	—		$	352