1. Business and Basis of Presentation

Penn National Gaming, Inc. ("Penn") and together with its subsidiaries (collectively, the "Company") is a diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. The Company was incorporated in Pennsylvania in 1982 as PNRC Corp. and adopted its current name in 1994, when the Company became a publicly traded company. 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, along with our joint venture partner, opened Hollywood Casino at Kansas Speedway on February 3, 2012. In Ohio, we have opened four new gaming properties over the last four years, including: Hollywood Casino Toledo on May 29, 2012, Hollywood Casino Columbus on October 8, 2012, Hollywood Gaming at Dayton Raceway on August 28, 2014, and Hollywood Gaming at Mahoning Valley Race Course on September 17, 2014. In addition, on November 2, 2012, we acquired Harrah's St Louis, which we subsequently rebranded as Hollywood Casino St Louis. On June 24, 2015, we opened Plainridge Park Casino an integrated racing and slots-only gaming facility in Plainville, Massachusetts. On August 25, 2015, we completed the acquisition of our first Las Vegas strip asset, Tropicana Hotel and Casino in Las Vegas, Nevada. On September 1, 2015 we completed our acquisition of Prairie State Gaming, one of the largest video gaming terminal route operators in Illinois. In addition, we are developing a Hollywood Casino branded gaming facility on the Jamul Indian Village near San Diego, California, which we will manage upon its anticipated opening in mid-2016.

As of December 31, 2015, the Company owned, managed, or had ownership interests in twenty-seven facilities in the following seventeen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario. On July 30, 2014, the Company closed its facility in Sioux City, Iowa. In addition, Beulah Park and Raceway Park in Ohio were closed as the racetracks were relocated to Hollywood Gaming at Mahoning Valley Race Course and Hollywood Gaming at Dayton Raceway, respectively, both of which opened in the third quarter of 2014.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.

On March 7, 2016, the Company filed with the SEC restated consolidated financial statements for the years ended December 31, 2014 and 2013, as well as for the interim periods ended March 31, 2015 and June 30, 2015, respectively. The restatement of the Company's audited financial statements primarily results from the Company's accounting for its November 1, 2013 spin-off of real estate assets to Gaming and Leisure Properties, Inc. ("GLPI") under the Master Lease Agreement, which had been 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 transaction 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 consolidated balance sheets therefore include an adjustment to property and equipment, net for the carrying value of the real property assets leased from GLPI of $2.04 billion at December 31, 2014, and additional liabilities of $3.61 billion at December 31, 2014, representing the present value of the future minimum lease payments due to GLPI under the Master Lease. Consequently, the 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, along with the periodic reduction of the financing obligation reflected in the consolidated balance sheets. The lease payment amounts previously recorded as rent expense were $421.4 million and $69.5 million for the years ended December 31, 2014 and 2013, respectively. The increases to interest expense and depreciation expense as a result of the restatement were $379.2 million and $89.8 million, respectively, for the year ended December 31, 2014, and $62.1 million and $14.8 million, respectively, for the year ended December 31, 2013.

Additionally, this change in accounting treatment resulted in adjustments to the carrying values of the Company's reporting units as well as differences in the allocation of the GLPI financing obligation to the impacted reporting units, which changed each reporting unit's fair value. The resultant changes to the Company's previously recognized impairment charges are described below.

As part of its restatement, the Company also identified certain other errors affecting the consolidated financial statements as of and for the years ended December 31, 2014 and 2013:

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.

The Company concluded that the distribution of Hollywood Casino Perryville and Hollywood Casino Baton Rouge to GLPI should be presented as discontinued operations in accordance with Accounting Standards Codification ("ASC") 205-20, Discontinued Operations. Refer to note 21 for further details.

During 2014, the Company incurred a liability aggregating $150 million to State of Ohio in return for the right to locate its racing operations from Toledo, Ohio to Dayton, Ohio (Hollywood Gaming at Dayton Raceway) and from Grove City, Ohio to Austintown, Ohio (Hollywood Gaming at Mahoning Valley). The Company originally accounted for these costs as a cost of the real estate and was therefore 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. This resulted in a decrease to depreciation expense of $3.6 million for the year ended December 31, 2014.

The Company concluded that cash totaling $240.2 million that was distributed to GLPI in connection with the Spin-Off (see Note 2) should have been classified in the 2013 consolidated statement of cash flows as a cash outflow from financing activities rather than a cash outflow from investing activities.

The Company concluded that the Carlino exchange transaction should have been accounted for as a treasury stock transaction with the $10.7 million excess of the fair value of the consideration of the GLPI common stock exchanged at $39.1 million over the fair value of the treasury stock received of $28.4 million recorded as a transaction cost incurred in connection with the Spin-Off, which is included in general and administrative expenses.

The Company concluded that as a result of the failed spin-off leaseback accounting treatment which resulted in a significant increase to its net deferred tax assets, a valuation allowance should be recorded on the Company's net deferred tax assets given the significant negative evidence associated with being in or expecting to be 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. As a result, a valuation allowance of $47.7 million and $90.3 million was recognized as a component of income tax provision (benefit) during the years ended December 31, 2014 and 2013, respectively.

The Company reclassified a contingent earn-out liability from long-term debt to other non-current liabilities which totaled $19.2 million at December 31, 2014. Additionally, changes in the fair value of this liability which totaled $0.7 million for the year ended December 31, 2014 were reclassified from interest expense to general and administrative expenses.

The Company corrected the classification of a corporate airplane lease that had previously been accounted for as an operating lease but upon review should have been accounted for as a capital lease. This resulted in an increase to net property and equipment of $7.0 million at December 31, 2014 as well as an increase to long term debt of $24.9 million at December 31, 2014. It also resulted in an increase to interest expense, with an offsetting decrease to general and administrative costs of $0.7 million for the years ended December 31, 2014, 2013, and 2012 as well as an increase to depreciation expense of $2.2 million for the years ended December 31, 2014, 2013, and 2012, respectively. This error also resulted in a reduction of the Company's retained earnings balance at December 31, 2011 of $7.9 million.

The Company corrected the income tax provision and related income tax balances on the consolidated balance sheet and 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 consolidated financial statements.