SEC Filing | PENN Entertainment

FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-24206 Penn National Gaming, Inc. (Exact name of Registrant as specified in its charter) Pennsylvania 23-2234473 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Penn National Gaming, Inc. 825 Berkshire Blvd., Suite 200 Wyomissing, PA 19610 (Address of principal executive offices) (Zip code) 610-373-2400 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____

(APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title Outstanding as of May 10, 2000 Common Stock Par value $.01 per share 14,925,975 THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS REPORT LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND", "ESTIMATE", "ANTICIPATE", "BELIEVE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIOUNARY STATEMENTS") ARE DISCLOSED IN THIS REPORT AND IN OTHER MATERIALS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. References to "Penn National Gaming" or the "Company" include Penn National Gaming, Inc. and its subsidiaries. 2

Penn National Gaming, Inc. and Subsidiaries INDEX PART I - FINANCIAL INFORMATION PAGE Item 1 - Financial Statements Consolidated Balance Sheets - March 31, 2000 (unaudited) and December 31, 1999 4-5 Consolidated Statements of Income - Three Months Ended March 31, 2000 and 1999 (unaudited) 6 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2000 (unaudited) 7 Consolidated Statements of Cash Flow - Three Months Ended March 31, 2000 and 1999 (unaudited) 8 Notes to Consolidated Financial Statements 9-15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-18 Item 3 - Changes in Information About Market Risk 19 - ------------------------------------------------- PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 20 - ----------------------------------------- Signature Page 21 3

Part I. Financial Information Item 1. Financial Statements PENN NATIONAL GAMING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) March 31, December 31, 2000 1999 (Unaudited) ---------------------------------------- Assets Current assets Cash and cash equivalents $ 11,430 $ 9,434 Accounts receivable 4,410 4,779 Prepaid expenses and other current assets 2,192 1,793 Deferred income taxes 669 888 Prepaid income taxes - 1,088 ---------------------------------------- Total current assets 18,701 17,982 ---------------------------------------- Property, plant and equipment, at cost Land and improvements 27,878 27,988 Building and improvements 72,114 70,870 Furniture, fixtures and equipment 37,870 36,195 Transportation equipment 887 860 Leasehold improvements 9,806 9,802 Construction in progress 991 1,980 ---------------------------------------- 149,546 147,695 Less accumulated depreciation and amortization 22,479 20,824 ---------------------------------------- Net property, plant and equipment 127,067 126,871 ---------------------------------------- Other assets Investment in and advances to unconsolidated affiliate 13,449 12,862 Investment in minority interest purchase 5,845 - Cash in escrow 5,000 5,000 Excess of cost over fair market value of net assets acquired (net of accumulated amortization of $2,762 and $2,611, respectively) 21,430 21,582 Deferred financing costs 4,825 5,014 Miscellaneous 1,262 1,289 ---------------------------------------- Total other assets 51,811 45,747 ---------------------------------------- $ 197,579 $ 190,600 ---------------------------------------- See accompanying notes to consolidated financial statements. 4

PENN NATIONAL GAMING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) March 31, December 31, 2000 1999 (Unaudited) -------------------------------------- Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt and capital lease obligations $ 5,160 $ 5,160 Accounts payable 5,346 10,210 Purses due horsemen 3,601 2,114 Uncashed pari-mutuel tickets 1,641 1,351 Accrued expenses 1,485 2,694 Accrued interest 2,302 433 Accrued salaries and wages 930 1,098 Customer deposits 946 800 Taxes, other than income taxes 2,189 1,491 Income taxes 845 - -------------------------------------- Total current liabilities 24,445 25,351 -------------------------------------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 90,292 86,053 Deferred income taxes 12,881 12,924 -------------------------------------- Total long-term liabilities 103,173 98,977 -------------------------------------- Commitments and contingencies Shareholders' equity Preferred stock,$.01 par value, authorized 1,000,000 shares; issued none - - Common stock,$.01 par value, authorized 20,000,000 shares; issued 15,332,675 and 15,314,175, respectively 153 153 Treasury stock, 424,700 shares at cost (2,379) (2,379) Additional paid in capital 38,597 38,527 Retained earnings 33,590 29,971 -------------------------------------- Total shareholders' equity 69,961 66,272 -------------------------------------- $ 197,579 $ 190,600 -------------------------------------- See accompanying note to consolidated financial statements. 5

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Three Months Ending March 31, 2000 1999 --------------------------------- Revenue Pari-mutuel revenues Live races $ 4,065 $ 2,414 Import simulcasting 19,816 15,301 Export simulcasting 1,594 511 Gaming revenue 22,166 11,297 Admissions, programs and other racing revenue 1,656 1,120 Concessions revenues 3,378 2,146 Earnings from unconsolidated affiliates 587 - --------------------------------- Total revenues 53,262 32,789 --------------------------------- Operating expenses Purses, stakes, and trophies 9,571 5,711 Direct salaries, payroll taxes and employee benefits 5,372 3,715 Simulcast expenses 3,501 2,387 Pari-mutuel taxes 2,322 1,669 Lottery taxes and administration 8,748 4,489 Other direct meeting expenses 6,315 4,592 Concessions expenses 2,974 2,022 Other operating expenses 4,437 3,074 Horsemen's action expenses - 1,250 Depreciation and amortization 2,176 2,015 --------------------------------- Total operating expenses 45,416 30,924 --------------------------------- Income from operations 7,846 1,865 --------------------------------- Other income (expense) Interest (expense) (2,382) (2,125) Interest income 450 209 Other (154) - --------------------------------- Total other (expense) (2,086) (1,916) --------------------------------- Income (loss) before income taxes 5,760 (51) Taxes (benefit) on income 2,141 (73) --------------------------------- Net income $ 3,619 $ 22 ================================= Per share data Basic $ .24 $ .00 Diluted $ .24 $ .00 Weighted average shares outstanding Basic 14,898 14,762 Diluted 15,212 15,079 See accompanying notes to consolidated financial statements. 6

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data) (Unaudited) Additional Common Stock Treasury Paid-In Retained Shares Amount Stock Capital Earnings Total Balance, January 1, 2000 15,314,175 $ 153 $ (2,379) $ 38,527 $ 29,971 $ 66,272 Issuance of common stock 18,500 - - 70 - 70 Net income for the three months ended March 31, 2000 - - - - 3,619 3,619 - ------------------------------------ ------------ ------------- ------------- ------------- ------------- ----------- Balance, March 31, 2000 15,332,675 $ 153 $ (2,379) $ 38,597 $ 33,590 $ 69,961 ==================================== ============ ============= ============= ============= ============= =========== See accompanying notes to consolidated financial statements. 7

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) Three Months Ended March 31, 2000 1999 ---------------------------------- Cash flows from operating activities Net income $ 3,619 $ 22 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,176 2,015 Income from unconsolidated affiliates (587) - Deferred income taxes 176 232 Decrease (increase) in Accounts receivable 369 533 Prepaid expenses (498) (149) Prepaid income taxes 1,088 (482) Miscellaneous other assets 25 (9) Increase (decrease) in Accounts payable (4,865) (562) Purses due horsemen 1,487 871 Uncashed pari-mutuel tickets 290 152 Accrued expenses (1,209) 639 Accrued interest 1,869 1,975 Accrued salaries & wages (168) 40 Customer deposit 146 2 Taxes, other than income payable 698 (152) Income taxes 845 - ---------------------------------- Net cash provided by operating activities 5,461 5,127 ---------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (1,851) (1,458) Note receivable - (11,250) Minority interest purchase (5,845) - ---------------------------------- Net cash (used) in investing activities (7,696) (12,708) ---------------------------------- Cash flows from financing activities Proceeds from sale of common stock 70 29 Proceeds from long-term debt 4,247 11,500 Principal payments on long-term debt and capital lease (8) (17) obligations Increase in unamortized deferred financing costs (78) (579) ---------------------------------- Net cash provided by financing activities 4,231 10,933 ---------------------------------- Net increase in cash and cash equivalents 1,996 3,352 Cash and cash equivalents, at beginning of period 9,434 6,826 ---------------------------------- Cash and cash equivalents, at end of period $ 11,430 $ 10,178 ================================== See accompanying notes to consolidated financial statements 8

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Financial Statement Presentation The accompanying consolidated financial statements are unaudited and include the accounts of Penn National Gaming, Inc., ("Penn") and its wholly and majority owned subsidiaries, (collectively, the "Company"). All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company as of March 31, 2000 and the results of its operations for the three month periods ended March 31, 2000 and 1999. The results of operations experienced for the three month period ended March 31, 2000 are not necessarily indicative of the results to be experienced for the fiscal year ended December 31, 2000. The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying notes should therefore be read in conjunction with the Company's December 31, 1999 annual financial statements. 2. Wagering Information (in thousands) Three months ended March 31, 2000 Penn Pocono Charles National Downs Town Total Pari-mutuel wagering in-state on company live races $ 13,345 $ - $ 5,770 $ 19,115 ---------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 49,710 32,672 12,598 94,980 Export simulcasting to out of State wagering facilities 38,190 - 14,693 52,883 ---------------------------------------------------------------- 87,900 32,672 27,291 147,863 ---------------------------------------------------------------- Total pari-mutuel wagering $ 101,245 $32,672 $ 33,061 $ 166,978 ================================================================ 9

Three months ended March 31, 1999 Penn Pocono Charles National Downs Town Total Pari-mutuel wagering in-state on company live races $ 6,679 $ - $ 5,043 $ 11,722 ---------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 27,605 35,164 12,599 75,368 Export simulcasting to out of State wagering facilities 17,154 - - 17,154 ---------------------------------------------------------------- 44,759 35,164 12,599 92,522 ---------------------------------------------------------------- Total pari-mutuel wagering $ 51,438 $35,164 $ 17,642 $ 104,244 ================================================================ 3. Commitments At March 31, 2000, the Company was contingently obligated under letters of credit with face amounts aggregating $1,970,000. These amounts consisted of $1,727,000 relating to horsemen's account balances, $104,000 for Pennsylvania pari-mutuel taxes and $139,000 for other items. 4. Supplemental Disclosures of Cash Flow Information Cash paid during the three months ended March 31, 2000 and 1999 for interest was $422,000 and $67,000, respectively. Cash paid during the three months ended March 31, 2000 and 1999 for income taxes was $29,800 and $199,000, respectively. 10

5. Subsidiary Guarantors Summarized financial information for the three month period ended March 31, 2000 and 1999 for Penn National Gaming, Inc., ("Parent"), the Subsidiary Guarantors and Subsidiary Nonguarantors is as follows: - ----------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ----------------------------------------------------------------------------------------------------------------- As of March 31, 2000 Consolidated Balance Sheet (In Thousands) Current assets $ 3,316 $ 8,283 $ 8,125 $ (1,023) $ 18,701 Net property, plant and equipment 822 79,226 47,019 - 127,067 Other assets 119,026 172,364 7,609 (247,188) 51,811 - ----------------------------------------------------------------------------------------------------------------- Total $ 123,164 $ 259,873 $ 62,753 $ (248,211) $ 197,579 - ----------------------------------------------------------------------------------------------------------------- Current liabilities $ 2,358 $ 26,491 $ 6,985 $ (11,389) $ 24,445 Long-term liabilities 81,995 96,180 53,449 (128,451) 103,173 Shareholders' equity 38,811 137,202 2,319 (108,371) 69,961 - ----------------------------------------------------------------------------------------------------------------- Total $ 123,164 $ 259,873 $ 62,753 $ (248,211) $ 197,579 - ----------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2000 Consolidated Statement of Income (In Thousands) Total revenues $ 6 $ 26,890 $ 28,718 $ (2,352) $ 53,262 Total operating expenses (1,469) 24,855 24,382 (2,352) 45,416 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Income from operations 1,475 2,035 4,336 - 7,846 Other income(expenses) (1,181) 411 (1,162) (154) (2,086) - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 294 2,446 3,174 (154) 5,760 Taxes on income 126 2,067 - (52) 2,141 - ----------------------------------------------------------------------------------------------------------------- Net income $ 168 $ 379 $ 3,174 $ (102) $ 3,619 - ----------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2000 Consolidated Statement of Cash Flow (In Thousands) Net cash provided by (used in) operating activities $ (3,780) $ (4,711) $ (3,893) $ 17,845 $ 5,461 Net cash provided by (used in) investing activities 2,841 2,606 (1,298) (11,845) (7,696) Net cash provided by (used in) financing activities 320 3,920 5,991 (6,000) 4,231 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (619) 1,815 800 - 1,996 Cash and cash equivalents at January 1, 2000 2,544 2,538 4,352 - 9,434 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at March 31, 2000 $ 1,925 $ 4,353 $ 5,152 $ - $ 11,430 - ----------------------------------------------------------------------------------------------------------------- 11

- ----------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ----------------------------------------------------------------------------------------------------------------- As of March 31, 1999 Consolidated Balance Sheet (In Thousands) Current assets $ 6,667 $ 6,613 $ 4,687 $ (418) $ 17,549 Net property, plant and equipment 13,200 62,510 44,778 - 120,488 Other assets 114,009 154,037 1,804 (232,371) 37,479 - ----------------------------------------------------------------------------------------------------------------- Total $ 133,876 $ 223,160 $ 51,269 $ (232,789) $ 175,516 - ----------------------------------------------------------------------------------------------------------------- Current liabilities $ 8,520 $ 14,165 $ 7,886 $ (10,410) $ 20,161 Long-term liabilities 87,735 78,313 47,559 (117,339) 96,268 Shareholders' equity (deficiency) 37,621 130,682 (4,176) (105,040) 59,087 - ----------------------------------------------------------------------------------------------------------------- Total $ 133,876 $ 223,160 $ 51,269 $ (232,789) $ 175,516 - ----------------------------------------------------------------------------------------------------------------- Three months ended March 31, 1999 Consolidated Statement of Income (In Thousands) Total revenues $ 3,696 $ 13,852 $ 16,365 $ (1,124) $ 32,789 Total operating expenses 2,019 15,179 14,850 (1,124) 30,924 - ----------------------------------------------------------------------------------------------------------------- Income from operations 1,677 (1,327) 1,515 - 1,865 Other income(expenses) (1,506) 755 (1,165) - (1,916) - ----------------------------------------------------------------------------------------------------------------- Income(loss)before income taxes 171 (572) 350 - (51) Taxes (benefit) on income 89 (324) 162 - (73) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ 82 $ (248) $ 188 $ - $ 22 - ----------------------------------------------------------------------------------------------------------------- Three months ended March 31, 1999 Consolidated Statement of Cash Flow (In Thousands) Net cash provided by (used in) operating activities $ 2,506 $ 1,763 $ 858 $ - $ 5,127 Net cash provided by (used in) investing activities (11,379) (716) (613) - (12,708) Net cash provided by (used in) financing activities 11,529 (596) - - 10,933 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,656 451 245 - 3,352 Cash and cash equivalents at January 1, 1999 2,001 1,705 3,120 - 6,826 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at March 31, 1999 $ 4,657 $ 2,156 $ 3,365 $ - $ 10,178 - ----------------------------------------------------------------------------------------------------------------- 12

6. Mississippi Agreement On December 10, 1999, the Company entered into two definitive agreements to purchase all of the assets of the Casino Magic hotel, casino, golf resort, recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi and the Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle Entertainment, Inc. formerly Hollywood Park, Inc. (NYSE:PNK) for $195 million. These agreements are contingent upon each other. In addition to acquiring all of the operating assets and related operations of the Casino Magic Bay St. Louis and Boomtown Biloxi properties (the "Mississippi Acquisitions"), the Company will enter into a licensing agreement to use Boomtown and Casino Magic names and marks at the properties being acquired. The transaction is subject to certain closing conditions including the approval of the Mississippi Gaming Commission, financing and expiration of the applicable Hart-Scott-Rodino waiting period. As part of the agreement, the Company paid a deposit of $5 million to an escrow account, which is refundable if certain conditions are not met. In connection with financing the Mississippi acquisition, the Company will explore a number of financing alternatives, which may include repaying or redeeming its existing debt. The Company received approval for a gaming license from the Mississippi Gaming Commission on April 20, 2000. 7. New Jersey Joint Venture On January 28, 1999, pursuant to a First Amendment to an Asset Purchase Agreement by and among Greenwood New Jersey, Inc. ("Greenwood"), International Thoroughbred Breeders Inc., Garden State Race Track Inc., Freehold Racing Association, Atlantic City Harness, Inc. and Circa 1850, Inc., the original parties to an Asset Purchase Agreement entered into as of July 2, 1998 and the Company (the "Agreement"), and pursuant to which the Company entered into a joint venture ("Joint Venture"), the Company, along with its Joint Venture partner, Greenwood, agreed to purchase certain assets of the Garden State Race Track and Freehold Raceway, both located in New Jersey (the "Acquisition"). The purchase price for the Acquisition was approximately $46 million (subject to reduction of certain disputed items, for which amounts have been placed in escrow). The purchase price consisted of $23 million in cash and $23 million pursuant to two deferred purchase price promissory notes in the amount of $22 million and $1 million each. On July 29, 1999, after receiving the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture, pursuant to which Pennwood, Inc. was formed with Greenwood New Jersey, Inc. (a wholly-owned subsidiary of Greenwood Racing, Inc. the owner of Philadelphia Park Race Track). Pursuant to the Joint Venture Agreement, the Company agreed to guarantee severally: (i) up to 50% of the obligation of the Joint Venture under its Put Option Agreement ($17.5 million) with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"); (ii) up to 50% of the Joint Venture obligation for the seven year lease at Garden State Park and; (iii) up to 50% of the Joint Venture obligation to International Thoroughbred Breeders, Inc. for the contingent purchase price notes ($10.0 million) relating to the operation subject to passage by the New Jersey legislature, by the Joint Venture of OTWs and telephone wagering accounts in New Jersey. In conjunction with the closing, the Company entered into a Debt Service Maintenance Agreement with Commerce Bank, N.A. for the funding of a $23.0 million credit facility to the Joint Venture. The Joint Venture Agreement provides for a limited obligation of the Company of $11.5 million subject to limitations provided for in the Company's 10.625% Senior Notes Indenture. The Company's investment in the Joint Venture is accounted for under the equity method, original investments are recorded at cost and adjusted by the Company's share of income or losses of the Joint Venture. The income for the three months ended March 31, 2000 of the Joint Venture is included in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income for the three months ended March 31, 2000. 13

Summarized balance sheet information for the Joint Venture as of March 31, 2000 is as follows (in thousands): Current assets $ 9,604 Property, plant and equipment, net 30,473 Other 17,983 --------------------- Total assets $ 58,060 ===================== Current liabilities $ 8,070 Long-term liabilities 46,221 Members' equity 3,769 --------------------- Total liabilities and members' equity $ 58,060 ===================== Summarized results of operations of the unconsolidated Joint Venture for the three months ended March 31, 2000 is as follows (in thousands): Revenues $ 14,679 Operating expenses 11,813 ------------------- EBITDA* 2,866 ------------------- Net Income $ 1,174 ------------------- * Earnings before interest, taxes, depreciation and amortization. 8. Trackpower, Inc. and eBet Limited In July 1999, the Company entered into an agreement with Trackpower, Inc. (OTC BB: TPWR) ("Trackpower") to serve as the exclusive pari-mutuel wagering hub operator for Trackpower. Trackpower provides direct-to-home digital satellite transmissions of horse racing to its subscriber base. The initial term of the contract is for five years with an additional five-year option available. The Company pays Trackpower a commission on all new revenues earned from their subscriber base. As an additional incentive to enter into the contract, the Company received warrants to purchase 5,000,000 shares of common stock of Trackpower at prices ranging from $1.58 per share to $2.58 per share. The warrants vest at 20% per year and expire on April 30, 2004. The fair market value of the warrants issued will be amortized over the vesting period or one year from the anniversary date of the agreement. As a result of the transition of operations in 1999, the amount to be amortized as a reduction of commissions earned in 1999 by Trackpower was not material. In March 2000, the Company entered into a letter of intent with Trackpower and eBet Limited ("eBet") which, if a definitive agreement is executed, will replace and restate the above described agreement between the Company and Trackpower. Under the terms of the letter of intent, the Company and eBet will contribute various assets, equipment, management agreements relating to our telephone account wagering systems and business operations to Trackpower. Under the proposed agreement, the Company will continue to receive the same level of income as in 1999, the Company and eBet will each receive 18,000,000 shares of Trackpower common stock as well as warrants to purchase additional shares exercisable at $1.00 per share. Upon completion of the proposed transaction the Company and eBet will each own 26.5% of Trackpower not including future exercise of options or warrants. The proposed agreement is subject to due diligence, regulatory and other approvals. 14

9. Minority Interest Purchase On March 15, 2000, the Company purchased from the BDC Group ("BDC"), its joint venture partner in West Virginia, BDC's 11% interest in PNGI Charles Town Gaming Limited Liability Company, which owns and operates Charles Town Races for $6.0 million in cash. The investment is recorded net of the minority interest tax liability of $155,000 or $5.845 million. The Company is in the process of determining the allocation of the purchase price to the various property, plant and equipment accounts. The allocation will be based on the results of an appraisal that is to be completed in June. As a result of the purchase, Charles Town Races is now a 100%-owned subsidiary of the Company. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The percentage of the Company's revenue derived from gaming operations has increased over the last few years as a result of the gaming operations at the Charles Town Entertainment Complex. The Company expects that the Mississippi Acquisition and the continued expansion of the Charles Town Entertainment Complex will cause this trend to continue. In the future the Company expects to alter the presentation of certain of its financial information to better capture this trend. An example of a type of presentation that the Company is likely to use is presented below. The results of operations for the three months ended March 31, 1999 and 2000 by property level are summarized as follows: Charles Town Racing Penn National and Pocono Downs and OTWs and Gaming OTWs (in thousands) 1999 2000 1999 2000 1999 2000 ---- ---- ---- ---- ---- ---- Revenues Gaming $11,399 $ 22,372 $ - $ - $ - $ - Racing 3,964 4,628 7,795 15,101 7,623 7,501 Other 1,002 1,718 635 1,171 509 490 ------------------------- ------------------------ ------------------------- Total revenues 16,365 28,718 8,430 16,272 8,132 7,991 Expenses Gaming 8,593 16,416 - - - - Racing 4,060 4,673 6,497 11,191 4,941 5,323 Other* 1,699 2,796 1,825 2,317 964 1,078 ------------------------- ------------------------ ------------------------- Total expenses 14,352 23,885 8,322 13,508 5,905 6,401 EBITDA Gaming 2,806 5,956 - - - - Racing (96) (45) 1,298 3,910 2,682 2,178 Other (697) (1,078) (1,190) (1,146) (455) (588) ------------------------- ------------------------ ------------------------- Total EBITDA $ 2,013 $ 4,833 $ 108 $ 2,764 $ 2,227 $ 1,590 ========================= ======================== ========================= * Other expenses include property level general and administrative expenses and excludes corporate overhead and non-recurring expenses. 15

Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999 Revenues for the three months ended March 31, 2000 increased by approximately $20.5 million or 62.4% to $53.3 million from $32.8 million for the three months ended March 31, 1999. The increase in revenues is attributed to Penn National Race Course running 48 live race days in the year 2000 compared to 18 live race days during a Horsemen action in the first quarter in 1999, the addition of 663 slot and video lottery machines at Charles Town and simulcast of race broadcasts from Charles Town in 2000. Operating expenses for the three months ended March 31, 2000 increased by approximately $14.5 million or 46.8% to $45.4 million from $30.9 million for the three months ended March 31, 1999. Included in operating expenses were non-recurring expenses for the three months ended March 31, 1999 for the Horsemen's action at Penn National Race Course ($1.3 million). Income from operations increased by $6.0 million to $7.8 million for the three months ended March 31, 2000 from $1.8 million for the three months ended March 31, 1999. Other expenses for the three months ended March 31, 2000 and 1999 consisted of approximately $2.1 million and $2.0 million, respectively, of net interest primarily due to the 10.625% Senior Notes, the Bank of America term loan and the revolving Credit Facility with First Union National Bank. Taxes on income increased by $2.2 million to $2.1 million for the three months ended March 31, 2000 from a credit of $.1 million for the three months ended March 31, 1999. Net income increased by $3.6 million to $3.6 million for the three months ended March 31, 2000 from $22,000 for the three months ended March 31, 1999 due to the factors described above. Charles Town Entertainment Complex Revenues increased at Charles Town by approximately $12.3 million or 75.5% to $28.7 million in 2000 from $16.4 million in 1999. Gaming revenue increased by $11.0 million or 96.2% to $22.4 million in 2000 from $11.4 million in 1999 due to the addition of 136 new video lottery machines and 565 new reel spinning, coin-out slot machines since the first quarter of last year. The average number of machines in play increased to 1,464 in 2000 from 837 in 1999 and the average win per machine increased to $169 in 2000 from $150 in 1999. Racing revenue increased by $.7 million or 16.7% to $4.6 million in 2000 from $3.9 million in 1999. The live meet consisted of 45 race days in 2000 compared to 39 race days in 1999 and a change in the schedule from a Wednesday afternoon race program to a Thursday evening race program to accommodate export simulcasting. Charles Town began exporting its live race program to tracks across the country on June 5, 1999 and generated export simulcasting revenues of $.5 million for the quarter. Concession revenues increased by approximately $.7 million or 71.4% to $1.7 million in 2000 from $1.0 million in 1999 due to increased attendance for gaming and racing and the expansion of the concession areas, dining room and buffet area. Operating expenses increased by $9.5 million or 66.4 % to $23.9 million in 2000 from $14.4 million in 1999. The increase was due to an increase in direct costs associated with additional wagering on horse racing and gaming machine play, the addition of gaming machines and floor space (new temporary facility for gaming machines), export simulcast expenses and expanded concession and dining capability and capacity. Penn National Race Course and OTW Facilities (Penn National Race Course) Penn National Race Course had an increase in revenue of approximately $7.9 million or 93.0% to $16.3 million in 2000 from $8.4 million in 1999. The increase in revenues is attributed to Penn National Race Course running 48 live race days in 2000 compared to 18 live race days during a Horsemen action in the first quarter that resulted in the closure of the facilities from February 16 to March 24, 1999. Operating expenses increased by approximately $5.2 million or 62.3% to $13.5 million in 2000 from $8.3 million in 1999 as a result of the increased race days. Included in the 1999 expenses is $1.3 million for the Horsemen's action. 16

Pocono Downs and OTW Facilities (Pocono Downs) Revenues at Pocono Downs decreased by $.1 million or 1.7% to $8.0 million in 2000 from $8.1 million in 1999. Revenue decreased at Allentown OTW ($.3 million) and Hazleton OTW ($.1 million) due to loss of Penn National Race Course customers wagering at Pocono Downs sites during the 1999 action. The revenue decrease was partially offset by revenue increases at Erie OTW, Carbondale OTW and the Pocono Downs racetrack. Expenses increased by approximately $.5 million or 8.4% to $6.4 million in 2000 from $5.9 million in 1999. New Jersey Joint Venture On July 29, 1999, after receiving the necessary approvals from the New Jersey Racing Commission and the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture. The Joint Venture operates Freehold Raceway and Garden State Race Track. Summarized results of operations of the unconsolidated Joint Venture for the three months ended March 31, 2000 include $14.7 million in revenue, $11.8 million in operating expenses and net income of $1.2 million. The Company's 50% share of net income or $.6 million is recorded as "Earnings from unconsolidated affiliates" on the income statement. Capital Expenditures The Company had capital expenditures of $1.8 million in 2000 compared to $1.5 million in 1999. Capital expenditures at Charles Town were approximately $1.3 million for machinery, equipment and improvements. Capital expenditures at Penn National and its OTW facilities ($.2 million) and Pocono Downs and its OTW facilities ($.3 million) were for equipment replacement and leasehold improvements. As a result, depreciation and amortization increased $.2 million or 8.9% to $2.2 million in 2000 from $2.0 million in 1999. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary sources of liquidity and capital resources have been cash flow from operations, borrowings from banks and proceeds from issuance of equity securities. Net cash provided from operating activities was $5.5 million for the period ended March 31, 2000. This consisted of net income and non-cash expenses ($5.2 million), a decrease in prepaid income taxes ($1.1 million) and an increase in corporate income tax liability ($.9 million) due to an increase in taxable income, a decrease in accounts payable and accrued expenses due to completion of construction for the temporary facility at Charles Town ($6.1 million), an increase in purses due horsemen ($1.5 million), an increase in taxes, other than income taxes ($.7 million) due to a change in payment schedules for Pennsylvania pari-mutuel taxes, an increase in accrued interest for the 10.625% Senior Notes ($1.9 million) and other changes in certain assets and liabilities ($.3 million). Cash flows used in investing activities for the period ended March 31, 2000 ($7.7 million) consisted of the Company's buyout of the 11% interest in Charles Town that was owned by other investors ($5.9 million), machinery, equipment and improvements at Charles Town ($1.3 million), and equipment replacement and building improvements at Penn National ($.2 million) and Pocono Downs ($.3 million) facilities. Cash flows provided by financing activities ($4.2 million) consisted of borrowings under the credit facility ($4.2 million) for Charles Town expansion and proceeds from the exercise of stock options and warrants ($.1 million). This was offset by an increase in financing costs ($.1 million) for amending the credit facility. The Company is subject to possible liabilities arising from the 17

environmental condition at the Landfill adjacent to Pocono Downs. Specifically, the Company may incur expenses in connection with the landfill in the future, which expenses may not be reimbursed by the four municipalities, which are parties to the Settlement Agreement. The Company is unable to estimate the amount, if any, that it may be required to expend. In 2000, the Company anticipates spending approximately $21.5 million on capital expenditures at its racetrack and OTW facilities. The Company anticipates expending approximately $18.2 million at the Charles Town Entertainment Complex for player tracking ($.7 million), new slot machines and conversion kits ($2.1 million), paddock casino and interior renovations ($7.4 million), machinery and equipment ($2.0 million) and other projects including construction of a structured parking facility, design and planning for a new hotel ($6.0 million). The Company also plans to spend approximately $261,000 at Pocono Downs, $550,000 at Penn National, $400,000 at the OTW facilities for building improvements and equipment and $2.0 million on building improvements and equipment for its new OTW facility in East Stroudsburg, Pennsylvania. The Company spent approximately $1.8 million on these projects in the first quarter. The Company entered into its Credit Facility with Bankers Trust Company, as Agent in 1996. This Credit Facility was amended and restated on January 29, 1999 with First Union National Bank replacing Bankers Trust Company, as Agent. The Credit Facility, as amended, provides for a $20 million revolving Credit Facility, including a $3 million sub-limit for standby letters of credit and a $5 million term loan. Under the terms of the Credit Facility, as amended, the Company borrowed an additional $11.5 million which was used to finance its share of the New Jersey Joint Venture (see Note 4). The revolving Credit Facility is secured by substantially all of the assets of the Company, except for the assets of the Charles Town Entertainment Complex. The revolving Credit Facility provides for certain covenants, including those of a financial nature. The $5.0 million term loan was repaid on December 16, 1999. At the Company's option, the revolving facility may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 2% or the revolving facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 3%. The outstanding amount under this Credit Facility as of March 31, 2000 was $12.9 million at an interest rate of 8.75%. Mandatory repayments of the revolving facility are required in an amount equal to a percentage of the net cash proceeds from any issuance or incurrence of equity or funded debt by the Company, that percentage to be dependent upon the then outstanding balance of the revolving facility and the Company's leverage ratio. Mandatory repayments of varying percentages are also required in the event of either asset sales in excess of stipulated amounts or defined excess cash flow. On December 13, 1999, the Company entered into a $20.0 million Senior Secured Multiple Draw Term Loan with Bank of America, as an Agent for a bank group. The term loan is payable in quarterly installments of $1.3 million principle plus interest. The loan is secured by gaming equipment and improvements at the Charles Town Entertainment Complex. Part of the term loan was used to repay the $5.0 million First Union term loan and the balance will be used to finance gaming equipment and improvements at the Charles Town Entertainment Complex. At the Company's option the term loan may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 1.75% or the facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 2.75%. The outstanding amount under this credit facility as of March 31, 2000 was $ 13.3 million at an interest rate of 8.89%. In connection with the Company's agreement to acquire all of the assets of Casino Magic Bay St. Louis and Boomtown Biloxi, the Company is exploring a number of financing alternatives, which may involve repaying or redeeming its existing debt. The Company expects to use part of the proceeds from any refinancing to make certain improvements to the Mississippi properties. The Company currently estimates that the cash generated from operations and available borrowings under the credit facilities will be sufficient to finance its current operations and planned capital expenditure requirements, not including the Mississippi Acquisition. There can be no assurance, however, that the Company will not be required to seek additional capital, in addition to that available from the foregoing sources. The Company may, from time to time, seek additional funding through public or private financing, including equity financing. There can be no assurance that adequate funding will be available as needed or, if available, on terms acceptable to the Company. 18

Item 3. Changes in Information about Market Risk Most of the Company's debt obligations at March 31, 2000 were fixed rate obligations, and management, therefore, does not believe that the Company has any material risk from its debt obligations. 19

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Purchase Agreement dated March 15, 2000, between PNGI Charles Town Gaming, LLC and BDC Group. Amendment No. 1 to Term Loan Agreement between the Company and Bank of America, dated March 29, 2000. Amendment No. 4 to Loan Agreement between the Company and First Union National Bank dated March 29, 2000. (b) Reports on Form 8-K None 20

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Penn National Gaming, Inc. May 12, 2000 By: /s/Robert S. Ippolito - ------------ ------------------------ Date Chief Financial Officer, Secretary/Treasurer 21

EXHIBIT INDEX Page 10.18a Purchase Agreement dated March 15, 2000, between PNGI Charles Town Gaming, LLC and BDC Group. 23-36 10.19a Amendment No. 1 to Term Loan Agreement between the Company and Bank of America, dated March 29, 2000. 37-38 10.20a Amendment No. 4 to Loan Agreement between the Company and First Union National Bank dated March 29, 2000. 39-48 22

AGREEMENT FOR SALE OF MEMBERSHIP INTERESTS IN PNGI CHARLES TOWN GAMING LIMITED LIABILITY COMPANY Agreement made as of this 15th day of March, 2000, by, between and among Thomas Hale Boggs, Jr., William C. Bryant, James A. Reeder, Sun Mountain Development, LLC and Timber Nation Limited Partnership (hereinafter individually a "Seller" and collectively the "Sellers" or the "BDC Group"), Penn National Gaming of West Virginia, Inc., a West Virginia Corporation, or its affiliated designee, (hereinafter "Buyer"), PNGI Charles Town Gaming Limited Liability Company, a West Virginia limited liability company (hereinafter the "LLC"), Penn National Gaming, Inc., a Pennsylvania Corporation (hereinafter "PENN"), and Dr. Henry G. Jarecki (hereinafter "Jarecki"). BACKGROUND: The BDC Group owns eleven percent of the Membership Interests in the LLC (collectively the "BDC Membership Interest" and individually a "Seller's Membership Interest"). The BDC Group desires to sell to the Buyer the BDC Membership Interest in accordance with that certain Second Amended and Restated Operating Agreement of the LLC dated as of October 17, 1997 among the BDC Group, the Buyer, the LLC and Bryant Development Company, Nominee (the "Operating Agreement"). The Buyer desires to purchase the BDC Membership Interest in accordance with the Operating Agreement and the terms and provisions hereof. A G R E E M E N T NOW THEREFORE, in consideration of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF THE BDC MEMBERSHIP INTEREST 1.1 Basic Transaction. On and subject to the terms and conditions of this Agreement, the Buyer agrees to and does hereby purchase from each Seller and each Seller agrees to and does hereby sell to the Buyer his or its Seller's Membership Interest, collectively constituting the entire BDC Membership Interest, for the consideration specified in this Article I. 1.2 Purchase Price. The Buyer agrees to pay to the Sellers Six Million ($6,000,000) Dollars (the "Purchase Price") in immediately available funds at the Closing (defined below) by wire transfer to such accounts and divided among the Sellers as set forth on Schedule 1.2.1, Column A, attached hereto and made a part hereof; provided that to the extent any amount is owed to Jarecki by any member of the BDC Group, the amount which is set forth on Schedule 1.2.1, Column B for such member shall be deducted by the Buyer from the amount otherwise payable to such member of the BDC Group and shall be paid by the Buyer to Jarecki at the Closing. The net amount payable by the Buyer to each BDC Group member and Jarecki is set forth on Schedule 1.2.1, Column C. 1.3 The Closing. The closing of the transaction contemplated by this Agreement (the "Closing") shall take place promptly after each party has executed and delivered this Agreement to PENN, but not later than March 31, 2000, or such other date as the parties hereto may agree (the "Closing Date"). 23

ARTICLE 2 REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION 2.1 Representations and Warranties of the Sellers. Each Seller individually represents and warrants to the Buyer as ----------------------------------------------- follows as of the date hereof and as of the Closing Date: 2.1.1 Authorization of Transaction. Each Seller has full power and authority to execute and deliver this Agreement and to perform his or its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of each Seller enforceable in accordance with its terms. Each Seller has given notice to, made any filing with or obtained any authorization, consent or approval of any person, firm, corporation or federal or state government agency, commissioner or board (hereinafter referred to as a "Person") necessary in order to consummate the transaction contemplated by this Agreement. 2.1.2 Noncontravention. Neither the execution and the delivery of this Agreement nor the consummation of the transaction contemplated hereby will violate any judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which any Seller is subject or conflict with or result in a breach of or constitute a default under any agreement, contract, instrument or other arrangement to which any Seller is a party or by which any Seller or any of any Seller's assets is subject. 2.1.3 Broker's Fees. No Seller has any liability or obligation to pay any fees or commission to any broker, finder or agent with respect to the transaction contemplated by this Agreement for which the Buyer could become liable or obligated. 2.1.4 Seller Membership Interest. Except for the promissory notes executed by various BDC Group members to Jarecki, which promissory notes will be extinguished at the Closing when the amounts set forth on Schedule 1.2.1., Column B are paid to Jarecki pursuant to the provisions of Section 1.2 above, each Seller owns the Seller's Membership Interest of record and beneficially and has not issued or granted to any person, firm or corporation any present or future right to acquire the Seller's Membership Interest or any interest therein except as set forth in the Operating Agreement. The Sellers' Membership Interests in the aggregate constitute all the BDC Membership Interest and individually the entire Membership Interest of each Seller in the LLC. 2.1.5No Seller Action. No Seller has taken any action or incurred any liability on behalf of the LLC. ---------------- 2.1.6 No Litigation. No action, suit or proceeding is pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (i) prevent consummation of the transactions contemplated by this Agreement, (ii) cause the transaction contemplated by this Agreement to be rescinded following the consummation, or (iii) adversely affect the right of the Buyer to own each Seller's Membership Interest (and no such injunction, judgment, order, decree, ruling or charge is in effect). 2.2 Representations and Warranties of the Buyer. The Buyer and PENN, jointly and severally, represent and warrant to the Sellers as follows as of the date of this Agreement and as of the Closing Date: 2.2.1 Organization and Qualification. PENN and each of its subsidiaries is a corporation duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and has the requisite corporate power to own its properties and to carry on its business as now being 24

conducted. PENN and each of its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a material adverse effect. The Buyer is an indirect wholly owned subsidiary of PENN. 2.2.2 Authorization of Transaction. The Buyer and PENN have full power and authority to execute and deliver this Agreement and to perform their respective obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Buyer and PENN enforceable in accordance with its terms and conditions. The Buyer and PENN have given notice to, made any filing with or obtained any authorization, consent or approval of any Person necessary in order to consummate the transaction contemplated by this Agreement. 2.2.3 Noncontravention. Neither the execution and the delivery of this Agreement nor the consummation of the transaction contemplated hereby will violate any judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which Buyer or PENN is subject or conflict with or result in a breach of or constitute a default under any agreement, contract, instrument or other arrangement to which Buyer or PENN is a party or by which Buyer or PENN or any of their assets is subject. 2.2.4 Broker's Fees. Neither Buyer nor PENN has any liability or obligation to pay any fees or commission to any broker, finder or agent with respect to the transaction contemplated by this Agreement for which any of the Sellers could become liable or obligated. 2.2.5 Investment. The Buyer is not acquiring the BDC Membership Interest with a view to or for sale in connection with any distribution in violation of the Securities Act of 1933, as amended (the "Act"). 2.2.6 Full Knowledge. The Buyer is the Managing Member of the LLC and has full and complete knowledge of the assets, liabilities and financial affairs of the LLC and is not relying on any representations or warranties of the Sellers (other than those specifically set forth herein) in reaching its decision to enter into this Agreement. 2.2.7 No Litigation. No action, suit or proceeding is pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (i) prevent consummation of the transactions contemplated by this Agreement, or (ii) cause the transaction contemplated by this Agreement to be rescinded following the consummation (and no such injunction, judgment, order, decree, ruling or charge is in effect). ARTICLE 3 TAX MATTERS 3.1 In the case of termination of the LLC for tax purposes (or if such a termination is deemed to occur) at Closing, a final federal income tax return shall be filed through March 15, 2000, the effective date hereof. Except in the event of such termination (or a deemed termination), and in the case of state and local income tax returns, if there is no deemed termination for such tax purposes, with respect to each of the Sellers, the LLC shall close its books as of the Closing Date to determine each Seller's distributive share of income, gain, loss, deduction or credit for the year in which the Closing occurs. ARTICLE 4 CONDITIONS TO CLOSING 4.1 The obligation of Sellers to close hereunder shall be subject to the satisfaction or waiver of the following conditions on or prior to Closing: 25

4.1.1 Buyer shall have delivered to the Sellers and Jarecki, respectively, the cash amounts set forth on Schedule 1.2.1, Column C, by wire transfer, as more fully set forth on Schedule 1.2.1. 4.1.2 Buyer and PENN shall have delivered to each Seller a release substantially in the form of Exhibit "A", attached hereto and made a part hereof. 4.1.3 Each of the representations and warranties of Buyer and PENN contained in Section 2.2 above shall be true and correct on and as of the Closing Date to the same extent as if made on and as of the Closing Date. 4.2 The obligation of Buyer and PENN to close hereunder shall be subject to the satisfaction of the following conditions on or prior to Closing: 4.2.1 Each of the representations and warranties of each of the Sellers contained in Section 2.1 above shall be true and correct on and as of the Closing Date to the same extent as if made on and as of the Closing Date. 4.2.2 Each Seller shall have delivered to Buyer and PENN a release substantially in the form of Exhibit "B" attached hereto and made a part hereof. ARTICLE 5 COVENANTS 5.1 Further Action. In case at any time, either before or after the Closing, any further action is necessary to carry out the purpose of this Agreement, each of the parties will take such further commercially reasonable action, including the execution and delivery of such further instruments and documents, as any other party may reasonably request. 5.2 Dissociation. Effective the close of business on March 15, 2000, each Seller shall be deemed to have dissociated from the LLC in accordance with Article 6 of the West Virginia Uniform Limited Liability Company Act and the Operating Agreement and shall thereafter cease to have any rights or obligations under the Operating Agreement or otherwise as a "Member" of the LLC. 5.3 Public Announcements. Neither party shall make any pubic announcement of the existence of this Agreement or the transaction contemplated hereby without the prior approval of the other parties; provided, however, if PENN determines it is required to make a public announcement pursuant to the Rules of the NASD or the Securities Exchange Act of 1934, as amended, it may do so. 5.4 Delivery of K-1's. The Buyer and PENN agree to furnish all BDC Group members with K-1's and any other necessary tax related information pertaining to the LLC concerning the period through March 15, 2000, prior to the filing of the LLC's federal tax return concerning such period; and each Seller shall be given a reasonable opportunity to review and comment on such tax return before it is filed by the LLC. Within 90 days after the Closing, the Buyer will provide each Seller with a reasonable estimate of the information that will appear in such Seller's final K-1 with respect to the LLC. 5.5. PENN Guaranty. PENN agrees that it shall cause the Buyer to perform all of its agreements and obligations under this Agreement, including, but not limited to, the purchase of the BDC Group Membership Interest pursuant to this Agreement. ARTICLE 6 REMEDIES FOR BREACH OF THIS AGREEMENT 6.1 Survival. All the representations, warranties and covenants of the parties contained in this Agreement shall survive the Closing hereunder (even if the other party knew or had reason to know of any misrepresentation or breach of 26

any warranty at the time of Closing) and continue in full force and effect for the period of the applicable statute of limitations. 6.2 Indemnification Provision for the Benefit of the Buyer and PENN. In the event any Seller breaches any of his or its representations, warranties and covenants contained herein, provided that if the Buyer or PENN makes a written claim for indemnification against such Seller within the applicable survival period, then such Seller agrees to indemnify the Buyer from and against the entirety of any adverse consequences the Buyer or PENN may suffer (including legal fees and any adverse consequences the Buyer may suffer after the end of the applicable survival period) resulting from, arising out of, or relating to or caused by the breach. 6.3 Indemnification Provision for the Benefit of each Seller. In the event Buyer or PENN breaches any of their representations, warranties and covenants contained herein, provided that if one or more Sellers makes a written claim for indemnification against Buyer or PENN within the applicable survival period, then Buyer and PENN agree to indemnify such Sellers from and against the entirety of any adverse consequences such Sellers may suffer (including legal fees and any adverse consequences the Seller may suffer after the end of the applicable survival period) resulting from, arising out of, or relating to or caused by the breach. ARTICLE 7 MISCELLANEOUS 7.1 No Third Party Beneficiaries. This Agreement shall not confer any right or remedy upon any Persons other than the ----------------------------- parties hereto and their respective successors and assigns. 7.2 Entire Agreement. This Agreement, including the documents and schedules referred to herein, constitute the entire agreement among the parties with respect to the subject matter hereof and supersedes any prior understandings, agreements or representations by and among the parties, written or oral, to the extent they relate in any way to the subject matter hereof. 7.3 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his rights, interests or obligations hereunder without the prior approval of the other parties, which consent shall not be unreasonably withheld. 7.4 Counterparts. This Agreement may be executed in one or more counterparts each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 7.5 Headings. The Section headings contained are inserted for convenience only and shall not affect in any way the -------- meaning or interpretation of this Agreement. 7.6 Notices. All written notices, demands and requests of any kind which a party may be required or may desire to serve upon the other parties hereto in connection with this Agreement shall be delivered only by nationally recognized overnight courier or other means of personal service which provides written verification of receipt (a "Notice"). All Notices shall be addressed to each of the parties to be served as follows: Buyer or PENN Peter M. Carlino, Chairman Wyomissing Professional Center 825 Berkshire Boulevard, Suite 200 Wyomissing, Pennsylvania 19610 All Notices with a copy to: 27

Robert P. Krauss, Esquire Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street, 38th Floor Philadelphia, Pennsylvania 19103-7598 Sellers and Jarecki (all such Notices to go to one or more of the following, as appropriate) ------------------- James A. Reeder, with an address at: --------------- c/o Patton Boggs, L.L.P. 2550 M Street, N.W. Washington, D.C. 20037 28

Thomas Hale Boggs, Jr., with an address at: ---------------------- c/o Patton Boggs, L.L.P. 2550 M Street, N.W. Washington, D.C. 20037 William C. Bryant, with an address at: ----------------- c/o James A. Reeder Patton Boggs, L.L.P. 2550 M. Street, N.W. Washington, D.C. 20037 Sun Mountain Development, LLC, with an address at: c/o Gerald L. Diddy 8525 N. 84th Place Scottsdale, AZ 85258-2401 Timber Nation Limited Partnership or Jarecki, with an address at: c/o Falconwood Corporation 565 Fifth Avenue, 3rd Floor New York, NY 10017 All Notices to Timber Nation Limited Partnership or Jarecki with a copy to: Nancy A. Lieberman, Esquire Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 or other such address as shall be furnished in writing by any such party to the other parties, and such Notice shall be effective and be deemed to have been given as of the date actually received. 29

7.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to any choice or conflict of law provisions or rules that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania. 7.8 Amendment and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer, PENN, each Seller and Jarecki. No waiver by any party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or effect in any way any right arising by virtue of any prior or subsequent such occurrence. 7.9 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof, or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 7.10 Expenses. Each of the parties shall bear his or its own costs or expenses (including legal fees and expenses) incurred in connection with this Agreement and the transaction contemplated hereby. 7.11 Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed to also refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. 30

IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date first written above. SELLERS: __/s/Thomas Hale Boggs_______ Thomas Hale Boggs, Jr. Resident of Maryland _/s/William C. Bryant____________ William C. Bryant Resident of Virginia ___/s/James A. Reeder______________ James A. Reeder Resident of Virginia SUN MOUNTAIN DEVELOPMENT, LLC, a Nevada Limited Liability Company By:___/s/Gerald L. Diddy____________ Gerald L. Diddy, Member TIMBER NATION LIMITED PARTNERSHIP, a Delaware Limited Partnership By:__/s/Henry G. Jarecki_____________ Dr. Henry G. Jarecki, General Partner ____/s/Henry G. Jarecki_____ Dr. Henry G. Jarecki 31

BUYER PENN NATIONAL GAMING OF WEST VIRGINIA, INC. By:_/s/William J. Bork______________ William J. Bork, President PENN NATIONAL GAMING, INC. By:__/s/Peter M. Carlino____________ Peter M. Carlino, Chairman and Chief Executive Officer PNGI CHARLES TOWN GAMING LIMITED LIABILITY COMPANY By: PENN NATIONAL GAMING OF WEST VIRGINIA, INC., MANAGING MEMBER By:__/s/William J. Bork_____________ William J. Bork, President 32

EXHIBIT A RELEASE For and in consideration of the execution and delivery of that certain Agreement for Sale of Membership Interests dated as of March 15, 2000 (the "Sale Agreement") among the undersigned and others pertaining to the purchase and sale of Membership Interests in PNGI Charles Town Gaming Limited Liability Company, and a mutual Release being received by the undersigned on the date hereof, the undersigned does hereby remise, release and forever discharge PNGI Charles Town Gaming Limited Liability Company, Penn National Gaming of West Virginia, Inc. and Penn National Gaming, Inc. and their respective officers, directors, employees, successors and assigns (collectively referred to herein as the "Releasees") of and from any and all actions and causes of action, claims and demands whatsoever, at law or in equity, whether known or unknown, which the undersigned ever had, now has, or which the undersigned's heirs, executors, administrators, successors or assigns, or any of them, hereinafter can, shall or may have, for or by reason of or related to the undersigned having been a Member of PNGI Charles Town Gaming Limited Liability Company or any rights under the Second Amended and Restated Operating Agreement of PNGI Charles Town Gaming Limited Liability Company dated as of October 17, 1997 or of the undersigned arising out of or with respect to having been such a Member, from the beginning of the world to the date hereof, provided, however, that notwithstanding anything to the contrary in this Release, none of the undersigned are releasing any of the Releasees from any of their duties or obligations under the Sale Agreement. IN WITNESS WHEREOF, the undersigned has executed this Release as of this 15th day of March, 2000. ___/s/Thomas Hale Boggs_________ Thomas Hale Boggs, Jr. ____/s/William C. Bryant____ William C. Bryant ____/s/James A. Reeder_____ James A. Reeder SUN MOUNTAIN DEVELOPMENT, LLC By:/s/Gerald L. Diddy Gerald L. Diddy, Member TIMBER NATION LIMITED PARTNERSHIP By:_/s/Dr. Henry G. Jarecki _ Dr. Henry G. Jarecki, General Partner 33

EXHIBIT B RELEASE For and in consideration of the execution and delivery of that certain Agreement for Sale of Membership Interests dated as of March 15, 2000 (the "Sale Agreement") among the undersigned and others pertaining to the purchase and sale of Membership Interests in PNGI Charles Town Gaming Limited Liability Company, and a mutual Release being received by the undersigned on the date hereof, the undersigned does hereby remise, release and forever discharge Thomas Hale Boggs, Jr., William C. Bryant, James A. Reeder, Sun Mountain Development, LLC, Timber Nation Limited Partnership and their respective officers, directors, members, partners, employees, successors and assigns (collectively referred to herein as the "Releasees") of and from any and all actions and causes of action, claims and demands whatsoever, at law or in equity, whether known or unknown, which the undersigned ever had, now has, or which the undersigned's successors or assigns, or any of them, hereinafter can, shall or may have, for or by reason of or related to the Releasees having been a Member of PNGI Charles Town Gaming Limited Liability Company, including, but not limited to, any obligations of the Releasees with respect to any financial or other obligations of PNGI Charles Town Gaming Limited Liability Company or any obligations of the Releasees under that certain Second Amended and Restated Operating Agreement of PNGI Charles Town Gaming Limited Liability Company dated October 17, 1997, as amended, or any rights of the Releasees arising out of or with respect to having been such a Member, from the beginning of the world to the date hereof, provided, however, that notwithstanding anything to the contrary in this Release, none of the undersigned are releasing any of the Releasees from any of their duties or obligations under the Sale Agreement. IN WITNESS WHEREOF, the undersigned has executed this Release as of this 15th day of March, 2000. PENN NATIONAL GAMING OF WEST VIRGINIA, INC. By:/s/William J. Bork William J. Bork, President PENN NATIONAL GAMING, INC. By: /s/Peter M. Carlino Peter M. Carlino, Chairman and Chief Executive Officer PNGI CHARLES TOWN GAMING LIMITED LIABILITY COMPANY By: PENN NATIONAL GAMING OF WEST VIRGINIA, INC., MANAGING MEMBER By:__/s/William J. Bork William J. Bork, President 34

SCHEDULE 1.2.1 I. Cash portion of the Purchase Price: ---------------------------------- Name Column A Column B Column C Thomas Hale Boggs, Jr. 2.9167% $1,590,909 $(149,888) 1,441,021 William C. Bryant 1.25% 681,818 (41,816) 640,002 James A. Reeder 2.9166% 1,590,909 (149,888) 1,441,021 Sun Mountain Development, LLC 1.00% 545,455 (30,096) 515,359 Timber Nation Limited Partnership 2.9167% 1,590,909 1,590,909 Dr. Henry G. Jarecki 371,688 371,688 Total 11% 6,000,000 _____ 6,000,000 II. Wire Instructions Phone Fax Wire Amount Thomas Boggs 202-457-6040 202-457-6315 $1,441,021 First Union Natl Bank ABA# 054001220 A/C Thomas Boggs A/C# 100050335274 James Reeder 202-457-5616 202-457-6315 $1,441,021 Chase Manhattan Bank ABA # 021000021 A/C James A. Reeder A/C # 066-296390 35

Phone Fax Wire Amount William L. Bryant 703-430-3100 703-444-1052 $ 640,002 First Union Natl Bank Herndon Junction 47040 Community Plaza Sterling, VA 20164 ABA# 051400549 A/C William L. Bryant A/C# 1050000847115 Jerry Diddy Sun Mountain Development 480-948-6725 480-948-0065 $ 515,359 Western Security Bank 7401 E. Camelback Road Scottsdale, AZ 85251 ABA# 122105184 A/C Sun Mountain Development, LLC A/C# 6376701021 Timber National LP 212-984-1444 212-984-1442 $1,590,909 Chase Manhattan Bank ABA# 021000021 A/C Henry G. Jarecki A/C# 910-1-590157 Dr. Henry G. Jarecki 212-984-1444 212-984-1442 $ 371,688 Chase Manhattan Bank ABA# 021000021 A/C Henry G. Jarecki A/C# 910-1-590157 36

FIRST AMENDMENT TO LOAN AGREEMENT This First Amendment to Loan Agreement (this "Amendment") is entered into with reference to the Senior Secured Multiple Draw Term Loan Agreement dated as of December 13, 1999 among Penn National Gaming of West Virginia, Inc. ("Borrower"), the Lenders party thereto and Bank of America, N.A., as Administrative Agent (as heretofore amended, the "Loan Agreement"). Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Loan Agreement. Borrower and the Lenders hereby agree to amend the Loan Agreement as follows: 1. Definitions. Section 1.1 of the Loan Agreement is hereby amended to add the following definition: "Charles Town Purchase Agreement" means the agreement for sale of membership interests in PNGI Charles Town Gaming Limited Liability Company, copies of which have been distributed to the Banks. 2. Consent to Charles Town Buy-Out. Section 6.18 of the Loan Agreement is hereby amended to read in full as follows: "6.18 Acquisitions and InvestmentsAcquisitions and InvestmentsAcquisitions and Investments. Make any Acquisition or make any Investment other than (a) Acquisitions and Investments permitted by Section 8.05 of the PNGI Credit Agreement which do not constitute Significant Transactions and (b) Investments consisting of the purchase of the remaining ownership of PNGI Charles Town Gaming Limited Liability Company not owned by Borrower as of the Closing Date pursuant to the Charles Town Purchase Agreement." 3. Acknowledgment Regarding Casino Magic. Borrower confirms that it has entered into an agreement to purchase the Casino Magic Bay St. Louis and Boomtown Biloxi properties from Pinnacle Entertainment, Inc. (formerly known as "Hollywood Park Corporation"). Borrower acknowledges that the consummation of the proposed purchase will constitute a "Significant Transaction" as defined in the Loan Agreement and will require the concurrent repayment in full of all of the Obligations and the termination of the Commitment. 4. Expenses. Borrower confirms that pursuant to Section 11.3 of the Loan Agreement, it has agreed to pay all reasonable out-of-pocket cost and expenses of the Administrative Agent in connection with this Amendment. 5. Representations and Warranties. Borrower represents and warrants to the Administrative Agent and the Lenders that: (a) no Default or Event of Default has occurred and remains continuing or will result from the consummation of the transactions contemplated by the Charles Town Purchase Agreement. (b) Borrower has delivered a true, correct and complete copy of the Charles Town Purchase Agreement to each of the Banks.. 6. Confirmation. In all other respects, the terms of the Loan Agreement and the other Loan Documents are hereby confirmed. 37

IN WITNESS WHEREOF, Borrower and the Administrative Agent have executed this Amendment as of March 29, 2000 by their duly authorized representatives. PENN NATIONAL GAMING OF WEST VIRGINIA, INC. By: __/s/Robert S. Ippolito Title: _Secretary/Treasurer________ BANK OF AMERICA, N.A. By: _/s/Jeff Bailard___________________ Title: _Vice President_________________ FIRST UNION NATIONAL BANK By: _/s/_Lynn B. Eagleson____________ Title: __Vice President______________ The undersigned hereby consent to the foregoing: PENN NATIONAL GAMING, INC. By: __/s/Robert S. Ippolito Title: _Secretary/Treasurer________ PNGI CHARLES TOWN GAMING LIMITED LIABILITY COMPANY By: __/s/Robert S. Ippolito Title: _Secretary/Treasurer________ 38

AGREEMENT FOR CONSENT AND WAIVER UNDER SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS AGREEMENT FOR CONSENT AND WAIVER UNDER SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this Agreement) is made this 31st day of March, 2000 by and among PENN NATIONAL GAMING, INC., a Pennsylvania corporation (Borrower); PENN NATIONAL GAMING OF WEST VIRGINIA, INC., a West Virginia corporation (PNGIWV); FIRST UNION NATIONAL BANK, a national banking association (for itself and in its capacity as agent hereunder, Agent); the banks signatory to this Agreement (together with the Agent, each individually a Bank and individually and collectively, the Banks) and PNGI CHARLES TOWN GAMING LIMITED LIABILITY COMPANY, a West Virginia limited liability company (Charles Town). BACKGROUND Borrower and Banks entered into a Second Amended and Restated Credit Agreement dated January 28, 1999, as amended by Amendment No. 1 to Second Amended and Restated Credit Agreement and Joinder of Subsidiary Guarantor dated July 22, 1999, Amendment No. 2 to and Consent under Second Amended and Restated Credit Agreement dated July 29, 1999 and Amendment No. 3 to and Consent and Waiver under Second Amended and Restated Credit Agreement (Amendment No. 3) dated December 13, 1999 (and as may be further amended from time to time, the Credit Agreement) for the purposes of providing a revolving credit facility, for the financing of a loan from Borrower to FR Park Racing L.P., the refinancing of certain then- existing indebtedness of Borrower, the issuance of letters of credit for the benefit of Borrower, and for the working capital needs and general corporate purposes of the Borrower. PNGIWV, a wholly-owned Subsidiary of Borrower and a Subsidiary Guarantor, will acquire the eleven percent (11%) Minority Interest of Charles Town for a purchase price of Six Million Dollars ($6,000,000) in cash (the Purchase), after which Charles Town will become a wholly-owned Subsidiary of PNGIWV. In consideration of the foregoing and the premises and the agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 39

1. Consent and Waiver. a. Section 8.02 of the Credit Agreement prohibits the Borrower and the Credit Parties from acquiring any part of the property or assets of any Person. Section 8.05 of the Credit Agreement prohibits the Borrower from making Investments; however Section 8.05(ix) of the Credit Agreement allows the Borrower and the Credit Parties to invest up to $47,566,077 plus accrued interest in Charles Town. After the Purchase, PNGIWVs Investment in Charles Town will exceed $47,566,077 plus accrued interest. Therefore, the Purchase is not permitted by Sections 8.02 and 8.05 of the Credit Agreement. Banks hereby consent to the Purchase and waive any Default or Event of Default resulting thereby. b. Section 8.17(iii) of the Credit Agreement prohibits the Borrower or a Wholly-Owned Subsidiary from establishing, creating or acquiring any Subsidiary unless such Subsidiary executes a counterpart to the Subsidiaries Guaranty, the Pledge Agreement and the Security Agreement. Section 8.17(x) of the Credit Agreement requires any new Wholly-Owned Subsidiary to execute and deliver all documentation such Wholly-Owned Subsidiary would have had to deliver if it were a Credit Party on the Restatement Effective Date. Section 8.17(y) requires the Borrower, at such time as Charles Town becomes a Wholly-Owned Subsidiary of Borrower, to cause Charles Town to execute the Subsidiaries Guaranty, the Pledge Agreement and Security Agreement, to execute and deliver all documentation required by Section 8.17(x) of the Credit Agreement and deliver all additional collateral required by Agent or Required Banks. Banks hereby consent to the establishment of Charles Town as a Wholly-Owned Subsidiary of a Subsidiary and waive the requirements of Sections 8.17(iii), 8.17(x) and 8.17(y) with respect thereto; provided, however, that such waiver shall cease to be effective on or after June 30, 2000, on which date Borrower agrees to comply with the terms of Paragraph 3 hereof. 40

2. Acknowledgments. a. PNGIWV, as evidenced by its signature below, hereby acknowledges and agrees that the interests it owns of Charles Town constitute Collateral (as defined in the Pledge Agreement) and are pledged to Agent, for the benefit of Banks, under the Pledge Agreement. Annex G to the Pledge Agreement, which lists the pledged limited liability company interests, is hereby amended and restated in its entirety as set forth on Exhibit A attached hereto. b. Section 8.12(ii) prohibits modifications of the Charles Town Joint Venture Agreement, other than modifications that could reasonably be expected to be adverse to the interests of the Banks in any material respect. Banks hereby acknowledge the Purchase for purposes of Section 8.12(ii) of the Credit Agreement. 3. Affirmative Covenant. Borrower, PNGIWV and Charles Town each hereby covenant and agree that if: (i) any Banks Commitment under the Credit Agreement remains effective or (ii) any Indebtedness under the Credit Agreement remains outstanding, in each case on June 30, 2000, then Charles Town will (and Borrower and PNGIWV hereby agree to cause Charles Town to) deliver on or before June 30, 2000 the following documents to Agent: a. a duly executed joinder to the Subsidiaries Guaranty, Security Agreement and Pledge Agreement, in form and substance satisfactory to Banks; b. executed UCC-1 financing statement to be filed against Charles Town in those jurisdictions required by Agent; c. any and all pledged intercompany notes from or for the benefit of Charles Town; d. a duly executed mortgage or deed of trust, in favor of Agent for the benefit of Banks, on each parcel of real property owned by Charles Town; e. a marked-up title report of a title insurance company satisfactory to Agent, representing such title insurance companys commitment to issue in favor of Agent for the benefit of Banks, at Borrowers expense, a standard form title insurance policy insuring the lien of each mortgage delivered pursuant to subparagraph (e) above, subject to no other liens except as listed therein and acceptable to Agent; 41

f. a Phase I environmental report with respect to each property for which a mortgage is delivered pursuant to subparagraph (e) above, in form and substance satisfactory to Agent and prepared by a qualified environmental professional acceptable to Agent; g. an opinion of counsel to Charles Town, in form and substance satisfactory to Agent; h. a certificate of good standing dated as of a recent date for Charles Town in the jurisdiction of its formation; i. a certificate from the secretary of Charles Town: (i) attaching the operating agreement of Charles Town or certifying that the operating agreement has not been modified since it was last delivered to Banks; (ii) attaching resolutions from the [board of managers] of Charles Town authorizing the execution by Charles Town of each mortgage and the joinder to the Security Agreement and Pledge Agreement; and (iii) attaching an incumbency certificate; and j. such additional documents as Agent shall reasonably request. 4. Negative Covenants. Charles Town hereby covenants and agrees to comply with the terms of the negative covenants set forth in Section 8 of the Credit Agreement as if Charles Town were a Subsidiary Guarantor. PNGIWV hereby covenants and agrees to cause Charles Town to comply with the terms of the negative covenants set forth in Section 8 of the Credit Agreement as if Charles Town were a Subsidiary Guarantor. 5. Representations and Warranties. Borrower and each Subsidiary Guarantor hereby represents and warrants to Banks as follows: a. Representations. The representations and warranties set forth in Section 6 of the Credit Agreement are true and correct in all material respects as of the date hereof, including as applied to Charles Town as a Subsidiary; there is no Event of Default or Default under the Credit Agreement, as amended hereby; and there has been no material adverse change in the financial condition or business of Borrower or any Subsidiary from the date on which Borrower last delivered financial statements to Banks. b. Power and Authority. Borrower, PNGIWV and Charles Town each has the power and authority under the laws of each of their states of incorporation or formation and under their articles or certificates of incorporation and bylaws or other formation documents or other formation documents to enter into and perform this Agreement and the other documents and agreements required hereunder (collectively, the Agreement Documents); all actions (corporate or otherwise) necessary or appropriate for the execution and performance by each of Borrower, PNGIWV and Charles Town of the Agreement Documents have been taken; and that each of the Agreement Documents and the Credit Agreement constitute the valid and binding obligations of Borrower, PNGIWV, Charles Town and each other Subsidiary, enforceable in accordance with their respective terms. c. No Violations of Law or Agreements. The making and performance of the Agreement Documents by Borrower, PNGIWV and Charles Town will not (i) violate any provisions of any law or regulation, federal, state or local, or the articles or certificates of incorporation or bylaws or other formation documents of any of Borrower, PNGIWV or Charles Town or (ii) result in any breach or violation of, or constitute a default or require the obtaining of any consent under, any agreement or instrument by which any of Borrower, PNGIWV or Charles Town or any of their property may be bound. 42

6. Conditions to Effectiveness of Amendment. This Agreement shall be effective upon Agents receipt of the following documents, each in form and substance satisfactory to Agent: a. Agreement. This Agreement duly executed by Borrower, PNGIWV, Charles Town, Agent and Banks. b. Opinion of Counsel to Charles Town. An opinion letter from counsel to Charles Town in form and substance satisfactory to Agent. c. Purchase Agreement. A duly executed copy of the Agreement for Sale of Membership Interest in PNGI Charles Town Gaming Limited Liability Company dated the ____ day of March, 2000 by and between Thomas Hale Boggs, Jr., William C. Bryant, James A. Reeder, Sun Mountain Development, LLC and Timber Nation Limited Partnership, PNGIWV, or its affiliated designee, Charles Town and Borrower. d. Consents and Approvals. Receipt by Borrower, PNGIWV and Charles Town of all necessary regulatory and other consents and approvals for the Purchase. e. Lien Searches against Charles Town. As soon as available, updated lien searches against Charles Town in such locations as Agent shall reasonably request. f. Certificates of Membership Interest. Any and all certificate(s) of membership interest of Charles Town. g. Other Documents. Such additional documents as Agent may reasonably request. 7. Affirmations. Borrower, PNGIWV and Charles Town hereby: (i)affirm all the provisions of the Credit Agreement, Security Agreement, Pledge Agreement and Contribution and Indemnification Agreement and (ii)agree that the terms and conditions of the Credit Agreement, Security Agreement, Pledge Agreement and Contribution and Indemnification Agreement shall continue in full force and effect. 43

8. Miscellaneous. a. Borrower agrees to pay or reimburse Agent for all reasonable fees and expenses (including without limitation reasonable fees and expenses of counsel) incurred by Agent in connection with the preparation, execution and delivery of this Agreement. b. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflicts-of-law or choice-of-law rules. c. All terms and provisions of this Agreement shall be for the benefit of and be binding upon and enforceable by the respective successors and assigns of the parties hereto. d. This Agreement may be executed in any number of counterparts with the same effect as if all the signatures on such counterparts appeared on one document and each such counterpart shall be deemed an original. e. Except as expressly set forth herein, neither the execution, delivery and performance of this Agreement, nor anything contained herein shall be construed as or shall operate as a consent to or waiver of any provision of, or any right, power or remedy of Banks under the Credit Agreement and the agreements and documents executed in connection therewith. 44

IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day and year first above written. PENN NATIONAL GAMING, INC. By: /s/Robert S. Ippolito_____ Name: Robert S. Ippolito Title: Secretary/Treasurer PENN NATIONAL GAMING OF WEST VIRGINIA, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer PNGI CHARLES TOWN GAMING LIMITED LIABILITY COMPANY By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer [EXECUTIONS CONTINUED] 45

FIRST UNION NATIONAL BANK, as Agent By: /s/Lynn B. Eagleson________ Name: Lynn B. Eagleson Title: Vice President SUMMIT BANK By: /s/Mary R. Balciar___________ Name: Mary R. Balciar Title: Vice President Accepted and Agreed: MOUNTAINVIEW THOROUGHBRED RACING ASSOCIATION, as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer PENNSYLVANIA NATIONAL TURF CLUB, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer [EXECUTIONS CONTINUED] 46

PENN NATIONAL SPEEDWAY, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer STERLING AVIATION, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer PENN NATIONAL HOLDING COMPANY, as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer PNGI POCONO, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer 47 [EXECUTIONS CONTINUED]

TENNESSEE DOWNS, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer THE DOWNS RACING, INC., as a Subsidiary Guarantor By: /s/Joseph A. Lashinger Name: Joseph A. Lashinger Title: President/Secretary/Treasurer NORTHEAST CONCESSIONS, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title: Vice President/Treasurer BACKSIDE, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title: Assistant Secretary MILL CREEK LAND, INC., as a Subsidiary Guarantor By: /s/Robert S. Ippolito__ Name: Robert S. Ippolito Title:Secretary/Treasurer WILKES BARRE DOWNS, INC., as a Subsidiary Guarantor By: /s/Robert E. Abraham Name:Robert E. Abraham Title:President/Secretary/Treasurer 48

5 1000 3-Mos Dec-31-2000 Jan-01-2000 Mar-31-2000 11,430 0 4,410 0 0 18,701 149,546 22,479 197,579 24,445 69,000 0 0 153 69,808 197,579 53,262 53,262 40,979 40,979 4,437 0 2,382 5,760 2,141 3,619 0 0 0 3,619 .24 .24