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 JUNE 30, 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 August 8, 2000 Common Stock Par value $.01 per share 15,006,475 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 - June 30, 2000 (unaudited) and December 31, 1999 4-5 Consolidated Statements of Income - Six Months Ended June 30, 2000 and 1999 (unaudited) 6-7 Consolidated Statements of Income - Three Months Ended June 30, 2000 and 1999 (unaudited) 8-9 Consolidated Statement of Shareholders' Equity - Six Months Ended June 30, 2000 (unaudited) 10 Consolidated Statements of Cash Flow - Six Months Ended June 30, 2000 and 1999 (unaudited) 11-12 Notes to Consolidated Financial Statements 13-22 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Item3 - Changes in information about Market Risk 30 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Item 6 - Exhibits and Reports on Form 8-K 31 Signature Page 32 Part I. Financial Information Item 1. Financial Statements 3

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 2000 1999 (Unaudited) ----------------------------------------- Assets Current assets Cash and cash equivalents $ 13,831 $ 9,434 Accounts receivable 5,011 4,779 Prepaid expenses and other current assets 2,748 1,793 Deferred income taxes 594 888 Prepaid income tax - 1,088 ----------------------------------------- Total current assets 22,184 17,982 ----------------------------------------- Property, plant and equipment, at cost Land and improvements 28,014 27,988 Building and improvements 72,227 70,870 Furniture, fixtures and equipment 40,046 36,195 Transportation equipment 914 860 Leasehold improvements 9,826 9,802 Construction in progress 3,766 1,980 ----------------------------------------- 154,793 147,695 Less accumulated depreciation and amortization 24,126 20,824 ----------------------------------------- Net property, plant and equipment 130,667 126,871 ----------------------------------------- Other assets Investment in and advances to unconsolidated affiliate 13,517 12,862 Cash in escrow 5,000 5,000 Excess of cost over fair market value of net assets acquired (net of accumulated amortization of $2,914 and $2,611, respectively) 27,123 21,582 Deferred financing costs 4,569 5,014 Miscellaneous 1,306 1,289 ----------------------------------------- Total other assets 51,515 45,747 ----------------------------------------- $ 204,366 $ 190,600 ========================================= See accompanying notes to consolidated financial statements. 4

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 2000 1999 (Unaudited) ----------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 5,160 $ 5,160 Accounts payable 6,664 10,210 Purses due horsemen 2,451 2,114 Uncashed pari-mutuel tickets 809 1,351 Accrued expenses 1,814 2,694 Accrued interest 323 433 Accrued salaries & wages 1,310 1,098 Customer deposits 1,121 800 Taxes, other than income taxes 1,568 1,491 Income taxes 2,640 - ----------------------------------------------- Total current liabilities 23,860 25,351 ----------------------------------------------- Long Term Liabilities Long-term debt net of current maturities 90,883 86,053 Deferred income taxes 12,906 12,294 ----------------------------------------------- Total long-term liabilities 103,789 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 15,429,925 and 15,314,175, respectively 154 153 Treasury stock, 424,700 shares at cost (2,379) (2,379) Additional paid in capital 39,125 38,527 Retained earnings 39,817 29,971 ----------------------------------------------- Total shareholders' equity 76,717 66,272 ----------------------------------------------- $ 204,366 $ 190,600 =============================================== See accompanying notes to consolidated financial statements. 5

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Six Months Ended June 30, 2000 1999 ------------------------------------------- Revenues Pari-mutuel revenues Live races $ 10,378 $ 8,283 Import simulcasting 40,005 35,050 Export simulcasting 3,418 1,358 Gaming revenue 49,019 24,913 Admissions, programs and other racing revenue 3,887 2,984 Concessions revenues 7,539 5,584 Earnings from unconsolidated affiliates 1,429 - ------------------------------------------- Total revenues 115,675 78,172 ------------------------------------------- Operating expenses Purses, stakes, and trophies 20,577 14,098 Direct salaries, payroll taxes and employee benefits 11,258 8,720 Simulcast expenses 7,639 6,071 Pari-mutuel taxes 4,926 4,103 Lottery taxes and administration 19,320 9,904 Other direct meeting expenses 12,932 10,613 Concessions expenses 6,565 4,968 Other operating expenses 8,564 6,435 Horsemen's action expenses - 1,250 Depreciation and amortization 4,368 4,145 ------------------------------------------- Total operating expenses 96,149 70,307 ------------------------------------------- Income from operations 19,526 7,865 ------------------------------------------- Other income (expenses) Interest (expense) (4,816) (4,333) Interest income 881 605 Other (154) (7) ------------------------------------------- Total other (expenses) (4,089) (3,735) ------------------------------------------- Income before taxes 15,437 4,130 Taxes on income 5,591 1,568 ------------------------------------------ Net Income $ 9,846 $ 2,562 ========================================== See accompanying notes to consolidated financial statements 6

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Six Months Ended June 30, 2000 1999 ------------------------------------------- Per share data Basic earnings per share $ .66 $ 0.17 ------------------------------------------ Diluted earnings per share $ .64 $ 0.17 ------------------------------------------ Weighted shares outstanding Basic 14,918 14,784 ------------------------------------------ Diluted 15,338 15,135 ------------------------------------------ See accompanying notes to consolidated financial statements. 7

PENN NATIONAL GAMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Three Months Ended June 30, 2000 1999 ------------------------------------------ Revenues Pari-mutuel revenues Live races $ 6,313 $ 5,868 Import simulcasting 20,189 19,749 Export simulcasting 1,824 847 Gaming revenue 26,853 13,616 Admissions, programs and other racing revenue 2,231 1,865 Concessions revenues 4,161 3,438 Earnings of unconsolidated affiliates 842 - ------------------------------------------ Total revenues 62,413 45,383 ------------------------------------------ Operating expenses Purses, stakes, and trophies 11,007 8,388 Direct salaries, payroll taxes and employee benefits 5,886 5,005 Simulcast expenses 4,138 3,685 Pari-mutuel taxes 2,604 2,434 Lottery taxes and administration 10,572 5,415 Other direct meeting expenses 6,617 6,021 Concessions expenses 3,591 2,945 Other operating expenses 4,129 3,360 Depreciation and amortization 2,191 2,130 ------------------------------------------ Total operating expenses 50,735 39,383 ------------------------------------------ Income from operations 11,678 6,000 ------------------------------------------ Other income (expenses) Interest (expense) (2,434) (2,208) Interest income 431 396 Other - (7) ------------------------------------------ Total other (expenses) (2,003) (1,819) ------------------------------------------ Income before taxes 9,675 4,181 Taxes on income 3,449 1,642 ------------------------------------------ Net income $ 6,226 $ 2,539 ========================================== See accompanying notes to consolidatedfinancial statements. 8

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Three Months Ended June 30, 2000 1999 ------------------------------------------ Per share data Basic earnings per share $ .42 $ .17 ------------------------------------------ Diluted earnings per share $ .40 $ .17 ------------------------------------------ Weighted shares outstanding Basic 14,939 14,828 ------------------------------------------ Diluted 15,431 15,190 ------------------------------------------ See accompanying notes to consolidated financial statements. 9

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 Amounts Stock Capital Earnings Total Balance, at January 1, 2000 15,314,175 $ 153 $ (2,379) $ 38,527 $ 29,971 $ 66,272 Issuance of common stock 115,750 1 - 598 - 599 Net income for the six months ended June 30, 2000 - - - - 9,846 9,846 -------------------------------------------------------------------------------------- Balance, at June 30, 2000 15,429,925 $ 154 $ (2,379) $ 39,125 $ 39,817 $ 76,717 ====================================================================================== See accompanying notes to consolidated financial statements. 10

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) (Unaudited) Six Months Ended June 30, 2000 1999 ----------------------------------- Cash flows from operating activities Net income $ 9,846 $ 2,562 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 4,368 4,145 Income from unconsolidated affiliates (655) - Deferred income taxes 276 572 Decrease (Increase) in Accounts receivable (232) (2,155) Prepaid expenses (1,155) 50 Prepaid income taxes 1,088 745 Miscellaneous other assets (17) (25) Increase (decrease) in Accounts payable (3,548) 358 Purses due horsemen 337 2,591 Uncashed pari-mutuel tickets (542) (503) Accrued expenses (880) 299 Accrued interest (110) (55) Accrued salaries & wages 212 - Customers deposits 321 171 Taxes other than income payable 77 462 Income taxes 2,640 - ----------------------------------- Net cash provided by operating activities 12,026 9,217 ----------------------------------- Cash flows from investing activities Expenditures for property and equipment (7,298) (2,578) Proceeds from sale of property and equipment 178 - Investment in and advances to unconsolidated affiliate - (11,250) Acquisition of business (5,845) - Other - 251 ----------------------------------- Net cash (used in) investing activities (12,965) (13,577) ----------------------------------- See accompanying notes to consolidated financial statements. 11

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) (Unaudited) Six Months Ended June 30, 2000 1999 ---------------------------------- Cash flows from financing activities Proceeds from sale of common stock 599 424 Proceeds from long-term debt 4,847 11,500 Principal payments on long-term debt and capital lease obligations (17) (3,326) (Increase) in unamortized financing cost (93) (580) ----------------------------------- Net cash provided by financing activities 5,336 8,018 ----------------------------------- Net increase in cash 4,397 3,658 Cash and cash equivalents at beginning of period 9,434 6,826 ------------------------------------ Cash and cash equivalents, at end of period $ 13,831 $ 10,484 ==================================== See accompanying notes to consolidated financial statements. 12

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 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 June 30, 2000 and the results of its operations for the three and six month periods ended June 30, 2000 and 1999. The results of operations experienced for the six month period ended June 30, 2000 are not necessarily indicative of the results to be experienced for the fiscal year ended December 31, 2000. The statements and related notes herein 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 June 30, 2000 Penn Pocono Charles National Downs Town Total Pari-mutuel wagering in-state on Company's live races $ 14,477 $ 6,337 $ 7,981 $ 28,795 -------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 49,722 33,815 12,933 96,470 Export simulcasting to out of state wagering facilities 35,680 6,432 18,871 60,983 -------------------------------------------------------------- 85,402 40,247 31,804 157,453 -------------------------------------------------------------- Total pari-mutuel wagering $ 99,879 $ 46,584 $ 39,785 $ 186,248 ============================================================== 13

Three months ended June 30, 1999 Penn Pocono Charles National Downs Town Total Pari-mutuel wagering in-state on Company's live races $ 11,291 $ 7,197 $ 8,346 $ 26,834 -------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 49,421 34,831 12,962 97,214 Export simulcasting to out of state wagering facilities 20,228 6,348 2,042 28,618 -------------------------------------------------------------- 69,649 41,179 15,004 125,832 -------------------------------------------------------------- Total pari-mutuel wagering $ 80,940 $ 48,376 $ 23,350 $ 152,666 ============================================================== Six months ended June 30, 2000 Penn Pocono Charles National Downs Town Total Pari-mutuel wagering in-state on Company's live races $ 27,822 $ 6,337 $ 13,751 $ 47,910 -------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 99,432 66,487 25,531 191,450 Export simulcasting to out of state wagering facilities 73,870 6,432 33,564 113,866 -------------------------------------------------------------- 173,302 72,919 59,095 305,316 -------------------------------------------------------------- Total pari-mutuel wagering $ 201,124 $ 79,256 $ 72,846 $ 353,226 ============================================================== Six months ended June 30, 1999 Penn Pocono Charles National Downs Town Total Pari-mutuel wagering in-state on Company's live races $ 17,970 $ 7,197 $ 13,389 $ 38,556 -------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 77,026 69,995 25,561 172,582 Export simulcasting to out of state wagering facilities 37,382 6,348 2,042 45,772 -------------------------------------------------------------- 114,408 76,343 27,603 218,354 -------------------------------------------------------------- Total pari-mutuel wagering $ 132,378 $ 83,540 $ 40,992 $ 256,910 ============================================================== 14

3. Commitments At June 30, 2000, the Company was contingently obligated under letters of credit with face amounts aggregating $2,031,000. These amounts consisted of $1,727,000 relating to horsemen's account balances, $104,000 for Pennsylvania pari-mutuel taxes, and $200,000 for purses. 4. Supplemental Disclosures of Cash Flow Information Cash paid during the six months ended June 30, 2000 and 1999 for interest was $4,849,000 and $4,307,204, respectively. Cash paid during the three months ended June 30, 2000 and 1999 for income taxes was $1,735,000 and $206,000, respectively. 5. Subsidiary Guarantors Summarized financial information as of June 30, 2000 and December 31, 1999 for the three and six months ended June 30, 2000 and 1999 for Penn National Gaming, Inc. ("Parent"), the Subsidiary Guarantors and Subsidiary Nonguarantors is as follows: 15

- -------------------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - -------------------------------------------------------------------------------------------------------------------------- As of June 30, 2000 Consolidated Balance Sheet (In Thousands) Current assets $ 3,188 $ 6,222 $ 12,989 $ (215) $ 22,184 Net property plant and equipment 815 82,344 47,508 - 130,667 Other assets 120,163 170,965 7,598 (247,211) 51,515 - -------------------------------------------------------------------------------------------------------------------------- Total $ 124,166 $ 259,531 $ 68,095 $ (247,426) $ 204,366 - -------------------------------------------------------------------------------------------------------------------------- Current liabilities 2,600 24,906 6,958 (10,604) 23,860 Long-term liabilities 81,981 96,818 53,441 (128,451) 103,789 Shareholders' equity (deficiency) 39,585 137,807 7,696 (108,371) 76,717 - -------------------------------------------------------------------------------------------------------------------------- Total $ 124,166 $ 259,531 $ 68,095 $ (247,426) $ 204,366 - -------------------------------------------------------------------------------------------------------------------------- Three months ended June 30, 2000 Consolidated Statement of Income (In Thousands) Total revenues $ 57 $ 30,393 $ 34,925 $ (2,962) $ 62,413 Total operating expenses (1,571) 26,878 28,390 (2,962) 50,735 - -------------------------------------------------------------------------------------------------------------------------- Income from operations 1,628 3,515 6,535 - 11,678 Other income (expenses) (1,202) 360 (1,161) - (2,003) - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 426 3,875 5,374 - 9,675 Taxes on income 182 3,267 - - 3,449 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 244 $ 608 $ 5,374 $ - $ 6,226 - -------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 2000 Consolidated Statement of Income (In Thousands) Total revenues $ 63 $ 57,283 $ 63,643 $ (5,314) $ 115,675 Total operating expenses (3,042) 51,733 52,772 (5,314) 96,149 - -------------------------------------------------------------------------------------------------------------------------- Income from operations 3,105 5,550 10,871 - 19,526 Other income (expenses) (2,383) 771 (2,323) (154) (4,089) - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 722 6,321 8,548 (154) 15,437 Taxes on income 307 5,336 - (52) 5,591 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 415 $ 985 $ 8,548 $ (102) $ 9,846 - -------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 2000 Consolidated Statement of Cash Flow (In Thousands) Net cash flows from operating $ (3,753) $ (3,151) $ 1,081 $ 18,000 $ 12,177 activities Net cash flows from investing 1,419 (203) (2,181) (12,000) (12,965) activities Net cash flows from financing 961 4,241 5,983 (6,000) 5,185 activities - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash (1,373) 887 4,883 - 4,397 Cash and cash equivalents at January 1, 2000 $ 2,544 $ 2,538 $ 4,352 $ - $ 4,397 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at June 30, 2000 $ 1,171 $ 3,425 $ 9,235 $ - $ 13,831 - -------------------------------------------------------------------------------------------------------------------------- 16

- ------------------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ------------------------------------------------------------------------------------------------------------------------- As of December 31, 1999 Consolidated Balance Sheet (In Thousands) Current assets $ 3,651 $ 7,669 $ 6,523 $ 139 $ 17,982 Net property, plant and equipment 813 79,932 46,126 - 126,871 Other assets 116,170 155,509 1,620 (227,552) 45,747 - ------------------------------------------------------------------------------------------------------------------------- Total $ 120,634 $ 243,110 $ 54,269 $ (227,413) $ 190,600 - ------------------------------------------------------------------------------------------------------------------------- Current liabilities $ (29) $ 25,731 $ 7,664 $ (8,015) $ 25,351 Long-term liabilities 82,091 86,556 47,459 (117,129) 98,977 Shareholders' equity (deficiency) 38,572 130,823 (854) (102,269) 66,272 - ------------------------------------------------------------------------------------------------------------------------- Total $ 120,634 $ 243,110 $ 54,269 $ (227,413) $ 190,600 Three months ended June 30, 1999 Consolidated Statement of Income (In Thousands) Total revenues $ 4,515 $ 22,173 $ 20,205 $ (1,510) $ 45,383 Total operating expenses 2,141 21,291 17,461 (1,510) 39,383 - ------------------------------------------------------------------------------------------------------------------------- Income from operations 2,374 882 2,744 - 6,000 Other income (expenses) (1,464) 749 (1,104) - (1,819) - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 910 1,631 1,640 - 4,181 Taxes on income 376 609 656 - 1,641 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 534 $ 1,022 $ 984 $ - $ 2,540 - ------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 1999 Consolidated Statement of Income (In Thousands) Total revenues $ 2,038 $ 42,199 $ 36,570 $ (2,635) $ 78,172 Total operating expenses (2,012) 42,642 32,312 (2,635) 70,307 - ------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 4,050 (443) 4,258 - 7,865 Other income (expenses) (2,969) 1,504 (2,270) (3,735) - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,081 1,061 1,988 - 4,130 Taxes on income 465 285 818 1,568 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 616 $ 776 $ 1,170 $ - $ 2,562 - ------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 1999 Consolidated Statement of Cash Flow (In Thousands) Net Cash Flows from Operating $ 6,000 $ 239 $ 2,978 $ - $ 9,217 Activities Net Cash Flows from Investing (11,736) (745) (1,096) - (13,577) Activities Net Cash Flows from Financing 8,527 (509) - - 8,018 Activities - ------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 2,791 (1,015) 1,882 - 3,658 Cash and cash equivalents at January 1, 2,001 1,705 3,120 - 6,826 1999 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at June $ 4,792 $ 690 $ 5,002 $ - $ 10,484 30, 1999 - ------------------------------------------------------------------------------------------------------------------------- 17

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 an aggregate of $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 has entered into a licensing agreement to use Boomtown and Casino Magic names and marks at the properties acquired. The transaction was 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 was refundable if certain conditions were not met. The Company received approval for a gaming license from the Mississippi Gaming Commission on April 20, 2000. On June 14, 2000 the Company entered into a financing commitment letter agreement with Lehman Brothers and CIBC World Markets, Corp., the proceeds of which in part will be used to finance the Mississippi Acquisitions. On August 8, 2000 the Company completed the Mississippi Acquisitions and are now operating both facilities. (See Note 11.) 7. New Jersey Joint Venture 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 and six months ended June 30, 2000 of the Joint Venture is included in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income for the three and six months ended June 30, 2000. Summarized balance sheet information for the Joint Venture as of June 30, 2000 is as follows (in thousands): Current assets $ 11,027 Property, plant and equipment, net 30,220 Other 17,807 --------------------- Total assets $ 59,054 ===================== Current liabilities $ 8,858 Long-term liabilities 45,765 Members' equity 4,431 --------------------- Total liabilities and members' equity $ 59,054 ===================== 18

Summarized results of operations of the unconsolidated Joint Venture is as follows: (in thousands) Three Months Ended Six Months Ended June 30, 2000 June 30, 2000 ------------------------ ------------------------- Revenues $ 15,108 $ 29,787 Operating expenses 11,660 23,473 ------------------------ ------------------------- EBITDA* $ 3,448 $ 6,314 ------------------------ ------------------------- Net Income $ 1,686 $ 2,860 ------------------------ ------------------------- * Earnings before interest, taxes, depreciation and amortization. In connection with the refinancing described in Note 11, the Company became a full guarantor of indebtedness of the Joint Venture in the amount of $11.5 million. 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, up until August 1, 2000, provided 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 of 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 2000 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 was executed, would have replaced and restated the above described agreement between the Company and Trackpower. On June 27, 2000, the March 2000 letter of intent was terminated. The Company will continue to work under existing license agreements and contracts entered into with Trackpower prior to March 2000. 19

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 a recently completed appraisal on the property. As a result of the purchase, PNGI Charles Town Gaming Limited Liability Company is now a 100%-owned subsidiary of the Company. 10. Financing Agreement On June 14, 2000, the Company entered into a financing commitment letter with Lehman Brothers, Inc. and CIBC World Markets, Corp. for a $350 million credit facility with bank and institutional lenders. On August 8, 2000, the Company completed the credit agreement with Lehman Brothers, Inc. and CIBC World Markets, Corp. as co-arrangers, among others. The proceeds of the credit facility were used to finance the $195 million Mississippi Acquisitions, to refinance the Company's existing debts with First Union National Bank and Bank of America, to purchase the outstanding 10 5/8% Senior Notes and for working capital purposes. The credit facility provides for a $75 million revolving credit facility maturing on August 8, 2005, a $75 million Tranche A term loan maturing on August 8, 2005 and a $200 million Tranche B term loan maturing on August 8, 2006. At the Company's option, the revolving credit facility and the Tranche A term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the federal funds effective rate or the rate that the bank group announces from time to time as its prime lending rate plus an applicable margin of up to 2.25% or, (2) a rate tied to a eurodollar rate plus an applicable margin up to 3.25%. At the Company's option, the Tranche B term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the federal funds effective rate or the rate that the bank group announces from time to time as its prime lending rate plus an applicable margin of up to 3.25% or, (2) a rate tied to a eurodollar rate plus an applicable margin up to 4.00%. The credit facility provides for certain covenants, including those of a financial nature. Substantially all of the Company's assets are pledged as collateral under the Credit Agreement. The outstanding amount under this credit facility as of August 8, 2000 was $312 million. A form 8-K will be filed with further information regarding this Credit Facility. On June 29, 2000 the Company commenced a cash tender offer to purchase all of its outstanding $69 million 10 5/8% Senior Notes due 2004 (the "Notes") and a related consent solicitation to eliminate certain restrictive covenants and related provisions in the indenture pursuant to which the notes were issued. The total consideration payable pursuant to the tender offer and consent solicitation to holders who tender Notes (and thereby deliver consents) prior to 5:00pm, New York City time, on the Consent Date (as defined below) will be calculated using a fixed spread of 75 basis points over the bid side yield of the reference U.S. Treasury security on the second business day immediately 20

preceding the expiration date. The total consideration includes a consent fee of $30 per Note. If a holder's Notes are not properly tendered prior to 5:00p.m., New York City time, on the Consent Date, the holder will not receive the consent payment, even though the Notes are subsequently tendered by the expiration date of the tender offer. Under the terms of the tender offer and consent solicitation, holders may not deliver consents without also tendering Notes. The Consent Date is the later of July 17, 2000 or the date on which the Company receives consents from holders of a majority in principal amount of the outstanding Notes. The tender offer was scheduled to expire at 5:00p.m., New York City time, on August 1, 2000 unless extended. The tender offer and the consent solicitation are subject to the terms and conditions set forth in the Offer to Purchase and Consent Solicitation Statement and the related Consent and Letter of Transmittal that are being sent to all holders of Notes. Subject to the terms and conditions of the tender offer and consent solicitation, the Company will make all payments promptly after the acceptance date. On July 18, 2000, the Company announced that holders of more than a majority of the Company's outstanding Notes had tendered Notes and delivered consents in connection with the Company's tender offer and consent solicitation announced on June 29, 2000. Accordingly, the Company and the trustee under the Indenture relating to the Notes have executed and delivered a supplemental indenture containing the amendments described in the Company's Offer to Purchase and Consent Solicitation Statement dated as of June 29, 2000. The amendments will not become operative unless the Notes are accepted for purchase in accordance with the terms of the tender offer. If the amendments become operative, holders of all untendered Notes will be bound thereby. On July 28, 2000 the Company announced that it was extending, until 5:00pm on August 8, 2000, the expiration date of the Company's tender offer for its Notes, as a result, the pricing of the tender was extended until 2:00pm on August 4, 2000. The tender offer had previously been scheduled to expire August 1, 2000. The expiration was extended to accommodate the execution and funding of a new credit agreement with a group of lenders as described in the Company's Offer to Purchase and Consent Solicitation Statement dated June 29, 2000 (the "Statement"). The tender offer was completed on August 8, 2000. 11. Subsequent Events On July 31, 2000, the Company announced that it entered into a definitive agreement to acquire CRC Holdings, Inc. ("CRC") which does business as Carnival Resorts and Casinos for $95.8 million and the assumption of approximately $32 million in net debt (the "CRC Acquisition"). CRC is an experienced operator of gaming facilities and the owner of approximately 59% of Louisiana Casino Cruises, Inc. ("LCCI"). The Company also announced that it had entered into a definitive agreement with the minority owners of LCCI to acquire their approximately 41% stake for $32.5 million. Under the terms of the agreement, CRC will divest all of its non-gaming related assets prior to closing. The acquisitions are expected to be accretive to Penn National's results in the first year of operations after closing. In the twelve months ended February 29, 2000 CRC's gaming business, including LCCI, generated approximately $30.6 million in EBITDA. 21

LCCI owns and operates the Casino Rouge, a riverboat gaming facility on the east bank of the Mississippi River in Baton Rouge, Louisiana. The Casino Rouge features a four-story, 47,000 square foot riverboat casino replicating a 19th century Mississippi River paddlewheel steamboat, a two-story, 58,000 square foot dockside embarkation facility and parking for 1,650 cars. The riverboat has a capacity of 1,800 patrons and emphasizes spaciousness and excitement with its generous aisle space, 15-foot ceilings, a large central atrium and specially designed lighting. The Casino Rouge offers 28,000 square feet of gaming space spread over three decks with 974 gaming machines and 42 table games. The dockside embarkation facility offers a panoramic view of the Mississippi River and a variety of amenities including a 268-seat buffet, bar and lounge areas, meeting and planning space and a gift shop. The Casino Rouge cruises eight times a day. Located on a 23-acre site, five acres of which are owned by LCCI, the Casino Rouge is within approximately one mile of both Interstate 10 and Interstate 110. For the year ended November 30, 1999 the Casino Rouge had a 61.9% share of the Baton Rouge gaming market casino revenues, as reported by the Louisiana State Police, a regulatory body governing the market. CRC also has a management contract for Casino Rama which is in effect until 2011. Casino Rama is located approximately 80 miles north of Toronto, Canada, in Orillia, Canada on the Chippewas of Mnjikaning First Nation land. Casino Rama, with 75,000 square feet of gaming space, features 2,300 slot machines and 110 table games as well as a buffet, two restaurants, a nightclub, a retail center and a 3,000 seat outdoor theater. The Casino Rama facility is currently undergoing a U.S. $160 million expansion. Since opening in 1996, Casino Rama has built its revenues to approximately U.S. $354 million in 1999. Casino Rama's daily win per position at U.S. $320 in 1999 ranks among the highest of casinos in the U.S. and Canada. The transaction, expected to close in the first half of 2001, is subject to regulatory and other approvals in both Louisiana and Canada, financing, the expiration of the applicable Hart-Scott-Rodino waiting period and other customary closing conditions. 22

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 Acquisitions 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. Three Months Ended June 30, 2000 Compared To Three Months Ended June 30, 1999 Revenues for the three months ended June 30, 2000 increased by approximately $17.0 million or 37.5% to $62.4 million from $45.4 million for the three months ended June 30, 1999. At Charles Town, the increase in revenues ($14.7 million) is attributed to the operation of an average of 1,406 gaming machines for the three months ended June 30, 2000 compared to 915 gaming machines for the three months ended June 30, 1999. Operating expenses for the three months ended June 30, 2000 increased by approximately 11.3 million or 28.8% to $50.7 million from $39.4 million for the three months ended June 30, 1999. Income from operations increased by $5.7 million or 94.7% to $11.7 million for the three months ended June 30, 2000 from $6.0 million for the three months ended June 30, 1999. Other expenses for the three months ended June 30, 2000 and 1999 consisted of approximately $2.0 million and $1.8 million, respectively, of net interest primarily due to the 10.625% Senior Notes and the Revolving Credit Facility. Taxes on income increased by $1.8 million to $3.4 million for the three months ended June 30, 2000 from $1.6 million for the three months ended June 30, 1999. Net income increased by $3.7 million to $6.2 million for the three months ended June 30, 2000 from $2.5 million for the three months ended June 30, 1999. 23

The results of operations for the three months ended June 30, 1999 and 2000 by property level are summarized as follows: (in thousands) Charles Town Racing Penn National and Pocono Downs and OTWs and Gaming OTWs 1999 2000 1999 2000 1999 2000 ---- ---- ---- ---- ---- ---- Revenues Gaming $ 13,768 $26,878 $ - $ - $ - $ - Racing 4,763 5,214 13,668 15,406 9,674 9,483 Other 1,674 2,833 1,241 1,328 859 871 ------------------------- ------------------------ ------------------------- Total revenues 20,205 34,925 14,909 16,734 10,533 10,354 ------------------------- ------------------------ ------------------------- Expenses Gaming 9,674 18,075 - - - - Racing 3,835 4,101 10,652 12,086 6,705 6,827 Other* 2,333 3,353 1,807 1,885 1,160 1,142 ------------------------- ------------------------ ------------------------- Total expenses 15,842 25,529 12,459 13,971 7,865 7,969 ------------------------- ------------------------ ------------------------- EBITDA Gaming 4,094 8,803 - - - - Racing 928 1,113 3,016 3,320 2,969 2,656 Other (659) (520) (566) (557) (301) (271) ------------------------- ------------------------ ------------------------- Total EBITDA $ 4,363 $ 9,396 $ 2,450 $ 2,763 $ 2,668 $ 2,385 ========================= ======================== ========================= * Other expenses include property level general and administrative expenses and excludes corporate overhead and non-recurring expenses. Charles Town Entertainment Complex Revenues increased at Charles Town by approximately $14.7 million or 72.8% to $34.9 million in 2000 from $20.2 million in 1999. Gaming revenue increased by $13.1 million or 95.2% to $26.9 million in 2000 from $13.8 million in 1999 due to the addition of 565 new reel spinning, coin-out slot machines since the second quarter of last year. The average number of machines in play increased to 1,406 in 2000 from 915 in 1999 and the average win per machine increased to $211 in 2000 from $164 in 1999. Racing revenue increased by $.5 million or 9.7% to $5.2 million in 2000 from $4.7 million in 1999. The live meet consisted of 60 race days in 2000 and 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 $566,000 for 2000 compared to $61,000 in 1999. Concession and other revenues increased by approximately $1.1 million or 69.2% 24

to $2.8 million in 2000 from $1.7 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 $9.7 million or 61.1 % to $25.5 million in 2000 from $15.8 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. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $5.0 million or 115.4% to $9.4 million in 2000 from $4.4 million in 1999. Penn National Race Course and OTW Facilities (Penn National Race Course) Penn National Race Course had an increase in revenue of approximately $1.8 million or 12.2% to $16.7 million in 2000 from $14.9 million in 1999. The increase in revenues is attributed to Penn National Race Course running 51 live race days in 2000 compared to 32 live race days in 1999 resulting in an increase in live racing commissions and export simulcasting revenue. Expenses increased by approximately $1.5 million or 12.1% to $14.0 million in 2000 from $12.5 million in 1999. Pocono Downs and OTW Facilities (Pocono Downs) Revenues at Pocono Downs decreased by $.2 million or 1.7% to $10.3 million in 2000 from $10.5 million in 1999. Revenue decreased at Allentown and Hazleton due to loss of Penn National Race Course customers wagering at Pocono Downs sites during the 1999 strike. Expenses increased by approximately $.1 million or 1.3% to $8.0 million in 2000 from $7.9 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 period ended June 30, 2000 include $15.1 million in revenue, $11.6 million in operating expenses and net income of $1.7 million. The Company's 50% share of net income or $.8 million is recorded as "Earnings from unconsolidated affiliates" on the income statement. Capital Expenditures The Company had capital expenditures of $5.2 million in 2000 compared to $1.1 million in 1999. Capital expenditures at Charles Town were approximately $3.7 million for the indoor paddock project that will be the new gaming floor space for 500 machines ($1.6 million), 174 new reel spinning, coin-out slot machines ($1.3 million), and equipment replacement and upgrades ($.8 million). Capital expenditures at Penn National and its OTW facilities ($.2 million) and Pocono Downs and its OTW facilities ($.1 million) were for normal equipment replacement and leasehold improvements. Pocono Downs has also spent $1.2 million on the construction of its new OTW facility in East Stroudsburg, Pennsylvania. The new OTW opened July 31, 2000. As a result, depreciation and amortization increased $.1 million or 2.9% to $2.2 million in 2000 from $2.1 million in 1999. 25

Six Months Ended June 30, 2000 Compared To Six Months Ended June 30, 1999 Revenues for the six months ended June 30, 2000 increased by approximately $37.5 million or 48.0% to $115.7 million from $78.2 million for the six months ended June 30, 1999. Operating expenses for the six months ended June 30, 2000 increased by approximately 25.8 million or 36.8% to $96.1 million from $70.3 million for the six months ended June 30, 1999. Income from operations increased by 11.7 million or 148.2% to $19.5 million for the six months ended June 30, 2000 from $7.8 million for the six months ended June 30, 1999. Other expenses for the six months ended June 30, 2000 and 1999 consisted of approximately $4.1 million and $3.7 million, respectively, of net interest primarily due to the 10.625% Senior Notes and the Revolving Credit Facility. Taxes on income increased by $4.0 million to $5.6 million for the six months ended June 30, 2000 from $1.6 million for the six months ended June 30, 1999. Net income increased by 7.3 million to $9.8 million for the six months ended June 30, 2000 from $2.5 million for the six months ended June 30, 1999. The results of operations for the six months ended June 30, 1999 and 2000 by property level are summarized as follows: (in thousands) Charles Town Racing Penn National and Pocono Downs and OTWs and Gaming OTWs 1999 2000 1999 2000 1999 2000 ---- ---- ---- ---- ---- ---- Revenues Gaming $ 25,206 $49,059 $ - $ - $ - $ - Racing 8,575 9,612 21,447 30,474 17,276 16,899 Other 2,789 4,972 1,892 2,532 1,389 1,446 ------------------------- ------------------------ ------------------------- Total revenues 36,570 63,643 23,339 33,006 18,665 18,345 ------------------------- ------------------------ ------------------------- Expenses Gaming 18,622 33,514 - - - - Racing 6,957 7,671 16,657 23,804 11,637 12,140 Other* 3,740 6,284 2,874 3,675 2,133 2,230 ------------------------- ------------------------ ------------------------- Total expenses 29,319 47,469 19,531 27,479 13,770 14,370 ------------------------- ------------------------ ------------------------- EBITDA Gaming 6,584 15,545 - - - - Racing 1,618 1,941 4,790 6,670 5,639 4,759 Other (951) (1,312) (982) (1,143) (744) (784) ------------------------- ------------------------ ------------------------- Total EBITDA $ 7,251 $16,174 $ 3,808 $ 5,527 $ 4,895 $ 3,975 ========================= ======================== ========================= * Other expenses include property level general and administrative expenses and excludes corporate overhead and non-recurring expenses. 26

Charles Town Entertainment Complex Revenues increased at Charles Town by approximately $27.1 million or 74.0% to $63.6 million in 2000 from $36.5 million in 1999. Gaming revenue increased by $23.9 million or 94.6% to $49.1 million in 2000 from $25.2 million in 1999 due to the addition of 136 new video lottery machines and 565 new reel spinning, coin-out slot machines since January of last year. The average number of machines in play increased to 1,435 in 2000 from 876 in 1999 and the average win per machine increased to $190 in 2000 from $157 in 1999. Racing revenue increased by $1.0 million or 12.1% to $9.6 million in 2000 from $8.6 million in 1999. The live meet consisted of 105 race days in 2000 and compared to 99 race days in 1999 and a change in the schedule from a Wednesday afternoon race program to a Thursday evening race program in 2000 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 $1,031,000 for 2000 compared to $61,000 in 1999. Concession and other revenues increased by approximately $2.2 million or 78.3% to $5.0 million in 2000 from $2.8 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 $18.1 million or 61.2 % to $47.4 million in 2000 from $29.3 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. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $8.9 million or 123.1% to $16.2 million in 2000 from $7.3 million in 1999. Penn National Race Course and OTW Facilities (Penn National Race Course) Penn National Race Course had an increase in revenue of approximately $9.7 million or 41.4% to $33.0 million in 2000 from $23.3 million in 1999. The increase in revenues is attributed to Penn National Race Course running 99 live race days in 2000 compared to 50 live race days in 1999 resulting in an increase in live racing commissions and export simulcasting revenue. Penn National only ran 50 live race days in 1999 due to the Horsemen action in the first quarter that resulted in the closure of all of the facilities from February 16 to March 24, 1999. Expenses increased by approximately $6.7 million or 32.2% to $27.5 million in 2000 from $20.8 million in 1999. Pocono Downs and OTW Facilities (Pocono Downs) Revenues at Pocono Downs decreased by $.3 million or 1.7% to $18.3 million in 2000 from $18.6 million in 1999. Revenue decreased at Allentown and Hazleton due to loss of Penn National Race Course customers wagering at Pocono Downs sites during the 1999 horsemen action. Expenses increased by approximately $.6 million or 4.3% to $14.4 million in 2000 from $13.8 million in 1999. 27

New Jersey Joint Venture Summarized results of operations of the unconsolidated Joint Venture for the six months ended June 30, 2000 were $29.8 million in revenue, $23.5 million in operating expenses and net income of $2.8 million. The Company's 50% share of net income or $1.4 million is recorded as "Earnings from unconsolidated affiliates" on the income statement. Capital Expenditures The Company had capital expenditures of $7.3 million in 2000 compared to $2.6 million in 1999. Capital expenditures at Charles Town were approximately $5.1 million for the indoor paddock project that will be the new gaming floor space for 500 machines ($1.7 million), 174 new reel spinning, coin-out slot machines ($1.3 million) and equipment replacement and upgrades ($2.3 million). Capital expenditures at Penn National and its OTW facilities ($.3 million) and Pocono Downs and its OTW facilities ($.2 million) were for normal equipment replacement and leasehold improvements. Pocono Downs has also spent $1.5 million on the construction of its new OTW facility in East Stroudsburg, Pennsylvania. The new OTW opened July 31, 2000. As a result, depreciation and amortization increased $.2 million or 5.4% to $4.4 million in 2000 from $4.1 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 $12.0 million for the period ended June 30, 2000. This consisted of net income and non-cash expenses ($13.8 million), a decrease in prepaid income taxes ($1.1 million) and an increase in corporate income tax liability ($2.6 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 ($4.2 million), an increase in prepaid expenses for the Mississippi acquisition ($.8 million) and other expenses ($.4 million), and other changes in certain assets and liabilities ($.1 million). Cash flows used in investing activities for the period ended June 30, 2000 ($13.0 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 ($2.3 million), 174 new reel spinning, coin-out slot machines at Charles Town ($1.3 million), construction of the new gaming area at Charles Town ($1.6 million), equipment replacement and building improvements at Penn National ($.3 million) and Pocono Downs ($.2 million) facilities, and construction of the East Stroudsburg OTW facility ($1.5 million). Cash flows provided by financing activities ($5.3 million) consisted of borrowings under the credit facility ($4.8 million) for Charles Town expansion and proceeds from the exercise of stock options and warrants ($.6 million). This was offset by an increase in financing costs ($.1 million) for amending the credit facility. 28

The Company is subject to possible liabilities arising from the 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 fiscal year 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 $7.3 million on these projects through June 30, 2000. 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 outstanding amount under this Credit Facility as of June 30, 2000 was $12.9 million at an interest rate of 9.16%. The credit facility was repaid on August 8, 2000. 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 was payable in quarterly installments of $1.3 million principle plus interest. The loan was 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. The outstanding amount under this credit facility as of June 30, 2000 was $ 13.9 million at an interest rate of 9.15%. The credit facility was repaid on August 8, 2000. On June 14, 2000, the Company entered into a financing commitment letter with Lehman Brothers, Inc. and CIBC World Markets, Corp. for a $350 million credit facility with bank and institutional lenders. On August 8, 2000, the Company completed the credit agreement with Lehman Brothers, Inc. and CIBC World Markets Corp. as co-arrangers among others. The proceeds of the credit facility were used to finance the $195 million Mississippi acquisition, to refinance the Company's existing debts with First Union National Bank and Bank of America, to purchase the outstanding 10 5/8% Senior Notes and for working capital purposes. The credit facility provides for a $75 million revolving credit facility maturing on August 8, 2005, a $75 million Tranche A term loan maturing on August 8, 2005 and a $200 million Tranche B term loan maturing on August 8, 2006. 29

At the Company's option, the revolving credit facility and the Tranche A term loan may bear the interest at (1) the highest of 1/2 of 1% in excess of the federal funds effective rate or the rate that the bank group announces from time to time as its prime lending rate plus an applicable margin of up to 2.25% or, (2) a rate tied to a eurodollar rate plus an applicable margin up to 3.25%. At the Company's option, the Tranche B term loan may bear the interest at (1) the highest of 1/2 of 1% in excess of the federal funds effective rate or the rate that the bank group announces from time to time as its prime lending rate plus an applicable margin of up to 3.25%, or, (2) a rate tied to a eurodollar rate plus an applicable margin up to 4.00%. The credit facility provides for certain covenants, including those of a financial nature. Substantially all of the Company's assets are pledged as collateral under the Credit agreement. The outstanding amount under this credit facility as of August 8, 2000 was $312 million. A form 8-K will be filed with further information regarding this Credit Facility. The Company currently estimates that the cash generated from operations and available borrowings under the new credit facilities will be sufficient to finance its current operations and planned capital expenditure requirements, not including the CRC 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. Item 3. Changes in Information about Market Risk Most of the Company's debt obligations at June 30, 2000 were fixed rate obligations, and management, therefore, does not believe that the Company has any material risk from its debt obligations. 30

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 31

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. August 14, 2000 By: /s/Robert S. Ippolito Date Chief Financial Officer Secretary/Treasurer 32

5 1000 6-Mos Dec-31-2000 Jan-01-2000 Jun-30-2000 13,831 0 5,011 0 0 22,184 154,793 24,126 204,366 23,860 69,000 0 0 154 76,563 204,366 115,675 115,675 87,585 87,585 8,564 0 4,816 15,437 5,591 9,846 0 0 0 9,846 .66 .64