-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PULLn9j0KFAdKK+ZCDv3hLKDCq44qOJVuoqkxA0QZjBg4CEo7mwTvMKZl0V7D11S B7XrWXFXOn07p4/8NcjRlg== 0000891105-97-000003.txt : 19970401 0000891105-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000891105-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASINO MAGIC CORP CENTRAL INDEX KEY: 0000891105 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 640817483 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20712 FILM NUMBER: 97568231 BUSINESS ADDRESS: STREET 1: 711 CASINO MAGIC DR CITY: BAY ST LOUIS STATE: MS ZIP: 39520 BUSINESS PHONE: 6014679257 MAIL ADDRESS: STREET 1: PO BOX 3150 CITY: BAY ST LOUIS STATE: MS ZIP: 39521 10-K 1 1996 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K XAnnual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For Fiscal Year Ended December 31, 1996 or Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ______ to ______ Commission File No. 0-20712 CASINO MAGIC CORP. (Exact name of Registrant as specified in its charter) Minnesota 64-0817483 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 711 Casino Magic Drive, Bay Saint Louis, MS 39520 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (601) 466-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant was as of March 21, 1997. As of the close of business , there wereshares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated herein by reference: The discussions under the sections captioned ELECTION OF DIRECTORS," "EXECUTIVE COMPENSATION," "CERTAIN TRANSACTIONS" and "PRINCIPAL SHAREHOLDERS" to be included in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission and delivered to the Registrant's shareholders pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, with respect to the 1997 annual meeting of shareholders of the Registrant are incorporated herein in response to Items 10, 11, 12 and 13 of Part III hereof, respectively. ii INDEX Page PART I Item 1. - BUSINESS................................................... 1 Item 2. - PROPERTIES................................................. 23 Item 3. - LEGAL PROCEEDINGS.......................................... 26 Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 27 PART II Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................ 27 Item 6. - SELECTED FINANCIAL DATA.................................... 29 Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 30 Item 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 40 Item 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 40 PART III Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 11 - EXECUTIVE COMPENSATION Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Items 10, 11, 12 and 13 ARE INCORPORATED BY REFERENCE TO THE COMPANY'S 1997 DEFINITIVE PROXY STATEMENT PART IV Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ................................................. 41 CONSOLIDATED FINANCIAL STATEMENTS.................................... F-1 EXHIBITS iii PART I. ITEM 1. BUSINESS GENERAL Casino Magic Corp., through its wholly owned subsidiaries, owns and operates casinos and related amenities primarily in the southeastern United States, including two dockside facilities on the Mississippi Gulf Coast at Bay St. Louis and Biloxi, Mississippi, and one dockside facility in Bossier City, Louisiana, which opened on October 4, 1996. In addition to its domestic operations, a Casino Magic Corp., through wholly owned subsidiaries, owns and operates two casinos in Neuqu n and San Mart n de los Andes, Argentina. The following is a tabulation of the Company's operating casino properties at December 31, 1996: Date Casino Commenced Square Slot Table Hotel Business Footage Machines Games Rooms --------- ------- -------- ----- ------ Bay Saint Louis 9/92 39,500 1,101 44 201 Biloxi 6/93 47,700 1,196 36 -- Bossier City 10/96 30,000 986 44 -- Argentina 1/95 29,000 395 54 -- ------- ------ --- ---- Total 146,200 3,678 178 201 ======= ====== === ==== In May 1995, the Company opened a gaming facility in Porto Carras, Greece, in which the Company had a 49% equity ownership. In addition, since its inception in 1992, the Company owned and operated a small hotel and casino in Deadwood, South Dakota. In 1996, the Company sold its gaming facilities in Deadwood, South Dakota, and its 49% ownership in a gaming facility in Porto Carras, Greece, primarily because of poor operating performance. In addition, during 1996, the Company terminated all management agreements in Greece. Unless the context requires otherwise, reference in this Annual Report to the "Company" means Casino Magic Corp. and its relevant subsidiaries, and reference to "Casino Magic" means Casino Magic Corp. Casino Magic was incorporated under the laws of the State of Minnesota on April 17, 1992. The Company's principal executive and administrative offices are located at 711 Casino Magic Drive, Bay Saint Louis, Mississippi 39520. The Company's telephone number is (601) 466-8000. INDUSTRY BACKGROUND Until approximately 1988, legalized casino gaming in the United States was restricted substantially to the State of Nevada and the City of Atlantic City, New Jersey. Since then, legalized casino gaming has significantly expanded throughout the United States. Numerous states have legalized either land-based, riverboat or dockside gaming. At least 35 states sponsor lotteries, and several states sponsor the use of video poker, video blackjack, or video lottery machines in connection with their lotteries. Riverboat gaming is 1 conducted on vessels which by law are required to leave their mooring and cruise during gaming operations. The laws generally require cruises to be of a certain duration, and will permit dockside gaming shortly preceding and following the cruise period. While dockside gaming must be conducted on a vessel in a body of water, the vessel is not required to leave its moorings, and customers may come and go at will. Dockside gaming was authorized in Mississippi in June 1990, but gaming operations did not commence until August 1992, with the opening of three dockside casinos in Biloxi. Riverboat and dockside gaming was legalized in Louisiana in 1991, but gaming operations did not begin until October 1993. Some states limit the amount that a gaming customer may bet or lose, which is referred to as "limited stakes gaming," and prohibit the issuance of house credit. The gaming laws of Mississippi and Louisiana permit 24-hour unlimited stakes gaming, and permit the issuance of house credit. Since the passage of the 1988 Indian Gaming Regulatory Act, a significant number of North American Indian tribes have established gaming on Indian reservations. Gaming on Indian lands is subject to compacts that North American Indian tribes are required to enter into with the state in which the gaming takes place, which may or may not limit the nature of the tribe's gaming activity. The expansion of gaming has also occurred in countries other than the United States. Numerous countries, including Argentina, have either adopted laws which permit gaming, or expanded such legislation to allow private enterprises to operate casinos. As in the United States, a significant motive for allowing or expanding gaming operations is the revenues generated for the government of the country in which the gaming activity is located. FINANCIAL INFORMATION REGARDING SEGMENTS See "Item 6.-SELECTED FINANCIAL DATA," "Item 14.-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K" and the Consolidated Statements of Operations, page F-3 in the 1996 Financial Statements which accompany this report. DOMESTIC OPERATIONS CASINO MAGIC-BSL The casino at Bay Saint Louis, Mississippi (referred to herein as "Casino Magic-BSL") commenced operations on September 30, 1992, as the first dockside casino in Mississippi to operate on a barge rather than a traditional riverboat. The casino is located in a 17-acre marina that is part of a 591-acre Company-owned site located 1.5 miles north of U.S. Highway 90, approximately nine miles south of Interstate 10, and approximately 51 miles east of New Orleans, Louisiana. Casino Magic-BSL consists primarily of a 76,520 square foot facility with approximately 39,500 square feet of gaming space offering 1,101 slot machines, 44 table games and poker and keno. Other amenities within the facility include a 330-seat buffet restaurant, an 80-seat fine dining restaurant, a snack bar, a gift shop, a lounge area for live entertainment, a customer service center and office space. The Company owns 2 and operates the 201-room "Casino Magic Inn" at Casino Magic-BSL which includes four deluxe suites, 20 junior suites, 177 standard and handicapped-accessible rooms, 1,500 square feet of banquet and meeting space, 2,000 square feet of outdoor terrace, and an outdoor swimming pool and Jacuzzi. Included at the Casino Magic-BSL complex is a 97-space recreational vechicle park and an 18-hole Arnold Palmer designed Championship Golf Course, which hosts an Arnold Palmer Golf Academy. The Company has preliminary plans for further development of Casino Magic-BSL. These plans include the expansion and improvement of the existing casino, and the construction of a second hotel with such amenities as restaurants, shops, a swimming pool and convention space. There is no assurance that these plans for further development will be implemented or completed, or that the required funds will be available to the Company or, if available, on terms that are acceptable to the Company. CASINO MAGIC-BILOXI The casino at Biloxi, Mississippi (referred herein as "Casino Magic-Biloxi") is located on the Gulf Coast south of and adjacent to U.S. Highway 90 in the middle of a four-casino strip. Biloxi is approximately 54 miles west of Mobile, Alabama and 27 miles east of Bay Saint Louis, Mississippi. Casino Magic-Biloxi encompasses 11 acres of land. Casino Magic-Biloxi, which opened in June 1993, consists of a 117,600 square foot facility, which contains a 47,700 square foot, three-level gaming area. The casino offers 1,196 slot machines and 36 table games. Other amenities include a 360-seat buffet, a fine dining restaurant, a McDonald's restaurant operated by a franchisee unaffiliated with the Company, two bars, a 250-seat lounge and entertainment area, a customer service area, a gift shop and office space. The property has an adjacent 700-space, eight-floor parking garage, 250 surface parking spaces and parking for approximately 30 tour buses across U.S. Highway 90. In addition, the Company shares an immediately adjacent 430-space parking facility with a neighboring casino. In December 1996, the Company commenced construction of a 378-room hotel tower atop its existing parking garage at Casino Magic-Biloxi. When completed, the hotel is expected to be one of the tallest buildings in Biloxi. The hotel tower will have amenities such as a swimming pool and conference space and will include 86 suites. Two additional major casino-hotels are expected to be added to the eight casinos currently operating in Biloxi within the next year. As competition in the Gulf Coast market intensifies, management believes the addition of an on-site hotel at Casino Magic-Biloxi will complement its central location and strengthen its competitive position. 3 Although the Company is taking steps to minimize the potential construction disruption on its existing operations at Casino Magic-Biloxi during the hotel construction, some disruption is expected. The Company has made provisions to maintain adequate parking throughout the construction process. Construction of the hotel is expected to be completed in the first quarter of 1998, although unexpected construction difficulties or lack of funding could delay such completion. CASINO MAGIC-BOSSIER CITY The Company's dockside casino at Bossier City, Louisiana (referred to herein as "Casino Magic-Bossier City"), is located on 23 acres of land on the Red River, and is within one mile of Interstate 20. Bossier City is approximately 180-miles east of the Dallas/Fort Worth. In May 1996, Casino Magic, through its wholly-owned subsidiary, Jefferson Casino Corp. ("Jefferson Corp.") acquired Crescent City Development Corporation, ("Crescent City") for $50 million plus the assumption of up to $5.7 million in equipment liabilities. Jefferson Corp paid $15 million in cash at closing and caused Crescent City to issue $35 million of 11.5% secured, three year notes. Crescent City, was the subject of a plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996, and owned the Crescent City Queen ("Crescent City Riverboat"), a cruising riverboat outfitted for gaming. In addition, Crescent City owned a license to conduct riverboat gaming operations in Louisiana, as well as gaming, surveillance and other gaming related equipment. When Crescent City emerged from the bankruptcy proceedings in May 1996, it was acquired by Jefferson Corp. and renamed Casino Magic of Louisiana, Corp. (referred to herein as "Louisiana Corp.") Although Jefferson Corp. was required to purchase the Crescent City Riverboat to obtain the Louisiana gaming license, the Crescent City Riverboat is one of the largest riverboats in the United States and could not be used at Casino Magic-Bossier City because of its width. Therefore, the Company purchased a casino riverboat (the "Bossier Riverboat") for use at Casino Magic-Bossier City for $20 million. The Company intends to sell the Crescent City Riverboat, and use the proceeds of such sale to assist in the funding of the further development of Casino Magic-Bossier City. The Company can give no assurances that it will be able to sell the Crescent City Riverboat on acceptable terms or in a timely manner. The gaming, surveillance and related equipment acquired in the acquisition by Jefferson Corp. is being used at Casino Magic-Bossier City. To fund the initial development of Casino Magic-Bossier City, on August 22, 1996, Louisiana Corp. sold $115.0 million aggregate principal amount of 13% First Mortgage Notes due in 2003. (See Item 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES.") 4 The Company opened Casino Magic-Bossier City on October 4, 1996 using a temporary boarding facility, and on December 31, 1996, opened the permanent facility. The Company's plans for the development of Casino Magic-Bossier City are divided into two phases. The first phase (which was completed on December 31, 1996) included construction of the existing 30,000 square foot floating dockside casino, a 37,000 square foot entertainment, food and beverage pavilion, a four story 1,500 space parking garage, and surface parking for 400 cars. The second phase plans include the construction of a 60,000 square foot entertainment facility and a 400-room convention hotel. The hotel is expected to house restaurants, banquet space, a theater, a swimming pool, a health club and a child-care facility. The development and construction of the second phase improvements are largely dependent upon receipt of proceeds from a future sale of the Crescent City Riverboat and future operating cash flow of Casino Magic-Bossier City. There is no assurance that such funds will become available or that such hotel and related facilities will ever be developed. GOLDIGGERS SALE On June 13, 1996, the Company sold the capital stock of Atlantic-Pacific Corp., which operates "Goldiggers," a small casino-hotel in Deadwood, South Dakota, with approximately 8,500 square feet of gaming area and nine hotel rooms. Management's decision to sale Goldiggers was based on its continued disappointing operating results and negative cash flow. At the date of the sale, June 13, 1996, Goldiggers had accumulated losses of $1.8 million. CASINO MAGIC-NORTH DAKOTA The Company, through a wholly-owned subsidiary, entered into a consulting agreement with the Sisseton-Wahpeton Dakota Nation ("Sisseton") to provide consulting services to Sisseton concerning the operation of a casino facility on Tribal land located adjacent to Interstate 29, 75 miles north of Fargo, North Dakota. The Company began providing these services in November 1996 after the opening of a temporary casino facility. Under this agreement, the Company will provide consulting services to Sisseton for a minimum period of two years. The fee for these services is based on gross revenues of the casino facility. It is anticipated that Sisseton will contruct a permanent casino which will consist of approximately 25,000 square feet of gaming space housed in a facility totaling approximately 60,000 square feet. Casino Magic-North Dakota is operates approximately 1,000 gaming positions, including 600 slot machines and 40 table games, including poker, blackjack, craps, mini-baccarat, Caribbean Stud Poker , and other popular games. Casino Magic-North Dakota plans for the future a live keno parlor, a race book and a limited sports book. Future plans also include a construction of a 200-room hotel and a recreational vehicle park. Development of the project is subject to Sisseton obtaining additional financing. 5 INTERNATIONAL OPERATIONS. The Company has in the past pursued the management and the operation of casinos and related entertainment facilities outside of the United States. With the shift of the Company's focus, the Company does not anticipate pursuing similar arrangements in the foreseeable future. The following is a summary of the Company's current and recently terminated international operations. CASINO MAGIC-ARGENTINA In December 1994, the Company, through its wholly-owned subsidiary, Casino Magic Neuqu n S.A., began gaming operations in the Argentine cities of Neuqu n and San Mart n de los Andes. The largest casino, located in the city of Neuquen, has approximately 27,000 square feet of gaming space and contains 40 table games, 342 slot machines and a 384-seat bingo facility. The smaller casino in San Mart n de los Andes, a ski town approximately 200 miles southwest of Neuquen City has approximately 2,000 square feet of gaming space, 53 slots and 14 table games. The Company has unrestricted rights to increase the number of gaming positions at both locations although the Company does not anticipate significant additional investment in Casino Magic-Argentina. Prior to December 1994, the two casinos were operated by the Neuquen provincial government. CASINO MAGIC-PORTO CARRAS SALE At September 30, 1996, management determined that its 49% equity investment in Porto Carras Casino S.A.("Porto Carras, S.A."), was impaired. Because of this impairment, management wrote off its equity investment in Porto Carras, S.A., including all unpaid notes and receivables from Porto Carras, S.A.. Management's decision was based on results from Porto Carras, S.A. after Hyatt Corporation opened a new casino in September 1996 in the City of Thessaloniki, Porto Carras's primary market. The Greek Government allowed Hyatt Corporation to charge an $8 admission tax compared to a $20 admission tax required to be paid by Porto Carras, S.A. Although the Company anticipated some revenue loss as a result of this increased competition and admission fee differential, the actual effects were much greater than anticipated and resulted in an approximate $2.0 million operating loss at Porto Carras for the month of September 1996. Despite new marketing and cost containment efforts, these losses continued. Furthermore, the 51% owner of Porto Carras was unwilling or unable to advance any funds to the operation. Additionally, the majority owner informed the Company that it did not intend to operate a substantial portion of the Porto Carras resort area, consisting of two hotels and amenities, during the 1997 season. These factors, among others, led the Company to the decision to divest itself of its investment in Porto Carras Casino S.A. in December 1996. In addition to management's decision to sale Porto Carras, all management agreements in effect to operate other casinos in Greece were terminated in December 1996. 6 FUTURE DEVELOPMENT INDIANA Casino Magic, through its wholly owned subsidiary, Crawford County Casino, Corp. (" Indiana Corp.") is one of two applicants for the tenth gaming license expected to be issued in the State of Indiana. If successful in obtaining this gaming license, the Company plans to develop a riverboat casino and entertainment facility at a 160-acre site on the Ohio River in Crawford County, Indiana. As part of the development, it is anticipated that Indiana Corp. would purchase the Crescent City Riverboat from Louisiana Corp. for use at its Indiana gaming operation and move the boat to the Crawford County site. The Crescent City Riverboat is one of the largest gaming riverboats in the U.S., measuring approximately 430 feet by 100 feet, with a total area of 88,000 square feet on three decks. The Company estimates that it will require approximately $60 million to develop, contruct and equip a land-based facility to support the riverboat casino, including a 250-room hotel, a restaurant, and entertainment and parking facilities. The Company can give no assurances that a gaming license will be obtained in Indiana, or if obtained that sufficient capital to fund the Indiana project will be available. NEW HAMPSHIRE In May 1995, the Company entered into an agreement with Lakes Regional Greyhound Park ("LRGP"). Under the terms of the Agreement, the parties intend to form an entity to pursue a gaming development at LRGP's pari-mutual track in Belmont, New Hampshire, if gaming is legalized in New Hampshire. The entity will be equally owned by the Company and LRGP, and the Company will manage gaming operations. Under the agreement with LRGP, the Company is obligated to provide up to $4 million in funding, $3 million of which is subject to certain contingencies including the passage of legislation permitting gaming at racetracks in New Hampshire. There is no assurance that the Company will have the funds to pursue such gaming opportunity. OTHER The Company has purchased land and acquired options to lease land in states which have not legalized gaming activities. There can be no assurances that gaming will be legalized in these states. The cost of options and land deposits are being amortized over the life of the option or deposit. However, if a determination is made that a permanent impairment has occurred, the option or deposit is written down to its net realizable value. 7 MARKETS AND MARKETING CASINO MAGIC-BSL AND CASINO MAGIC-BILOXI MARKETS Casino Magic-BSL and Casino Magic-Biloxi are two of the ten casinos in operation in the Mississippi Gulf Coast market. Approximately 70% of the customers of these two casinos reside within 150 miles of the two sites. This primary market area includes a population of an estimated 4.5 million residents. New Orleans is approximately 51 miles west of Casino Magic-BSL, and Mobile, Alabama is approximately 54 miles east of Casino Magic-Biloxi. Previously, the market range was limited due to the lack of overnight, on-site accommodations on the Mississippi Gulf Coast. The opening of the 201-room Casino Magic Inn at Casino Magic-BSL has allowed the Company to expand its market range beyond the traditional 150-mile range. With the completion of the golf course in Casino Magic-BSL (opened February 19, 1997) and the anticipated completion in 1998 of the Casino Magic-Biloxi hotel, the Company expects to draw additional visitors from areas outside the 150-mile radius. The major market for Casino Magic-BSL is approximately 51 miles away in the greater New Orleans metropolitan area where over 1.5 million adults reside. In addition to local residents, Casino Magic-Biloxi attracts customers from Mobile, Alabama, and Pensacola, Florida. The Mobile-Pensacola region is home to over 1,000,000 adult. Mobile and the Florida Panhandle area account for nearly half of Casino Magic-Biloxi's customers. In addition, Casino Magic-Biloxi's location in the middle of the Biloxi Strip better enables it to attract customers from surrounding casinos. Local gaming industry marketing surveys have indicated the typical non-resident gaming customer visits an average of three casinos. CASINO MAGIC-BOSSIER CITY MARKET Casino Magic-Bossier City is one of our four casinos operating in the Shreveport/Bossier City, Louisiana metropolitan area. Casino Magic-Bossier City's primary market is the 6.8 million adults residing within 200 miles of Bossier City, including persons residing in the Dallas-Forth Worth area which is located approximately 180 miles west of Casino Magic-Bossier City. Casino Magic-Bossier City's location will provide customers from the Dallas-FortWorth market easy and direct access from Interstate Highway 20, the major east-west artery connecting Dallas-Fort Worth to Bossier City. Other cities within 200 miles of Casino Magic-Bossier City include Longview, Texas, and Monroe, Louisiana. 8 DOMESTIC MARKETING The Company's marketing programs consist of a variety of advertising, direct mail and promotional programs intended to encourage more repeat visits to the Company's facilities. The Company's domestic marketing efforts include newspaper and direct mail advertising of its Magic Money Player's Club, special promotions, events and entertainment, and a motor coach program. The Magic Money Players Club is the most important marketing tool utilized by the Company. Like a frequent flier airline card or cash back credit card, it promotes customer loyalty and frequent use. Guests who enroll in this free club complete a questionnaire that provides the Company with useful demographic information. Specific groups can be targeted for direct-mail offers and promotions, and each member of the Magic Money Players Club receives a bi-monthly newsletter that includes upcoming events, entertainment schedules, current membership incentives and photos of recent winning patrons. The Magic Money Players Club also provides benefits to the customer such as cash rewards, club perquisites and a sense of belonging. Because gaming members earn points that are redeemable for cash, the Magic Money Players Club provides an effective way to give back to loyal customers a portion of their play. The reward levels are viewed as goals for the member and therefore increase length of stay and frequency of visits. Active members with high play levels are also rewarded with complimentary entertainment and event tickets as well as free dining and lodging. Since other commpeting casinos have similar "clubs", the preceived quality of such clubs is an important marketing factor. The Company schedules mid-week gaming promotions to add to the Company's customer base, generate more frequent visits from its existing customers base, and increase the length of customer stay and play levels. In addition Casino Magic-BSL normally hosts four nationally televised boxing events per year to increase national exposure. Local advertising and direct mail are used to target the player base and the general public for large promotions. Additional direct-mail offers, including gaming packages, car drawings, free buffets, event tickets and party invitations, are sent to high-end players. Every promotion is monitored through the Magic Money Players Club for cost effectiveness. The success of each promotion not only depends on player appeal, but also the level of internal and external advertising related to the promotion. Casino Magic-BSL and Casino Magic-Biloxi also actively promote motorcoach group package programs. The "Magic Bus" program is available Sunday through Thursday and includes a free bus trip to the property, a free breakfast or lunch and other benefits. Intended to maintain customer volume during traditionally non-peak times, Magic Bus programs originate at locations 50 to 150 miles from the properties, are completed in one day and are generally organized by one of the participants. Professional tour operators also organize bus trips which originate at locations more than 250 miles from the coast. These motorcoach groups will typically spend one or more nights away from home. Currently, Casino Magic-BSL and Casino Magic-Biloxi welcome over 10,000 motorcoach passengers each month. The motorcoach program experience that the Company has gained in Mississippi will be beneficial for the development of a similar program at Casino Magic-Bossier City. 9 The Mississippi Gulf Coast provides 35 miles of sandy beaches, and the area offers a variety of outdoor activities, including boating, sport fishing and golf. The Company's advertising, coupled with other casinos' marketing efforts and marketing campaigns by local tourism promotion agencies, promote the area as a desirable recreational and gaming location. It is hoped that these activities will have the affect of increasing the volume of compensating for future expansion of existing and new gaming facilities in Mississippi, Louisiana and neighboring states. The Company recently established a new marketing research and analysis program to provide the Company with objective information related to competition, market potential, program profitability, customer attitudes and advertising effectiveness. The department is responsible for conducting monthly exit surveys to measure customer satisfaction, analyze the appeal of casino events and promotions, evaluate current competitive factors and measure the effectiveness of various advertising and promotional efforts. CASINO MAGIC-ARGENTINA The two casinos comprising Casino Magic-Neuquen are in the Province of Neuqu n located in west-central Argentina. The population within a 150-miles radius of those two cities is approximately 900,000. The cities of Neuqu n and San Mart n de los Andes are located near a number of Argentine tourist attractions including national parks, ski resorts and a wide variety of outdoor activities. The two cities have a combined total of more than 5,000 hotel rooms. The San Mart n de los Andes casino was moved in December 1995 to a location in the heart of the city. The Company believes that this move has resulted in an increase in business. SEASONALITY The Company's current gaming operations on the Mississippi Gulf Coast and in Bossier City, Louisiana, are subject to seasonal variation. Gaming revenues typically decline during the third and fourth quarters of the year. The operations of Casino Magic-Argentina, also experience similar seasonal variation due to reliance on tourism. COMPETITION GENERAL The Company has experienced intense competition due primarily to the recent and significant expansion of gaming on the Mississippi Gulf Coast. Many of the Company's competitors have greater name recognition, marketing capabilities and financial resources. In attempting to attract customers to its casinos, the Company faces, or may face, increasing competition from new casinos developed on the Mississippi Gulf Coast, in Northwest Louisiana and in surrounding market areas, and from established gaming centers such as those in Nevada and Atlantic City, New Jersey. The Company also faces competition from other forms of lawful gaming, such as state-sponsored lotteries and video lottery terminals, pari-mutuel betting on horse and dog racing, and bingo parlors as well as from other forms of entertainment. It is possible that increased competition could have a material adverse effect on the Company. 10 CASINO MAGIC-BSL AND CASINO MAGIC-BILOXI The Mississippi gaming market is highly competitive. The Company's current Mississippi operations compete primarily with nine other dockside gaming casinos on the Mississippi Gulf Coast, all of which have been opened since August 1992. Seven competing facilities are located in Biloxi and two are located in Gulfport, approximately 10 miles from Biloxi. In addition, the Company believes that many of its competitors will add or enhance their existing amenities and competitors will enter the Mississippi Gulf Coast market. Mirage Resorts, Inc. has begun construction and has received a gaming license to open a casino and resort complex in Biloxi in 1998. In addition, the "Imperial Palace" casino is currently scheduled to open in Biloxi in July 1997. Both such developments include substantial hotels with 1,000 or more rooms each. Both Circus Circus and Hilton are attempting to develop casino resorts off of Interstate 10 in Bay Saint Louis just across the bay and north of Casino Magic-BSL. Both casinos, if developed, may be more easily accessed by customers coming from New Orleans, than Casino Magic-BSL. Intense competition on the Mississippi Gulf Coast has contributed to the closure of two gaming facilities in that area, and one other is operating under bankruptcy protection. Mississippi law does not limit the number of gaming licenses that may be granted. Any increase in the number of gaming facilities along the Mississippi Gulf Coast and surrounding areas could have a material adverse effect on the Company. CASINO MAGIC-BOSSIER CITY There are currently fourteen riverboat casinos operating in Louisiana, all of which have opened since September 1993. Of these fourteen riverboat casinos, four are currently licensed and operate in the Bossier City/Shreveport market and offer substantially similar gaming facilities. Casino Magic-Bossier City faces competition from those existing operations, particularly to the extent that they add to or enhance existing amenities. For example, Binion's Horseshoe Casino has begun construction of a 606-room all suites hotel at its riverboat casino location in Bossier City. In addition, one riverboat owned by Hilton Corporation currently operating in the New Orleans market has received approval to relocate to the Bossier City market in late 1997 and a sixth gaming company, Hollywood Casino, has received approval to obtain a license to operate a dockside riverboat casino in the Bossier City/Shreveport area thus increasing competition in this area. TEXAS AND ALABAMA LEGALIZATION RISKS Casino gaming is currently prohibited in several jurisdictions adjacent to Louisiana and Mississippi. As a result, residents of these jurisdictions, principally Texas and Alabama, comprise a significant portion of the customers of Casino Magic-BSL, Casino Magic-Biloxi and Casino Magic-Bossier City. 11 Although casino gaming is not currently permitted in Texas and the Texas Attorney General has issued an opinion that gaming in Texas would require an amendment to the Texas Constitution, the Texas Legislature has considered various proposals to authorize casino gaming. No gaming legislation was enacted in the most recent legislative session ended May 29, 1995. A constitutional amendment would require a two-thirds vote of those present and voting in each house of the Texas Legislature and approval by the electorate in a referendum. The legalization of casino gaming in Texas and the opening of one or more casinos in the Dallas/Fort Worth area, which is a major market for Bossier City/Shreveport gaming operations, would have a material adverse effect on Casino Magic-Bossier City operations. Casino gaming is currently illegal in Alabama due to a constitutional prohibition against lotteries. Several attempts have been made to pass a resolution of the Alabama Legislature providing for a statewide referendum on the repeal of the pertinent section of the Alabama Constitution prohibiting lotteries (and thereby gaming). This action would require a three-fifths vote of each house of the legislature followed by a statewide referendum. Both the Governor and the Attorney General of Alabama have stated their opposition to the legalized casino gaming even though pari-mutuel wagering and limited charitable bingo exist within the state. The legalization of casino gaming in Alabama would have a material adverse effect on the Company's Mississippi operations, particularly Casino Magic-Biloxi, both because the Mobile metropolitan area is a major market for the Company's Casino Magic-Biloxi operation and because a substantial portion of the Company's customers are residents of areas east of Mobile including Florida and Georgia. ARGENTINA The Company's two casinos in the Province of Neuqu n, Argentina, located in the cities of Neuqu n and San Mart n de los Andes are currently the only operating casinos in the Province of Neuqu n. There are, however, 44 government-operated casino operations throughout the country, including a casino in Chipolletti, across the Rio Negro River from the City of Neuquen in Rio Negro Province, and a casino in Rio Negro Province approximately 30 miles southeast of the city of Neuqu n. The Company's exclusive concession in the Province of Neuqu n is the second out of 12 which have been or will be awarded under the Argentine government's casino privatization program. GOVERNMENT REGULATION DOMESTIC The ownership and operation of a casino gaming business within the United States and other jurisdictions in which the Company operates are subject to extensive and complex governmental regulation and control under federal, state or local laws and regulations. These laws and regulations are subject to change including the repeal of laws which permit gaming. The Company and certain of its officers, directors, key employees, shareholders and other affiliates ("Regulated Persons") are subject to strict legal and regulatory requirements, including mandatory licensing and approval requirements, suitability requirements, and ongoing regulatory oversight with respect to such gaming operations. Such legal and regulatory requirements and oversight will be administered and exercised by the relevant regulatory agency or agencies in each jurisdiction. 12 The Company and the Regulated Persons will need to satisfy the licensing, approval and suitability requirements of each jurisdiction in which the Company seeks to become involved in gaming operations. Such requirements vary from jurisdiction to jurisdiction, but generally concern the responsibility, financial stability and character of the owners and managers of gaming operations, as well as persons financially interested or involved in operations. In general, the procedures for gaming licensing, approval and findings of suitability require that the Company and each Regulated Person to submit detailed background and financial information and that the Company demonstrate that the proposed gaming operation has adequate financial resources generated from suitable sources and adequate procedures to comply with the operating controls and requirements imposed by law and regulation in each jurisdiction. This submission is normally followed by a thorough investigation by the regulatory authorities. An application for any gaming license, approval or finding of suitability may be denied for any cause that the regulatory authorities deem reasonable. There can be no assurance that the Company or the Regulated Persons will obtain or maintain all of the necessary licenses, approvals and findings of suitability to permit the Company to continue its development plans. Once a license or approval is obtained, the Company will be required to periodically submit detailed financial and operating reports to regulatory authorities. Such licenses and approvals may be subject to periodic renewal and generally are not transferable. The regulatory authorities may at any time revoke, suspend, condition, limit or restrict a license, approval, or finding of suitability for any cause they deem reasonable. Fines for violations may be levied against the holder of a license and in some jurisdictions gaming operation revenues can be forfeited to the state under certain circumstances. The laws, regulations and procedures pertaining to gaming are subject to the interpretation of the regulatory authorities and may be amended. Any changes in such laws or regulations, or their current interpretations, could have a material adverse effect on the Company. MISSISSIPPI GAMING REGULATIONS In 1990, the State of Mississippi legalized dockside casino gaming for counties along the Mississippi River and the Gulf Coast. The legislation gave each of those counties the opportunity to hold a referendum on whether to allow dockside casino gaming within its boundaries. Mississippi law permits gaming licensees to offer unlimited stakes gaming on a 24-hour basis. The law does not restrict the amount or percentage of space on a vessel that may be utilized for gaming. The legislation also does not limit the number of licenses that the Mississippi Gaming Commission (the "Mississippi Commission") can grant a particular area and does not impose different conditions on different licensees. The ownership and operation of casino gaming facilities in Mississippi are subject to extensive state and local regulation. The Company, through its subsidiaries, holds licenses for Casino Magic-Biloxi and Casino Magic-BSL under the Mississippi Gaming Control Act (the "Mississippi Act"). Each license is site specific. The Company's current and proposed gaming operations are subject to the licensing and regulatory control of the Mississippi Commission and various federal, state, county and city regulatory agencies. The Mississippi Commission adopted regulations in furtherance of the Mississippi Act. These regulations have been amended from time to time since that date. 13 The Company is required to submit detailed financial, operating and other reports to the Mississippi Commission. Substantially all loans, leases, sales of securities and similar financing transactions entered into by the Company must be reported to or approved by the Mississippi Commission. The Company is also required to periodically submit detailed financial and operating reports to the Mississippi Commission and furnish any other information which the Mississippi Commission may require. Each of the directors, officers and certain key employees of the Company who are actively and directly engaged in the administration or supervision of gaming, or who have any other significant influence on the activities of the Company, must be found suitable therefor and may be required to be licensed by the Mississippi Commission. In practice, a finding of suitability of an individual is considered the same as licensing that individual. The finding of suitability requires submission of detailed personal financial information followed by a thorough investigation. Although certain current members of the Company's management have been found suitable in connection with the licensing of the Casino Magic-Biloxi and Casino Magic-BSL, there can be no assurance that additional key personnel or management persons who may be recruited from time to time by the Company will be found suitable by the Mississippi Commission, if the Mississipi Commission were to find a director, officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company, the Company would have to suspend, dismiss and sever all relationships with such person. The Company would have similar obligations with regard to any person who refuses to file appropriate applications. Each gaming employee must obtain a work permit. The Mississippi Commission may refuse to issue a work permit to a gaming employee for various grounds enumerated in the Mississippi Act, including if the employee has committed larceny, embezzlement or any crime of moral turpitude, or knowingly violated the Mississippi Act or Mississippi regulations, or for any other reasonable cause. Denial of a work permit is mandatory if the applicant has committed, attempted or conspired to commit a felony. The licenses obtained by the Company have terms of two years and are not transferable. New licenses must be obtained at the end of each two-year period. There can be no assurance that new licenses can be obtained. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, and to fine any person as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or other person who is subject to the Mississippi Act up to $100,000 for each violation of the Mississippi Act, which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of certain decisions of the Mississippi Commission by petition to a Mississippi circuit court, but the filing of such petition does not necessarily stay any such action taken by the Mississippi Commission pending a decision by the circuit court. 14 Any individual who is found to have a material relationship to, or material involvement with, the Company or, in the discretion of the Gaming Commission, any other person associated with a gaming establishment of the Company, may be required to be investigated in order to be found suitable or to be licensed as a business associate of the Company. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of the Company may also be deemed to have such a relationship or involvement. The Mississippi Act requires that owners of more than 10% of the Company's voting securities be found suitable by the Mississippi Commission. The statutes and regulations also give the Mississippi Commission the discretion to require a suitability finding with respect to anyone who acquires any security of the Company regardless of the percentage of ownership. The current policy of the Mississippi Commission is to require anyone acquiring 5% or more of any voting securities to be found suitable. If the owner of voting securities who is required to be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any owner of voting securities who is found unsuitable and who holds, directly or indirectly, any beneficial ownership of equity interests in the Company beyond such period of time as may be prescribed by the Mississippi Commission may be guilty of a misdemeanor. Additionally, any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by such Commission may be found unsuitable. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to have any relationship with it, the Company (i) pays the unsuitable person any distributions or interest upon any securities of the Company or any payments or distribution of any kind whatsoever, (ii) recognizes the exercise, directly or indirectly, of any voting rights in its securities by the unsuitable person, or (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances. The Company will be required to maintain current equity ownership ledgers in the State of Mississippi which may be examined by the Mississippi Commission at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company also is required to render maximum assistance in determining the identity of the beneficial owner. The Mississippi Act requires that certificates representing equity securities of the Company bear a legend to the general effect that the securities are subject to the Mississippi Act and regulations of the Mississippi Commission. The Mississippi Commission has the authority to grant a waiver from the legend requirement, which the Company has obtained. The Mississippi Commission has the power to impose additional restrictions on the holders of the Company's securities at any time through its power to regulate licenses. 15 The regulations provide that a change in control of the Company may not occur without the prior approval of the Mississippi Commission. Mississippi law prohibits the Company from making a public offering of its securities without the approval of the Mississippi Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi, or to retire or extend obligations incurred for one or more of such purposes. The Mississippi Commission has enacted regulations requiring that, as a condition to licensure or renewal licensure, an applicant provide a plan to develop "infrastructure facilities" amounting to 25% of the cost of the casino and a parking facility capable of accommodating 500 cars. "Infrastructure facilities" include any of the following: a 250-room hotel, theme park, golf course, marina, tennis complex, or any other facilities approved by the Mississippi Commission, but such team does not include parking facilities, roads, sewage and water systems or civic facilities. The Mississippi Commission may reduce the number of rooms required in a hotel, where it is shown to the satisfaction of the Mississippi Commission that sufficient rooms are available to accommodate the anticipated number of visitors. The Company's future gaming operations outside of Mississippi are also subject to approval by the Mississippi Commission. LOUISIANA GAMING REGULATIONS In 1991 the Louisiana legislature enacted the Louisiana Riverboat Economic and Gaming Control Act, LSA-R.S. 4:501, et. seq. (the "Louisiana Gaming Act"). The Louisiana Gaming Act authorized the licensing of up to 15 riverboats to conduct gaming on designated rivers and waterways. Pursuant to the Louisiana Gaming Act, the Riverboat Gaming Commission (the "Louisiana Commission"), was created within the Department of Public Safety and Corrections for the State of Louisiana. Additionally, a riverboat gaming regulatory group within the Louisiana State Police was created. The Louisiana Gaming Commission and the State Police were authorized to and did promulgate the existing rules and regulations governing the licensing and operations of riverboats. The Louisiana legislature in the First Extraordinary Session, 1996, enacted new legislation (the "Louisiana Board Act") which transferred the regulatory oversight of most gaming operations in Louisiana, including riverboat gaming, to the Gaming Control Board (the "Louisiana Board"), effective as of May 1, 1996. The Louisiana Commission was abolished as of that same date. The Louisiana Board will consist of nine members appointed by the Governor of Louisiana. As of December 31, 1996, the chairman and five members of the Louisiana Board have been appointed, which constitutes a quorum necessary for the Louisiana Board to conduct business. At the first meeting of the Louisiana Board, which was held on July 19, 1996, the Louisiana Board adopted an internal board policy, a travel policy, a declaration of emergency, and emergency rules 101 through 104. Rule 101 provides definitions of the Louisiana Board, the Chairman of the Louisiana Board (the "Chairman") and the Department of Public Safety (the "Department"). Rule 102 authorizes the Department to issue to qualified applicants non-key gaming employee permits and non-gaming vendor licenses and to renew licenses for the operation of video poker devices at facilities with no more than three video poker devices. 16 Rule 102 further authorizes the Department to determine an applicant's qualifications in accordance with the current laws. Rule 103 put in place a procedure for appeals by applicants whose renewals have been denied. Finally, Rule 104 is a general delegation of power to the Chairman to exercise all posers and authority of the Louisiana Board, except the Chairman shall not: 1. enter into contracts in excess of $100,000; 2. adopt rules: 3. enter into the casino operating contract on behalf of the Louisiana Board; 4. issue a riverboat gaming operator license, provided that the Chairman may determine that conditions imposed on a conditionally licensed riverboat gaming operator have been met; 5. approve changes of the berth or design specifications of a riverboat; or 6. approve transfers of ownership interests in a riverboat gaming operator licensee, the casino gaming operator, or a qualified video-poker truck-stop facility. The Louisiana Board is empowered to regulate four forms of gaming activities and operations in the state: riverboat, video poker, the land-based casino in New Orleans, and all state regulated aspects of Indian gaming. (Excluded is the regulation and oversight of horse racing and off-track betting, the state lottery, and charitable gaming.) Accordingly, the Louisiana Board has all regulatory authority, control, and jurisdiction, including investigation, licensing, and enforcement, and all power incidental to or necessary for such regulatory authority, control and jurisdiction, over all aspects of gaming activities and operations as authorized pursuant to the provisions of the Louisiana Gaming Act, the Louisiana Economic Development and Gaming Corporation Act (Land-Based Casino in New Orleans), and the Video Draw Poker Devices Control Act. The Louisiana Board has been authorized to promulgate rules and regulations to govern the aforesaid types of gaming in Louisiana; however, all administrative rules and regulations promulgated by entities whose powers have been transferred to the Louisiana Board are to be considered valid and remain in effect until repealed by the Louisiana Board. The construction, ownership and operation of riverboat gaming vessels will now be subject to regulation by the Louisiana Board. The independent authority previously granted to the State Police by the Louisiana Gaming Act has been significantly reduced by the Louisiana Control Board Act. The State Police will now conduct investigations and audits regarding the qualifications of applicants for licenses or permits requiring suitability determinations, submit all investigative reports to the Louisiana Board, conduct audits to assist the Louisiana Board, issue certain licenses and permits in accordance with rules adopted by the Louisiana Board, and perform all other duties and functions necessary for the efficient and thorough regulation and control of gaming activities and operations under the Louisiana Board's jurisdiction. 17 The Louisiana Board Act did not repeal the Louisiana Gaming Act, the original 1991 statute authorizing riverboat gaming in Louisiana, but rather amended it to transfer licensing and regulatory authority to the Louisiana Board and to redefine the authority of the State Police. Otherwise the Louisiana Gaming Act remains in effect. Accordingly, the Louisiana Gaming Act continues to authorize up to 15 licenses to conduct gaming activities on riverboats, with no more than six licenses to be granted to riverboats operating in any one parish. Local regulation remains restricted to the imposition of an admission fee of up to $2.50 per passenger ($3.00 per passenger in Shreveport and Bossier City). On November 5, 1996, voters in both Caddo and Bossier parishes approved a continuation of riverboat gaming in such parishes. Voters in all other Louisiana parishes in which riverboat gaming is currently conducted also approved a continuation of that form of gaming in their respective parishes. Current Louisiana law limits the number of riverboat casino licenses in the state to 15, all of which have been awarded, and limits the concentration of riverboat casino licenses in any one parish to six. Six of those licenses (including the Company's, another recently approved relocation from the New Orleans market) have been granted in the Bossier City/Shreveport market which encompasses both the Caddo and Bossier parishes. The relative success of gaming operations in the Bossier City/Shreveport market, as compared to other Louisiana markets, may increase the possibility that existing licenses may be relocated to the Bossier City/Shreveport market. However, the relocation of existing licenses to another parish or of riverboats within the same parish will be restricted by the Constitutional Amendment which requires, among other things, a local parish-wide election to approve, by majority vote, the licensing of any additional riverboats in a parish with existing licensed riverboats or the relocation of any operating riverboat to a different berth in the same parish. During September, 1996, in a statewide election, a Constitutional Amendment was approved by voters statewide, which requires local option elections in parishes before new forms of gaming may be conducted therein or before existing forms of gaming may be conducted in new areas. For example, the Constitutional Amendment requires a local option referendum before an additional riverboat could move into a parish, regardless of whether such parish had authorized the continuation of riverboat gaming in such parish in the Louisiana Referendum. In this respect, (i.e., relocation of riverboat gaming vessels to new locations) the Constitutional Amendment would appear to be more restrictive than the legislation requiring the Louisiana Referendum. Licenses may be and have been issued for dockside riverboat gaming along the Red River in the Shreveport/Bossier City area. Dockside gaming is presently prohibited at other locations in the state. A riverboat gaming license has an initial term of five years, with subsequent annual renewals thereafter. Pursuant to the decision of the State Police at a hearing held on April 30, 1996, the Louisiana riverboat gaming license acquired by the Company has an unexpired term of five years less the sixty-five days that the previous licensee conducted riverboat gaming operations. The unexpired term of 18 the license recommenced on October 4, 1996 the date that the Company began riverboat gaming operations in Bossier City. The application for renewal consists of a sworn statement of all changes in information, including financial information, provided in any previous applications. The transfer of a license is prohibited. The Louisiana Board may restrict, suspend or revoke a license or permit. Suspension or revocation of any license or permit would have a material adverse effect upon the business of the Company. Pursuant to the existing laws, rules and regulations, the Company must submit detailed financial, operating and other reports to the Louisiana Board periodically. Substantially all loans, leases, private sales of securities, extensions of credit and similar financing transactions entered into by any of the Regulated Persons, including the sale and issuance of the Senior Notes offered hereby, must be reported to the Louisiana Board within thirty days after the consummation of any such transactions. The Louisiana Board is required to investigate all reported loans or extensions of credit, and to either approve or disapprove same. If disapproved, the pertinent loan or extension of credit must be rescinded by the appropriate Regulated Person. The Company is also required to periodically submit detailed financial and operating reports to the Louisiana Board and furnish any other information which the Louisiana Board may require. The applicant for a gaming license, its directors, officers, key personnel, partners, and persons holding a 5% or greater interest in the applicant will be required to be found suitable by the Louisiana Board. This requires the filing of an extensive application to the Louisiana Board disclosing personal, financial, criminal, business and other information. The applicant is required to pay all costs of investigation. There can be no assurance that such person will be found suitable by the Louisiana Board. An application for licensing of an individual may be denied for any cause deemed reasonable by the Louisiana Board. Any individual who is found to have a material relationship to or a material involvement with, the Company may be required to be investigated in order to be found suitable or be licensed as a business associate of an applicant. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of the Company may also be deemed to have such a relationship or involvement. If the Louisiana Board were to find a director, officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with an applicant, the applicant would have to suspend, dismiss and sever all relationships with such person. The applicant would have similar obligations with regard to any person who refuses to file appropriate applications. Each gaming employee must obtain a gaming employee permit which may be revoked upon the occurrence of certain specified events. The sale, assignment, transfer, pledge or disposition of securities which represent 5% of more of the total outstanding shares issued by a corporate licensee is subject to Louisiana Board approval. After a license is granted, any person acquiring an economic interest of 5% or more in a license must obtain the Louisiana Board's prior approval for the transaction. Failure to obtain that approval is grounds for license revocation. A security issued by a corporate license must generally disclose these restrictions. 19 If the Louisiana Board finds that an individual holder of a corporate licensee's securities or a director, partner, officer or manager of the licensee is not qualified pursuant to the existing laws, rules and regulations, and if as a result the licensee is no longer qualified to continue as a licensee, it can propose action necessary to protect the public interest, including the suspension or revocation of a license or permit. It may also issue, under penalty of revocation of license, a condition of disqualification naming the person and declaring that such person may not (a) receive dividends or interest on securities of the licensee, (b) exercise any right conferred by securities of the licensee, (c) receive remuneration or any other economic benefit from the licensee or continue in an ownership or economic interest in the licensee or remain as a director, partner, officer, or manager of the licensee. FOREIGN The Provincial Government of Neuqu n, Argentina enacted a casino privatization program to issue 12-year exclusive concession agreements to operate existing casinos. The Company's two casinos are the only casinos in the province of Neuqu n, in west central Argentina, and are located in Neuqu n City and San Mart n de los Andes. The casinos had previously been operated by the provincial government. The Ministry of Finance of Argentina has adopted a modified regulatory system for casinos, based on the regulatory system utilized by the State of Nevada, and such regulatory system is being administered by the Provincial Government of Neuqu n. The Company cannot predict what effect the enactment of other laws, regulations or pronouncements relating to casino operations may have on the operations of the Casino Magic-Argentina. NATIVE AMERICAN GAMING REGULATION Gaming on Native American land is regulated by federal, state and tribal governments. The operation of Native American gaming facilities may be subject to regulation by the Bureau of Indian affairs, National Indian Gaming Commission and the Tribal Gaming Commission. The regulations and guidelines pursuant to which governmental bodies will administer gaming statutes and regulations are incomplete and evolving. Such statutes and regulations are subject to interpretation and may be subject to judicial and legislative clarification or amendment. The Sisseton-Whapeton Dakota Nation has entered into a compact for class III gaming with the State of North Dakota, which has been approved by the Secretary of the Interior. Under that compact, no person may wager more than $50 in any single betting transaction. Games authorized in the compact include reel slots, video poker, video keno, black jack, poker, pai gow poker, Caribbean Stud Poker, craps, pari-mutuel and simulcast betting and sports and Calcutta pools, among others. 20 NON-GAMING REGULATION The Company is subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental laws and regulations. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in future additional costs to the Company's operations. For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and rationalize mechanisms under various oil spill response laws. The Department of Transportation has proposed regulations requiring owners and operators of certain vessels to establish through the U.S. Coast Guard evidence of financial responsibility in the amount of $5.5 million for clean-up of oil pollution. This requirement would be satisfied by either proof of adequate insurance (including self-insurance) or the posting of a surety bond or guaranty. Traditional riverboats capable of cruising, including those that are not required to cruise, must comply with U.S. Coast Guard requirements as to boat design, on-board facilities, equipment, personnel and safety. Each of them must hold a Certificate of Seaworthiness or must be approved by the American Bureau of Shipping ("ABS") Building Code. The U.S. Coast Guard requirements establish design standards, set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessels. Loss of a vessel's Certificate of Seaworthiness or ABS approval would preclude its use as a floating casino. All shipboard employees of the Company, even those who have nothing to do with the actual operation of the vessel, such as dealers, waiters and security personnel, may be subject to the Jones Act which, among other things, exempts those employees from state limits on workers' compensation awards. COMPANY LICENSES AND APPLICATIONS To date, other than in Mississippi, Louisiana, South Dakota, Greece and Argentina, no gaming licenses, approvals or findings of suitability have been obtained or, other than in Indiana, applied for by the Company. The Company may apply for additional gaming licenses in domestic and international jurisdictions. The loss or suspension of any such license, or the failure to obtain any license for properties upon which the Company plans to operate a gaming casino in the future, would have a material adverse affect on the Company's business. INFORMATION REGARDING FOREIGN OPERATIONS The Company operates casinos in Argentina. Although a number of the Company's employees have experience in the operation of casinos outside of the United States, the Company's executive officers have had limited experience in such operations. The distance of the operations from the Company's executive offices, the stability of the relevant government, regulations imposed by the 21 foreign government, tax issues, and the acceptance of American-style gaming are all risks associated with a foreign operation with which the Company's management has had limited previous experience. Additionally, the Company's operations in foreign jurisdictions are subject to risks associated with currency exchange rate fluctuations and the repatriation of funds. See Note 16 regarding the geographical distribution of operations in the accompanying Consolidated Financial Statements. SERVICE MARKS Casino Magic is the owner of U.S. service mark registrations for the service marks "Casino Magic ", "A Cut Above " and "Casino Magic GetawaysSM" granted by the U.S. Patent and Trademark Office on July 13, 1993, June 21, 1994, and October 18, 1994, respectively. Casino Magic is also the owner of a Canadian service mark registration for "Casino Magic " service mark granted on March 3, 1995. The Company has filed service mark registration applications for the "Casino Magic" service mark in Greece and Mexico. A service mark application with respect to the service mark "Magic MoneySM" has been filed with the U.S. Patent and Trademark Office, and an opposition proceeding is currently underway in connection with such application. The Company also uses and claims rights to several additional service marks. The effect of the Company's service marks is to provide an identity between the Company and its services. U.S. service mark registrations provide protection for a period of 10 years from the date of registration and may be renewed indefinitely for successive 10-year periods. While prior use of a service mark may establish an exclusive right to its use in connection with the sale of services in a particular market area, registration with the U.S. Patent and Trademark Office, or similar government agencies in foreign jurisdictions, provides such right throughout the United States or the foreign jurisdiction and a presumption of damage to the Company should the mark be infringed. There are no assurances that any of the service marks used by the Company, whether or not registered, will be free from future challenge by others as to prior use or as otherwise being unprotectable. PERSONNEL As of January 1, 1997, the Company had approximately 2025 full-time employees and 240 part-time employees in the United States. Of the employees, six are executive officers of the Company. The Company has approximately 265 full-time employees at two foreign locations that the Company owns or operates. The Company's management believes that its relationship with its employees is good. With the expansion of gaming in the Mississippi Gulf Coast region and Northwest Louisiana, new competitors are likely to actively recruit the Company's management and casino personnel, many of whom have been trained at the expense of the Company. None of the Company's employees are currently presented by a labor union. FORWARD LOOKING STATEMENTS The discussions regarding proposed Company developments and operations included in "Item 1 - BUSINESS" contain forward looking statements that involve a number of risks and uncertainties. In addition to the factors discussed above, other factors that could cause actual results to differ materially are the following: business conditions and growth in the gaming industry and the general economy; existing and future development by gaming 22 operators competing with the Company; obtaining and retaining necessary licenses or regulatory approvals; acquiring or generating funding necessary to undertake and complete development plans; and other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. ITEM 2. PROPERTIES The Company's principal executive and administrative offices are located in approximately 6,000 square feet of office space in the Casino Magic-BSL support building at 711 Casino Magic Drive, Bay Saint Louis, Mississippi 39520. In all, the Company owns, leases or has contracts to acquire the properties described below, each of which either currently has gaming facilities or, the Company's management believes, is potentially suitable for future gaming operations. CASINO MAGIC-BSL PROPERTY Casino Magic-BSL is located on property owned by the Company, which consists of approximately 591 acres of land, including a 17-acre marina and an 18 hole golf course located in Bay Saint Louis, Mississippi, on the Gulf of Mexico. The 591-acre property secures the $135,000,000 First Mortgage Notes issued in October 1993. CASINO MAGIC-BILOXI PROPERTY The Casino Magic-Biloxi property consists of approximately 9.0 acres of contiguous land in Biloxi, Mississippi, on the Gulf of Mexico. The Company leases approximately 3.8 acres of the Biloxi property for current annual rental payments of approximately $450,000. The primary term of the lease commenced on January 4, 1993. The Company has 17 renewal options for five years each at an annual base rent of $550,000, plus an additional amount based upon increases in the Consumer Price Index. In addition, the Company acquired approximately 1.3 acres of land contiguous with and to the east of the Biloxi property. The Company leases approximately 1.5 acres from the State of Mississippi for an amount equal to the ad valorem tax which currently is approximately $6,500. This lease is for approximately 80 years. The Company owns approximately 2.5 acres of land north of the Biloxi property across from Highway 90. The Company also leases the water area under the Casino Magic-Biloxi barge from the State of Mississippi pursuant to a 10-year lease at an annual rent of $595,000 during the first year, increasing annually to $775,000 at the end of the fifth year and thereafter increasing at rates based on rules published by the Secretary of State of the State of Mississippi. The Company has a renewal option for five years at an annual base rent of $775,000. On May 26, 1995, the Company acquired 4.1 acres of additional adjacent land through the issuance of 2,125,000 shares of its Common Stock and thereby acquired all of the outstanding stock of Casino One Corporation, a developmental stage company. Through such purchase, the Company acquired assets with a fair value of approximately $17.0 million, allocated between land ($15.8 million) and barges ($1.2 million) and assumed liabilities of approximately $4.4 million, consisting of notes payable, capital leases and long-term debt. The purchased land is adjacent to the Casino Magic-Biloxi property. 23 BOSSIER CITY PROPERTY In October 1995, the Company acquired approximately 20 acres of land on the Red River in Bossier City, Louisiana, in exchange for a total of 1,085,000 shares of the Company's Common Stock through the acquisition of two corporations, C-M of Louisiana, Inc. and Coastal Land of Florida, Inc. which merged with the surviving entity becoming Louisiana Corp. The Company issued 787,500 of these shares to Belle Cherri Land Co., the sole shareholder of C-M of Louisiana, Inc. and fee owner of the acquired property, in exchange for 100% of the capital stock of C-M of Louisiana, Inc., and issued 297,500 shares to Mark G. George, the sole shareholder of Coastal Land of Florida, Inc., the holder of a 99-year leasehold interest in the property, in exchange for 100% of the capital stock of Coastal Land of Florida, Inc. In July 1996, the Company acquired 3 additional acres of land contiguous the above mentioned 20 acres for $900,000. OTHER PROPERTIES The Company owns approximately nine acres of land with approximately 370 feet of shoreline in Bay Saint Louis, Mississippi on U.S. Highway 90 approximately 2.5 miles from Casino Magic-BSL. This site, which was acquired in August 1992, has been approved as a gaming site by the Mississippi Commission. The Company does not currently intend to develop this site for gaming. The Company purchased approximately 25.6 acres of land on which two private residences are located. This property is on the Jordan River, immediately west of the Company's gaming operation in Bay Saint Louis, Mississippi. The Company purchased the property to provide additional land for future expansion and to prevent potential competition from acquiring a possible gaming site in immediate proximity to Casino Magic-BSL. The Company has no plans to develop the property in the near future. On July 13, 1993, the Company executed three 12 month option agreements to acquire certain parcels of land in Mobile, Alabama which may be suitable for casino gaming. The total price to exercise the option is $15.0 million and is subject to an escalation index. In July 1994, the Company extended the options for an additional year at a cost of approximately $196,000. In July 1995, the Company extended the options through the year 2000 at a cost of approximately $1.3 million, 4.9% of income before income taxes of all casinos and related business conducted by the Company on the optioned property for 10 years and an option to purchase 200,000 shares of the Company's stock at an exercise price of $5.8125 per share. In 1993 and 1994, the Company acquired two parcels of land in downtown St. Louis, Missouri in anticipation of obtaining a gaming license in that city through a joint venture with Caesars World, Inc. One 3.5 acre parcel of unimproved land was purchased at a cost of approximately $3.6 million, and is included in the Company's Financial Statements at December 31, 1996, property held for sale, with a book value of approximately $4.0 million The other 0.2 acre parcel of land was purchased for $0.8 million and is included in the Company's financial statements at December 31, 1996, as property held for sale having a book value of approximately $820,000. 24 On December 11, 1993, the Company entered into an agreement for an option to lease certain property in Indiana. The agreement requires advance payments of $500,000 in each of four years, and upon exercise, would allow the Company to lease the subject property at $1,000,000 per year for twenty years. At December 31, 1996, aggregate payments of $2,000,000 under this agreement are included in options and land deposits. On January 11, 1994, the Company executed two $20,000 option agreements to acquire land in Indiana at a cost of $6,000 per acre on approximately 40 acres, and $7,000 per acre on approximately 119 acres, or $240,000 and $833,000, respectively, less the option payments. The options expire (i) one year from the date of the agreements or (ii) on the date the Company receives a gaming license from the Indiana Gaming Commission, whichever term is longer. In February 1995, the Company paid $6,000 for a two-year option to purchase additional land in Indiana at a cost of $7,000 per acre on approximately 35 acres ($245,000), less the option payment. Aggregate payments of $46,000 are included in options and land deposits at December 31, 1996, with respect to the Indiana options. On March 12, 1994, a wholly-owned subsidiary of the Company acquired an option to purchase certain property located in Boston, Massachusetts, for $60.0 million. In December 1995, the Company abandoned all efforts to pursue gaming at this site. The option agreement required that the Company pay a $5.0 million option payment in March 1994 and a second option payment of $5.0 million in January 1996. In January 1996, the Company renegotiated this option and obtained significant cost reductions in the second option payment under the agreement. The renegotiated option agreement requires payments of $2.9 million in February 1996, $500,000 in January 1997, $500,000 in January 1998 and $475,000 in January 1999, and extends the option through 2003. The agreement escalates the purchase price by $10.0 million per year through 1998 and requires the land owner to pay all taxes on the optioned property. Although the new option agreement extends the option through 2003, the Company does not intend to pursue gaming at this site and in December 1995, the Company expensed approximately $9.0 million in costs associated with this property. This includes the discounted value of future option payments. In June 1994, the Company purchased property in Pennsylvania at a total cost of approximately $2.0 million which is included in the Company's financial statement as property held for development at December 31, 1996 and 1995. In addition to the basic purchase price of the property, the agreement of sale requires the Company to pay the seller $5.0 million if the Company obtains a license to operate a casino operation on the premises at any time before May 31, 1999. ARGENTINA LEASED PREMISES The Company, through its wholly-owned subsidiary, Casino Magic-Neuqu n SA, leases the existing casino premises for one of its casinos. Included in the annual cannon fee are monthly fees of $40,000 for the use of space in a building near the airport in the City of Neuqu n. At the Company's option, the current operations can be relocated at any time, thereby eliminating the monthly fees. See "Item 1-Business-Existing Operations-Casino Magic-Argentina". See Item 1 - "Business-Future Development". 25 ITEM 3. LEGAL PROCEEDINGS ONGOING LEGAL PROCEEDINGS A class action lawsuit was filed on April 26, 1994, in the United States District Court, Middle District of Florida (the "Poulos Lawsuit"), naming as defendants 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including the Company. The lawsuit alleges that such defendants have engaged in a course of fraudulent and misleading conduct intended to induce people to play such games based on a false belief concerning the operation of the gaming machines, as well as the extent to which there is an opportunity to win. The suit alleges violations of the Racketeer Influenced and Corrupt Organization Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the United States District Court, Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who were named in the Poulos Lawsuit and adding as defendants the owners of certain casino operations in Puerto Rico and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are identical to the claims in the Poulos Lawsuit. Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern Lawsuit have now been consolidated into one case file in the United States District Court, Middle District of Florida. On December 9, 1994 defendants' motion for change of venue was granted, transferring the case to the U.S. District Court, District of Nevada, in Las Vegas. In response to a motion to dismiss the Complaint brought by the Company and other defendants, the United States District Court for the District of Nevada entered an Order dated April 17, 1996, granting the motions and dismissing the complaint without prejudice. The plaintiffs then filed an amended Complaint on May 31, 1996, in which the plaintiffs sought damages against the Company and other defendants in excess of $1 billion and punitive damages for violations of the Racketeer Influenced and Corrupt Organizations Act and for state common law claims for fraud, unjust enrichment and negligent misrepresentation. The Company and other defendants have moved to dismiss the amended Complaint. The Company believes that the claims are without merit and does not expect that the lawsuit will have a material adverse effect on the financial condition or results of operations of the Company. On October 20, 1994, International Gaming Network, Inc., commenced litigation in Federal Court against Casino Magic Corp. by filing a Complaint with the U.S. District Court, District of South Dakota, Southern Division. Plaintiff, in that litigation, has alleged, among other things, that the Company intentionally and improperly interfered with Plaintiff's existing and perspective contractual, economic or business relationship with the Sisseton-Wahpeton Sioux Tribe, and seeks damages of $28,292,102. In April 1994, the Company entered into an agreement with the Tribe to develop and manage a gaming casino on tribal lands in northeastern South Dakota. (The Company has since canceled the management agreement and entered into a consulting agreement with the Tribe.) On November 9, 1994, the Company interposed an answer denying the allegations contained in Plaintiff's estimated range or potential loss, if any, which may be sustained by the Company in connection with this litigation, but believes the lawsuit is meritless and intends to vigorously defend the claim. 26 The United States District Court, on October 7, 1996, filed a Judgment of Dismissal, dismissing all of Plaintiff's claims, pursuant to a Motion for Summary Judgment which had been brought by Casino Magic. Pursuant to a Notice of Appeal dated November 5, 1996, the Plaintiff has appealed the dismissal of its claims to the United States Court of Appeals for the Eight Circuit. The Company can furnish no opinion at this time concerning likelihood of a favorable outcome or an estimation range or potential loss, if any, which may be sustained by the Company in connection with this litigation, but believes the lawsuit is meritless and intends to vigorously defend the claim. TERMINATED LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded over-the-counter and has been quoted on the NASDAQ National Market since October 23, 1992, under the symbol CMAG. The following table sets forth for the periods indicated the high and low per share bid prices for the Company's common stock as quoted on the NASDAQ National Market. The information set forth below was obtained from the NASDAQ National Market. 1995 High Low Quarter 1 $ 7.500 $ 4.875 Quarter 2 $ 7.625 $ 5.313 Quarter 3 $ 6.500 $ 5.125 Quarter 4 $ 5.500 $ 3.000 1996 Quarter 1 $ 4.063 $ 2.750 Quarter 2 $ 7.063 $ 3.875 Quarter 3 $ 5.875 $ 3.625 Quarter 4 $ 4.125 $ 2.156 1997 Quarter 1* $ 1.844 $ 1.625 ______________________ * As of the close of business on March 21, 1997. 27 The last sales price for the Company's common stock as quoted on the NASDAQ National Market as of the close of business on March 21, 1997 was $1.625 per share. The over-the-counter quotations above reflect inter-dealer prices, without retail markup, markdown or commissions, and may not represent actual transactions. There were approximately 1,318 shareholders owning the Company's common stock of record as of the close of business March 21, 1997. The Company has not paid any cash dividends with respect to its common stock, and does not anticipate doing so in the foreseeable future. The Company intends to retain all earnings for the foreseeable future to fund the operation and expansion of its business. The payment of any future dividends will be determined by its Board of Directors in light of conditions then existing, including the Company's earnings, financial condition and requirements, restrictions in financing agreements, business conditions and other factors. The indenture agreements covering both outstanding first mortgage notes in the aggregate principal amount of $250,000,000 million, contain limitations on the Company's ability to pay dividends. 28 ITEM 6. SELECTED FINANCIAL DATA Presented below are the selected consolidated financial data of Casino Magic and its subsidiaries for the five years ended December 31, 1996 which has been derived from the audited consolidated financial statements of Casino Magic and its subsidiaries. This data has not been examined by the Company's independent auditors, Arthur Andersen LLP. The selected consolidated financial data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report. (IN THOUSANDS EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, Statements of operations data 1996(5) 1995(4) 1994(3) 1993(2) 1992(1) Revenue $180,278 $177,723 $185,018 $202,404 $27,139 Costs and Expenses 171,435 172,952 173,786 136,996 17,419 Income (loss) from Operations 8,843 4,771 11,232 65,408 9,720 Other Expenses 45,109 18,294 14,450 5,677 1,762 Net Income (loss) (31,589) (10,292) (3,030) 38,506 5,046 Net Income (loss) Per Share (.88) (.30) (0.10) 1.32 0.30 (IN THOUSANDS) DECEMBER 31, Balance Sheet Data 1996(5) 1995(4) 1994(3) 1993(2) 1992(1) Working Capital (deficiency) $ (6,492) $ 15,910 $ 20,847 $ 50,021 $(13,926) Total Assets 370,602 268,473 252,623 222,892 61,293 Current Liabilities (including con- struction Payables) 48,449 32,171 25,139 21,553 23,757 Long-term Debt, Net of Current Maturities 258,261 136,840 135,643 131,984 12,605 Shareholders' Equity 63,625 95,179 79,577 66,858 24,932 29 (1) Includes full years operations of Casino Magic-South Dakota and 91 days of operations of Casino Magic-BSL. (2) Includes full years operations of, Casino Magic-BSL, Casino Magic-South Dakota and approximately seven months of operations of Casino Magic- Biloxi. (3) Includes full years, operations of, Casino Magic-BSL and Casino Magic- Biloxi, Casino Magic-South Dakota. (4) Includes full years, operations of, Casino Magic-BSL, Casino Magic- Biloxi and Casino Magic-Neuqu n, Casino Magic-South Dakota seven and one half months of operations for Casino Magic-Porto Carras a 49% equity interest of Casino Magic. (5) Includes full years, operations of Casino Magic-BSL, Casino Magic-Biloxi, Casino Magic-Neuquen, 87 days of operations of Casino Magic-Bossier City, six and one half months of operations of Casino Magic-South Dakota and nine months of operations for Casino Magic-Porto Carras a 49% equity interest of Casino Magic. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company commenced operations on the Gulf Coast of Mississippi in September 1992 at Casino Magic-BSL. In 1993 the Company opened Casino Magic-Biloxi; in 1995 the Company opened a gaming facility in Porto Carras, Greece, (in which the Company had a 49% equity ownership): in 1995 the Company opened two gaming facilities in the Province of Neuquen Argentina; and in 1996 the Company opened Casino Magic-Bossier City. Since its organization in 1992, the Company owned and operated a casino in Deadwood, South Dakota, which was immaterial to the Company's business. Because of poor operating performance, in 1996 the Company sold its gaming facilities in Deadwood, South Dakota, and its' 49% ownership in the gaming facility in Porto Carras, Greece. In addition, the Company terminated all management operating agreements in Greece. 30 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain operating information for the Company on a consolidated basis and for its existing properties as of December 31, 1996. The principal operating entities are Casino Magic-BSL and Casino Magic-Biloxi, both dockside casinos operating on the Gulf Coast of Mississippi, Casino Magic-Bossier City, a dockside casino which commenced gaming operations in Northwest Louisiana on October 4, 1996 using a temporary facility and Casino Magic-Neuqu n, which commenced gaming operations at its two casinos in Neuqu n and San Mart n de los Andes, Argentina, on January 1, 1995. The revenues, costs and expenses of Porto Carras are not included below, as Porto Carras is accounted for under the equity method of accounting. FISCAL YEAR ENDED DECEMBER 31, (In Thousands) 1996 1995 1994 Revenues: Casino Magic-BSL (1) $ 83,924 $ 87,534 $107,547 Casino Magic-Biloxi (2) 63,876 72,737 75,095 Casino Magic-Bossier City(3) 12,738 -- -- Casino Magic-Neuqu n (4) 15,885 13,084 -- Corporate and Other (5) 3,855 4,368 2,376 Total Revenues: $180,278 $177,723 $185,018 Costs and Expenses: Casino Magic-BSL (1) $ 67,356 S 71,356 $80,361 Casino Magic-Biloxi (2) 56,983 59,882 65,471 Casino Magic-Bossier City (3) 20,060 -- -- Casino Magic-Neuqu n (4) 12,553 11,424 -- Corporate and Other (5) 14,483 30,290 27,954 Total Costs and Expenses: $171,435 $172,952 $173,786 Income (Loss) From Operations: Casino Magic-BSL (1) $ 16,568 $ 16,178 $27,186 Casino Magic-Biloxi (2) 6,893 12,855 9,624 Casino Magic-Bossier City (3) (7,322) -- -- Casino Magic-Neuqu n (4) 3,332 1,660 -- Corporate and Other (5) ($10,628) ($25,922) ($25,578) Total Income From Operations: $ 8,843 $ 4,771 $11,232 (1) Began operations September 30, 1992; expanded casino capacity December 31, 1992. (2) Began operations June 5, 1993; expanded casino capacity December 16, 1993. (3) Began operations October 4, 1996; opened permanent facility on December 31, 1996. (4) Began operations January 1, 1995. (5) Includes management fees and royalty fees from Porto Carras which began operations May 18, 1995. Equity in earnings with respect to Porto Carras is reported as non-operating income. The Company ceased recording management fees and royalty fees from Porto Carras on October 1, 1996. 31 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Consolidated revenues increased $2.6 million, or 1.4%, to $180.3 in 1996 compared to $177.7 in 1995. The increase in 1996 consolidated revenues is attributable to $12.7 million in revenues from the Company's new facility, Casino Magic-Bossier City, which opened using a temporary facility on October 4, 1996 and increased revenues from Casino Magic-Neuqu n of $2.8 million, or 21.4%. The majority of the increase at Casino Magic-Neuquen in revenues is attributable to the increased slot revenues of $3.4 million. Slot revenues increased in 1996 compared to the same period in 1995 due to an increase in the number of slots at Casino Magic-Neuquen from 89 to 400 in May 1995. Additional increases resulted from increased customer counts and their influence on food and beverage revenues. These increases in revenues at Casino Magic-Neuquen were offset by declining table games revenues. The increase in consolidated revenues where offset by reduced revenues at Casino Magic-BSL, Casino Magic-Biloxi and the loss of approximately six months revenues from the sale of a gaming facility in Deadwood, South Dakota, which the Company sold in June 1996. Casino Magic-Biloxi revenues declined $8.9 million, or 12.2%, from 1995 to 1996. This decline is primarily the result of adjacent hotel/casino operations on both sides of Casino Magic-Biloxi which have significantly greater amenities than Casino Magic-Biloxi. While competitive pressures will likely continue to adversely effect Casino Magic-Biloxi's revenues and operating margins, management believes that the hotel currently under construction at Casino Magic-Biloxi will help offset or reverse these declines in revenues. Completion of the hotel at Casino Magic-Biloxi is expected in the first quarter of 1998. Additionally, Casino Magic-Biloxi may experience reduced revenues in 1997 during the construction of the hotel due to customer inconveniences during the construction phase of the casino and hotel entrance areas. However, Management is preparing to minimize the impact of the construction on the customer. The combination of construction disruption caused by the development of a new buffet and kitchen and increased overall competition in the Gulf Coast and New Orleans markets, both of which Casino Magic-BSL competes in, caused the $3.6 million, or 4.1%, decline in revenues at Casino Magic-BSL. The loss of $1.4 million in Corporate and other revenues is due to the sale of a gaming facility located in Deadwood, South Dakota, ("Goldiggers") which the Company sold in June 1996. Although royalty and management fee revenues increased by $0.9 million, or 39.3%, to $3.1 million in 1996, the Company has divested itself of all operations in Greece during 1996 where the majority of all royalties and management fee revenues where generated. Total operating costs and expenses were down $1.5 million, or 1.0%, in 1996 compared to 1995. Casino expenses increased $5.3 million, or 7.6%, during the same period principally as a result of the Company opening a new gaming facility in Bossier City, Louisiana, which had $7.1 million in casino expenses in 1996. This increase in casino expenses relating to Casino Magic-Bossier City was offset by reduced expenses at Casino Magic-Biloxi as a result of reduced revenues, and the sale of the Company's gaming facility at Deadwood, South Dakota in June 1996. Food and beverage costs increased $0.6 million, or 8.1%, as a result of increased customer traffic at Casino Magic-Neuquen. Casino Magic-Neuquen relies on its food and beverage facilities at the casino to promote casino operations. Other operating costs and expenses increased $1.5 million, or 110.5%, to $2.8 million in 1996 compared to 1995. This increase is the result of additions to amenities at Casino Magic-BSL, and the transfer of the gift shop operations at Casino Magic-BSL and Casino Magic-Biloxi from a third party to the Company. During 1996, Casino Magic-BSL added 32 amenities relating to the Arnold Palmer designed golf course, such as the pro shop, the Arnold Palmer Golf Academy and the groundskeeping department. These costs will increase in 1997 since the golf course became fully operational in February 1997. In addition, Casino Magic-BSL began operating a child-care facility for casino patrons in 1996. Advertising and marketing expenses decreased by $5.0 million, or 19.2%, in 1996 as compared to 1995. This decrease is the result of several factors: a reduction in the use of air charters to attract customers; the use of more cost efficient promotions concerning give-aways through the Magic Money Players Club Card; and an overall reduction in marketing and advertising costs during 1996. This decrease was offset by the opening of the Company's new facility, Casino Magic-Bossier City, in October 1996. As a result of the opening of this third major gaming facility, marketing and advertising costs are expected to increase during 1997. General and administrative expenses decreased $4.3 million, or 15.0%, in 1996 as compared to the same period of 1995. The decline is a result of cost reduction measures implemented in early 1996, including the elimination of several corporate officer positions. In future periods, this reduction will be partially offset due to additions in July 1996 to the Company's management of two key executive officer positions, a Vice President/Chief Operating Officer and a Vice President/Construction and Development. Additionally, general and administrative costs are expected to increase in 1997 as a result of the opening of Casino Magic-Bossier City in 1996. Property operation, maintenance and energy costs increased $3.4 million, or 83.2%, in 1996 as compared to 1995 as the result of the addition of Casino Magic-Bossier City, the continued aging of the gaming facilities at Casino Magic-BSL and Casino Magic-Biloxi which required more maintenance costs in 1996, and the addition of the golf facility at Casino Magic-BSL in 1996. This expense category is anticipated to increase in 1997 as a result of the continued maintenance of Casino Magic-BSL (including the golf facility), Casino Magic-Biloxi and Casino Magic-Bossier City. Rents, property taxes and insurance costs increased by $1.7 million, or 38.9%, in 1996 as compared to 1995. The increase is in part a result of the addition of Casino Magic-Bossier City. Depreciation and amortization increased $2.6 million, or 16.3%, in 1996 as compared to the same period in 1995. This increase is due to the addition of tangible depreciable property, the amortization of the investment costs in excess of equity interest in the 49% owned Greek gaming facility which was amortized for 105 days in 1995 and for nine months in 1996, and a change in 1996 in the method used to amortize the Company's land option deposits over the life of the option. After September 1996, management wrote-off the excess of equity interest in the Greek gaming facility. Furthermore, the addition of Casino Magic-Bossier City increased depreciation expense, while the divesting of the Company's gaming facility in Deadwood, South Dakota, decreased depreciation expense. In 1997, depreciation and amortization will increase due to the addition of Casino Magic-Bossier City. Preopening costs increased by $4.7 million, or 260.0%, in 1996 from 1995. This is a result of the opening of Casino Magic-Bossier City in October 1996. In 1995 the Company opened the Greek gaming facility in which it had a 49% ownership. 33 Consolidated income from operations increased $4.0 million, or 83.3%, to $8.8 million in 1996 compared to $4.8 million in 1995. Operating margins (income from operations as a percentage of revenues) grew from 2.7% to 4.9% over the comparative periods. Casino Magic-BSL's operating margin grew from 18.5% to 19.7%, Casino Magic-Biloxi's operating margin decreased from 17.6% to 10.8% and Casino Magic-Neuqu n's operating margin increased from 12.7% to 21.0%. The increased margin at Casino Magic-BSL is primarily due to cost-cutting measures, the decline in Casino Magic-Biloxi's margin is due to the significant decline in revenues from the loss of market share along the Biloxi Strip, and Casino Magic-Neuqu n's increased margin is attributable to the increase in the number of slot machines and the low cost revenues associated with slots as opposed to table games. Consolidated other (income) expense (non-operating income and expenses) increased $26.8 million from a net expense of $18.3 million to a net expense of $45.1 million over the comparative periods. Of this increase, $26.1 million, is due to the Company's decision to write off its investment in a gaming facility in Porto Carras, Greece, ("Porto Carras") where the Company had a 49% equity interest. Management's decision was based on the results from the Company's Greek gaming facilities after the opening of a competing casino. In September 1996, Hyatt Corporation opened a new casino in the City of Thessaloniki, Porto Carras's primary market, and was allowed to charge an $8 admission fee compared to Porto Carras' $20 admission fee. Although the Company anticipated some revenue loss as a result of this increased competition and admission fee differential, the actual effects were greater than anticipated and resulted in a $2.0 million loss in operations at Porto Carras for the month of September 1996. Despite new marketing and cost containment efforts, these losses continued. Furthermore, the majority owner in Porto Carras venture was unwilling or unable to advance any funds to the operation. Additionally, the majority owner informed the Company that it did not intend to operate a substantial portion of the Porto Carras resort area, consisting of two hotels and amenities, during the 1997 season. These factors, among others, led to the Company's decision to write off its investment in Porto Carras and led to the sale of Porto Carras in December 1996 for a nominal amount. Net interest expense (interest expense less capitalized interest and interest income) increased $2.1 million from 1995 to 1996. The increase reflects the cost of funding the development of Casino Magic-Bossier City. In August 1996, the Company, through a wholly owned subsidiary, issued $115 million in first mortgage notes to fund Casino Magic-Bossier City. In 1997, net interest expense will increase based on the issuance of these first mortgage notes. In 1995, the Company expensed capitalized costs relating to development joint ventures in the amount of $2.2 million. In 1996, no such expense was incurred. The Company's effective tax rate for 1996 of approximately (13.0%) is the result of an allowance against deferred tax assets of approximately $8.3 million. This valuation allowance was recorded in recognition of the Company's recent operating results. The effective tax rate for 1995 of (24.0%) is due to significant permanent tax differences. 34 The Company had a net loss of ($31.6) million, or a loss of ($0.88) per share in 1996 as compared to net loss of ($10.3) million, or a loss of ($0.30) per share in 1995. The increase in the net loss is attributable to several factors; the write off of the Company's investment in Porto Carras Casino S.A. of $26.1 million; the preopening cost relating to Casino Magic-Bossier City of $6.6 million; to a lesser extent, decreased revenues at the Company's Gulf Coast operations which resulted in part from intensified competition on the Gulf Coast over comparative periods; as well as the recording of a tax valuation allowance of $8.3 million. These 1996 increases are somewhat offset by 1995 write-offs relating to terminated development efforts with respect to specific properties and jurisdictions of $13.6 million. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Consolidated revenues decreased $7.3 million, or 3.9%, to $ 177.7 million in 1995, compared to $185.0 million in 1994. The 1995 revenues include $13.1 million of revenues from Casino Magic-Neuqu n, a wholly-owned Argentina subsidiary of Casino Magic Corp.. Gaming revenues were $12.3 million less in 1995 compared to the prior year. The decrease was made up of a decline in gaming revenues at Casino Magic-BSL of $22.0 million which was offset partially by the gaming revenues at Casino Magic-Neuqu n of $12.2 million. The decrease in revenues at Casino Magic-BSL reflects the continued competition from casinos operating in Southern Louisiana, including Harrah's temporary land-based casino in New Orleans which opened in May, 1995 and closed in November, 1995. The New Orleans metropolitan area is Casino Magic-BSL's primary market area. Food and beverage revenues increased $0.7 million, of which $0.8 million was generated by Casino Magic-Neuqu n. Room revenues increased approximately $2.1 million as a result of the addition of the 201 room inn at Casino Magic-BSL which began operations in December, 1994. The 1995 revenue also reflects $2.2 million of Royalty and Management Fee income with respect to Porto Carras. The Porto Carras casino opened May 18, 1995 and is accounted for under the equity method of accounting. Total operating costs and expenses were down $0.8 million, or 0.5%, in 1995 compared to 1994. Casino expenses decreased $3.64.5 million, or 4.96.3%, during the same period, principally as a result of lower operating costs of $11.1 million, or 16%, at Casino Magic-BSL and Casino Magic-Biloxi. The lower operating costs were partially offset by the addition of $6.7 million of casino expenses at Casino Magic-Neuqu n. Rooms expense increased $1.0 million over the comparative year as a result of the addition of the Inn at Casino Magic-BSL. Advertising and marketing expenses, as a percentage of revenues, increased to 146.6% compared to 13.65% in 1994. The increase in advertising and marketing expenses is in response to increased competition at the Company's Gulf Coast operations. However, in June 1995 the Company reduced its reliance on its air charter program resulting in a decrease in the air charter program costs. This decrease was offset by an increase in advertising and promotion costs, some of which relates to Casino Magic-Neuqu n. General and administrative expenses were down $1.3 million or 4.3% in 1995 compared to 1994. General and administrative expenses in the current year reflects a $0.9 million reduction of payroll and benefit costs related to canceled stock options and grants previously expensed to deferred compensation expense. The overall decrease in general and administrative costs in 1995 was partially offset by the addition of Casino Magic-Neuqu n which increased general and 35 administrative cost by $1.9 million in the current year. Depreciation and amortization increased $5.1 million in 1995 due to (i) amortization of the cost of the concession agreement with the government of Argentina relating to Casino Magic-Neuqu n, (ii) amortization of investment costs in excess of equity interest in Porto Carras, (iii) an entire year's depreciation on the Inn at Casino Magic-BSL, (iv) amortization of land options and (v) a $1.0 million write down of the Goldiggers property. Development expenses decreased approximately $8.0 million, to $2.2 million in 1995 as a result of the Company's decision to scale back development activities in 1995. The Company incurred special charges in 1995 and 1994 of $14.5 million and $5.5 million, respectively, due to the Company's decision to terminate development efforts with respect to specific properties and jurisdictions. Because of this determination, significant capitalized amounts relating to land, land options, joint ventures and construction projects were written-off or revalued. The write-offs are recorded under "Write-off of capitalized costs relating to inactive developments" and "Depreciation and amortization". Income from operations (excluding the special charges in 1995 and 1994) increased $0.4 million to $17.1 million in 1995 compared to $16.7 million in 1994. Operating margins (income from operations -- excluding special charges, as a percentage of revenues) increased from 9.0% to 9.6% over the comparative periods. A portion of this improvement is a result of royalty and management fees generated from Porto Carras which was generated at substantially lower costs than owned properties. Casino Magic-BSL's operating margin fell from 25.9% to 18.5% reflecting the continued decline in revenues resulting mostly from competition in the New Orleans regional market. Casino Magic-Biloxi's operating margin increased from 14.1% to 17.7% principally due to decreases in operating costs. Loss from unconsolidated subsidiaries primarily reflects the Company's share in the losses generated by a joint venture parking garage adjacent to Casino-Magic Biloxi which is partially offset by the Company's 49% equity interest in Porto Carras. Other income and expense (non-operating income and expense) for 1995 includes amortization of $1.3 million of loan guarantee fees with respect to the proposed purchase of the majority interest of Porto Carras and certain operating assets. Net interest expense (interest expense less capitalized interest and interest income) increased $1.8 million from 1994 to 1995. The increased interest expense is due to the financing of new gaming equipment at Casino Magic-BSL, and the addition of a $3.0 million bank loan in December of 1994, and lower interest income, as cash and marketable securities were applied to new developments. The Company had a net loss of $10.3 million or $.30 per share in 1995 compared to a net loss of $3.0 million or $.10 per share in the preceding year. The decreased earnings were a result of the significant write-offs related to the Company's decision to terminate development efforts with respect to specific properties and jurisdictions and to a lesser extent decreased revenues at the Company's Gulf Coast operations. The decrease in revenues was due in part from intensified competition on the Gulf Coast during 1995, particularly in the more populous areas of southern Louisiana. The decreases were partially offset by earnings with respect to Porto Carras and Casino Magic-Neuqu n coupled with lower costs and expenses in the current period. 36 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company had unrestricted cash and marketable securities of $17.6 million compared to cash and marketable securities of $30.8 million at December 31, 1995. In addition, the Company had $17.0 million in restricted cash relating to the $115,000,000 First Mortgage Notes ("Louisiana First Mortgage Notes") issued to fund the construction of Casino Magic-Bossier City (see discussion of offering below). For the year ended December 31, 1996, the Company generated $26.0 million of cash flow from operating activities and received $121.0 million of proceeds from the incurrence of long term debt. The Company spent $70.0 million for the acquisition of property, equipment and other long-term assets, and reduced long term debt by $48.6 million. The Company expended approximately $17.2 million in capital improvements at its Gulf Coast properties and $54.0 million in capital improvements at Casino Magic-Bossier City during 1996. The Company plans additional investments in 1997 at its Gulf Coast properties and Casino Magic-Bossier City, much of which is subject to the availability of financing. The Company is pursuing gaming opportunities outside of Mississippi and Louisiana primarily in Indiana, which would also require additional investment. There are no assurances that such gaming opportunities will develop or that adequate funding will be available for these planned investments. In May 1996, Casino Magic, through its wholly-owned subsidiary, Jefferson Corp acquired Crescent City, for $50 million plus the assumption of up to $5.7 million in equipment liabilities. Jefferson Corp paid $15 million in cash at closing and caused Crescent City to issue $35 million of 11.5% secured, three year notes . Crescent City, which was the subject of a plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code, owned the Crescent City Queen Riverboat ("Crescent City Riverboat"), gaming and related equipment and surveillance equipment and a license to conduct riverboat gaming operations in Louisiana. Crescent City emerged from the Bankruptcy proceedings as Casino Magic of Louisiana, Corp. ("Louisiana Corp.") The Company is using Louisiana Corp.'s gaming license in Bossier City, Louisiana, where it owns 23 acres of land and has developed Casino Magic-Bossier City. Although Jefferson Corp. was required to purchase the Crescent City Riverboat to obtain the Louisiana gaming license, the Crescent City Riverboat is one of the largest riverboats in the United States and could not be used at the Casino Magic-Bossier City because of the Crescent City Riverboat's width. Therefore, the Company acquired a casino riverboat (the "Bossier Riverboat") for use at Casino Magic-Bossier City for $20 million. It is the Company's intention to sell the Crescent City Riverboat and use the proceeds to assist in the funding of Casino Magic-Bossier City casino entertainment facilities or a hotel. The Company can give no assurances that it will be able to dispose of the Crescent City Riverboat on acceptable terms or in a timely manner. However, management is proceeding with options to sell the Crescent City Riverboat. The assets acquired as a part of the acquisition of Louisiana Corp., which included gaming, surveillance and related equipment, are being used at the Bossier City gaming site. 37 On August 22, 1996, Louisiana Corp. sold $115.0 million aggregate principal amount of 13% Louisiana First Mortgage Notes due in 2003 with Contingent Interest. Interest at the rate of 13% plus Contingent Interest, is payable on the remaining balance of the Louisiana First Mortgage Notes semi-annually, February 15 and August 15. Contingent Interest is an amount equal to 5% of the Casino Magic-Bossier City's Adjusted Consolidated Cash Flow (as defined in the Louisiana Indenture) for the six-month period ending on June 30 or December 31 most recently completed prior to such interest payment date, provided that no Contingent Interest shall be payable with respect to any period prior to the Commencement Date (a defined term in the Louisiana Indenture). Payment of all or a portion of any installment of Contingent Interest may be deferred, at the option of the Company if, and only to the extent that, (i) the payment of such portion of Contingent Interest will cause the Casino Magic-Bossier City's Adjusted Fixed Charge Coverage Ratio (a defined term in the Louisiana Indenture) for the Casino Magic-Bossier City's most recently completed Reference Period prior to such interest payment date to be less than 1.5 to 1.0 on a pro forma basis after giving effect to the assumed payment of such Contingent Interest and (ii) the principal amount of the Louisiana First Mortgage Notes corresponding to such Contingent Interest has not then matured and become due and payable (at stated maturity, upon acceleration, upon redemption, upon maturity of a repurchase obligation or otherwise). The aggregate amount of Contingent Interest payable in any semiannual period will be reduced pro rata for reductions in the outstanding principal amount of Louisiana First Mortgage Notes prior to the close of business on the record date immediately preceding such payment of Contingent Interest. The Louisiana First Mortgage Notes are governed by an indenture ("the Louisiana Indenture") pursuant to which the Louisiana First Mortgage Notes have been issued. The Louisiana Indenture contains certain covenants that limit the ability of Louisiana Corp. and its subsidiaries to, among other things, incur additional indebtedness and issue preferred stock, pay dividends, make investments or make other restricted payments, incur liens, enter into mergers or consolidations, enter into transactions with affiliates or sell assets. Excluding amounts expended in May 1996 in connection with Jefferson Corp.'s acquisition of Louisiana Corp. (formerly Crescent City), the total project cost for Casino Magic-Bossier City is estimated to be $72.6 million which includes: (i) approximately $13.6 million expended for the acquisition of the 23-acre site, (ii) $20.0 million expended for the acquisition of the Bossier Riverboat, and (iii) $39.07.8 million for the construction of buildings and other improvements at Casino Magic-Bossier City (including approximately $8.4 million of preopening costs, opening bankroll and additional gaming equipment, but excluding estimated fees and expenses and $10.4 million in reserves for completion, operating expenses and fixed interest). The Company opened Casino Magic-Bossier City on October 4, 1996, using a temporary boarding facility, and on December 31, 1996, opened the permanent facility. The Company's plans for the development of Casino Magic-Bossier City are divided into two phases. The first phase (which was completed on December 31, 1996) includes a 30,000 square foot floating dockside casino space, with 986 slots and 44 table games; a 37,000 square foot entertainment and 38 food and beverage pavilion, with 1,550 covered parking spaces and surface parking spaces for 400 cars. The second phase plans include the construction of a 60,000 square foot entertainment facility and a 400-room convention hotel and related amenities, including restaurants, banquet space, a theater, a swimming pool, a health club and a child-care facility. The development and construction of the second phase improvements are largely dependent upon receipt of proceeds from a future sale of the Crescent City Riverboat and future operating cash flow of Casino Magic-Bossier City. No assurances can be given that such funds will become available or that such hotel and related facilities will ever be developed. The Company is currently constructing a hotel tower at Casino Magic-Biloxi atop of the eight-story parking garage adjacent to the casino. The hotel will consist of approximately 378 rooms, including approximately 86 suites and standard amenities such as a swimming pool and modest conference space. The hotel structure, when completed, is expected to be one of the tallest buildings in Biloxi. Construction on the hotel commenced in December 1996, and completion is estimated for the first quarter of 1998. The hotel construction costs are being funded solely out of the cash flow of Casino Magic-BSL and Casino Magic-Biloxi. In early 1996, the Company, through a wholly-owned subsidiary, entered into a consulting agreement with Sisseton-Wahpeton Dakota Nation ("Sisseton"). Under the agreement, the Company began providing consulting services to Sisseton relating to the development and opening of the temporary casino facility on Tribal land. Sisseton opened a temporary casino in November 1996. The agreement also specifies that the Company provide consulting services to Sisseton after the opening of the temporary facility for a period of two years and includes unlimited one year extensions. The fee for these services is based on gross revenues of the casino facility. This agreement replaces all previous agreements entered into between the Company and Sisseton. In June 1996, Sisseton received a $17,500,000 loan ("Sisseton Loan")for the construction of its planned casino development from a consortium of lenders of which the Company, through a wholly-owned subsidiary, participated in the loan for up to $5 million, or a 28.6%, participation. On July 11, 1996, the Company received payment in full of all outstanding amounts under a prior bridge loan agreement with Sisseton and participated in the first draw down of the Sisseton loan. The Company's participation in the $17.5 million loan through December 31, 1996, is approximately $4.9 million. First payment of principal and interest on this loan was received in February 1997. In February 1997, the Company engaged an investment banking firm to assist the Company in exploring alternatives of a merger, joint venture or strategic alliance with a third party to facilitate the Company in the future development of the Company's gaming facilities, specifically with the Company's Gulf Coast properties. The Company commenced operations in 1995 outside the United States becoming subject to certain risks including foreign currency exchange, repatriation of earnings and profits, and adverse foreign tax treatment. In addition, the Company will incur the general business risk associated with operating in foreign countries where culture and business practices may vary significantly from that in the United States. Such risks could have a material impact on the operating results and liquidity of the Company. 39 At September 30, 1996, management determined that its 49% equity investment in Porto Carras Casino S.A. and notes and accounts receivables relating to unpaid management fees and royalties had been impaired. Because of this impairment, management wrote off its investment in the gaming facility in Porto Carras. In December 1996 the Company sold its shares of common stock in Porto Carras in December 1996 for a nominal amount. The Company will have a significant need for cash in 1997 and beyond in order to continue its planned pursuit of gaming opportunities and the continued development of its existing properties. The Company believes that cash and marketable securities at December 31, 1996, cash flows from operations will be sufficient to service its operating and debt service requirements, as well as the planned 1997 construction activities relating to the Casino Magic-Biloxi hotel, through at least the next twelve months, but are not sufficient to engage in any other development activities without additional debt or equity financing. Under the terms of the indenture associated with the $135,000,000 First Mortgage Notes, Casino Magic Corp., Mardi Gras Casino Corp., Biloxi Casino Corp. and Casino Magic Finance Corp. have certain restrictions relative to additional borrowings and guarantees. Jefferson Corp and Louisiana Corp. have certain restrictions relative to additional borrowings and cash flow under the terms of the Louisiana Indenture associated with the Louisiana First Mortgage Notes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of Casino Magic and subsidiaries and the notes thereto are attached to this Annual Report and are incorporated by reference in response to this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The discussion under the section captioned "Proposal No. 1 - ELECTION OF DIRECTORS" to be included in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission ("SEC") and delivered to the Registrant's shareholders pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Regulation 14A"), with respect to the 1996 annual meeting of shareholders of the Registrant ("1996 Shareholders Meeting") is incorporated by reference in response to this Item 10. ITEM 11. EXECUTIVE COMPENSATION The discussion under the section captioned "EXECUTIVE COMPENSATION" but excluding the discussions contained in the subsections captioned "EXECUTIVE COMPENSATION - Compensation Committee Report on Executive Compensation" and "EXECUTIVE COMPENSATION - Performance Graph", to be included in the Registrant's definitive proxy statement to be filed with the SEC and delivered to the Registrant's shareholders pursuant to Regulation 14A with respect to the 1996 Shareholders Meeting is incorporated by reference in response to Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The discussion under the section captioned "PRINCIPAL SHAREHOLDERS" to be included in the Registrant's definitive proxy statement to be filed with the SEC and delivered to the Registrant's shareholders pursuant to Regulation 14A with respect to the 1996 Shareholders Meeting is incorporated by reference in response to Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The discussion under the section captioned "CERTAIN TRANSACTIONS" to be included in the Registrant's definitive proxy statement to be filed with the SEC and delivered to the Registrant's shareholders pursuant to Regulation 14A with respect to the 1996 Shareholders Meeting is incorporated by reference in response to Item 13. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS OF CASINO MAGIC CORP. AND ITS SUBSIDIARIEs Independent Auditors' Report of Arthur Andersen LLP. Consolidated Balance Sheets as of December 31, 1996 and 1995. Consolidated Statements of Operations - years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Shareholders' Equity - years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows - years ended December 31, 1996, 1995, and 1994. Notes to Consolidated Financial Statements. 41 2. FINANCIAL STATEMENT SCHEDULES OF CASINO MAGIC CORP. AND ITS SUBSIDIARIEs All schedules are omitted because they are not applicable, or not required, or the information is included in the Consolidated Financial Statements of Casino Magic Corp. and its subsidiaries. (B) REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the fourth quarter of the year ended December 31, 1996. (C) EXHIBITs 3(i)(a)(1) Articles of Incorporation of Casino Magic Corp. 3(i)(b)(2) Articles of Amendment to Articles of Incorporation of Casino Magic Corp. 3(ii)(a)(1) By-Laws of Casino Magic Corp. as amended. 3(ii)(b)(10) Amendment dated April 4, 1995 to the By-Laws of Casino Magic Corp. 3(ii)(c) Amendment dated August 11, 1995 to the By-Laws of Casino Magic Corp. 4.1(5) Form of Certificate for Common Stock of Casino Magic Corp. 4.2(4 )Form of 11.5% First Mortgage Note due 2001 Series B. 4.3(2) Indenture Dated October 14, 1993 among Casino Magic Finance Corp., Casino Magic Corp., and IBJ Schroder Bank & Trust Company (Without Exhibits). 4.4 Deleted 4.5 Deleted 4.6(6) Form of Warrant issued to Summit Investment Corporation and related persons for the purchase of an aggregate of 1,110,000 shares of Common Stock. 4.7(19) Indenture dated as of may 13, 1996, $35,000,000 11 1/2% Senior Secured Notes due 1999. 4.8(18) Form of Casino Magic of Louisiana Corp.'s ("Louisiana Corp") 13% First Mortgage Notes due 2003 with Contingent Interest in the aggregate principal amount of $115,000,000. 4.9(18) Form of Guarantee issued on August 22, 1996 by Jefferson Casino Corporation. 4.10(18) Indenture dated as of August 22, 1996 by and among Louisiana Corp, First Union Bank of Connecticut, as Trustee, and the Guarantors named therein, for Louisiana Corp.'s $115,000,000 of 13% First Mortgage Notes due 2003 with Contingent Interest. 42 4.11(18) Registration Rights Agreement dated as of August 22, 1996 by and among Louisiana Corp, the Guarantors named therein and the Initial Purchasers named therein. 4.12(18) Cash Collateral and Disbursement Agreement dated August 22, 1996 by and among Louisiana Corp, First Union Bank of Connecticut, as Trustee, and First National Bank of Commerce, as disbursement agent. 4.13(18) Security Agreement dated as of August 12, 1996 by and between First Union Bank of Commecticut, as Trustee, and Louisiana Corp, as Guarantor. 4.14(18) Stock Pledge dated as of August 22, 1996 by and between First Union Bank of Connecticut, as Trustee, and Jefferson Casino Corporation, as Pledgor. 4.15(18) Security Agreements dated as of August 22, 1996 by and between First Union Bank of Connecticut, as Trustee, and Jefferson Casino Corporation. 4.16(18) First Preferred Ship Mortgages dated as of August 22, 1996 executed in favor of First Union Bank of Connecticut, as Trustee, by Louisiana Corp. 4.17(18) First Preferred Ship Mortgages dated as of August 22, 1996 executed in favor of First Union Bank of Connecticut, as Trustee, by Louisiana Corp. 4.18(18) Mortgage of Louisiana Corp. dated as of August 22, 1996 executed in favor of First Union Bank of Connecticut, as Trustee. 4.19(18) Cash Collateral and Disbursement Agreement. 4.20(18) Form of Accounts Pledge Agreement. 4.21(18) Note Purchase Agreement dated August 16, 1996. 4.22(18) Collateral Assignment dated August 22, 1996. 10.1(1)* Employment Agreement dated June 1, 1992 between Marlin F. Torguson and Casino Magic Corp., and Amendment No. 1 thereto dated August 26, 1992. 10.2(9)* Amendment No. 2 dated August 26, 1994 to Employment Agreement between Marlin F. Torguson and Casino Magic Corp. 10.3 Deleted 10.4 Deleted 10.5 Deleted 10.6(a)(1)* Incentive Stock Option Plan. 43 10.6(b)(2)* Amendment adopted on May 13, 1993 to Incentive Stock Option Plan. 10.6(c)(2)* Amendment adopted on May 14, 1993 to Incentive Stock Option Plan. 10.7(1) Lease Agreement dated April 4, 1992 between G & W Enterprises, Inc. and Biloxi Casino Corp. 10.8 Deleted 10.11 Deleted 10.12(2) Public Trust Tidelands Lease dated May 27, 1993 between Biloxi Casino Corp. and the State of Mississippi. 10.13(2) Lease Agreement dated November 23, 1992 between Gary Gollott, Tommy Gollott and Tyrone Gollott, and Biloxi Casino Corp. 10.14(2) Promissory Note dated October 14, 1993 in the principal sum of $67,500,000 issued by Mardi Gras Casino Corp. in favor of Casino Magic Finance Corp. 10.15(2) Promissory Note dated October 14, 1993 in the principal sum of $67,500,000 issued by Biloxi Casino Corp. in favor of Casino Magic Finance Corp. 10.16(2) Guaranty dated October 14, 1993 by Mardi Gras Casino Corp. of Biloxi Casino Corp. Note. 10.17(2) Guaranty dated October 14, 1993 by Biloxi Casino Corp. of Mardi Gras Casino Corp. Note. 10.18(2) First and Second Deeds of Trust dated October 14, 1993 by Mardi Gras Casino Corp. in favor of Casino Magic Finance Corp. 10.19(2) First and Second Deeds of Trust dated October 14, 1993 by Biloxi Casino Corp. in favor of Casino Magic Finance Corp. 10.20(2) First and Second Leasehold Deeds of Trust dated October 14, 1993 for G&W Lease. 10.21(2) First and Second Leasehold Deeds of Trust dated October 14, 1993 for Gollott Lease. 10.22(2)First and Second Leasehold Deeds of Trust dated October 14, 1993 for State of Mississippi Lease. 10.23(2) Assignments of Deeds of Trust dated October 14, 1993. 10.24(2) Pledge and Security Agreement I & II dated October 14, 1993 of Mardi Gras Casino Corp. 44 10.25(2) Pledge and Security Agreement I & II dated October 14, 1993 of Biloxi Casino Corp. 10.26(2) Assignment and Pledge Agreement dated October 14, 1993 of Casino Magic Finance Corp. 10.27 Deleted 10.28 Deleted 10.29 Deleted 10.30 Deleted 10.31 Deleted 10.32(5)Option Agreement dated March 2, 1994 between Anthony's Hawthorne, Inc. and Boston Casino Corp. 10.33(5)Option Mortgage dated March 2, 1994 by Anthony's Hawthorne, Inc. in favor of Boston Casino Corp. 10.34(5)Guaranty dated March 2, 1994 by Casino Magic Corp. in favor of Anthony's Hawthorne, Inc. 10.35(5)Option Agreement dated July 2, 1993 between Atlantic Land Corp. and Casino Magic Corp. to acquire real estate located in Mobile, Alabama. 10.36(5)Option Agreement dated July 13, 1993 between Marshall J. Demouy and Edward F. Murray, Jr., as Trustees and Casino Magic Corp. to acquire real estate located in Mobile, Alabama. 10.37(5)Option Agreement dated July 13, 1993 between Marshall J. Demouy and Edward F. Murray, Jr., as Trustees and Casino Magic Corp. to acquire real estate located in Mobile, Alabama. 10.38(5)Option to Lease Real Estate dated December 11, 1993 between Opportunity Options, Inc. and Casino Magic Corp. to lease real estate located in Crawford County, Indiana. 10.39 Deleted 10.40 Deleted 10.41 Deleted 10.42 Deleted 10.43 Deleted 10.44(8)*Employment Agreement dated September 1, 1994 between Robert A. Callaway and Casino Magic Corp. 10.45 Deleted 10.46 Deleted 10.47 Deleted 45 10.48(9) Deleted 10.49(9)Agreement (architectural and design services) dated April 1, 1993 between Mardi Gras Casino Corp. and Palmer Course Design Company. 10.50(9)Concession Contract for the Management, Operation, Maintenance and Related Services of the Gaming Houses of the Provincial Casino in the Cities of Neuqu n and San Martin De Los Andes dated December 21, 1994 between the Province of Neuqu n and Casino Magic Neuqu n, S.A. (English translation). 10.51(9)Option Agreement dated May 25, 1994 among Camptown Greyhound Racing, Inc., the Racing Association of Kansas Southeast, and Kansas Gaming Partners, L.L.C., as amended. 10.52(9)Option Agreement dated February 14, 1995 among Estate of Janice Small, Ronald W. Brewer, executor, and Casino Magic Corp. 10.53(9)Option Agreement dated January 11, 1994 between Terry Roser and Eddie P. Roser (collectively) and Casino Magic Corp. 10.54 Deleted 10.55(9)Agreement of Sale dated June 10, 1994 between Township of Bensalem, Bucks County, Pennsylvania and Bucks County Casino Corp. 10.56(9)Consulting Agreement between Casino Magic Corp. and National Gaming Consultants, Inc. dated January 15, 1994. 10.57 Deleted 10.58 Deleted 10.59(9)Operating Agreement of Kansas Gaming Partners, L.L.C. dated November 23, 1994 10.60(9) Operating Agreement of Kansas Financial Partners, L.L.C. dated November 23, 1994 10.61(9) Promissory Note dated November 28, 1994 in the principal sum of $3,205,000 issued by Camptown Greyhound Racing, Inc. in favor of Boatmen's First National Bank of Kansas City. 10.62(9) Guaranty dated November 28, 1994 executed by Kansas Financial Partners, L.L.C. 10.63(9) Certificate of Deposit Pledge and Security Agreement of Kansas Financial Partners, L.L.C. dated November 28, 1994. 10.64(9) Option Agreement dated January 11, 1994 between Tower Orchards, Inc. and Casino Magic Corp. 10.65 Deleted 10.66 Deleted 46 10.67 Deleted 10.68 Deleted 10.69(13)Stock Exchange Agreement between Casino Magic Corp. and Gaming Corporation of America dated May 10, 1995 (without exhibits or schedules) 10.70(11)Memorandum of Agreement among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A. and Casino Magic (Europe) B.V. dated June 21, 1995. 10.71(11)Management Agreement between Agrotiki, Viomichaniki Macedonias S.A. and Casino Magic (Europe) B.V. dated May 31, 1995. 10.72(11)Management Agreement between Koinopraxia, Casino Doiranis and Casino Magic (Europe) B.V. dated June 22, 1995. 10.73(11)Amendment Number One dated April 29, 1995 to Joint Venture Agreement among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A., Casino Magic (Europe) B.V., Casino Management Services Corp. and Casino Magic Corp. 10.74(11)Management Agreement dated April 29, 1995 between Porto Carras Casino S.A. and Casino Magic (Europe) B.V. 10.75(11)Agreement dated April 29, 1995 among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A., Casino Magic (Europe) B.V., Casino Management Services Corp. and Casino Magic Corp. relating to the Joint Venture Agreement. 10.76(11)Management Fee Agreement dated April 29, 1995 between Parral Companis Naviera, S.A. and Casino Magic (Europe) B.V. 10.77(11)Extension of Exclusive Option to Purchase dated June 26, 1995 between Atlantic Land Corp. and Casino Magic Corp. to acquire real estate located in Mobile, Alabama. 10.78(11)Registration Agreement dated June 26, 1995 between Atlantic Land Corp. and Casino Magic Corp. 10.79(11)Stock Option Agreement dated June 26, 1995 between Atlantic Land Corp. and Casino Magic Corp. 10.80(11)*Separation Agreement dated April 17, 1995 between Allen J. Kokesch and Casino Magic Corp. 10.81(12)*Employment Agreement dated October 2, 1995 between the Company and Jay S. Osman 10.82(12)Lease Agreement dated September 29, 1995 between the Company and the State of Mississippi 10.83(12)Memorandum of Understanding dated May, 1995 between the Company and Lakes Region Greyhound Park. 47 10.84(12)Stock Exchange Agreement dated October 26, 1995 between Casino Magic Corp. and Mark G. George. 10.85(12)Registration Agreement dated October 26, 1995 between the Company and Mark G. George. 10.86(13)Stock Exchange Agreement dated May 10, 1995 between the Company, and Gaming Corporation of America. 10.87(12)Registration Agreement dated October 26, 1995 between the Company and Belle Cherri Land Co. 10.88(13)Registration Agreement between Casino Magic Corp. and Gaming Corporation of America dated May 26, 1995. 10.89(14)Stock Exchange Agreement among Casino Magic Corp., Belle Cherri Land Co. and Cherryll Young Arnold dated September 13, 1995. (Excluding exhibits). 10.90(14) Stock Exchange Agreement between Casino Magic Corp. and Mark G. George dated October 26, 1995 (Excluding exhibits). 10.91(15)Consulting Agreement between Casino Magic American Corp. and the Sisseton-Wahpeton Sioux Tribe dated March 13, 1996. 10.92(15)Employment Agreement between Casino Magic Corp. and James E. Ernst dated December 20, 1995. 10.93(15)* Promissory Note evidencing indebtedness owed by James E. Ernst to Casino Magic Corp. dated December 20, 1995. 10.94(15)* Termination Agreement between Casino Magic Corp. and Dual B. Cooper dated December 18, 1995. 10.95(15)Purchase Agreement between Casino Magic Corp., Jefferson Casino Corporation, C-M of Louisiana, Inc. and Capital Gaming International, Inc. dated February 21, 1996. [Crescent City]. 10.96(15)Amendment to an option agreement between Boston Casino Corp. and Anthony's Hawthorne, Inc. dated January 22, 1996. 10.97 Deleted 10.98(15)Non-Statutory Stock Option Agreement dated December 20, 1995 between James E. Ernst and Casino Magic Corp. 10.99(16) Agreement dated May 3, 1996 between Mark G. George, Stuart Capital Corporation, Southeast Gaming Corporation, Casino Magic Corp., and Jefferson Casino Corp. for purchase of Gaming Fee and Option Agreement. 10.100(16) Promissory Note dated May 3, 1996 between Jefferson Casino Corporation, C-M of Louisiana, Inc. and Mark G. George. 10.101(16) Release dated May 3, 1996 by Mark G. George of Gaming Fee and Option Agreement. 48 10.102(16) Subordination Agreement dated May 3, 1996 between Jefferson Casino Corporation, C-M of Louisiana, Inc. and Mark G. George. 10.103(17) Loan Participation Agreement dated June 28, 1996 by and between BNC National Bank and Casino Magic American Corp. 10.104* Employment Agreement dated June 25, 1996 between Ken Schultz and Casino Magic Corp. 10.105* Employment Agreement dated July 2, 1996 between Juris Basens and Casino Magic Corp. 10.106* Employment Agreement dated July 11, 1992 between David Paltzik and Casino Magic Corp 10.107 Agreement dated December 12, 1996 among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A., Casino Magic (Europe) B.V., Casino Magic Hellas Management Services S.A. and Casino Magic Corp. relating to the termination of Joint Venture Agreement and the Management Agreement between the parties. 10.108 Agreement dated December 12, 1996 among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A., Casino Magic (Europe) B.V., Casino Magic Hellas Management Services S.A., Casino Magic Corp. and Murbec Inc. relating to the purchase of Porto Carras Casino S.A. 10.109 Admendment to Operating Agreement of Kansas Gaming Partners, L.L.C. dated January 22, 1997. 18. Letter from Arthur Andersen LLP regarding change in accounting principal or practice. 21.1 Subsidiaries of Casino Magic Corp. 23.1 Consent of Independent Public Accountants. 24.1 Power of Attorney (contained on the signature page). 27. Financial Data Schedule (filed electronically only). * Indicates management contracts and compensatory plans and arrangements. (1) Incorporated by reference to the Registrant's Registration Statement (No. 33-51438) on Form S-1 dated August 28, 1992. (2) Incorporated by reference to the Registrant's Registration Statement (No. 33-71572) on Form S-4 dated November 12, 1993. (3) Incorporated by reference to Amendment No. 1 to the Registrant's Registration Statement (No. 33-71572) on Form S-4 dated December 22, 1993. (4) Incorporated by reference to Amendment No. 2 to the Registrant's Registration Statement (No. 33-71572) on Form S-4 dated February 3, 1994. (5) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 49 (6) Incorporated by reference to Amendment No. 3 to the Registrant's Registration Statement (No. 33-51438) on Form S-1 dated October 21, 1992. (7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1994. (8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1994. (9) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1994. (10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1995. (11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1995. (12) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1995. (13) Incorporated by reference to a Registration Statement (No. 33-93650) of Casino Magic Corp. filed on June 19, 1995. (14) Incorporated by reference to a Registration Statement (No. 33-99248) of Casino Magic Corp. on Form S-3 filed November 9, 1995. (15) Incorporated by reference to Registrant's Annual Report on Form 10-K for the period ended December 31, 1995. (16) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996. (17) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (18) Incorporated by reference to Casino Magic of Louisiana Corp. Registration Statement (No. 333-14535) on Form S-4 dated October 21, 1996. (19) Incorporated by reference to the Registrants Form 8-K filed May 28, 1996. (D) Financial Statements required by Regulation S-X which are excluded from the Annual Report to Shareholders. None. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. CASINO MAGIC CORP. Dated: March 25, 1997 By: /s/ James E. Ernst James E. Ernst., President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Marlin F. Torguson and James E. Ernst, or either of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Marlin F. Torguson Chairman of the Board March 25, 1997 Marlin F. Torguson /s/ James E. Ernst President and Chief March 25, 1997 James E. Ernst Executive Officer (principal executive officer) /s/ Jay S. Osman Chief Financial March 25, 1997 Jay S. Osman Officer and Treasurer (principal financial and accounting officer) /s/ Roger H. Frommelt Director March 25, 1997 Roger H. Frommelt /s/E. Thomas Welch Director March 25, 1997 E. Thomas Welch 51 CASINO MAGIC CORP. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 INDEX TO EXHIBITS Exhibit Number Page - ------------------------------------------------------------------------------ 10.99* Employment Agreement dated June 25, 1996 between Ken Schultz and Casino Magic Corp. 10.100* Employment Agreement dated July 2, 1996 between Juris Basens and Casino Magic Corp. 10.101* Employment Agreement dated July 11, 1992 between David Paltzik and Casino Magic Corp 10.102 Agreement dated December 12, 1996 among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A., Casino Magic (Europe) B.V., Casino Magic Hellas Management Services S.A. and Casino Magic Corp. relating to the termination of Joint Venture Agreement and the Management Agreement between the parties. 10.103 Agreement dated December 12, 1996 among Touristiki Georgiki Exagogiki, S.A., Parral Compania Naviera, S.A., Casino Magic (Europe) B.V., Casino Magic Hellas Management Services S.A., Casino Magic Corp. and Murbec Inc. relating to the purchase of Porto Carras Casino S.A. 10.104 Admendment to Operating Agreement of Kansas Gaming Partners, L.L.C. dated January 22, 1997. 21.1 Subsidiaries of Casino Magic Corp. 23.1 Consent of Independent Public Accountants. 24.1 Power of Attorney (contained on the signature page). 52 CASINO MAGIC CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Public Accountants F-2 Consolidated Statements of Operations F-3 Consolidated Balance Sheets - Assets F-4 Consolidated Balance Sheets - Liabilities and Shareholders' Equity F-5 Consolidated Statements of Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-11 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Casino Magic Corp.: We have audited the accompanying consolidated balance sheets of Casino Magic Corp. (a Minnesota corporation) and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Casino Magic Corp. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New Orleans, Louisiana February 28, 1997 F-2 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 1995 1994 REVENUES: Casino 167,153,012 165,997,836 178,336,647 Food and beverage and rooms 8,080,067 8,392,529 5,625,703 Royalty and management fees 3,099,407 2,224,351 -- Other operating revenues 1,945,357 1,108,049 1,056,125 180,277,843 177,722,765 185,018,475 COSTS AND EXPENSES: Casino 74,943,304 69,654,888 73,212,895 Food and beverage 7,351,838 6,795,164 6,412,264 Rooms 1,039,081 1,224,685 198,112 Other operating costs and expenses 2,807,038 1,333,183 1,601,792 Advertising and marketing 20,901,821 25,873,832 25,097,126 General and administrative 24,216,613 28,501,308 29,765,041 Property operation, maintenance and energy cost 7,433,262 4,057,144 7,632,034 Rents, property taxes and insurance 5,991,261 4,314,355 3,475,089 Depreciation and amortization 18,346,202 15,768,546 10,668,770 Preopening costs 6,554,535 1,818,715 -- Development expenses 1,849,583 2,228,549 10,244,317 Write-off of capitalized costs relating to inactive developments -- 11,381,945 5,479,164 171,434,538 172,952,314 173,786,604 INCOME FROM OPERATIONS 8,843,305 4,770,451 11,231,871 OTHER (INCOME) EXPENSE: Interest expense 25,071,767 17,436,904 16,645,963 Interest capitalized (5,717,494) (867,236) (1,306,476) Interest income (1,436,468) (803,624) (1,403,692) Loss from unconsolidated subsidiaries 26,501,808 112,250 407,787 Write-off of capitalized costs primarily relating to joint ventures -- 2,210,219 -- Other 689,221 204,981 106,779 45,108,834 18,293,494 14,450,361 LOSS BEFORE INCOME TAXES (36,265,529) (13,523,043) (3,218,490) INCOME TAX BENEFIT (4,676,182) (3,230,864) (188,039) NET LOSS $(31,589,347) $(10,292,179) $ (3,030,451) NET LOSS PER COMMON SHARE: PRIMARY $ (0.88) $ (.30) $ (.10) FULLY-DILUTED $(0.89) $ (.31) $ (.11) AVERAGE SHARES AND EQUIVALENTS OUTSTANDING: PRIMARY 36,039,909 34,179,842 28,934,185 FULLY-DILUTED 35,448,068 33,260,904 27,314,172 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 17,561,512 $ 30,755,698 Restricted Cash 16,984,654 -- Income tax receivable 802,174 4,225,047 Prepaid expenses 2,844,995 2,671,210 Notes and accounts receivable, net 2,889,486 6,879,080 Deferred income taxes -- 2,923,171 Other current assets 873,676 626,846 Total current assets 41,956,497 48,081,052 PROPERTY AND EQUIPMENT, NET 243,692,571 169,791,757 OTHER LONG-TERM ASSETS: Notes Receivable 4,119,700 -- Investments in unconsolidated subsidiaries 957,831 18,574,859 Options and land deposits 2,282,244 3,211,562 Foreign casino concession agreement, net of accumulated amortization of $1,897,790 in 1996 and $948,895 in 1995 9,488,950 10,437,845 Deferred gaming license cost, net of accumulated amortization of $395,489 in 1996 38,337,333 -- Property held for development 3,040,357 3,540,357 Property held for sale 15,108,541 5,118,740 Debt issuance costs, net of accumulated amortization of $1,160,478 in 1996 and $994,350 in 1995 10,195,688 5,936,591 Deposits and other 1,421,979 3,738,079 Total other long-term assets 84,952,623 50,558,033 $370,601,691 $268,430,842 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY DECEMBER 31, 1996 1995 CURRENT LIABILITIES: Notes and contracts payable $ 4,708,603 $ 964,174 Current maturities of long-term debt 4,648,638 3,595,745 Accounts payable 7,945,068 4,098,992 Accrued expenses 11,320,101 10,853,261 Accrued interest 8,830,040 3,476,947 Accrued payroll and related benefits 8,341,720 7,150,253 Accrued progressive gaming liabilities 1,121,623 1,071,760 Other current liabilities 1,533,192 959,609 Total current liabilities 48,448,985 32,170,741 DEFERRED INCOME TAXES 266,761 3,991,325 OTHER LONG-TERM LIABILITIES -- 250,000 LONG-TERM DEBT, NET OF CURRENT MATURITIES 258,261,231 136,840,010 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $0.01 par, 50,000,000 shares, authorized 35,637,083 issued and outstanding in 1996 and 35,279,564 issued and outstanding in 1995 356,371 352,796 Undesignated stock, 2,500,000 shares authorized, None issued -- -- Additional paid-in capital 67,123,702 66,087,413 Retained earnings (deficit) (2,513,062) 29,076,285 Cumulative foreign currency translation adjustment -- (224,195) Unrealized holding loss on securities (850,156) -- Less unearned compensation (492,141) (113,533) Total shareholders' equity 63,624,714 95,178,766 $370,601,691 $268,430,842 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Foreign Common Stock Additional currency Shares Amount paid-in capital adjustment BALANCE AT DECEMBER 31, 1993 25,215,000 $252,150 $25,005,578 -- Amortization of unearned compensation -- -- -- -- Stock options granted to executive officers -- -- 1,190,625 -- Net proceeds from exercise of warrants 2,873,500 28,735 4,352,685 -- Net proceeds from exercise of employee stock options 155,250 1,553 227,835 -- Net proceeds from common stock issued pursuant to Regulation S 1,700,000 17,000 10,156,000 -- Stock issued for consultants compensation 18,000 180 194,445 -- Net loss -- -- -- - -- BALANCE AT DECEMBER 31, 1994 29,961,750 $299,618 $41,127,168 -- Amortization of unearned compensation -- -- -- -- Write-off of unearned compensation -- -- (1,642,886) -- Stock options to executive officers -- -- 101,563 -- Vested stock grants to executive officers 16,250 162 (162) -- Net proceeds from exercise of stock options 308,564 3,086 376,726 -- Net proceeds from common stock issued pursuant to Regulation S 1,771,000 17,710 8,303,095 -- Stock issued for consultants' compensation 12,000 120 63,632 -- Stock issued for land 3,210,000 32,100 17,758,277 -- Foreign currency translation -- -- -- (224,195) Net loss -- -- -- - -- BALANCE AT DECEMBER 31, 1995 35,279,564 $352,796 $66,087,413 ($224,195) Amortization of unearned compensation -- -- -- -- Stock options granted to executive officers -- -- 567,188 -- Net proceeds from exercise of warrants -- -- 500 -- Net proceeds from exercise of employee and non-employee director stock options 357,519 3,575 453,654 -- Casino One Corp. acquisition -- -- 14,947 -- Unrealized Holding Loss on Securities Available for Sale -- -- -- -- Foreign currency translation adjustment -- -- -- 224,195 Net loss -- -- -- - -- BALANCE AT DECEMBER 31, 1996 35,637,083 $356,371 $67,123,702 $ -- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED) UNREALIZED HOLDING RETAINED LESS loss on securites (deficit) unearned available for sale earnings compensation Total BALANCE AT DECEMBER 31, 1993 $ -- $42,398,915 $(798,306) $66,858,337 Amortization of unearned compensation -- -- 770,180 770,180 Stock options granted to executive officers -- -- (1,190,625) -- Net proceeds from exercise of warrants -- -- -- 4,381,420 Net proceeds from exercise of employee stock options -- -- -- 229,388 Net proceeds from common stock issued pursuant to Regulation S -- -- -- 10,173,000 Stock issued for consultants compensation -- -- -- 194,625 Net loss -- (3,030,451) -- (3,030,451) BALANCE AT DECEMBER 31, 1994 $ -- $39,368,464 $(1,218,751) $79,576,499 Amortization of unearned compensation -- -- 470,962 470,962 Write-off of unearned compensation -- -- 735,819 (907,067) Stock options to executive officers -- -- (101,563) -- Vested stock grants to executive officers -- -- -- -- Net proceeds from exercise of stock options -- -- -- 379,812 Net proceeds from common stock issued pursuant to Regulation S -- -- -- 8,320,805 Stock issued for consultants' compensation -- -- -- 63,752 Stock issued for land -- -- -- 17,790,377 Foreign currency translation -- -- -- (224,195) Net loss -- (10,292,179) -- (10,292,179) BALANCE AT DECEMBER 31, 1995 -- $29,076,285 $ (113,533) $95,178,766 Amortization of unearned compensation -- -- 188,580 188,580 Stock options granted to executive officers -- -- (567,188) -- Net proceeds from exercise of warrants -- -- -- 500 Net proceeds from exercise of employee and non-employee director stock options -- -- -- 457,229 Casino One Corp. acquisition -- -- -- 14,947 Unrealized Holding Loss on Securities Available for Sale (850,156) -- -- (850,156) Foreign currency translation adjustment -- -- -- 224,195 Net loss -- (31,589,347) -- (31,589,347) BALANCE AT DECEMBER 31, 1996 $(850,156) $(2,513,062) $(492,141) $63,624,714 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(31,589,347) $(10,292,179) $(3,030,451) Adjustments to reconcile net income loss to (loss) to net cash provided by operating activities: Depreciation and amortization 16,263,2708,346,202 13,387,3455,768,546 10,668,77029,455 Amortization 2,082,932 2,381,201 39,315 Loss on disposal of property and equipment 339,9056 466,712 -- Amortization of original issue discount and deferred debt issuance costs 1,496,259 954,351 844,818 Amortization of unearned stock compensation, net of recoveries 188,580 (436,105) 770,180 Consultants' compensation recognized on issuance of stock --(0) 63,752 103,125 Gain on contract settlement --(0) (855,000) - -- Write-off of preopening costs, development project cost, land options and deposits & property held for development 7,054,5325 12,104,212 4,340,543 Loss on investment in unconsolidated subsidiaries 22,436,241 112,250 407,787 (Increase) decrease in income tax receivable 3,422,873 1,899,459 (3,560,970) (Increase) decrease in prepaid expenses 88,861 1,634,019 558,795 Increase in notes and accounts receivable, net (147,705) (4,753,232) (1,032,162) Decrease in deferred income taxes- current 2,923,171 (720,628) (130,182) Increase in other current assets (277,793) (129,225) (17,881) Increase (decrease) in deferred income taxes-non current (4,173,197) (1,063,610) 2,558,240 Increase (decrease) in accounts payable 2,924,820 (389,241) 973,784 Increase (decrease) in accrued expenses (4,278,518) (2,026,436) 2,704,726 Increase (decrease) in accrued interest 3,487,883 208,449 (15,472) Increase (decrease) in accrued payroll and related benefits 1,255,364 2,236,447 (281,652) Increase (decrease) in accrued progressive gaming liabilities 55,376 (393,866) (166,442) Increase in contractual obligations --(0) -- 2,210,000 Increase (decrease) in income taxes payable 573,583 959,609 -- NET CASH PROVIDED BY OPERATING ACTIVITIES 24,126,2416,011,855) 15,348,284 17,905,556 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.(CONTINUED) F-8 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1996 1995 1994 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment 1,436,821 173,389 -- Acquisitions of property and equipment (67,850,010) (11,396,332) (27,444,563) Payments for Aacquisition of gaming license (15,250,000) -- -- Acquisitions of property held for development --(0) -- (2,315,588) Acquisitions of property held for sale 40,437 -- (742,921) Investments in unconsolidated subsidiaries (651,206) (6,117,636) (11,997,139) Expenditures for organizational and acquisition cost (359) (80,788) -- Expenditures for land options and deposits (480,000) (1,326,130) (7,162,277) Acquisition of foreign gaming concession --(0) -- (11,386,740) Expenditures for development and preopening costs (6,554,535) (130,794) (2,897,440) Acquisitions of deposits and other long-term assets 2,530,873 (1,898,786) (1,474,772) (Increase) decrease in marketable securities -- 10,244,233 8,950,988 Issuance of short-term note -- -- -- NET CASH USED IN INVESTING ACTIVITIES (86,777,9799,392,474) (10,532,844) (56,470,452) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt or notes payable 121,043,749 202,011 3,000,000 Payments of debt issuance costs (5,419,575) (2,000) (198,093) Principal payments on notes payable (1,010,180) (1,185,342) (114,658) Principal payments on long-term debt (48,644,469) (2,261,096) (1,025,811) Net proceeds from sale of common stock 14,947 8,320,805 10,173,000 Net proceeds from sale or exercise of warrants -- -- 4,381,420 Net proceeds from exercise of employee stock options 457,734 379,812 229,388 NET CASH PROVIDED BY FINANCING ACTIVITIES 66,442,2064 5,454,190 16,445,246 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,790,468810,871 10,269,630 (22,119,650) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,755,698 20,486,068 42,605,718 CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH, END OF PERIOD $34,546,166566,569 $30,755,698 $20,486,068 F-9 CASINO MAGIC CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL CASH FLOW INFORMATION YEARS ENDED DECEMBER 31, 1996 1995 1994 Interest paid, net of amount capitalized 12,379,128 15,406,868 $14,510,141 Income taxes paid, net of refunds (7,604,043)(4,236,206) 1,741,370 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property and equipment and other asset acquisitions financed with short-term notes payable -- 0 850,208 1,300,000 Property and equipment and other asset acquisitions included in accounts and construction payable and accrued expenses 5,455,469 177,091 952,506 Gaming license acquisition financed with long-term debt 21,617,612 -- -- Land acquired through the issuance of common stock -- 0 22,140,969 - -- Property and equipment under capital leases 81,114 63,632 131,221 Property and equipment and property held for sale financed with long- term debt 30,728,879 -- 2,774,527 Land held for development financed with short-term notes and long-term debt -- 0 -- 700,000 Consulting services performed for common stock -- 0 63,752 91,500 Common stock granted to officers 567,188 101,563 1,190,625 Commitment for land option -- 0 (156,725) 5,000,000 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-10 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION: Casino Magic Corp. and Subsidiaries (the "Company") is an international gaming company with operations in Bay Saint Louis, Mississippi, Biloxi, Mississippi, Bossier City, Louisiana, and the Argentina Province of Neuqu n in the cities of Neuqu n City and San Mart n de los Andes. The Company also is pursuing gaming opportunities in other jurisdictions. The consolidated financial statements of the Company include the accounts of Casino Magic Corp. ("Casino Magic") and its wholly-owned subsidiaries (the "Subsidiaries") which are Mardi Gras Casino Corp. ("Casino Magic-BSL"), Biloxi Casino Corp. ("Casino Magic-Biloxi"), Casino Magic of Louisiana Corp. ("Casino Magic-Bossier City"), Atlantic-Pacific Corp. ("Atlantic-Pacific"), Casino Magic Neuqu n SA, ("Casino Magic-Neuqu n"), Casino Magic (Europe) B.V. ("Europe"), Casino One Corporation, Casino Magic Finance Corp., St. Louis Casino Corp., Bucks County Casino Corp., Casino Magic American Corp., Boston Casino Corp. and Kansas Magic Corp. Other subsidiaries are either inactive or have insignificant operating or development activity as of the date of these financial statements. All significant intercompany accounts and transactions have been eliminated. PRINCIPAL ACTIVITIES OF THE COMPANY: Casino Magic-BSL operates a bi-level dockside casino in Bay Saint Louis, Mississippi. The casino began operations on September 30, 1992. The casino facility includes a 330 seat buffet, a fine dining restaurant, fast food and entertainment areas; and surface parking for approximately 2,000 cars. The casino is located on a site that occupies approximately 591 acres, including a 201 room inn, marina and recreational vehicle park. Construction of the golf course began in October 1995 and wasas completed in February 1997. Proposed additions to Casino Magic-BSL include a hotel and associated amenities. Casino Magic-Biloxi operates a three-level dockside casino in Biloxi, Mississippi. The casino began operations on June 5, 1993. The casino facility includes a 360 seat buffet, a fine dining restaurant, fast food and lounge and entertainment areas. Parking facilities include an eight-story parking garage containing 695 parking spaces, a shared parking garage with 204 parking spaces and 221 additional surface parking spaces. Construction of an approximately 380 room hotel tower atop the parking garage began in 1997. Casino Magic-Bossier City operates a three-level dockside casino in Bossier City, Louisiana. Casino Magic-Bossier City opened on October 4, 1996, using a temporary facility, and opened the permanent facility on December 31, 1996. The permanent facility has been developed on a 23 acre site and includes:; a 37,000 square foot land based pavilion, which includes a 350 seat buffet, a fine dining restaurant, fast food and entertainment areas; a parking garage for approximately 1,550 cars and surface parking for another approximately 400 cars. F-11 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Atlantic-Pacific Corp. leaseds and operateds a limited stakes gaming establishment in Deadwood, South Dakota, under the name of Goldiggers. The establishment consists of 94 slot and video lottery machines, four table games, restaurant and bar, and a nine-room hotel. Operations commenced April 11, 1991. Casino Magic sold Atlantic-Pacific Corp. in June 1996. Casino Magic-Neuqu n operates two casinos in the Argentina Province of Neuqu n in the cities of Neuqu n City and San Mart n de los Andes. The casinos include approximately 29,000 square feet of gaming space including 54 table games, 395 slot machines and a bingo facility. The casinos began operations on January 1, 1995. Europe owneds a 49% interest in Porto Carras Casino S.A., ("Porto Carras"), a Greek company which operates an American-style casino in northern Greece. Equity in the income of Porto Carras is accounted for using the equity method of accounting and is included in loss from unconsolidated subsidiaries. Casino Magic sold its interest in Porto Carras in December 1996. Casino One Corporation holds title to land in Biloxi, Mississippi, adjacent to the property on which the Company conducts gaming operations in Biloxi, Mississippi. Casino Magic Finance Corp. is a special purpose finance subsidiary formed specifically to issue $135,000,000 First Mortgage Notes ("Mississippi First Mortgage Notes"). Casino Magic Finance Corp. is 50% owned by each of Mardi Gras Casino Corp. and Biloxi Casino Corp. St. Louis Casino Corp. holds title to real estate in St. Louis, Missouri. It is the Company's intention to sell this property . Bucks County Casino Corp. holds title to real estate and has options to purchase additional real estate in Bucks County, Pennsylvania. It is the Company's intention to use this property in connection with the development of a proposed casino, if, and when, legislation is passed allowing such activity. Casino Magic American Corp. is a wholly-owned subsidiary of the Company through which the Company manages or provides consulting services to Native American gaming operations. Boston Casino Corp. has an option on real estate. During 1995, the Company abandoned all efforts to pursue gaming at this site and all amounts capitalized relating to this option were expensed. Kansas Magic Corp. is a wholly-owned subsidiary of the Company through which the Company is a 50% member of each of two limited liability companies, Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial Partners, L.L.C. ("KFP"). During 1995, the Company expensed its recorded investment due to a bankruptcy proceeding as discussed in Note 910. F-12 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): CASINO REVENUES AND COMPLIMENTARIES: In accordance with common industry practice, casino revenues are the net of gaming wins less losses. Revenues exclude the retail value of complimentary rooms, food and beverage furnished gratuitously to customers. The estimated departmental costs of providing rooms is not significant, and the estimated departmental costs of providing food and beverage services are included in casino expense as follows: YEARS ENDED DECEMBER 31, 1996 1995 1994 $13,838,000 $12,072,000 $14,750,000 CASH AND CASH EQUIVALENTS: For purposes of the consolidated balance sheets and statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. RESTRICTED CASH: At the closing of the Louisiana First Mortgage Notes (See Note 6), approximately $45.2 million of the net proceeds thereof were deposited in collateral accounts (the "Cash Collateral Accounts") to be disbursed only in accordance with the Cash Collateral and Disbursement Agreement executed at the closing of the Louisiana First Mortgage Notes Offering. The balances that remain in these collateral accounts at December 31, 1996, are shown as restricted cash. MARKETABLE SECURITIES: Marketable securities were short-term investments in government securities or low-risk financial instruments recorded at cost which approximates market value. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation, including amortization of capital leases and leasehold improvements, is computed using the straight-line method. Estimated useful lives for property and equipment are 15 - 31 years for barges and buildings, life of the lease for leasehold improvements and 5-7 years for furniture and equipment. Normal repairs and maintenance are charged to expense when incurred. Expenditures which materially extend the useful life of capital assets are capitalized. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES: Investments in unconsolidated subsidiaries where the Company exercises significant influence are accounted for under the equity method. F-13 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): AMORTIZATION OF INTANGIBLES: Deferred charges relating to debt issuance costs and original issue discounts on long-term debt instruments are amortized over the life of the related debt using the effective interest rate method to provide a constant yield. Deferred charges relating to debt issuance costs and original issue discounts on long-term debt instruments are amortized over the life of the related debt using the effective interest rate method to provide a constant yield. Included under other long term assets is "Deferred gaming license cost." Deferred gaming license cost represents the estimated fair value of the Louisiana gaming license, an asset acquired in conjunction with the purchase of Crescent City Development Corporation ("Crescent City") see Note 4. This cost is being amortized on a straight-line basis over twenty-five years, the estimated period to be benefited by the license which commenced at the time gaming operations began at Bossier City. FOREIGN CASINO CONCESSION AGREEMENT: The costs capitalized to acquire the foreign casino concession agreement are being amortized on a straight-line basis over the twelve year life of the agreement. DEVELOPMENT AND PREOPENING COSTS: All internal salary and related costs of the Company's development activities are expensed as incurred. Amounts paid for outside consultants and professional fees are expensed until gaming has been legalized in the jurisdiction, the Company has an approved site and there is a reasonable likelihood that the Company will be granted a gaming license. From this point forward, outside and incremental development costs are capitalized. Capitalized development costs of $2,055,509 were included in development and expenses as of December 31, 1994. As discussed in Note 9, during 1995, the Company modified its agreements with the Sisseton-Wahpeton Dakota Nation. As a result of this, the amounts previously capitalized were expensed. Preopening costs are capitalized then expensed when the related business commences operations. OPTIONS AND LAND DEPOSITS: The costs of options and land deposits are amortized over the life of the option or deposit until such time as the option or deposit is exercised or abandoned. INCOME TAXES: Income taxes are accounted for in accordance with provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-14 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): FOREIGN CURRENCY TRANSLATION: The functional currency for certain foreign subsidiaries and unconsolidated companies is the applicable local currency. The translation of the applicable local currencies into U.S. dollars is performed for balance sheet accounts using the current exchange rates in effect at the balance sheet date and for revenue and expense accounts using weighted average exchange rates during the period. The gains and losses resulting from the balance sheet account translations, net of deferred income taxes, are included in shareholders' equity. Some transactions of the Company and its subsidiaries are made in currencies different from their own. Gains and losses from these transactions are included in the consolidated statements of operations as they occur. Foreign currency transaction gains or losses included in the consolidated statement of operations have not been material. NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common and common equivalent share is calculated using the weighted average number of common shares outstanding increased by the additional number of shares which would be issuable upon the exercise of warrants and stock options, including options granted under the Company's 1992 Incentive Stock Option Plan. In the calculation, as required under Opinion No. 15 of the Accounting Principles Board ("APB 15"), an assumption is made that the Company used the exercise proceeds to purchase additional shares at the average market price and applied any excess proceeds under the "modified treasury stock method." As further required by APB 15, proceeds were calculated to include the exercise proceeds of the issuances, average unearned compensation for future services, and the tax benefit associated with the increase in market price of certain stock options granted outside the Plan. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES: GAMING REGULATION LICENSING. The Company has gaming operations in the United States and abroad that depend on the continued licensability or qualification of the Company and subsidiaries that hold gaming licenses in various jurisdictions. Such licensing and qualifications are reviewed periodically by the gaming authorities in those jurisdictions. COMPETITION. The gaming industry is extremely competitive and the Company faces competition from new developments in both the United States, specifically on the Mississippi Gulf Coast and in Louisiana, and abroad. FOREIGN OPERATIONS. The Company has investments and net assets of approximately $16 million in gaming operations outside of the United States which are subject to risks associated with the distance of these casino facilities from the Company's executive offices, the stability of the relevant government, regulations imposed by foreign governments, the continued ability to repatriate cash, and currency exchange issues. F-15 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): CAPITALIZED COSTS. At December 31, 1996, the accompanying balance sheet reflects assets related to options and land deposits and property held for development in states where the Company does not presently have a license to conduct gaming or gaming is not presently allowed by law. If the Company is not successful in acquiring licenses or gaming is not legalized in such states, future adjustments to the carrying value of these assets may be required. SEVERE WEATHER. The Mississippi Gulf Coast is subject to severe weather, including hurricanes. Severe weather could cause damage to one or both of the Company's Mississippi casino facilities. The Company maintains insurance against casualty losses resulting from severe weather and against business interruption. Such insurance may not adequately compensate the Company for loss of profits resulting from severe weather. START-UP OF OPERATIONS. Initial operations of the Casino Magic-Bossier City casino were adversely affected by high water which forced the closure of the casino for 15 days during 1996, as well as beginning operations before a substantial portion of the Casino's amenities were completed. It is anticipated that these difficulties incurred during start-up operation will negatively impact operations during the early part of 1997. PERVASIVENESS OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain reclassifications have been made to the 1995 and 1994 amounts to conform with the December 31, 1996 presentation. F-16 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. NOTES AND ACCOUNTS RECEIVABLENOTES AND ACCOUNTS RECEIVABLE: Notes and accounts receivable consist of the following: DECEMBER 31, 1996 1995 Current: Notes receivable - from affiliate $ -- $2,000,000 Notes receivable 790,228 -- Accounts receivable - air charter 548,239 570,540 Accounts receivable - trade 2,505,463 1,653,912 Accounts receivable - from affiliate -- 0 3,211,588 Other 606,631 846,909 $4,450,561 $8,282,949 Less allowance for doubtful accounts 1,561,075 1,403,869 Total Notes and Accounts Receivable (current) $2,889,486 $6,879,080 Noncurrent: Notes receivable 4,119,700-- 0 Total Notes and Accounts Receivable $7,009,186 $6,879,080 Included in notes receivable is a commercial loan in which the Company, through a wholly-owned subsidiary, participated. The amount of Company's participation is $5 million. The entire loan amount in which the Company, is participating is $17,500,000. The loan was made by a consortium of lenders to the Sisseton-Wahpeton Dakota Nation, a Native American Tribe, for the construction of a casino facility on Tribal land. The Company, through a wholly-owned subsidiary, has a consulting agreement with the Native American Tribe to assist in the operations of the casino facility. The loan was converted from a construction loan to a term loan in February 1997. The term loan is repayable over a sixty month period payable in monthly installments of $105,230 including principal and interest at a fixed rate of 10.375% through February 2002. 3. PROPERTY AND EQUIPMENTPROPERTY AND EQUIPMENT: Property and equipment consists of the following: DECEMBER 31, 1996 1995 Land and improvements $ 67,658,624 $ 58,018,386 Buildings and improvements 44,554,665 41,672,748 Barges and improvements 55,203,063 35,973,068 Leasehold improvements 382,907 1,362,141 Furniture and equipment 69,663,192 54,916,169 Construction in progress 48,549,525 8,424,425 286,011,976 200,366,937 Less accumulated depreciation and amortization (42,319,405) (30,575,180) $243,692,571 $169,791,757 F-17 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. STOCK ACQUISITIONS: In May 1996, Casino Magic, through its wholly-owned subsidiary, Jefferson Casino Corporation ("Jefferson Corp") acquired Crescent City Capital Development Corp.("Crescent City") for $50 million plus the assumption of up to $5.7 million in equipment liabilities. Jefferson Corp paid $15 million in cash at closing and caused Crescent City to issue $35 million of 11.5% secured, three year notes . Crescent City, which was the subject of a plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code, owned the Crescent City Queen riverboat ("Crescent City Riverboat"), gaming and related equipment and surveillance equipment and a license to conduct riverboat gaming operations in Louisiana. Crescent City emerged from the Bankruptcy proceedings as Casino Magic of Louisiana Corp. ("Casino Magic-Bossier City"). The Company is using Casino Magic-Bossier City's gaming license in Bossier City, Louisiana, where it currently owns 23 acres of land. Although Jefferson Corp. was required to purchase the Crescent City Riverboat to obtain the Louisiana gaming license, the Crescent City Riverboat is one of the largest riverboats in the United States and could not be used at Casino Magic-Bossier City because of Crescent City Riverboat's width. Therefore, the Company purchased a casino riverboat (the "Bossier Riverboat") for use at Casino Magic-Bossier City for $20 million. The Crescent City Riverboat, classified as property held for sale, with a carrying value of $10.1 million at December 31,1996, will be sold and the proceeds will be used to assist in the funding of the hotel at Bossier City. The Company can give no assurances that it will be able to dispose of the Crescent City Riverboat on acceptable terms or in a timely manner. The assets acquired as a part of the acquisition of Casino Magic-Bossier City which included gaming, surveillance and related equipment are being used at Casino Magic-Bossier City's gaming site. 5. DISPOSITIONS On June 13, 1996, the Company sold the capital stock of Atlantic-Pacific Corp., which operates "Goldiggers," a small casino-hotel in Deadwood, South Dakota, to Royal Casino Group, Inc. ("RCG"), an unaffiliated party whose common stock trades on the NASDAQ market (ticker symbol WINZ). Goldiggers had not been regarded by the Company as material to its operations for several years. In consideration for the sale of such stock, the Company received shares of RCG Series A Convertible Preferred Stock and warrants to acquire shares of RCG common stock. The Indenture (See Note 7) required that at least 85% of the consideration received by the Company in respect of such asset sale be in the form of cash. By selling such securities for cash to a subsidiary that is not subject to the investment covenants of such Indenture, management has taken steps which it believes are sufficient to cure such violation. F-18 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. DISPOSITIONS (CONTINUED) At September 30, 1996, management determined that its 49% equity investment in Porto Carras Casino S.A., and notes and accounts receivable relating to unpaid management fees and royalties were impaired. Because of this impairment, management wrote off its investment in such gaming facilities in Porto Carras, Greece, ("Porto Carras") and all unpaid notes and receivables related thereto. The total charge recorded relating to the write off of Porto Carras was $26.1 million. Management's decision was based, primarily, on the results from Porto Carras after the opening of a competing casino. In September 1996, Hyatt Corporation opened a new casino in the City of Thessaloniki, Porto Carras's primary market and was required by the Greek Government to charge an $8 admission tax compared to Porto Carras' $20 admission tax. Although the Company anticipated some revenue loss as a result of this increased competition and admission fee differential, the actual effects were much greater than anticipated and resulted in a $2.0 million loss from operations at Porto Carras for the month of September 1996. Despite new marketing and cost containment efforts, these losses continued; furthermore, the majority owner in Porto Carras venture was unwilling or unable to advance any funds to the operation. Additionally, the majority owner informed the Company that it did not intend to operate a substantial portion of the Porto Carras resort area, consisting of two hotels and amenities, during the 1997 season. These factors, among others, led to the Company's decision to write off its investment in Porto Carras and led to the sale of Porto Carras in December 1996. 6. NOTES AND CONTRACTS PAYABLENOTES AND CONTRACTS PAYABLE: Short-term notes and contracts payable consist of the following: December 31, 1996 1995 Construction contracts (a) $ 4,540,434 $ 113,966 Other (b)(c) 168,169 850,208 $ 4,708,603 $ 964,174 (a) Consists of various payables relating to both fixed and cost plus contracts. (b) In 1996, the balance consisted of three notes payable. The detail of these notes is as follows: (i) $161,939 uncollaterized note, payable in monthly installments of $27,585 including interest at 7.5%, through June 1997. (ii) $1,837 note collateralized by office equipment, payable in monthly installments of $157. (iii) $4,393 note collateralized by golf equipment, payable in monthly installments of $290. (c) In 1995, the balance consisted of an uncollaterized note, payable in variable monthly installments including interest at prime plus 5% through September 1996. F-19 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBTLONG-TERM DEBT: Long-term debt, including capital lease obligations, consists of the following: DECEMBER 31, 1996 1995 Notes payable, bank (a) $ 9,585,130 $ 2,765,423 Equipment contracts (b) 622,274 -- Notes payable, land (c) 3,470,415 4,102,507 Capital lease obligations (Note 9) 308,514 259,557 Other (d) 1,207,986 928,500 Louisiana First Mortgage Notes (e) 115,000,000 -- First Mortgage Notes (f) 135,000,000 135,000,000 Unamortized original issue discount (2,284,450) (2,620,232) $262,909,869 $140,435,755 Less current maturities $ (4,648,638) $ (3,595,745) $258,261,231 $136,840,010 (a) Consists of four notes payable to banks. The detail of these notes is as follows: (i)$3,000,000 uncollateralized promissory note, payable in monthly installments of interest only through July 1996; thereafter, principal and interest based on a 60 month amortization through February 2000. The promissory note bears interest at prime plus 1% (9.25% at December 31, 1996) throughout the life of the note with a final balloon payment due in February 2000. (ii) $1,700,000 note collateralized by gaming equipment. The first payment is due 120 days following the opening of Bossier City's gaming facility. The note is payable in thirty-six monthly payments of $53,463.49, including interest at prime plus 1/4% (8.5% at December 31, 1996). (iii) $1,343,749 assumed note collateralized by the company jet. This note was paid off subsequent to year end when the jet sold. The note is payable in 34 remaining monthly payments of $35,000, including interest at prime plus 1% (9.25% at December 31, 1996) throughout the life of the note with a final balloon payment due October 1999. (iv) $4,575,740 collateralized by gaming equipment. The first payment is due 120 days following the opening of Bossier City's gaming facility. The note is payable in thirty-six monthly payments of $135,788.17, including interest at prime plus 1% (9.25% at December 31, 1996). (b) Consists of two notes payable collateralized by golf equipment. The detail of these notes is as follows: (i) $482,365 note payable in forty-three remaining monthly payments of $12,150.80, including interest at 9.64%. (ii) $182,049 note collaterized by golf equipment, payable in forty-one remaining monthly payments of $4,540.68, including interest at 9.12%. F-20 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT (CONTINUED)LONG-TERM DEBT: (c) Consists of three notes payable for land acquisitions. The detail of the three notes is as follows: (i)$471,614 note payable in monthly installments of $14,920.34 including interest at prime plus 2% (10.25% at December 31, 1996), through April 1999. (ii)$870,942 note payable in monthly installments of $12,134 including interest at 8% through July 2003. (iii)$3,000,000 note payable in monthly installments of $111,699 including interest at 8.75% through November 1998. (d) Consists of various collateralized notes payable through the year 2004. The interest rates on these notes vary from 7.9% to 10% fixed rates. (e) On August 22, 1996, a wholly owned subsidiary of the Company, Casino Magic-Bossier City, sold $115,000,000 aggregate principal amount of 13%, First Mortgage Notes securities due in 2003 ("Series A Notes") with contingent interest. Casino Magic-Bossier City is required to offer to exchange up to an aggregate of $115,000,000 principal amount of 13% Series B First Mortgage Notes due 2003 with Contingent Interest (the "Series B Notes" and, together with the Series A Notes, the "Louisiana First Mortgage Notes") for such Series A Notes. The Series B Notes will be identical to the Series A Notes but will be registered with the Securities and Exchange Commission. Contingent Interest is payable on the Louisiana First Mortgage Notes, on each interest payment date, in an aggregate amount equal to 5% of Casino Magic-Bossier City's Adjusted Consolidated Cash Flow (as defined in the Louisiana First Mortgage Notes Indenture ("Louisiana Indenture") for the Accrual Period (as defined in the Louisiana Indenture, but generally a six month period) last completed prior to such interest payment date; provided that no Contingent Interest is payable with respect to any period prior to the Commencement Date (as defined in the Louisiana Indenture). Payment of all or a portion of any installment of Contingent Interest may be deferred, at the option of Casino Magic-Bossier City, if, and only to the extent that, (i) the payment of such portion of Contingent Interest will cause Casino Magic-Bossier City's Adjusted Fixed Charge Coverage Ratio (as defined in the Louisiana Indenture) for Casino Magic-Bossier City's most recently completed Reference Period prior to such interest payment date to be less than 1.5 to 1.0 on a pro forma basis after giving effect to the assumed payment of such Contingent Interest and (ii) the principal amount of the Louisiana First Mortgage Notes corresponding to such Contingent Interest has not then matured and become due and payable (at stated maturity, upon acceleration, upon redemption, upon maturity of a repurchase obligation or otherwise). The aggregate amount of Contingent Interest payable in any Semiannual Period will be reduced pro rata for reductions in the outstanding principal amount of notes prior to the close of business on the record date immediately preceding such payment of Contingent Interest. The Series A Notes were issued to consolidate the funding necessary to develop Casino Magic-Bossier City project. This included the repayment of the Louisiana Land Note and the Louisiana Notes. F-21 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT (CONTINUED)LONG-TERM DEBT: The Louisiana First Mortgage Notes are secured by a first priority security interest, subject to permitted liens, in substantially all of the existing and future assets of Bossier City, including the Bossier Riverboat and substantially all of the other assets that comprise Casino Magic-Bossier City, the Crescent City Riverboat, and an assignment of the construction contracts pursuant to which Casino Magic-Bossier City was being constructed. The Jefferson Guarantee will be secured by a pledge of all of the capital stock of Jefferson Casino Corp., a wholly owned subsidiary of the Company. Casino Magic-Bossier City has contractually committed to apply net proceeds from an asset sale of the Crescent City Riverboat to the construction of Casino Magic-Bossier City which improvements shall be owned by Casino Magic-Bossier City or such Subsidiary and be used by or useful to Casino Magic-Bossier City or such Subsidiary in any line of business in which Bossier City or such Subsidiary is permitted to be engaged pursuant to the covenant described under "Certain Covenants Line of Business as defined in the Indenture;" provided, however, that the Net Proceeds from an asset sale of the Crescent City Riverboat may be applied only to the making of a capital expenditure or the acquisition of long-term assets or the payment of the costs of construction of real property improvements, in any case, to be used by Casino Magic-Bossier City ator the Casino Magic-Bossier as a casino entertainment facility or hotel. The Louisiana First Mortgage Notes are governed by the Louisiana Indenture. The Louisiana Indenture pursuant to which the Louisiana First Mortgage Notes have been issued contains certain covenants that will limit the ability of Casino Magic-Bossier City and its subsidiaries to, among other things, incur additional indebtedness and issue preferred stock, pay dividends, make investments or make other restricted payments, incur liens, enter into mergers or consolidations, enter into transactions with affiliates or sell assets. (f) On October 14, 1993, a wholly owned indirect subsidiary of the Company, Casino Magic Finance Corp. ("Finance Corp."), sold $135,000,000 in aggregate principal amount of 11 1/2% First Mortgage Notes due in 2001 (the " Finance Notes") and warrants to purchase 810,000 shares of Casino Magic Corp. common stock. Proceeds from the Notes were allocated by the underwriter between the Finance Corp. and the Company based on the estimated fair market value at the time of issuance of the Finance Notes and the warrants in the amounts of $131,760,000 and $3,240,000 ($4 per warrant), respectively. The value of the warrants is treated as original issue discount for financial statement purposes, and is reflected in the balance sheet net of amortization as an adjustment to the carrying value of long-term debt. The Finance Notes are governed by an Indenture (the "Indenture") entered into on the same date between Finance Corp., the Company and IBJ Schroder Bank & Trust Company as the Trustee. Under Section 4.10 of the Indenture, the Company's ability to pay dividends on its common stock is restricted to an amount which is determined under a formula based primarily on the Company's future income, and is precluded upon the occurrence of an "Event of Default" as defined under the Indenture. Events of Default include, among other things, the failure to pay the interest or principal due on the Finance Notes, the entry of a judgment in F-22 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT (CONTINUED)LONG-TERM DEBT: excess of $10,000,000 against the Company or its material subsidiaries, which is not discharged within 60 days after entry, and the default by the Company or its material subsidiaries under indebtedness due to third parties. The Indenture also contains certain covenants that restrict, among other things, the making of certain investments, payments of dividends and other distributions, the incurrence of additional indebtedness and future guarantees of indebtedness, certain transactions with shareholders and affiliates, certain mergers and consolidations, certain asset sales and the creation of certain liens. Additionally, in Mississippi, where certain of the Company's subsidiaries are incorporated, laws exist which prohibit payments of dividends if such payments would create negative equity on a fair market value basis. The Finance Notes are secured by a pledge of the stock of Finance Corp., Bay Saint Louis and Biloxi along with the accounts receivable, inventories, property and equipment, property held for development and deposits of Casino Magic-BSL and Casino Magic-Biloxi. The book basis of these pledged assets is approximately $150,000,000 at December 31, 1996. The effective interest rate of the Notes is 13.06%. The proceeds from the Notes were used to pay off substantially all outstanding obligations at October 14, 1993. Maturities of the Company's long-term debt, including capital lease obligations, as of December 31, 1996, are as follows: YEAR ENDING DECEMBER 31, 1997 $ 4,648,638 1998 4,985,055 1999 3,891,168 2000 937,205 2001 135,245,043 Thereafter 115,487,210 265,194,319 Unamortized original issue discount (2,284,450) $262,909,869 8. LEASE COMMITMENTS: The Company has long-term lease agreements for land for the site of Casino Magic-Biloxi and additional land at Casino Magic-BSL. The Casino Magic-Biloxi land is classified as an operating lease. The annual rental payments for the initial five-year term of the Casino Magic-Biloxi land lease began June 5, 1993, and are $550,000, $250,000, $450,000, $450,000 and $200,000 for the first through fifth year. The land lease contains seventeen, five-year renewal options at contractually higher rentals, plus inflation adjustments not to exceed 4.5% per year. F-23 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LEASE COMMITMENTS (CONTINUED): On June 4, 1993, the Company entered into a long-term agreement with the State of Mississippi to lease 283,217 square feet of submerged lands or tidelands for Casino Magic-Biloxi. The initial lease term expires May 31, 2003, but is cancelable by the Company in May 1998. Annual rental payments are due in advance on the first of June in the amount of $595,000, plus an annual increase of $45,000 for the first five years. The following is a schedule of future minimum lease payments for capital and operating leases (with initial or remaining terms in excess of one year) as of December 31, 1996: Year ending December 31, Capital Operating Leases Leases 1997 $351,565 $1,866,404$ 462,032 1998 211,342 1,323,4472,664,093 1999 155,279 1,112,7092,341,394 2000 27,185 1,063,3061,139,168 2001 21,488 952,0001,141,025 Thereafter 45,5722,070,5001,039,000 Total minimum lease payments 812,431 $8,388,366786,712 Less amount representing interest (8% to 13%) 131,974 Present value of net minimum capital lease payments $680,457 Rent expense for all non-cancelable operating leases was $1,800,000, $3,048,000, and $3,254,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 9. OTHER COMMITMENTS AND CONTINGENCIES ONGOING LEGAL PROCEEDINGS: A class action lawsuit was filed on April 26, 1994, in the United States District Court, Middle District of Florida (the "Poulos Lawsuit"), naming as defendants 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including the Company. The lawsuit alleges that such defendants have engaged in a course of fraudulent and misleading conduct intended to induce people to play such games based on a false belief concerning the operation of the gaming machines, as well as the extent to which there is an opportunity to win. The suit alleges violations of the Racketeer Influenced and Corrupt Organization Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the United States District Court, Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who were named in the Poulos Lawsuit and adding as defendants the owners of certain casino operations in Puerto Rico and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are F-24 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): identical to the claims in the Poulos Lawsuit. Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern Lawsuit have now been consolidated into one case file in the United States District Court, Middle District of Florida. On December 9, 1994 defendants' motion for change of venue was granted, transferring the case to the U.S. District Court, District of Nevada, in Las Vegas. In response to a motion to dismiss the Complaint brought by the Company and other defendants, the United States District Court for the District of Nevada entered an Order dated April 17, 1996, granting the motions and dismissing the complaint without prejudice. The plaintiffs then filed an amended Complaint on May 31, 1996, in which the plaintiffs sought damages against the Company and other defendants in excess of $1 billion and punitive damages for violations of the Racketeer Influenced and Corrupt Organizations Act and for state common law claims for fraud, unjust enrichment and negligent misrepresentation. The Company and other defendants have moved to dismiss the amended Complaint. The Company believes that the claims are without merit and does not expect that the lawsuit will have a material adverse effect on the financial condition or results of operations of the Company. On October 20, 1994, International Gaming Network, Inc., commenced litigation in Federal Court against Casino Magic Corp. by filing a Complaint with the U.S. District Court, District of South Dakota, Southern Division. Plaintiff, in that litigation, has alleged, among other things, that the Company intentionally and improperly interfered with Plaintiff's existing and perspective contractual, economic or business relationship with the Sisseton-Wahpeton Sioux Tribe, and seeks damages of $28,292,102. In April 1994, the Company entered into an agreement with the Tribe to develop and manage a gaming casino on tribal lands in northeastern South Dakota. (The Company has since canceled the management agreement and entered into a consulting agreement with the Tribe.) On November 9, 1994, the Company interposed an answer denying the allegations contained in Plaintiff's estimated range or potential loss, if any, which may be sustained by the Company in connection with this litigation, but believes the lawsuit is meritless and intends to vigorously defend the claim. The United States District Court, on October 7, 1996, filed a Judgment of Dismissal, dismissing all of Plaintiff's claims, pursuant to a Motion for Summary Judgment which had been brought by Casino Magic. Pursuant to a Notice of Appeal dated November 5, 1996, the Plaintiff has appealed the dismissal of its claims to the United States Court of Appeals for the Eighth Circuit. Company management believes that the outcome of the litigation discussed above will not have a material adverse effect on the Company's financial position or results of operations. In addition, the Company is a litigant in legal matters arising in the normal course of business. In the opinion of management, all such pending legal matters are either adequately covered by insurance, or if not insured, will not have a material adverse effect on the financial position or results of operations of the Company. F-25 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): CONTRACTUAL AGREEMENTS: ARGENTINA. In December 1994, the Company, through its wholly-owned subsidiary, Casino Magic-Neuqu n, entered into a 12-year concession agreement with the Province of Neuqu n, Argentina. Casino Magic-Neuqu n which began operations in January 1995 operates two casinos in the Province of Neuqu n in the cities of Neuqu n City and San Mart n de los Andes. The Company has unrestricted rights to increase the number of gaming positions at both locations. CAMPTOWN GREYHOUND RACING, INC. On July 7, 1994, the Company and Alliance Gaming Corp. (formerly United Gaming) formed two joint ventures ("KGP" and "KFP") to loan Camptown Greyhound Racing, Inc. ("Camptown') approximately $3.2 million. On October 28, 1994, KFP executed a loan agreement with Boatmen's Bank of Kansas City ("Boatmen's") whereby Boatmen's loaned $3.2 million to Camptown. KFP had collateralized the loan with a $3.1 million certificate of deposit (one-half funded by each party to the joint venture) and, in addition, guaranteed the repayment of the loan. In January 1996, Camptown filed for protection under Chapter 11 of U.S. Bankruptcy Code. KFP has satisfied its obligation under the guarantee, and now owns a second mortgage on Camptown's facility in Frontense, Kansas in the amount of $3,205,000, plus accrued interest. The Company has taken steps to protect its investment and rights to operate gaming devices at the Camptown facility, if and when such operation is legalized. The Company's $1,580,000 share of the amount loaned by KFP to Camptown was expensed in 1995. In January 1997, the Company transferred all of its interest in KGP and KFP to Alliance Gaming Corp., an unrelated third party, except for a deminimusdiminimums interest. The consideration for the transfer was Alliance Gaming Corp.'s agreement to assume certain current financial obligations and to repay the Company all of its cost in the project if they are successful in commencing gaming operations at Camptown. LAKES REGIONAL GREYHOUND PARK. In May 1995, the Company entered into an agreement with Lakes Regional Greyhound Park ("LRGP"). Under the terms of the Agreement, the parties intend to form an entity to pursue a gaming development at LRGP's pari-mutual track in Belmont, New Hampshire. The entity will be equally owned by the Company and LRGP and the Company will manage gaming operations. Under the agreement the Company is obligated to provide up to $4 million in funding to the entity of which the payment of $3 million is subject to certain contingencies including the passage of legislation permitting gaming at racetracks in New Hampshire. There is no assurance that the Company will have the funds to pursue such gaming opportunity. F-26 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): PROMOTIONAL SERVICES. In April 1993, the Company entered into an agreement with Casino Magic Vacations ("CMV"), an unrelated company, to provide promotional services primarily related to customer travel arrangements to the Company's Gulf Coast properties. The Company's costs consisted of air charter fees, CMV commissions, compensation, and monthly operating expense reimbursements as provided for under the agreement. The Company incurred promotional costs under the agreement of approximately $12,000,000 and $6,100,000 for the years ended December 31, 1994 and 1993, respectively. In October 1994, the Company notified CMV of its intent to reduce costs by running the air charter promotion in-house and began negotiations with CMV to terminate the agreement. The Company filed suit against CMV in December 1994. In August 1995, the Company was awarded $2.2 million, of which $1 million has been paid. There is no assurance that the Company will collect the balance of this award; accordingly, this receivable has been fully reserved. GREECE MANAGEMENT AGREEMENTS In June 1994, the Company negotiated the terms of definitive agreements pursuant to which it would acquire a 49% interest in a proposed gaming casino, Porto Carras, Porto Carras is located at the Porto Carras resort in northeastern Greece. The Company invested approximately $20 million for its 49% interest. The remaining 51% is owned by Touristiki Georgiki Exagogiki, a Greek company ("TGE"). Under the terms of the agreement, the Company managed the hotel and casino for a fee equal to 2.5% of hotel gross revenues and 10% of casino net operating income. The Company also received a royalty of 2% of casino gross revenues. In December 1996 the Company sold its interest in Porto Carras and terminated all management and royalty agreements associated with Porto Carras. In 1995, the Company entered into an agreement with a consortium of Greek companies to manage and operate an American-style casino to be constructed in Xanthi, in the Thrace region of Northeastern Greece which is located near the borders of Bulgaria and Turkey. The Tourism Ministry of Greece has awarded a license to build and operate the casino to members of the consortium. The initial phase of the casino operation opened on December 1, 1995. The Company terminated this agreement in December 1996. F-27 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): LAND ACQUISITIONS. The Company has acquired land and options to purchase land in order to enhance the Company's developmental and licensing procurement potential in various States. However, the Company's ability to develop additional gaming properties will be subject to its ability to raise additional debt or equity financing. While the Company believes that such arrangements can, and will, be made, there are no assurances that the Company will be able to procure such licensing, nor be able to raise additional debt or equity financing on acceptable terms. On July 13, 1993, the Company executed an option agreement, though the year 2000, to acquire certain parcels of land in Alabama which may be suitable for casino gaming. The total price to exercise the option is $15,000,000 and is subject to an escalation index. The option includes provisions to pay 4.9% of income before income taxes of all casinos and related business conducted by the Company on the optioned property for 10 years and an option to purchase 200,000 shares of the Company's stock at an exercise price of $5.8125 per share. Aggregate payments made of $1,210,000 are included in options and land deposits at December 31, 1996. On August 31, 1993, the Company assigned to the Company's Chairman (then President and Chief Executive Officer) the Company's rights under a purchase agreement for the acquisition of approximately 3.5 acres of unimproved land in downtown St. Louis, Missouri. The purchase agreement was entered into by the Company on June 16, 1993 and provided the Company the right to purchase the land at a price of $3,550,000. In consideration for the Company's assignment of its rights to purchase the land, the Company's Chairman acquired the land and granted to the Company an option to repurchase the land. On November 30, 1993 the Company exercised its option to purchase the land at a cost of $3,633,176. No gain or loss was recognized on the sale to the Company. At December 31, 1996, approximately $4,000,000 is included in property held for sale related to this transaction. In December 1993, the Company obtained an option at a cost of $77,500 to purchase additional land and real estate located in Downtown St. Louis, Missouri at a cost of $812,500, less the option price. In February 1994, the Company exercised its option and purchased the property in March 1994. At December 31, 1996, $820,421 is included in property held for sale related to this transaction. F-28 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): LAND ACQUISITIONS (CONTINUED). On January 11, 1994, the Company executed two, $20,000 option agreements to acquire land in Indiana at a cost of $6,000 per acre on approximately 40 acres, and $7,000 per acre on approximately 119 acres, or $240,000 and $833,000, respectively, less the option payments. The options expire (i) one year from the date of the agreements or (ii) on the date the Company receives a gaming license from the Indiana Gaming Commission, whichever term is longer. In February 1995, the Company paid $6,000 for a two-year option to purchase additional land in Indiana at a cost of $7,000 per acre on approximately 35 acres or $245,000, less the option payment. Aggregate payments of $46,000 are included in options and land deposits at December 31, 1996 with respect to the Indiana options. On February 7, 1994, the Company paid $150,000 for a 90-day option to purchase property in Pennsylvania at a cost of $2,200,000. Under the agreement, additional land may be conveyed at $40,000 per acre in addition to the original purchase price. The option was extended for eleven additional 90-day periods at $50,000 for two 90-day periods, $62,500 for three 90-day periods, $75,000 for three 90-day periods, and $87,500 for three 90-day periods. Aggregate payments of $512,500 previously made under this option agreement were expensed in 1996 and the options were cancelled. On March 12, 1994, a wholly-owned subsidiary of the Company acquired an option to purchase certain property located in Boston, Massachusetts for $60,000,000. In December 1995, the Company abandoned all efforts to pursue gaming at this site and expensed $8,986,722 in costs associated with this property. This includes the discounted value of future option payments to be made until the year 1999. In June 1994, the Company purchased property in Pennsylvania at a total cost of approximately $2,000,000 which is included in property held for development at December 31, 1996 and 1995. In addition to the basic purchase price of the property, the agreement of sale requires the Company to pay the seller $5,000,000 if the Company obtains a license to operate a casino gambling operation on the premises at any time before May 31, 1999. F-29 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): OPTION TO LEASE REAL ESTATE. On December 11, 1993, the Company entered into an agreement for an option to lease certain property in Indiana. The agreement requires advance payments of $500,000 in each of four years, and upon exercise, would allow the Company to lease the subject property at $1,000,000 per year for twenty years. At December 31, 1996, aggregate payments of $2,000,000 under this agreement are included in options and land deposits. GULF COAST DEVELOPMENT. Future renewals of Casino Magic-Biloxi's Mississippi gaming license are conditioned upon the completion of a hotel on or near the premises, or in the alternative, the completion of a hotel and golf course at Casino Magic-BSL. Both projects are included in the Company's plan for future capital projects. CONSULTING AGREEMENTS: SISSETON-WAHPETON DAKOTA NATION. In early 1996, the Company, through a wholly-owned subsidiary entered into a consulting agreement with Sisseton-Wahpeton Dakota Nation ("Sisseton"). The Company provided consulting services to Sisseton during the development and opening of a temporary casino facility, on Tribal land, for a fee of $350,000. The agreement also specifies that the Company provide consulting services to Sisseton after the opening of the temporary facility for a period of two years and includes unlimited one year extensions. The fee for these services is based upon gross revenues of the hotel and casino facility and can range from $0 to $4,500,000 per year. No fees were earned in 1996 after the opening of the temporary casino facility. (See Note 2 for related note receivable.) 10. SHAREHOLDERS' EQUITY: RESTRICTED SHARES Prior to the initial public offering, the Company sold an additional 900,000 shares of common stock to outside investors at $1.17 per share. Concurrent with the sale, 450,000 shares of common stock held by the Company's Chairman and principal shareholder and an employee of the Company were returned to the Company for cancellation. The net effect of these transactions was an increase of 450,000 shares outstanding. In August and September 1994, the Company sold a total of 1,700,000 shares of common stock to foreign investors. The shares were issued pursuant to Regulation "S" as an exemption to the provisions under the United States Securities Act of 1933, as amended (the "Act"). Aggregate proceeds from the issuance, net of offering costs of $727,750, were $10,173,000. F-30 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SHAREHOLDERS' EQUITY:(CONTINUED): UNDESIGNATED SHARES: In January and February 1995, the Company sold an aggregate of 1,771,000 shares of common stock to foreign investors which were also issued pursuant to Regulation "S" as an exemption to the provisions under the Act. Aggregate proceeds from the issuance, net of offering costs of $534,195, were $8,320,805. Approximately 12,450,000 of the Company's outstanding shares of common stock were restricted as to the length of time the shares must be held before divestment and the quantities that can be traded when sold. Substantially all of the shares currently held became eligible for trading in limited quantities commencing after May 1994. UNDESIGNATED SHARES: The Board of Directors is authorized to determine, without shareholder approval, the rights, preferences and privileges of 2,500,000 authorized, but unused, undesignated shares. Accordingly, the dividend and liquidation rights of the shareholders of common stock may be subordinate to those of holders of undesignated shares, if and when such shares are designated and issued. WARRANT REGISTRATION: The Company registered up to 2,743,500 shares of common stock for offer and sale to the holders of outstanding warrants of the Company exercisable at $1.50 per share, and up to 1,110,000 shares of common stock to the holders of outstanding warrants of the Company exercisable at $2.75 per share. In February 1995, the Company filed a post effective amendment to remove from registration 980,000 remaining shares of common stock issuable to holders of the foregoing outstanding warrants, at an exercise price of $2.75. As of December 31, 1995, 2,873,500 warrants were exercised resulting in aggregate proceeds of $4,381,420, net of registration costs and expenses of $91,330. F-31 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK AND EMPLOYEE BENEFIT PLANS: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," effective for the Company for 1996. Under SFAS 123, companies can either record expense based on the fair value of stock based compensation upon issuance or elect to remain under the current "APB Opinion No. 25" method whereby no compensation cost is recognized upon grant if certain requirements are met. The Company is continuing to account for its stock-based compensation plans under APB Opinion No. 25. However, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 are presented below. INCENTIVE STOCK OPTION PLAN: In 1992, the Company adopted an incentive stock option plan (the "Plan") in which directors, officers, and key employees of the Company participate. The Company has registered 3,700,000 shares of the Company's common stock currently authorized for issuance under the Plan pursuant to stock options. Under the Plan, options may be granted for a term of up to ten years, except for options granted to owners of 10% or more of the Company's outstanding common stock, which must be exercised within five years from the date the option is granted. Vesting of all options granted is contingent on continued employment with the Company prior to the exercise date. The option prices are determined by a stock option committee composed of members of the Board of Directors (the "Stock Option Committee") and cannot be less than the greater of (i) the fair market value of the shares on the date the option is granted or (ii) the average of the closing sales prices for the Company's common stock for the thirty (30) consecutive trading days commencing forty-five (45) trading days prior to the date of grant, or less than 110% of the fair market value of the shares in the case of 10% or more shareholders. Under the plan, options to purchase a total of 1,502,600, 1,799,730, and 2,191,420 shares of common stock were outstanding as of December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, 867,564 incentive stock options had been exercised for an aggregate proceeds of $1,086,283. The plan has a provision which provides for employees to exchange existing stock held for the exercise price of the option 5. Under this provision, exercies of 66,231 shares in 1996 are shown in the table below which are not reflected in the statement of shareholder's equity as the exchange resulted in no net increase in common shares outstanding. REPRICING OF OPTIONS: Upon consideration of recommendations of the Company's management, the Stock Option Committee and the Board of Directors determined that it was in the best interests of the Company to reduce the exercise price of incentive stock options, as well as options granted outside of the Plan, so that the exercise price would more closely reflect the current market price of the Company's common stock and therefore assist in retaining the interest of such employees, officers and consultants in the advancement of the Company's business and rewarding them should such advancement enhance the market value of the Company's common stock. On July 25, 1996, on January 18, 1994 and on July 27, 1994, the Stock Option Committee and the Board of Directors reduced the exercise price of incentive stock options and nonincentive stock options to $3.63, $14.75 and $7.20 per share, respectively. F-32 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK AND EMPLOYEE BENEFIT PLANS (CONTINUED): OPTIONS GRANTED OUTSIDE OF THE PLAN: During February and March 1994, the Company granted options outside the plan for 44,000 shares of common stock, to each of three executive officers, that vest over a period of four years, at exercise prices ranging from $14.25 to $15.75 per share. These options were repriced to $7.20 per share in July 1994 and have been canceled as of December 1995 due to the officers not fulfilling their obligations under the option agreements. In April 1994, the Company granted options outside the Plan for 200,000 shares of common stock to the Sisseton-Wahpeton Dakota Nation (the "Tribe") at an exercise price of $15.30 per share. The options are exercisable in annual increments of 20,000 shares each commencing on April 21, 1995 subject to approvals and the continuation of gaming as contemplated by a consulting agreement between the Tribe and a wholly-owned subsidiary of the Company. In July 1994, the Company granted options outside the Plan for 15,000 and 75,000 shares, respectively to each of two outside directors, exercisable at a price of $7.20 per share. The options are exercisable in the same manner as those previously granted to the other directors. In March 1994, the Company granted 25,000 restricted shares of common stock, to each of three executive officers, that vest over a period of four years. Unearned compensation of $1,190,625 had been computed at $15.875 per share, the market value at the date of grant. During 1995, 16,250 shares were vested and the remaining 58,750 have been canceled as a result of officers not fulfilling their obligations under the related agreements. As a result of this cancellation, the Company reversed into income amortization of unearned compensation of $146,072 recognized in 1994. In June 1995, the Company granted options outside the Plan for 200,000 shares of common stock to Atlantic Land Corp. ("Atlantic") at an exercise price of $5.8125 per share. These options were granted as partial compensation for the exclusive option to purchase land. The options were fully exercisable as of June 26, 1995. In November 1995, the Company granted 25,000 restricted shares of common stock, to an executive officer, that vest over a period of four years. Unearned compensation of $101,563 has been computed at $4.063 per share, the market value at the date of grant, and will be amortized through November 1999. In December 1995, the Company granted options outside the plan for 490,000 shares of common stock to an executive officer, that vest over a period of five years, at an exercise price of $4.75 per share. The options were granted at above market prices. In May 1996, the Company granted 25,000 restricted shares of common stock, to an executive officer, that vest over a period of four years. Unearned compensation of $135,938 has been computed at $5.438 per share, the market value at the date of grant, and will be amortized through May 2000. F-33 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK AND EMPLOYEE BENEFIT PLANS (CONTINUED): ADDITIONAL INFORMATION RELATING TO OPTION ACTIVITY (CONTINUED): On December 31, 1996, 532,850 of a total of 1,345,000 options granted outside the Plan were exercisable, and 20,000 options have been exercised to date. On December 31, 1996, 1,091,785 of a total of 2,841,080 options granted under the Plan were exercisable, and 1,310,900 shares were available for future grants under the Plan. Total compensation expense (income), net of recoveries, of $188,580, ($436,571), and $770,180 was recognized for the years ended December 31, 1996, 1995 and 1994, respectively. Compensation expense for the year ended December 31, 1995 consisted of $65,017 of compensation expense reduced by $501,588 of compensation expense recoveries from prior years as a result of optionees not fulfilling their obligations under the related agreements. A summary of the status of the Company's stock options, non-qualified options, and warrants as of December 31, 1996 and 1995 and changes during the years ended on those dates is presented below (shares in thousands): December 31, 1996 1995 . Wgtd. Avg. Wgtd. Avg. Shares Exer. Price Shares Exer. Price Outstanding at beginning of year 5,108 $7.60 4,943 $7.42 Granted 1,695 3.63 950 5.06 Exercised (424) 1.72 (344) 1.43 Canceled (2,482) 12.00 (441) 4.61 Outstanding at end of year 3,897 $3.74 5,108 $7.60 Options exercisable at end of year 2,655 $3.11 3,072 $9.12 Options available for future grant under the plan 1,311 1,583 Weighted average fair value of options granted during the year $1.11 $1.28 The fair value of each option granted during the periods presented is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 20%, (3) risk-free interest rates of 5.2%, 5.26%, 5.47% and 5.5%, and (4) expected life of 2.25, 4.5, 6.75, and 9 years. The following table summarizes information about stock options and warrants outstanding at December 31, 1996: F-34 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK AND EMPLOYEE BENEFIT PLANS (CONTINUED): Options Outstanding Options Exercisable Range of Number Wgtd. Avg. Wgtd. Avg. Number Wgtd. Avg. Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/96 Contr. Life Price at 12/31/96 Price $0.00- $1.17 86,000 0.58 $1.17 39,750 $1.17 1.42- 1.42 600,000 0.49 1.42 600,000 1.42 1.67- 1.67 220,000 0.76 1.67 220,000 1.67 2.75- 2.75 980,000 0.81 2.75 980,000 2.75 2.83- 2.83 48,000 0.58 2.83 34,500 2.83 3.63- 3.63 1,393,600 4.35 3.63 407,785 3.63 5.81- 5.81 200,000 5.48 5.81 200,000 5.81 7.20- 7.20 119,100 3.67 7.20 82,600 7.20 7.35- 7.35 50,000 2.88 7.35 50,000 7.35 15.30- 15.30 200,000 7.30 15.30 40,000 15.30 $0.00-$15.30 3,896,700 2.75 $3.74 2,654,635 $3.11 Had compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and net earnings (loss) per common share for the years ended December 31, 1996 and 1995 would approximate the pro forma amounts below (in thousands, except per share data): December 31, 1996 1995 As Reported Pro Forma As Reported Pro Forma Net Income (Loss) $(31,589) $(32,344) $(10,292) $(11,131) Earnings per common share Primary $(0.88) $(0.90) $(0.30) $(0.33) Fully diluted $(0.89) $(0.91) $(0.31) $(0.33) The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. PENSIONS AND OTHER BENEFITS: The Company currently sponsors no post-retirement or post-employment employee benefit plans. CASINO MAGIC CORP. 401(K) PLAN: In July 1993, the Company adopted The Casino Magic Corp. 401(k) Plan (the "401(k) Plan"), a defined contribution plan covering all eligible employees of the Company who have one year of service and are age twenty-one or older. The 401(k) Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Each year, participants may contribute up to 15% of pretax annual compensation, as defined in the 401(k) Plan. The Company's matching and/or additional contributions may be contributed at the discretion of the Company's Board of Directors. The Company's contributions to the 401(k) Plan are allocated to employed participants' accounts as of the last day of the plan year. Total employer contributions to the 401(k) Plan at December 31, 1996, 1995 and 1994 were approximately $176,000, $177,000 and $145,000, respectively. F-35 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCENTIVE STOCK OPTION PLAN:In 1992, the Company adopted an incentive stock option plan (the "Plan") in which directors, officers and key employees of the Company participate. The Company has registered 3,700,000 shares of the Company's common stock currently authorized for issuance under the Plan pursuant to stock options. Under the Plan, options may be granted for a term of up to ten years, except for options granted to owners of 10% or more of the Company's outstanding common stock, which must be exercised within five years from the date the option is granted. Vesting of all options granted is contingent on continued employment with the Company prior to the exercise date. The option prices are determined by a stock option committee composed of members of the Board of Directors (the "Stock Option Committee") and cannot be less than the greater of (i) the fair market value of the shares on the date the option is granted or (ii) the average of the closing sales prices for the Company's common stock for the thirty (30) consecutive trading days commencing forty-five (45) trading days prior to the date of grant, or less than 110% of the fair market value of the shares in the case of 10% or more shareholders. Under the plan, options to purchase a total of 1,799,730, 2,191,420 and 2,138,250 shares of common stock were outstanding as of December 31, 1995, 1994 and 1993, respectively. As of December 31, 1995, 443,814 incentive stock options had been exercised for an aggregate proceeds of $626,216. In May 1993, vesting schedules for some of the Plan participants were modified to allow the aggregate fair market value (determined at the time of the grant of the option) of the number of shares of common stock purchasable for the first time during any calendar year not to exceed the $100,000 limitation imposed by Section 422(d) of the Internal Revenue Code. OPTIONS GRANTED OUTSIDE OF THE PLAN: On May 14, 1993, the Company granted options outside the Plan for 60,000 shares of common stock to an outside Director and for 60,000 shares of common stock to a consultant currently exercisable at $7.20 per share (market value at date of reprice, originally granted at $20.83 per share). The 60,000 options granted to the director are exercisable in increments of 12,000 shares each after the first, second, third and fourth years following this election as director, so long as he consents to serve in such capacity. The options will terminate at the end of the fifth year following his initial election as a member of the Board of Directors. The 60,000 options granted to the consultant are fully exercisable, and will terminate in May 1997. On April 21, 1993, the Company granted options outside the Plan for 60,000 shares of common stock to each of two consultants in connection with an agreement to develop, administer and operate air charter services performed under the name "Casino Magic Vacations." The options were exercisable at $8.33 per share over a four-year period through October 1997. Unearned compensation of $670,000 had been computed as the difference between the $8.33 per share exercise price and the $13.92 per share market value at the date of the grant. These options were canceled in 1995 due to the consultants not fulfilling their obligations under the option agreements. As a result of this cancellation, in 1995 the Company reversed into income amortization of unearned compensation of $265,208 and $72,584 recognized in 1994 and 1993, respectively. During February and March 1994, the Company granted options outside the plan for 44,000 shares of common stock, to each of three executive officers, that vest over a period of four years, at exercise prices ranging from $14.25 to $15.75 per share. These options were repriced to $7.20 per share in July 1994 and have been canceled as of December 1995 due to the officers not fulfilling their obligations under the option agreements. In April 1994, the Company granted options outside the Plan for 200,000 shares of common stock to the Sisseton-Wahpeton Dakota Nation (the "Tribe") at an exercise price of $15.30 per share. The options are exercisable in annual increments of 20,000 shares each commencing on April 21, 1995 subject to approvals and the continuation of gaming as contemplated by a consulting agreement between the Tribe and a wholly-owned subsidiary of the Company. In July 1994, the Company granted options outside the Plan for 15,000 and 75,000, respectively to each of two outside directors, exercisable at a price of $7.20 per share. The options are exercisable in the same manner as those previously granted to the other directors. In March 1994, the Company granted 25,000 restricted shares of common stock, to each of three executive officers, that vest over a period of four years. Unearned compensation of $1,190,625 had been computed at $15.875 per share, the market value at the date of grant. During 1995, 16,250 shares were vested and the remaining 58,750 have been canceled as a result of officers not fulfilling their obligations under the related agreements. As a result of this cancellation, the Company reversed into income amortization of unearned compensation of $146,072 recognized in 1994. In June 1995, the Company granted options outside the Plan for 200,000 shares of common stock to Atlantic Land Corp. ("Atlantic") at an exercise price of $5.8125 per share. These options were granted as partial compensation for the exclusive option to purchase land. The options are fully exercisable as of June 26, 1995. In November 1995, the Company granted 25,000 restricted shares of common stock, to an executive officer, that vest over a period of four years. Unearned compensation of $101,563 has been computed at $4.063 per share, the market value at the date of grant, and will be amortized through November 1999. OPTIONS GRANTED OUTSIDE OF THE PLAN: In December 1995, the Company granted options outside the plan for 490,000 shares of common stock to an executive officer, that vest over a period of five years, at an exercise price of $4.75 per share. The options were granted at above market prices. REPRICING OF OPTIONS: Upon consideration of recommendations of the Company's management, the Stock Option Committee and the Board of Directors determined that it was in the best interests of the Company to reduce the exercise price of incentive stock options, as well as options granted outside of the Plan, so that the exercise price would more closely reflect the current market price of the Company's common stock and therefore assist in retaining the interest of such employees, officers and consultants in the advancement of the Company's business and rewarding them should such advancement enhance the market value of the Company's common stock. On January 18, 1994 and on July 27, 1994, the Stock Option Committee and the Board of Directors reduced the exercise price of incentive stock options and nonincentive stock options to $14.75 and $7.20 per share, respectively. ADDITIONAL INFORMATION RELATING TO OPTION ACTIVITY (CONTINUED): At December 31, 1995, 246,000 of a total of 1,320,000 options granted outside the Plan were exercisable, and 20,000 options have been exercised to date. At December 31, 1995, 652,790 of a total of 1,795,980 options granted under the Plan were exercisable, and 1,904,020 shares were available for future grants under the Plan. Unearned compensation, originally in the amount of $457,500, computed as the difference between the exercise price of the options and the initial public offering price (market value at the date of grant), is being amortized through July 1996. Total compensation expense (income), net of recoveries, of ($436,571), $770,180 and $238,437 was recognized for the years ended December 31, 1995, 1994 and 1993, respectively. Compensation expense for the year ended December 31, 1995 consisted of $65,017 of compensation expense reduced by $501,588 of compensation expense recoveries from prior years as a result of optionees not fulfilling their option agreements. ADDITIONAL INFORMATION RELATING TO OPTION ACTIVITY (CONTINUED): Option price Proceeds Options per share on exercise Outstanding at December 31, 1992 1,950,000 $ 3,072,500 Granted: Officers and key employees 441,000 $6.83 -$20.83 6,548,750 Consultants 180,000 $8.33 -$20.83 2,250,000 Non-employee Directors 60,000 $20.83 1,250,000 Canceled or expired: Officers and key employees (12,750) $1.67 (21,250) Outstanding at December 31, 1993 2,618,250 13,100,000 Granted: Officers and key employees 1,484,800 $7.20 -$16.00 16,302,229 Consultants 120,000 $7.20 -$14.75 1,317,000 Non-employee Directors 210,000 $7.20 -$14.75 1,965,000 Others (Sisseton-Wahpeton) 200,000 $15.30 3,060,000 Canceled or expired: Officers and key employees (1,144,380) $1.17 -$20.83 (17,128,217) Consultants (120,000)$14.75 -$20.83 (2,135,000) Non-employee Directors (120,000)$14.75 -$20.83 (2,135,000) Exercised: Officers and key employees (155,250) $1.17 -$2.83 (259,000) Outstanding at December 31, 1994 3,093,420 14,087,012 Granted: Officers and key employees 725,000 $4.75 -$5.30 3,518,000 Others (Atlantic Land Corp.) 200,000 $5.81 1,162,600 Canceled or expired: Officers and key employees (473,876) $1.17 -$7.20 (2,639,303) Consultants (120,000) $8.33 (999,960) Exercised: Officers and key employees (288,564) $1.17 -$2.83 (345,966) Non-employee Directors (20,000) $1.67 (33,333) Outstanding at December 31, 1995 3,115,980 $ 14,749,050 PENSIONS AND OTHER BENEFITS: The Company currently sponsors no post-retirement or post-employment employee benefit plans. CASINO MAGIC CORP. 401(K) PLAN: In July 1993, the Company adopted The Casino Magic Corp. 401(k) Plan (the "401(k) Plan"), a defined contribution plan covering all eligible employees of the Company who have one year of service and are age twenty-one or older. The 401(k) Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Each year, participants may contribute up to 15% of pretax annual compensation, as defined in the 401(k) Plan. The Company's matching and/or additional contributions may be contributed at the discretion of the Company's Board of Directors. The Company's contributions to the 401(k) Plan are allocated to employed participants' accounts as of the last day of the plan year. Total employer contributions to the 401(k) Plan at December 31, 1996, 1995 and 1994 were approximately $176,000, $177,000 and $145,000, respectively. In October 1995, the FASB issued Staement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," effective for the Company for 1996. Under SFAS 123, companies can either record expense based on the fair value of stock based compensation upon issuance or elect to remain under the current "APB Opinion No. 25" method whereby no compensation cost is recognized upon grant if certain requirements are met. The Company is continuing to account for its stock-based compensation plans under APB Opinion No. 25. However, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 are presented below. In 1992, the Company adopted an incentive stock option plan (the "Plan") in which directors, officers, and key employees of the Company participate. The Company has registered 3,700,000 shares of the Company's common stock currently authorized for issuance under the Plan pursuant to stock options. Under the Plan, options may be granted for a term of up to ten years, except for options granted to owners of 10% or more of the Company's outstanding common stock, which must be exercised within five years from the date the option is granted. Vesting of all options granted is contingent on continued employment with the Company prior to the exercise date. The option prices are determined by a stock option committee composed of members of the Board of Directors (the "Stock Option Committee") and cannot be less than the greater of (i) the fair market value of the shares on the date the option is granted or (ii) the average of the closing sales prices for the Company's common stock for the thirty (30) consecutive trading days commen cing forty-five (45) trading days prior to the date of grant, or less than 110% of the fair market value of the shares in the case of 10% or more shareholders. A summary of the status of the Company's stock options as of December 31, 1996, 1995, and 1994 and changes during the years ended on those dates is presented below (shares in thousands): 1996 1995 Wgtd. Avg. Wgtd. Avg. Shares Exer. Price Shares Exer. Price Outstanding at beginning of year 5,106 $7.60 4,943 $7.42 Granted 1,695 3.63 950 5.06 Exercised (424) 1.72 (344) 1.43 Canceled (2,482) 12.00 (442) 4.61 Outstanding at end of year 3,897 $3.74 5,108 $7.60 Options exercisable at year-end 2,655 3,072 Options available for future grant Weighted average fair value of options granted during the year The fair value of each option granted during the periods presented is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 20%, (3) risk-free interest rate of 5.5%, and (4) expected life of 9 years. The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable Range of Number Wgtd. Avg. Wgtd. Avg. Number Wgtd. Avg. Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/96 Contr. Life Price at 12/31/96 Price $0 - $1.42 636,000 0.50 $1.40 636,000 $1.40 1.67- 1.67 220,000 0.76 1.67 220,000 1.67 2.75- 2.75 980,000 0.81 2.75 980,000 2.75 2.83- 2.83 48,000 0.58 2.83 34,500 2.83 3.63- 3.63 1,393,600 4.35 3.63 407,785 3.63 5.81- 15.30 569,100 5.52 9.57 372,600 7.35 $0 -$15.30 3,846,700 2.75 $3.74 2,650,885 $3.11 Had compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and net earnings (loss) per common share for the years ended December 31, 1996 and 1995 would approximate the pro forma amounts below (in thousands, except per share data): December 31, 1996 1995 As Reported Pro Forma As Reported Pro Forma Net Income (Loss) $(31,859) $(32,344) $(10,292) $(10,189) Earnings per common share Primary $(0.88) $(0.90) $(0.30) $(0.30) Fully diluted $(0.89) $(0.91) $(0.31) $(0.31) The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 12. WRITE-OFF OF CAPITALIZED COSTS RELATING TO INACTIVE DEVELOPMENTS In 1995 and 1994 the Company decided to terminate development efforts with respect to specific properties and jurisdictions. Because of this determination, significant capitalized amounts relating to land, land options, joint ventures and construction projects were written-off or revalued. In addition, certain consulting agreements that were entered into to pursue gaming opportunities in new jurisdictions were terminated. The amounts expensed in the fourth quarter of 1995 and 1994 were $14,542,164 and $5,479,164 respectively. 13. ADVERTISING The company expenses all production and communication costs of advertising as incurred. Advertising expense was approximately $5,470,000, $4,472,000, and $2,650,000 for years ended December 31, 1996, 1995, and 1994, respectively. 14. RELATED PARTY TRANSACTIONS: During the years ended December 31, 1996, 1995, and 1994, the Company incurred $1,346,861, $353,888, and $1,874,747, respectively, for architectural and design services provided by an architectural firm that is wholly-owned by an outside director and shareholder of the Company. During the years ended December 31, 1996, 1995, and 1994, the Company incurred $154,028, $388,944, and $566,072, respectively, for legal services provided by a law firm in which an outside director of the Company is a shareholder. During the year ended December 31, 1996 and 1995, the Company incurred $219,800, and $387,422, respectively, for charter plane rentals provided by a company that is wholly owned by the Company's Chairman. The Company purchased a jet airplane in February 1996 from the Company's Chairman. The Company paid $1.7 million for the airplane which approximated fair value at the date of purchase. 15. INCOME TAXES: Pretax financial income (loss) generated from domestic and foreign sources was as follows: DECEMBER 31, 1996 1995 1994 Domestic $ (15,322,992) $ (15,336,975) $ (3,218,490) Foreign (20,942,537) 1,813,932 - -- Total pretax loss $ (36,265,529) $ (13,523,043) $ (3,218,490) Provision (benefit) for income taxes for the years ended December 31, 1996, 1995 and 1994 are as follows: DECEMBER 31, 1996 1995 1994 Federal and state current $ (4,253,704) $ (2,546,443) $ (2,616,095) Foreign current 827,548 1,099,816 -- Federal deferred 1,250,026 (1,221,514) 2,428,056 Foreign deferred -- (562,723) - -- Total provision $ (4,676,182) $ (3,230,864) $ (188,039) F-36 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. INCOME TAXES (CONTINUED): Components of deferred tax liabilities (assets) are as follows: DECEMBER 31, 1996 1995 Depreciation and amortization $ 9,535,121 $ 9,123,061 Foreign sourced income 257,949 - -- Gross deferred tax liabilities 9,793,070 9,123,061 Write-off of preopening costs (2,493,074) (1,087,058) Tax benefits related to non-statutory stock Options (504,000) (504,000) Accrued employee benefits and liabilities (1,433,067) (1,589,378) Abandoned development projects (10,229,821) (3,804,589) Foreign sourced income -- (562,723) Net operating loss carryforward (2,269,344) -- Other (798,293) (507,159) Gross deferred tax assets (17,727,599) (8,054,907) Less valuation allowance $ 8,201,290 $ - -- Net deferred tax liabilities $ 266,761 $ 1,068,154 The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from continuing operations as a result of the following differences: DECEMBER 31, 1996 1995 1994 Statutory U.S. tax rate (35%) $(12,692,935) $ (4,733,065) $ (1,126,472) Increase (decrease) in rates resulting from: Expenses which were non-deductible for tax purposes 357,805 733,876 985,816 Foreign taxes 827,548 1,099,816 -- Valuation allowance 8,201,290 -- -- State tax benefit (802,174) -- -- Other (577,716) (331,491) (47,383) Effective tax rate ((13%), (24%) and (6%), respectively) $ (4,676,182) $(3,230,864) $ (188,039) The valuation allowance against deferred tax assets was recorded in recognition of operating losses incurred by the Company for the last three years. Mississippi State taxes were offset by a tax credit for state gaming taxes based on gross revenues realized by Casino Magic-BSL and Casino Magic-Biloxi. The credit is the lesser of the annual total gaming taxes paid or the state income tax. Credit carry-forwards are not permitted. Louisiana State taxes do not allow for an offset of state gaming taxes based on gross revenues realized by Louisiana. F-37 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. GEOGRAPHICAL DISTRIBUTION OF OPERATIONS: The following represents the geographical distribution of the Company: (IN THOUSANDS) 1996 1995 1994 Revenues: United States $161,292 162,415 185,018 Europe 1,910 1,479 -- South America 15,885 13,084 -- General Corporate and non-operating companies 1,191 745 - -- $180,278 177,723 185,018 Net Income (Loss): United States $ 8,999 17,478 23,623 Europe (1) (12,753) (1,254) 104 South America 2,409 1,219 -- General Corporate and non-operating companies (2) (30,244) (27,735) (26,757) $(31,589) (10,292) (3,030) Identifiable Assets: United States $315,153 172,746 168,681 Europe 221 21,963 17,452 South America 12,641 15,498 13,289 General Corporate and non-operating companies 45,836 58,224 53,201 $373,851 268,431 252,623 (1) Includes equity income (loss) from Porto Carras Casino SA. (2) Includes total interest expense on bonds issued by Casino Magic Finance Corp. F-38 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" requires disclosure of an estimate of the fair value of certain financial instruments. The carrying amounts and fair values of the Company's financial instruments at December 31, 1996 are as follows: CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE Cash and cash equivalents (Including restricted cash) 34,546 34,546 Accounts receivable, trade, aircharter, other, net 2,099 2,099 Notes receivable 4,910 4,910 Notes payable and current maturities of long-term debt and long-term debt 262,910 277,910 The following methods and assumptions were used by the Company in estimating its fair value disclosure: Cash and cash equivalents, accounts receivable, trade, aircharter, other, net. The carrying amount reported on the consolidated balance sheet approximates its fair value because of the short naturematurity of these instruments. Notes receivable. This is a long-term note recievable from an Indian Tribe. The fair value of the note approximates market value based on the interest rate of the note and the collateral securing the note. Notes payable and current maturities of long-term debt and long-term debt. The fair value of the Company's debt either approximates its carrying value or is based upon the market price of the debt instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. F-39 CASINO MAGIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED): YEAR ENDED DECEMBER 31, 1996 (in thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Totals Revenue $43,125 $42,368 $43,271 $51,514 $180,278 Income from operations 5,565 6,473 5,355 (8,550) 8,843 Income (loss) before tax 2,352 2,456 (26,024) (15,050) (36,266) Net income (loss) 1,644 1,660 (20,683) (14,210) (31,589) Earnings (loss) per share: Primary 0.05 0.05 (0.57) (0.40) (0.88) Fully-diluted 0.05 0.05 (0.57) (0.40) (0.89) YEAR ENDED DECEMBER 31, 1995 (in thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Totals Revenue $43,169 $45,185 $47,518 $41,851 $177,723 Income from operations 4,755 2,654 8,225 (10,863) 4,771 Income (loss) before tax 666 (2,258) 5,452 (17,383) (13,523) Net income (loss) 322 (1,597) 3,402 (12,419) (10,292) Earnings (loss) per share: Primary 0.01 (0.05) 0.10 (0.36) (0.30) Fully-diluted 0.01 (0.05) 0.10 (0.36) (0.31) NOTE: Earnings (loss) per share totals will note necessarily agree to the sum of the quarterly information. F-40 EX-10.104 2 EMPLOYMENT AGREEMENT KEN SCHULTZ EMPLOYMENT AGREEMENT THIS AGREEMENT is dated, made and entered into on March ____, 1997 and is effective as of the 25th day of July, 1996, by and between Casino Magic Corp., a Minnesota corporation (the "Company"), and David L. Paltzik (the "Employee"). RECITALS WHEREAS, the Company is desirous of obtaining the full-time services of the Employee: WHEREAS, Employee commenced his employment with the Company on June 25, 1996. WHEREAS, the Employee and the Company are each willing to enter into this employment agreement (the "Agreement'), all on the terms and subject to the conditions herein contained; and WHEREAS, Employee is desirous of receiving stock grants and options to purchase common stock in the company under the Company's Incentive Stock Option Play, which options and grants require the approval of the Company's Board of Directors and the Stock Option Committee, respectively; and WHEREAS, this Agreement is intended to supersede and take the place of all prior agreements and understandings concerning employment; . AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties agree as follows: 1. Employment of the Employee; Term (a) The Company agrees to and hereby does employ the Employee, and the Employee accepts such employment and agrees to discharge faithfully, diligently and to the best of Employee's abilities, the responsibilities of such employment on the terms and subject to the conditions herein provided. (b) The initial term of Employee's employment hereunder shall terminate on December 31, 1998 ("Initial Expiration Date"),unless terminated earlier as provided in Section 4. (c) Notwithstanding the foregoing, following the Initial Expiration Date, Employee's employment shall thereafter continue on an at will basis on the terms and conditions contained in this Agreement, provided, however, that all obligations of the Company and the rights of the Employee under Subsection 4(a) will terminate. 2. Duties of the Employee. During the term of Employee's employment with the Company hereunder, the Employee shall: (a) Devote substantially all of Employee's business time and attention necessary to carry out the duties of Employee's employment thereunder, applying Employee's best effort and skill for the benefit of the Company. (b) Act as Vice Presidentof Construction for the Company and perform such services and assume such duties and responsibilities as are assigned to Employee by the President, consistent with such office, all in accordance with the terms of this Agreement, the Articles of Incorporation and By-Laws of the Company. (c) Report directly to the President of the Company. 3. Compensation. As compensation and in consideration for the performance of services by the Employee and Employee's observance of all of the provisions of this Agreement, the Company agrees to pay or provide, and Employee agrees to accept, the following: (a) Salary. During the term of Employee's employment, the Company shall pay to the Employee, at least semi-monthly, a base salary at an initial annual rate of $200,000.00. The employee's base salary may be reviewed from time to time, but at least annually for increases as determined by the Company. (b) Benefits. During the term of Employee's employment, the Employee shag be entitled to three weeks of paid vacation per annum from and after Employee's employment start date, seven paid holidays annually, and three paid sick days annually. In addition, during the term of Employee's employment, the Employee shall be entitled to medical and hospitalization insurance or reimbursement, consistent with that provided to other salaried employees of the Company, or as may be established in a written policy by the Board of Directors. The Company further agrees to waive the 90-day eligibility period. (c) Business Expenses. The Company shall reimburse the Employee for business expenses reasonably incurred by the Employee in connection with the performance of Employee's duties hereunder, upon the presentation by Employee of receipts and itemized accounts of such expenditures in accordance with the rules and regulations of the Internal Revenue Code. Such expenditures shag be subject at all times to the prior approval of the President of the Company or his designee. Except for expenses previously approved by such officer or his designee, the Board of Directors of the Company may take such action as may be necessary to enforce the repayment to the Company by the Employee of any amounts reimbursed upon finding that such reimbursement was not made primarily for the purpose of advancing the legitimate interests of the Company. In lieu of direct payment by the Employee, the Company, by action of its Board of Directors, may withhold such disallowed amounts from future compensation of the Employee until the amount owed to the Company has been recovered. (d) Moving Allowance. Subject to submission of invoices and Company approval, the Company will reimburse Employee for the reasonable expenses incurred in moving his household goods to the Gulf coast area. (e) Bonus. In addition to the foregoing, Employee shall be entitled to participate in any executive bonus pool established by the Company. (f) Employment Bonus and Lump Sum Relocation Payment. Upon commencement of employment, Employee is to be paid the sum of $82,500.00, however, such sum shall be promptly returned to the Company if, prior to the anniversary of the Employee's initial year under this Agreement, Employee voluntarily terminates his employment with the Company or is terminated for "good cause" as set forth in Subsection 4(a). 4. Termination of Agreement. (a) Termination With Cause. The Company may terminate Employee's term of employment under this Agreement for "good cause" upon notice of such termination to the Employee. For purposes of this Agreement, "good cause" shall mean Employee's (i) failure or refusal to observe or perform any of the material provisions of this Agreement or any other written agreement with the Company, or to substantially perform any of the material duties required of Employee under this Agreement or any other written agreement with the Company, or (ii) commission of fraud, misappropriation, embezzlement or other acts of dishonesty, alcoholism, drug addiction or dependency, or conviction for any crime punishable as a felony or as a gross misdemeanor involving moral turpitude, which actions have a material adverse effect upon the Employee's ability to perform the duties which are assumed or assigned under Section 2 hereof, or which actions or occurrences are materially adverse to the interests of the Company, or (iii) unreasonable refusal or failure to faithfully perform the duties and responsibilities of Employee's employment hereunder or to comply with the directions of the President, his designee or the Board of Directors. Termination of Employee's employment for good cause under Subsection 4(a)(ii) above shall be effective upon notice. Termination of Employee's employment for good cause under Subsections 4(a)(i) or 4(a)(iii) shall be effective upon fourteen days' prior notice; provided that prior to the giving of such notice of termination, the Company shall notify Employee that a factual basis for termination for good cause termination such basis. (b) Termination with Notice. After the Initial Expiration Date, Employee's term of employment under this Agreement may be terminated by either party for any reason upon not less than 30 days' prior written notice. (c) Termination upon Death of Employee. This Agreement shall automatically terminate in the event of the Employee's death. (d) Termination If Employee Not Found Suitable by Mississippi Gaming Commission and Related Matters. Employee's position with the Company may require a finding of suitability by the Mississippi Gaming Commission or other state gaming commission, as the case may be. The Company will pay all investigative fees and costs associated with the Mississippi Gaming Commission or other state gaming commission suitability determinations. If the Employee is not found suitable by the Mississippi Gaming Commission or other gaming commission as the case may be, Employee's employment with the Company shall thereafter immediately terminate and this Agreement shall be deemed null and void. (e) Termination Obligations. In the event of a termination of the Employee's term of employment in accordance with Section 4, the Company shall have no further obligation to the Employee under this Agreement, and the Employee shall only be entitled to payment by the Company for all compensation accrued under this Agreement to such date of termination. However, such termination of the Employee's employment shall not terminate or extinguish the Employee's obligations under Sections 3 or 6 hereof (unless otherwise provided therein) or Employee's obligation or liability to pay to the Company any amounts owed to the Company the Employee, including, but not limited to, any amounts misappropriated or obtained by the Employee, without prejudice to any other rights or remedies of the Company at law or in equity. Notwithstanding the foregoing, in the event that the Employee's term of employment is terminated by the Company other than for "good cause" as provided under Subsection 4(a) prior to the Initial Expiration Date, the Company shall continue to pay to the Employee, at least semimonthly, base salary based on the annualized monthly base salary then being paid to Employee as of the date of termination) through the Initial Expiration Date. Employee and the Company acknowledge and agree that no part of any incentive compensation that is based on the Company's financial performance for a fiscal year, if any, is payable if Employee's employment is terminated for any reason prior to expiration of such fiscal year. (f) Severance Allowance. In the event Employee's term of employment is terminated by the Company pursuant to Subsections 4(b) or 4(d), Employee will be entitled to receive a severance allowance in an amount equal to six months' base salary (based on the annualized monthly base salary then being paid to Employee as of the date of termination) to be paid out over the six months following Employee's date of termination in at least semimonthly installments. No severance allowance will be payable to Employee if the Employee voluntarily resigns or otherwise terminates employment pursuant to Subsection 4(b). (g) Options and Grants. Notwithstanding any provision in this Agreement to the contrary, should the current President of the Company be replaced or terminated prior to the Initial Expiration Date, any stock options or grants given to Employee pursuant to an executed agreement between the Company and Employee shall promptly vest if, prior to the Initial Expiration Date: - (i) Employee is also replaced or terminated; or (ii) The duties of Employee with the Company or compensation from the Company changes in any material respect. Within ninety (90) days after the President is replaced, Employee makes a reasonable good faith determination that due solely to specified action or inaction of such replacement, he cannot effectively discharge the duties delineated herein. To be effective, such determination by Employee must be provided to the Company in a writing which sets forth the factual basis of such action or inaction by the replacement President. 5. Disclosure of Confidential Information. (a) Definition of Confidential Information. For purposes of this Agreement, "Confidential Information" means any information that is not generally known to the public that relates to the existing or reasonably foreseeable business of the Company which has been expressly or implicitly protected by the Company or which, from all of the circumstances, the Employee knows or has reason to know that the Company y intends or expects the secrecy of such information to be maintained. Confidential Information includes, but is not limited to, information contained in or relating to the customer lists, account lists, price lists, product designs, marketing plans or proposals, customer information, merchandising, selling, accounting, finances, know-how, trademarks, trade names, trade practices, trade secrets and other proprietary information of the Company. (b) Employee Shall Not Disclose Confidential Information. The Employee will not, during the term of Employee's employment or following the termination of Employee's employment with the Company, use, show, display, release, discuss, communicate, divulge or otherwise disclose Confidential Information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, without the prior written consent or authorization of the Company. (c) Scope. Employee's covenant in Subsection 5(b) to not disclose Confidential Information shall not apply to information which, at the time of such disclosure, may be obtained from sources outside of the Company, its agents, lawyers or accountants, so long as those sources did not receive the information directly or indirectly as the result of Employee's action. (d) Tide. All documents or other tangible or intangible property relating in any way to the business of the Company which are conceived or generated by Employee or come into Employee's possession during the employment period shall be and remain the exclusive property of the Company, and Employee agrees to return all such documents, and tangible and intangible property, including, but not limited to, all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, magnetic tapes, computer disks, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, customers, products, practices or techniques of the Company, and all other property of the Company, including, but not limited to, all documents which in whole or in part contain any Confidential Information of the Company which in any of these cases are in Employee's possession or under Employee's control, to the Company upon the termination of Employee's employment with the Company, or at such earlier time as the Company may request him to do so. (e) Compelled Disclosure. In the event a third party seeks to compel disclosure of Confidential Information by the Employee by judicial or administrative process, the Employee shall promptly notify the Board of Directors of the Company of such occurrence and furnish to such Board of Directors a copy of the demand, summons, subpoena or other process served upon the Employee to compel such disclosure, and will permit the Company to assume, at its expense, but with the Employee's cooperation, defense of such disclosure demand. In the event that the Company refuses to contest such a third party disclosure demand under judicial or administrative process, or a judicial order is issued compelling disclosure of Confidential Information by the Employee, the Employee shall be entitled to disclose such information in compliance with the terms of such administrative or judicial process or order. 6. Non-competition. (a) Restriction. Commencing on the date hereof and for so long as Employee continues to receive compensation under this Agreement (salary or severance), whether voluntarily or involuntarily and whether or not for good cause, Employee shall not, without the prior written consent of the Company, directly or indirectly, engage in, or assist any other person to engage in, any activity, whether as a proprietor, partner, joint venture, principal, employer, officer, agent, employee, consultant or beneficial or record owner (other than as an investor owning less than a 2% interest in an entity whose securities are regularly traded in a public market), and whether or not for compensation, that is competitive in any respect with the business of the Company within the States of Louisiana and Mississippi. For purposes of this Agreement, the "business of the Company" shall be any business in which the Company is engaged at the time of Employee's termination of employment or in which the Company was engaged within six months prior to such termination, including, but not limited to, a business involved in or relating to gambling casinos or gaming establishments. (b) Modification. In the event that any court of competent jurisdiction determines that the term, the business scope or geographic scope of the covenants contained in Subsection 6(a) is impermissible due to the extent thereof, said covenant shall be modified to reduce its terms, business scope or geographic scope, as the case may be, to the extent necessary to make said covenant valid, and said covenant shall be enforced as modified. (c) Non-Compete Consideration. As additional consideration for the Employee's observance of the non-compete covenant set forth in Subsection 6(a), the Company has granted to Employee incentive stock options to purchase shares of the Company's common stock. 7. Breach of Restrictive Covenants. (a) It is agreed that it would be difficult or impossible to ascertain the measure of damages to the Company resulting from any breach of Sections 5 or 6, and that injury to the Company from any such breach may be irremediable. In the event of a breach or threatened breach by the Employee of the provisions of Section 3, the Company shall be entitled to specific performance of Section 3 and may seek a temporary or permanent injunction to enjoin the Employee from breaching Sections 3, in addition to any other rights or remedies that the Company may have available under applicable law for such breach or threatened breach, including the recovery of damages. In the event of a breach of Section 6, damages shall be limited to salary discontinuance of any and all compensation, including but not necessarily limited to salary and severance, otherwise payable to Employee under this Agreement (b) Survival of Restrictive Covenant. The provisions of Section 3 of @ Agreement shall survive the expiration of the term of employee's employment thereunder, and shall be binding upon the Employee's following the termination of Employee's employment by the Company. 8. Affiliate. The term "Company" when used in Sections 3, 6 and 7 of this Agreement shall mean in addition to the Company, any affiliate of the Company. The terms '"affiliate" or "affiliates" when used in this Agreement shall mean any corporation that controls the Company, or is controlled by the Company, or is under common control with the Company. 9. Entire Agreement; Modification. This Agreement constitutes the full and complete understanding and agreement of the parties with respect to the employment of the Employee by the Company, and supersedes any prior understanding or agreement between the parties relating thereto. No amendment, waiver or modification of any provision of this Agreement shall be binding unless made in writing and signed by the parties hereto. 10. Assignment. The rights and benefits of the Company and its permitted assigns under this Agreement shall be fully assignable and transferable to any other entity: (a) which is an affiliate of the Company; or (b) which is not an affiliate and with which the Company has merged or consolidated, or to which it may have sold substantially all its assets in a transaction in which it has assumed the liabilities of the Company under this Agreement, and in the event of any such assignment or transfer, all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by or against the successors and assigns of the Company. This Agreement is a personal service contract and shall not be assignable by the Employee, but all obligations and agreements of the Employee hereunder shall be binding upon and enforceable against the Employee and Employee's personal representatives, heirs, legatees and devisees. 11. Notices. To be effective, all notices, consents or other communications required or permitted hereunder shall be in writing. A written notice or other communication shall be deemed to have been given hereunder (i) if delivered by hand, when the notifying party delivers such notice or other communication to all other parties to this Agreement, (ii) if delivered by telecopier or overnight delivery service, on the first business day following the date of such notice or other communication is transmitted by telecopier or timely delivered to the overnight courier, or (iii) if delivered by mail, on the third business day the date such notice or other communication is deposited in the U.S. mail by certified or registered mail addressed to the other party. Mailed or telecopied communications shall be as follows unless written notice of a change of address or telecopier number has been given in writing in accordance with this Section: If to Company: Casino Magic Corp. Attn: Robert Callaway Bay St. Louis, NE 39520 Facsimile No. (601) 467-3407 If to Employee: Kenneth N. Schultz 9032 Greymonte Circle Gulfport, MS 39503 12. Waiver. No waiver of any term, condition or covenant of this Agreement by a party shall be deemed to be a waiver of any subsequent breaches of the same or other terms, covenants or conditions hereof by such party. 13. Counter Parts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all such counterparts shall constitute one instrument. 14. Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective or valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Mississippi. 16. Attorney's Fees. In the event a judgment is entered against any party hereto in a court of competent jurisdiction based upon a breach of the terms of this Agreement, the prevailing party shall be entitled to receive, as part of any award, the amount of reasonable attorney's fees and expenses incurred by the prevailing party in such action A party shall be deemed to have prevailed if the judgment entered (without including attorney's fees and expenses) is more favorable to that party than any offer of settlement made to that party within twenty days after the services of the complaint in such action. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date flat above written. CASINO MAGIC CORP. EMPLOYEE By: Ed Ernst, President Kenneth N. Schultz (Type or Print Name of Employee) EX-10.105 3 EMPLOYMENT AGREEMENT JURIS BASENS July 2, 1996 Mr. Juris Basens 9010 Suntree Lane Gulfport, MS 39503 Dear Juris: It is my pleasure to extend an offer to you as Vice President and Chief Operating Officer for Casino Magic Corp. The terms of the offer is in accordance with the attached employment agreement. In addition, the Company will provide to you a stock grant at 25,000 shares which will vest over the next four and one half (4 1/2) years which is consistent with the Company's policy. Also, you will be granted options for 75,000 shares under the Company's qualified stock option plan which will vest in accordance with the plan. Juris, I look forward to working with you again. Very truly yours, Casino Magic Corp. Ed Ernst President & CEO Enclosure Accepted By: Juris Basens cc: Board Compensation Committee Marlin Torguson Bob Callaway THIS AGREEMENT is dated, made and entered into on September ____, 1996 and is effective as of the 25th day of July, 1996, by and between Casino Magic Corp., a Minnesota corporation (the "Company"), and Juris Basens (the "Employee"). RECITALS WHEREAS, the Company is desirous of obtaining the full-time services of the Employee: WHEREAS, Employee commenced his employment with the Company on July 25, 1996. WHEREAS, the Employee and the Company are each desirous of formalizing the employment arrangement and are each willing to enter into this employment agreement (the "Agreement'), all on the terms and subject to the conditions herein contained; and WHEREAS, this Agreement is intended to supersede and take the place of all prior agreements and understandings concerning employment; . AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties agree as follows: 1. Employment of the Employee; Term (a) The Company agrees to and hereby does employ the Employee, and the Employee accepts such employment and agrees to discharge faithfully, diligently and to the best of Employee's abilities, the responsibilities of such employment on the terms and subject to the conditions herein provided. (b) The initial term of Employee's employment hereunder shall terminate on December 31, 1998 ("Initial Expiration Date"),unless terminated earlier as provided in Section 4. (c) Notwithstanding the foregoing, following the Initial Expiration Date, Employee's employment shall thereafter continue on an at will basis on the terms and conditions contained in this Agreement, provided, however, that all obligations of the Company and the rights of the Employee under Subsection 4(a) will terminate. 2. Duties of the Employee. During the term of Employee's employment with the Company hereunder, the Employee shall: (a) Devote substantially all of Employee's business time and attention necessary to carry out the duties of Employee's employment thereunder, applying Employee's best effort and skill for the benefit of the Company. (b) Act as Vice President and Chief Operating Officer for the Company and perform such services and assume such duties and responsibilities as are assigned to Employee by the President, consistent with such office, all in accordance with the terms of this Agreement, the Articles of Incorporation and By-Laws of the Company. (c) Report directly to the President of the Company. 3. Compensation. As compensation and in consideration for the performance of services by the Employee and Employee's observance of all of the provisions of this Agreement, the Company agrees to pay or provide, and Employee agrees to accept, the following: (a) Salary. During the term of Employee's employment, the Company shall pay to the Employee, at least semi-monthly, a base salary at an initial annual rate of $200,000.00. The employee's base salary may be reviewed from time to time, but at least annually for increases as determined by the Company. (b) Benefits. During the term of Employee's employment, the Employee shag be entitled to three weeks of paid vacation per annum from and after Employee's employment start date, seven paid holidays annually, and three paid sick days annually. In addition, during the term of Employee's employment, the Employee shall be entitled to medical and hospitalization insurance or reimbursement, consistent with that provided to other salaried employees of the Company, or as may be established in a written policy by the Board of Directors. The Company further agrees to waive the 90-day eligibility period. (c) Business Expenses. The Company shall reimburse the Employee for business expenses reasonably incurred by the Employee in connection with the performance of Employee's duties hereunder, upon the presentation by Employee of receipts and itemized accounts of such expenditures in accordance with the rules and regulations of the Internal Revenue Code. Such expenditures shag be subject at all times to the prior approval of the President of the Company or his designee. Except for expenses previously approved by such officer or his designee, the Board of Directors of the Company may take such action as may be necessary to enforce the repayment to the Company by the Employee of any amounts reimbursed upon finding that such reimbursement was not made primarily for the purpose of advancing the legitimate interests of the Company. In lieu of direct payment by the Employee, the Company, by action of its Board of Directors, may withhold such disallowed amounts from future compensation of the Employee until the amount owed to the Company has been recovered. (d) Bonus. In addition to the foregoing, Employee shall be entitled to participate in any executive bonus pool established by the Company. (e) Employment Bonus Upon commencement of employment, Employee is to be paid the sum of 520,000.00, however, such sum shall be promptly returned to the Company if, prior to the anniversary of the Employee's initial year under this Agreement, Employee voluntarily terminates his employment with the Company. 4. Termination of Agreement. (a) Termination With Cause. The Company may terminate Employee's term of employment under this Agreement for "good cause" upon notice of such termination to the Employee. For purposes of this Agreement, "good cause" shall mean Employee's (i) failure or refusal to observe or perform any of the material provisions of this Agreement or any other written agreement with the Company, or to substantially perform any of the material duties required of Employee under this Agreement or any other written agreement with the Company, or (ii) commission of fraud, misappropriation, embezzlement or other acts of dishonesty, alcoholism, drug addiction or dependency, or conviction for any crime punishable as a felony or as a gross misdemeanor involving moral turpitude, which actions have a material adverse effect upon the Employee's ability to perform the duties which are assumed or assigned under Section 2 hereof, or which actions or occurrences are materially adverse to the interests of the Company, or (iii) unreasonable refusal or failure to faithfully perform the duties and responsibilities of Employee's employment hereunder or to comply with the directions of the President, his designee or the Board of Directors. Termination of Employee's employment for good cause under Subsection 4(a)(ii) above shall be effective upon notice. Termination of Employee's employment for good cause under Subsections 4(a)(i) or 4(a)(iii) shall be effective upon fourteen days' prior notice; provided that prior to the giving of such notice of termination, the Company shall notify Employee that a factual basis for termination for good cause termination such basis. (b) Termination with Notice. After the Initial Expiration Date, Employee's term of employment under this Agreement may be terminated by either party for any reason upon not less than 30 days' prior written notice. (c) Termination upon Death of Employee. This Agreement shall automatically terminate in the event of the Employee's death. (d) Termination If Employee Not Found Suitable by Mississippi Gaming Commission and Related Matters. Employee's position with the Company may require a finding of suitability by the Mississippi Gaming Commission or other state gaming commission, as the case may be. The Company will pay all investigative fees and costs associated with the Mississippi Gaming Commission or other state gaming commission suitability determinations. If the Employee is not found suitable by the Mississippi Gaming Commission or other gaming commission as the case may be, Employee's employment with the Company shall thereafter immediately terminate and this Agreement shall be deemed null and void. (e) Termination Obligations. In the event of a termination of the Employee's term of employment in accordance with Section 4, the Company shall have no further obligation to the Employee under this Agreement, and the Employee shall only be entitled to payment by the Company for all compensation accrued under this Agreement to such date of termination. However, such termination of the Employee's employment shall not terminate or extinguish the Employee's obligations under Sections 3 or 6 hereof (unless otherwise provided therein) or Employee's obligation or liability to pay to the Company any amounts owed to the Company the Employee, including, but not limited to, any amounts misappropriated or obtained by the Employee, without prejudice to any other rights or remedies of the Company at law or in equity. Notwithstanding the foregoing, in the event that the Employee's term of employment is terminated by the Company other than for "good cause" as provided under Subsection 4(a) prior to the Initial Expiration Date, the Company shall continue to pay to the Employee, at least semimonthly, base salary based on the annualized monthly base salary then being paid to Employee as of the date of termination) through the Initial Expiration Date. Employee and the Company acknowledge and agree that no part of any incentive compensation that is based on the Company's financial performance for a fiscal year, if any, is payable if Employee's employment is terminated for any reason prior to expiration of such fiscal year. (f) Severance Allowance. In the event Employee's term of employment is terminated by the Company pursuant to Subsections 4(b) or 4(d), Employee will be entitled to receive a severance allowance in an amount equal to six months' base salary (based on the annualized monthly base salary then being paid to Employee as of the date of termination) to be paid out over the six months following Employee's date of termination in at least semimonthly installments. No severance allowance will be payable to Employee if the Employee voluntarily resigns or otherwise terminates employment pursuant to Subsection 4(b). (g) Options and Grants. Notwithstanding any provision in this Agreement to the contrary, should the current President of the Company be replaced or terminated prior to the Initial Expiration Date, any stock options or grants given to Employee pursuant to an executed agreement between the Company and Employee shall promptly vest if, prior to the Initial Expiration Date: - (i) Employee is also replaced or terminated; or (ii) The duties of Employee with the Company or compensation from the Company changes in any material respect. Within ninety (90) days after the President is replaced, Employee makes a reasonable good faith determination that due solely to specified action or inaction of such replacement, he cannot effectively discharge the duties delineated herein. To be effective, such determination by Employee must be provided to the Company in a writing which sets forth the factual basis of such action or inaction by the replacement President. 5. Disclosure of Confidential Information. (a) Definition of Confidential Information. For purposes of this Agreement, "Confidential Information" means any information that is not generally known to the public that relates to the existing or reasonably foreseeable business of the Company which has been expressly or implicitly protected by the Company or which, from all of the circumstances, the Employee knows or has reason to know that the Company y intends or expects the secrecy of such information to be maintained. Confidential Information includes, but is not limited to, information contained in or relating to the customer lists, account lists, price lists, product designs, marketing plans or proposals, customer information, merchandising, selling, accounting, finances, know-how, trademarks, trade names, trade practices, trade secrets and other proprietary information of the Company. (b) Employee Shall Not Disclose Confidential Information. The Employee will not, during the term of Employee's employment or following the termination of Employee's employment with the Company, use, show, display, release, discuss, communicate, divulge or otherwise disclose Confidential Information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, without the prior written consent or authorization of the Company. (c) Scope. Employee's covenant in Subsection 5(b) to not disclose Confidential Information shall not apply to information which, at the time of such disclosure, may be obtained from sources outside of the Company, its agents, lawyers or accountants, so long as those sources did not receive the information directly or indirectly as the result of Employee's action. (d) Tide. All documents or other tangible or intangible property relating in any way to the business of the Company which are conceived or generated by Employee or come into Employee's possession during the employment period shall be and remain the exclusive property of the Company, and Employee agrees to return all such documents, and tangible and intangible property, including, but not limited to, all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, magnetic tapes, computer disks, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, customers, products, practices or techniques of the Company, and all other property of the Company, including, but not limited to, all documents which in whole or in part contain any Confidential Information of the Company which in any of these cases are in Employee's possession or under Employee's control, to the Company upon the termination of Employee's employment with the Company, or at such earlier time as the Company may request him to do so. (e) Compelled Disclosure. In the event a third party seeks to compel disclosure of Confidential Information by the Employee by judicial or administrative process, the Employee shall promptly notify the Board of Directors of the Company of such occurrence and furnish to such Board of Directors a copy of the demand, summons, subpoena or other process served upon the Employee to compel such disclosure, and will permit the Company to assume, at its expense, but with the Employee's cooperation, defense of such disclosure demand. In the event that the Company refuses to contest such a third party disclosure demand under judicial or administrative process, or a judicial order is issued compelling disclosure of Confidential Information by the Employee, the Employee shall be entitled to disclose such information in compliance with the terms of such administrative or judicial process or order. 6. Non-competition. (a) Restriction. Commencing on the date hereof and for so long as Employee continues to receive compensation under this Agreement (salary or severance), whether voluntarily or involuntarily and whether or not for good cause, Employee shall not, without the prior written consent of the Company, directly or indirectly, engage in, or assist any other person to engage in, any activity, whether as a proprietor, partner, joint venture, principal, employer, officer, agent, employee, consultant or beneficial or record owner (other than as an investor owning less than a 2% interest in an entity whose securities are regularly traded in a public market), and whether or not for compensation, that is competitive in any respect with the business of the Company within the States of Louisiana and Mississippi. For purposes of this Agreement, the "business of the Company" shall be any business in which the Company is engaged at the time of Employee's termination of employment or in which the Company was engaged within six months prior to such termination, including, but not limited to, a business involved in or relating to gambling casinos or gaming establishments. (b) Modification. In the event that any court of competent jurisdiction determines that the term, the business scope or geographic scope of the covenants contained in Subsection 6(a) is impermissible due to the extent thereof, said covenant shall be modified to reduce its terms, business scope or geographic scope, as the case may be, to the extent necessary to make said covenant valid, and said covenant shall be enforced as modified. (c) Non-Compete Consideration. As additional consideration for the Employee's observance of the non-compete covenant set forth in Subsection 6(a), the Company has granted to Employee incentive stock options to purchase shares of the Company's common stock. 7. Breach of Restrictive Covenants. (a) It is agreed that it would be difficult or impossible to ascertain the measure of damages to the Company resulting from any breach of Sections 5 or 6, and that injury to the Company from any such breach may be irremediable. In the event of a breach or threatened breach by the Employee of the provisions of Section 3, the Company shall be entitled to specific performance of Section 3 and may seek a temporary or permanent injunction to enjoin the Employee from breaching Sections 3, in addition to any other rights or remedies that the Company may have available under applicable law for such breach or threatened breach, including the recovery of damages. In the event of a breach of Section 6, damages shall be limited to salary discontinuance of any and all compensation, including but not necessarily limited to salary and severance, otherwise payable to Employee under this Agreement (b) Survival of Restrictive Covenant. The provisions of Section 3 of @ Agreement shall survive the expiration of the term of employee's employment thereunder, and shall be binding upon the Employee's following the termination of Employee's employment by the Company. 8. Affiliate. The term "Company" when used in Sections 3, 6 and 7 of this Agreement shall mean in addition to the Company, any affiliate of the Company. The terms '"affiliate" or "affiliates" when used in this Agreement shall mean any corporation that controls the Company, or is controlled by the Company, or is under common control with the Company. 9. Entire Agreement; Modification. This Agreement constitutes the full and complete understanding and agreement of the parties with respect to the employment of the Employee by the Company, and supersedes any prior understanding or agreement between the parties relating thereto. No amendment, waiver or modification of any provision of this Agreement shall be binding unless made in writing and signed by the parties hereto. 10. Assignment. The rights and benefits of the Company and its permitted assigns under this Agreement shall be fully assignable and transferable to any other entity: (a) which is an affiliate of the Company; or (b) which is not an affiliate and with which the Company has merged or consolidated, or to which it may have sold substantially all its assets in a transaction in which it has assumed the liabilities of the Company under this Agreement, and in the event of any such assignment or transfer, all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by or against the successors and assigns of the Company. This Agreement is a personal service contract and shall not be assignable by the Employee, but all obligations and agreements of the Employee hereunder shall be binding upon and enforceable against the Employee and Employee's personal representatives, heirs, legatees and devisees. 11. Notices. To be effective, all notices, consents or other communications required or permitted hereunder shall be in writing. A written notice or other communication shall be deemed to have been given hereunder (i) if delivered by hand, when the notifying party delivers such notice or other communication to all other parties to this Agreement, (ii) if delivered by telecopier or overnight delivery service, on the first business day following the date of such notice or other communication is transmitted by telecopier or timely delivered to the overnight courier, or (iii) if delivered by mail, on the third business day the date such notice or other communication is deposited in the U.S. mail by certified or registered mail addressed to the other party. Mailed or telecopied communications shall be as follows unless written notice of a change of address or telecopier number has been given in writing in accordance with this Section: If to Company: Casino Magic Corp. Attn: Robert Callaway Bay St. Louis, NE 39520 Facsimile No. (601) 467-3407 If to Employee: Juris Basens 9010 Suntree Lane Gulfport, MS 39503 12. Waiver. No waiver of any term, condition or covenant of this Agreement by a party shall be deemed to be a waiver of any subsequent breaches of the same or other terms, covenants or conditions hereof by such party. 13. Counter Parts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all such counterparts shall constitute one instrument. 14. Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective or valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Mississippi. 16. Attorney's Fees. In the event a judgment is entered against any party hereto in a court of competent jurisdiction based upon a breach of the terms of this Agreement, the prevailing party shall be entitled to receive, as part of any award, the amount of reasonable attorney's fees and expenses incurred by the prevailing party in such action A party shall be deemed to have prevailed if the judgment entered (without including attorney's fees and expenses) is more favorable to that party than any offer of settlement made to that party within twenty days after the services of the complaint in such action. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date flat above written. CASINO MAGIC CORP. EMPLOYEE By: Ed Ernst, President Juris Basens (Type or Print Name of Employee) EX-10.106 4 EMPLOYMENT AGREEMENT DAVID PALTZIK EMPLOYMENT AGREEMENT THIS AGREEMENT is dated, made and entered into on March ____, 1997 and is effective as of the 23rd day of July, 1996, by and between Casino Magic Corp., a Minnesota corporation (the "Company"), and David L. Paltzik (the "Employee"). RECITALS WHEREAS, the Company is desirous of obtaining the full-time services of the Employee: WHEREAS, Employee commenced his employment with the Company on July 23, 1996. WHEREAS, the Employee and the Company are each willing to enter into this employment agreement (the "Agreement'), all on the terms and subject to the conditions herein contained; and WHEREAS, Employee is desirous of receiving stock grants and options to purchase common stock in the company under the Company's Incentive Stock Option Play, which options and grants require the approval of the Company's Board of Directors and the Stock Option Committee, respectively; and WHEREAS, this Agreement is intended to supersede and take the place of all prior agreements and understandings concerning employment; . AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties agree as follows: 1. Employment of the Employee; Term (a) The Company agrees to and hereby does employ the Employee, and the Employee accepts such employment and agrees to discharge faithfully, diligently and to the best of Employee's abilities, the responsibilities of such employment on the terms and subject to the conditions herein provided. (b) The initial term of Employee's employment hereunder shall terminate on December 31, 1998 ("Initial Expiration Date"),unless terminated earlier as provided in Section 4. (c) Notwithstanding the foregoing, following the Initial Expiration Date, Employee's employment shall thereafter continue on an at will basis on the terms and conditions contained in this Agreement, provided, however, that all obligations of the Company and the rights of the Employee under Subsection 4(a) will terminate. 2. Duties of the Employee. During the term of Employee's employment with the Company hereunder, the Employee shall: (a) Devote substantially all of Employee's business time and attention necessary to carry out the duties of Employee's employment thereunder, applying Employee's best effort and skill for the benefit of the Company. (b) Act as Vice President/Marketing for the Company and perform such services and assume such duties and responsibilities as are assigned to Employee by the President, consistent with such office, all in accordance with the terms of this Agreement, the Articles of Incorporation and By-Laws of the Company. (c) Report directly to the President of the Company. 3. Compensation. As compensation and in consideration for the performance of services by the Employee and Employee's observance of all of the provisions of this Agreement, the Company agrees to pay or provide, and Employee agrees to accept, the following: (a) Salary. During the term of Employee's employment, the Company shall pay to the Employee, at least semi-monthly, a base salary at an initial annual rate of $200,000.00. The employee's base salary may be reviewed from time to time, but at least annually for increases as determined by the Company. (b) Benefits. During the term of Employee's employment, the Employee shag be entitled to three weeks of paid vacation per annum from and after Employee's employment start date, seven paid holidays annually, and three paid sick days annually. In addition, during the term of Employee's employment, the Employee shall be entitled to medical and hospitalization insurance or reimbursement, consistent with that provided to other salaried employees of the Company, or as may be established in a written policy by the Board of Directors. The Company further agrees to waive the 90-day eligibility period. (c) Business Expenses. The Company shall reimburse the Employee for business expenses reasonably incurred by the Employee in connection with the performance of Employee's duties hereunder, upon the presentation by Employee of receipts and itemized accounts of such expenditures in accordance with the rules and regulations of the Internal Revenue Code. Such expenditures shag be subject at all times to the prior approval of the President of the Company or his designee. Except for expenses previously approved by such officer or his designee, the Board of Directors of the Company may take such action as may be necessary to enforce the repayment to the Company by the Employee of any amounts reimbursed upon finding that such reimbursement was not made primarily for the purpose of advancing the legitimate interests of the Company. In lieu of direct payment by the Employee, the Company, by action of its Board of Directors, may withhold such disallowed amounts from future compensation of the Employee until the amount owed to the Company has been recovered. (d) Bonus. In addition to the foregoing, Employee shall be entitled to participate in any executive bonus pool established by the Company. (e) Employment Bonus Upon commencement of employment, Employee is to be paid the sum of 520,000.00, however, such sum shall be promptly returned to the Company if, prior to the anniversary of the Employee's initial year under this Agreement, Employee voluntarily terminates his employment with the Company. 4. Termination of Agreement. (a) Termination With Cause. The Company may terminate Employee's term of employment under this Agreement for "good cause" upon notice of such termination to the Employee. For purposes of this Agreement, "good cause" shall mean Employee's (i) failure or refusal to observe or perform any of the material provisions of this Agreement or any other written agreement with the Company, or to substantially perform any of the material duties required of Employee under this Agreement or any other written agreement with the Company, or (ii) commission of fraud, misappropriation, embezzlement or other acts of dishonesty, alcoholism, drug addiction or dependency, or conviction for any crime punishable as a felony or as a gross misdemeanor involving moral turpitude, which actions have a material adverse effect upon the Employee's ability to perform the duties which are assumed or assigned under Section 2 hereof, or which actions or occurrences are materially adverse to the interests of the Company, or (iii) unreasonable refusal or failure to faithfully perform the duties and responsibilities of Employee's employment hereunder or to comply with the directions of the President, his designee or the Board of Directors. Termination of Employee's employment for good cause under Subsection 4(a)(ii) above shall be effective upon notice. Termination of Employee's employment for good cause under Subsections 4(a)(i) or 4(a)(iii) shall be effective upon fourteen days' prior notice; provided that prior to the giving of such notice of termination, the Company shall notify Employee that a factual basis for termination for good cause termination such basis. (b) Termination with Notice. After the Initial Expiration Date, Employee's term of employment under this Agreement may be terminated by either party for any reason upon not less than 30 days' prior written notice. (c) Termination upon Death of Employee. This Agreement shall automatically terminate in the event of the Employee's death. (d) Termination If Employee Not Found Suitable by Mississippi Gaming Commission and Related Matters. Employee's position with the Company may require a finding of suitability by the Mississippi Gaming Commission or other state gaming commission, as the case may be. The Company will pay all investigative fees and costs associated with the Mississippi Gaming Commission or other state gaming commission suitability determinations. If the Employee is not found suitable by the Mississippi Gaming Commission or other gaming commission as the case may be, Employee's employment with the Company shall thereafter immediately terminate and this Agreement shall be deemed null and void. (e) Termination Obligations. In the event of a termination of the Employee's term of employment in accordance with Section 4, the Company shall have no further obligation to the Employee under this Agreement, and the Employee shall only be entitled to payment by the Company for all compensation accrued under this Agreement to such date of termination. However, such termination of the Employee's employment shall not terminate or extinguish the Employee's obligations under Sections 3 or 6 hereof (unless otherwise provided therein) or Employee's obligation or liability to pay to the Company any amounts owed to the Company the Employee, including, but not limited to, any amounts misappropriated or obtained by the Employee, without prejudice to any other rights or remedies of the Company at law or in equity. Notwithstanding the foregoing, in the event that the Employee's term of employment is terminated by the Company other than for "good cause" as provided under Subsection 4(a) prior to the Initial Expiration Date, the Company shall continue to pay to the Employee, at least semimonthly, base salary based on the annualized monthly base salary then being paid to Employee as of the date of termination) through the Initial Expiration Date. Employee and the Company acknowledge and agree that no part of any incentive compensation that is based on the Company's financial performance for a fiscal year, if any, is payable if Employee's employment is terminated for any reason prior to expiration of such fiscal year. (f) Severance Allowance. In the event Employee's term of employment is terminated by the Company pursuant to Subsections 4(b) or 4(d), Employee will be entitled to receive a severance allowance in an amount equal to six months' base salary (based on the annualized monthly base salary then being paid to Employee as of the date of termination) to be paid out over the six months following Employee's date of termination in at least semimonthly installments. No severance allowance will be payable to Employee if the Employee voluntarily resigns or otherwise terminates employment pursuant to Subsection 4(b). (g) Options and Grants. Notwithstanding any provision in this Agreement to the contrary, should the current President of the Company be replaced or terminated prior to the Initial Expiration Date, any stock options or grants given to Employee pursuant to an executed agreement between the Company and Employee shall promptly vest if, prior to the Initial Expiration Date: - (i) Employee is also replaced or terminated; or (ii) The duties of Employee with the Company or compensation from the Company changes in any material respect. Within ninety (90) days after the President is replaced, Employee makes a reasonable good faith determination that due solely to specified action or inaction of such replacement, he cannot effectively discharge the duties delineated herein. To be effective, such determination by Employee must be provided to the Company in a writing which sets forth the factual basis of such action or inaction by the replacement President. 5. Disclosure of Confidential Information. (a) Definition of Confidential Information. For purposes of this Agreement, "Confidential Information" means any information that is not generally known to the public that relates to the existing or reasonably foreseeable business of the Company which has been expressly or implicitly protected by the Company or which, from all of the circumstances, the Employee knows or has reason to know that the Company y intends or expects the secrecy of such information to be maintained. Confidential Information includes, but is not limited to, information contained in or relating to the customer lists, account lists, price lists, product designs, marketing plans or proposals, customer information, merchandising, selling, accounting, finances, know-how, trademarks, trade names, trade practices, trade secrets and other proprietary information of the Company. (b) Employee Shall Not Disclose Confidential Information. The Employee will not, during the term of Employee's employment or following the termination of Employee's employment with the Company, use, show, display, release, discuss, communicate, divulge or otherwise disclose Confidential Information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, without the prior written consent or authorization of the Company. (c) Scope. Employee's covenant in Subsection 5(b) to not disclose Confidential Information shall not apply to information which, at the time of such disclosure, may be obtained from sources outside of the Company, its agents, lawyers or accountants, so long as those sources did not receive the information directly or indirectly as the result of Employee's action. (d) Tide. All documents or other tangible or intangible property relating in any way to the business of the Company which are conceived or generated by Employee or come into Employee's possession during the employment period shall be and remain the exclusive property of the Company, and Employee agrees to return all such documents, and tangible and intangible property, including, but not limited to, all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, magnetic tapes, computer disks, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, customers, products, practices or techniques of the Company, and all other property of the Company, including, but not limited to, all documents which in whole or in part contain any Confidential Information of the Company which in any of these cases are in Employee's possession or under Employee's control, to the Company upon the termination of Employee's employment with the Company, or at such earlier time as the Company may request him to do so. (e) Compelled Disclosure. In the event a third party seeks to compel disclosure of Confidential Information by the Employee by judicial or administrative process, the Employee shall promptly notify the Board of Directors of the Company of such occurrence and furnish to such Board of Directors a copy of the demand, summons, subpoena or other process served upon the Employee to compel such disclosure, and will permit the Company to assume, at its expense, but with the Employee's cooperation, defense of such disclosure demand. In the event that the Company refuses to contest such a third party disclosure demand under judicial or administrative process, or a judicial order is issued compelling disclosure of Confidential Information by the Employee, the Employee shall be entitled to disclose such information in compliance with the terms of such administrative or judicial process or order. 6. Non-competition. (a) Restriction. Commencing on the date hereof and for so long as Employee continues to receive compensation under this Agreement (salary or severance), whether voluntarily or involuntarily and whether or not for good cause, Employee shall not, without the prior written consent of the Company, directly or indirectly, engage in, or assist any other person to engage in, any activity, whether as a proprietor, partner, joint venture, principal, employer, officer, agent, employee, consultant or beneficial or record owner (other than as an investor owning less than a 2% interest in an entity whose securities are regularly traded in a public market), and whether or not for compensation, that is competitive in any respect with the business of the Company within the States of Louisiana and Mississippi. For purposes of this Agreement, the "business of the Company" shall be any business in which the Company is engaged at the time of Employee's termination of employment or in which the Company was engaged within six months prior to such termination, including, but not limited to, a business involved in or relating to gambling casinos or gaming establishments. (b) Modification. In the event that any court of competent jurisdiction determines that the term, the business scope or geographic scope of the covenants contained in Subsection 6(a) is impermissible due to the extent thereof, said covenant shall be modified to reduce its terms, business scope or geographic scope, as the case may be, to the extent necessary to make said covenant valid, and said covenant shall be enforced as modified. (c) Non-Compete Consideration. As additional consideration for the Employee's observance of the non-compete covenant set forth in Subsection 6(a), the Company has granted to Employee incentive stock options to purchase shares of the Company's common stock. 7. Breach of Restrictive Covenants. (a) It is agreed that it would be difficult or impossible to ascertain the measure of damages to the Company resulting from any breach of Sections 5 or 6, and that injury to the Company from any such breach may be irremediable. In the event of a breach or threatened breach by the Employee of the provisions of Section 3, the Company shall be entitled to specific performance of Section 3 and may seek a temporary or permanent injunction to enjoin the Employee from breaching Sections 3, in addition to any other rights or remedies that the Company may have available under applicable law for such breach or threatened breach, including the recovery of damages. In the event of a breach of Section 6, damages shall be limited to salary discontinuance of any and all compensation, including but not necessarily limited to salary and severance, otherwise payable to Employee under this Agreement (b) Survival of Restrictive Covenant. The provisions of Section 3 of @ Agreement shall survive the expiration of the term of employee's employment thereunder, and shall be binding upon the Employee's following the termination of Employee's employment by the Company. 8. Affiliate. The term "Company" when used in Sections 3, 6 and 7 of this Agreement shall mean in addition to the Company, any affiliate of the Company. The terms '"affiliate" or "affiliates" when used in this Agreement shall mean any corporation that controls the Company, or is controlled by the Company, or is under common control with the Company. 9. Entire Agreement; Modification. This Agreement constitutes the full and complete understanding and agreement of the parties with respect to the employment of the Employee by the Company, and supersedes any prior understanding or agreement between the parties relating thereto. No amendment, waiver or modification of any provision of this Agreement shall be binding unless made in writing and signed by the parties hereto. 10. Assignment. The rights and benefits of the Company and its permitted assigns under this Agreement shall be fully assignable and transferable to any other entity: (a) which is an affiliate of the Company; or (b) which is not an affiliate and with which the Company has merged or consolidated, or to which it may have sold substantially all its assets in a transaction in which it has assumed the liabilities of the Company under this Agreement, and in the event of any such assignment or transfer, all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by or against the successors and assigns of the Company. This Agreement is a personal service contract and shall not be assignable by the Employee, but all obligations and agreements of the Employee hereunder shall be binding upon and enforceable against the Employee and Employee's personal representatives, heirs, legatees and devisees. 11. Notices. To be effective, all notices, consents or other communications required or permitted hereunder shall be in writing. A written notice or other communication shall be deemed to have been given hereunder (i) if delivered by hand, when the notifying party delivers such notice or other communication to all other parties to this Agreement, (ii) if delivered by telecopier or overnight delivery service, on the first business day following the date of such notice or other communication is transmitted by telecopier or timely delivered to the overnight courier, or (iii) if delivered by mail, on the third business day the date such notice or other communication is deposited in the U.S. mail by certified or registered mail addressed to the other party. Mailed or telecopied communications shall be as follows unless written notice of a change of address or telecopier number has been given in writing in accordance with this Section: If to Company: Casino Magic Corp. Attn: Robert Callaway Bay St. Louis, NE 39520 Facsimile No. (601) 467-3407 If to Employee: David L. Paltzik 411 Caribe Place Gulfport, MS 39507 12. Waiver. No waiver of any term, condition or covenant of this Agreement by a party shall be deemed to be a waiver of any subsequent breaches of the same or other terms, covenants or conditions hereof by such party. 13. Counter Parts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all such counterparts shall constitute one instrument. 14. Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective or valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Mississippi. 16. Attorney's Fees. In the event a judgment is entered against any party hereto in a court of competent jurisdiction based upon a breach of the terms of this Agreement, the prevailing party shall be entitled to receive, as part of any award, the amount of reasonable attorney's fees and expenses incurred by the prevailing party in such action A party shall be deemed to have prevailed if the judgment entered (without including attorney's fees and expenses) is more favorable to that party than any offer of settlement made to that party within twenty days after the services of the complaint in such action. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date flat above written. CASINO MAGIC CORP. EMPLOYEE By: Ed Ernst, President David L. Paltzik (Type or Print Name of Employee) EX-10.107 5 TERMINATION OF JOINT VENTURE AGREEMENT AGREEMENT DATE: 12 December 1996 PARTIES: Touristiki Georgiki Exagogiki S.A. ("TGE") 9 Frangini Street Thessaloniki Greece Parral Compania Naviera S.A. ("Parral") c/o MN Trust Rue Saint-Ldger 8, P.O. Box 24 1211 Geneva 4 Switzerland Casino Magic (Europe) B.V. ("CME") Emmaplein 5, 1075 AW Amsterdam P.O. Box 75215, 1070 AE Amsterdam The Netherlands Casino Magic Hellas Management Services S.A. ("CMH") 711 Casino Magic Drive Bay St. Louis, MS 39520 U.S.A. Casino Magic Corp. ("CMC") 711 Casino Magic Drive Bay St. Louis, MS 39520 U.S.A. RECITALS A. TGE, Parral, CME, CMC and Casino Magic Management Services Corp. ("CMMSC") entered into that certain joint venture agreement dated 14 June 1994 which was amended by agreement dated 29 April 1995 (such joint venture agreement, as amended is referred to herein as the "Joint Venture Agreement"). B. Pursuant to the Joint Venture Agreement, Porto Carras Casino S.A. ("PCC") was created to own and operate a gaming casino at the Sithonia Hotel at Porto Carras (the "Casino") and to operate the Sithonia Hotel. On 30 December 1994, the Republic of Greece granted PCC a gaming license to operate a casino at Porto Carras (the "Gaming License"). C. Pursuant to the terms of the Joint Venture Agreement, PCC entered into a lease for the Sithonia Hotel with TGE dated 3 August 1994, as amended (the "Lease"). D. Pursuant to the terms af the Joint Venture Agreement, PCC entered into a management agreement with CME dated 29 April 1995 (the "Management Agreement"). E. Pursuant to the terms of the Joint Venture Agreement, PCC entered into a license agreement with CMC (the "CMC License"). F. Pursuant to the terms O:E the Joint Venture Agreement, PCC entered into a license agreement with TGE (the "TGE License"). G. On 29 April 1995 TGE, Parral, CME, CMMSC and CMC entered into an agreement which contained a number of provisions including an agreement by CME to advance certain funds to PCC (the "April 1995 Agreement"). H. Parral and CME entered into a management fee agreement dated as of 29 April 1995 pursuant to which CME was permitted to manage certain other casinos in Greece and was obligated to make certain payments to Parral (the "Management Fee Agreement"). I. In September 1996, CME advanced funds to PCC to cover an immediate cash shortfall. J. The Tax Authorities of Thessaloniki by decisions numbered 157/96 and 158/96 notified PCC of the assessment of a fine against PCC (the "Fine 11). K. PCC is continuing to experience a severe cash shortage and cannot survive without an immediate additional cash infusion. As of the date hereof, the parties hereto and PCC have entered into an agreement with the Buyer pursuant to which all of the outstanding shares of PCC will be sold to Buyer (the "Sale Agreement"). L. The parties hereto have from time to time made claims that other parties hereto have not fulfilled their respective obligations under the Operative Aqreements and otherwise. M. The purpose of this Agreement is to provide a settlement of all past claims and disputes so that the transactions contemplated by the Sale Agreement can be concluded. AGREEMENT: The parties hereto, each intending to be legally bound, agree that upon the consilmmation of the transactions contemplated by the Sale Agreement, the following agreements will become effective: ARTICLE 1 - DEFINITIONS In this Agreement, including the Recitals, the following expressions shall have the meanings indicated below: "April 1995 Agreement" shall have the meaning ascri-bed to it in Recital G hereto. "Buyer" shall mean Murbec Inc, a company incorporated, organized and ex4-sting under the laws of Quebec, Canada, with a place of business at 1320 Graham Blvd, Suite 335, town of Mount Royal, Quebec, Canada or another company designated by Murbec Inc. "Casino" shall have the meaning ascribed to it in Recital B hereto. "CMC" shall mean casino magic Corp. "CMC License" shall have the meaning ascribed to it in Rec'ital E hereto. "CME" shall mean Casino Magic (Europe) B.V. "CMHII shall mean Casino Magic Management Hellas, S.A. "CMMSCII shall mean Casino Magic Management Services Corp. "Fine" shall have the meaning ascribed to it in Recital J hereto. "Gaming License,, shall have the meaning ascribed to it in Recital B hereto. "Joint Venture Agreement" shall have the meaning ascribed to it in Recital A hereto. "Lease" shall have the meaning ascribed to it in Recital C hereto. "Management Agreement" shall have the meaning ascribed to it in Recital D hereto. "Management Fee Agreement" shall have the meaning ascribed to it in Recital H hereto. "Operative Agreements" shall mean collectively the Joint Venture Agreement, the Lease, the Management Agreement, the CMC License, the TGE License, the April 1995 Agreement and the Management Fee Agreement. "Parral" shall mean Parral Compania Naviera, S.A. IIPCC" shall mean Porto Carras Casino S.A. "Sale Agreement" shall have the meaning ascribed to it in Recital K hereto. "TGE" shall mean Touristiki Georgiki Exagogiki, S.A. 'ITGE License" shall have the meaning ascribed to it in Recital F hereto. ARTICLE 2 - MUTUAL RELEASES 2. 1 TGE and Parral, an behalf of themselves and on behalf of their respective agents, representatives, officers, directors, shareholders, successors and assigns hereby unconditionally and f orever release and discharge each of CME, CMH and CMC, and each of their officers, directors, employees, shareholders, subsidiaries, agents, attorneys, successors and assigns (including without limitation all persons Twho have served as directors of CME, CMH or CMC prior to the date hereof and all persons who may so serve in the future), from any and all actions, causes of actions, claims, suits and/or debts, whether known or unknown, asserted o-unasserted, and howsoever arising (whether based in contract, tort, statute or otherwise), which any of them now or in the future may have concerning, relating or referring to any facts, circumstances, occurrences or events existing or occurring at any time prior to and through the date the transactions contemplated by tl7ie Sale Agreement are consummated, including without limitation, any such actions, causes of actions, claims, suits and/or debts, which arise out of or are related to the Operative Agreements. 2.2 TGE and Parral, on behalf of themselves and on behalf of @-heir respective agents, representatives, officers, directors, shareholders, successors and assigns hereby unconditionally and forever release and discharge PC,@-, and its officers, directors, employees, shareholders, agents, attorneys, successors and assigns (including without limitation all persons who have served as directors of PCC prior to the date hereof and all persons who may so serve in the future), from any and all actions, causes of actions, claims, suits and/or debts, whether known or unknown, asserted or unassarted, and howsoever arising (whether based in contract, tort, statute or otherdise), which any of them now or in the future may have concerning, relating or referring to any facts, circumstances, occurrences or events existing or occurring at any time prior to and through the date the transactions contemplated by time prior to and through the date the transactions contemplated by the Sale Agreement are consummated, including without limitation, (any such actions, causes of actions, claims, suits and/or debts, which arise out of or are related to the Operative Agreements. Notwithstanding the foregoing sentence, TGE does not release its claim for rent which is due and payable as of the date hereof or ng in the future. TGE does, however, pursuant to this Clause elease any claim of default by PCC under the Lease through te the transactions contemplated by the Sale Agreement are consummated. 2.3 CMH, CME and CMC, on behalf of themselves and on behalf of their resioective agents, representatives, officers, directors, shareholders, successors and assigns hereby unconditionally and forever release and discharge TGE and Parral, and their respective officers, directors, employees, shareholders, agents, attorneys, successors and assigns (including without limitation all persons who have served as directors of TGE or Parral prior to the date hereof and all persons who may so serve in the future), from any and all actions, causes of actions, claims, suits and/or debts, whether known or unknown, asserted or unasserted, and howsoever arising (whether based in cant--act, tort, statute or otherwise), which any of them now or in the future may have concerning, relating or referring to any facts, circumstances, occurrences or events existing or occurring at any time prior to and through the date the transactions contemplated by the Sale Agreement are consummated, including without limitation, any such actions, causes of actions, claims, suits and/or debts, which arise out of or are related to the Operative Agreements. ARTICLE 3 - OPERAT = AGREEMENTS 3.1 Joint Venture Agreement. The Joint Venture Agreement will terminate, and no party thereto shall have any liabilities or obligations pursuant thereto from and after such termination. 3.2 Management Agreement. CMH shall agree to an immediate termination of the Management Agreement. 3.3 April 1995 Acireement. The April 1995 Agreement will terminate, and no party thereto shall have any liabilities or obligations pursuant thereto from and after such termination. 3.4 Management Fee Agreement. The Management Fee Agreement will terminate, and no party thereto shall have any liabilities or obligations pursuant thereto from and after such termination. 3.5 Lease. The Lease shall remain in effect notwithstanding the consummation of the transactions contemplated by the Sale Agreement. 3.6 CMC License. The CMC License will be amended as provided in the Sale Agreement. 3.7 TGE License. The TGE License shall remain in effect notwithstanding the consummation of the transactions contemplated by the Sale Agreement. ARTICLE 4 - MISCELLANEOUS 4. 1 Governincr Laws. This Agreement shall be governed by and construed in accordance with the laws of England. 4.2 Counterparts and Execution. This Agreement may be executed in any number of counterparts and with facsimi signatures. Any single counterpart or set of counterparts signed, in either case by the parties hereto either as originals or as facsimile copies, shall constitute a full and original agreement for all purposes. 4.3 Notices. In any case where any notice Or Other COMMunications is required or permitted to be given hereunder, such notice or co=unication shall be in Twriting and (a) personally delivered by means of courier or other available f orm, (b) sent by postage prepaid registered airmail, or (c) transmitted by telex or (d) transmitted by telefax, as follows: (a) If to TGE: Touristiki Georgiki Exagogiki S.A. Porto Carras, Neos Marmaras, Sithonia 63081 Halkidiki Greece Telecopier No.: (375) 71229 With copy to: Touristiki Georgiki Exagogiki S.A. 28 Akadimias Street 106 71 Athens Greece Telecopier No.: (1)3644103 (b) If to Parral: Parral Compania Naviera S.A c/o MN Trust Rue Saint-Ldger 8, P.O. Box 24 1211 Geneva 4 Switzerland Telecopier No.: (22) 313 31 20 With copy to: Mr. E.K. Stavrianakis Attorney at Law Albany House 324/326 Regent Street London, WlR SAA Telecopier No. (071) 436 3618 (c) If to CME: Casino Magic (Europe) B.V. Attn: Chief Executive Officer 711 Casino Magic Drive Bay St. Louis, MS 39520 Telecopier No.: (601) 467-7998 (d) If to CMH: Casino Magic Hellas Management Services, S.A. Attn: Chief Executive Officer 711 Casino magic Drive Bay Saint Louis, Mississippi 39520 Telecopier No.: (601) 467-7998 (e) If to CMC: Casino Maqic Corp. Attn: Chief Executive Officer 711 Casino Magic Drive Bay Saint Louis, Mississippi 39520 Telecopier No.: (601) 467-7998 (f) If to CME, CMH or CMC a copy to: General Counsel Casino Magic Crop. 711 Casino maqic Drive Bay Saint Louis, Mississippi 39520 Telecopier No.: (601) 467-7998 All such notices or other communications shall be deemed to have been given or received (i) upon reciaipt if personally delivered, (ii) on the fifth day following posting if by mail, (iii) when sent with confirmed answerback if by telex, and (iv) when sent with transmission confirmation evidence if by telefax. 4.4 Arbitration. Any disputes arising out of this Agreement, including any questions regarding its existence, validity or termination shall be referred to and finally resolved by arbitration in London under the Rules of the London Court of International Arbitration, which Rules are deemed to be incorporated by reference into this Clause. Such arbitration shall be conducted in accordance with the provisions of the Arbitration Act 1979. 4.5 Bindinct Effect; Assicrnment. Except as otherwise expressly provided, this Agreement shall inure to the benefit and be binding upon each party hereto and their respective successors and permitted assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. TOURISTIKI GEORGIKI EXAGOGIKI S.A. By: Title: Chairman of the Board of Directors PARRAL COMPANI NAVIERA S.A. By: Title: CASINO MAGIC HELLAS MANAGEMENT SERVICES S.A. By: Title: CASINO MAGIC (EUROPE) B.V. By: Title: CASINO MAGIC CORP. By: Title: EX-10.108 6 PURCHASE AGREEMENT OF PORTA CARRAS S.A. AGREEMENT THIS AGREEMENT is made this .12. day of December 1996 by and between: Parral Compania Naviera S.A., a company incorporated, organized and existing under the laws of Panama with a place of business at rue Saint-Leger 8, P.O. Box 24, 1211 Geneva 4, Switzerland, (hereinafter referred to as "Parral/Seller"), Casino Magic (Europe) B.V., a company incorporated, organized and existing under the laws of the Netherlands with its registered office at Emmaplein 5, 1075 AW Amsterdam, P.O. Box 75215, 1070 AE Amsterdam, the Netherlands, (hereinafter referred to as "CME/Seller"), on the one part, and Murbec Inc, a company incorporated, organized and existing under the laws of Quebec, Canada, with a place of business at 1320 Graham Blvd., Suite 335, town of Mount Royal, Quebec, Canada or another company designated by Murbec Inc, (hereinafter referred to as "Buyer"), on the other part, and Porto Carras Casino S.A., a company incorporated, organized and existing under the laws of Greece, with its registered office at 9 Frangini Street, Thessaloniki, Greece, (hereinafter referred to as "PCC/Company"), Casino Magic Hellas Management Services S.A., a company incorporated, organized and existing under the laws of Greece, with its registered of f ice at 57, Themistokli Sofouli Street, Kalamaria, Greece, (hereinafter referred to as "CMH/Manager"), Touristiki Georgiki Exagogiki S.A., a company incorporated, organized and existing under the laws of Greece, with its registered of f ice at 9 Frangini Street, Thessaloniki, Greece, (hereinafter referred to as "TGE/Lessor"), Casino Magic Corp. a company incorporated, organized and existing under the laws of the State of Minnesota, USA, with a place of business at 711 Casino Magic Drive, Bay St. Louis, MS 39520, U.S.A., (hereinafter referred to as "CMC/Licensor"). The above parties have reached an agreement for the sale of all of the outstanding shares in the share capital of PCC (the "Shares") to Buyer on the following terms: 1.1. Buyer agrees to acquire 51% of the Shares from Parral for the consideration of a sum of US$1,000,000 net of any charges whatsoever, payable in immediately available funds to Parral or in the manner described in clause 8.3. hereof, and the obligations undertaken under the terms of this Agreement. Buyer agrees to acquire 49% of the Shares of PCC from CME for the consideration of US$l and the obligations undertaken under the terms of this Agreement. 1.2. Any charges, taxes or other payments whatsoever related to the transfer of the shares or which may be imposed as a result thereof will be borne exclusively by Buyer. Parral and CME shall not be liable to make any payment whatsoever in connection with the transfer of the Shares to Buyer or in connection with PCC in general, except any payment that CME may be under the obligation to make under clause 3 hereof. 2.1 Buyer acknowledges that PCC has and will have at the time of closing the transaction hereby agreed (the "Closing") significant obligations and liabilities and is satisfied about it. 2.2 Parral, CME, PCC, CMH, TGE and CMC make no representations or warranties whatsoever in respect of the obligations and liabilities of PCC except the following: (i) PCC, CME, PARRAL and CMH warrant that the gaming equipment of the Porto Carras Casino has been purchased and not leased by PCC and that PCC has not granted any contractual security interest on such equipment. (ii) PCC warrants that it has not entered into any employment contracts with its employees other than usual employment contracts under Greek law and in particular that it has not entered into employment contracts of unusually lengthy period or contracts with special advisors on a long term basis. It is however acknowledged and agreed that PCC has recognized prior service of certain employees with TGE and assumed relevant liabilities in connection with the accrual of severance pay in favour of these employees. (iii) PCC warrants that income tax for financial year 1995, calculated on the basis of declared income, has been paid. 2.3 Buyer unconditionally guarantees and undertakes that all of the obligations and liabilities of PCC accrued and/or accruing to the date of the Closing which could result in personal liability on the part of any members of the board of directors of PCC past or present shall be paid and satisfied in full. 2.4 CME, Parral, CMC, CMH and PCC acknowledge that the liabilities on the books of PCC owing to CME, CMC and CMH were intended to be treated as equity contributions and not as obligations of PCC to CME, CMC and CMH. At the Closing, Parral and CME shall take all necessary actions to have those liabilities of PCC owing to CME, CMH and CMC converted into share capital of PCC. All the shares which will be issued as a result of such conversion of liabilities into share capital will at and upon Closing also be transferred to the Buyer for the consideration of US$l and the obligations undertaken on the terms of this Agreement. 3. PCC, CMC, CME and CMH will at and upon Closing mutually release each of the other entities from any claims whatever. In consideration for such release CMC shall procure that CME shall pay PCC at the Closing the sum of US$500.000. 4. With regard to the lease between PCC and TGE for the Sithania Hotel, it is agreed subject to the Closing that there will be no increase or decrease in the Minimum Rent (as defined in the Lease Contract) after the increase which becomes effective on lst January 1997, provided the formula for percentage rent will remain unchanged. The past due amounts owed to TGE under the lease must be paid as soon as possible after the Closing. As of November 30, 1996 the total amount owed to TGE under the lease did not exceed GRD 195-000-GOO 5. The management agreement between CMH and PCC will on Closing be terminated. 6. The license agreement between CMC and PCC will be amended at Closing to provide for the elimination of the royalty set forth therein and to provide for termination six months after the Closing. 7.1. CME and PCC warrant that there are no other agreements between PCC and any company affiliated with CME or obligations of PCC towards any company affiliated with CME except this Agreement and those mentioned herein. 7.2. PARRAL and PCC warrant that there are no other agreements between PCC and PARRAL or obligations of PCC towards PARRAL except this Agreement. 7.3. TGE and PCC warrant that there are no other agreements between PCC and TGE or obligations of PCC towards TGE except this Agreement; the lease for the SITHONIA hotel, PCC's obligation to make payments f or common services shared with TGE and normal trade payables. 8.1 The consummation of the transactions hereby agreed will be contingent upon the approval of the transfer of the Shares to Buyer by the Greek Gaming Commission, the Greek Minister of Tourism and any other competent Greek Gaming Authorities f or the transfer of the Shares which approvals must be obtained within three months f from the date hereof. If the Closing cannot be effected due to delay on the part of the Greek Gaming Commission (or any other competent Gaming Authority f or such approval to be obtained) then the 3-month period shall be extended further as it shall be reasonably required. 8.2 The closing will take place not later than five (5) working days from the date on which the approval by the Greek Gaming Commission (and any other competent Authority involved related to Gaming) shall have been given, PROVIDED ALWAYS that Buyer has duly complied with all its obligations hereunder. 8.3 Subject to the satisfaction of the requirements referred to in Clauses 8.1 and 8.2 above, at the Closing Buyer shall in exchange of the transfer of the Shares pay to Parral the sum of US$1,000,000 net of any withholdings, taxes or any other charges whatsoever in immediately available funds and shall pay to CME the sum of US$l. Provided that the Buyer shall have the option to pay to Parral a sum of S$500.000 in immediately available funds at the Closing and a sum of US$500.000 within 6 months from the date of Closing secured by a bank guarantee acceptable to Parral to be delivered at the time of Closing. 9. 1 During the period from the date of this Agreement to the date of the Closing, Buyer will make sure that PCC will continue to properly operate the Casino and will contribute to PCC in time the funds required for PCC to meet its obligations punctually and in particular and in order of priority: (a) pay all taxes and social security contributions that are currently overdue and all interest, fines and penalties associated with any non payment or late payment thereof and pay all taxes and social security contributions as they come due and all interest, fines and penalties associated with any non payment or late payment thereof, including 20@. of the fine that has been imposed on PCC anticipated to be ascertained before 31 December 1996; (b) pay all the employees as THEIR- salaries, bonuses and other benefits come due; (c) pay or otherwise settle amounts to the suppliers, vendors, directors and other creditors of PCC and persons to whom PCC is obligated as they become due, including those already due; (d) maintain an appropriate amount of working capital to permit PCC to properly operate in a normal and reasonable manner; and (e) maintain cash in the cage of at least GRD 130,000,000. 9.2 Buyer shall make arrangements for an immediate cash infusion to be made to PCC to enable PCC to meet its financial obligations. In this respect, Buyer shall procure that an amount of GRD 400,000,000 be paid to PCC as follows: GRD 150,000,000 shall be paid by Buyer to PCC by 16 December 1996; and GRD 130,000,000 shall be paid by Buyer to PCC by 8t-h January 1997; and GRD 120,000,000 Shall be paid by Buyer to PCC at the Closing. 9.3 CMH as the manager of PCC during the (interim) period to the Closing, shall, in conjunction with Buyer's representative, use PCC's available funds (including those contributed by Buyer) in discharge of the obligations/liabilities of PCC in the order of priority referred to in the foregoing Clause 9.1. 10.1 Buyer will immediately after the execution of this Agreement, nominate five members for the board of directors of PCC. Parral and CME shall immediately hold an extraordinary meeting of the General Assembly of the shareholders of PCC and elect the members of the board of directors so nominated by Buyer. Buyer shall procure that the new members of the Board of Directors immediately after being elected pass a resolution approving, retroactively, any and all acts undertaken by Lynn Simmons, as managing director of PCC, including the signing of this Agreement, until that date. 10.2 From the date hereof through the Closing or the termination of this Agreement, CMH shall, in conjunction with Buyer's representative, continue to manage PCC pursuant to the current management agreement between PCC and CMH in a manner consistent with the past and will not make any substantial changes in the operations of PCC without the approval of Buyer; provided, however, that CMH shall not be entitled to any compensation under such management agreement during such period. In addition, from the date hereof through the Closing or the termination of this Agreement, no royalties shall accrue to CMC under the license agreement between CMC and PCC. 10. 3 Buyer will immediately make all appropriate applications and submit fully all documents required to the Greek Gaming Commission and any other competent Greek Authorities related to Gaming. All parties hereto will use their best good faith efforts to obtain approval of the transfer of the Shares to Buyer from the competent Greek Authorities related to Gaming at the shortest time after the execution of this Agreement as the intention of the parties hereto is to consummate this Agreement and proceed to the Closing as soon as possible. 11. I If the transaction does not close for any reason by 12 March 1997 or such later date as provided for in Clause 8.1 above, this Agreement shall terminate and the funds advanced by Buyer will be considered a loan to PCC and will be repaid by PCC out of free cash f low or at the time of any sale of PCC; provided however that if this Agreement be breached by Buyer and Buyer does not remedy such breach within five working days from receiving notice of the breach by any of the other parties to this Agreement, PCC will have no obligation to repay any funds advanced to it by Buyer under clause 9.2 hereof. Notice to the Buyer is valid if delivered and addressed to Mr. Nikos Salavrakos 8, Valaoritou Str. Athens, Tel 3638123, 3615315. 11.2 In the event that Buyer is not in default hereunder, on 31, January 1997 and approval of the Greek Gaming Commission and any other competent Greek Gaming Authorities required have not yet been given, Buyer may terminate this Agreement by written notice of such termination to Parral and CME given immediately thereafter. In the event that Buyer so terminates this Agreement, the funds advanced by Buyer to PCC will be considered a loan to PCC and will be repaid by PCC out of free cash flow or at the time of any sale of PCC. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in seven (7) originals as of the day and year first written above. PARRAL COMPANIA NAVIERA S.A. By: Title: CASINO MAGIC (EUROPE) B.V. By: Title: MURBEC, Inc. By: Title: PORTO CARRAS CASINO S.A. By: Title: CASINO MAGIC HELLAS MANAGEMENT SERVICES S.A. By: Title: TOURISTIKI GEORGIKI EXAGOGIKI S.A. By: Title: CASIO MAGIC CORP. By: Title: EX-10.109 7 AMEND OP. AGREEMENT KANSAS PARTNERS Kansas Gaming Ventures, Inc. 6601 South Beimuda Road Las Vegas, Nevada 89119 January 22,1997 Kansas Magic Corp. c/o Casino Magic Corp. 711 Casino Magic Drive Bay St. Louis, Mississippi 39520 Gentlemen: We refer to the (a) Operating Agreement dated November 23, 1994 of Kansas Gaming Partners, L.C., a Kansas limited liability company ("KGP"), among KGP., Kansas Gaming Ventures, Inc., a Nevada corporation and wholly-owned subsidiary of Alliance Gaming Corporation, a Nevada corporation ("KGVI"), and Kansas Magic Corp., a Minnesota corporation and wholly-owned subsidiary of Casino Magic Corp. ("KMC"), and (b) Operating Agreement dated November 23, 1994 of Kansas Financial Partners, L.L.C., a Kansas limited liability company ("KFP"; together with KGP, the "Kansas LLCs"), among KFP, KGVI and KMC (the agreements, referred to in clauses- (a) and (b), the "Operating Agreements"). Capitalized terms not defined herein have the meanings ascribed to them in the Operating Agreements. The Kansas LLCs have undertaken certain development work to date related to the Camptown racetrack in Frontenac, Kansas (the "Project"). KMC no longer desires to continue such development work and KMC therefore desires to-restructure the Kansas LLCs in order to provide that Kansas Alliance Corp., a Nevada corporation and an affiliate of KGVI (the "Transferee"), will acquire from KMC a 49.9% Membership Interest in each of the Kansas LLCs presently owned by KMC, which will assign, transfer and set over each of such 49.9% Membership Interests to the Transferee, as provided herein, thereby causing the Transferee to own 49.9% of the equity interests in each of the Kansas LLCS, with the option to acquire the remaining .I% Membership lnterests therein, as provided herein. Inconnectiontherewiththc Transferee will make the payments to KMC provided for herein. The parties agree as follows: 1) Effective on the date hereof, KMC hereby assigns, transfers and sets over to the Transferee, KMC's entire right, title and interest in a 49.9% Membership Interest in each of the Kansas LLCs . including without limitation, KMC's capital accounts associated with such Membership interest. In connection with such transaction, (a) KMC shall hereafter promptly upon request execute, deliver and cause to be recorded and/or filed such additional or supplemental documents and instruments (including confirmatory deeds, limited Usability company certificate amendments, transfers and assignments, including those in the form attached hereto as t ) as KGVI may from time to time reasonably request and (b) the parties shall, if KGVI requests, promptly execute and deliver appropriate amendments to the Operating Agreements. 2) (a) KGVI and the Transferee shall have the right, in their sole discretion,. to conduct all operations and management of the Kansas LLCS, without the requirement to consult with or obtain the approval or consent of KMC (consistent with the Operating Agreements, as amended to implement this letter agreement); in connection therewith,, KGVI and the Transferee shall have the right to make all determinations relating to funding (or the failure to fund) the Project and any and all related or ancillary amounts. In addition, KGVI and the Transferee shall have the right to abandon or discontinue efforts in respect of the Project at any time (the date of any such abandonment or discontinuance, the "Project Termination Date") without obligation to KMC or any of its affiliates, except with respect to the obligations set forth in Section 3 below. In furtherance of the foregoing, KMC shall cause such members of any board of directors, management or operating committee or similar capacity who have been appointed by it to resign as of the date of this letter agreement and to be replaced with designees of KGVI and the Transferee. (b) KGVI, KMC and the Transferee agree that, effective as of this date, each of the Operating Agreements is amended as follows, (i) Section 4.2 of each of the Operating Agreements is amended to read as follows: "Each Member (excluding, however, KMC) agrees to make additional capital. contributions in cash in an amount equal to 50% of the amounts necessary, in the event of the exercise of the Option, to consummate such transactions as are agreed upon by the affirmative vote of the owners of mot-e than 50% of all Membership Interests."; (ii) The fourth and fifth sentences of Section 6.1 of each of the Operating Agreements are amended to read as follows: "Each Member shall have authority to bind the Company, by execution of documents or otherwise, to any obligation not inconsistent with this Agreement or the Act. Notwithstanding the foregoing, Kansas Magic Corp., acting alone, shall have no right, power or authority whatsoever to bind or obligate the Company to any contract., debt, agreement, liability or obligation, and the signature or other written concurrence of another Member of the Company shall be necessary for the Company to be so bound or obligated. Subject to, and without affecting, Article XIII of the Articles of Organization of the Company, no person dealing with any Member shall be required to determine the Member's authority to act on behalf of the Company or to determine any facts or circumstances bearing upon the existence of such authority." (iii) The first sentence of Section 7. 1.1 of each of the Operating Agreements is amended to read as follows: "No Member shall Transfer any portion of its interest in the Company or enter into any agreement by which any person shall become interested in the Company unless the prior written consent of the owners of more than 50% of all Membership Interests is obtained pursuant to Section 7.2 of this Agreement."; (iv) The first sentence of Section 7.2 of each of the Operating Agreements is amended to read as follows: "Prior written consent will be deemed obtained only when the owners of a Majority In. Interest approve such Transfer in writing,"; and (v) Section 7.4 of each of the Operating Agreements is amended to read as follows- "The Members, upon the affirmative vote of the owners of a Majority In Interest, may admit additional Members on the terms and conditions agreed upon at the time of such admittance; provided that such additional Member shall be subject to this Agreement and shall so agree in writing upon request." (c) KMC agrees that it shall not bind or seek or attempt to bind either of the LLCs to any liability or obligation without obtaining the prior written consent of KGVI, which consent may be denied or conditioned in the sole and absolute discretion. of KGVI. KMC shall indemnify and hold harmless KG- VI and the Transferee and their respective affiliates from any breach or violation of the terms of this paragraph by KMC, including costs and attorneys' fees incurred in defending against any such liability or obligation or in enforcing its right to indemnity hereunder. 3) The Transferee shall be obligated to pay to King Hershey Koch & Stone for the benefit of KMC, as provided herein, as the full consideration and purchase price for KMC's 49.9% Membership Interest in each of the Kansas LLCS, as described above, up to S25,000. In addition, KGVI shall be obligated to pay to KMC an additional contingent purchase price (the 'Contingent Purchase Price"), as follows-. The Contingent Purchase Price shall be equal to the lesser of (a) S 1,700.000, plus a return thereon of 10% per year, compounded annually (beginning on the date hereof) until paid in full, and (b) the cumulative cash otherwise available for distribution to KGVI, or the Transferee as permitted by the Operating Agreements, derived from the Project from the date hereof through the earlier to occur of January 22, 2017 and the Project Termination Date (thus, KMC shall receive all cash otherwise available for distribution to KGVI and the Transferee (but not, for example, cash available for distribution to additional Members other than KGVI or the Transferee) from the Project, as described above, until KMC has received in the aggregate S 1,700,000 plus 10% interest per year, compounded annually, or until January 7, 2017, whichever occurs first). The Contingent Purchase Price shall be payable prior to the time that any cash distributions from the Project are made to KGVT. or the Transferee. KGVI and the Transferee shall be responsible to make such payments solely from such cash derived from the Project and neither KGVI nor the Transferee nor any of their respective affiliates shall be liable to KMC for any other amount or in any other respect related to the transactions contemplated hereby. Notwitbstanding the foregoing, KGVI or the Transferee, may, at any time, in their sole option, accelerate payment of the unpaid portion of the Contingent Purchase Price, in whole or in part-t, to an earlier time than otherwise provided above. 4) Except for the future right to receive the Contingent Purchase Price as set forth in Section 3 above, KMC shall have no right to receive any distributions or returns of capital with respect to or by reason of the 49.9% Membership Interest being transferred to the Transferee, all of such interests in each of the Kansas and LLCs being transferred, assigned and set over to the Transferee as provided herein. 5) Each party represents to the other that it has full corporate authority to enter into and to consummate the transactions contemplated hereby, and that such transactions have been duly authorized by all necessary corporate, shareholder and other action and that this letter agreement (a) does not violate any instrument or agreement binding upon such party and (b) constitutes the legal and valid obligations of such party, and is enforceable against such party in accordance with its terms. Each party represents to the other that except as set forth in Section 7 below, no consent of any governmental authority or other third party is required for the consummation of the transactions contemplated hereby. KMC represents that it has not bound either of the Kansas LLCs to any -liability, obligation, contract, debt, undertaking or incurred or permitted to exist any obligation, liability or lien against the Kansas LLCs or their properties or assets. The representations above shall survive the execution and delivery of This letter agreement and the consummation of the transactions contemplated hereby and, in the event of any breach of any of such representations by KMC, KGVI and the Transferee shall be entitled, in addition to au other rights and remedies at law or in equity, to withhold amounts otherwise payable as provided iii Section 3 above and to apply such withheld amounts to the amounts of KGVI's and the Transferee's damage resulting therefrom. 6) Each of the Kansas, LLCs and KGVI agrees to indemnify, defend and hold harmless KMC and its affiliates from and against any and all loss, cost or expense, including reasonable attorney's fees and disbursements, resulting or arising from the operation of the Kansas LLCs with respect to any event or circumstance first existing or arising after the date hereof 7) This letter agreement (a) shall be governed by and construed-d in accordance with the internal laws of Kansas, without regard to principles of conflicts of laws, (b) may be executed in counterparts and delivered by facsimile transmission, (c) shall not be assigned or delegated by KMC without the prior written consent of KGVI (but may be assigned by KGVI or the Transferee); subject to the foregoing, shall be binding upon and inure the benefit of the parties' respective successors and assigns. Each party consents to the jurisdiction of any federal or state court sitting in Kansas City, Kansas over any dispute arising thereunder or related hereto. 8) The transactions contemplated by this letter agreement (and the performance of each party's obligations hereunder) are subject to appropriate regulatory approvals. including the approval of the Kansas Racing Commission, if required; in such regard, each. party agrees to make all necessary appropriate filings, appear at all necessary or appropriate hearings and otherwise reasonably cooperate with the other to obtain such regulatory approvals. 9) The parties acknowledge that (a) KGVI and the Transferee shall be permitted (in their sole discretion) to admit additional members to either or both of the Kansas LLCS, in which case the parties' respective Membership Interests shall be reduced proportionately, and (b) neither KGVI nor the Transferee shall have any fiduciary or other obligations to KMC or any of KMC's affiliates, other than the obligations explicitly set forth herein, and KGVI and the Transferee shall be permitted to operate, finance and manage the Kansas LLCs and the Project in their sole discretion in such manner as they determine, and (c) KGVI and the Transferee shall have the eight to acquire KMC's . 1% interest in each of the Kansas LLCs at any time upon written notice to KMC for S1,000 in cash (by wire transfer or check), in which case KMC shall assign, transfer and set over to KGVI and/or the Transferee such interest documents and instruments in the form attached hereto as Exhibit A(with appropriate conforming changes) or such other form as KGVI shall reasonably request, Please indicate your agreement to the foregoing by signing a copy of this letter agreement where indicated below. Very truly yours, Kansas Gaming Ventures, Inc. By: Name: Scott Schweinfurth Title: Treasurer Ageed to, Kartsas Magic Corp. By: Name: Robert Callaway Title: Secretary [Transferee] By: Name: Title: Exhibit A [KANSAS GAMING PARTNERS] ASSIGNMENT OF MEMBERSHIP INTEREST AND ADMISSION OF NEW MEMBER FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are acknowledged, Kansas Magic Corp. (the "Transferor"), the owner of a 50% membership interest in Kansas Gaming Partners, L.L.C. (the "LCC"), hereby assigns, transfers, bargains and conveys to (the "Transferee") all of the Transferor's Tight, title and interest in and to a 49.9% Membership Interest in the LLC owned by the Transferor (the "Interest"). The Transferor is retaining ownership of a 10% ' Membership Interest in the LLC, subject to the terms of a letter agreement dated January - -1 1997 between the Transferor and Kansas Gaming Ventures, Inc. and the Transferee (the "Letter Agreement"). The Transferee accepts the foregoing assignment of the Interest and agrees that it -is bound by, and its ownership of the Interest is subject to, the Operating Agreement of the LLC dated November 23, 1994, as amended by certain provisions of the Letter Agreement. Kansas Gaming Ventures, Inc.. ("KGVI") consents to the foregoing assignment of the Interest, and KGVI and the Transfcror agree that the Trarisferee is admitted as a new Member of the LLC. WITNESS our hands and seals this day of Janua-ry , 1997. KANSAS GAMING VENTURES, INC. By: Name: Robert Callaway Title: Secretary [Transferee] By: Name: Title: KANSAS GAMING VENTURES, INC. By: Name: Title: [KANSAS FINANCIAL PARTNERS] ASSIGNMENT OF MEMBERSHIP INTEREST AND ADMISSION OF NEW MEMBER FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are acknowledged, Kansas Magic Corp. (the "Transferor"), the owner of a 50% membership interest in Kansas Financial Partners, L.L.C. (the "L.LC") hereby assigns, transfers, bargains and conveys to (the "Transferee") all of the Transferor's right, title and interest in and to a 49.9% Membership Interest in the LLC owned by the Transferor (the "Interest"). The Transferor is retaining ownership of a.10% Membership Interest in the LLC, subject to the terms of a letter agreement dated January _, 1997 between the Transferor and Kansas Gaming Ventures, Inc, and the Transferee (the "Letter Agreement"). The Transferee accepts the foregoing assignment of the Interest and agrees that it is bound by, and its ownership of the Interest is subject to, the Operating Agreement of the LLC dated November 23, 1994, as amended by certain provisions of the Letter Agreement. Kansas Gaming Ventures, Inc. ("KGVT") consents to the foregoing assignment of the Interest, and KGVI and the Transferor agree that the Transferee is admitted as a new Member of the LLC. WITNESS our hands and seals this _ day of January, 1997. KANSAS MAGIC CORP. By: Name: Robert Callaway Title: Secretary [Transferere] By: Name: Title: KANSAS GAMING VENTURES, INC By: Name: Title: FIRST AMENDNENT TO ARTICLES OF ORGANIZATION OF KANSAS GAMING PARTNERS, L.L.C. The undersigned, for purposes of amending the Aiticies of Organization of Kansas Gaming Panners, L.L.C., filed on July 19, 1994 ("Alticies of Organizadon"), adopts the following: 1. Article VM of the Articles of Organization is amended to read as follows: Management of the Company shall be reserved in its members; Kansas Gaming Venmres, Inc., a Nevada corporation, Kansas Alliance Corp.. a Nevada corporation, and Kansas Magic Co-rp., a Minnesota corporation, whose addresses are c/o King Rershey Koch & Stone, Suite 2100, 2345 Grand Boulevard., Kaasas City, Missouri 641 08. 2. The Articles of Organization are amended by adding the following new Article XIII: "ARTICLE XIII Notice is hereby given that Kansas Magic Corp., acting along, has no right, power or authority whatsoever to bind or obligate the Company to any contract, debt, agreement, liability or obligation, and the signature or other written concurrence of another member of the Company shall be necessary for the Company to be so bound or obligated." 3. Except as modified by this First Amendment, the Articles of Organization are ratified by the parties. This First Amendment to the Articles of Organization was duly executed on this day of January, 1997, and is filed in accordance with the Act. KANSAS GAMING VENTURES, INC. By: Name: Title: KANSAS ALLIANCE CORP. By: Name: Title: FIRST AMENDMENT TO ARTICLES OF ORGANIZATION OF KANSAS FINANCIAL PARTNERS, L.L.C. The undersigned, for the purpose of amending the Articles of Organization of Kansas Financial partners, L.L.C., filed on July 19, 1994 ("Articles of Organization"), adopts the following: Article VIII of the Articles of Organization is amended to read as follows: Management of the Company shall be reserved in its members: Kansas Gaming Ventures, Inc., a Nevada corporation, Kansas Alliance Corp., a Nevada corporation, and Kansas Magic Corp., a Minnesota corporation, whose addresses are c/o King Hershey Koch & Stone, Suite 2100, 2345 Grand Boulevard, Kansas City, Missouri 64108. 2. The Articles of Organization are amended by adding the following new ARTICLE XIII: "ARTICLE XIII Notice is hereby given that Kansas Magic Corp., acting along, has no right, power or authority whatsoever to bind or obligate the Company to any contract debt, agreement, liability or obligation, and the signature or other written concurrence of another member of the Company shall be necessary for the Company to be so bound or obligated." 3. Except as modified by this First Amendment, the Articles of Organization as originally filed remain in effect and are ratified by the parties. This First Amendment to the Articles of Organization was duty executed on this day of January, 1997, and is filed in accordance with the Act. KANSAS GAMING VENTURES, INC. By: Name: Title: KANSAS ALLIANCE CORP. By: Name: Title: EX-21.01 8 SUBSIDIARIES OF CASINO MAGIC CORP. Exhibit 21.1 Subsidiaries of Casino Magic Corp. State of Other Names Incorporation Under Which Subsidiary or Organization Business is Conducted Atlantic-Pacific Corp. South Dakota Goldiggers Biloxi Casino Corp. Mississippi Casino Magic - Biloxi Boston Casino Corp. Massachusetts None Bucks County Casino Corp. Pennsylvania None Casino Magic (Europe) B.V. Netherlands Casino Magic (Europe) Casino Magic American Corp. Minnesota Dakota Magic Casino Magic Finance Corp. Mississippi None Casino Magic Neuquen S.A. Argentina Casino Magic - Argentina Casino One Corporation Mississippi None Kansas Magic Corp. Minnesota None Mardi Gras Casino Corp. Mississippi Casino Magic - Bay St. Louis St. Louis Casino Corp. Missouri None Jefferson Casino Corp. Louisiana None Subsidiary of Jefferson Casino Corp. Casino Magic of Louisiana Corp. Louisiana Casino Magic - Bossier City EX-23.01 9 CONSENT OF ARTHUR ANDERSEN CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 28, 1997 included in this Form 10-K for the year ended December 31, 1996, into the Company's previously filed Registration Statements File Nos. 33-73632, 33-79674, 33-84030, 33-93650, 33-93916, and 33-99248 /s/ Arthur Andersen LLP New Orlenas, Louisiana March 26, 1997 EX-27.00 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1996, CONSOLIDATED FINANCIAL STATEMENTS OF CASINO MAGIC CORP. AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 34,546,166 5,767 2,889,489 0 825,816 41,956,497 286,011,977 42,319,405 370,601,691 48,448,985 258,261,231 0 0 356,371 63,268,343 370,601,691 180,277,843 180,277,843 0 171,434,538 27,191,029 0 17,917,805 (36,265,529) (4,676,182) 8,843,305 0 0 0 (31,589,347) (0.88) (0.89)
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