<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1999
FILE NO. 0-25093
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
HARVEYS ACQUISITION CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
NEVADA 91-1942191
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1999 AVENUE OF THE STARS, SUITE
1200
LOS ANGELES, CALIFORNIA 90067
(Address of Principal (Zip Code)
Executive Offices)
</TABLE>
------------------------
Registrant's telephone number, including area code:
310-282-8820
------------------------
Copies of correspondence to:
<TABLE>
<S> <C>
Richard Ekleberry, Esq. Jonathan H. Grunzweig, Esq.
Harveys Acquisition Corporation Skadden, Arps, Slate, Meagher & Flom LLP
201 Main Street, Suite 2420 300 South Grand Avenue
Fort Worth, TX 76102 Los Angeles, CA 90071
</TABLE>
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
NOT APPLICABLE NOT APPLICABLE
Title of each class Name of each exchange on which
to be so registered each class to be registered
</TABLE>
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Item 1. Business......................................................... 1
Item 2. Financial Information............................................ 21
Item 3. Properties....................................................... 36
Item 4. Security Ownership of Certain Beneficial Owners and Management... 37
Item 5. Directors and Executive Officers................................. 38
Item 6. Executive Compensation........................................... 40
Item 7. Certain Relationships and Related Transactions................... 47
Item 8. Legal Proceedings................................................ 49
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.................................. 49
Item 10. Recent Sales of Unregistered Securities.......................... 49
Item 11. Description of Registrant's Securities to be Registered.......... 49
Item 12. Indemnification of Directors and Officers........................ 51
Item 13. Financial Statements and Supplementary Data...................... 51
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 51
Item 15. Financial Statements and Exhibits................................ 52
Index to Financial Statements............................................. F-1
</TABLE>
i
<PAGE>
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
CERTAIN STATEMENTS IN THIS REGISTRATION STATEMENT (THE "REGISTRATION
STATEMENT") CONTAIN OR MAY CONTAIN INFORMATION THAT IS FORWARD-LOOKING. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS AND WILL BE AFFECTED BY A VARIETY OF RISKS AND FACTORS INCLUDING BUT
NOT LIMITED TO THE FOLLOWING: THE INABILITY OF REGULATED ENTITIES AND CERTAIN
OFFICERS AND OTHER AFFILIATES OF THE COMPANY OR HARVEYS (AS DEFINED HEREIN) TO
OBTAIN GAMING LICENSES OR PERMITS IN JURISDICTIONS WHERE THE CURRENT OR PLANNED
BUSINESS OF HARVEYS REQUIRES SUCH LICENSES OR PERMITS; THE LIMITATION,
CONDITIONING, REVOCATION OR SUSPENSION OF ANY SUCH GAMING LICENSES OR PERMITS; A
FINDING OF UNSUITABILITY OR DENIAL BY REGULATORY AUTHORITIES WITH RESPECT TO ANY
OFFICERS, DIRECTORS OR KEY EMPLOYEES REQUIRED TO BE FOUND SUITABLE; LOSS OR
RETIREMENT OF KEY EXECUTIVES; INCREASED COMPETITION IN EXISTING MARKETS OR THE
OPENING OF NEW GAMING JURISDICTIONS (INCLUDING IN NATIVE AMERICAN LANDS); A
DECLINE IN THE PUBLIC ACCEPTANCE OF GAMING; INCREASES IN OR NEW TAXES OR FEES
IMPOSED ON GAMING REVENUES OR GAMING DEVICES; SIGNIFICANT INCREASES IN FUEL OR
TRANSPORTATION PRICES; ADVERSE ECONOMIC CONDITIONS IN HARVEYS' KEY MARKETS; AND
SEVERE OR UNUSUAL WEATHER IN HARVEYS' KEY MARKETS. IN ADDITION, THE FINANCING
REQUIRED FOR THE MERGER WILL SUBSTANTIALLY INCREASE THE LEVERAGE AND OTHER FIXED
CHARGE OBLIGATIONS OF HARVEYS. THE LEVEL OF HARVEYS' INDEBTEDNESS AND OTHER
FIXED CHARGE OBLIGATIONS COULD HAVE IMPORTANT CONSEQUENCES, INCLUDING BUT NOT
LIMITED TO THE FOLLOWING: (1) A SUBSTANTIAL PORTION OF HARVEYS' CASH FLOW FROM
OPERATIONS WOULD BE DEDICATED TO DEBT SERVICE AND OTHER FIXED CHARGE OBLIGATIONS
AND WOULD NOT BE AVAILABLE FOR OTHER PURPOSES; (2) HARVEYS' ABILITY TO OBTAIN
ADDITIONAL FINANCING IN THE FUTURE FOR WORKING CAPITAL, CAPITAL EXPENDITURES OR
ACQUISITIONS MAY BE LIMITED; AND (3) HARVEYS' LEVEL OF INDEBTEDNESS COULD LIMIT
ITS FLEXIBILITY IN REACTING TO CHANGES IN ITS INDUSTRY AND ECONOMIC CONDITIONS
GENERALLY. READERS SHOULD CAREFULLY REVIEW THIS REGISTRATION STATEMENT IN ITS
ENTIRETY, INCLUDING BUT NOT LIMITED TO HARVEYS' AND THE COMPANY'S RESPECTIVE
FINANCIAL STATEMENTS AND THE NOTES THERETO.
ITEM 1. BUSINESS.
THE COMPANY
Harveys Acquisition Corporation (the "Company") was formed at the direction
of Colony Investors III, L.P., a Delaware limited partnership ("Colony III") and
an affiliate of Colony Capital, Inc. ("Colony Capital") of Los Angeles,
California, under the laws of the State of Nevada on January 30, 1998. The
Company has conducted no business other than in connection with the Merger
Agreement (as defined herein).
Colony Capital is a private, international investment firm focusing
primarily on real estate-related assets and operating companies with a strategic
dependence on such assets. Colony III is its third discrete investment fund, a
$1.0 billion discretionary equity partnership. Established coinvestment
mechanisms provide the partnership with access to significant additional
capital, as does the fund's $425 million revolving financing facility. Colony
Capital is led by Thomas J. Barrack, Jr., Chairman and Chief Executive Officer,
and Kelvin L. Davis, President and Chief Operating Officer. Colony Capital has a
staff of approximately 80, with offices in Los Angeles, New York, Fort Worth,
Kohala Coast in Hawaii, Singapore and Paris.
The Company and Harveys Casino Resorts, a Nevada corporation ("Harveys"),
entered into an Agreement and Plan of Merger dated as of February 1, 1998 (the
"Merger Agreement"). Pursuant to the Merger Agreement, subject to the
satisfaction or waiver of certain conditions to the obligations of the parties
under the Merger Agreement, the Company will be merged (the "Merger") with and
into Harveys. Harveys will be the surviving corporation in the Merger and
continue its current business operations. The Articles of Incorporation and the
Bylaws of the Company will become the Articles of Incorporation and the Bylaws
of Harveys.
In the Merger, each share of common stock of Harveys ("Harveys Common
Stock") outstanding at the time the Merger becomes effective (the "Effective
Time") (other than shares of Harveys Common
1
<PAGE>
Stock held in Harveys' treasury) will be converted into the right to receive
cash as provided in the Merger Agreement.
In connection with and immediately prior to the Merger, the Company expects
to issue 37,799 shares of its Class A Common Stock ("Class A Common") to Colony
HCR Voteco, LLC, a Delaware limited liability company owned and managed by
Messrs. Barrack and Davis ("Voteco"), and 3,879,001 shares of its Class B Common
Stock ("Class B Common") to Colony III. Holders of Class A Common are entitled
to one vote per share in all matters to be voted on by stockholders of the
Company. Holders of Class B Common have no vote, except as otherwise expressly
required by law. As a result of such issuance Voteco will hold 38,800 shares of
Class A Common, and Colony III will hold 3,880,000 shares of Class B Common.
The Company is issuing Class A Common and Class B Common so that Colony III
may acquire substantially all the equity interest in Harveys without having any
voting or other power to control the affairs of the Harveys, except as otherwise
expressly required by law. If Colony III had any voting or other power to
control the affairs of the Harveys, it or its constituent partners could be
required to be licensed or found suitable pursuant to the gaming laws and
regulations of jurisdictions in which Harveys conducts gaming operations.
Following the Merger, Colony III will own approximately 97% of the outstanding
non-voting common stock of Harveys through the ownership of 97% of the
outstanding non-voting Class B Common, representing approximately 96% of the
common equity of Harveys. Voteco will own 97% of the voting stock in Harveys
through the ownership of 97% of the outstanding voting Class A Common,
representing approximately 1% of the common equity of Harveys. Certain executive
officers of Harveys will own 3% of the outstanding non-voting common stock and
voting stock of Harveys through the ownership of 3% of each of the outstanding
Class A Common and outstanding Class B Common representing approximately 3% of
the common equity of Harveys. See "Item 4. Securities Ownership of Certain
Beneficial Owners and Management" and "Item 7. Certain Relationships and Related
Transactions." As a result, Voteco will be able to govern all matters of the
Company that are subject to the vote of stockholders, including the appointment
of directors and the amendment of the Company's Articles of Incorporation and
Bylaws.
The conditions to the consummation of the Merger include receipt of
requisite approvals from the authorities regulating gaming in the states of
Nevada, Colorado and Iowa. Voteco is required to be approved by the Nevada State
Gaming Control Board and the Nevada Gaming Commission to acquire control of
Harveys through the Merger. The proposed change of control in Harveys resulting
from the Merger requires the approval of the Colorado Limited Gaming Control
Commission, and Voteco, Colony III, the direct and indirect general partners of
Colony III, Mr. Barrack, Mr. Davis and Mark Hedstrom, Chief Financial Officer of
Colony Capital, who is expected to be appointed an observer of the Board of
Directors of Harveys upon the Effective Time, are each required to be found
suitable to be associated persons of Harveys' Colorado operating subsidiary. The
proposed Merger required the approval of the Iowa Racing and Gaming Commission,
which was granted on October 28, 1998 following background investigations of
Voteco, Colony III, the direct and indirect general partners of Colony III, Mr.
Barrack, Mr. Davis and Mr. Hedstrom. See "--Regulatory Matters."
2
<PAGE>
The diagram below shows the ownership of the Company and Harveys immediately
before the Merger and the issuances of 37,799 shares of Class A Common and
3,879,001 shares of Class B Common to Voteco and Colony III, respectively, as
well as certain affiliations between certain parties.
[Graphic depicting the following:
- -Mr. Davis and Mr. Barrack each are members of Voteco
- -Voteco owns 1 share of Class A Common of the Company
- -Mr. Davis and Mr. Barrack each owns a stock interest in the indirect
corporate general partner of Colony III
- -Colony III owns 999 shares of Class B Common of the Company
- -Public and management stockholders hold Harveys Common Stock
- -The Company is to be merged with and into Harveys]
3
<PAGE>
The diagram below shows the ownership of the Company following the Merger,
as well as certain affiliations among certain parties.
[Graphic depicting the following:
- -Mr. Davis and Mr. Barrack each are members of Voteco
- -Voteco owns 38,800 shares of Class A Common of Harveys
- -Mr. Davis and Mr. Barrack each owns a stock interest in the indirect
corporate general partner of Colony III
- -Colony III owns 3,880,000 shares of Class B Common of Harveys
- -Certain management stockholders hold 1,200 shares of Class A Common
and 120,000 shares of Class B Common of Harveys
- -Harveys pays merger consideration to public and certain management
stockholders and option holders of Harveys]
Shares of Class A Common held by Voteco will be subject to a Transfer
Restriction Agreement (the "Transfer Restriction Agreement") by and among
Messrs. Barrack and Davis, Voteco and Colony III. The Transfer Restriction
Agreement will provide, among other things, that (1) Colony III has the option
to purchase shares of Class A Common from Voteco in connection with sales of
Class B Common by Colony III to a proposed purchaser who, in connection with
such proposed sale, has obtained all licenses, permits, registrations,
authorizations, consents, waivers, orders, findings of suitability or other
approvals required to be obtained from, and has made all filings, notices or
declarations required to be made with, all gaming authorities under all
applicable gaming laws, and (2) Voteco will not transfer ownership of shares of
Class A Common owned by it except pursuant to such option of Colony III. See
"Item 4. Security Ownership of Certain Beneficial Owners and Management." Colony
III required Voteco, Mr. Barrack and Mr. Davis to enter into the Transfer
Restriction Agreement to restrict the ability of Voteco, Mr. Barrack and Mr.
Davis, without the assent of Colony III, to obtain personal benefit from any
control premium or price appreciation associated with the shares of Class A
Common or to transfer control of Harveys to a third party. The per share
exercise price of Colony III's option under the Transfer Restriction Agreement
has been set to reimburse Voteco for its original cost of acquiring shares of
Class A Common, plus a market-based interest rate. In addition, the Articles of
Incorporation of the Company provide that no stock or other securities issued by
the Company and no interest, claim or charge therein or thereto may be
transferred, except in accordance with the provisions of the Nevada Gaming
Control Act and the regulations promulgated thereunder (collectively, the
"Nevada Act"). See "Item 11. Description of Registrant's Securities to be
Registered."
4
<PAGE>
In addition, the Company has entered into a Memorandum of Understanding
dated February 1, 1998 (the "MOU") with three senior executive officers of
Harveys. The MOU provides, among other things, that the Company shall grant to
certain executive officers of Harveys the number of shares of Class A Common and
Class B Common that is equivalent in the aggregate to 3% of the Class A Common
and Class B Common, respectively, outstanding as of the Effective Time. Pursuant
to the MOU, HAC has agreed to appoint Charles W. Scharer, currently Chairman of
the Board of Directors, President and Chief Executive Officer of Harveys, to be
a director of the Company, and Stephen L. Cavallaro, currently Chief Operating
Officer (Subsidiary Properties) of Harveys, to serve as a non-voting observer of
the Board of Directors of the Company.
The Company currently intends to finance the Merger and pay related fees and
expenses with (1) proceeds from the issuance of Class B Common to Colony III and
Class A Common to Voteco, (2) proceeds from the private placement of non-voting
preferred stock (the "Series A Preferred"), (3) borrowings by Harveys under a
$185 million credit facility (the "Amended and Restated Credit Facility") and
(4) Harveys' available cash (collectively, the "Merger Financing"). A portion of
the financing for the Merger will be initially provided pursuant to a loan (the
"Loan") from a group of banks led by Wells Fargo Bank, National Association
("Wells Fargo") to the Company. Upon consummation of the Merger, the Loan will
be refinanced principally through the Amended and Restated Credit Facility
pursuant to an Amended and Restated Credit Agreement among Harveys, Harveys C.C.
Management Company, Inc., Harveys Iowa Management Company, Inc., Harveys Tahoe
Management Company, Inc. and HCR Services Company, Inc., as borrowers (the
"Borrowers"), Wells Fargo, as swingline lender, letter of credit issuer and
agent, and the lenders party thereto. The Amended and Restated Credit Facility
will replace Harveys' existing credit facility upon consummation of the Merger.
Funding under the Loan and the Amended and Restated Credit Facility is subject
to the satisfaction of customary conditions precedent. If the Merger is
consummated, the actual types and amounts of funds utilized to finance the
Merger and pay related fees and expenses may differ based on prevailing
circumstances at the time. In addition, application of the Merger Financing is
subject to, among other matters, applicable gaming authority approvals.
The Amended and Restated Credit Facility will be secured by substantially
all of Harveys' and the other Borrowers' assets including, subject to applicable
gaming approvals, a pledge of all of the capital stock of each of the Borrowers
(other than Harveys), mortgages on all material real property owned or leased by
the Borrowers and the accounts receivable, inventory, equipment and intangibles
of the Borrowers. The Amended and Restated Credit Facility will mature and be
fully due and payable five years from the date of the Merger. The permitted
principal balance of the Amended and Restated Credit Facility will reduce on a
quarterly basis, commencing on the last day of the seventh fiscal quarter
following the date of the Merger. Interest on borrowings outstanding under the
Amended and Restated Credit Facility will be payable, at Harveys' option, at
either the London Inter-Bank Offering Rate or an alternative base rate, in each
case plus an applicable margin. In the future, the applicable margins may be
changed, based on the ratio of the Borrowers' total funded debt to EBITDA. The
Amended and Restated Credit Facility contains a number of covenants that, among
other things, subject to applicable gaming approvals, restrict the ability of
Harveys and the other Borrowers to dispose of assets, incur additional
indebtedness, prepay the Notes, pay dividends, create liens on assets, make
investments, loans or advances, engage in mergers or consolidations, change the
business conducted by Harveys or the other Borrowers or engage in certain
transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under the Amended and Restated Credit Facility, Harveys
and the other Borrowers will be required to maintain specified financial ratios
and net worth requirements, satisfy specified financial tests, including
interest coverage tests, and maintain certain levels of annual capital
expenditures. The Amended and Restated Credit Facility contains events of
default customary for facilities of this nature. Specifically, the Amended and
Restated Credit Facility prohibits the payment of cash dividends on the
Preferred Stock, unless the Leverage Ratio is less than or equal to 3 to 1.
"Leverage Ratio" is calculated by reference to Harveys, HCCMC, HIMC, HLVMC and
HTMC and any other subsidiaries of Harveys subsequently designated as a
5
<PAGE>
"Restricted Subsidiary" under the Amended and Restated Credit Facility and
refers to the ratio of total indebtedness to EBITDA.
Harveys recently amended the indenture (the "Indenture") governing its
10 5/8% Senior Subordinated Notes due 2006 (the "Notes"), with the changes to
become operative at the Effective Time. Harveys sought and received the consent
of the holders of its Notes to: (1) the one-time waiver of the applicability of
the Indenture to the Merger, including the waivers of (a) the change of control
covenant in the Indenture and (b) the "Merger, Consolidation or Sale of Assets"
provision in the Indenture that may restrict the financing of the Merger and
related transactions, and (2) the amendment of the definition of "Consolidated
Cash Flow" in the Indenture to add back certain costs related to the Merger. The
Merger is subject to satisfaction or waiver of certain conditions, including the
receipt of gaming regulatory approvals, and there can be no assurance that it
will be consummated.
The Company is filing this Form 10 Registration Statement (the "Registration
Statement") voluntarily. The Company is not required to file this Registration
Statement pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or the rules and regulations of the Securities and Exchange
Commission (the "SEC") promulgated thereunder. Following effectiveness of this
Registration Statement, the Company will be required to file annual, quarterly
and current reports, proxy statements and other information with the SEC. You
may read and copy any reports, statements or other information filed by the
Company at the SEC's public reference facilities or Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The Company's filings are also available to the public
from commercial document retrieval services and at the world wide web site
maintained by the SEC at http://www.sec.gov.
HARVEYS CASINO RESORTS
OVERVIEW
Harveys is an established owner, operator and developer of high-quality
hotel/casinos in Nevada, Colorado and Iowa. Harveys, through its wholly owned
subsidiary Harveys Tahoe Management Company, Inc. ("HTMC"), owns and operates
Harveys Resort Hotel/Casino ("Harveys Resort"), the Lake Tahoe area's largest
hotel/casino. Harveys Resort, in operation since 1944, is situated on the south
shore of scenic Lake Tahoe on the Nevada/California state line. Harveys, through
its wholly owned subsidiary Harveys C.C. Management Company, Inc. ("HCCMC"),
owns and operates Harveys Wagon Wheel Hotel/ Casino ("Harveys Wagon Wheel") in
Central City, Colorado, which opened in December 1994 as the first major
hotel/casino serving the greater Denver area. Harveys, through its wholly owned
subsidiary Harveys Iowa Management Company, Inc. ("HIMC"), owns and operates a
riverboat casino and hotel/convention center in Council Bluffs, Iowa across the
Missouri River from Omaha, Nebraska. The Harveys Casino Hotel riverboat casino
opened on January 1, 1996 and is one of only three operators in the
Omaha/Council Bluffs gaming market, which includes one other riverboat casino
and a slot machine operator at the local dogtrack. Harveys was incorporated in
Nevada in 1955.
Harveys Resort was originally founded on the south shore of Lake Tahoe by
Harvey and Llewellyn Gross in 1944 as a one-room saloon, cafe and casino.
Harveys has developed the property into a major hotel/casino consisting of 740
hotel rooms, an 82,000-square foot casino, 23,000 square feet of convention
space, 2,946 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding
chapel, restaurants and retail shops, a pool, a health club and a video arcade.
Harveys Resort offers its customers high-quality hotel rooms, excellent dining
facilities, an exciting location, entertaining events and a lively gaming
atmosphere.
Through Harveys Wagon Wheel, which opened in December 1994, Harveys
established the first major hotel/casino serving the greater Denver area,
Colorado's major population center of more than 2 million
6
<PAGE>
people. Harveys Wagon Wheel includes 1,046 slot machines, 18 table games and a
nine-table poker area, a 118-room hotel and 730 on-site covered parking spaces.
Other amenities include a Tony Roma's Famous for Ribs restaurant, a Tony Roma's
Express, an entertainment lounge and a video game arcade.
The Harveys Casino Hotel riverboat casino accommodates 2,352 passengers and
is berthed on the Missouri River directly across from Omaha in Council Bluffs,
Iowa. The riverboat casino has 28,250 square feet of casino space on three decks
and contains 1,084 slot machines, 51 table games and a seven-table poker area.
The land-based amenities, which opened in May 1996, include surface parking for
approximately 2,300 cars and a 14-story, 251-room hotel with a 21,000-square
foot convention center.
BUSINESS STRATEGY
Harveys' business strategy is to develop premium hotel/casino facilities in
markets in which Harveys believes it can establish and maintain a prominent
position or niche. Each of Harveys' properties offers casino gaming and a full
range of amenities in a friendly atmosphere that caters to middle- and upper
middle-income customers. This strategy emphasizes the following elements:
HIGH-QUALITY FACILITIES AND SUPERIOR CUSTOMER SERVICE. As part of its
commitment to providing a quality entertainment experience for its patrons,
Harveys is dedicated to ensuring a high level of customer satisfaction and
loyalty by providing distinctive and modern accommodations and attentive
customer service in a friendly atmosphere. Management recognizes that consistent
quality and a comfortable atmosphere can differentiate its facilities from the
competition in all of its markets. Harveys strives to meet customer demand by
furnishing each of its properties with a variety of restaurants and non-gaming
amenities. To foster a high level of customer satisfaction through attentive
customer service, management plays an active role in the training of all of its
employees at all levels. Harveys' goal of becoming a truly customer-focused
organization has been achieved at all Harveys' properties through training
programs that include role playing and simulations. Management believes that
these programs have evolved to provide Harveys' customers with a truly unique
experience. Harveys has implemented attractive employee benefit programs at all
of its facilities to recruit and retain friendly, professional employees.
STRATEGIC LOCATIONS. Management believes that location is the key to
attracting customers. South Lake Tahoe, which draws approximately 2 million
visitors per year, is a unique gaming location because of its natural
surroundings and variety of outdoor attractions and activities. Harveys Resort
is strategically placed on a site adjacent to the California border in close
proximity to more than 6,500 hotel and motel rooms in non-gaming facilities.
Harveys Wagon Wheel is located on a highly visible site in Central City,
Colorado, a picturesque mountain town approximately 35 miles west of Denver.
Harveys Casino Hotel is within a ten-minute drive of the Omaha/Council Bluffs
metropolitan regional airport and is located directly off Interstates 29, 80 and
480.
TARGETED CUSTOMER BASE. Harveys targets middle- to upper middle-income
customers who tend to have more disposable income for gaming and entertainment.
Harveys Resort seeks to attract these customers by offering well-appointed rooms
and a "party" atmosphere for those seeking nightlife and entertainment. Harveys
also has established extensive customer databases and uses sophisticated player
tracking systems to award cash rebates or promotional allowances, such as
complimentary rooms, food, beverage and entertainment. Management believes that
by continuing to promote the Harveys image and retain and develop customer
relationships it will increase its share of higher-income customers attracted to
the south Lake Tahoe market. Harveys Wagon Wheel targets middle- to upper
middle-income customers from the greater Denver area who seek a quality gaming
experience, convenient parking and overnight accommodations. Harveys' management
believes it has successfully built a loyal customer base at Harveys Wagon Wheel
by being the first full-service casino, with overnight accommodations and full
amenities, in the Central City/Black Hawk area. Harveys Casino Hotel targets
frequent, middle-income players from the Omaha/Council Bluffs area. Harveys
believes that the hotel and convention facilities, opened in mid-1996, attract
new players by capturing overnight guests as well as meetings and small
conventions business.
7
<PAGE>
EFFECTIVE MARKETING. Harveys aggressively promotes all of its properties
through television, radio, billboard and print advertising. In February 1997,
Harveys announced that Bill Cosby agreed to become a spokesperson for Harveys.
Under a contract with Harveys, Mr. Cosby is actively involved in promoting
Harveys through entertainment appearances at Harveys' properties and through
advertising messages on television, radio and billboards. Harveys believes that
its association has been and will continue to enhance the national visibility of
Harveys. Since 1989, Harveys has increased its share of gaming revenues in south
Lake Tahoe from approximately 24% to approximately 28% in 1997, due largely to
its targeted marketing strategy. Harveys attracts customers to Harveys Wagon
Wheel by aggressively promoting the facility's hotel rooms, on-site parking,
quality dining facilities and varied entertainment activities in a market in
which such amenities are a distinct competitive advantage. Harveys Casino Hotel
is marketed as "Harveys, You Can Have It All!" in the Omaha/Council Bluffs
market through the extensive use of television and newspaper advertisement,
billboards, regular promotions and sweepstakes as well as point-of-sale
materials located in local motels, hotels, restaurants and other visitor
attractions.
EMPHASIS ON SLOT PLAY. Responding to the increased popularity of slot
machines over the past several years, Harveys has shifted its gaming mix toward
slot machines. The mix of slot machines is closely matched to the demand of the
customer base at each property. Harveys Resort now includes a greater percentage
of $1 and higher denominated machines to appeal to the higher-income gaming
clientele of Harveys Resort, including $5, $25 and $100 slot machines offered
within a premium player section. This increase in higher denominated machines
increased win per unit at Harveys Resort by approximately 31.8% between fiscal
years 1988 and 1998. Harveys Wagon Wheel offers 1,046 slot machines,
approximately 246 more machines than are currently offered by any other gaming
facility in the area, and Harveys Casino Hotel offers 1,084 slot machines. Slot
machines, which are less labor intensive and require less square footage than
table games, also generate higher profit margins compared to table games.
Harveys monitors payout percentages closely and ensures that its slot machine
payouts are competitive.
PROPERTIES
HARVEYS RESORT. Harveys Resort, the largest hotel/casino in the Lake Tahoe
area, is located on approximately 19.8 acres on U.S. Highway 50, the main route
through south Lake Tahoe. The hotel/casino, situated on the south shore of Lake
Tahoe with a panoramic view of the lake and surrounding mountains, is among Lake
Tahoe's most modern facilities. The main structure is a 17-story glass-faced
tower completed in 1991, connected to a 12-story tower which was completely
rebuilt in 1982. Harveys Resort features 740 rooms, 36 of which are luxury
suites, and an 82,000-square foot casino containing approximately 2,060 slot
machines, 95 table games, a 13-table poker area, a race and sports book and a
keno lounge. Other amenities include 23,000 square feet of convention space,
2,946 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding
chapel, restaurants, retail shops, a pool, a health club and a video arcade.
Harveys Resort's eight restaurants offer a wide variety of high quality food and
consist of a coffee shop, a Mexican restaurant, a seafood and pasta restaurant,
a premier steakhouse, a buffet, a snack bar, Llewellyn's, Harveys Resort's
upscale award-winning restaurant featuring a spectacular view of Lake Tahoe, and
a Hard Rock Cafe, located on the casino floor, which is owned and operated by
Hard Rock Cafe International (USA), Inc. In recognition of the outstanding
quality of the facility and its excellent service, Harveys Resort has received
the AAA Four Diamond Award every year for the last 17 years. Harveys expended
$15.9 million at Harveys Resort in fiscal years 1997 and 1998, and has carried
over $1.8 million in unexpended budgeted amounts to fiscal year 1999, to
increase Harveys' market share and to position Harveys to benefit from the
ongoing South Lake Tahoe Redevelopment Projects. In 1984, the City of South Lake
Tahoe, California, adopted a redevelopment plan and created the South Tahoe
Redevelopment Agency. The redevelopment plan has resulted in the removal of
numerous older motel and retail properties along Highway 50 through the City of
South Lake Tahoe. The properties were demolished, creating a scenic open space
corridor containing public facilities and wetlands. The redevelopment plan
resulted in a 400-room Embassy Suites hotel on the California-Nevada state line,
completed in 1991. It is anticipated that the next phase of redevelopment will
involve the condemnation of certain older motels
8
<PAGE>
and retail establishments located within one mile of Harveys Resort and the
replacement thereof with a regional transit center including an aerial tram to
the Heavenly ski area, parking facilities, a theater complex, retail space,
upscale hotels and vacation interval units. It is anticipated that the third
phase, also to be located immediately adjacent to the California-Nevada state
line, will result in a regional convention facility, hotel, retail space,
regional parking facilities and various public amenities. Harveys has entered
into a Memorandum of Understanding with the South Lake Tahoe Redevelopment
Agency that provides Harveys with the exclusive right until January 31, 1999 to
develop the third phase.
The south Lake Tahoe gaming market generated over $300 million in gaming
revenues in each of Harveys' last three fiscal years. The Lake Tahoe area is a
unique gaming location because of its natural surroundings and variety of
year-round outdoor recreational activities, including skiing, boating, fishing
and golfing. The south Lake Tahoe area draws tourists primarily from nearby Reno
and Northern California. There are four major casinos in this market to serve
the approximately 2 million annual visitors. The Tahoe Regional Planning
Compact, a compact between the states of Nevada and California approved by the
U.S. Congress, prohibits the addition of new gaming facilities and limits the
expansion of existing casinos in the Lake Tahoe basin.
HARVEYS WAGON WHEEL. Through Harveys Wagon Wheel, which opened in December
1994, Harveys established the first major hotel/casino serving the greater
Denver area. Harveys Wagon Wheel is located on a highly visible site in Central
City, Colorado, a picturesque mountain town approximately 35 miles west of
Denver. Harveys Wagon Wheel includes approximately 40,000 square feet of casino
space, 1,046 slot machines, 18 table games, a nine-table poker area, a 118-room
hotel and 730 on-site covered parking spaces, including 530 spaces in the
market's first self-park garage, completed in June 1997. Other amenities include
a Tony Roma's Famous for Ribs restaurant, a Tony Roma's Express, an
entertainment lounge and a video game arcade. Harveys Wagon Wheel was the first
casino in the Central City/Black Hawk area to offer all of these amenities.
HARVEYS CASINO HOTEL. On January 1, 1996, Harveys opened, as the first
phase of Harveys Casino Hotel, a 2,352-passenger riverboat casino berthed on the
Missouri River in Council Bluffs, Iowa directly across from Omaha. The riverboat
has 28,250 square feet of casino space on three decks and contains 1,084 slot
machines, 51 table games and a seven-table poker area. On May 24, 1996, Harveys
opened the second phase of Harveys Casino Hotel, including surface parking for
approximately 2,300 cars, and a 14-story, 251-room hotel with a 21,000-square
foot convention center. Harveys has recently received all approvals necessary to
build a 1,630-space parking structure that will feature climate-controlled
access to the adjacent casino. Construction on the parking structure is planned
to commence in fiscal year 1999.
Harveys Casino Hotel is situated on a 60.7-acre parcel of land which is
located within a ten-minute drive of the Omaha/Council Bluffs regional airport
and directly off Interstates 29, 80 and 480. Approximately 20 acres of the site
are occupied by a nine-hole municipal golf course, which Harveys leases to the
City of Council Bluffs for a nominal fee. This arrangement allows Harveys the
option of using this land for future expansion needs. In addition, Harveys has
acquired an adjacent 42.5-acre site to accommodate future expansion or support
facilities.
Harveys Casino Hotel's target market is the approximately 760,000 residents
in the greater Omaha/ Council Bluffs metropolitan area and the nearly 3 million
residents within a three-hour drive of the facility. In addition, the casino,
hotel and convention facilities are marketed to the estimated 2.7 million
visitors and tourists who visit the Omaha metropolitan area annually. Harveys
Casino Hotel markets itself as "Harveys, You Can Have It All!" in the
Omaha/Council Bluffs market through the extensive use of television and
newspaper advertisement, billboards, regular promotions and sweepstakes as well
as point-of-sale materials located in local motels, hotels, restaurants and
other visitor attractions. Harveys Casino Hotel targets frequent, middle-income
players from Omaha, Council Bluffs and the surrounding area. Harveys believes
that the hotel and convention facilities attracts new players by capturing
overnight guests and individuals attending meetings and small conventions.
9
<PAGE>
The following table sets forth certain information about Harveys' hotel
operations:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of hotel rooms.................... 1109 1109 858 740 740
Average hotel occupancy rate............. 83.9% 82.2% 77.2% 71.8% 76.4%
Average daily room rate.................. $ 90.70 $ 92.39 $ 100.49 $ 106.99 $ 102.81
Average daily revenue per available
room................................... $ 76.07 $ 75.98 $ 77.60 $ 76.87 $ 78.57
</TABLE>
In addition, Harveys expended approximately $1.1 million and $0.3 million for
renovations in conection with its hotel operations in fiscal years 1998 and
1997, respectively.
LAS VEGAS AND OTHER DEVELOPMENT OPPORTUNITIES. In December 1997, Harveys
entered into an option agreement, subsequently extended to April 15, 1999, to
acquire 33.3 acres of land located at the intersection of Harmon Avenue and
Koval Lane in Las Vegas, which is one block from the Las Vegas Strip. The option
price is $2.36 million per acre. Harveys is currently considering the
feasibility of developing a hotel/casino project on the site. There can be no
assurance that Harveys will exercise its option or, if it exercises the option,
will successfully develop a project on the site. Any such development would
require substantial financing, which Harveys may not be able to obtain or
service. Any development would also require significant management resources,
which could limit the availability of Harveys' existing management for the
operation of Harveys' current hotel/casino operations.
Harveys from time to time considers strategic acquisition opportunities
which come to its attention, both in jurisdictions in which it currently
conducts business and in other jurisdictions. There can be no assurance that any
acquisition or other development agreements will be reached.
COMPETITION
The gaming industry is highly competitive. Harveys competes for customers
primarily on the basis of location, range and pricing of amenities and overall
atmosphere. Several of the competitors of Harveys have substantially greater
name recognition and financial and marketing resources.
LAKE TAHOE. Harveys Resort competes with a number of other hotel/casinos at
Lake Tahoe and to a lesser extent, with hotel/casino operations located in Reno,
Las Vegas and Laughlin, Nevada and casinos on Native American lands in
California. In south Lake Tahoe, Harveys Resort competes primarily with three
other major casino operations: Harrah's Lake Tahoe, Caesars Tahoe and the
Horizon Casino Resort.
In 1987, the Tahoe Regional Planning Agency, an entity approved by Congress
and established under the Tahoe Regional Planning Compact between the states of
California and Nevada, placed restrictions on additional commercial, residential
and tourist accommodation construction at Lake Tahoe in an effort to curb
development and to preserve the local environment. Under the Tahoe Regional
Planning Compact and community plan constraints, future tourist accommodation
units added to the market will be required to mitigate their environmental
impacts. Such measures may include replacing an imposed multiple of older
tourist accommodation units. The limited number of rooms available at Lake
Tahoe, however, allows Lake Tahoe hotel/casino operators to achieve much higher
nightly room rates than those in most other gaming jurisdictions. The occupancy
rate for the 2,250 upscale rooms in the four major south Lake Tahoe casinos has
historically been between 75% and 80%, while the occupancy rate in the motels is
typically between 40% and 50%. It is estimated that the average daily room rate
for the Lake Tahoe hotel/casinos is over $100, compared to average estimated
rates of $25 to $65 for Las Vegas, Reno and Laughlin. The Tahoe Regional
Planning Agency has imposed significant restrictions on construction, and the
Tahoe Regional Planning Compact limits the expansion of gaming facilities, in
the Lake Tahoe basin. These restrictions prohibit existing casinos from
expanding cubic volume of structures housing gaming and limit expansion of the
gaming areas within such structures. Harveys believes that because of such
restrictions, it is unlikely that any new hotel/casinos will commence operations
at Lake Tahoe or that any of the smaller
10
<PAGE>
existing casinos will expand to a size that could make them competitive with the
four major casinos; however, Harveys expects that the four major hotel/casinos
will continue to compete intensely.
In addition, as a result of the approval of state proposition 5, the
California Indian Self-Reliance Initiative, in California in November 1998,
additional competition could result from an increase in the number of casinos on
Native American lands in California, including on lands that are between Harveys
Resort and major population centers, such as the San Francisco Bay area, and
proximate to Highway 50, the primary road route to south Lake Tahoe.
CENTRAL CITY/BLACK HAWK. Harveys Wagon Wheel competes primarily with the
six casinos with the largest number of gaming devices in Central City and Black
Hawk as well as the 24 smaller gaming establishments in operation as of November
1, 1998, in Central City and Black Hawk. The six largest casinos, together with
Harveys Wagon Wheel, as of November 1, 1998 had more than 56% of all gaming
devices in the Central City/Black Hawk area. The adjacent cities of Central City
and Black Hawk form Colorado's primary gaming market. In this market the
majority of the existing gaming establishments lack on-site parking, overnight
accommodations and non-gaming amenities. The Lodge Casino, offering 700 on-site
parking spaces (including 300 spaces shared with the adjacent Gilpin Hotel
Casino) and overnight accommodations in 50 hotel rooms, opened in Black Hawk in
June 1998. The Isle of Capri opened in Black Hawk on December 31, 1998, with
1,100 parking spaces. A number of other projects are either under construction,
including a casino proposed to have 520 covered self-park spaces being developed
by Riviera Holdings Corporation, or in the planning stages. Some or all of these
projects may include on-site parking spaces and overnight accommodations or
other amenities that would increase competition with Harveys Wagon Wheel.
Substantially all recent casino development in the Central City/Black Hawk area
has occurred in Black Hawk, which visitors from the Denver area must drive
through in order to reach Central City. In addition, from time to time, the
towns of Central City and Black Hawk undertake roadway and other infrastructure
improvements. Because the towns are generally accessible only by a single road,
such infrastructure projects may deter gaming customers from visiting the
Central City/Black Hawk area or traveling through Black Hawk to Central City.
There can be no assurance that the development or concentration of casinos or
infrastructure improvements in Black Hawk will not adversely affect the number
of gaming customers visiting Harveys Wagon Wheel in Central City. In addition,
the municipal governments of Central City and Black Hawk compete to attract
gaming patrons and gaming development to their respective towns, including by
improving road access. Black Hawk's financial resources are currently
substantially greater than Central City's, and there can be no assurance that
Black Hawk will not make improvements or provide other inducements that would
result in reduction of the number of gaming patrons visiting Harveys Wagon Wheel
in Central City. Currently, limited stakes gaming in Colorado is legal in
Central City, Black Hawk, Cripple Creek and two Native American reservations in
southwest Colorado. However, there can be no assurances that limited stakes
gaming will not be approved in other Colorado communities in the future, or that
other forms of gaming will not be legalized in the Central City/ Black Hawk
area, other Colorado communities or in the state generally. For instance, state
legislation permitting video lottery terminals has been proposed from time to
time; although such legislation has failed, there can be no assurance that video
lottery terminals will not be legalized in Colorado. The legalization of gaming
in areas closer than Central City/Black Hawk to Denver, the major population
center of Colorado, would likely have a material adverse effect on Harveys'
operation in Central City.
OMAHA/COUNCIL BLUFFS. Harveys Casino Hotel, with its riverboat casino that
opened on January 1, 1996 and the adjacent 251-room hotel and 21,000-square foot
convention center that opened on May 24, 1996, provided the first of only three
major hotel products in the city. Harveys Casino Hotel's target markets are the
760,000 residents of the greater Omaha/Council Bluffs area and the nearly 3
million residents within a three-hour drive of the facility. Additionally,
Harveys Casino Hotel's hotel and convention facilities are marketed to an
estimated 2.7 million visitors and tourists who visit the Omaha metropolitan
area annually, which now offers approximately 7,000 hotel and motel units and is
home to major tourist attractions such as the Henry Doorley Zoo, museums, a
pari-mutuel track and historic monuments. Harveys Casino Hotel's casino competes
with Ameristar Casino Inc.'s riverboat casino in
11
<PAGE>
Council Bluffs, which opened on January 19, 1996, as well as with the slot
machines installed at a dogtrack in the Council Bluffs area and other amusement
attractions.
In Iowa, gaming is subject to approval by county referendum. While gaming is
approved in Pottawattamie County, where Harveys Casino Hotel is located, another
referendum may be held at any time upon satisfactory petition, and another
referendum is required to be held in 2002. There can be no assurance that gaming
would be approved again in any referendum in Pottawattamie County. In addition,
should casino-style gaming be permitted in Nebraska, or should gaming facilities
be opened in Omaha, Harveys Casino Hotel could be materially adversely affected.
EMPLOYEES
As of November 30, 1998, Harveys had approximately 4,115 employees.
Management believes that employee relations are good. Harveys has entered into a
collective bargaining agreement that covers approximately eight employees. This
agreement relates to stage-hand employees who provide support to entertainment
facilities at Harveys Resort. None of Harveys' other employees are represented
by labor unions.
ENVIRONMENTAL MATTERS
Harveys is subject to various Federal, state and local laws, ordinances and
regulations which (1) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal of solid and hazardous toxic wastes, or (2) may impose liability on
property owners and operators for the costs of removal or remediation of certain
hazardous substances released on their property. Harveys management believes it
is in material compliance with these laws.
Harveys Wagon Wheel is in the vicinity of the Central City/Clear Creek
Superfund Site (the "Superfund Site") as designated by the Environmental
Protection Agency (the "EPA") pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA" or
"Superfund"). The Superfund Site, the overall boundaries of which have not been
explicitly defined, includes numerous specifically identified areas of mine
tailings and other waste piles from former gold mine operations that are the
subject of ongoing investigation and cleanup by the EPA and the State of
Colorado. CERCLA requires cleanup of sites from which there has been a release
or threatened release of hazardous substances and authorizes the EPA to take any
necessary response actions at Superfund sites, including ordering potentially
responsible parties ("PRPs") to clean up or contribute to the cleanup of a
Superfund site. PRPs are broadly defined under CERCLA, and include past and
present owners and operators of a site. Courts have interpreted CERCLA to impose
strict, joint and several liability upon all persons liable for response costs.
In the course of developing Harveys Wagon Wheel, investigations at the site
were conducted in accordance with requirements of governmental authorities as a
prerequisite to obtaining necessary development permits. The investigations have
been completed and the requisite permits issued. Currently, the EPA has not
identified any mine tailings or other waste piles at Harveys Wagon Wheel.
Nonetheless, there is the potential that the EPA or other governmental
authorities could broaden their investigations and identify additional areas,
including the Harveys Wagon Wheel site, for cleanup as part of the Superfund
Site. If the Harveys Wagon Wheel site were included in the EPA's investigation
and designated as an additional area within the Superfund Site, Harveys may be
identified as a PRP and any liability of Harveys related to the Superfund Site
could have a material adverse effect on Harveys.
LITIGATION
Harveys is a defendant in various lawsuits and other legal proceedings
incidental to its business. Harveys' management does not believe that the
outcome of any such litigation, in the aggregate, will have a material adverse
effect on Harveys.
The Company has not been a party to any lawsuit or other legal proceedings
adverse to it.
12
<PAGE>
REGULATORY MATTERS
NEVADA GAMING LAWS AND REGULATIONS. The ownership and operation of casino
gaming facilities in Nevada and the manufacture and distribution of gaming
devices and cashless wagering systems for use or play in Nevada or for
distribution outside of Nevada are subject to (1) the Nevada Act and (2) various
local ordinances and regulations. Harveys' gaming operations are subject to the
licensing and regulatory control of the Nevada State Gaming Control Board (the
"Nevada Board") and the Nevada Gaming Commission (the "Nevada Commission"). The
Nevada Board and the Nevada Commission are collectively referred to hereinafter
as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (1) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (2) the strict regulation of all persons, locations, practices,
associations and activities related to the operation of licensed gaming
establishments and the manufacture and distribution of gaming devices and
cashless wagering systems; (3) the establishment and maintenance of responsible
accounting practices and procedures; (4) the maintenance of effective controls
over the financial practices of licensees, including the establishment of
minimum procedures for internal fiscal affairs and the safeguarding of assets
and revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (5) the prevention of
cheating and other fraudulent practices; and (6) providing a source of state and
local revenues through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on Harveys' gaming
operations.
HTMC is required to be licensed by the Nevada Gaming Authorities. The gaming
license requires the periodic payment of fees and taxes and is not transferable.
HTMC is also licensed as a manufacturer and distributor of gaming devices.
Harveys is registered by the Nevada Commission as a publicly traded corporation
(a "Registered Corporation") and has been found suitable to own the stock of
HTMC. As a Registered Corporation, Harveys is required to submit detailed
financial and operating reports to the Nevada Commission and Nevada Board and
furnish any other information which the Nevada Commission or Nevada Board may
require. Harveys is expected to continue to qualify as a Registered Corporation
as defined in the Nevada Act upon the effectiveness of this Registration
Statement. No person may become a stockholder of, or receive any percentage of
the profits from, HTMC without first obtaining licenses and approvals from the
Nevada Gaming Authorities. Harveys and HTMC have obtained from the Nevada Gaming
Authorities the various registrations, licenses, findings of suitability,
approvals and permits (individually, a "Gaming License" and, collectively, the
"Gaming Licenses") required in order to engage in gaming, manufacturing and
distributing operations in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, Harveys or HTMC in order
to determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of Harveys and HTMC must file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with Harveys or HTMC, the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require Harveys and HTMC to terminate the employment of any person who refuses
to file appropriate
13
<PAGE>
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
Harveys and HTMC each are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by Harveys and
HTMC must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Harveys or HTMC,
the Gaming Licenses they hold could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, Harveys and HTMC, and the persons involved, could be subject to
substantial fines of up to $250,000 for each separate violation of the Nevada
Act at the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate Harveys Resort and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of Harveys Resort) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of any gaming license or
the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect Harveys' gaming operations.
Any beneficial holder of Harveys' voting securities or other equity
securities such as the Class B Common and Series A Preferred, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have such holder's suitability as a beneficial holder of Harveys' voting
securities or other equity securities determined if the Nevada Commission has
reason to believe that such ownership would otherwise be inconsistent with the
declared policies of the State of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of Harveys' voting securities to report the acquisition to the Nevada
Commission, and such person may be required to be found suitable. The Nevada Act
requires that beneficial owners of more than 10% of Harveys' voting securities
apply to the Nevada Commission for a finding of suitability within thirty days
after the Chairman of the Nevada Board mails the written notice requiring such
filing. Under certain circumstances, an "institutional investor," as defined in
the Nevada Act, which acquires more than 10%, but not more than 15%, of Harveys'
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of Harveys, any change in Harveys' corporate charter, bylaws, management,
policies or operations of Harveys, or any of its gaming affiliates, or any other
action which the Nevada Commission finds to be inconsistent with holding
Harveys' voting securities for investment purposes only. Activities which are
not deemed to be inconsistent with holding voting securities for investment
purposes only include: (1) voting on all matters voted on by stockholders; (2)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (3) such other activities as the Nevada
Commission may determine to be consistent with such investment intent. If the
beneficial holder of voting securities who must 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 person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. Harveys is subject to
14
<PAGE>
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with Harveys, Harveys (1)
pays that person any dividend or interest upon voting securities of Harveys, (2)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (3) pays remuneration in any
form to that person for services rendered or otherwise, or (4) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation, such as the Notes, to file applications,
be investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including by revocation of its approvals, if without the
prior approval of the Nevada Commission, the Registered Corporation: (1) pays to
the unsuitable person any dividend, interest, or any distribution whatsoever;
(2) recognizes any voting right by such unsuitable person in connection with
such securities; (3) pays the unsuitable person remuneration in any form; or (4)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction.
Harveys is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities 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 Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. Harveys is also required to render maximum assistance in determining
the identity of the beneficial owner. The Nevada Commission has the power to
require Harveys' stock certificates to bear a legend indicating that the
securities are subject to the Nevada Act. However, to date, the Nevada
Commission has not imposed such a requirement on Harveys.
Harveys may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or the proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. On
October 23, 1997, the Nevada Commission granted Harveys approval to make public
offerings for a period of two years, subject to certain conditions (the "Shelf
Approval"). The Shelf Approval may, however, be rescinded for good cause without
prior notice upon the issuance of an interlocutory stop order by the Chairman of
the Nevada Board and must be renewed at the end of the two-year approval period.
The Shelf Approval does not constitute a finding, recommendation or approval by
the Nevada Commission or the Nevada Board as to the accuracy or adequacy of any
prospectus regarding or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of Harveys through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby the person obtains control, may not occur without the prior
approval of the Nevada Gaming Authorities. Entities seeking to acquire control
of a Registered Corporation must satisfy the Nevada Board and Nevada Commission
in a variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as part of the approval process relating to the transaction. Voteco has
filed an application for approval of the Nevada Board and Nevada Commission to
acquire control of Harveys and for registration as a holding company. In
connection with Voteco's application, Messrs. Barrack and Davis have filed
applications for Gaming Licenses as members of Voteco, and as directors and
controlling persons of Harveys. No assurances can be given that such approval
and Gaming Licenses will be granted or that, if granted, they will be granted on
a timely basis.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and
15
<PAGE>
Registered Corporations that are affiliated with those operations, may be
injurious to stable and productive corporate gaming. The Nevada Commission has
established a regulatory scheme to ameliorate the potentially adverse effects of
these business practices upon Nevada's gaming industry and to further Nevada's
policy to: (1) assure the financial stability of corporate gaming operators and
their affiliates; (2) preserve the beneficial aspects of conducting business in
the corporate form; and (3) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before Harveys can make exceptional
repurchases of voting securities above the current market price thereof and
before a corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization proposed
by Harveys' Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which a Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (1) a percentage of the gross revenues received; (2) the number of
gaming devices operated; or (3) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in a cabaret, nightclub, cocktail lounge or casino showroom in
connection with the serving or selling of food or refreshments, or the selling
of any merchandise. Nevada licensees that hold a license as an operator of a
slot machine route, or a manufacturer's or distributor's license, also pay
certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered, or under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities or
enters into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employs, contracts with, or associates
with, a person in the foreign operation who has been denied a license or finding
of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at Harveys Resort is subject to the
regulation and licensing by the Douglas County Liquor Board. HTMC has received
all required liquor licenses. Such liquor licenses are revocable and are not
transferable.
COLORADO GAMING LAWS AND REGULATIONS. The State of Colorado created the
Division of Gaming (the "Division") within the Department of Revenue to license,
implement, regulate and supervise the conduct of limited gaming under the
Colorado Limited Gaming Act. The Director of the Division, under the supervision
of a five-member Colorado Limited Gaming Control Commission (the "Colorado
Commission"), has been granted broad power to ensure compliance with the
Colorado gaming regulations (the "Colorado Regulations"). The Director may
inspect, without notice, impound or remove any gaming device. He may examine and
copy any licensee's records, may investigate the background and conduct of
licensees and their employees, and may bring disciplinary actions against
licensees and their employees. He may also conduct detailed background
investigations of persons who loan money to Harveys or own any securities of
Harveys.
16
<PAGE>
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The licenses are revocable and non-transferable. The
failure or inability of Harveys, HCCMC, Voteco, Colony III, the general partner
of Colony III or others associated with Harveys Wagon Wheel to maintain
necessary gaming licenses will have a material adverse effect on the operations
of Harveys. All persons employed by Harveys or HCCMC and involved, directly or
indirectly, in gaming operations in Colorado also are required to obtain a
Colorado gaming license. Licenses of key and support employees are required to
be renewed biennially, and all other licenses must be renewed annually.
As a general rule, under the multiple license statute of the Colorado
Regulations, it is a criminal violation for any person to have an "ownership
interest" in more than three retail gaming licenses in Colorado. The Colorado
Commission has ruled that a person does not have an ownership interest in a
licensee for purposes of the multiple license prohibition if: (1) such person
has less than a five percent (5%) ownership interest in an institutional
investor which has an ownership interest in a publicly traded licensee or
publicly traded company affiliated with a licensee (such as Harveys); (2) a
person has a five percent (5%) or more ownership interest in an institutional
investor, but the institutional investor has less than a five percent (5%)
ownership interest in a publicly traded licensee or publicly traded company
affiliated with a licensee; (3) an institutional investor has less than a five
percent (5%) ownership interest in a publicly traded licensee or publicly traded
company affiliated with a licensee; (4) an institutional investor possesses
voting securities in a fiduciary capacity for another person, and does not
exercise voting control over five percent (5%) or more of the outstanding voting
securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee; (5) a registered broker or dealer retains possession
of voting securities of a publicly traded licensee or of a publicly traded
company affiliated with a licensee for its customers in street name or
otherwise, and exercises voting rights for less than five percent (5%) of the
publicly traded licensee's voting securities or of a publicly traded company
affiliated with a licensee; (6) a registered broker or dealer acts as a market
maker for the stock of a publicly traded licensee or of a publicly traded
company affiliated with a licensee and possesses a voting rights in less than
five percent (5%) of the stock of the publicly traded licensee or of a publicly
traded company affiliated with a licensee; (7) an underwriter is holding voting
securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee as part of an underwriting for no more than 90 days
if it exercises voting rights of less than five percent (5%) of the outstanding
voting securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee; (8) a book-entry transfer facility holds voting
securities for third parties, if it exercises voting rights with respect to less
than five percent (5%) of the outstanding securities of a publicly traded
licensee or of a publicly traded company affiliated with a licensee; or (9) a
person owns less than five percent (5%) of the voting securities of the publicly
traded licensee or publicly traded company affiliated with a licensee. Hence,
Harveys' and its stockholders' business opportunities in Colorado are limited to
such interests that comply with the Colorado Regulations and the Colorado
Commission's rules.
In addition, pursuant to the vertical ownership statute of the Colorado
Regulations, no manufacturer or distributor of slot machines may have an
interest in any casino retailer or operator, allow any of its officers or
persons with a substantial interest in it to have such an interest, employ any
person if such person is employed by a casino retailer or operator, or allow any
casino retailer or operator or person with a "substantial interest" therein to
have an interest in a manufacturer's or distributor's business. "Substantial
interest" means the lesser of as large an interest as that of any other
shareholder, partner or principal, or any financial or equity interest equal to
or greater than five percent (5%). But, with respect to a publicly traded
licensee or publicly traded affiliate of a licensee, the Colorado Commission has
ruled that a person does not have a "substantial interest" if such persons'
ownership interest in the licensee is through the ownership of less than five
percent (5%) of such voting securities of a publicly traded licensee or a
publicly traded affiliated company.
Counsel for the Division has informed counsel for HCCMC that, for purposes
of the multiple-license statute and the vertical ownership statute described
above, the Division has taken the position that only a
17
<PAGE>
person deemed to have "beneficial ownership" (as defined in the rules and
regulations of the SEC under Section 13(d) of the Exchange Act) of shares of
Harveys will be deemed to have an "ownership interest" in Harveys under the
multiple license statute or an "interest" in Harveys under the vertical
ownership statute. HCCMC understands that neither the Colorado Commission nor
the Colorado legislature has addressed this issue. As a result, there can be no
assurance that the Colorado Commission or the Colorado legislature will not
apply a more restrictive interpretation.
Under the Colorado Regulations, any person or entity having any direct or
indirect legal, beneficial, financial or voting interest in a gaming licensee or
an applicant for a gaming license, including, but not limited to, Harveys and
stockholders of Harveys, persons or entities directly or indirectly having an
interest in a stockholder of Harveys, and lenders to and preferred stockholders
of Harveys may be required to supply the Colorado Commission with substantial
information, including, but not limited to, background information, source of
funding information, a sworn statement that such person or entity is not holding
his interest for any other party, and fingerprints. Such information,
investigation and licensing as an "associated person" automatically will be
required of all persons (other than certain institutional investors discussed
below) which directly or indirectly beneficially own ten percent (10%) or more
of any class of voting securities of Harveys. Such persons must report their
interest and file appropriate applications within 45 days after acquiring such
interest. Persons directly or indirectly having a five percent (5%) or more (but
less than 10%) beneficial ownership of any class of voting securities of Harveys
must report their interest to the Colorado Commission within ten (10) days after
acquiring such interest and may be required to provide additional information
and to be found suitable. If certain institutional investors provide certain
information to the Colorado Commission, such investors, at the Colorado
Commission's discretion, may be permitted to beneficially own up to 14.99% of
any class of voting securities of Harveys before being required to be found
suitable. All licensing and investigation fees will have to be paid by the
person in question. The associated person investigation fee currently is $53 per
hour.
The Colorado Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and to
investigate the moral character, honesty, integrity, prior activities, criminal
record, reputation, habits and associations of (1) all persons licensed pursuant
to the Colorado Limited Gaming Act, (2) all officers, directors and stockholders
of a licensed privately held corporation, (3) all officers, directors and
stockholders holding either a five percent (5%) or greater interest or a
controlling interest in a licensed publicly traded corporation, (4) all general
partners and all limited partners of a licensed partnership, (5) all persons
which have a relationship similar to that of an officer, director or stockholder
of a corporation (such as members and managers of a limited liability company),
(6) all persons supplying financing or loaning money to any licensee connected
with the establishment or operation of limited gaming (such as lenders and
preferred stockholders), and (7) all persons having a contract, lease or ongoing
financial or business arrangement with any licensee, where such contract, lease
or arrangement relates to limited gaming operations, equipment, devices or
premises.
In addition, under the Colorado Regulations, every person who is a party to
a "gaming contract" (as defined below) with an applicant for a license, or with
a licensee, upon the request of the Colorado Commission or the Director, must
promptly provide to the Colorado Commission or Director all information which
may be requested concerning financial history, financial holdings, real and
personal property ownership, interests in other companies, criminal history,
personal history and associations, character, reputation in the community, and
all other information which might be relevant to a determination whether a
person would be suitable to be licensed by the Colorado Commission. Failure to
provide all information requested constitutes sufficient grounds for the
Director or the Colorado Commission to require a licensee or applicant to
terminate its "gaming contract" with any person who failed to provide the
information requested. In addition, the Director or the Colorado Commission may
require changes in "gaming contracts" before an application is approved or
participation in the contract is allowed. A "gaming contract" is defined as an
agreement in which a person does business with or on the premises of a licensed
entity.
18
<PAGE>
An application for licensure or suitability may be denied for any cause
deemed reasonable by the Colorado Commission or the Director, as appropriate.
Specifically, the Colorado Commission and the Director must deny a license to
any applicant who (1) fails to prove by clear and convincing evidence that the
applicant is qualified; (2) fails to provide information and documentation
requested; (3) fails to reveal any fact material to qualification, or supplies
information which is untrue or misleading as to a material fact pertaining to
qualification; (4) has been, or has any director, officer, general partner,
stockholder, limited partner or other person who has a financial or equity
interest in the applicant who has been, convicted of certain crimes, including
the service of a sentence upon conviction of a felony in a correctional
facility, city or county jail, or community correctional facility or under the
state board of parole or any probation department within ten years prior to the
date of the application, gambling-related offenses, theft by deception or crimes
involving fraud or misrepresentation, is under current prosecution for such
crimes (during the pendency of which license determination may be deferred), is
a career offender or a member or associate of a career offender cartel, or is a
professional gambler; or (5) has refused to cooperate with any state or federal
body investigating organized crime, official corruption or gaming offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in Harveys, then Harveys or HCCMC may be sanctioned, which may
include the loss by Harveys or HCCMC of their respective approvals and licenses.
The Colorado Commission does not need to approve in advance a public
offering of securities but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
Under the regulations, the Colorado Commission may, in its discretion, require
additional information and prior approval of such public offering.
In addition, the Colorado Regulations prohibit a licensee or affiliated
company thereof, such as Harveys, from paying dividends, interest or other
remuneration to any unsuitable person, or recognizing the exercise of any voting
rights by any unsuitable person. Further, Harveys may repurchase the shares of
anyone found unsuitable at the lesser of the cash equivalent of the original
investment in Harveys or the current market price. Further, the regulations
require anyone with a material involvement with a licensee, including a director
or officer of a holding company, such as Harveys, to file for a finding of
suitability if required by the Colorado Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Commission has jurisdiction to disapprove a change in
corporate position of a licensee and may have such authority with respect to any
entity which is required to be found suitable by the Colorado Commission. The
Colorado Commission has the power to require Harveys and HCCMC to suspend or
dismiss managers, officers, directors and other key employees or sever
relationships with other persons who refuse to file appropriate applications or
whom the authorities find unsuitable to act in such capacities; and may have
such power with respect to any entity which is required to be found suitable.
A person or entity may not sell, lease, purchase, convey or acquire a
controlling interest in Harveys without the prior approval of the Colorado
Commission. Harveys may not sell any interest in HCCMC without the prior
approval of the Colorado Commission. Harveys Wagon Wheel must meet certain
architectural requirements, fire safety standards and standards for access for
disabled persons. Harveys Wagon Wheel also must not exceed certain gaming square
footage limits as to each floor and the full building. The casino at Harveys
Wagon Wheel may operate only between 8:00 a.m. and 2:00 a.m., and may permit
only individuals 21 years or older to gamble. It may permit slot machines,
blackjack and poker, with a maximum single bet of $5.00. Harveys Wagon Wheel may
not provide credit to its gaming patrons.
The Colorado Regulations permit gaming only in a limited number of cities
and certain commercial districts.
The Colorado Constitution permits a gaming tax of up to 40% on adjusted
gross gaming proceeds. The Colorado Commission has set a gaming tax rate of 2%
on adjusted gross gaming proceeds of up to and
19
<PAGE>
including $2 million, 4% over $2 million up to and including $4 million, 14%
over $4 million up to and including $5 million, 18% over $5 million up to and
including $10 million and 20% on adjusted gross gaming proceeds in excess of $10
million. The Colorado Commission also has imposed an annual device fee of $75
per gaming device. The Colorado Commission may revise the gaming tax rate and
device fee from time to time. Central City has imposed an annual device fee of
$1,265 per gaming device and may revise the same from time to time.
The sale of alcoholic beverages is subject to licensing, control and
regulation by the Colorado Liquor Agencies. All persons who directly or
indirectly own 10% or more of Harveys Wagon Wheel, through their ownership of
Harveys, may be required to file applications and possibly be investigated by
the Colorado Liquor Agencies. The Colorado Liquor Agencies also may investigate
those persons who, directly or indirectly, loan money to or have any financial
interest in liquor licensees. All licenses are revocable and not transferable.
The Colorado Liquor Agencies have the full power to limit, condition, suspend or
revoke any such license and any such disciplinary action could (and revocation
would) have a material adverse effect upon the operations of Harveys. Harveys
Wagon Wheel holds a hotel and restaurant liquor license for its casino, hotel
and restaurant operations, rather than a gaming tavern license. Accordingly, no
person with an interest in Harveys can have an interest in a liquor licensee
which holds anything other than a hotel and restaurant liquor license, and
specifically cannot have an interest in an entity which holds a gaming tavern
license.
IOWA GAMING LAWS AND REGULATIONS. The State of Iowa first authorized
excursion gambling boat activities in 1989. The Iowa Racing and Gaming
Commission (the "Iowa Commission") has the authority to grant and review
licenses to owners and operators of excursion gambling boats and has the further
authority to adopt and enforce rules governing a broad range of subjects dealing
with excursion gambling boat facilities and operations. The Iowa Commission
consists of five members who are appointed by the governor and confirmed by the
state senate. Members serve a term not to exceed three years at the pleasure of
the governor.
Under Iowa law, only non-profit organizations may receive a license to own
gambling game operations; for profit organizations may receive a license for
their management and operation. Harveys, through HIMC, together with Iowa West,
a qualified non-profit organization, have been granted the necessary licenses to
own and operate the current gambling facilities and activities on the riverboat
casino at Harveys Casino Hotel. The present licenses have a term expiring March
31, 1999. The licenses are granted upon the condition that the license holders
accept, observe and enforce all applicable laws, regulations, ordinances, rules
and orders. Any violation by a license holder, including violations by its
officers, employees or agents, may result in disciplinary action, including the
suspension or revocation of the license.
HIMC and Iowa West have entered into an excursion sponsorship and operating
agreement dated August 22, 1994 (the "Operating Agreement"), pursuant to which
Iowa West authorizes HIMC to operate the excursion gambling boat activities on
the riverboat casino under Iowa West's gaming license. The Operating Agreement's
initial term continues through December 31, 2002, and during such term HIMC has
agreed to pay Iowa West a fee equal to $1.50 for each adult passenger embarking
upon the excursion gambling boat. HIMC further agrees to pay, and hold Iowa West
harmless from, the admission fees payable to the Iowa Commission and the local
municipality and the wagering tax imposed by Iowa law. Following the expiration
of the initial term of the Operating Agreement, HIMC may extend its provisions
for five successive three-year periods, except that the admission fees payable
by HIMC to Iowa West for each such period shall be adjusted to reflect increases
in the consumer price index.
Excursion boat gambling licenses may be granted by the Iowa Commission only
in those counties that have approved the conduct of gambling games in a
county-wide referendum. Gambling has been approved by the county electorate in
Pottawattamie County, Iowa, the location of Harveys Casino Hotel, but another
referendum requested by petition can be held at any time and is required to be
held in 2002. There can be no assurance that gambling in Pottawattamie County
would be approved again in any referendum. If
20
<PAGE>
licenses to conduct gambling games and to operate an excursion gambling boat are
in effect at the time gambling is disapproved by a referendum of the county
electorate, the licenses remain valid and may, at the discretion of the Iowa
Commission, be renewed for a total of nine years from the date of the original
issue.
Following the issuance of a gaming license, the Iowa Commission monitors and
supervises the activities of the excursion gambling boat and its licenses.
Material contracts to be entered into by the licensee, changes in ownership of
the licensee and acquisitions of interests in other gambling activities by the
licensee or its owners must all be reported to, and approved by, the Iowa
Commission. Further, the Iowa Commission has the authority to determine the
payouts from the gambling games, to set the payout rate for all slot machines,
to establish minimum charges for admission to excursion gambling boats and
regulate the number of free admissions and to define the excursion season and
the duration of an excursion.
Iowa law authorizes the imposition of an admission fee, set by and payable
to the Iowa State Treasurer, on each person embarking on an excursion gambling
boat. An additional admission fee may be imposed by the municipality in which
the gambling operation is located. In practice, the Iowa Commission has not
imposed a per-person admission fee, but rather imposed a fee on each excursion
gambling boat based upon the estimated costs of supervision and enforcement to
be incurred by the Iowa Commission for the ensuing fiscal year. For the fiscal
year beginning July 1, 1998, the fee is $303,680, payable in weekly installments
of $5,840. A $0.50 per person admission fee is also payable to the City of
Council Bluffs, Iowa. Further, Iowa law imposes an annual wagering tax ranging
from five percent on the first million dollars of adjusted gross receipts from
gambling games to 20% on adjusted gross receipts in excess of $3 million.
Harveys' excursion gambling boat activities are also subject to safety and
inspection requirements of the State of Iowa and the U.S. Coast Guard. These
requirements set limits on the operation of the vessel; mandate that it must be
operated by a minimum complement of licensed personnel; establish periodic
inspections, including the physical inspection of the outside hull requiring the
vessel to be drydocked every five years; and establish other mechanical and
operational rules.
ITEM 2. FINANCIAL INFORMATION.
THE COMPANY
The Company has conducted no business other than in connection with the
Merger Agreement and has no material assets or liabilities. See "Item 1.
Business--The Company" and the balance sheet of the Company as of November 15,
1998 included elsewhere herein.
SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected pro forma condensed consolidated
financial data of the Company as of and for the nine-month period ended August
31, 1998 and for the year ended November 30, 1997. The pro forma condensed
consolidated financial statements of the Company as of August 31, 1998 and for
the nine months ended August 31, 1998 and the year ended November 30, 1997 give
effect to (1) the consummation of the Merger and (2) the Merger Financing,
assumed to be comprised of (a) gross proceeds of $75.0 million from the issuance
of Class B Common to Colony III, (b) gross proceeds of $55.0 million from the
private placement of non-voting Series A Preferred, (c) borrowings of $175.0
million under the Amended and Restated Credit Facility and (d) Harveys'
available cash. The selected pro forma condensed consolidated financial
statements give effect to the Merger and the Merger Financing as if they
occurred, for balance sheet purposes, on August 31, 1998 and, for income
statement purposes, on December 1, 1996. There can be no assurance that the
Merger will be consummated or that the Merger Financing will be utilized. See
"Item 1. Business--The Company." If the Merger is consummated, the actual types
and amounts of funds utilized to finance the Merger and pay related fees and
expenses may differ based on prevailing circumstances at the time. The selected
pro forma condensed consolidated
21
<PAGE>
financial statements are not necessarily indicative of the results that would
have been reported had such transactions actually occurred on the date
specified, nor are they indicative of the Company's or Harveys' future results
of operations or financial condition. The selected pro forma condensed
consolidated financial statements are based on and should be read in conjunction
with, and are qualified in their entirety by, the historical and pro forma
financial statements and notes thereto of the Company, the historical financial
statements and notes thereto of Harveys (including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" relating thereto)
appearing elsewhere in this Registration Statement.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEAR ENDED
AUGUST 31, 1998 NOVEMBER 30, 1997
------------------------ ------------------------
HARVEYS PRO FORMA HARVEYS PRO FORMA
HISTORICAL AS ADJUSTED HISTORICAL AS ADJUSTED
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Casino-hotel operations................................. $ 250,720 $ 250,720 $ 300,422 $ 300,422
Management fees and joint venture....................... -- -- 4,507 4,507
Less casino promotional allowances...................... (17,763) (17,763) (21,366) (21,366)
----------- ----------- ----------- -----------
Total net revenues.................................... 232,957 232,957 283,563 283,563
----------- ----------- ----------- -----------
Costs and expenses:
Casino-hotel operations................................. 121,503 121,503 146,571 146,571
Selling, general and administrative..................... 58,766 57,880 73,945 73,317
Depreciation and amortization........................... 15,641 18,181 19,077 24,242
Merger-related costs.................................... 1,103 1,103 2,690 2,690
----------- ----------- ----------- -----------
Total costs and expenses.............................. 197,013 198,667 242,283 246,820
----------- ----------- ----------- -----------
Operating income.......................................... 35,944 34,290 41,280 36,743
----------- ----------- ----------- -----------
Other income (expense)
Interest income......................................... 1,495 -- 509 --
Interest expense........................................ (13,390) (23,417) (19,401) (31,013)
Gain on sale of interests in
unconsolidated affiliate.............................. -- -- 27,422 27,422
Other, net.............................................. (123) (123) (137) (137)
----------- ----------- ----------- -----------
Total other income (expense).......................... (12,018) (23,540) 8,393 (3,728)
----------- ----------- ----------- -----------
Income before income taxes................................ 23,926 10,750 49,673 33,015
Income tax provision...................................... (9,571) (5,010) (18,898) (14,143)
----------- ----------- ----------- -----------
Income before extraordinary item.......................... $ 14,355 $ 5,740 $ 30,775 $ 18,872
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1998
------------------------
HARVEYS PRO FORMA
HISTORICAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Balance sheet data:
Cash and cash equivalents........................................................... $ 78,245 $ 54,521
Goodwill............................................................................ -- 58,514
Total assets........................................................................ 426,645 548,489
Long-term debt, net................................................................. 150,209 334,209(1)
Preferred stock..................................................................... -- 55,000
Common stock........................................................................ 101 --
Additional paid-in capital.......................................................... 43,483 75,000
Total stockholders' equity.......................................................... 196,608 130,000
</TABLE>
NOTE TO SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(1) Long-term debt, net, is adjusted to reflect borrowings of $175.0 million
under the Amended and Restated Credit Facility and the step-up of the Notes
under purchase accounting by $9.0 million to fair market value.
22
<PAGE>
HARVEYS CASINO RESORTS
The following table sets forth selected consolidated financial data of
Harveys for each of the years in the five-year period ended November 30, 1997
and as of and for the nine-month periods ended August 31, 1998 and 1997. The
statement of income and balance sheet data as of and for each of the years in
the five-year period ended November 30, 1997 are derived from Harveys' audited
Consolidated Financial Statements and related notes thereto. The audited
Consolidated Financial Statements of Harveys and related notes thereto as of
November 30, 1997 and 1996 and for the three years ended November 30, 1997, 1996
and 1995 appear elsewhere in this Registration Statement. Deloitte & Touche
LLP's report with respect to the consolidated financial statements for the
fiscal years ended November 30, 1997 and 1996 and Grant Thornton LLP's report
with respect to the consolidated statements of income, stockholders' equity and
cash flows for the fiscal year ended November 30, 1995 are included elsewhere in
this Registration Statement. The statement of income and balance sheet data as
of and for each of the nine-month periods ended August 31, 1998 and 1997 are
unaudited; however, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation of the
results for such periods, have been included. The results for such periods
should not be considered indicative of results for a full fiscal year. The
selected consolidated financial data is not necessarily indicative of the
Company's or Harveys' future results of operations or financial condition, and
should be read in conjunction with "Management's Discussion and Analysis of
Harveys' Financial Condition and Results of Operations" and Harveys'
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Registration Statement.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30, AUGUST 31,
----------------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Casino................................. $ 216,564 $ 186,369 $ 121,369 $ 83,991 $ 87,523 $ 183,501 $ 162,397
Lodging................................ 32,175 28,746 25,499 21,870 22,292 26,157 24,659
Food and beverage...................... 44,406 39,852 33,970 29,768 31,011 35,479 33,380
Other.................................. 7,277 6,402 6,287 5,599 5,866 5,583 5,267
Management fees and joint venture...... 4,507 5,023 1,669 -- -- -- 3,920
Less casino promotional allowances..... (21,366) (18,643) (15,594) (12,942) (14,433) (17,763) (16,092)
--------- --------- --------- --------- --------- --------- ---------
Total net revenues..................... 283,563 247,749 173,200 128,286 132,259 232,957 213,531
--------- --------- --------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Casino................................. 100,500 86,732 57,520 40,999 43,235 86,310 75,168
Lodging................................ 13,374 11,677 9,458 7,429 6,534 10,299 10,051
Food and beverage...................... 29,886 24,797 20,280 17,408 17,271 22,664 22,595
Other operating........................ 2,811 2,813 2,838 2,557 2,733 2,230 2,145
Selling, general and administrative.... 73,945 67,128 50,270 39,813 38,159 58,766 55,432
Depreciation and amortization.......... 19,077 16,482 12,333 9,704 10,300 15,641 13,987
Business development costs............. 2,690 -- -- -- -- -- --
Pre-opening expenses................... -- 4,099 2,147 -- -- -- --
Nonrecurring compensation charges...... -- -- -- -- 1,834 -- --
Merger related costs................... -- -- -- -- -- 1,103 --
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses................. 242,283 213,728 154,846 117,903 120,066 197,013 179,378
--------- --------- --------- --------- --------- --------- ---------
Operating income......................... 41,280 34,021 18,354 10,383 12,193 35,944 34,153
Interest expense, net (1)................ 18,892 14,195 7,960 (2,886) (4,256) 11,895 14,531
Gain on sale of interests in
unconsolidated affiliate............... 27,422 -- -- -- -- -- --
Life insurance benefits.................. -- -- 2,246 371 -- -- --
Other income (expense), net.............. (137) (221) 605 (230) (134) (123) 49
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item..................... 49,673 19,605 13,245 7,638 7,803 23,926 19,671
Income tax provision..................... (18,898) (7,791) (3,900) (2,500) (2,994) (9,571) (7,965)
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item......... 30,775 11,814 9,345 5,138 4,809 14,355 11,706
Loss on early retirement of debt, net of
taxes.................................. -- 522 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income............................... $ 30,775 $ 11,292 $ 9,345 $ 5,138 $ 4,809 $ 14,355 $ 11,706
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Net income (diluted)................... $ 3.13 $ 1.16 $ 0.99 $ 0.58 $ 0.67 $ 1.41 $ 1.19
Dividends on common stock.............. $ 0.20 $ 0.18 $ 0.16 $ 0.13 $ 0.11 $ 0.15 $ 0.15
Weighted average common shares
outstanding (diluted)................ 9,844 9,699 9,456 8,886 7,182 10,213 9,835
OTHER OPERATING DATA:
EBITDA (2)............................. $ 63,047 $ 54,602 $ 35,080 $ 20,458 $ 24,327 $ 52,687 $ 48,140
Net cash provided by operating
activities........................... 44,637 39,768 19,594 14,106 15,563 35,058 39,858
Net cash provided by (used in)
investing activities................. 24,428 (55,502) (70,433) (33,505) (25,592) (12,942) (18,485)
Net cash provided by (used in)
financing activities................. (35,151) 26,363 53,886 15,506 (730) 1,094 (16,446)
Capital expenditures (3)............... 22,532 72,395 74,418 35,593 10,648 13,040 22,114
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 55,035 $ 21,121 $ 10,493 $ 7,446 $ 11,338 $ 78,245 $ 26,048
Total assets........................... 403,465 393,768 313,244 238,544 213,463 426,645 402,046
Long-term debt, net.................... 150,220 181,354 126,676 64,896 80,203 150,209 167,720
Stockholders' equity................... 179,358 149,763 132,301 123,611 90,008 196,608 160,563
</TABLE>
24
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA:
(1) Net of amounts capitalized and interest income.
(2) EBITDA (operating income plus depreciation and amortization and excluding
non-recurring items) should not be construed as an indicator of Harveys'
operating performance, or as an alternative to cash flows from operating
activities as a measure of liquidity. Harveys has presented EBITDA solely as
supplemental disclosure, because Harveys believes that it allows for more
complete analysis of results of operations. Because companies do not
calculate EBITDA identically, the presentation of EBITDA herein is not
necessarily comparable to similarly entitled measures of other companies.
EBITDA is not intended to represent and should not be considered more
meaningful than, or an alternative to, measures of operating performance as
determined in accordance with generally accepted accounting principles. For
fiscal 1997, EBITDA has been adjusted to exclude approximately $2.7 million
of business development costs; for fiscal 1996 and fiscal 1995, EBITDA has
been adjusted to exclude approximately $4.1 million and $2.1 million of
pre-opening expenses, respectively; for fiscal 1995 and fiscal 1994, EBITDA
has been adjusted to include approximately $2.2 million and $0.4 million of
life insurance benefits, respectively; and for fiscal 1993, EBITDA has been
adjusted to exclude approximately $1.8 million of nonrecurring compensation
charges. For the nine months ended August 31, 1998, EBITDA has been adjusted
to exclude approximately $1.1 million of expensed costs related to the
Merger.
(3) Of amounts shown, approximately $11.6 million in fiscal 1997, $7.2 million
in fiscal 1996, $4.6 million in fiscal 1995, $4.4 million in fiscal 1994,
and $6.5 million in fiscal 1993 related to recurring capital expenditures
for maintenance of the current facilities. For the nine months ended August
31, 1998 and 1997, approximately $6.8 million and $7.1 million,
respectively, related to recurring capital expenditures for maintenance of
the current facilities.
RECENT FINANCIAL RESULTS
On January 5, 1999, Harveys announced that for its fiscal year ended
November 30, 1998, it generated net revenues of $309.5 million and operating
income of $47.2 million, compared to $283.6 million and $41.3 million,
respectively, for its fiscal year ended November 30, 1997. The following table
presents certain other operating results of Harveys for the year ended November
30, 1998:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Net revenues
Harveys Resort..................................................... $ 133,454
Harveys Wagon Wheel................................................ 62,514
Harveys Casino Hotel............................................... 113,541
-------------
Total net revenues............................................... $ 309,509
-------------
-------------
Cash and cash equivalents............................................ $ 66,316
Total debt........................................................... $ 150,220
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW OF THE COMPANY
The Company has conducted no business or operations other than in connection
with the Merger. In the Merger, the Company will be merged into Harveys, which
will continue its existing business and operations. See "Item 2. Financial
Information--The Company."
OVERVIEW OF HARVEYS
Harveys currently owns and operates: (a) Harveys Resort on the south shore
of Lake Tahoe in Nevada, (b) Harveys Wagon Wheel in Central City, Colorado and
(c) Harveys Casino Hotel in Council Bluffs, Iowa. Until October 24, 1997,
Harveys, through its wholly owned subsidiary, Harveys Las Vegas Management
Company ("HLVMC"), owned 40% of the equity interest in Hard Rock Hotel, Inc.
("HRHC"), which owns the Hard Rock Hotel and Casino in Las Vegas. HLVMC managed
the Las Vegas hotel and casino pursuant to a management contract with HRHC. On
October 24, 1997, Harveys completed the sale of its 40% equity interest and its
interest in the management contract to HRHC (the "Hard Rock Sale").
The following table presents certain operating results for Harveys'
properties. The operating results for Harveys Resort, which, since June 1, 1997,
has been owned and operated by Harveys' wholly owned subsidiary HTMC, have been
presented for all periods, excluding the effects of corporate and future
business development expenses. Those expenses have been presented under the
caption "Corporate and Development." On April 30, 1996, Harveys acquired all of
the 30% minority interest in Harveys Wagon Wheel Casino Limited Liability
Company ("HWW") which owned Harveys Wagon Wheel. Since that time, Harveys Wagon
Wheel has been wholly owned by Harveys. The riverboat casino portion of Harveys
Casino Hotel opened on January 1, 1996 and the land-based facilities opened on
May 24, 1996. The operating results of HLVMC for the nine months ended August
31, 1997 and the years ended November 30, 1997, 1996 and 1995 include the fees
earned by HLVMC for managing the operations of the Hard Rock Hotel and Casino
and the 40% equity interest in the income of the Hard Rock Hotel and Casino.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 31, YEARS ENDED NOVEMBER 30,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Revenues
Harveys Resort..................................... $ 101,739 $ 98,390 $ 129,970 $ 130,535 $ 130,615
Harveys Wagon Wheel................................ 47,035 36,350 49,445 43,128 40,911
Harveys Casino Hotel............................... 84,183 74,871 99,641 69,063 --
Harveys L.V. Management Company.................... -- 3,920 4,507 5,023 1,669
Corporate and Development.......................... -- -- -- -- 5
---------- ---------- ---------- ---------- ----------
Total Net Revenues................................. $ 232,957 $ 213,531 $ 283,563 $ 247,749 $ 173,200
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Operating Income (Loss) (1)
Harveys Resort..................................... $ 19,424 $ 18,298 $ 23,674 $ 23,585 $ 21,575
Harveys Wagon Wheel................................ 11,002 7,215 9,848 8,652 5,031
Harveys Casino Hotel............................... 15,928 13,423 17,630 8,016 --
Harveys L.V. Management Company.................... -- 3,754 4,308 4,800 1,469
Corporate and Development.......................... (10,410) (8,537) (14,180) (11,032) (9,721)
---------- ---------- ---------- ---------- ----------
Total Operating Income............................. $ 35,944 $ 34,153 $ 41,280 $ 34,021 $ 18,354
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 31, YEARS ENDED NOVEMBER 30,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA (2)
Harveys Resort..................................... $ 26,529 $ 24,546 $ 32,125 $ 32,127 $ 30,886
Harveys Wagon Wheel................................ 13,716 9,573 13,114 11,564 10,305
Harveys Casino Hotel............................... 21,340 18,230 24,285 16,849 --
Harveys L.V. Management Company.................... -- 3,920 4,507 5,021 1,635
Corporate and Development.......................... (8,898) (8,129) (10,984) (10,959) (7,746)
---------- ---------- ---------- ---------- ----------
Total EBITDA....................................... $ 52,687 $ 48,140 $ 63,047 $ 54,602 $ 35,080
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) The operating loss for Corporate and Development for fiscal year 1997
includes a write-off of business development costs of approximately $2.7
million. For fiscal year 1996 and fiscal year 1995, operating income
includes approximately $4.1 million of pre-opening expenses related to
Harveys Casino Hotel and approximately $2.1 million of pre-opening expenses
related to Harveys Wagon Wheel, respectively.
(2) EBITDA (operating income plus depreciation and amortization and excluding
non-recurring items), should not be construed as an indicator of Harveys'
operating performance, or as an alternative to cash flows from operating
activities as a measure of liquidity. EBITDA is presented solely as
supplemental disclosure, because Harveys believes that it allows for a more
complete analysis of results of operations. Because companies do not
calculate EBITDA identically, the presentation of EBITDA herein is not
necessarily comparable to similarly entitled measures of other companies.
EBITDA is not intended to represent and should not be considered more
meaningful than, or an alternative to, measures of operating performance as
determined in accordance with generally accepted accounting principles. For
fiscal year 1997, EBITDA for Corporate and Development excludes the
write-off of approximately $2.7 million of business development costs. For
fiscal year 1996, Harveys Casino Hotel's EBITDA excludes approximately $4.1
million of pre-opening expenses. For fiscal year 1995, EBITDA for (a)
Harveys Resort includes approximately $271,000 of life insurance benefits,
(b) Harveys Wagon Wheel excludes approximately $2.1 million of pre-closing
expenses, and (c) Corporate and Development includes approximately $2.0
million in life insurance benefits. For the nine-month period ended August
31, 1998, EBITDA excludes approximately $1.1 million of expensed costs
related to the Merger.
COMPARISON OF THE NINE MONTHS ENDED AUGUST 31, 1998 TO THE NINE MONTHS ENDED
AUGUST 31, 1997
Harveys' consolidated net revenues for the nine months ended August 31, 1998
amounted to approximately $233.0 million, an increase of $19.4 million, or 9.1%,
over net revenues recorded in the same period of fiscal 1997. The improvement
was attributable to an increase in net revenues at all of the Company's
properties. Harveys Wagon Wheel experienced an increase in net revenues of $10.7
million. The increased net revenues from the Colorado property demonstrated the
value of additional on-site parking added by the opening of the 530-space
parking garage in June 1997. Net revenues at Harveys Casino Hotel in Iowa
improved by $9.3 million due, in part, to the casino expansion. Net revenues
from the Harveys Resort property increased by approximately $3.3 million due, in
part, to a decrease in weather related road closures or controls in the first
quarter of 1998 compared to 1997. The revenue contribution from the management
fees and equity in earnings from the Hard Rock Hotel and Casino declined by
approximately $3.9 million as a result of the Hard Rock Sale in October 1997.
Casino revenues for the fiscal 1998 nine months amounted to approximately
$183.5 million, an improvement of $21.1 million, or 13.0%, over the comparable
prior year period. Harveys Wagon Wheel
27
<PAGE>
produced an increase of approximately $10.8 million in casino revenues over the
prior year comparable period. Gaming activity in Iowa produced an increase of
approximately $9.1 million in casino revenues. Harveys Resort casino revenues
improved by approximately $1.3 million. Casino costs and expenses increased for
the comparable periods, up $11.1 million to $86.3 million for the current year
period. The Council Bluffs casino accounted for $6.7 million of the increase,
while the Colorado operations accounted for approximately $4.7 million of the
increase. The Lake Tahoe operations produced a $0.2 million savings in casino
costs. The increase in casino costs and expenses at the Iowa and Colorado
properties was attributable to increases in payroll and related costs, gaming
taxes and licenses (a consequence of increased casino revenues) and an increase
in promotional expenses at both of the properties.
Lodging revenues for the fiscal 1998 nine month period improved by
approximately $1.5 million, or 6.1%, over the prior year comparable period and
amounted to $26.2 million. The hotel facility at Lake Tahoe contributed $1.1
million of the lodging revenues improvement and the Council Bluffs hotel
contributed approximately $0.4 million of the lodging revenues improvement.
Lodging profits improved by approximately $1.2 million. The improvement in
lodging profit margins was the result of an increase in revenue per available
room at all properties.
Food and beverage revenues for the current fiscal year period amounted to
approximately $35.5 million, an improvement of $2.1 million, or 6.3%, over the
1997 period. The Lake Tahoe property contributed an increase of approximately
$1.1 million and the Council Bluffs property contributed an increase of
approximately $0.9 million. The Central City property contributed an increase of
$0.1 million in beverage revenues. Food and beverage profits and margins
improved for the period-to-period comparison due to increased revenues at all
operating properties and the controlling of related costs.
The combination of other revenues and the contribution from management fees
and equity in the earnings from the Hard Rock Hotel and Casino decreased by
approximately $3.6 million, or 39.2%, primarily as a result of the sale of
Harveys' interests in the Hard Rock Hotel and Casino.
Selling, general and administrative expenses increased by approximately $3.3
million, or 6.0%, to $58.8 million for the current fiscal year period. The
operations in Central City experienced an increase of approximately $2.0 million
in selling, general and administrative expenses, primarily as the result of
increased marketing expenses. The Lake Tahoe operations recognized an increase
in overall selling, general and administrative expenses of approximately $0.6
million. Corporate expenses increased by $0.8 million. Selling, general and
administrative expenses in Council Bluffs remained level.
Depreciation and amortization expenses increased by $1.7 million, or 11.8%.
The depreciation expense at the Lake Tahoe property included a charge of
approximately $0.4 million related to the disposal of assets necessary to
facilitate the construction of a Hard Rock Cafe on the casino floor which opened
early in the third quarter of fiscal 1998. The balance of the increase was
attributable to the completion of the parking garage in Central City and
replacements and improvements at the operating properties.
The current fiscal year nine month period included approximately $1.1
million of Merger-related expenses due to the third quarter recognition of
financial consulting, legal and accounting fees relative to the pending Merger.
Interest expense, net of interest income and interest capitalized, decreased
by approximately $2.6 million to $11.9 million for the first nine months of
fiscal 1998. The decrease was attributable to the use of the proceeds from the
Hard Rock Sale in October 1997. A portion of the proceeds was used to pay the
outstanding balance under Harveys' existing credit facility, thereby reducing
interest expenses. The balance of the proceeds was invested in cash equivalents,
resulting in an increase in interest income. Approximately $0.4 million of
interest expense was capitalized during the first nine months of fiscal 1997 in
connection with the construction of the parking facility in Central City. No
interest was capitalized during the first nine months of fiscal 1998.
Net income for the first nine months of fiscal 1998 amounted to
approximately $14.4 million compared to $11.7 million for the prior fiscal year
period, an increase of 22.6%.
28
<PAGE>
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1997 TO FISCAL YEAR ENDED
NOVEMBER 30, 1996
Harveys' consolidated net revenues for fiscal 1997 were $283.6 million, an
increase of $35.9 million, or 14.5%, from the $247.7 million recorded in fiscal
1996. The improvement was substantially attributable to the $30.6 million
increase in net revenues produced by Harveys Casino Hotel. Net revenues for
fiscal 1997 from the Iowa property included a full twelve months of operations
of the complete facility while fiscal 1996 included only eleven months of
revenues from the riverboat casino and six full months of revenues from the
land-based facilities. Net revenues from Harveys Resort declined by
approximately $0.5 million, the result of adverse first quarter weather
conditions and severe flooding in northern Nevada and in many of the northern
California communities that provide many of the Lake Tahoe property's customers.
Mud slides triggered by the inclement weather closed U.S. Highway 50, the major
link between the south shore of Lake Tahoe and northern California, for 42 days
of the first quarter. Harveys Wagon Wheel experienced an increase in net
revenues of $6.3 million, a substantial portion of which was recognized in the
third and fourth quarters, after the opening of that property's new parking
garage. The revenue contribution from the management fees and equity in earnings
from the Hard Rock Hotel and Casino decreased approximately $0.5 million, as a
result of the Hard Rock Sale on October 24, 1997.
CASINO. Fiscal 1997 casino revenues increased $30.2 million, up 16.2% from
fiscal 1996 casino revenues of $186.4 million to $216.6 million. The twelve
months of gaming activity in Iowa produced an increase of approximately $23.6
million in casino revenues compared to those produced at the Council Bluffs
property during the initial eleven months of operations in fiscal 1996. Harveys
Resort suffered a decline in casino revenues of approximately $0.8 million as a
result of the adverse weather and road conditions experienced in the first
quarter. Harveys Wagon Wheel produced an increase of approximately $7.4 million
in casino revenues over the prior year comparable period. Casino costs and
expenses increased for the comparable periods, up $13.8 million to $100.5
million for the current year period. The Council Bluffs casino accounted for
$10.6 million of the increase while the Colorado operations accounted for
approximately $4.3 million of the increase. The Lake Tahoe operations produced a
$1.1 million improvement in casino costs due to lower payroll and related costs
and the reduction of other operating costs in reaction to the lower casino
volume resulting from the impact of the first quarter's adverse weather
conditions.
LODGING. Lodging revenues of $32.2 million for fiscal 1997 were up $3.5
million, or 11.9%, from fiscal 1996. The hotel facility in Council Bluffs, which
opened at the end of May 1996, contributed an increase of $2.8 million in
lodging revenues during 1997, accounting for the majority of the lodging
revenues improvement. Lodging profits improved by approximately $1.7 million.
The decline in lodging profit margins was the result of the contribution from
the Council Bluffs hotel, which has a lower profit margin than the Lake Tahoe
hotel, becoming a more significant part of lodging profits and of the increase
in promotional costs at the Lake Tahoe hotel.
FOOD AND BEVERAGE. Food and beverage revenues improved by 11.4%, up $4.5
million to $44.4 million. Food and beverage revenues from the Council Bluffs
property, which included revenues from the land-based facilities for all of
1997, compared to six full months of the 1996 period, contributed an increase of
approximately $6.3 million. That increase was offset by declines at Lake Tahoe,
precipitated by the effects of adverse weather, and declines at Central City as
the result of outsourcing, commencing the second quarter of fiscal 1996, the
food service and a portion of the beverage service. Food and beverage profits
and margins declined for the period-to-period comparison primarily as a result
of the decision to attractively price the food and beverage offerings at the
Council Bluffs property to attract local customers.
OTHER REVENUES. Other revenues amounted to $11.8 million in fiscal 1997,
including $4.5 million in fees from its contract with HRHC to manage the Hard
Rock Hotel and Casino and Harveys' 40% equity interest in the earnings of HRHC,
an improvement of $0.4 million from fiscal 1996. The improvement in other
revenues was achieved despite the fact that the contribution from the Hard Rock
Hotel and Casino was recognized for approximately 11 months of fiscal 1997
compared to a full year's contribution in fiscal 1996.
29
<PAGE>
SG&A, DEPRECIATION AND AMORTIZATION, NET INTEREST EXPENSE. Consolidated
selling, general and administrative expense increased 10.2%, up $6.8 million to
$73.9 million for fiscal 1997. The operations in Council Bluffs experienced an
increase of approximately $5.0 million in selling, general and administrative
expenses. The increase was attributable, in part, to the fact that the entire
Council Bluffs facility was in operation for all of fiscal 1997 compared to
eleven months and approximately six months of operations for the riverboat
casino and land based facilities, respectively, in fiscal 1996. Additionally,
the assessed value of the property was increased resulting in an increase in
property taxes of approximately $0.9 million. Certain fees required to be paid
on the basis of customer headcounts increased by approximately $1.8 million as
the result of increases in the number of customers visiting the Council Bluffs
property. The Lake Tahoe operations recognized an improvement in overall
selling, general and administrative expenses of approximately $0.1 million from
the fiscal 1996 period to the fiscal 1997 period. Selling, general and
administrative expenses increased by $1.8 million at the Central City property
as a result of an increase in promotional costs and a grand opening event
promoting the new parking garage. Depreciation and amortization expenses
increased by $2.6 million. The increase in depreciation was associated with the
expanded facilities in Council Bluffs and the opening of the Central City
parking garage. Interest expense, net of interest income and interest
capitalized, increased by approximately $4.7 million to $18.9 million for fiscal
1997. The increase was attributable to the Notes which were issued in May 1996,
and to the effect of capitalizing approximately $2.6 million of interest in
fiscal 1996 in connection with the construction of the Council Bluffs facilities
compared to the effect of capitalizing approximately $0.4 million of interest in
the current year in connection with the construction of the parking facility in
Central City.
BUSINESS DEVELOPMENT COSTS. In the fourth quarter of fiscal 1997, Harveys
reviewed and evaluated certain capitalized costs relative to business
development efforts in specific geographical areas where there was a potential
for approval of casino gaming. As a result of the review process, amounts
previously capitalized with respect to real estate options, joint ventures,
legal and other costs were written off or revalued. The amount expensed in the
fourth quarter was approximately $2.7 million. The amount of such costs that
continued to be deferred at November 30, 1997 was approximately $0.9 million.
SALE OF INTERESTS IN UNCONSOLIDATED AFFILIATE. In the fourth quarter of
fiscal 1997, Harveys sold its 40% equity interest in HRHC and all of Harveys'
rights under a management agreement to manage the operations of the Hard Rock
Hotel and Casino. Harveys received $45.0 million cash for its equity interest
and the rights under the management agreement and an additional $1.2 million
cash in satisfaction of a note and other amounts due Harveys at the time of the
sale. Harveys recognized a gain of approximately $27.4 million on the
transaction.
NET INCOME. Net income for fiscal 1997 amounted to approximately $30.8
million, including the after-tax gain of approximately $17.4 million
attributable to the sale of Harveys' interests in the Hard Rock Hotel and Casino
and the after-tax write-down of approximately $1.7 million related to certain
business development costs, compared to $11.3 million of net income for fiscal
1996.
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1996 TO FISCAL YEAR ENDED
NOVEMBER 30, 1995
Harveys' net revenues for fiscal 1996 were $247.7 million, an increase of
$74.5 million, or 43.0%, from the $173.2 million recorded in fiscal 1995. Of the
increase, $69.1 million, or 92.6% of the total increase, was attributable to the
first year of operations of Harveys Casino Hotel in Council Bluffs.
Approximately $3.4 million of the net revenue increase was attributable to an
increase in the combination of the management fees earned for the management of
the Hard Rock Hotel and Casino in Las Vegas and Harveys' 40% equity interest in
the income of HRHC. The balance of the increase in net revenues was provided by
operations of Harveys Wagon Wheel.
CASINO. Fiscal 1996 casino revenues increased $65.0 million, up 53.6% from
fiscal 1995 casino revenues of $121.4 million, to $186.4 million. The first year
operations of Harveys Casino Hotel provided $62.6 million of the increase. While
the Lake Tahoe operations accounted for $84.4 million, or 45.3% of consolidated
casino revenues, the contribution to casino revenues from the northern Nevada
property
30
<PAGE>
declined by 1.6%. The contribution from Harveys' casino operations in the
Colorado market improved by $3.7 million over the prior year. Casino costs and
expenses also increased with the opening of Harveys Casino Hotel. While the
Council Bluffs property accounted for 96.3% of the casino revenue growth, it
also accounted for 86.8% of the growth in casino costs and expenses, up in total
from $57.5 million in fiscal 1995 to $86.7 million in fiscal 1996.
LODGING. Lodging revenues of $28.7 million for fiscal 1996 were up $3.2
million, or 12.7%, from fiscal 1995. Revenues from the 251-room Council Bluffs
hotel operation provided nearly $2.3 million of the increase with an occupancy
rate of 80.0% since its opening in late May 1996 through the end of fiscal 1996.
Management's decision to price the Council Bluffs hotel rooms at an attractive
rate was successful in attracting initial customers to the property. The
740-room hotel at the Lake Tahoe facility provided the balance of the lodging
revenue increase due to an increase in occupancy from 76.9% in fiscal 1995 to
80.5% in fiscal 1996. As expected, due to the promotional pricing in Council
Bluffs, total lodging costs and expenses increased at a higher rate than lodging
revenue growth. The 740-room Lake Tahoe hotel operates at a greater economy of
scale than the 251-room Council Bluffs hotel or the 118-room Central City hotel
and commands a higher average daily rate while spreading necessary costs over a
more extensive room base.
FOOD AND BEVERAGE. Food and beverage revenues improved by 17.3%, up $5.9
million to $39.9 million. Approximately $6.5 million was provided by the new
operations in Council Bluffs where the decision had been made to attractively
price the food service to entice local customers to the property. The Lake Tahoe
property experienced a 5.3% decline in the number of meals served but, due in
part to menu price increases, recognized an increase in the average guest check,
which resulted in flat food revenues at the property. Beverage revenues at Lake
Tahoe improved by approximately $425,000. Food and beverage revenues at the
Central City property declined approximately $1.1 million, primarily as the
result of outsourcing the food service during the second half of fiscal 1996. As
expected, food and beverage profit margins declined due to promotional pricing
and the attendant higher cost-of-goods-sold percentage experienced in Council
Bluffs.
OTHER REVENUES. Other revenues amounted to $11.4 million in fiscal 1996,
including $5.0 million from the combination of fees from its contract with HRHC
to manage the Hard Rock Hotel and Casino and a 40% equity interest in the income
of HRHC. Other revenues in fiscal 1995 amounted to $8.0 million, including $1.7
million attributable to the Hard Rock Hotel and Casino, net of Harveys' pro rata
share of pre-opening expenses. Other expenses remained relatively flat in
absolute dollars.
SG&A, DEPRECIATION AND AMORTIZATION, NET INTEREST EXPENSE. Consolidated
selling, general and administrative expenses increased 33.5%, up $16.9 million
to $67.1 million for fiscal 1996. Approximately $17.7 million was attributable
to the new operations in Council Bluffs. The offsetting savings of approximately
$0.8 million represented a 5.1% decrease from comparable expenses in fiscal 1995
primarily as a result of reduced marketing costs at the Lake Tahoe property.
Depreciation and amortization increased $4.1 million from fiscal 1995 to fiscal
1996. The 1996 depreciation charges associated with Harveys Casino Hotel
amounted to $4.7 million. All other operations recorded a decrease of nearly
$0.6 million as a result of the value of fully depreciated and retired assets in
fiscal 1996 exceeding the value of depreciable assets acquired. Interest
expense, net of interest capitalized, increased $6.2 million, or 78.3%, from
fiscal 1995 to fiscal 1996. This increase was attributable to Harveys Casino
Hotel financing and the issuance of the Notes. In fiscal 1995, $1.1 million of
interest was capitalized, primarily in conjunction with the construction of
Harveys Casino Hotel. In fiscal 1996, an additional $2.6 million was capitalized
in conjunction with that construction.
PRE-OPENING EXPENSES. As a result of the opening of Harveys Casino Hotel in
fiscal 1996, Harveys recognized $4.1 million of pre-opening expenses. These
charges had previously been incurred in connection with the development of that
property and deferred until the facility opened. Approximately $2.1 million of
such costs had been deferred through fiscal 1995 year end. In fiscal 1995
Harveys recognized approximately $2.1 million of pre-opening expenses with the
opening of Harveys Wagon Wheel.
31
<PAGE>
EXTRAORDINARY ITEM. In May 1996, Harveys expensed the remaining unamortized
debt issuance costs related to a $10 million note payable that was retired
before maturity. In June 1996, Harveys applied a portion of the net proceeds
from the sale of the Notes to retire the note payable under a riverboat
financing agreement and expensed the unamortized debt issuance cost related to
that agreement. In July 1996, Harveys retired subordinated notes issued in
exchange for notes payable by HWW and recognized expense as the result of
writing off the related debt issuance costs. These items are reflected in
operating results as an extraordinary loss of approximately $0.5 million, net of
income tax benefit.
INCOME TAX PROVISION. The income tax provision for fiscal 1996 was
unfavorably affected by the state income taxes applicable to the expansion of
Harveys' operations outside of the state of Nevada.
NET INCOME. As a result of the above, net income for fiscal 1996 improved
to $11.3 million from $9.3 million in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Set forth below is a description of Harveys' historical liquidity and
capital resources. Assuming consummation of the Merger, at the Effective Time
the leverage and fixed charge obligations of the Company will be substantially
increased. In addition to the offering of Series A Preferred, a portion of the
the Merger Financing is expected to be provided pursuant to the Loan. Upon
consummation of the Merger, the Loan would immediately be refinanced principally
through the Amended and Restated Credit Facility. The fundings of the Loan and
the Amended and Restated Credit Facility are subject to customary conditions
precedent. See "Item 2. Financial Information--The Company." Among other
covenants and restrictions it imposes, the Amended and Restated Credit Facility
will prohibit the payment of cash dividends unless the Leverage Ratio is not
greater than 3 to 1. "Leverage Ratio" will be calculated by reference to
Harveys, HCCMC, HIMC, HLVMC and HTMC and any other subsidiaries of Harveys
subsequently designated as a "Restricted Subsidiary" under the Amended and
Restated Credit Facility and refers to the ratio of total indebtedness to EBITDA
(as defined in the Amended and Restated Credit Facility).
The Notes are governed by the Indenture and are general unsecured
obligations of Harveys, subordinated in right of payment to all existing and
future Senior Debt of Harveys (as defined in the Indenture). The Notes are
guaranteed by each of the Restricted Subsidiaries of Harveys (as defined in the
Indenture). Each guarantee is a general unsecured obligation of the guaranteeing
Restricted Subsidiary, subordinated in right of payment to all existing and
future Senior Debt of each guaranteeing Restricted Subsidiary. At August 31,
1998, the guaranteeing Restricted Subsidiaries were HCCMC, HIMC, HLVMC and HTMC.
Interest on the Notes is payable semi-annually on June 1 and December 1 of
each year. The Notes will mature on June 1, 2006. The Notes are redeemable at
the option of Harveys, in whole or in part, at any time on or after June 1, 2001
at prices ranging from 105.313% of the principal amount plus accrued and unpaid
interest, to 100% of the principal amount plus accrued and unpaid interest
beginning June 1, 2004 and thereafter. Harveys has received the consent of the
holders of the Notes to the waiver of provisions of the Indenture that would
have given each holder of Notes the right upon consummation of the Merger to
require Harveys to repurchase such holder's Notes at 101% of the principal
amount plus accrued and unpaid interest to the repurchase date and that may have
restricted the Merger Financing. See "Item 1 Business--The Company."
The Indenture contains certain covenants that impose limitations on, among
other things, (a) the incurrence of additional indebtedness by Harveys or any
Restricted Subsidiary, (b) the payment of dividends, (c) the repurchase of
capital stock and the making of certain other Restricted Payments and Restricted
Investments (as defined in the Indenture) by Harveys or any Restricted
Subsidiary, (d) mergers, consolidations and sales of assets by Harveys or any
Restricted Subsidiary, (e) the creation or incurrence of liens on the assets of
Harveys or any Restricted Subsidiary, and (f) transactions by Harveys or any of
its subsidiaries with Affiliates (as defined in the Indenture). These
limitations are subject to a number of
32
<PAGE>
qualifications and exceptions as described in the indenture. Harveys was in
compliance with those covenants at August 31, 1998.
Harveys had budgeted $18.6 million for maintenance capital expenditures and
property improvements in fiscal year 1999. Harveys believes that its existing
cash and cash equivalents, cash flows from operations and its borrowing capacity
under the Amended and Restated Credit Facility, on a pro forma basis giving
effect to the Merger and Merger Financing, will be sufficient to meet the cash
requirements of its existing operations during at least the next twelve months,
including capital improvements and replacements at the operating properties,
dividends and debt service requirements. Harveys currently believes that its
capital expenditures beyond the next twelve months will consist of dividend and
debt service requirements and capital improvements and replacements in the
ordinary course, which Harveys expects to be met by then-existing cash, cash
flows from operations and borrowing capacity under the Amended and Restated
Credit Facility. Harveys does not currently anticipate incurring material
capital expenditures, balloon or other extraordinary payments on long-term
obligations or any other extraordinary demands or commitments beyond the next
twelve months. The Company and Harveys do not expect that cash dividends will be
paid on the Series A Preferred for the five-year period during which dividends
will be permitted to be paid in-kind because of, among other reasons,
restrictions in the Amended and Restated Credit Facility and the Indenture on
the payment of cash dividends.
NINE MONTHS ENDED AUGUST 31, 1998. Harveys' primary sources of liquidity
and capital resources during the first nine months of fiscal 1998 were cash flow
from operations of approximately $35.1 million and the proceeds of approximately
$3.4 million from the exercise of options to purchase shares of Harveys' common
stock.
During the first nine months of fiscal 1998, Harveys expended approximately
$9.8 million in cash for income taxes. Additionally, Harveys made cash payments
for dividends of approximately $1.5 million during the period and incurred
additional cash expenditures of approximately $13.0 million in connection with
capital improvements and replacements, approximately $5.0 million of which was
related to casino expansion and remodeling in Council Bluffs, which was
completed near the end of the first quarter of fiscal 1998.
At August 31, 1998, Harveys had approximately $78.2 million of cash and cash
equivalents and a maximum of approximately $113.0 million available under the
Credit Facility, subject to compliance with certain financial covenants.
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995. In addition to cash flows
from operations and borrowings under the Credit Facility, in fiscal year 1997,
Harveys received $46.2 million when it sold its interests in HRHC and
approximately $3.7 million from the sale of other assets.
Cash flow from operations for fiscal year 1997 was approximately $44.6
million. On October 24, 1997 Harveys received $45.0 million cash when it sold:
(a) all of the capital stock of HRHC held by Harveys, representing 40% of the
then outstanding capital stock of HRHC, and (b) all of Harveys' rights under a
management agreement between HRHC and HLVMC relating to the management and
operations of the Hard Rock Hotel and Casino. Harveys also received
approximately $1.2 million cash in satisfaction of a note and other amounts due
Harveys from HRHC as of October 24, 1997. Additionally, Harveys sold, in
separate transactions in fiscal year 1997, a note receivable from an unrelated
party and Harveys' airplane, realizing net proceeds of approximately $3.7
million from these transactions.
During fiscal year 1997, Harveys expended approximately $1.5 million in cash
relative to construction payables and retentions associated with the
construction of the hotel and convention center portion of Harveys Casino Hotel
in Council Bluffs and expended approximately $7.6 million in cash relative to
the construction of a parking garage at Harveys Wagon Wheel in Central City,
Colorado. Additionally, Harveys made cash payments for dividends of
approximately $2.0 million during the period, incurred additional cash
expenditures of approximately $16.9 million in connection with capital
improvements and replacements and made net cash payments of approximately $33.3
million reducing Harveys' outstanding borrowings.
33
<PAGE>
During fiscal year 1996, Harveys completed the construction of the Council
Bluffs project, expending $36.8 million in cash and financing the acquisition of
the riverboat and equipment through a $20 million riverboat financing agreement.
Additionally, Harveys made cash payments for dividends of approximately $1.7
million during the year and incurred additional cash expenditures of
approximately $11.6 million in connection with capital improvements and
replacements at the operating properties and corporate offices.
On April 30, 1996, Harveys paid the holders of approximately $11.9 million
of 12% subordinated notes payable by HWW (the "HWW Notes") $6 million in cash
and issued an aggregate of $8 million in subordinated notes in exchange for all
of the outstanding HWW Notes and unpaid interest accrued thereon (the "Debt
Exchange"). On such date, Harveys also exchanged 382,500 shares of Harveys'
common stock for: (a) 30% of the equity interests of HWW, (b) the rights to an
approximately $3 million priority return from HWW, and (c) an option to acquire
an additional 5% of the equity interests in HWW (the "Equity Exchange").
On May 22, 1996, Harveys completed its public debt offering of $150 million
of the Notes. The proceeds, $145.5 million net of underwriting discounts and
commissions, were used to: (a) pay off a $10 million note payable to a private
investor, (b) retire the $19 million principal balance of the note payable under
a riverboat financing agreement, (c) redeem, for $7.8 million plus accrued and
unpaid interest, the $8 million aggregate principal amount of subordinated notes
issued in the Debt Exchange, and (d) reduce the outstanding principal balance
under the Credit Facility.
In September 1996, the Credit Facility was amended. Among other things the
amendment: (a) extended the maturity date from August 16, 2000 to February 15,
2002, (b) extended the due dates of required repayments of principal, (c)
modified the terms of certain financial covenants, and (d) reduced the maximum
available principal balance to $115 million. In connection with the financing
for the Merger, it is expected that the Credit Facility will be amended and
restated. See "Item 1. Business--The Company."
During fiscal 1995, Harveys' principal uses of funds were: (a) advances and
investments of approximately $49.6 million to fund the development and
construction of Harveys Casino Hotel in Council Bluffs, (b) investment of an
additional $4.0 million in HRHC, (c) advances of an additional $7.3 million to
complete the funding for the construction of Harveys Wagon Wheel, (d) dividend
payments of approximately $1.5 million, and (e) pursuing additional expansion
opportunities.
YEAR 2000 ISSUE
Many technological systems (including those that employ embedded technology
such as microcontrollers) rely on hardware, software and components that were
originally designed to recognize a date by using the last two digits of a four
digit year. Tasks performed using these truncated fields may not work properly
for dates from 2000 and beyond. This could result in system failures or
miscalculations causing disruptions of, or the inability to engage in, normal
business operations. This is generally known as the "Year 2000 Problem."
Harveys has established a task force to coordinate its response to the Year
2000 Problem. This task force includes Harveys' Chief Executive Officer, Chief
Financial Officer, Manager of Internal Audit, the Director of Information
Services as well as support staff. An outside consultant was also engaged who
assisted in establishing a Year 2000 compliance program for Harveys.
The Year 2000 compliance programs developed for Harveys consist of the
following phases:
1: Compilation of an inventory of systems and equipment that may cause a
Year 2000 Disruption ("Critical Systems and Equipment").
2: Identification and priorization of the Critical Systems and Equipment
from the inventory compiled in Phase 1 and inquiries of third parties
with whom Harveys does significant business (i.e., vendors and suppliers)
as to their state of their Year 2000 readiness.
34
<PAGE>
3: Analysis of the identified Critical Systems and Equipment to determine
which systems and equipment are not Year 2000 compliant and evaluation of
the costs to repair or replace those systems.
4: Repair or replacement and testing of noncompliant Critical Systems and
Equipment and the testing of Critical Systems and Equipment for which
representation as to Year 2000 compliance has not been received or for
which representation has been received but has not been confirmed.
Harveys is not currently planning to use any independent verification and
validation process to assure the reliability of their risk and cost estimates.
However, this position will continue to be reevaluated as the Year 2000
compliance programs proceed at Harveys' facilities.
Harveys also initiated a more limited review of the Year 2000 Problem as it
relates to business associates of Harveys including material vendors, suppliers,
financial institutions and utility and communications providers. The scope of
the review was generally limited to inquiries of such business associates. Based
on the responses received, Harveys is not aware of any Year 2000 Problem impact
on a material business associate that would have a material adverse affect on
Harveys' business operations. However, there can be no assurances that all of
Harveys' material business associates will be Year 2000 compliant in a timely
manner.
Harveys relies on Systems in many areas of its business operations including
casino operations, retail outlets, hotel operations, accounting and finance,
facilities and environmental, communications and administration. Harveys has not
developed a comprehensive contingency plan, although a number of Systems are
"backed up" by manual procedures that have been employed during times Systems
have been unavailable. Harveys will continue to assess the need for a
comprehensive contingency plan as implementation of the corrective action plan
continues and as the review of business associates' readiness progresses.
Harveys is in the process of implementing its corrective action plan.
Harveys is utilizing internal resources and external resources to achieve the
plan objectives. Harveys anticipates that the required modifications, upgrades
and replacements of Systems will most likely be completed in the second quarter
of fiscal year 1999, allowing for additional testing and revisions, if
necessary, before the year 2000. Harveys believes that its corrective action
plan, including the timelines, is adequate and realistic. Nevertheless, if one
or more of Harveys' Systems has been overlooked or if implementation of the
corrective action plan fails to achieve Year 2000 compliance for one or more
Systems, or if a key business associate fails to provide necessary products or
services due to Year 2000 Problem business disruptions, there could be a
material adverse impact on Harveys' business operations or financial
performance. With respect to Harveys' Systems, the most reasonable likely worst
case scenario if a Year 2000 Problem occurred would be the necessity to perform
manually those procedures customarily performed by a noncompliant System. This
could result in a slowdown of normal business operations and would likely be
more costly. The performing of procedures manually would continue until such
time as the noncompliant System could be made compliant or a suitable
alternative could be found and installed. With respect to a key business
associate, the most reasonable likely worst case scenario if a Year 2000 Problem
occurred would be the failure to deliver to Harveys essential utilities, which
could result in the inability of one or more of Harveys' hotel/casinos to
operate and require the affected property or properties to close until such
utilities could be restored.
Harveys estimates that the costs to achieve Year 2000 compliance, including
those costs that are capitalizable, will be approximately $4.4 million and will
be expended through 2000. Harveys incurred costs of approximately $1.0 million
in fiscal year 1998, including approximately $0.7 million that was capitalized.
Harveys expects to incur an additional cost of approximately $3.4 million in
fiscal 1999, approximately $3.0 million of which will be for capital
acquisitions. Harveys believes that its expenditures in fiscal 2000 will not be
material. These estimates are based on Harveys' evaluation and experience to
date and are subject to modification as implementation of the corrective action
plan progresses. There can be no assurances that the estimated costs are
adequate or achievable, and actual costs could materially differ from the
estimate.
35
<PAGE>
ITEM 3. PROPERTIES.
THE COMPANY
Prior to the Merger, the Company will own no property. In the Merger, the
Company will be merged into Harveys, which will be the surviving corporation and
will continue to own the properties it currently owns.
HARVEYS CASINO RESORTS
Harveys Resort comprises approximately 1,020,000 square feet on
approximately 19.8 acres, of which HTMC owns approximately 5.4 acres and leases
approximately 14.4 acres pursuant to several ground leases that expire in 2045.
A 973,000-square foot parking garage and certain other amenities are located on
the leased property.
The Harveys Wagon Wheel hotel and casino facility encompasses approximately
200,000 square feet on approximately 1.1 acres and a 730-space garage on a
contiguous 8-acre parcel. Additionally, HCCMC owns approximately 40 acres of
undeveloped land adjacent to the Harveys Wagon Wheel facility.
Harveys Casino Hotel is located on approximately 36 acres of land owned by
HIMC. The land-based amenities, including a covered "skywalk" to the riverboat
casino, are comprised of a hotel, convention center, and passenger staging area,
totaling nearly 300,000 square feet. Contiguous thereto is a 24-acre leasehold
parcel which contains the boat docking facility and additional parking. This
parcel is subject to a long term lease with the City of Council Bluffs for a
nominal annual sum. Additionally, HIMC owns an adjacent 42.5-acre parcel
suitable for expansion or support facilities.
36
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth expected beneficial ownership of the
Company's Class A Common (the only class of voting securities of the Company) at
the Effective Time by (1) all persons who are expected to be beneficial owners
of more than five percent of the Class A Common, (2) each expected director, (3)
the Company's expected Chief Executive Officer and four most highly compensated
executive officers other than the Chief Executive Officer, in each case who were
serving in such capacity on behalf of Harveys at the end of the last fiscal year
and (4) all persons expected to be directors and executive officers, as a group.
Except as otherwise indicated, the Company believes that the expected beneficial
owners of the Class A Common listed below, based on information furnished by
such owners, will have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Unless otherwise
indicated, the business address of such persons is Highway 50 and Stateline
Avenue, P.O. Box 128, Lake Tahoe, Nevada 89449. As of the Effective Time, 40,000
shares of Class A Common are expected to be outstanding. It is expected that all
holders of Class A Common at the Effective Time will hold a number of shares of
Class B Common such that their holdings of Class A Common and Class B Common
each bear the same proportion to the total outstanding shares of each such
class.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED CLASS
- --------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Colony HCR Voteco, LLC
1999 Avenue of the Stars, Suite 1200
Los Angeles, California 90067...................................... 38,800 97.0%(1)
Thomas J. Barrack, Jr. (2)........................................... 38,800 97.0
Kelvin L. Davis (2).................................................. 38,800 97.0
Charles W. Scharer...................................................
Stephen L. Cavallaro.................................................
John J. McLaughlin...................................................
Gary D. Armentrout................................................... *
Kevin O. Servatius................................................... *
All directors and executive officers as a group
(11 persons) (2)................................................... 40,000 100.0%
</TABLE>
- ------------------------
* Less than one percent
(1) Pursuant to the Transfer Restrictions Agreement, Colony III has the right to
acquire such shares on each occasion that Colony III proposes to transfer
any shares of Class B Common held by it to a proposed purchaser who, in
connection with such proposed transfer, has obtained all licenses, permits,
registrations, authorizations, consents, waivers, orders, findings or
suitability or other approvals required to be obtained from, and has made
all filings, notices or declarations required to be made with, all gaming
authorities under all applicable gaming laws (an "Approved Sale"). In such
event, Colony III shall have an option to purchase from Voteco the number of
shares of Class A Common equal to the product of (a) the number of shares of
Class A Common held by Voteco and (b) the fraction whose numerator is the
number of shares of Class B Common proposed to be sold by Colony III in the
Approved Sale and whose denominator is the number of shares of Class B
Common held by Colony III.
(2) Messrs. Barrack and Davis are the Managers of Voteco, and thereby each may
be deemed to have beneficial ownership of the Class A Common owned of record
by Voteco. Messrs. Barrack and Davis each disclaim beneficial ownership of
such shares of Class A Common.
37
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The directors and executive officers of Harveys as of the Effective Time are
expected to be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ------------------------------------------------------------------------------
<S> <C> <C>
Thomas J. Barrack, Jr....... 51 Chairman of the Board of Directors
Charles W. Scharer.......... 43 President and Chief Executive Officer; Director
Stephen L. Cavallaro........ 40 Chief Operating Officer--Subsidiary Properties
John J. McLaughlin.......... 43 Senior Vice President, Chief Financial Officer and Treasurer
Gary D. Armentrout.......... 50 Senior Vice President--Business Development and Government Relations
James J. Rafferty........... 42 Senior Vice President--Corporate Marketing
Edward B. Barraco........... 53 Senior Vice President and General Manager--Harveys Wagon Wheel
Kevin O. Servatius.......... 46 Senior Vice President and General Manager--Harveys Resort
Verne H. Welch, Jr.......... 61 Senior Vice President and General Manager--Harveys Casino Hotel
John R. Bellotti............ 41 Corporate Vice President of Human Resources
Kelvin L. Davis............. 35 Director
</TABLE>
THOMAS J. BARRACK, JR. is expected to serve as Chairman of the Board of
Directors of the Company. He currently serves as Treasurer and a Director of the
Company and is expected to resign as Treasurer at the Effective Time. Mr.
Barrack also holds a minority membership interest in Voteco. Mr. Barrack has
served as Chairman and Chief Executive Officer of each of Colony Capital and
Colony Advisors, Inc. ("Colony Advisors") since August 1997. Colony Capital and
Colony Advisors are international real estate investment and management firms.
Mr. Barrack served as President of Colony Capital and Colony Advisors from
August 1992 and September 1991, respectively, until August 1997. Mr. Barrack is
a Director of Continental Airlines, Inc., a commercial airline, Public Storage,
Inc., a developer, owner and operator of self-storage facilities, and
Kennedy-Wilson, Inc., a worldwide real estate marketing, brokerage and
investment services company.
CHARLES W. SCHARER is expected to serve as President and Chief Executive
Officer. He was appointed President and Chief Executive Officer of Harveys
effective December 1, 1995, He was elected Chairman of the Board of Directors of
Harveys on May 1, 1997 and has served as a director of Harveys since April 1995.
Prior to becoming President and Chief Executive Officer of Harveys, Mr. Scharer
served as Executive Vice President from August 1995. He was appointed Chief
Financial Officer in July 1993 and Treasurer in September 1993.
STEPHEN L. CAVALLARO is expected to serve as Chief Operating Officer of
Subsidiary Properties. He has served as Chief Operating Officer of Subsidiary
Properties of Harveys in February 1996. In this position he has had operational
responsibility for Harveys Wagon Wheel in Central City, Colorado and Harveys
Casino Hotel in Council Bluffs, Iowa. Until October 24, 1997, when the Hard Rock
Sale was consummated, Mr Cavallaro also had operational responsibility for the
Hard Rock Hotel and Casino in Las Vegas, Nevada. Mr. Cavallaro joined Harveys in
February 1994 to direct and develop the Hard Rock Hotel and Casino as Senior
Vice President and General Manager--Hard Rock Hotel. From 1992 to 1994, he
served as Vice President and General Manager of the Palace Station.
JOHN J. MCLAUGHLIN is expected to serve as Senior Vice President, Chief
Financial Officer and Treasurer. He was appointed Senior Vice President, Chief
Financial Officer and Treasurer of Harveys in March 1996. He joined Harveys in
September 1995 as Chief Financial Officer. From January 1993 until September
1995, he was Chief Financial Officer of President Riverboat Casinos, Inc. Mr.
McLaughlin is a Certified Public Accountant.
38
<PAGE>
GARY D. ARMENTROUT is expected to serve as Senior Vice President--Business
Development and Government Relations. He has served as Senior Vice
President--Business Development and Government Relations of Harveys since May
1995. In this position he has been responsible for identifying and pursuing the
development of new projects for Harveys. Prior to joining Harveys, Mr.
Armentrout was employed by President Riverboat Casinos, Inc. where he served as
Vice President--Gaming from May 1990 until June 1994 when he was appointed Vice
President--Gaming Development.
JAMES J. RAFFERTY is expected to serve as Corporate Vice President of
Marketing. He was appointed Corporate Vice President of Marketing of Harveys in
December 1995 and was promoted to Senior Vice President of Corporate Marketing
in 1997. Mr. Rafferty served as Vice President, Marketing--Lake Tahoe from 1992
to 1995.
EDWARD B. BARRACO is expected to serve as Senior Vice President and General
Manager--Harveys Wagon Wheel. He has served as Harveys' Senior Vice President
and General Manager--Harveys Wagon Wheel since July 1995. From 1985 to 1995, Mr.
Barraco served as Assistant General Manager--Lake Tahoe, where he was
responsible for overseeing all aspects of the operation on an assigned shift.
KEVIN O. SERVATIUS is expected to serve as Senior Vice President and General
Manager--Harveys Resort. He was appointed Senior Vice President and General
Manager--Harveys Resort in August 1995. From March 1993 to August 1995, Mr.
Servatius was Senior Vice President and General Manager of Harrah's--Lake Tahoe.
He serves as Vice Chairman of the Board of the Tahoe Douglas Visitors Authority
and serves as President and board member of the Lake Tahoe Gaming Alliance.
VERNE H. WELCH, JR. is expected to serve as Senior Vice President and
General Manager--Harveys Casino Hotel. He has served as Senior Vice President
and General Manager--Harveys Casino Hotel since September 1995. Prior to moving
to the Council Bluffs property, Mr. Welch served as Senior Vice President and
General Manager--Lake Tahoe from December 1993 to September 1995. From 1988 to
December 1993, he served as Vice President--Casino Operations.
JOHN R. BELLOTTI is expected to serve as Corporate Vice President of Human
Resources. He was appointed Corporate Vice President of Human Resources of
Harveys in August 1997. Prior to joining Harveys in August 1997, Mr. Bellotti
was employed by Hyatt Hotels Corporation, serving most recently as Assistant
Vice President of Human Resources from 1993 to 1997.
KELVIN L. DAVIS is expected to serve as a Director. He currently serves as
President and Secretary and a Director of the Company and is expected to resign
as President and Secretary at the Effective Time. Mr. Davis also holds a
majority membership interest in Voteco. Mr. Davis has served as President and
Chief Operating Officer of each of Colony Capital and Colony Advisors since
August 1997. He served as Executive Vice President of Colony Capital and Colony
Advisors from August 1992 and September 1991, respectively, to August 1997. Mr.
Davis is a director of Franchise Finance Corporation of America, a specialty
real estate financing company.
Mark Hedstrom, Chief Financial Officer of Colony Capital, and Mr. Cavallaro
are expected to serve as non-voting observers on the Board of Directors. In
addition to the foregoing officers and directors, all current senior executives
of Harveys are expected to remain in their current positions at the Effective
Time.
39
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION.
The Company currently pays no compensation to any of its executive officers.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by Harveys during the
three fiscal years ended November 30, 1997 to the Chief Executive Officer of
Harveys, each of the four other most highly compensated executive officers of
Harveys, and a former executive officer of Harveys who would have been one of
Harveys' four other most highly compensated executive officers had he continued
to be an executive officer through the end of the fiscal year ended November 30,
1997 (the "Named Executive Officers"). Messrs. Scharer, Cavallaro, McLaughlin,
Armentrout and Servatius are expected to serve in identical positions with the
Company as of the Effective Time, in certain cases pursuant to new employment
agreements and new benefit plans, except that Mr. Cavallaro is not expected to
serve as a director of the Company following the Effective Time. See "Item 7.
Certain Relationships and Related Transactions."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM AWARDS
ANNUAL COMPENSATION -------------------------------------
--------------------------------------- RESTRICTED SECURITIES
YEAR OTHER STOCK UNDERLYING LTIP
ENDED SALARY ANNUAL AWARDS OPTIONS PAYOUTS
NAME AND PRINCIPAL POSITION NOVEMBER 30, ($) BONUS ($) COMPENSATION ($)(1) (#) ($)
- ------------------------------ ----------------- --------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles W. Scharer (3)........ 1997 428,462 360,000 -- -- 183,500 81,384
Director; President and 1996 347,400 168,000 -- -- 135,000 --
Chief Executive Officer 1995 240,507 125,000 -- -- -- --
Stephen L. Cavallaro (4)...... 1997 333,462 240,000 -- -- 48,800 61,718
Director; Chief Operating 1996 267,785 120,000 -- -- 28,000 --
Officer--Subsidiary 1995 242,135 124,020 -- -- -- --
Properties
John J. McLaughlin (5)........ 1997 221,346 165,000 -- -- 41,000 --
Senior Vice President, Chief 1996 175,000 70,000 -- -- 10,000 --
Financial Officer and 1995 30,288 7,500 21,586(6) 190,000 20,000 --
Treasurer
Gary D. Armentrout (7)........ 1997 234,598 130,000 -- -- 41,000 --
Senior Vice President-- 1996 210,384 67,735 -- -- 10,000 --
Business Development and 1995 107,692 11,000 -- 198,750 20,000 --
Government Relations
Kevin O. Servatius (8)........ 1997 268,846 105,000 -- -- 51,000 --
Senior Vice President and 1996 231,538 100,000 -- -- 10,000 --
General Manager--Harveys 1995 60,577 7,500 -- 285,000 30,000 --
Resort
Thomas M. Yturbide (9)........ 1997 400,000 -- -- -- 100,000 148,350
Consultant to the President 1996 400,000 -- -- -- 100,000 --
and Chief Executive Officer 1995 400,000 148,000(10) -- -- -- --
<CAPTION>
ALL
OTHER
COMPENSATION
NAME AND PRINCIPAL POSITION ($)(2)
- ------------------------------ ---------------
<S> <C>
Charles W. Scharer (3)........ 11,067
Director; President and 8,845
Chief Executive Officer 6,439
Stephen L. Cavallaro (4)...... 500(2)
Director; Chief Operating 500(2)
Officer--Subsidiary 500(2)
Properties
John J. McLaughlin (5)........ 6,735
Senior Vice President, Chief 808
Financial Officer and --
Treasurer
Gary D. Armentrout (7)........ 5,512
Senior Vice President-- 3,081
Business Development and --
Government Relations
Kevin O. Servatius (8)........ 8,037
Senior Vice President and 1,828
General Manager--Harveys --
Resort
Thomas M. Yturbide (9)........ 59,116
Consultant to the President 45,896
and Chief Executive Officer 38,694
</TABLE>
- ----------------------------------
(1) In the case of Mr. McLaughlin, represents the market value ($19.00 per
share) of 10,000 shares of restricted stock awarded to Mr. McLaughlin on
August 14, 1995. The value as of November 30, 1997 was $199,063. In the case
of Mr. Armentrout, represents the market value ($19.875 per share) of 10,000
shares of restricted stock awarded to Mr. Armentrout on May 9, 1995. The
value as of November 30, 1997 was $199,063. In the case of Mr. Servatius,
represents the market value ($19.00 per share) of 15,000 shares of
restricted stock awarded to Mr. Servatius on August 14, 1995. The value as
of November 30, 1997 was $298,595. All of the awards were made pursuant to
Harvey's Omnibus Incentive Plans and vested immediately as to 25% of the
award on the date of grant and vested, or were to vest, as to 25% on each of
the next three anniversaries of the date of grant. In addition, as of
November 30, 1997, Messrs. Scharer and Cavallaro held 18,000 and 15,000
shares of restricted stock having a value of $358,313 and $298,595,
respectively. The Named Executive Officers receive dividends on all of their
shares. All such shares would vest upon closing of the Merger and would be
cashed out for an amount per share equal to the consideration paid per share
of Harveys Common Stock in the Merger.
(2) Amounts include Harveys' 401(k) Plan contributions, payments of term life
insurance premiums and above-market rate interest earned on deferred
compensation. In fiscal 1997, Harveys' 401(k) Plan contributions were $4,750
for each of Mr. Scharer, Mr. Cavallaro and Mr. Yturbide and $6,735, $5,512
and $7,477, respectively, for Mr. McLaughlin, Mr. Armentrout and Mr.
Servatius. In fiscal 1997, Harveys
40
<PAGE>
paid term life insurance premiums of $1,130 and $7,093 for policies insuring
the lives of Mr. Scharer and Mr. Yturbide, respectively. In fiscal 1997, the
above-market rate interest earned by Mr. Scharer, Mr. Cavallaro, Mr.
Servatius and Mr. Yturbide on deferred compensation amounted to $5,187,
$4,365, $560 and $47,273, respectively.
(3) On December 1, 1995, Mr. Scharer became Harveys' President and Chief
Executive Officer and on May 1, 1997 was elected Chairman of the Board of
Directors.
(4) On February 1, 1996, Mr. Cavallaro became Chief Operating Officer of
Subsidiary Operations.
(5) Mr. McLaughlin was appointed Chief Financial Officer on September 18, 1995,
and was elected Senior Vice President, Chief Financial Officer and Treasurer
in March 1996.
(6) Includes $20,120 of relocation expense reimbursement, $1,312 of compensation
related to the personal use of an automobile provided by Harveys and $154 of
medical expense payments in excess of Harveys' group medical insurance
coverage.
(7) Mr. Armentrout was appointed Senior Vice President of Business Development
and Government Relations on May 9, 1995.
(8) On August 14, 1995, Mr. Servatius became Senior Vice President and General
Manager-Harveys Resort .
(9) From December 1, 1995 to May 1, 1997, Mr. Yturbide served as Harveys'
Chairman of the Board of Directors. Since May 1, 1997, Mr. Yturbide has
served as Consultant to the President and Chief Executive Officer.
(10) Includes a $100,000 signing bonus paid by Harveys in connection with Mr.
Yturbide's employment contract.
OPTION GRANTS
The tables below set forth certain information regarding options granted to
the Named Executive Officers during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
-------------------------------------------------------- OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------------- -------------- --------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Scharer............. 183,500 26.82 $ 16.4375 05/22/07 1,896,923 4,807,176
Stephen L. Cavallaro........... 48,800 7.13 $ 16.4375 05/22/07 504,468 1,278,420
John J. McLaughlin............. 41,000 5.99 $ 16.4375 05/22/07 423,836 1,074,083
Gary D. Armentrout............. 41,000 5.99 $ 16.4375 05/22/07 423,836 1,074,083
Kevin O. Servatius............. 51,000 7.45 $ 16.4375 05/22/07 527,210 1,336,054
Thomas M. Yturbide............. 100,000 14.62 $ 16.4375 05/22/07 1,103,720 2,840,086
</TABLE>
- ------------------------
(1) The Named Executive Officers received options pursuant to Harveys' incentive
plans. The options granted during the fiscal year include options granted in
previous years that were repriced May 22, 1997. Options to purchase a total
of 498,880 shares were repriced on that date. Of that total, the Named
Executive Officers received the following repriced options: Mr. Scharer,
135,000; Mr. Cavallaro, 28,000; Mr. McLaughlin, 30,000; Mr. Armentrout,
30,000; Mr. Servatius, 40,000; and Mr. Yturbide, 100,000. The MOU provides
that options to acquire Harveys Common Stock held by Mr. Scharer, Mr.
Cavallaro and Mr. McLaughlin will be cancelled in the Merger, and Mr.
Scharer, Mr. Cavallaro and Mr. McLaughlin will receive lump sum payments in
consideration therefor. See "Item 7. Certain Relationships and Related
Transactions." The Merger Agreement similarly provides that each outstanding
option to acquire Harveys Common Stock will be cancelled immediately prior
to the Effective Time in exchange for a cash payment equal to the product of
the number of shares of Harveys Common Stock subject to such option and the
excess of the consideration payable per share of Harveys Common Stock in the
Merger over the per share exercise price of such option, and such provisions
will apply to each of the Named Executive Officers.
41
<PAGE>
(2) The entries in these columns are provided pursuant to requirements of the
SEC and do not represent a prediction by the Company or Harveys as to the
actual performance of the Harveys Common Stock. As noted above, upon
consummation of the Merger, each option referenced in the table will
terminate.
OPTION EXERCISES AND HOLDINGS
The table below sets forth information concerning the exercise of options
during the fiscal year ended November 30, 1997 and unexercised options held at
the end of such year by the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR END FISCAL YEAR END ($)(1)
ACQUIRED ON AGGREGATE VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Scharer....................... -- -- 32,000 183,500 189,002 636,525
Stephen L. Cavallaro..................... -- -- 30,000 48,800 177,189 169,277
John J. McLaughlin....................... -- -- -- 41,000 -- 142,221
Gary D. Armentrout....................... -- -- -- 41,000 -- 142,221
Kevin O. Servatius....................... -- -- -- 51,000 -- 176,909
Thomas M. Yturbide....................... -- -- 110,000 100,000 649,693 346,880
</TABLE>
- ------------------------
(1) Options are in-the-money if the fair market value of the underlying
securities exceeds the exercise price of the options.
The MOU provides that options to acquire Harveys Common Stock held by Mr.
Scharer, Mr. Cavallaro and Mr. McLaughlin will be cancelled in the Merger, and
Mr. Scharer, Mr. Cavallaro and Mr. McLaughlin will receive lump sum payments in
consideration therefor. See "Item 7. Certain Relationships and Related
Transactions." The Merger Agreement similarly provides that each outstanding
option to acquire Harveys Common Stock will be cancelled immediately prior to
the Effective Time in exchange for a cash payment equal to the product of the
number of shares of Harveys Common Stock subject to such option and the excess
of the consideration payable per share of Harveys Common Stock in the Merger
over the per share exercise price of such option, and such provisions will apply
to each of the Named Executive Officers.
42
<PAGE>
LONG-TERM INCENTIVE PLAN
In fiscal year 1994, Harveys adopted a Long-Term Incentive Plan. The table
below sets forth awards made to Named Executive Officers in the last fiscal year
under Harveys' Long-Term Incentive Plan.
LONG-TERM INCENTIVE PLANS--AWARDS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF
SHARES UNITS NON-STOCK PRICE-BASED PLANS
OR OTHER PERFORMANCE OR OTHER PERIOD -----------------------------------
NAME RIGHTS UNTIL MATURATION OR PAYOUT THRESHOLD TARGET MAXIMUM
- ------------------------------- ------------- ----------------------------------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Charles W. Scharer............. -- Three years ending November 30, 1997 $ 32,135 $ 64,269 $ 96,404
-- Three years ending November 30, 1998 32,135 64,269 96,404
-- Three years ending November 30, 1999 32,135 64,269 96,404
Stephen L. Cavallaro........... -- Three years ending November 30, 1997 19,452 38,904 58,356
-- Three years ending November 30, 1998 19,452 38,904 58,356
-- Three years ending November 30, 1999 19,452 38,904 58,356
John J. McLaughlin............. -- Three years ending November 30, 1997 -- -- --
-- Three years ending November 30, 1998 11,067 22,135 33,202
-- Three years ending November 30, 1999 11,067 22,135 33,202
Gary D. Armentrout............. -- Three years ending November 30, 1997 -- -- --
-- Three years ending November 30, 1998 11,730 23,460 35,190
-- Three years ending November 30, 1999 11,730 23,460 35,190
Kevin O. Servatius............. -- Three years ending November 30, 1997 -- -- --
-- Three years ending November 30, 1998 13,442 26,885 40,327
-- Three years ending November 30, 1999 13,442 26,885 40,327
Thomas M. Yturbide............. -- Three years ending November 30, 1997 30,000 60,000 90,000
-- Three years ending November 30, 1998 -- -- --
-- Three years ending November 30, 1999 -- -- --
</TABLE>
Mr. Yturbide does not participate in Harveys' Long-Term Incentive Plan
beyond the three-year cycle ending November 30, 1997. Benefits received by
participants under this plan are based on Harveys' achieving specified levels of
cash flow and return on equity over three-year periods. The target amount of the
incentive is earned if the average of the percentage of achievement of the two
goals equals 100%. The threshold amount is earned if the average of the
percentage of achievement of the two goals equals 80% and the maximum amount is
earned if the average of the percentage of achievement of the two goals equals
or exceeds 120%.
The MOU provides that, upon consummation of the Merger, the Long-Term
Incentive Plan will be terminated, and Messrs. Scharer, Cavallaro and McLaughlin
each will receive lump sum payments at maximum in connection therewith. See
"Item 7. Certain Relationships and Related Transactions." Pursuant to the
Harveys Change of Control Plan (the "Change of Control Plan"), Messrs.
Armentrout, Servatius and Yturbide will similarly receive lump sum payments at
maximum.
COMPENSATION OF DIRECTORS
In fiscal 1997, non-employee directors received an annual retainer of
$30,000 and an additional $1,000 for each board meeting attended. During such
period, non-employee committee members received $1,000 for each committee
meeting attended, and the non-employee chairs of each of the Audit Committee and
the Compensation Committee received $1,200 for each meeting attended.
Non-employee directors are
43
<PAGE>
reimbursed for expenses incurred in connection with attending meetings of
Harveys' Board of Directors and Committees thereof.
Harveys established an Outside Directors' Retirement Plan pursuant to which
each outside director and any employee-director who is not covered under the
Harveys' Supplemental Executive Retirement Plan or Senior Supplemental Executive
Retirement Plan and who has served five or more years, or his or her
beneficiaries as applicable, shall be entitled to receive $25,000 per year for
up to ten years upon such director's retirement, death or disability. The plan
also provides for continuing medical insurance coverage under Harveys' executive
health plan for a period of up to 10 years.
The Change of Control Plan provides that (1) all options granted to
directors under the 1993 Non-Employee Director Stock Option Plan will vest upon
consummation of the Merger, and (2) members of the Board who are asked to resign
as a result of a Change of Control will be paid their annual compensation for
the balance of the term for which they were elected and will be entitled to a
lump sum payment of the compensation due under the Outside Directors' Retirement
Plan.
It is expected that new director compensation arrangements will be
instituted upon consummation of the Merger.
Directors who are also employees may be eligible to participate in Harveys'
employee incentive plans.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The tables below set forth total benefits payable to executive employees,
including the Named Executive Officers, who participate in Harveys' Supplemental
Executive Retirement Plan (the "SERP"). Amounts shown represent the aggregate
amounts to which such employees are entitled under the SERP.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE
(SEVEN YEAR VESTING)
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS AT AGE 65 FOR
REPRESENTATIVE YEARS OF SERVICE ($)
-----------------------------------------------------
REMUNERATION ($) 3 4 5 6 7
- ------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
125,000..................................................... 12,500 25,000 37,500 50,000 62,500
150,000..................................................... 15,000 30,000 45,000 60,000 75,000
175,000..................................................... 17,500 35,000 52,500 70,000 87,500
200,000..................................................... 20,000 40,000 60,000 80,000 100,000
225,000..................................................... 22,500 45,000 67,500 90,000 112,500
250,000..................................................... 25,000 50,000 75,000 100,000 125,000
300,000..................................................... 30,000 60,000 90,000 120,000 150,000
400,000..................................................... 40,000 80,000 120,000 160,000 200,000
450,000..................................................... 45,000 90,000 135,000 180,000 225,000
500,000..................................................... 50,000 100,000 150,000 200,000 250,000
</TABLE>
44
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE
(20 YEAR VESTING)
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS AT AGE 65 FOR
REPRESENTATIVE YEARS OF SERVICE ($)
------------------------------------------
REMUNERATION ($) 5 10 15 20
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
125,000................................................................ 15,625 31,250 46,875 62,500
150,000................................................................ 18,750 37,500 56,250 75,000
175,000................................................................ 21,875 43,750 65,625 87,500
200,000................................................................ 25,000 50,000 75,000 100,000
225,000................................................................ 28,125 56,250 84,375 112,500
250,000................................................................ 31,250 62,500 93,750 125,000
300,000................................................................ 37,500 75,000 112,500 150,000
400,000................................................................ 50,000 100,000 150,000 200,000
450,000................................................................ 56,250 112,500 168,750 225,000
500,000................................................................ 62,500 125,000 187,500 250,000
</TABLE>
On November 20, 1997 the SERP was amended by the Board of Directors to,
among other things, limit participation to employees (a) whose positions are
classified as members of the Executive Committee of Harveys, (b) whose
participation has been recommended by the President and Chief Executive Officer,
(c) whose participation has been approved and confirmed by the Committee, and
(d) who do not participate in the Senior Supplemental Retirement Plan. Those
employees who were participating in the SERP prior to November 20, 1997, and had
partially or fully vested but do not meet the amended participation requirements
after November 20, 1997 will continue to participate in the SERP.
The seven year vesting SERP presently covers approximately 21 current or
former executive employees. The 20 year vesting SERP, for those who began
participation after October 1, 1994, covers approximately 8 executive employees.
SERP benefits are based on a percentage of average base compensation earned
during the participant's last five years of service. Base compensation is the
participant's annual salary (but not bonuses or incentive compensation), which
is the same as compensation depicted as salary in the Summary Compensation
Table. Benefits are generally computed as a straight-life annuity, and are not
subject to any deduction for social security benefits. Participants are entitled
to receive SERP benefits upon attaining age 65 (age 63 for Mr. Yturbide) and
having become vested in the SERP. Participants in the seven year vesting SERP
become 20% vested after having accumulated at least three years of service with
Harveys and vesting continues in 20% increments each year thereafter, with 100%
vesting occurring upon completion of seven years of service. Participants in the
20 year vesting SERP become 25% vested after having accumulated at least five
years of service with Harveys and vesting continues in 5% increments each year
thereafter, with 100% vesting occurring upon completion of 20 years of service.
Amounts shown for seven years or 20 years of service in the respective tables
above represent the maximum annual payments a participant may receive under the
SERP. Benefits under the SERP are payable for a period of 15 years.
Messrs. Scharer and Yturbide are fully vested under the terms of the seven
year vesting plan. Mr. Cavallaro has approximately five years of credited
service under the terms of the seven year vesting plan. Mr. Armentrout has
approximately three and one-half years of credited service under the terms of
the twenty year vesting plan. Mr. McLaughlin and Mr. Servatius each have
approximately three years of credited service under the terms of the twenty year
vesting plan.
The MOU provides that, upon consummation of the Merger, the rights of Mr.
Scharer, Mr. Cavallaro and Mr. McLaughlin to participate in the SERP will be
terminated, and they will receive lump sum payments in connection therewith. See
"Item 7. Certain Relationships and Related Transactions." In accordance with the
Change of Control Plan, upon consummation of the Merger, Messrs. Armentrout and
Servatius will receive two additional years of vesting credit under the SERP.
45
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following individuals served on the Compensation Committee during fiscal
year 1997: Eugene R. White (Chair), Jessica L. Ledbetter, Luther Mack, Jr.,
William B. Ledbetter and Franklin K. Rahbeck. Charles W. Scharer and John J.
McLaughlin participated as non-voting members. During fiscal year 1997, Charles
W. Scharer served as Harveys' Chairman of the Board, President and Chief
Executive Officer. John J. McLaughlin served as Senior Vice President, Chief
Financial Officer and Treasurer of Harveys during fiscal year 1997.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Scharer serves as President and Chief Executive Officer under an
employment contract with Harveys. The term of the contract began on December 1,
1995 and was extended in fiscal year 1997 to run through November 30, 2002. The
agreement provides that Mr. Scharer's salary during the term of the agreement
will be subject to annual review by the Compensation Committee of the Board of
Directors. Mr. Scharer's salary was increased to $467,500 per year beginning
December 1, 1997. The agreement also provided for the award of options to
purchase shares of Harveys Common Stock. The contract is terminable at any time
(upon ninety days notice) by Mr. Scharer or Harveys. If the agreement is
terminated by Harveys for reason other than cause, Mr. Scharer is entitled to
receive the full value of his salary and other benefits for the remainder of the
agreement. The MOU provides that Mr. Scharer's current employment contract will
be terminated at the Effective Time of the Merger, and that Mr. Scharer will
enter into a new employment contract with the Company. See "Item 7. Certain
Relationships and Related Transactions."
Mr. Cavallaro serves as Chief Operating Officer of Subsidiary Operations
under an employment contract with Harveys effective as of February 1, 1996. The
term of the contract was extended on February 10, 1997 and terminates on January
31, 2000. Mr. Cavallaro's annual salary established by the contract is subject
to annual review and adjustment. Mr. Cavallaro's current salary is $360,000 per
year. The contract also provided for the award of options to purchase shares of
Harveys Common Stock. The contract is terminable at any time (upon ninety days
notice) by Mr. Cavallaro or Harveys. If the contract is terminated by Harveys
for reasons other than cause, Mr. Cavallaro is entitled to receive the full
value of his salary and other benefits for the remainder of the contract term.
The MOU provides that Mr. Cavallaro's current employment contract will be
terminated at the Effective Time of the Merger, and that Mr. Cavallaro will
enter into a new employment contract with the Company. See "Item 7. Certain
Relationships and Related Transactions."
Mr. McLaughlin serves as Senior Vice President, Chief Financial Officer and
Treasurer under an employment contract with Harveys effective as of August 14,
1995 and extending to September 17, 2000. Mr. McLaughlin's annual salary
established by the contract is subject to annual review and adjustment. Mr.
McLaughlin's current salary is $250,000 per year. The contract also provided for
the award of options to purchase shares of Harveys Common Stock and the award of
restricted shares of Harveys Common Stock. The contract is terminable at any
time (upon ninety days notice) by Mr. McLaughlin or Harveys. If the contract is
terminated by Harveys for reasons other than cause, Mr. McLaughlin is entitled
to receive the full value of his salary and other benefits for the remainder of
the contract term. The MOU provides that Mr. McLaughlin's current employment
contract will be terminated at the Effective Time of the Merger, and that Mr.
McLaughlin will enter into a new employment contract with the Company. See "Item
7. Certain Relationships and Related Transactions."
Mr. Armentrout serves as Senior Vice President of Business Development and
Government Relations under an employment contract with Harveys effective as of
May 9, 1995 and extending to May 9, 2000. Mr. Armentrout's annual salary under
the contract is currently $240,000. The contract also provided for the award of
options to purchase shares of Harveys Common Stock and the award of restricted
shares of Harveys Common Stock. The contract is terminable at any time (upon
ninety days notice) by
46
<PAGE>
Mr. Armentrout or Harveys. If the contract is terminated by Harveys for reasons
other than cause, Mr. Armentrout is entitled to receive the full value of his
salary and other benefits for the remainder of the contract term.
Mr. Servatius serves as Senior Vice President and General Manager--Harveys
Resort under an employment contract with Harveys effective as of August 14,
1995. The term of the contract runs for five years, terminating on August 13,
2000. Mr. Servatius' annual salary is currently $280,000. The contract also
provided for the award of restricted shares of Harveys Common Stock and options
to purchase shares of Harveys Common Stock. The contract is terminable at
anytime (upon ninety days notice) by Mr. Servatius or Harveys. If the contract
is terminated by Harveys for reasons other than cause, Mr. Servatius is entitled
to receive the full value of his salary and other benefits for the remainder of
the contract term.
In addition to the change of control benefits described above with respect
to the cash-out of stock options, the payment of long-term incentive bonuses and
additional vesting and payout of accrued benefits under the SERP, the Change of
Control Plan also provides that the Named Executive Officers are entitled to
receive (1) continuation of annual salary and certain welfare benefits for the
greater of (a) a period ranging from 24 to 36 months depending on position
within the company, and (b) the remaining term of their employment contract
term, and (2) a lump sum payment at maximum under Harveys' Management Incentive
Plan (the "MIP") if their employment is terminated. For a discussion of the
benefits that Messrs. Scharer, Cavallaro and McLaughlin will receive in
connection with the Merger, see "Item 7. Certain Relationships and Related
Transactions."
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has entered into the MOU with Messrs. Scharer, Cavallaro and
McLaughlin (the "Executives"). The MOU provides that each of the Executives will
remain in the offices they now hold, Mr. Scharer will continue to serve as a
director and Mr. Cavallaro will be appointed to the Company's Board of Directors
in a non-voting capacity. After the Merger Mr. Scharer, Mr. McLaughlin, Mr.
Cavallaro, the general managers of Harveys' Nevada, Iowa and Colorado
facilities, the vice president of human resources, the vice president of
marketing, the vice president of business development and such other employees
as are determined by Mr. Scharer and the Board of Directors (the "Key Managers")
will be granted a number of shares of common stock of the Company representing
in the aggregate three percent of the outstanding Class A Common and Class B
Common, plus an additional two percent if the Company achieves certain
performance goals before the fifth anniversary of the Effective Time. The MOU
provides that 20 percent of such shares will vest on each of the first through
fifth anniversaries of the Effective Time, subject to certain exceptions. The
Key Managers will also be granted options to purchase the number of shares of
Class A Common and Class B Common that is equivalent in the aggregate to five
percent of the outstanding Class A Common and Class B Common, respectively.
Under the MOU each of Mr. Scharer, Mr. McLaughlin and Mr. Cavallaro have agreed
to support the Merger, including voting shares of Harveys Common Stock held by
him in favor of the Merger.
In addition, the MOU provides, among other things, as follows:
- Each option to purchase Harveys Common Stock held by the Executives will
be cancelled in exchange for payments equal to the product of (a) the
number of shares of Harveys Common Stock subject to such option and (b)
the excess, if any, of (i) the price per share of Harveys Common Stock to
be paid by the Company in the Merger for a share of Harveys Common Stock
over (ii) the exercise price per share of Harveys Common Stock of such
option. Assuming a price to be paid per share of Harveys Common Stock of
$28, Messrs. Scharer, Cavallaro and McLaughlin would receive payments of
$2,569,719, $984,250 and $474,063, respectively, in consideration for
cancellation of such options. The Merger Agreement provides that the
consideration to be paid per share of Harveys Common Stock in the Merger
will be adjusted upward to include an additional amount of cash, without
interest, equal to the difference, if positive, of (1) the product of (x)
$1.96 and (y) a
47
<PAGE>
fraction the numerator of which shall be the number of days elapsed from
and including September 1, 1998 to and excluding the closing date of the
Merger and the denominator of which shall be 365, minus (2) (x) the
aggregate amount of all cash dividends on the Harveys Common Stock paid
during the period from and including September 1, 1998 to and excluding
the closing date of the Merger, divided by (y) the number of shares of
Harveys Common Stock upon which the consideration for the Merger is paid
plus the number of shares of Harveys Common Stock underlying any stock
options, warrants and other rights to acquire Harveys Common Stock
canceled in connection with the Merger.
- The Long-Term Incentive Plan and the rights of Messrs. Scharer, Cavallaro
and McLaughlin to participate therein, shall be terminated in exchange for
lump sum payments pursuant to the terms of the LTIP of $1,081,988,
$531,018 and $332,063, respectively.
- The rights of the Executives to participate in the SERP will be
terminated, and the accrued SERP benefits for Messrs. Scharer, Cavallaro
and McLaughlin as of the consummation of the Merger shall be $1,261,435,
$701,454 and $450,000, respectively. One-half of each such amount is to be
paid in a lump sum to Messrs. Scharer, Cavallaro and McLaughlin, and the
remaining amounts, rather than being distributed, will be distributed and
invested in the common stock of the Company, or deemed to be so
distributed and invested under certain tax deferral arrangements.
- The rights of Messrs. Scharer, Cavallaro and McLaughlin to participate in
the MIP which provides key employees with financial rewards for
outstanding individual and operating unit performance which contribute
significantly to the financial success of Harveys, as in effect on the
date hereof, shall be terminated in exchange for lump sum payments
pursuant to the terms of the MIP of $467,500, $232,500 and $187,500,
respectively. The MIP provides key employees with cash awards, computed as
a variable percentage of base salary. Such cash awards are contingent on
the meeting of certain corporate, business unit and individual performance
objectives which are established at the beginning of the year by the
compensation committee, the participant and the participant's manager.
- The current employment contracts of Messrs. Scharer, Cavallaro and
McLaughlin shall be terminated at the Effective Time, and Messrs. Scharer,
Cavallaro and McLaughlin shall enter into new employment contracts with
the Company. The new employment contracts are expected to have terms of
five years from the Effective Time and provide for, without limitation,
(1) annual base salaries of $500,000, $400,000 and $300,000 for Messrs.
Scharer, Cavallaro and McLaughlin, (2) annual year-end incentive payments
under the MIP or other equivalent plan, (3) the continuation of
perquisites in effect with respect to Messrs. Scharer, Cavallaro and
McLaughlin as of the date hereof, (4) the immediate vesting of all options
and restricted stock grants upon a change of control, and (5) the vesting
of that portion of options and restricted stock grants due to vest over
the lesser of (1)(a) eighteen months (with respect to Messrs. Cavallaro
and McLaughlin) or (b) two years (with respect to Mr. Scharer) or (2) the
remainder of the employment agreement term (in each case, the "Period"),
and the provision of severance for the applicable Period (in each case
consisting of the terminated Executive's then-applicable base salary,
bonus and benefits, which severance shall be the exclusive severance
payable to such Executive and shall supersede and replace any severance
that might otherwise be due under the Company's Change of Control Plan)
upon a termination of the Executives other than for cause.
The Merger Agreement provides that the Company will provide directors and
officers liability insurance coverage to the current directors and officers of
the Company for a term of six years following the Effective Time.
48
<PAGE>
ITEM 8. LEGAL PROCEEDINGS.
The Company is not a party to any litigation and to its knowledge, no
action, suit or proceedings against it has been threatened by any person.
Harveys is a defendant in various lawsuits relating to routine matters
incidental to its business. Management of Harveys does not believe that the
outcome of any such litigation, in the aggregate, will have a material adverse
effect on Harveys.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
No established public trading market exists for the Company's common equity.
There are no plans, proposals, arrangements or understandings with any person
with regard to the development of a trading market in any of the Company's
common equity.
There are no outstanding options or warrants to purchase, or securities
convertible into, the Company's common equity. All shares of the Company's
common equity are subject to sale pursuant to Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), subject to the limitations set forth
therein. The Company has not agreed with any security holder to register any of
its common equity for sale by any security holder. The Company does not
currently propose to publicly offer any shares of its common equity.
As of the Effective Time, the Company will have ten holders of record of
each of its Class A Common and Class B Common.
The Company does not pay, and does not anticipate paying in the foreseeable
future, any dividends on its common equity.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
If the Company utilizes the Merger Financing, it expects to issue
immediately prior to the Effective Time (1) 3,879,001 shares of Class B Common
to Colony III and 37,799 shares of Class A Common to Voteco for aggregate
consideration of $75 million in cash and (2) 55,000 shares of Series A Preferred
in a private placement for aggregate consideration of $55 million in cash. Such
issuances are subject to certain conditions. See "Item 1. Business--The
Company."
Pursuant to the MOU, the Company expects to grant to the Key Managers the
number of shares of Class A Common and Class B Common that is equivalent in the
aggregate to three percent of the Class A Common and Class B Common,
respectively, outstanding as of the Effective Time. Twenty percent of such Base
Stock Grant Shares granted to each Key Manager shall vest on each of the first
through fifth anniversaries of the Effective Time, except as otherwise provided
in the MOU.
Each of the foregoing issuances is expected to be exempt from registration
under the Securities Act, pursuant to Section 4(2) thereof or Regulation D
thereunder, including, in the case of certain resales to third parties, Rule
144A thereunder.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL
The authorized capital stock of the Company consists of 10 million shares of
common stock, of which 5 million shares have been designated Class A Common, par
value $.01 per share, and 5 million shares have been designated Class B Common,
par value $.01 per share and 1 million shares of preferred stock, par value $.01
per share, none of which are designated. It is expected that 55,000 shares, plus
such additional number of shares as may be required from time to time to effect
payment of dividends on
49
<PAGE>
outstanding Series A Preferred in additional shares of Series A Preferred, of
preferred stock will be designated as Series A Preferred. At the Effective Time,
40,000 shares of Class A Common, 4,000,000 shares of Class B Common and 55,000
shares of Series A Preferred are expected to be outstanding. The Class A Common
is the only class of the Company's capital stock being registered pursuant to
this Registration Statement.
COMMON STOCK
Holders of Class A Common are entitled to one vote per share on all matters
to be voted on by the stockholders of the Company and are not entitled to
cumulative voting for the election of directors. Except as otherwise expressly
required by law, holders of Class B Common have no right to vote on any matters
to be voted on by the stockholders of the Company. Holders of Class A Common and
Class B Common have no preemptive rights, no other rights to subscribe for
additional shares of the Company, no conversion rights and no redemption rights,
will not benefit from any sinking fund and will not have any preferential rights
upon a liquidation. Subject to preferences that may apply to shares of preferred
stock at the time, holders of Class A Common and Class B Common are entitled to
share ratably, share for share, in dividends when, as and if declared on the
common stock of the Company, provided that dividends or distributions that are
declared that are payable in shares of, or in subscription or other rights to
acquire Class A Common or Class B Common, dividends or distributions payable in
shares of, or in subscription or other rights to acquire shares of, any
particular class of common stock shall be payable only to holders of such class
of common stock.
The shares of Class A Common are subject to substantial dilution. Colony III
will hold approximately 97 percent of the Class B Common to be issued. The
Company's Articles of Incorporation provide Colony III and its successors
entities and affiliates (as such term is defined in Rule 501(b) under the
Securities Act) with the right to convert at any time any of their shares of
Class B Common into an equal number of shares of Class A Common, subject to
compliance with all gaming and other statutes, laws, rules and regulations
applicable to the Company at the time of such exercise.
No stock or other securities issued by the Company and no interest, claim or
charge therein or thereto may be transferred, except in accordance with the
provisions of the Nevada Gaming Control Act and the regulations promulgated
thereunder. Any transfer in violation thereof is ineffective until the Company
ceases to be subject to the jurisdiction of the Nevada Commission or the Nevada
Commission, by affirmative action, validates, or waives any defect in, such
transfer.
PREFERRED STOCK
The Board of Directors of the Company is authorized to provide for the
issuance of the preferred stock in one or more classes or series, and to fix for
each such class or series such voting powers, full or limited, or no voting
powers, and such distinctive designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board providing for the issuance of
such class or series and as may be permitted by the Nevada Revised Statutes
("NRS"). The Board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of the Class A Common and Class B Common. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, have the
effect of delaying, deferring or preventing a change in control of the Company
and may adversely affect the voting and other rights of the holders of Class A
Common and Class B Common. If the Merger Financing is applied, the Company
currently plans designate shares of preferred stock as Series A Preferred and
expects that such stock would neither be required to be redeemed prior to June
1, 2006 (the maturity date of the Notes) nor otherwise constitute Disqualified
Stock (as defined in the Indenture). Cash dividends on the Series A Preferred
are not
50
<PAGE>
expected to be payable prior to five years from issuance. The Series A Preferred
may be issued to affiliates of Colony Capital or to third parties in a private
placement.
RESTRICTIONS ON BUSINESS COMBINATIONS AND CORPORATE CONTROL
Chapter 78 of the NRS contains provisions restricting the ability of a
corporation to engage in business combinations with an "interested shareholder."
Under the NRS, except under certain circumstances, business combinations are not
permitted for a period of three years following the date such shareholder became
an interested shareholder. The NRS defines an "interested shareholder,"
generally, as a person who beneficially owns 10% or more of the outstanding
shares of a corporation's voting stock.
In addition, the NRS generally disallows the exercise of voting rights with
respect to "control shares" of an "issuing corporation" (as defined in the NRS).
"Control shares" are the voting shares of an issuing corporation acquired in
connection with the acquisition of a "controlling interest." "Controlling
interest" is defined in terms of threshold levels of voting share ownership,
which, when crossed, trigger application of the voting bar with respect to the
newly acquired shares. The NRS also permits directors to resist a change or
potential change in control of the corporation if the directors determine that
such a change is opposed to or not in the best interest of the corporation.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation contain, pursuant to Nevada law,
provisions for indemnification of officers and directors of the Company and in
certain cases employees and other persons. In addition, the Company's Bylaws
require the Company to indemnify such persons to the full extent permitted by
Nevada law. Each such person will be indemnified in any proceeding if he or she
acted in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the Company. Indemnification would
cover expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement. The Company's Bylaws also provide that the
Company's Board of Directors may cause the Company to purchase and maintain
insurance on behalf of any present or past director or officer insuring against
any liability asserted against such person incurred in the capacity of director
or officer or arising out of such status, whether or not the Company would have
the power to indemnify such person. The Company is expected to maintain
directors' and officers' liability insurance.
The Company also expects to enter into separate indemnification agreements
with its directors and officers and certain key employees. Each indemnification
agreement is expected to provide for, among other things (1) indemnification
against any and all expenses, judgments, fines, penalties and amounts paid in
settlement of any claim against an indemnified party unless it is determined, as
provided in the indemnification agreement, that indemnification is not permitted
under law and (2) prompt advancement of expenses to any indemnitee in connection
with his or her defense against any claim.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are as set forth in the
"Index to Financial Statements" on page F-1.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
51
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) List separately all financial statements filed.
See "Index to Financial Statements."
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C>
2.1 Agreement and Plan of Merger dated as of February 1, 1998 by and between Harveys Acquisition
Corporation, a Nevada corporation, and Harveys Casino Resorts, a Nevada corporation*
3.1 Articles of Incorporation of Harveys Acquisition Corporation*
3.2 Form of Amended and Restated Bylaws of Harveys Acquisition Corporation
4.1 Form of stock certificate*
10.1 Memorandum of Understanding dated February 1, 1998 among Harveys Acquisition Corporation, a Nevada
corporation, Charles W. Scharer, Stephen L. Cavallaro and John L. McLaughlin*
10.2 Voting and Profit Sharing Agreement dated as of February 1, 1998 by and among Harveys Acquisition
Corporation and the individuals and entities signatory thereto*
10.3 Noncompetition and Trade Secret Agreement dated as of February 1, 1998 by and among Harveys Acquisition
Corporation and the individuals signatory thereto*
10.4 Form of Director and Officer Indemnification Agreement
27.1 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 1 to its registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
HARVEYS ACQUISITION CORPORATION
Date: January 6, 1999 By: /s/ KELVIN L. DAVIS
-----------------------------------------
Name: Kelvin L. Davis
Title: PRESIDENT
</TABLE>
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following audited balance sheet and pro forma financial statements of
Harveys Acquisition Corporation and audited and unaudited consolidated financial
statements of Harveys Casino Resorts and its subsidiaries are presented herein
on the page indicated:
HARVEYS ACQUISITION CORPORATION
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors.................................. F-2
Balance Sheet as of November 15, 1998.............................................. F-3
UNAUDITED PRO FORMA FINANCIAL STATEMENTS:
Pro Forma Condensed Consolidated Balance Sheet as of August 31, 1998............... F-6
Pro Forma Condensed Consolidated Statement of Income for the Nine-Month Period
Ended August 31, 1998............................................................ F-7
Pro Forma Condensed Consolidated Statement of Income for the Year Ended November
30, 1997......................................................................... F-8
HARVEYS CASINO RESORTS
AUDITED FINANCIAL STATEMENTS:
Report of Deloitte & Touche LLP, Independent Auditors.............................. F-13
Report of Grant Thornton LLP, Independent Auditors................................. F-14
Consolidated Balance Sheets as of November 30, 1997 and 1996....................... F-15
Consolidated Statements of Income for the Years Ended November 30, 1997, 1996 and
1995............................................................................. F-16
Consolidated Statements of Stockholders' Equity for the Years Ended November 30,
1997, 1996 and 1995.............................................................. F-17
Consolidated Statements of Cash Flows for the Years Ended November 30, 1997, 1996
and 1995......................................................................... F-18
Notes to Consolidated Financial Statements......................................... F-19
UNAUDITED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of November 30, 1997 and August 31,
1998............................................................................. F-40
Condensed Consolidated Statements of Income for the Nine Month Periods Ended August
31, 1998 and 1997................................................................ F-41
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended
August 31, 1998 and 1997......................................................... F-42
Notes to Unaudited Condensed Consolidated Financial Statements..................... F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Harveys Acquisition Corporation
We have audited the accompanying balance sheet of Harveys Acquisition
Corporation as of November 15, 1998. The balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Harveys Acquisition Corporation at
November 15, 1998 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
November 16, 1998
F-2
<PAGE>
HARVEYS ACQUISITION CORPORATION
BALANCE SHEET
NOVEMBER 15, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents......................................................... $ 1,000
---------
$ 1,000
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES......................................................................... $ --
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value--authorized 1,000,000 shares; 0 shares
outstanding..................................................................... --
Common stock, $.01 par value:
Class A--authorized, 5,000,000 shares; 1 share outstanding...................... --
Class B--authorized, 5,000,000 shares; 999 shares outstanding................... 10
Additional paid-in capital........................................................ 990
---------
1,000
---------
$ 1,000
---------
---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HARVEYS ACQUISITION CORPORATION
NOTES TO BALANCE SHEET
NOVEMBER 15, 1998
1. ORGANIZATION AND CAPITAL STRUCTURE
Harveys Acquisition Corporation (the Company) was formed by affiliates of
Colony Capital, Inc., under the laws of the State of Nevada on January 30, 1998.
The Company was formed for the purpose of entering into an Agreement and Plan of
Merger dated as of February 1, 1998 (the Merger Agreement) by and between the
Company and Harveys Casino Resorts, a Nevada corporation (Harveys) and merging
with and into Harveys.
Pursuant to the Merger Agreement, subject to the satisfaction or waiver of
certain conditions to the obligations of the parties under the Merger Agreement,
including the receipt of certain approvals from the gaming authorities of the
States of Nevada, Colorado and Iowa, the Company will be merged (the Merger)
with and into Harveys. In the Merger, each share of common stock (Common Stock)
of Harveys outstanding at the time the Merger becomes effective (the Effective
Time) (other than shares of Common Stock held in Harveys' treasury) will be
converted into the right to receive cash as provided in the Merger Agreement.
Harveys will be the surviving corporation in the Merger and continue its current
business operations.
Merger-related costs incurred by an affiliate of Colony Capital, Inc. are
not reflected in the accompanying balance sheet. Holders of Class A Common are
entitled to one vote per share in all matters to be voted on by stockholders of
the Company. Holders of Class B Common have no vote, except as otherwise
expressly required by law.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of 90
days or less when purchased to be cash equivalents.
USE OF ESTIMATES
The preparation of the balance sheet 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 asset and liabilities at the date of the balance sheet. Actual
results could differ from these estimates.
F-4
<PAGE>
HARVEYS ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma condensed consolidated financial statements of Harveys
Acquisition Corporation (the "Company") as of August 31, 1998 and for the nine
months ended August 31, 1998 and the year ended November 30, 1997 give effect
to: (a) the consummation of a merger (the "Merger") pursuant to an Agreement and
Plan of Merger dated as of February 1, 1998 (the "Merger Agreement") by and
between the Company and Harveys Casino Resorts ("Harveys"), and (b) a proposed
plan of financing (the "Merger Financing") for the Merger, assumed to consist of
the application of (1) gross proceeds of $75.0 million from the issuance of
shares of Class A Common Stock and Class B Common Stock, (2) gross proceeds of
$55.0 million from the issuance of shares of Series A Preferred Stock, (3)
borrowings of $175.0 million under an Amended and Restated Credit Facility (the
"Amended and Restated Credit Facility") and (4) Harveys' available cash.
Pursuant to the Merger Agreement, the Company would be merged with and into
Harveys. The Merger is subject to the satisfaction or waiver of certain
conditions to the obligations of the parties under the Merger Agreement,
including the receipt of certain approvals from the gaming authorities of the
States of Nevada, Colorado and Iowa. There can be no assurances that the Merger
will be consummated. The actual types and amounts of funds utilized to finance
the Merger may differ based on prevailing circumstances at the time. These pro
forma condensed consolidated financial statements give effect to the
transactions as if they occurred, for balance sheet purposes, on August 31, 1998
and, for income statement purposes, on December 1, 1996. The pro forma condensed
consolidated financial statements should be read in conjunction with the
Company's audited balance sheet, and notes thereto, and the financial
statements, and the notes thereto, of Harveys appearing elsewhere in this
Registration Statement. The pro forma condensed consolidated financial
statements are not necessarily indicative of the results that would have been
reported had such transactions actually occurred on the date specified, nor are
they indicative of the Company's future results.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances.
F-5
<PAGE>
HARVEYS ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
PAYMENT OF MERGER
CONSIDERATION,
ADJUSTMENTS FOR TRANSACTION FEES
HARVEYS MERGER AND PURCHASE PRO FORMA
HISTORICAL FINANCING METHOD ACCOUNTING AS ADJUSTED
----------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 78,245 $ 305,000(a) $ (23,790)(c) $ 54,521
(302,476)(d)
(2,458)(e)
Accounts and notes receivable, net............... 5,652 5,652
Other current assets............................. 8,550 8,550
----------- --------------- ----------------- -------------
Total current assets........................... 92,447 305,000 (328,724) 68,723
Property and equipment............................. 316,658 88,344(d) 405,002
Deferred financing costs........................... 5,946 (1,882)(b) 6,522
2,458(e)
Other assets....................................... 11,594 (2,446)(d) 9,728
580(d)
Goodwill........................................... 58,514(d) 58,514
----------- --------------- ----------------- -------------
Total assets................................... $ 426,645 $ 305,000 $ (183,156) $ 548,489
----------- --------------- ----------------- -------------
----------- --------------- ----------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt................ $ 11 $ 11
Accounts and contracts payable................... 6,044 6,044
Accrued expenses and other....................... 32,619 32,619
----------- -------------
Total current liabilities...................... 38,674 38,674
Long-term debt, net................................ 150,209 $ 175,000(a) $ 9,000(d) 334,209
Other liabilities.................................. 41,154 4,452(d) 45,606
----------- --------------- ----------------- -------------
Total liabilities.............................. 230,037 175,000 13,452 418,489
----------- --------------- ----------------- -------------
Stockholders' equity
Preferred stock.................................. -- 55,000(a) 55,000
Common stock..................................... 101 (101)(d) --
Additional paid-in capital....................... 43,483 75,000(a) (43,483)(d) 75,000
Retained earnings................................ 153,267 (1,882)(b) --
(23,790)(c)
(127,595)(d)
Treasury stock................................... (243) 243(d) --
----------- --------------- ----------------- -------------
Total stockholders' equity..................... 196,608 130,000 (196,608) 130,000
----------- --------------- ----------------- -------------
Total liabilities and stockholders' equity..... $ 426,645 $ 305,000 $ (183,156) $ 548,489
----------- --------------- ----------------- -------------
----------- --------------- ----------------- -------------
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements
F-6
<PAGE>
HARVEYS ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
HARVEYS FOR THE EFFECT PRO FORMA
HISTORICAL OF THE MERGER AS ADJUSTED
----------- -------------- -----------
<S> <C> <C> <C>
Revenues
Casino......................................................... $ 183,501 $ 183,501
Lodging........................................................ 26,157 26,157
Food and beverage.............................................. 35,479 35,479
Other.......................................................... 5,583 5,583
Less: Casino promotional allowances............................ (17,763) (17,763)
----------- -----------
Total net revenues........................................... 232,957 232,957
----------- -----------
Costs and expenses
Casino......................................................... 86,310 86,310
Lodging........................................................ 10,299 10,299
Food and beverage.............................................. 22,664 22,664
Other operating................................................ 2,230 2,230
Selling, general and administrative............................ 58,766 $ (886)(f) 57,880
Depreciation and amortization.................................. 15,641 2,540(g) 18,181
Merger-related costs........................................... 1,103 1,103
----------- -------------- -----------
Total costs and expenses..................................... 197,013 1,654 198,667
----------- -------------- -----------
Operating income................................................. 35,944 (1,654) 34,290
----------- -------------- -----------
Other income (expense)
Interest income................................................ 1,495 (1,495)(i) --
Interest expense............................................... (13,390) (10,027)(h) (23,417)
Other, net..................................................... (123) (123)
----------- -------------- -----------
Total other income (expense)................................. (12,018) (11,522) (23,540)
----------- -------------- -----------
Income before income taxes....................................... 23,926 (13,176) 10,750
Income tax provision............................................. (9,571) 4,561(j) (5,010)
----------- -------------- -----------
Net income....................................................... $ 14,355 $ (8,615) $ 5,740
----------- -------------- -----------
----------- -------------- -----------
Income per common share
Basic.......................................................... $ 1.43 $ (0.07)
----------- -----------
----------- -----------
Diluted........................................................ $ 1.41 $ (0.07)
----------- -----------
----------- -----------
Weighted average common shares used in calculating income per
common share
Basic.......................................................... 10,009,086 3,943,040
----------- -----------
----------- -----------
Diluted........................................................ 10,213,456 3,943,040
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements
F-7
<PAGE>
HARVEYS ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
HARVEYS FOR THE EFFECT PRO FORMA
HISTORICAL OF THE MERGER AS ADJUSTED
---------- -------------- -----------
<S> <C> <C> <C>
Revenues
Casino.................................................... $ 216,564 $ 216,564
Lodging................................................... 32,175 32,175
Food and beverage......................................... 44,406 44,406
Other..................................................... 7,277 7,277
Management fees and joint venture......................... 4,507 4,507
Less: Casino promotional allowances....................... (21,366) (21,366)
---------- -----------
Total net revenues...................................... 283,563 283,563
---------- -----------
Costs and expenses
Casino.................................................... 100,500 100,500
Lodging................................................... 13,374 13,374
Food and beverage......................................... 29,886 29,886
Other operating........................................... 2,811 2,811
Selling, general and administrative....................... 73,945 $ (628)(k) 73,317
Depreciation and amortization............................. 19,077 5,165(l) 24,242
Business development costs................................ 2,690 2,690
---------- -------------- -----------
Total costs and expenses................................ 242,283 4,537 246,820
---------- -------------- -----------
Operating income............................................ 41,280 (4,537) 36,743
---------- -------------- -----------
Other income (expense)
Interest income........................................... 509 (509)(n) --
Interest expense.......................................... (19,401) (11,612)(m) (31,013)
Gain on sale of interests in unconsolidated affiliate..... 27,422 27,422
Other, net................................................ (137) (137)
---------- -------------- -----------
Total other income (expense)............................ 8,393 (12,121) (3,728)
---------- -------------- -----------
Income before income taxes and extraordinary item........... 49,673 (16,658) 33,015
Income tax provision........................................ (18,898) 4,755(o) (14,143)
---------- -------------- -----------
Income before extraordinary item............................ $ 30,775 $ (11,903) $ 18,872
---------- -------------- -----------
---------- -------------- -----------
Income before extraordinary item per common share
Basic..................................................... $ 3.13 $ 2.98
---------- -----------
---------- -----------
Diluted................................................... $ 3.13 $ 2.89
---------- -----------
---------- -----------
Weighted average common shares outstanding used in
calculating income before extraordinary item per common
share
Basic..................................................... 9,826,636 3,918,800
---------- -----------
---------- -----------
Diluted................................................... 9,843,871 4,040,000
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements
F-8
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company was formed under the laws of the State of Nevada on January 30,
1998 by affiliates of Colony Capital, Inc. The Company has conducted no business
other than in connection with the Merger Agreement. Harveys is engaged in the
ownership and operation of hotel/casinos in Nevada, Colorado and Iowa. Upon the
consummation of the Merger, the Company would be merged with and into Harveys.
Each share of common stock of Harveys ("Common Stock") outstanding at the time
the Merger becomes effective (other than shares of Common Stock held in Harveys'
treasury) will be converted into the right to receive cash as provided in the
Merger Agreement. Harveys will be the surviving corporation in the Merger and
continue its current business operations.
The pro forma condensed consolidated balance sheet as of August 31, 1998
presents adjustments relative to the Merger Financing, the cancellation of an
existing reducing, revolving credit agreement of Harveys (the "Credit
Facility"), the payment of the consideration for Common Stock (including shares
underlying outstanding options to purchase Common Stock) in the Merger (the
"Merger Consideration"), the payment of fees, expenses and other transaction
costs relating to the Merger and the Merger Financing, including the consent fee
payable to holders of Harveys' 10 5/8% Senior Subordinated Notes due 2006 (the
"Notes") in connection with the receipt of consents to certain waivers and an
amendment to a provision of the indenture governing the Notes, and the
preliminary application of purchase method accounting allocating the purchase
price to the assets and liabilities acquired. The preliminary allocation results
in the recording of approximately $58.5 million of goodwill. The Merger
Consideration to be paid is $28 in cash for each of the approximately 10.1
million outstanding shares of Common Stock and a cash amount equal to $28 less
the option exercise price per share for each of the approximately 0.7 million
shares of Common Stock underlying outstanding options. Additional consideration
will be payable in cash, without interest, in an amount equal to the difference,
if positive, of (a) the product of (i) $1.96 times (ii) a fraction the numerator
of which shall be the number of days elapsed from and including September 1,
1998 to and excluding the date the Merger is consummated (the "Effective Time")
and the denominator of which shall be 365, minus (b) the quotient of (i) the
aggregated amount of all cash dividends paid on Common Stock during the period
from and including September 1, 1998 to and excluding the Effective Time divided
by (ii) the number of shares of Common Stock upon which the cash consideration
is to be paid plus the number of shares of Common Stock underlying the options
to acquire Common Stock upon which the cash consideration is to be paid.
The pro forma condensed consolidated statements of income for the nine
months ended August 31, 1998 and for the year ended November 30, 1997 present
adjustments relative to contractual changes to certain compensation arrangements
pursuant to the Merger, additional depreciation and amortization expense as the
result of the recognition of the fair market value of property and equipment and
the recognition of goodwill, changes to interest expense as a result of the
Merger Financing and the related effect of the foregoing adjustments on the
provision for income taxes. The changes in compensation arrangements include:
(a) the one-time payment of benefits due to three senior executive officers of
Harveys under a supplemental executive retirement plan and the subsequent
cessation of such officers' participation in the plan, (b) the one-time payment
of amounts due to senior executive officers of Harveys under a long-term
incentive plan and the subsequent cancellation of such plan and (c) the granting
to certain executive officers (the "Key Managers") of Harveys a number of shares
of common stock of the Company equivalent in the aggregate to 3% of the common
stock of the Company outstanding upon the consummation of the Merger. The
changes in interest expense include: (a) additional interest expense on the
Amended and Restated Credit Facility, (b) elimination of interest expense on the
existing Credit Facility, (c) amortization of deferred financing costs
associated with the Amended and Restated Credit Facility, (d) elimination of
amortization of deferred financing costs associated with the existing Credit
Facility, and (e) the reduction in interest expense due to the amortization of a
premium recognized on the Notes as a result of applying purchase method
accounting. The pro forma condensed consolidated statements of income do not
include the one-time payments due as a result of the contemplated changes in
F-9
<PAGE>
compensation agreements nor other one-time fees and expenses contemplated to be
paid in connection with the Merger.
ADJUSTMENTS TO THE PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF
AUGUST 31, 1998
(a) To record proceeds of stock issuances and borrowings in connection with the
Merger Financing, including: (1) gross proceeds of $75.0 million from the
issuance of shares of Class A Common Stock and Class B Common Stock, (2)
gross proceeds of $55.0 million from the issuance of shares of Series A
Preferred Stock, (3) borrowings of $175.0 million under an Amended and
Restated Credit Facility.
(b) To eliminate approximately $1.9 million of unamortized loan fees and
deferred financing costs related to the existing Credit Facility, which will
be terminated.
(c) To record the payment of fees and expenses of approximately $23.8 million
related to the Merger, including: (1) approximately $13.5 million in consent
fees payable to holders of the Notes, (2) approximately $7.7 million in
change of control payments to management and directors of Harveys and (3)
approximately $2.6 million of financial advisory fees and other expenses.
(d) To record the payment of the Merger Consideration of approximately $291.3
million and the payment of approximately $11.1 million in related financial
advisory fees and other costs, which financial advisory fees would be less
if the Series A Preferred Stock were issued to affiliates of Colony Capital,
Inc. To allocate, on a preliminary basis, the total payment of approximately
$302.4 million to the assets and liabilities acquired by: (1) recognizing
the step-up of approximately $88.3 million in the value of property and
equipment to reflect fair market value, (2) eliminating approximately $2.4
million of an intangible asset related to the unrecognized prior service
cost and the unrecognized transition obligation of supplemental executive
retirement plans, (3) recognizing the step-up of approximately $0.6 million
in the value of other assets to reflect fair market value, (4) recognizing a
premium of approximately $9.0 million to reflect the fair market value of
the Notes, (5) recognizing approximately $4.5 million of projected benefit
obligations in excess of plan assets related to supplemental executive
retirement plans and a post retirement medical benefit plan, (6) retiring
and cancelling Harveys' common equity of approximately $170.9 million and
(7) recognizing as goodwill the approximately $58.5 million excess of the
Merger Consideration over the fair market value of the assets and
liabilities acquired.
(e) To record the payment of approximately $2.5 million for loan fees and
deferred financing costs related to the Amended and Restated Credit
Facility.
ADJUSTMENTS TO THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR
THE NINE MONTHS ENDED AUGUST 31, 1998
(f) To eliminate expenses of approximately $336,000 related to certain
executives ceasing to participate in a supplemental executive retirement
plan. To eliminate compensation of approximately $753,000 for amounts
accrued and expensed related to a long-term incentive plan which is to be
canceled. To eliminate expenses of approximately $135,000 related to the
amortization of the value of restricted stock granted to Harveys'
management. To recognize additional expense of approximately $338,000
related to the vesting in the Harveys' Common Stock to be awarded to certain
executives.
(g) To recognize additional depreciation and amortization expense of
approximately $2.5 million related to the step-up in value of property and
equipment to reflect fair market value and the recognition of goodwill to be
amortized over 40 years.
(h) To recognize additional interest expense of approximately $10.9 million
related to the anticipated borrowing of $175.0 million under the Amended and
Restated Credit Facility. To recognize a reduction in interest expense of
approximately $711,000 related to the amortization of the premium recorded
on the Notes as a result of applying purchase method accounting. To
recognize additional
F-10
<PAGE>
interest expense of approximately $369,000 related to the amortization of
deferred financing costs incurred with the Amended and Restated Credit
Facility. To eliminate interest expense of approximately $580,000 related to
the existing Credit Facility.
(i) To eliminate interest income of approximately $1.5 million as a result of
using Harveys' available cash in the Merger Financing.
(j) To recognize the effect of the foregoing adjustments (excluding the
adjustments which the Company believes will have no effect on income taxes)
on the provision for income taxes, based on Harveys' effective tax rate.
ADJUSTMENTS TO THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR
THE YEAR ENDED NOVEMBER 30, 1997
(k) To eliminate expenses of approximately $364,000 related to certain
executives ceasing to participate in a supplemental executive retirement
plan. To eliminate compensation of approximately $477,000 for amounts
accrued and expensed related to a long-term incentive plan which is to be
canceled. To eliminate expenses of approximately $237,000 related to the
amortization of the value of restricted stock granted to Harveys'
management. To recognize additional expense of approximately $450,000
related to the vesting in Harveys' Common Stock to be awarded to certain
executives.
(l) To recognize additional depreciation and amortization expense of
approximately $5.2 million related to the step-up in value of property and
equipment to reflect fair market value and the recognition of goodwill to be
amortized over 40 years.
(m) To recognize additional interest expense of approximately $14.6 million
related to the anticipated borrowing of $175.0 million under the Amended and
Restated Credit Facility. To recognize a reduction in interest expense of
approximately $947,000 related to the amortization of the premium recorded
on the Notes as a result of applying purchase method accounting. To
recognize additional interest expense of approximately $492,000 related to
the amortization of deferred financing costs incurred with the Amended and
Restated Credit Facility. To eliminate interest expense of approximately
$2.5 million related to the existing Credit Facility.
(n) To eliminate interest income of approximately $0.5 million as a result of
using Harveys' available cash in the Merger Financing.
(o) To recognize the effect of the foregoing adjustments (excluding the
adjustments which the Company believes will have no effect on income taxes)
on the provision for income taxes, based on Harvey's effective tax rate.
F-11
<PAGE>
INCOME PER COMMON SHARE
The following presents the amounts used in computing basic earnings per
common share on a historical and pro forma basis and the effect of dilutive
securities on the computation of earnings per common share on a historical and
pro forma basis. On a historical basis, dilutive securities include restricted
stock and stock options outstanding and exercisable. On a pro forma basis, basic
common shares outstanding for the year ended November 30, 1997 consist of the
38,800 shares of Class A Common Stock to be held by Colony HCR Voteco, LLC
("Voteco") and the 3,880,000 shares of Class B Common Stock to be held by Colony
Investors III, L.P. ("Colony III"). The dilutive securities consist of the 1,200
shares of Class A Common Stock and the 120,000 shares of Class B Common Stock to
be held by the Key Managers. Basic and diluted income (loss) per share
computations for Class A Common Stock and Class B Common Stock have been
combined below, as each class of Common Stock shares ratably in income. For the
nine months ended August 31, 1998, on a pro forma basis, the basic common shares
outstanding consist of the 38,800 shares of Class A Common Stock to be held by
Voteco, 3,880,000 shares of Class B Common Stock to be held by Colony III and,
based on the 1,200 shares of Class A Common Stock and 120,000 shares of Class B
Common Stock issuable to the Key Managers, of which 20 percent vest on each of
the first through fifth anniversaries of the effectiveness of the Merger, 240
shares of Class A Common Stock and 24,000 shares of Class B Common Stock to be
held by the Key Managers, which would vest on December 1, 1997, assuming the
Merger was effective on December 1, 1996. For the nine months ended August 31,
1998, the unvested securities held by the Key Managers are antidilutive.
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31, 1998
------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------------ ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ------------ ----------- --------- ---------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net income................................ $ 14,355 $ 5,740
Effect of dividends on Series A
Preferred............................... -- (6,016)
--------- ---------
Income available to common shares......... $ 14,355 10,009,086 $ 1.43 $ (276) 3,943,040 $ (0.07)
----- -----------
----- -----------
Effect of dilutive securities............. 204,370 --
--------- ------------ --------- ----------
Diluted net income per common share....... $ 14,355 10,213,456 $ 1.41 $ (276) 3,943,040 $ (0.07)
--------- ------------ ----- --------- ---------- -----------
--------- ------------ ----- --------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1997
----------------------------------------------------------------------
HISTORICAL PRO FORMA
---------------------------------- ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ---------- ----------- --------- ---------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item........... $ 30,775 $ 18,872
Effect of dividends on Series A
Preferred................................ -- (7,204)
--------- ---------
Income before extraordinary item available
to common shares......................... $ 30,775 9,826,636 $ 3.13 $ 11,668 3,918,800 $ 2.98
----- -----
----- -----
Effect of dilutive securities.............. 17,235 121,200
--------- ---------- --------- ----------
Diluted income before extraordinary item
per common share......................... $ 30,775 9,843,871 $ 3.13 $ 11,668 4,040,000 $ 2.89
--------- ---------- ----- --------- ---------- -----
--------- ---------- ----- --------- ---------- -----
</TABLE>
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Harveys Casino Resorts:
We have audited the accompanying consolidated balance sheets of Harveys
Casino Resorts and subsidiaries as of November 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of November 30,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Reno, Nevada
January 9, 1998
(except for Note 2,
as to which the date is
November 19, 1998)
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harveys Casino Resorts:
We have audited the accompanying consolidated statement of income,
stockholders' equity, and cash flows of Harveys Casino Resorts for the year
ended November 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of Harveys Casino Resorts'
operations and its consolidated cash flows for the year ended November 30, 1995,
in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Reno, Nevada
January 12, 1996
(except for Note 2,
as to which the date is
November 19, 1998)
F-14
<PAGE>
HARVEYS CASINO RESORTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................................................... $ 55,034,861 $ 21,121,376
Accounts receivable, net of allowances for doubtful accounts of $100,724 and
$288,093...................................................................... 5,263,837 8,760,106
Inventories..................................................................... 3,658,746 3,320,897
Prepaid expenses and other current assets....................................... 3,446,870 4,461,531
Deferred income taxes........................................................... 651,965 3,483,912
-------------- --------------
Total current assets.......................................................... 68,056,279 41,147,822
-------------- --------------
Property and equipment............................................................
Land............................................................................ 20,717,863 20,670,975
Buildings and improvements...................................................... 260,327,007 247,968,009
Leasehold improvements.......................................................... 21,191,721 20,802,147
Equipment, furniture and fixtures............................................... 144,126,256 135,535,533
Construction in progress........................................................ 16,791 2,908,129
-------------- --------------
446,379,638 427,884,793
Less: Accumulated depreciation and amortization................................. (128,109,637) (112,976,595)
-------------- --------------
318,270,001 314,908,198
-------------- --------------
Notes receivable--related parties............................................... 1,875,765 2,071,163
-------------- --------------
Notes receivable--other......................................................... -- 2,796,715
-------------- --------------
Other assets.................................................................... 15,263,376 17,606,509
-------------- --------------
Investment in unconsolidated affiliate.......................................... -- 15,237,480
-------------- --------------
Total assets.................................................................. $ 403,465,421 $ 393,767,887
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................................... $ 633,354 $ 2,752,799
Accounts and contracts payable.................................................. 5,990,363 9,542,590
Income taxes payable............................................................ 7,056,237 --
Accrued expenses................................................................ 20,945,046 17,139,810
-------------- --------------
Total current liabilities..................................................... 34,625,000 29,435,199
-------------- --------------
Long-term debt, net of current portion............................................ 150,220,304 181,353,658
Deferred income taxes............................................................. 23,022,615 19,339,319
Other liabilities................................................................. 16,239,952 13,876,639
-------------- --------------
Total liabilities............................................................. 224,107,871 244,004,815
-------------- --------------
Commitments and contingencies (see note 9)
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued....... -- --
Common stock, $.01 par value; 30,000,000 shares authorized; issued 9,853,488 and
9,818,322..................................................................... 98,535 98,183
Additional paid-in capital and other.............................................. 39,191,390 38,634,439
Treasury stock, at cost; 12,516 shares and 10,036 shares.......................... (199,672) (151,276)
Deferred compensation............................................................. (148,069) (425,187)
Retained earnings................................................................. 140,415,366 111,606,913
-------------- --------------
Total stockholders' equity.................................................... 179,357,550 149,763,072
-------------- --------------
Total liabilities and stockholders' equity.................................... $ 403,465,421 $ 393,767,887
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE>
HARVEYS CASINO RESORTS
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Casino............................................................ $ 216,564,140 $ 186,368,776 $ 121,368,981
Lodging........................................................... 32,175,206 28,745,686 25,499,036
Food and beverage................................................. 44,405,880 39,851,616 33,969,834
Other............................................................. 7,276,772 6,402,770 6,287,024
Management fees and joint venture................................. 4,507,159 5,023,381 1,668,934
Less: Casino promotional allowances............................... (21,365,746) (18,643,497) (15,593,778)
------------- ------------- -------------
Total net revenues.............................................. 283,563,411 247,748,732 173,200,031
------------- ------------- -------------
Costs and expenses
Casino............................................................ 100,500,468 86,732,228 57,519,779
Lodging........................................................... 13,373,681 11,677,166 9,458,539
Food and beverage................................................. 29,886,093 24,796,962 20,280,268
Other operating................................................... 2,811,332 2,812,983 2,837,956
Selling, general and administrative............................... 73,945,020 67,126,744 50,269,869
Depreciation and amortization..................................... 19,077,058 16,482,145 12,332,956
Business development costs........................................ 2,689,875 -- --
Pre-opening expenses.............................................. -- 4,099,490 2,146,667
------------- ------------- -------------
Total costs and expenses........................................ 242,283,527 213,727,718 154,846,034
------------- ------------- -------------
Operating income.................................................... 41,279,884 34,021,014 18,353,997
------------- ------------- -------------
Other income (expense)
Interest income................................................... 509,620 903,975 950,525
Interest expense.................................................. (19,401,110) (15,098,509) (8,910,714)
Gain on sale of interests in unconsolidated affiliate............. 27,422,228 -- --
Life insurance benefits........................................... -- -- 2,245,520
Other, net........................................................ (137,448) (221,048) 605,933
------------- ------------- -------------
Total other income (expense).................................... 8,393,290 (14,415,582) (5,108,736)
------------- ------------- -------------
Income before income taxes and extraordinary item................... 49,673,174 19,605,432 13,245,261
Income tax provision................................................ (18,898,553) (7,791,497) (3,900,000)
------------- ------------- -------------
Income before extraordinary item.................................... 30,774,621 11,813,935 9,345,261
Loss on early retirement of debt, net of taxes...................... -- (521,705) --
------------- ------------- -------------
Net income.......................................................... $ 30,774,621 $ 11,292,230 $ 9,345,261
------------- ------------- -------------
------------- ------------- -------------
Net income per common share--basic
Income before extraordinary item.................................. $ 3.13 $ 1.22 $ 1.00
Extraordinary item................................................ -- (0.06) --
------------- ------------- -------------
Net income........................................................ $ 3.13 $ 1.16 $ 1.00
------------- ------------- -------------
------------- ------------- -------------
Net income per common share--diluted
Income before extraordinary item.................................. $ 3.13 $ 1.22 $ 0.99
Extraordinary item................................................ -- (0.06) --
------------- ------------- -------------
Net income........................................................ $ 3.13 $ 1.16 $ 0.99
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares used in calculating income per common
share
Basic............................................................. 9,826,636 9,645,708 9,364,520
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... 9,843,871 9,698,500 9,456,051
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
HARVEYS CASINO RESORTS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Common stock
Balance at beginning of year
Shares: 9,818,322 in 1997, 9,402,657 in 1996, and 9,348,823
in 1995................................................... $ 98,183 $ 94,026 $ 93,488
Issuance of restricted stock, Shares: 1,500 in 1996 and 50,500
in 1995..................................................... -- 15 505
Issuance of stock in acquisition of minority interest of
subsidiary Shares: 382,500 in 1996.......................... -- 3,825 --
Stock options exercised, Shares: 35,166 in 1997, 31,665 in
1996 and 3,334 in 1995...................................... 352 317 33
-------------- -------------- --------------
Balance at end of year, Shares: 9,853,488 in 1997, 9,818,322
in 1996 and 9,402,657 in 1995............................... 98,535 98,183 94,026
-------------- -------------- --------------
Additional Paid-in capital and other
Balance at beginning of year.................................. 38,634,439 31,419,882 30,511,349
Issuance of restricted stock.................................. -- 26,798 969,245
Issuance of stock in acquisition of minority interest of
subsidiary, net of issuance costs of $507,098............... -- 6,660,952 --
Stock options exercised....................................... 531,920 447,568 43,558
Other......................................................... 25,031 79,239 (104,270)
-------------- -------------- --------------
Balance at end of year........................................ 39,191,390 38,634,439 31,419,882
-------------- -------------- --------------
Treasury Stock
Balance at beginning of year.................................. (151,276) (79,733) (28,765)
Forfeiture of restricted stock................................ (40,250) (49,000) (24,500)
Acquisition of treasury stock................................. (8,146) (22,543) (26,468)
-------------- -------------- --------------
Balance at end of year........................................ (199,672) (151,276) (79,733)
-------------- -------------- --------------
Deferred Compensation
Balance at beginning of year.................................. (425,187) (1,196,828) (1,181,719)
Issuance of restricted stock.................................. -- (26,814) (969,750)
Amortization of deferred compensation......................... 236,868 749,455 930,141
Forfeiture of restricted stock................................ 40,250 49,000 24,500
-------------- -------------- --------------
Balance at end of year........................................ (148,069) (425,187) (1,196,828)
-------------- -------------- --------------
Retained Earnings
Balance at beginning of year.................................. 111,606,913 102,063,739 94,216,595
Net income.................................................... 30,774,621 11,292,230 9,345,261
Cash dividends declared....................................... (1,966,168) (1,749,056) (1,498,117)
-------------- -------------- --------------
Balance at end of year........................................ 140,415,366 111,606,913 102,063,739
-------------- -------------- --------------
Total Stockholders' Equity.................................... $ 179,357,550 $ 149,763,072 $ 132,301,086
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
HARVEYS CASINO RESORTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................................... $30,774,621 $ 11,292,230 $ 9,345,261
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization.............................................. 19,077,058 16,482,145 12,332,956
Gain on sale of interests in unconsolidated affiliate...................... (27,422,228) -- --
Equity in (income) loss of unconsolidated affiliate........................ (1,665,880) (1,720,710) 731,724
Amortization of deferred compensation...................................... 236,868 749,455 930,141
Amortization of debt issuance costs........................................ 1,042,668 1,719,218 331,417
Deferred income taxes...................................................... 6,515,243 2,439,759 352,320
Other...................................................................... 162,369 126,726 (588,078)
(Increase) decrease in assets
Accounts receivable, net................................................. 2,984,090 (1,020,290) (5,111,091)
Inventories.............................................................. (369,346) (750,456) 116,986
Prepaid expenses and other current assets................................ (235,227) 1,388,880 (289,594)
Other assets............................................................. 74,573 (315,760) (4,816,950)
Increase (decrease) in liabilities
Accounts and contracts payable........................................... 236,936 2,897,695 1,014,726
Accrued expenses......................................................... 4,433,595 5,285,369 4,808,098
Income taxes payable..................................................... 7,056,237 -- (259,510)
Other liabilities........................................................ 1,734,973 1,193,685 695,705
----------- ------------ ------------
Net cash provided by operating activities.............................. 44,636,550 39,767,946 19,594,111
----------- ------------ ------------
Cash flows from investing activities
Proceeds from disposition of assets........................................ 3,716,157 198,920 220,455
Capital expenditures....................................................... (22,531,641) (51,395,297) (66,897,927)
Proceeds from sale of marketable securities................................ 498,032 1,833,202 300,000
Purchase of marketable securities.......................................... (27,751) (132,592) (159,498)
Purchase of notes and accrued interest of consolidated subsidiary.......... -- (6,000,000) --
Investment in unconsolidated affiliate..................................... -- -- (4,000,500)
Loan to unconsolidated affiliate........................................... -- (200,000) --
Advances to employees...................................................... (173,510) -- (184,949)
Proceeds from notes receivable............................................. 168,910 193,608 289,482
Proceeds from sale of interests in unconsolidated affiliate................ 46,226,920 -- --
Decrease in construction payables.......................................... (3,448,828) -- --
----------- ------------ ------------
Net cash provided by (used in) investing activities.................... 24,428,289 (55,502,159) (70,432,937)
----------- ------------ ------------
Cash flows from financing activities
Net borrowings under short-term credit agreements.......................... (340,335) (335,019) 281,099
Proceeds from long-term debt............................................... 11,013,876 245,900,000 181,436,932
Principal payments on long-term debt....................................... (44,266,675) (210,835,153) (124,736,101)
Dividends paid............................................................. (1,966,168) (1,749,056) (1,498,117)
Debt issuance costs........................................................ (116,178) (7,043,342) (1,615,419)
Stock options exercised.................................................... 532,272 447,885 43,591
Acquisition of treasury stock.............................................. (8,146) (22,543) (26,468)
----------- ------------ ------------
Net cash provided by (used in) financing activities.................... (35,151,354) 26,362,772 53,885,517
----------- ------------ ------------
Increase in cash and cash equivalents........................................ 33,913,485 10,628,559 3,046,691
Cash and cash equivalents at beginning of year............................... 21,121,376 10,492,817 7,446,126
----------- ------------ ------------
Cash and cash equivalents at end of year..................................... $55,034,861 $ 21,121,376 $ 10,492,817
----------- ------------ ------------
----------- ------------ ------------
Supplemental disclosure of cash flows information
Cash paid for interest, net of amounts capitalized......................... $18,426,216 $ 15,775,000 $ 6,602,000
Cash paid for income taxes................................................. 3,429,087 6,068,000 4,600,000
Supplemental schedule of non-cash investing and financing activities
Property and equipment acquired on contracts and trade payables............ -- 22,303,908 7,520,305
Acquisition of minority interest in subsidiary
Fair value of net assets acquired........................................ -- 5,480,971 --
Minority interest........................................................ -- 1,690,904 --
Common stock issued...................................................... -- (7,171,875) --
Subordinated notes issued in acquisition of notes and accrued interest of
subsidiary............................................................... -- 8,000,000 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
Harveys Casino Resorts and subsidiaries (the "Company") is engaged in the
casino entertainment industry. In 1996, the Company formed a wholly-owned
subsidiary, Harveys Tahoe Management Company, Inc. ("HTMC"), to own and operate
the Company's resort on the south shore of Lake Tahoe, Nevada. On May 22, 1997,
HTMC was licensed by the Nevada gaming authorities and, on June 1, 1997, the
Company transferred the ownership of Harveys Resort Hotel/Casino to HTMC. The
Company, through its wholly-owned subsidiary, Harveys C. C. Management Company,
Inc. ("HCCMC"), owns and operates Harveys Wagon Wheel Hotel/Casino in Central
City, Colorado. Until April 30, 1996, the Company, through HCCMC, owned 70% of
the equity interest in Harveys Wagon Wheel Casino Limited Liability Company
("HWW") which owned Harveys Wagon Wheel Hotel/Casino. On April 30, 1996, the
Company acquired all of the 30% minority interest in HWW in exchange for common
stock of the Company. On June 1, 1997, the Company contributed its 30% interest
in HWW to HCCMC. Subsequently, HWW was liquidated and HCCMC became the sole
owner and operator of Harveys Wagon Wheel Hotel/Casino. Until October 24, 1997,
the Company, through its wholly-owned subsidiary, Harveys L.V. Management
Company, Inc. ("HLVMC"), owned 40% of the equity interest in Hard Rock Hotel,
Inc. ("HRHC"), which owns the Hard Rock Hotel and Casino in Las Vegas, Nevada.
HLVMC had a contract to manage the Las Vegas hotel and casino. On October 24,
1997 the Company sold its 40% equity interest and its interest in the management
contract to HRHC (see Note 11). Additionally, the Company's wholly owned
subsidiary, Harveys Iowa Management Company, Inc. ("HIMC"), is the owner and
operator of Harveys Casino Hotel, a riverboat casino, hotel and convention
center complex in Council Bluffs, Iowa. The riverboat casino portion of the
complex opened for business on January 1, 1996 and the land-based hotel opened
for business on May 24, 1996.
The consolidated financial statements include the accounts of Harveys Casino
Resorts and its majority and wholly-owned subsidiaries. In consolidating, all
significant intercompany accounts and transactions have been eliminated.
Investments in an unconsolidated affiliate are stated at cost adjusted by the
Company's equity in undistributed earnings or losses of the affiliate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks, interest
bearing deposits and highly liquid debt instruments purchased with initial
maturities of three months or less. Cash equivalents are carried at cost which
approximates market value.
INVENTORIES
Inventories consist primarily of operating supplies and food and beverage
stock and are stated at the lower of weighted-average cost or market.
F-19
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Interest incurred during
construction is capitalized and amortized over the life of the asset. Costs of
improvements are capitalized. Costs of normal repairs and maintenance are
charged to expense as incurred. Upon the sale or retirement of property and
equipment, the cost and related accumulated depreciation are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income. Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements are amortized over the shorter of the asset life or lease term.
Depreciable lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements.................................................. 15 to 45 years
Riverboat................................................................... 20 years
Leasehold improvements...................................................... 5 to 30 years
Equipment, furniture and fixtures........................................... 5 to 10 years
</TABLE>
UNAMORTIZED LOAN COSTS AND DEBT ISSUANCE COSTS
Loan costs incurred in connection with a reducing revolving credit agreement
are amortized to interest expense over the term of the loan on a straight-line
method. Debt issuance costs associated with the Company's senior subordinated
notes are amortized to interest expense over the term of the notes on the
interest method.
FUTURE DEVELOPMENT COSTS
The Company capitalizes costs associated with new gaming projects until (a)
the project is no longer considered viable and the costs are expensed, or (b)
the likelihood of the project is relatively certain and the costs are
reclassified to pre-opening and expensed when operations commence. Capitalized
future development costs, relating to potential new gaming projects, of
approximately $907,000 and $1,427,000 as of November 30, 1997 and 1996,
respectively, are included on the accompanying balance sheet as other assets.
During the fourth quarter of 1997, the Company expensed approximately $2.7
million of future business development costs.
PRE-OPENING EXPENSES
Pre-opening expenses are associated with the acquisition, development and
opening of the Company's new casino resorts. These amounts are expensed when the
casino commences operations and include items that were capitalized as incurred
prior to opening and items that are directly related to the opening of the
property and are nonrecurring in nature. In 1996, approximately $4.1 million was
expensed in conjunction with the Company's opening of the Harveys Casino Hotel
project in Council Bluffs, Iowa.
Approximately $2.1 million was expensed in fiscal 1995 in conjunction with
the Company's opening of Harveys Wagon Wheel Hotel/Casino in Central City,
Colorado. Additionally, the Company's equity in the loss of the Hard Rock Hotel
and Casino for fiscal year 1995 included the Company's share of approximately
$4.5 million in pre-opening expenses.
F-20
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. Promotional allowances consist principally of the retail
value of complimentary rooms, food, beverage, and other promotional allowances
provided to customers without charge. The estimated costs of providing such
complimentary services have been classified as casino operating expenses through
interdepartmental allocations as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Hotel........................................... $ 2,743,124 $ 2,454,401 $ 1,707,465
Food and beverage............................... 10,871,776 9,805,175 8,566,136
Other........................................... 63,505 51,782 53,527
------------- ------------- -------------
$ 13,678,405 $ 12,311,358 $ 10,327,128
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Income taxes are recorded in accordance with the liability method
specified by Statement of Financial Accounting Standards ("SFAS") No.
109--ACCOUNTING FOR INCOME TAXES. The following basic principles are applied in
accounting for income taxes: (a) a current liability or asset is recognized for
the estimated taxes payable or refundable for the current year; (b) a deferred
tax liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards; (c) the measurement of
current and deferred tax liabilities and assets is based on the provisions of
the enacted tax law, the effects of future changes in tax laws or rates are not
anticipated; and (d) the measurement of deferred taxes is reduced, if necessary,
by the amount of any tax benefits that, based upon available evidence, are not
expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS requires
the determination of fair value for certain of the Company's assets, liabilities
and contingent liabilities. When practicable, the following methods and
assumptions were used to estimate the fair value of those financial instruments
included in the following categories:
Notes receivable: The fair value of notes receivable is based upon projected
cash flows discounted at estimated current market rates of interest. It is not
practicable to estimate the fair value of notes receivable-related parties due
to the related party nature of those instruments.
Long-term debt: The fair value of long-term debt is estimated based on the
current borrowing rates offered to the Company for debt of the same remaining
maturities.
It is estimated that the carrying amounts of the Company's financial
instruments approximate fair value at November 30, 1997.
F-21
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business. These financial instruments consist of standby
letters of credit.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. The Company does not have collateral or other security to support
financial instruments with off-balance-sheet credit risk.
LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121--ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the
Company reviews the carrying amount of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Such reviews have
not had a material effect on the Company's results of operations or financial
position.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB has issued SFAS No. 131--DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes new standards for
determining a reportable segment and for disclosing information regarding each
such segment. A reportable segment is an operating segment: (a) that engages in
business activities from which it earns revenues and incurs expenses, (b) whose
operating results are regularly reviewed by the enterprise's chief operating
decision maker in deciding how to allocate resources and in assessing
performance, (c) for which discrete financial information is available, and (d)
that exceeds specific quantitative thresholds. SFAS No. 131 will be effective
for the Company beginning December 1, 1998. On adoption, and to the extent
practicable, segment information for earlier comparative years will be restated.
The Company anticipates, with the adoption of SFAS No. 131, it will expand its
segment disclosures relative to its Nevada, Colorado and Iowa operations. The
Company believes the segment information required to be disclosed under SFAS No.
131 will have no effect on the Company's consolidated results of operations,
financial position or cash flows, but will be more comprehensive than previously
provided, including expanded disclosure of income statement and balance sheet
items for each of its reportable operating segments.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year presentation. These
reclassifications have no effect on net income.
F-22
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NET INCOME PER COMMON SHARE
As of December 1, 1997, the Company adopted the provisions of SFAS No. 128,
Earnings Per Share. The Company has restated the prior periods net income per
common share to conform with the provisions of SFAS No. 128. Basic net income
per common share is calculated by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
common share is calculated by dividing net income by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares include restricted stock and stock options outstanding and
exercisable for the purpose of calculating diluted net income per common share.
The Company has no other potentially dilutive securities.
A reconciliation of net income and shares for basic and diluted net income
per common share follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1997
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------- ---------- -----------
<S> <C> <C> <C>
Basic net income per common share..................... $ 30,774,621 9,826,636 $ 3.13
-----
-----
Effect of dilutive securities......................... 17,235
------------- ----------
Diluted net income per common share................... $ 30,774,621 9,843,871 $ 3.13
------------- ---------- -----
------------- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1996
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------- ---------- -----------
<S> <C> <C> <C>
Basic net income before extraordinary item............ $ 11,813,935 9,645,708 $ 1.22
-----------
-----------
Effect of dilutive securities......................... 52,792
------------- ----------
Diluted net income per common share................... $ 11,813,935 9,698,500 $ 1.22
------------- ---------- -----------
------------- ---------- -----------
Extraordinary item, basic............................. $ (521,705) 9,645,708 $ (0.06)
-----------
-----------
Effect of dilutive securities......................... 52,792
------------- ----------
Extraordinary item, diluted........................... $ (521,705) 9,698,500 $ (0.06)
------------- ---------- -----------
------------- ---------- -----------
Basic net income per common share..................... $ 11,292,230 9,645,708 $ 1.16
-----------
-----------
Effect of dilutive securities......................... 52,792
------------- ----------
Diluted net income per common share................... $ 11,292,230 9,698,500 $ 1.16
------------- ---------- -----------
------------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1995
-------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------ ---------- -----------
<S> <C> <C> <C>
Basic net income per common share....................... $ 9,345,261 9,364,520 $ 1.00
-----
-----
Effect of dilutive securities........................... 91,531
------------ ----------
Diluted net income per common share..................... $ 9,345,261 9,456,051 $ 0.99
------------ ---------- -----
------------ ---------- -----
</TABLE>
F-23
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consist of the following as of:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Provision for progressive jackpot payouts...................... $ 1,458,571 $ 1,355,382
Accrued interest............................................... 174,706 242,480
Accrued salaries, wages and other employee benefits............ 8,301,094 7,131,230
Accrued taxes other than income taxes.......................... 4,462,947 2,066,110
Self-funded workers' compensation and medical claims accrual... 2,368,755 1,640,617
Outstanding gaming chips and tokens............................ 870,159 1,613,158
Race and sports book futures and unclaimed winners............. 808,903 754,279
Other accrued liabilities...................................... 2,499,911 2,336,554
------------- -------------
$ 20,945,046 $ 17,139,810
------------- -------------
------------- -------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following as of:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
10 5/8% senior subordinated notes, due 2006.................. $ 150,000,000 $ 150,000,000
Banks and others--
Note payable to banks...................................... -- 30,500,000
Notes payable to financing company......................... 623,387 3,367,226
Other...................................................... 230,271 239,231
-------------- --------------
150,853,658 184,106,457
Less current portion....................................... 633,354 2,752,799
-------------- --------------
$ 150,220,304 $ 181,353,658
-------------- --------------
-------------- --------------
</TABLE>
Aggregate annual maturities of long-term debt, based on amounts borrowed as
of November 30, 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING NOVEMBER 30,
- ------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 633,354
1999.......................................................................... 11,089
2000.......................................................................... 12,336
2001.......................................................................... 13,724
2002.......................................................................... 15,268
2003 and thereafter........................................................... 150,167,887
--------------
$ 150,853,658
--------------
--------------
</TABLE>
F-24
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
10 5/8% SENIOR SUBORDINATED NOTES, DUE 2006
On May 22, 1996 the Company issued and sold, pursuant to an underwritten
public offering, $150 million in aggregate principal amount of 10 5/8% senior
subordinated notes due 2006 (the "Senior Subordinated Notes").
The Senior Subordinated Notes are governed by an indenture (the "Indenture")
and are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future Senior Debt of the Company (as defined in the
Indenture). The Senior Subordinated Notes are guaranteed by each of the
Restricted Subsidiaries of the Company (as defined in the Indenture). Each
guarantee is a general unsecured obligation of the guaranteeing Restricted
Subsidiary, subordinated in right of payment to all existing and future Senior
Debt of each guaranteeing Restricted Subsidiary. The guaranteeing Restricted
Subsidiaries are HCCMC, HIMC, HLVMC and HTMC. Separate financial statements of
the guaranteeing Restricted Subsidiaries have not been included because
management has determined that they are not material to investors.
Interest on the Senior Subordinated Notes is payable semi-annually on June 1
and December 1 of each year. The Senior Subordinated Notes will mature on June
1, 2006. The Senior Subordinated Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2001 at prices
ranging from 105.313% of the principal amount plus accrued and unpaid interest
to 100% of the principal amount plus accrued and unpaid interest beginning June
1, 2004 and thereafter. Upon a Change of Control (as defined in the Indenture)
each holder of the Senior Subordinated Notes will have the right to require the
Company to repurchase such holder's Senior Subordinated Notes at 101% of the
principal amount plus accrued and unpaid interest to the repurchase date.
The Indenture contains certain covenants that impose limitations on, among
other things: (a) the incurrence of additional indebtedness by the Company or
any Restricted Subsidiary, (b) the payment of dividends in excess of regular
quarterly dividends which are not to exceed $500,000 per quarter, (c) the
repurchase of capital stock and the making of certain other Restricted Payments
and Restricted Investments (each as defined in the Indenture) by the Company or
any Restricted Subsidiary, (d) mergers, consolidations and sales of assets by
the Company or any Restricted Subsidiary, (e) the creation or incurrence of
liens on the assets of the Company or any Restricted Subsidiary, and (f)
transactions by the Company or any of its subsidiaries with Affiliates ( as
defined in the Indenture). These limitations are subject to a number of
qualifications and exceptions as described in the Indenture. The Company was in
compliance with these covenants at November 30, 1997.
NOTE PAYABLE TO BANKS
The Company is party to a reducing revolving credit agreement with a
consortium of banks (the "Credit Facility"). As of November 30, 1997, under the
Credit Facility, the Company could borrow up to a maximum available principal
balance of $115 million. The maximum available under the Credit Facility is
reduced by the advanced but unpaid principal balance and by any letter of credit
exposure. The advanced but unpaid principal balance at November 30, 1997 and
1996 was zero and $30.5 million, respectively. Outstanding letters of credit
amounted to approximately $1.2 million at November 30, 1997. The note
F-25
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
payable under the Credit Facility matures in February 2002. Until then, the
annual year-end maximum principal balances are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
- ------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 103,500,000
1999.......................................................................... 92,000,000
2000.......................................................................... 74,750,000
2001.......................................................................... 57,500,000
</TABLE>
The Company pays quarterly fees at an annual rate varying from three-eights
of one percent (0.375%) to one-half of one percent (0.5%) on the unborrowed
maximum principal balance depending on the Company's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization. The rate in
effect at November 30, 1997 was 0.425%.
Interest is due and payable monthly and is provided at the higher of the
prime rate or the Federal Funds Rate plus one-half of one percent (0.5%), plus
an applicable margin. However, in accordance with the terms of the Credit
Facility, the Company has the option to cause a portion, or all, of the
outstanding principal balance to accrue interest at a rate equal to the London
Inter-Bank Offering Rate ("LIBOR") plus an applicable margin. In each case, the
applicable margin is determined by reference to the Company's ratio of funded
debt to earnings before interest, taxes, depreciation and amortization. The
applicable margins at November 30, 1997 were 2.0%, with respect to LIBOR-based
borrowings, and 0.5%, with respect to prime rate borrowings.
The Credit Facility is secured by all of the real and personal property of:
(a) HTMC, (b) HIMC, (c) HCCMC, and (d) HCR Services Company, Inc. ("HCRSC"), a
Nevada corporation, which is wholly owned by the Company, as well as all of the
contracts the Company has entered into in connection with its ownership and
operation of: (i) HTMC, (ii) HIMC, (iii) HCCMC, and (iv) HCRSC. Additional
security is provided by a pledge of the stock of the following subsidiaries of
the Company: HLVMC, HCCMC, HIMC, HTMC, HCRSC, and Reno Projects, Inc., a Nevada
corporation, which is wholly owned by the Company.
The Credit Facility contains certain financial and other covenants. The
financial covenants prevent the Company from making any investments in or
advances to affiliates without the prior written consent of the lenders under
the Credit Facility. The covenants allow the declaration and payment of
dividends without the prior written consent of the lenders if certain fixed
charge coverage ratios are maintained. The covenants require the Company to
maintain certain set standards with respect to: (a) minimum tangible net worth,
(b) fixed charge coverage ratios, and (c) minimum annual capital expenditures.
The financial covenants also limit the Company's ability to incur additional
indebtedness. The Company was in compliance with these covenants at November 30,
1997.
NOTES PAYABLE TO FINANCING COMPANY
HWW entered into an equipment financing agreement with a financing company
to finance the acquisition of up to $7.5 million of gaming and associated
equipment. The obligations to repay the outstanding principal balances of the
secured notes under the equipment financing agreement have been assumed by HCCMC
and, as of November 30, 1997 were approximately $191,000 and $432,000. The notes
are secured by the equipment acquired and are payable in monthly payments of
approximately $194,000
F-26
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
and $56,000 including interest that accrues at a rate of 12.15% per annum. The
notes will mature in December 1997 and July 1998, respectively.
5. OPERATING LEASE COMMITMENTS
The Company's future minimum lease commitments under noncancellable
operating leases (principally for land) as of November 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING NOVEMBER 30,
- -------------------------------------------------------------------------------
<S> <C>
1998........................................................................... $ 2,668,801
1999........................................................................... 2,603,438
2000........................................................................... 2,515,615
2001........................................................................... 2,358,919
2002........................................................................... 2,296,670
2003 and thereafter............................................................ 94,717,473
</TABLE>
Certain leases included above have provisions which require periodic
increases in the rental payments based upon the consumer price index as of
certain dates. In addition, annual lease payments under an obligation on a land
lease are based upon an escalating percentage of gross gaming revenues or all
net revenues, whichever calculation is greater, of Harveys Resort Hotel/Casino.
The percentages applicable to gross gaming revenues and all net revenues in
fiscal 1998 will be 3.25% and 2.15%, respectively. In fiscal 1999 the
percentages increase to 3.35% and 2.25%, respectively, and in fiscal 2000 and
years thereafter the percentages are 3.5% and 2.35%, respectively. The actual
rent paid is the greater of the rent calculated as a percentage or a minimum
rent, as adjusted for the consumer price index. In 1997, the expiration of this
land lease was extended to the year 2045. For 1997, 1996 and 1995, the Company
recognized rental expense in connection with the land lease of approximately
$3.0 million, $3.1 million and $3.1 million, respectively, which includes
approximately $789,000, $655,000 and $740,000, respectively, above the minimum
rental amounts. Total rental expense recognized for 1997, 1996 and 1995 amounted
to approximately $3.7 million, $3.7 million and $3.6 million, respectively.
The Company is also a lessor on several noncancellable lease agreements. Of
the rental income recognized for the years ended November 30, 1997, 1996 and
1995, approximately $118,000, $77,000 and $85,000, respectively, represents
rents received as a percentage of gross receipts. The remaining amounts are
attributable to specified minimum rent. Future minimum payments due to the
Company under these noncancellable lease agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDING NOVEMBER 30,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 1,315,441
1999............................................................................ 437,656
2000............................................................................ 395,493
2001............................................................................ 310,143
2002............................................................................ 78,525
</TABLE>
F-27
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Current........................................... $ 12,383,310 $ 5,484,923 $ 3,547,680
Deferred.......................................... 6,515,243 2,306,574 352,320
------------- ------------ ------------
Income tax provision before extraordinary item.... 18,898,553 7,791,497 3,900,000
Income tax benefit of extraordinary item.......... -- (334,497) --
------------- ------------ ------------
Income tax provision.............................. $ 18,898,553 $ 7,457,000 $ 3,900,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The difference between the Company's provision for income taxes as presented
in the accompanying consolidated statements of income, and the provision for
income taxes computed at the statutory rate is comprised of the items shown in
the following table as a percent of pre-tax earnings.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax at the statutory rate............................. 35.0% 35.0% 35.0%
Non-deductible expenses.............................................. 1.2 0.8 0.7
Tax credits.......................................................... (0.5) (1.1) (1.2)
Nontaxable life insurance benefits................................... -- -- (5.3)
State income tax, net of federal benefit............................. 1.7 1.9 --
Other, net........................................................... 0.6 3.1 0.2
--- --- ---
38.0% 39.7% 29.4%
--- --- ---
--- --- ---
</TABLE>
The components of the deferred income tax assets and liabilities as
presented in the consolidated balance sheets, are as follows at November 30:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
DEFERRED TAX ASSET
Accrued compensation.......................................... $ 5,025,651 $ 4,513,769
Other accrued expenses........................................ 702,304 2,401,454
-------------- --------------
5,727,955 6,915,223
DEFERRED TAX LIABILITY
Property and equipment........................................ (28,098,605) (22,770,630)
-------------- --------------
Net deferred tax liability.................................... $ (22,370,650) $ (15,855,407)
-------------- --------------
-------------- --------------
Current deferred asset........................................ $ 651,965 $ 3,483,912
Noncurrent deferred liability................................. (23,022,615) (19,339,319)
-------------- --------------
Net deferred tax liability.................................... $ (22,370,650) $ (15,855,407)
-------------- --------------
-------------- --------------
</TABLE>
F-28
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
In 1997 the Internal Revenue Service completed examinations of the Company's
federal income tax returns for fiscal years 1995 and 1994. No significant
adjustments were made to the Company's income tax liability or income tax
provision as a result of the examinations.
7. STOCK-BASED COMPENSATION
OMNIBUS INCENTIVE PLANS
In November 1993, the Company adopted the 1993 Omnibus Incentive Plan (the
"1993 Plan") and in March 1996, the Company adopted the 1996 Omnibus Incentive
Plan (the "1996 Plan" and together with the 1993 Plan, collectively referred to
as the "Plans"). Under the Plans, shares of the Company's common stock may be
granted to employees or prospective employees of the Company and/or its
subsidiaries who are responsible for the management, growth and protection of
the business of the Company. Issuance of shares of common stock under the Plans
may consist of stock options, stock appreciation rights, restricted stock
grants, performance units and dividend equivalents. The Plans are administered
by a committee of the Board of Directors (the "Committee") whose members
determine who will be awarded stock options, stock appreciation rights,
restricted stock grants, performance units and dividend equivalents.
Under the 1993 Plan, 915,219 shares of the Company's common stock were
reserved for potential awards and under the 1996 Plan, an additional 500,000
shares of the Company's common stock were reserved.
Stock options may be granted alone or in addition to other awards or in
tandem with stock appreciation rights. The exercise price of stock options
granted under the Plans is established by the Committee, but the exercise price
may not be less than the market price of the Company's common stock on the date
the option is granted. The term of each stock option will be fixed by the
Committee. However, the term of any stock option may not exceed ten years. Stock
options granted under the Plans generally vest ratably over a three year period
from the date of grant.
In May 1997, the Board of Directors of the Company authorized the repricing
of certain stock options. The repricing resulted in the cancellation of stock
options to purchase 498,880 shares and the issuance of stock options to purchase
498,880 shares. The stock options were issued with an exercise price equal to
the market value of the common stock on the date of repricing. The repriced
options will vest 33 1/3% on each of the next three anniversaries of the grant.
Stock appreciation rights entitle the holder to receive in cash an amount
equal to the excess of the fair market value of common stock on the date of
exercise over the fair market value of common stock on the date of grant. A
stock appreciation right may be exercised at any time following the date which
is six months after the date of grant, but not prior to the exercisability of
any stock option with which it is granted in tandem. As of November 30, 1997, no
stock appreciation rights had been granted.
Restricted stock grants are awards of shares of common stock granted subject
to such restrictions, terms and conditions as the Committee deems appropriate.
The Committee determines the number of restricted shares to be granted and may
impose different terms and conditions on any particular restricted share grant
made to any employee. The Company has granted a total of 228,500 shares of
restricted common stock. Of the restricted shares granted, in each case, 25% of
the shares vested immediately as of the date of the grant and vest an additional
25% on each of the next three anniversaries of the grant. As of November 30,
1997, grantees of the restricted shares had forfeited 8,375 shares pursuant to
terms of the
F-29
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK-BASED COMPENSATION (CONTINUED)
Plans. The Company has recognized approximately $237,000, $750,000, and $930,000
as compensation expense in 1997, 1996, and 1995, respectively.
At November 30, 1997, 177,469 shares of the Company's common stock were
available for grant under the Plans.
1993 NON-EMPLOYEE DIRECTORS' STOCK OPTION PROGRAM
In November 1993, the Company adopted the 1993 Non-Employee Directors' Stock
Option Program (the "Program") whereby each currently serving non-employee
director was granted an option to purchase 4,500 shares of the Company's common
stock, and will be granted an option to purchase 1,500 shares of common stock
immediately following each annual meeting. Each new non-employee director
receives a grant of an option to purchase 4,500 shares of the Company's common
stock immediately after the first annual meeting of shareholders after any such
director is elected or appointed to the Board of Directors and will receive an
option to purchase 1,500 shares of common stock immediately following each
subsequent annual meeting. The options granted will vest 33 1/3% on the date of
grant and 33 1/3% on each of the next two anniversaries of grant. The exercise
price will be the fair market value of the common stock on the date of grant. A
total of 60,000 shares have been reserved for issuance under this plan.
STOCK OPTIONS PURSUANT TO EMPLOYMENT CONTRACTS
Two of the Company's directors, who are also employees, have been granted
options, outside of the Plans or the Program, to purchase 15,000 and 12,500
shares of the Company's common stock, respectively. The stock options were
granted in November 1993 pursuant to employment contracts and in anticipation of
the Company's initial public offering in February 1994. The stock options have
an exercise price of $14.00 per share. None of the stock options have been
exercised. All of the stock options are currently exercisable and expire ten
years from the date of grant.
F-30
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes information relative to stock options
granted, exercised, canceled, outstanding and exercisable under the various
plans discussed above:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Options outstanding at December 1, 1994........................ 413,000 $ 14.00
Options granted................................................ 125,200 19.21
Options canceled............................................... 15,434 13.74
Options exercised.............................................. 3,334 13.07
---------- ------
Options outstanding at November 30, 1995....................... 519,432 $ 15.32
Options granted................................................ 413,580 18.90
Options canceled............................................... 21,834 13.81
Options exercised.............................................. 31,665 14.14
---------- ------
Options outstanding at November 30, 1996....................... 879,513 $ 16.96
Options granted................................................ 684,193 16.48
Options canceled............................................... 513,080 19.04
Options exercised.............................................. 35,166 13.77
---------- ------
Options outstanding at November 30, 1997....................... 1,015,460 $ 15.69
----------
----------
Options exercisable at November 30, 1995....................... 274,166 $ 14.00
Options exercisable at November 30, 1996....................... 476,042 15.13
Options exercisable at November 30, 1997....................... 377,583 14.35
</TABLE>
The following table provides additional information relative to stock
options outstanding at November 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED- AVERAGE NUMBER WEIGHTED- AVERAGE
EXERCISE PRICES OUTSTANDING LIFE IN YEARS EXERCISABLE PRICE EXERCISABLE EXERCISABLE PRICE
- ----------------- ----------- ------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$12.44 - $16.25 339,367 6.17 $ 14.04 328,533 $ 14.00
$16.44 638,693 9.50 $ 16.44 38,150 $ 16.44
$17.16 - $19.25 37,400 9.17 $ 17.96 10,900 $ 17.57
----------- --- ------ ----------- ------
1,015,460 8.16 $ 15.69 377,583 $ 14.35
----------- -----------
----------- -----------
</TABLE>
The FASB has issued SFAS No. 123--ACCOUNTING FOR STOCK-BASED COMPENSATION.
SFAS No. 123 provides, among other things, that companies may elect to either
record expense based on the fair value of stock-based compensation upon issuance
or continue to apply the methods prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25") whereby no compensation cost is recognized upon
grant if certain requirements are met. The Company has elected to continue to
account for stock-based compensation in accordance with APB No. 25.
Had the Company recorded stock-based compensation cost consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma
F-31
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK-BASED COMPENSATION (CONTINUED)
amounts included in the table below. The table also discloses the
weighted-average assumptions used in estimating the fair value of stock options
using the Black-Scholes option pricing model and the weighted-average fair value
of the stock options granted. Because the accounting method prescribed by SFAS
No. 123 does not apply to stock options granted by the Company prior to December
1, 1995, the compensation cost reflected in the pro forma amounts included in
the table below may not be representative of that to be expected in future
years.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER
30,
--------------------
1997 1996
--------- ---------
DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE AMOUNTS
<S> <C> <C>
Income before extraordinary item
As reported...................................................................... $ 30,775 $ 11,814
Pro forma........................................................................ 30,406 11,465
Net income
As reported...................................................................... $ 30,775 $ 11,292
Pro forma........................................................................ 30,406 10,943
Income per share before extraordinary item
As reported...................................................................... $ 3.13 $ 1.22
Pro forma........................................................................ $ 3.09 $ 1.18
Net income per share
As reported...................................................................... $ 3.13 $ 1.16
Pro forma........................................................................ $ 3.09 $ 1.13
Weighted-average assumptions
Expected stock price volatility.................................................. 31.70% 32.64%
Risk-free interest rate.......................................................... 5.20% 5.81%
Expected option lives (years).................................................... 2.84 3.06
Expected dividend yield.......................................................... 1.00% 1.00%
Estimated fair value of options granted.......................................... $ 4.05 $ 3.97
</TABLE>
8. EMPLOYEE BENEFIT PLANS
401(K) PLAN
The Company maintains a defined contribution retirement savings plan for all
full-time employees who have at least one year of continuous employment and
1,000 hours of service. The Company contributes amounts equal to 50% of each
eligible employee's voluntary contributions. For purposes of determining the
Company's required contribution to the plan, the employee's voluntary
contributions cannot exceed 6% of the employee's qualified compensation. The
Company's contribution to the plan for the years ended November 30, 1997, 1996
and 1995 amounted to approximately $1.6 million, $1.0 million and $1.0 million,
respectively.
F-32
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
LONG-TERM INCENTIVE PLAN
In 1994, the Company adopted a long-term incentive plan for key employees.
Under the plan, incentives are accrued based upon annual operating results;
however, ultimate payment of these incentives is contingent upon the Company
attaining certain financial objectives over consecutive and concurrent
three-year periods. As of November 30, 1997 and 1996, the amount due to plan
participants was approximately $1.0 million and $782,000, respectively.
DEFERRED COMPENSATION PLAN
In 1990, the Company established a non-qualified deferred compensation plan
for designated executives and outside directors. Individuals electing to
participate in this plan may voluntarily defer receipt of up to twenty-five
percent (25%) of the participant's annual compensation. The deferred
compensation is credited to each participant's account, and interest on such
amounts is added to the participant's account each quarter. The interest rate
paid on amounts deferred prior to calendar year 1995 is the prime rate at the
beginning of each quarter plus five percent (13.25% at November 30, 1997). The
interest rate paid on amounts deferred subsequent to December 31, 1994 is the
prime rate plus two and one-half percent (10.75% at November 30, 1997). The
Company is under no obligation to fund amounts under this plan, and such amounts
are unsecured and treated as general obligations of the Company. As of November
30, 1997 and 1996, the amount due participants in this plan was approximately
$2.3 million and $2.0 million, respectively.
POSTRETIREMENT BENEFITS
The Company provides postretirement medical benefits for certain key
executives and members of the Company's Board of Directors. These plans have
been accounted for in accordance with the provisions of SFAS No. 106--EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This statement
requires that the cost of these postretirement medical benefits be recognized
under the accrual method of accounting. As permitted by SFAS No. 106, the
Company has elected to amortize over a period of 20 years the accumulated
postretirement benefit obligation (transition obligation) related to prior
service costs. The components of the periodic expense for postretirement
benefits were as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost of benefits earned.......................... $ 75,219 $ 94,414 $ 70,372
Interest cost on liability............................... 56,907 55,338 47,470
Amortization of transition obligation.................... 12,197 12,197 12,197
Prior service cost....................................... 6,683 6,683 5,012
Loss..................................................... -- 3,136 1,766
---------- ---------- ----------
Net periodic postretirement benefit cost................. $ 151,006 $ 171,768 $ 136,817
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-33
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company's current policy is to fund the plan as covered benefits are
paid. The actuarial and recorded liabilities for postretirement benefits, none
of which have been funded, were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.............................................................................. $ 71,761 $ 35,433
Fully eligible active plan participants............................................... 104,182 97,139
Other active plan participants........................................................ 739,129 775,681
----------- -----------
915,072 908,253
Plan assets at fair value............................................................... -- --
----------- -----------
Accumulated postretirement benefit obligation in excess of plan assets.................. 915,072 908,253
Prior service cost not recognized in net periodic postretirement benefit cost........... (95,864) (102,547)
Unrecognized net gain (loss)............................................................ 13,589 (110,393)
Unrecognized transition obligation...................................................... (182,943) (195,140)
----------- -----------
Postretirement benefit liability recognized in the consolidated balance sheets.......... $ 649,854 $ 500,173
----------- -----------
----------- -----------
</TABLE>
A 6% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1997 and 1996. Increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of November 30, 1997 and 1996 by
approximately $142,000 and $139,000 , respectively, and increase the service and
interest cost components of net periodic postretirement benefit cost by
approximately $23,000 and $26,000, respectively. The weighted-average discount
rate used to estimate the accumulated postretirement benefit obligation at
November 30, 1997 and 1996 was 7.25%.
SUPPLEMENTAL RETIREMENT PLANS
The Company provides noncontributory supplemental executive retirement plans
for certain key executives. Normal retirement under the supplemental executive
retirement plans is age 65, and participants receive benefits based on years of
service and compensation. The Company provides a noncontributory plan for
members of the Company's Board of Directors. Participants in the Board of
Directors plan receive benefits based on years of service, as a non-employee
director, upon retirement from the Board.
F-34
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet as of November 30, 1997 and 1996:
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $11,556,484 and
$10,024,952, respectively........................................................ $ 12,038,065 $ 10,662,987
------------- -------------
------------- -------------
Projected benefit obligation for service rendered to date.......................... $ 15,133,038 $ 13,660,863
Plan assets at fair value.......................................................... -- --
------------- -------------
Projected benefit obligation in excess of plan assets.............................. 15,133,038 13,660,863
Unrecognized net loss.............................................................. (2,639,993) (2,586,914)
Prior service cost not yet recognized in net periodic pension cost................. (1,649,152) (1,862,149)
Unrecognized net obligation at adoption date....................................... (1,714,122) (1,885,821)
------------- -------------
Accrued pension cost recognized.................................................... $ 9,129,771 $ 7,325,979
------------- -------------
------------- -------------
Additional liability and intangible asset:
Accumulated benefit obligation..................................................... $ 12,038,065 $ 10,662,987
Less: Plan assets at fair value.................................................... -- --
------------- -------------
Unfunded accumulated benefit obligation............................................ 12,038,065 10,662,987
Less: Accrued pension cost......................................................... (9,129,771) (7,325,979)
------------- -------------
Additional liability............................................................... $ 2,908,294 $ 3,337,008
------------- -------------
------------- -------------
Intangible asset--limited to unrecognized net obligation plus prior service cost... $ 2,908,294 $ 3,337,008
------------- -------------
------------- -------------
</TABLE>
Pension cost consists of the following components:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost--benefits earned during the period......................... $ 502,946 $ 425,334 $ 286,453
Interest cost on projected benefit obligation........................... 987,746 907,147 835,627
Return on plan assets................................................... -- -- --
Net amortization and deferral........................................... 496,173 517,165 451,468
------------ ------------ ------------
Net periodic pension cost............................................... $ 1,986,865 $ 1,849,646 $ 1,573,548
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The projected benefit obligation for November 30, 1997 and 1996 was
determined using an assumed discount rate of 7.25% and an assumed salary
increase rate of 5%. The Company has recorded additional liabilities of
$2,908,294 and $3,337,008, and intangible assets of $2,908,294 and $3,337,008 as
of November 30, 1997 and 1996, respectively. As of November 30, 1997 and 1996, a
liability of approximately $12.0
F-35
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
and $10.6 million, respectively, is included in the consolidated balance sheets
under the caption "Other liabilities" for the above plan.
SELF INSURED PLANS
The Company is self insured for employee medical coverage and workers'
compensation for the benefit of its employees. Estimated accrued obligations for
claims under these self-insured plans as of November 30, 1997 and 1996 were
approximately $2.4 million and $1.6 million, respectively. The Company's maximum
liability under both plans is limited by stop-loss agreements with insurance
companies.
9. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
In connection with regulatory requirements, the Company was required to
issue irrevocable standby letters of credit to guarantee the Company's
obligation to satisfy a progressive slot machine jackpot payout and guarantee
payment of workers' compensation benefits. Outstanding standby letters of credit
as of November 30, 1997 were as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION DATE
------------ -----------------
<S> <C> <C>
Gaming Patron................................................................... $ 430,476 March 31, 1998
St. Paul Fire and Marine (workers' compensation)................................ 812,500 April 15, 1998
------------
$ 1,242,976
------------
------------
</TABLE>
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements, each of which expires
prior to November 30, 2002, with certain key executives. The employment
agreements provide for, among other things, annual base compensation,
participation in bonus plans, certain stock grants and stock option provisions.
EMPLOYEE MEALS AND PAYROLL TAXES
On September 30, 1997, the United States Tax Court issued an adverse ruling
applicable to hotels and casinos which provide meals to employees. The Tax Court
ruled that nonqualifying employees are required to recognize income based upon
the fair value of the meals received in excess of the amount paid by the
employee. Accordingly, employers may be liable for withholding and payroll taxes
associated with the fair value of the meals provided to employees in excess of
the amount paid by the employee. At this time it is uncertain whether or not the
Company will be liable for withholding and payroll taxes related to the income
excluded from nonqualifying employee wages for the meals it has provided.
CLAIMS AND LEGAL ACTIONS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, all pending matters
are either adequately covered by insurance or if not covered by insurance, will
not have a material adverse effect on the Company's financial statements taken
as a whole.
F-36
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM RELATED PARTY TRUST
Jessica L. Ledbetter, Kirk B. Ledbetter and Franklin K. Rahbeck, all
directors of the Company, and Wells Fargo Bank, National Association are the
co-trustees of the William B. Ledbetter and Beverlee A. Ledbetter Irrevocable
Trust ("the Trust"). The Trust owns survivorship life insurance policies on the
lives of William B. Ledbetter and Beverlee A. Ledbetter, deceased. William B.
Ledbetter is an officer and director of the Company and until her death on
September 12, 1995, Beverlee A. Ledbetter was the largest shareholder of the
Company. Prior to fiscal 1995, the Company had paid premiums on the life
insurance policies owned by the Trust. The Company has no further obligation to
pay such premiums. The Trust has issued two notes payable to the Company for the
amounts of the premiums previously paid by the Company. The notes are in the
principal amounts of $1,376,995 and $455,272 and bear interest at the rate of
5.84% and 6.30%, respectively. Interest on the notes is payable on December 31
of each year and the entire unpaid principal amount becomes due on the earlier
of November 15, 2001 or the death of William B. Ledbetter.
11. SALE OF INTERESTS IN UNCONSOLIDATED AFFILIATE
Until October 24, 1997, the Company owned a 40% equity interest in HRHC. The
Company accounted for this investment on the equity method. Pursuant to a
management agreement between HRHC and HLVMC, relating to the management and
operations of the Hard Rock Hotel and Casino owned by HRHC (the "Management
Agreement"), the Company earned a base management fee from HRHC of 4% of
adjusted gross revenue, as defined in the Management Agreement, and up to an
additional 2% of adjusted gross revenue if certain financial targets were met.
On October 24, 1997, the Company sold all of the capital stock of HRHC held
by the Company, representing 40% of the then outstanding capital stock of HRHC,
and all of the Company's rights under the Management Agreement. The capital
stock and the rights under the Management Agreement were sold to HRHC. The sale
closed pursuant to the terms of a Stock Purchase and Management Buyout Agreement
entered into on July 1, 1997 by and among the Company, HLVMC, Lily Pond
Investments, Inc., a Nevada corporation ("Lily Pond") and HRHC. Upon closing,
the Management Agreement terminated and a stockholders' agreement among the
Company, HRHC and Lily Pond was canceled.
The Company received $45.0 million cash for the capital stock and the
Company's rights under the Management Agreement. The Company received, in
addition, approximately $1.2 million cash in satisfaction of a note and other
amounts due the Company from HRHC as of October 24, 1997.
F-37
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SALE OF INTERESTS IN UNCONSOLIDATED AFFILIATE (CONTINUED)
Summarized balance sheet and statement of income information for HRHC as of
November 30, 1996, for the year ended November 30, 1996 and for the period from
December 1, 1996 through October 24, 1997 were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
1996
------------
<S> <C>
Summarized Balance Sheet Information (in thousands)
Current assets................................................................ $ 11,376
Land, building and equipment, net............................................. 84,466
Other assets.................................................................. 11,792
------------
Total assets................................................................ 107,634
------------
Current liabilities........................................................... 20,950
Long-term debt................................................................ 55,922
------------
Total liabilities........................................................... 76,872
------------
Net assets.................................................................. $ 30,762
------------
------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
OCTOBER 24, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Summarized Statement of Income Information (in thousands)
Revenues....................................................... $ 68,699 $ 77,289
Operating income............................................... 11,323 12,663
Net income..................................................... 4,295 4,467
</TABLE>
12. SUBSEQUENT EVENT (UNAUDITED)
On February 1, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, the Company
has agreed to merge with Harveys Acquisition Corporation, a Delaware corporation
which is an affiliate of Colony Investors III, L.P., a Delaware limited
partnership and controlled affiliate of Colony Capital, Inc. of Los Angeles,
California ("Colony Capital"). Upon closing of the transaction contemplated by
the Merger Agreement, the Company will be an affiliate of Colony Capital. The
all-cash transaction values each of the approximately 10.8 million fully diluted
common shares of the Company at $28. Closing of the merger is subject to a
number of conditions, including approval by the stockholders of at least
two-thirds of the Company's common stock and receipt of all necessary regulatory
approvals, including the approvals of Nevada, Colorado and Iowa gaming
authorities. Stockholders owning approximately 41% of the Company's outstanding
common stock, including the Company's largest stockholder, have agreed to vote
in favor of the transaction. If the merger has not closed by September 1, 1998,
the Company's stockholders would receive additional consideration under certain
circumstances.
If the merger is consummated, under the terms of the Indenture each holder
of the Senior Subordinated Notes will have the right to require the Company to
repurchase such holder's Senior Subordinated Notes at 101% of the principal
amount plus accrued and unpaid interest to the repurchase date. See Note 4.
F-38
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited selected quarterly financial
information for each quarter of fiscal 1997 and 1996. This information, in the
opinion of management, includes only normal recurring adjustments necessary for
a fair representation of the information set forth therein. The operating
results for any quarter are not indicative of results for any future period.
Quarterly results may not be comparative due to the seasonal nature of
operations.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1997
Revenue............................................................. $ 58,554 $ 71,709 $ 83,676 $ 69,624
Operating income.................................................... 4,599 11,560 17,995 7,126
Income before income taxes (a)...................................... 7 6,683 12,981 30,002
Net income (a)...................................................... 4 3,978 7,724 19,068
Net income per common share (a) (b)................................. $ 0.00 $ 0.40 $ 0.78 $ 1.93
Fiscal 1996
Revenue............................................................. $ 49,474 $ 59,380 $ 74,249 $ 64,647
Operating income.................................................... 895 8,147 15,198 9,781
Income (loss) before income taxes and extraordinary item............ (896) 5,049 10,533 4,918
Extraordinary item, net of tax...................................... -- (141) (380) --
Net income (loss)................................................... (576) 3,003 5,905 2,961
Net income (loss) per common share (b)..............................
Income (loss) before extraordinary item........................... $ (0.06) $ 0.33 $ 0.64 $ 0.30
Extraordinary item, net of tax.................................... -- (0.02) (0.04) --
Net income (loss) per common share................................ $ (0.06) $ 0.31 $ 0.60 $ 0.30
</TABLE>
- ------------------------
(a) Income before income taxes, net income and net income per common share for
the fourth quarter of fiscal 1997 include the effect of the gain recognized
on the sale of the Company's interests in the Hard Rock Hotel and Casino.
The gain on the transaction was approximately $27.4 million, before income
taxes, and approximately $17.4 million on an after-tax basis.
(b) Net income (loss) per share calculations for each quarter are based on the
weighted average number of common stock and common stock equivalents
outstanding during the respective quarters; accordingly, the sum of the
quarters does not equal the full-year income per share.
F-39
<PAGE>
HARVEYS CASINO RESORTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................ $ 78,245 $ 55,035
Accounts and notes receivable, net................................................... 5,652 5,264
Prepaid expenses..................................................................... 4,033 3,447
Other current assets................................................................. 4,517 4,310
---------- ------------
Total current assets............................................................... 92,447 68,056
Property and equipment (net of accumulated depreciation of $141,565 and $128,110)...... 316,658 318,270
Notes receivable--related parties...................................................... 1,876 1,876
Other assets........................................................................... 15,664 15,263
---------- ------------
Total assets....................................................................... $ 426,645 $ 403,465
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.................................................... $ 11 $ 633
Accounts and contracts payable....................................................... 6,044 5,991
Income taxes payable................................................................. 5,948 7,056
Accrued interest payable............................................................. 4,153 175
Accrued expenses..................................................................... 22,518 20,770
---------- ------------
Total current liabilities.......................................................... 38,674 34,625
Long-term debt, net of current portion................................................. 150,209 150,220
Deferred income taxes.................................................................. 23,023 23,023
Other liabilities...................................................................... 18,131 16,240
---------- ------------
Total liabilities.................................................................. 230,037 224,108
---------- ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued............ -- --
Common stock, $.01 par value; 30,000,000 shares authorized; shares issued 10,079,671
and 9,853,488...................................................................... 101 99
Additional paid-in capital and other................................................. 43,483 39,043
Retained earnings.................................................................... 153,267 140,415
Treasury stock, at cost; 14,155 shares and 12,516 shares............................. (243) (200)
---------- ------------
Total stockholders' equity......................................................... 196,608 179,357
---------- ------------
Total liabilities and stockholders' equity......................................... $ 426,645 $ 403,465
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
HARVEYS CASINO RESORTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues
Casino........................................................................... $ 183,501 $ 162,397
Lodging.......................................................................... 26,157 24,659
Food and beverage................................................................ 35,479 33,380
Other............................................................................ 5,583 5,267
Management fees and joint venture................................................ -- 3,920
Less: Casino promotional allowances.............................................. (17,763) (16,092)
------------- -------------
Total net revenues............................................................. 232,957 213,531
------------- -------------
Costs and expenses
Casino........................................................................... 86,310 75,168
Lodging.......................................................................... 10,299 10,051
Food and beverage................................................................ 22,664 22,595
Other operating.................................................................. 2,230 2,145
Selling, general and administrative.............................................. 58,766 55,432
Depreciation and amortization.................................................... 15,641 13,987
Merger related costs............................................................. 1,103 --
------------- -------------
Total costs and expenses....................................................... 197,013 179,378
------------- -------------
Operating income................................................................... 35,944 34,153
------------- -------------
Other income (expense)
Interest income.................................................................. 1,495 245
Interest expense................................................................. (13,390) (14,776)
Other, net....................................................................... (123) 49
------------- -------------
Total other income (expense)................................................... (12,018) (14,482)
------------- -------------
Income before income taxes......................................................... 23,926 19,671
Income tax provision............................................................... (9,571) (7,965)
------------- -------------
Net income......................................................................... $ 14,355 $ 11,706
------------- -------------
------------- -------------
Income per common share
Basic............................................................................ $ 1.43 $ 1.19
------------- -------------
------------- -------------
Diluted.......................................................................... $ 1.41 $ 1.19
------------- -------------
------------- -------------
Dividends declared per common share.............................................. $ 0.15 $ 0.15
------------- -------------
------------- -------------
Weighted average common shares used in calculating income
per common share
Basic............................................................................ 10,009,086 9,822,667
------------- -------------
------------- -------------
Diluted.......................................................................... 10,213,456 9,835,297
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
HARVEYS CASINO RESORTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................................................. $ 14,355 $ 11,706
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization......................................................... 15,641 13,987
Other, net............................................................................ 5,062 14,165
---------- ----------
Net cash provided by operating activities........................................... 35,058 39,858
---------- ----------
Cash flows from investing activities
Capital expenditures.................................................................... (13,040) (22,114)
Proceeds from disposition of assets..................................................... 98 3,674
Other, net.............................................................................. -- (45)
---------- ----------
Net cash used in investing activities............................................... (12,942) (18,485)
---------- ----------
Cash flows from financing activities
Principal payments on long-term debt.................................................... (633) (26,049)
Dividends paid.......................................................................... (1,503) (1,474)
Proceeds from long-term debt............................................................ -- 11,014
Exercise of options to purchase stock................................................... 3,382 388
Other, net.............................................................................. (152) (325)
---------- ----------
Net cash used in financing activities............................................... 1,094 (16,446)
---------- ----------
Increase in cash and cash equivalents..................................................... 23,210 4,927
Cash and cash equivalents at beginning of period.......................................... 55,035 21,121
---------- ----------
Cash and cash equivalents at end of period................................................ $ 78,245 $ 26,048
---------- ----------
---------- ----------
Supplemental cash flows disclosure
Cash paid for interest, net of amounts capitalized...................................... $ 8,513 $ 10,104
Cash paid for income taxes.............................................................. 9,755 663
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CONSOLIDATION
Harveys Casino Resorts, a Nevada corporation, (the "Company") is engaged in
the casino entertainment industry. Through its wholly-owned subsidiary, Harveys
Tahoe Management Company, Inc. ("HTMC"), the Company owns and operates Harveys
Resort Hotel/Casino on the south shore of Lake Tahoe, Nevada. The Company,
through its wholly-owned subsidiary, Harveys C. C. Management Company, Inc.
("HCCMC"), owns and operates Harveys Wagon Wheel Hotel/Casino in Central City,
Colorado. Until October 24, 1997, the Company, through its wholly-owned
subsidiary, Harveys L.V. Management Company, Inc. ("HLVMC"), owned 40% of the
equity interest in Hard Rock Hotel, Inc. ("HRHC"), which owns the Hard Rock
Hotel and Casino in Las Vegas, Nevada. HLVMC had a contract to manage the Las
Vegas hotel and casino. On October 24, 1997 the Company sold its 40% equity
interest and its interest in the management contract to HRHC. Additionally, the
Company's wholly-owned subsidiary, Harveys Iowa Management Company, Inc.
("HIMC") is the owner and operator of Harveys Casino Hotel, a riverboat casino,
hotel and convention center complex in Council Bluffs, Iowa.
The condensed consolidated financial statements include the accounts of
Harveys Casino Resorts and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The condensed consolidated balance sheet as of November 30, 1997 has been
prepared from the audited financial statements at that date. The accompanying
condensed consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial condition,
results of operations and cash flows have been included. The results of
operations for the interim periods should not be considered indicative of
results for a full fiscal year. These financial statements should be read in
conjunction with the financial statements, and notes thereto, in the Company's
Annual Report on Form 10-K for the year ended November 30, 1997.
2. PROPOSED MERGER
At the Company's annual meeting of stockholders, held May 14, 1998, the
Company's stockholders voted to adopt an Agreement and Plan of Merger, dated as
of February 1, 1998 (the "Merger Agreement") and approved the merger described
therein (the "Merger"). Pursuant to the Merger Agreement, the Company has agreed
to merge with Harveys Acquisition Corporation, a Delaware corporation which is
an affiliate of Colony Investors III, L.P., a Delaware limited partnership and
an affiliate of Colony Capital, Inc. of Los Angeles, California ("Colony
Capital"). Upon closing of the Merger, the Company will be an affiliate of
Colony Capital. The all-cash transaction values each of the approximately 10.1
million outstanding common shares of the Company at $28 and each of the
approximately 0.7 million common shares of the Company underlying outstanding
options to purchase common shares at $28 less the option exercise price per
share. Closing of the Merger is subject to a number of conditions, including
receipt of all necessary regulatory approvals, including those of Nevada,
Colorado and Iowa gaming authorities. The Company's stockholders may receive
additional consideration under certain circumstances. The additional
consideration would be an amount in cash, without interest, equal to the
difference, if positive, of (a) the product of (i) $1.96 times (ii) a fraction
the numerator of which shall be the number of days elapsed from and including
September 1, 1998 to and excluding the date the Merger closes and the
denominator of
F-43
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPOSED MERGER (CONTINUED)
which shall be 365, minus (b) the quotient of (1) the aggregated amount of all
cash dividends paid on the Company's common stock during the period from and
including September 1, 1998 to and excluding the date the Merger closes, divided
by (2) the number of shares of the Company's common stock upon which the cash
consideration is to be paid plus the number of shares of the Company's common
stock underlying the stock options to acquire the Company's common stock upon
which the cash consideration is to be paid.
3. NET INCOME PER COMMON SHARE
As of December 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. The Company
has restated the prior periods net income per common share to conform with the
provisions of SFAS No. 128. Basic net income per common share is calculated by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is calculated by dividing
net income by the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares include restricted stock
and stock options outstanding and exercisable for the purpose of calculating
diluted net income per common share. The Company has no other potentially
dilutive securities.
A reconciliation of net income and shares for basic and diluted net income
per common share follows (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED AUGUST 31, 1998 ENDED AUGUST 31, 1997
------------------------------------ ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ------------ ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per common share........... $ 7,932 10,065,851 $ 0.79 $ 7,724 9,832,206 $ 0.79
----- -----
----- -----
Effect of dilutive securities............... 199,176 19,237
--------- ------------ --------- ----------
Diluted net income per common share......... $ 7,932 10,265,027 $ 0.77 $ 7,724 9,851,443 $ 0.78
--------- ------------ ----- --------- ---------- -----
--------- ------------ ----- --------- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED AUGUST 31, 1998 ENDED AUGUST 31, 1997
------------------------------------ ----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ------------ ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic net income per common share......... $ 14,355 10,009,086 $ 1.43 $ 11,706 9,822,667 $ 1.19
----- -----
----- -----
Effect of dilutive securities............. 204,370 12,630
--------- ------------ --------- ----------
Diluted net income per common share....... $ 14,355 10,213,456 $ 1.41 $ 11,706 9,835,297 $ 1.19
--------- ------------ ----- --------- ---------- -----
--------- ------------ ----- --------- ---------- -----
</TABLE>
4. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, which
establishes new standards for determining a reportable segment and for
disclosing information regarding each such segment. A reportable segment is an
operating segment: (a) that engages in business activities from which it earns
revenues and incurs expenses, (b) whose operating results are regularly reviewed
by the enterprise's chief operating decision
F-44
<PAGE>
HARVEYS CASINO RESORTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
maker in deciding how to allocate resources and in assessing performance, (c)
for which discrete financial information is available, and (d) that exceeds
specific quantitative thresholds. SFAS No. 131 will be effective for the Company
beginning December 1, 1998. On adoption, and to the extent practicable, segment
information for earlier comparative periods will be restated. The Company
anticipates, with the adoption of SFAS No. 131, it will expand its segment
disclosures relative to its Nevada, Colorado and Iowa operations. The Company
believes the segment information required to be disclosed under SFAS No. 131
will have no effect on the Company's consolidated results of operations,
financial position or cash flows, but will be more comprehensive than previously
provided, including expanded disclosure of income statement and balance sheet
items for each of its reportable operating segments.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued Statement of Position ("SOP") 98-5,
Reporting on the Costs of Start-Up Activities. SOP 98-5 requires costs of
start-up activities (commonly referred to as pre-opening costs in the gaming
industry) to be expensed as incurred. The Company will be required to adopt SOP
98-5 beginning December 1, 1999, although earlier adoption is encouraged. On
adoption, restatement of previously issued financial statements will not be
permitted. The initial effect of adopting SOP 98-5 will be reported as the
cumulative effect of a change in accounting principle. The Company has not yet
determined if it will elect to adopt SOP 98-5 early nor has it determined what
effect, if any, the adoption of SOP 98-5 will have on the financial position or
results of operations of the Company.
5. SUBSIDIARY GUARANTORS
The 10 5/8% Senior Subordinated Notes due 2006 (the "Senior Subordinated
Notes"), issued by the Company are guaranteed by all direct and indirect
subsidiaries of the Company (the "Subsidiary Guarantors") except for
subsidiaries which are inconsequential. The guarantees are full and
unconditional and are joint and several. The aggregate assets, liabilities,
earnings, and equity of the Subsidiary Guarantors are substantially equivalent
to the assets, liabilities, earnings, and equity of the Company on a
consolidated basis. Separate financial statements and other disclosures
concerning the Subsidiary Guarantors have not been included because management
has determined they are not material to investors. If the Merger is consummated
(see Note 2), under the terms of the Indenture governing the Senior Subordinated
Notes, each holder of the Senior Subordinated Notes will have the right to
require the Company to repurchase such holder's Senior Subordinated Notes at
101% of the principal amount plus accrued and unpaid interest to the repurchase
date.
F-45
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of February 1, 1998 by and between Harveys Acquisition
Corporation, a Nevada corporation, and Harveys Casino Resorts, a Nevada corporation*
3.1 Articles of Incorporation of Harveys Acquisition Corporation*
3.2 Form of Amended and Restated Bylaws of Harveys Acquisition Corporation
4.1 Form of stock certificate*
10.1 Memorandum of Understanding dated February 1, 1998 among Harveys Acquisition Corporation, a Nevada
corporation, Charles W. Scharer, Stephen L. Cavallaro and John L. McLaughlin*
10.2 Voting and Profit Sharing Agreement dated as of February 1, 1998 by and among Harveys Acquisition
Corporation and the individuals and entities signatory thereto*
10.3 Noncompetition and Trade Secret Agreement dated as of February 1, 1998 by and among Harveys Acquisition
Corporation and the individuals signatory thereto*
10.4 Form of Director and Officer Indemnification Agreement
27.1 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed
<PAGE>
FORM OF
AMENDED AND RESTATED
BYLAWS OF
HARVEYS ACQUISITION CORPORATION
ARTICLE I
OFFICES
SECTION 1.01 REGISTERED OFFICE. The registered office of the corporation
shall be in the City of Las Vegas, County of Clark, State of Nevada. The
corporation may, from time to time, in the manner provided by law, change the
registered office within the State of Nevada.
SECTION 1.02 OTHER OFFICES. The corporation may also maintain an office
or offices at such other places within or without the State of Nevada as the
Board of Directors may form time to time determine or the business of the
corporation may require.
ARTICLE II
STOCKHOLDERS
SECTION 2.01 ANNUAL MEETING. The annual meeting of stockholders shall be
held each year on a date and time designated by the Board of Directors. Any
previously scheduled annual meeting of the stockholders may be postponed by
resolution of the Board of Directors upon public notice given prior to the date
previously scheduled for such annual meeting of the stockholders.
SECTION 2.02 SPECIAL MEETINGS.
(a) Except as otherwise required by law and subject to the rights of
the holders of Preferred Stock, special meetings of stockholders may be called
only by the Board of Directors pursuant to a resolution approved by a majority
of the entire Board of Directors, the chairman of the board, chief executive
officer, or president. Each special meeting shall be held at such date, time
and place either within or without the State of Nevada as shall be designated by
the Board of Directors at least ten (10) days prior to such meeting.
(b) No business shall be acted upon at a special meeting except as
set forth in the notice calling the meeting, unless one of the conditions for
the holding of a meeting without notice set forth in Section 2.05 shall be
satisfied, in which case any business (except as noted in Section 2.12
immediately below) may be transacted and the meeting shall be valid for all
purposes.
SECTION 2.03 PLACE OF MEETINGS. Any meeting of the stockholders of the
corporation may be held at its registered office in the State of Nevada or at
such other place in or out of the United States as the Board of Directors may
designate. A waiver of notice signed by stockholders entitled to vote may
designate any place for the holding of such meeting.
-1-
<PAGE>
SECTION 2.04 NOTICE OF MEETINGS.
(a) The president, a vice president, the secretary, an assistant
secretary or any other individual designated by the Board of Directors shall
sign and deliver written notice of any meeting at least ten (10) days, but not
more than sixty (60) days, before the date of such meeting. The notice shall
state the place, date and time of the meeting and the purpose or purposes for
which the meeting is called.
(b) In the case of an annual meeting, subject to Section 2.12, any
proper business may be presented for action, except that action on any of the
following items shall be taken only if the general nature of the proposal is
stated in the notice:
(1) Action with respect to any contract or transaction between
the corporation and one or more of its directors or officers or between the
corporation and any corporation, firm or association in which one or more of the
corporation's directors or officers is a director or officer or is financially
interested;
(2) Adoption of amendments to the Articles of Incorporation; or
(3) Action with respect to a merger, share exchange,
reorganization, partial or complete liquidation, or dissolution of the
corporation.
(c) A copy of the notice shall be personally delivered or mailed
postage prepaid to each stockholder of record entitled to vote at the meeting at
the address appearing on the records of the corporation, and the notice shall be
deemed delivered the date the same is deposited in the United States mail for
transmission to such stockholder. If the address of any stockholder does not
appear upon the records of the corporation, it will be sufficient to address any
notice to such stockholder at the registered office of the corporation.
(d) The written certificate of the individual signing a notice of
meeting, setting forth the substance of the notice or having a copy thereof
attached, the date the notice was mailed or personally delivered to the
stockholders and the addresses to which the notice was mailed, shall be prima
facie evidence of the manner and fact of giving such notice.
(e) Any stockholder may waive notice of any meeting by a signed
writing, either before or after the meeting.
SECTION 2.05 MEETING WITHOUT NOTICE.
(a) Whenever all persons entitled to vote at any meeting consent,
either by:
(1) A writing on the records of the meeting or filed with the
secretary; or
-2-
<PAGE>
(2) Presence at such meeting and oral consent entered on the
minutes; or
(3) Taking part in the deliberations at such meeting without
objection;
The doings of such meeting shall be as valid as if had at a meeting regularly
called and noticed.
(b) At such meeting any business may be transacted which is not
excepted from the written consent or to the consideration of which no objection
for want of notice is made at the time.
(c) If any meeting be irregular for want of notice or of such
consent, provided a quorum was present at such meeting, the proceedings of the
meeting may be ratified and approved and rendered likewise valid and the
irregularity or defect therein waived by a writing signed by all parties having
the right to vote at such meeting.
(d) Such consent or approval may be by proxy or power of attorney,
but all such proxies and powers of attorney must be in writing.
SECTION 2.06 DETERMINATION OF STOCKHOLDERS OF RECORD.
(a) For the purpose of determining the stockholders entitled to
notice of and to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any distribution or the allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion,
or exchange of stock or for the purpose of any other lawful action, the
directors may fix, in advance, a record date, which shall not be more than sixty
(60) days nor less than ten (10) days before the date of such meeting, nor more
than sixty (60) days prior to any other action.
(b) If no record date is fixed, the record date for determining
stockholders: (i) entitled to notice of and to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held and (ii) for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 2.07 QUORUM; ADJOURNED MEETINGS.
(a) Unless the Articles of Incorporation provide for a different
proportion, stockholders holding at least a majority of the voting power of the
corporation's stock, represented in person or by proxy, are necessary to
constitute a quorum for the transaction of
-3-
<PAGE>
business at any meeting. If, on any issue, voting by classes is required by
the laws of the State of Nevada, the Articles of Incorporation or these
Bylaws, at least a majority of the voting power within each such class is
necessary to constitute a quorum of each such class.
(b) If a quorum is not represented, a majority of the voting power so
represented may adjourn the meeting from time to time until holders of the
voting power required to constitute a quorum shall be represented. At any such
adjourned meeting at which a quorum shall be represented, any business may be
transacted which might have been transacted as originally called. When a
stockholders' meeting is adjourned to another time or place hereunder, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. The stockholders
present at a duly convened meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum of the voting power.
SECTION 2.08 VOTING.
(a) Unless otherwise provided in the Articles of Incorporation, or in
the resolution providing for the issuance of the stock adopted by the Board of
Directors pursuant to authority expressly vested in it by the provisions of the
Articles of Incorporation, each stockholder of record, or such stockholder's
duly authorized proxy or attorney-in-fact, shall be entitled to one (1) vote for
each share of voting stock standing registered in such stockholder's name on the
record date. No stockholder of the corporation shall be entitled to cumulative
voting for the election of directors.
(b) Except as otherwise provided herein, all votes with respect to
shares standing in the name of an individual on the record date (included
pledged shares) shall be cast only by that individual or such individual's duly
authorized proxy, attorney-in-fact, or voting trustee(s) pursuant to a voting
trust. With respect to shares held by a representative of the estate of a
deceased stockholder, guardian, conservator, custodian or trustee, votes may be
cast by such holder upon proof of capacity, even though the shares do not stand
in the name of such holder. In the case of shares under the control of a
receiver, the receiver may cast votes carried by such shares even though the
shares do not stand in the name of the receiver; provided, that the order of the
court of competent jurisdiction which appoints the receiver contains the
authority to cast votes carried by such shares. If shares stand in the name of
a minor, votes may be cast only by the duly appointed guardian of the estate of
such minor if such guardian has provided the corporation with written proof of
such appointment.
(c) With respect to shares standing in the name of another
corporation, partnership, limited liability company or other legal entity on the
record date, votes may be cast: (i) in the case of a corporation, by such
individual as the bylaws of such other corporation prescribe, by such individual
as may be appointed by resolution of the board of directors of such other
corporation or by such individual (including the officer making the
authorization) authorized in writing to do so by the chairman of the board of
directors, president or any vice-president of such corporation and (ii) in the
case of a partnership, limited liability company
-4-
<PAGE>
or other legal entity, by an individual representing such stockholder upon
presentation to the corporation of satisfactory evidence of his authority to
do so.
(d) Notwithstanding anything to the contrary herein contained, no
votes may be cast for shares owned by this corporation or its subsidiaries, if
any. If shares are held by this corporation or its subsidiaries, if any, in a
fiduciary capacity, no votes shall be cast with respect thereto on any matter
except to the extent that the beneficial owner thereof possesses and exercises
either a right to vote or to give the corporation holding the same binding
instructions on how to vote.
(e) Any holder of shares entitled to vote on any matter may cast a
portion of the votes in favor of such matter and refrain from casting the
remaining votes or cast the same against the proposal, except in the case of
elections of directors. If such holder entitled to vote fails to specify the
number of affirmative votes, it will be conclusively presumed that the holder is
casting affirmative votes with respect to all shares held.
(f) With respect to shares standing in the name of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a stockholder voting agreement
or otherwise and shares held by two or more persons (including proxy holders)
having the same fiduciary relationship in respect to the same shares, votes may
be cast in the following manner:
(1) If only one person votes, the vote of such person binds all.
(2) If more than one person casts votes, the act of the majority
so voting binds all.
(3) If more than one person casts votes, but the vote is evenly
split on a particular matter, the votes shall be deemed cast proportionately, as
split.
(g) If a quorum is present, unless the Articles of Incorporation
provide for a different proportion, the affirmative vote of holders of at least
a majority of the voting power represented at the meeting and entitled to vote
on any matter shall be the act of the stockholders, unless voting by classes is
required for any action of the stockholders by the laws of the State of Nevada,
the Articles of Incorporation or these Bylaws, in which case the affirmative
vote of holders of a least a majority of the voting power of each such class
shall be required.
SECTION 2.09 PROXIES. At any meeting of stockholders, any holder of
shares entitled to vote may designate, in a manner permitted by the laws of the
State of Nevada, another person or persons to act as a proxy or proxies. No
proxy is valid after the expiration of six (6) months from the date of its
creation, unless it is coupled with an interest or unless otherwise specified in
the proxy. In no event shall the term of a proxy exceed seven (7) years from
the date of its
-5-
<PAGE>
creation. Every proxy shall continue in full force and effect until its
expiration or revocation in a manner permitted by the laws of the State of
Nevada.
SECTION 2.10 ORDER OF BUSINESS. At the annual stockholder's meeting, the
regular order of business shall be as follows:
1. Determination of stockholders present and existence of quorum, in
person or by proxy;
2. Reading and approval of the minutes of the previous meeting or
meetings;
3. Reports of the Board of Directors, and, if any, the president,
treasurer and secretary of the corporation;
4. Reports of committees;
5. Election of directors;
6. Unfinished business;
7. New business;
8. Adjournment.
SECTION 2.11 ABSENTEES' CONSENT TO MEETINGS. Transactions of any meeting
of the stockholders are as valid as though had at a meeting duly held after
regular call and notice if a quorum is represented, either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not represented in person or by proxy (and those who, although present,
either object at the beginning of the meeting to the transaction of any business
because the meeting has not been lawfully called or convened or expressly object
at the meeting to the consideration of matters not included in the notice which
are legally required to be included therein), signs a written waiver of notice
and/or consent to the holding of the meeting or an approval of the minutes
thereof. All such waivers, consents, and approvals shall be filed with the
corporate records and made a part of the minutes of the meeting. Attendance of
a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person objects at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters not properly included in the notice if
such objection is expressly made at the time any such matters are presented at
the meeting. Neither the business to be transacted at nor the purpose of any
regular or special meeting of stockholders need be specified in any written
waiver of notice or consent, except as otherwise provided in Section 2.04(a) and
(b) or Section 2.12 (if applicable) of these Bylaws.
-6-
<PAGE>
SECTION 2.12 BUSINESS TO BE CONDUCTED AT MEETING. At an annual or
special meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(b) brought before the meeting by or at the direction of the Board of Directors,
(c) properly brought before an annual meeting by a stockholder, or (d) if, and
only if, the notice of a special meeting provides for business to be brought
before the meeting by stockholders, properly brought before the meeting by a
stockholder who is a stockholder of record at the time of serving of the notice
pursuant to Section 2.04, who shall be entitled to vote at such meeting and who
complies with the notice procedures set forth in this Section 2.12. For
business to be properly brought before a meeting by a stockholder pursuant to
the preceding clauses (c) or (d), the stockholder must have given timely notice
thereof in writing to the secretary of the corporation. To be timely, a
stockholder's notice must be delivered to, or mailed and received by, the
secretary at the principal executive office of the corporation not less than
thirty-five (35) days prior to the meeting; PROVIDED, HOWEVER, that in the event
less than forty-five (45) days notice or public disclosure of the date of the
meeting is given or made to the stockholders, notice by the stockholder to be
timely must be so received not later than the fifth (5th) day following the day
on which such notice of the date of the meeting was mailed or such disclosure
was made. In no event shall the public disclosure of an adjournment of an
annual or special meeting commence a new time period for the giving of
stockholder's notice as described above. A stockholder's notice to the
secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, and the name and address of the beneficial
owner, if any, on whose behalf the proposal is made, (c) the class and number of
shares of the corporation which are owned beneficially and of record by such
stockholder of record and by the beneficial owner, if any, on whose behalf the
proposal is made, and (d) any material interest of such stockholder of record
and the beneficial owner, if any, on whose behalf the proposal is made in such
business. Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 2.12. The presiding officer at the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
brought in accordance with this Section 2.12, and if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 2.12, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder with respect to the
matters set forth herein. As used herein, "public disclosure" shall mean
disclosure in a press release reported by the Dow Jones News Association, the
Associated Press, or comparable news service or in a document publicly filed
with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d)
of the Exchange Act.
-7-
<PAGE>
ARTICLE III
DIRECTORS
SECTION 3.01 NUMBER, ELECTION, TENURE, AND QUALIFICATIONS. Except as
otherwise fixed by resolution of the Board of Directors pursuant to the Articles
of Incorporation relating to the authorization of the Board of Directors to
provide by resolution for the issuance of Preferred Stock and to determine the
rights of the holders of such Preferred Stock to elect directors, the Board of
Directors shall consist of at least one (1) individual who shall be elected at
the annual meeting of the stockholders of the corporation and who shall hold
office for one (1) year or until his or her successor is elected and qualify. A
director need not be a stockholder of the corporation.
SECTION 3.02 CHANGE IN NUMBER. Subject to any limitation in the laws of
the State of Nevada, the Articles of Incorporation or these Bylaws, the number
of directors may be changed from time to time by resolution adopted by the Board
of Directors.
SECTION 3.03 REDUCTION IN NUMBER. No reduction in the number of
directors shall have the effect of removing any director prior to the expiration
of his term in office.
SECTION 3.04 NOMINATION OF DIRECTORS. Except as otherwise fixed by
resolution of the Board of Directors pursuant to the Articles of Incorporation
relating to the authorization of the Board of Directors to provide by resolution
for the issuance of Preferred Stock and to determine the rights of the holders
of such Preferred Stock to elect directors, nominations for the election of
directors may be made by the Board of Directors, by a committee appointed by the
board of directors, or by any stockholder of record at the time of giving of
notice provided for herein. However, any stockholder entitled to vote in the
election of directors as provided herein may nominate one or more persons for
election as directors at a meeting only if written notice of such stockholder's
intent to make such nomination or nominations has been delivered to or mailed
and received by the secretary of the corporation not later than, (a) with
respect to an election to be held at an annual meeting of stockholders, 120
calendar days in advance of the first anniversary of the date the corporation's
proxy statement was released to security holders in connection with the
preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that the
date of the annual meeting is changed by more than thirty (30) days from such
anniversary date, notice by the stockholder to be timely must be received not
later than the close of business on the tenth (10th) day following the earlier
of the day on which notice of the date of the meeting was mailed or public
disclosure was made, and (b) with respect to an election to be held at a special
meeting of stockholders for the election of directors, not earlier than the
close of business on the 90th day prior to such special meeting and not later
than the close of business on the later of the 60th day prior to such special
meeting or the tenth (10th) day following the day on which public disclosure is
first made of the date of the special meeting and the nominees proposed by the
board of directors to be elected at such a meeting. Notwithstanding any of
the foregoing to the contrary, in the event that the number of directors to be
elected by the Board of Directors of the corporation is increased and there is
no public disclosure by the corporation naming the nominees for director or
specifying the size of the increased Board of Directors at least seventy
-8-
<PAGE>
(70) days prior to the first anniversary of the date of the preceding year's
annual meeting, a stockholder's notice required hereunder shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary at the
principal executive office of the corporation not later than the close of
business on the tenth (10th) day following the earlier of day on which notice
of the meeting is mailed or such public disclosure is first made by the
corporation. In no event shall the public announcement of an adjournment of
an annual or special meeting commence a new time period for the giving of a
stockholder's notice as describe above. Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the corporation
entitled to vote at such meeting and intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the notice; (c)
the class and number of shares of the corporation which are beneficially
owned by such stockholder and also which are owned of record by such
stockholder; (d) as to the beneficial owner, if any, on whose behalf the
nomination is made, (i) the name and address of such person and (ii) the
class and number of shares of the corporation which are beneficially owned by
such person; (e) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (f) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had such nominee been nominated, or intended to be nominated, by
the Board of Directors; and (g) the written consent of each nominee to being
named as nominee in the proxy statement and to serving as a director of the
corporation if so elected. At the request of the Board of Directors, any
person nominated by the Board of Directors for election as a director shall
furnish to the secretary of the corporation, that information required to be
set forth in a stockholder's notice of nomination which pertains to the
nominee. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
As used herein, "public disclosure" shall have the meaning set forth in
Section 2.12. No person shall be eligible to serve as a director of the
corporation unless nominated in accordance with the procedures set forth in
this Section 3.04. The presiding officer at the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made
in accordance with the procedures prescribed by this Section 3.04, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions
hereof, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein.
SECTION 3.05 VACANCIES; NEWLY CREATED DIRECTORSHIPS. Except as otherwise
fixed by resolution of the Board of Directors pursuant to the Articles of
Incorporation relating to the authorization of the Board of Directors to provide
by resolution for the issuance of Preferred Stock and to determine the rights of
the holders of such Preferred Stock to elect directors, any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office, or other cause, and newly created
directorships resulting from any increase in the authorized number of directors,
may be filled only by a majority vote
-9-
<PAGE>
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the director(s) so chosen shall hold office (i) in
the case of the replacement of a director, during the remainder of the term
of office of the replaced director and (ii) in the case of an increase in the
number of directors, until the next annual meeting of stockholders at which
directors are elected, unless sooner displaced.
SECTION 3.06 REMOVAL OF DIRECTORS. Subject to any rights of the holders
of Preferred Stock, any director may be removed from office by the affirmative
vote of the holders of at least two-thirds (2/3rds) of the voting power of all
shares of the corporation entitled to vote generally in the election of
directors (voting as a single class).
SECTION 3.07 ANNUAL AND REGULAR MEETINGS. Immediately following the
adjournment of, and at the same place as, the annual or any special meeting of
the stockholders at which directors are elected other than pursuant to Section
3.06 of this Article, the Board of Directors, including directors newly elected,
shall hold its annual meeting without notice, other than this provision, to
elect officers and to transact such further business as may be necessary or
appropriate. The Board of Directors may provide by resolution the place, date,
and hour for holding regular meetings between annual meetings.
SECTION 3.08 SPECIAL MEETINGS. Except as otherwise required by law, and
subject to the rights, if any, of the holders of Preferred Stock, special
meetings of the Board of Directors may be called by the chairman, or if there be
no chairman, by the president or secretary and shall be called by the chairman,
the president or the secretary upon the request of any two (2) directors. If
the chairman, or if there be no chairman both the president and secretary,
refuses or neglects to call such special meeting, a special meeting may be
called by notice signed by any two (2) directors.
SECTION 3.09 PLACE OF MEETINGS. Any regular or special meeting of the
directors of the corporation may be held at such place as the Board of
Directors, or in the absence of such designation, as the notice calling such
meeting, may designate. A waiver of notice signed by directors may designate
any place for the holding of such meeting.
SECTION 3.10 NOTICE OF MEETINGS. Except as otherwise provided in Section
3.07, there shall be delivered to all directors, at least forty-eight (48) hours
before the time of such meeting, a copy of a written notice of any meeting by
delivery of such notice personally by mailing such notice postage prepaid or by
telegram. Such notice shall be addressed in the manner provided for notice to
stockholders in Section 2.04(c). If mailed, the notice shall be deemed
delivered two (2) business days following the date the same is deposited in the
United States mail, postage prepaid. Any director may waive notice of any
meeting, and the attendance of a director at a meeting and oral consent entered
on the minutes of the meeting or taking part in deliberations of the meeting
without objection shall constitute a waiver of notice of such meeting.
Attendance for the express purpose of objecting to the transaction of business
thereat because the meeting is not properly called or convened shall not
constitute presence nor a waiver of notice for purposes hereof.
-10-
<PAGE>
SECTION 3.11 QUORUM; ADJOURNED MEETINGS.
(a) A majority of the directors in office, at a meeting duly
assembled, is necessary to constitute a quorum for the transaction of business.
(b) At any meeting of the Board of Directors where a quorum is not
present, a majority of those present may adjourn, from time to time, until a
quorum is present, and no notice of such adjournment shall be required. At any
adjourned meeting where a quorum is present, any business may be transacted
which could have been transacted at the meeting originally called.
SECTION 3.12 BOARD OF DIRECTORS' DECISIONS. The affirmative vote of a
majority of the directors present at a meeting at which a quorum is present is
the act of the Board of Directors.
SECTION 3.13 TELEPHONIC MEETINGS. Members of the Board of Directors or
of any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or committee by means of a telephone
conference or similar method of communication by which all persons participating
in such meeting can hear each other. Participation in a meeting pursuant to
this Section 3.13 constitutes presence in person at the meeting.
SECTION 3.14 ACTION WITHOUT MEETING. Any action required or permitted to
be taken at a meeting of the Board of Directors or of a committee thereof may be
taken without a meeting if, before or after the action, a written consent
thereto is signed by all of the members of the Board of Directors or the
committee. The written consent may be signed in counterparts and must be filed
with the minutes of the proceedings of the Board of Directors or committee.
SECTION 3.15 POWERS AND DUTIES.
(a) Except as otherwise restricted in the laws of the State of Nevada
or the Articles of Incorporation, the Board of Directors has full control over
the affairs of the corporation. The Board of Directors may delegate any of its
authority to manage, control or conduct the business of the corporation to any
standing or special committee, as more fully set forth in Article V of these
Bylaws, or to any officer or agent and to appoint any persons to be agents of
the corporation with such powers, including the power to subdelegate, and upon
such terms as may be deemed fit.
(b) The Board of Directors may present to the stockholders at annual
meetings of the stockholders, and when called for by a majority vote of the
stockholders at an annual meeting or, subject to Section 2.12, a special meeting
of the stockholders shall so present, a full and clear report of the condition
of the corporation.
(c) The Board of Directors, in its discretion, or the officer of the
corporation presiding at a meeting of stockholders, in his discretion, may
require that any votes cast at such
-11-
<PAGE>
meeting shall be cast by written ballot and may submit any contract or act
for approval or ratification at any annual meeting of the stockholders or any
special meeting properly called for the purpose of considering any such
contract or act, provided a quorum is present.
SECTION 3.16 COMPENSATION. The directors shall be paid their expenses of
attendance at each meeting of the board of directors and any applicable
committee and may be paid a fixed fee for attendance at each meeting of the
board of directors and any applicable committee or a stated salary as director
and member of an applicable committee. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
SECTION 3.17 BOARD OF DIRECTORS' OFFICERS.
(a) At its annual meeting, the Board of Directors shall elect, from
among its members, a chairman, who shall preside at meetings of the Board of
Directors and the stockholders. The Board of Directors may also elect such
other officers of the Board of Directors and for such term as it may, from time
to time, determine advisable.
(b) Any vacancy in any office of the Board of Directors because of
death, resignation, removal or otherwise may be filled by the Board of Directors
for the unexpired portion of the term of such office.
SECTION 3.18 ORDER OF BUSINESS. The order of business at any meeting of
the Board of Directors shall be as follows:
1. Determination of members present and existence of quorum;
2. Reading and approval of the minutes of any previous meeting or
meetings;
3. Reports of officers and committeemen;
4. Election of officers (annual meeting);
5. Unfinished business;
6. New business;
7. Adjournment.
ARTICLE IV
COMMITTEES
-12-
<PAGE>
SECTION 4.01 STANDING COMMITTEES. The Board of Directors shall designate
an audit committee and a compensation committee, each committee to consist of
two or more directors to serve at the pleasure of the Board. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. The committees shall keep regular minutes of their
proceedings and report the same to the Board when required
(a) AUDIT COMMITTEE. The audit committee will review the annual
audits of the corporation's independent public accountants, review and evaluate
internal accounting controls, recommend the selection of the corporation's
independent public accountants, review and pass upon (or ratify) related party
transactions, and conduct such reviews and examinations as it deems necessary
with respect to the practices and policies of, and the relationship between, the
corporation and its independent public accountants.
(b) COMPENSATION COMMITTEE. The Compensation Committee will review
salaries, bonuses and stock options of senior officers of the corporation and
administer the corporation's executive compensation policies and stock option
plan.
SECTION 4.02 SPECIAL COMMITTEES. In addition to the standing committees
provided in Section 4.01 above, the Board of Directors may, by resolution passed
by a majority of the whole board, designate one or more special committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Such committee or committees shall have
such name or names as may be determined from time to time by resolution adopted
by the Board of Directors. The committees shall keep regular minutes of their
proceedings and report the same to the Board when required. Subject to
applicable law and to the extent provided in the resolution of the Board of
Directors, any committee designated hereunder shall have and may exercise all
the powers of the Board of Directors, except with respect to: (i) the approval
of any action which, under Chapter 78 of the Nevada Revised Statutes, also
requires the approval of the full Board of Directors, or the stockholders of the
outstanding shares; (ii) the filling of vacancies on the Board of Directors or
in any committee; (iii) the amendment or repeal of bylaws or the adoption of
new bylaws; (iv) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable; (v) a
distribution to the stockholders of the corporation, except at a rate or in a
periodic amount or within a price range determined by the Board of Directors; or
(vi) the appointment of any other committees of the Board of Directors or the
members thereof.
-13-
<PAGE>
SECTION 4.03 MEETINGS AND ACTIONS OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held and taken in accordance with Sections
3.07 (annual and regular meetings), 3.08 (special meetings), 3.09 (place of
meetings). 3.10 (notice of meetings), 3.11 (quorum and adjourned meetings), 3.13
(telephonic meetings), and 3.13 (action without a meeting) of these Bylaws, with
such changes in the context of those bylaws as are necessary to substitute the
committee and its members for the Board of Directors, and notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
SECTION 5.01 ELECTION. The Board of Directors, at its annual meeting,
shall elect a president, a secretary and a treasurer to hold office for a term
of one (1) year or until their successors are chosen and qualify. Any
individual may hold two or more offices. The Board of Directors may, from time
to time, by resolution, elect one or more vice-presidents, assistant
secretaries, assistant treasurers or other officers, and appoint agents of the
corporation, prescribe their duties and fix their compensation.
SECTION 5.02 REMOVAL; RESIGNATION. Any officer or agent elected or
appointed by the Board of Directors may be removed by it with or without cause.
Any officer may resign at any time upon written notice to the corporation. Any
such removal or resignation shall be subject to the rights, if any, of the
respective parties under any contract between the corporation and such officer
or agent.
SECTION 5.03 VACANCIES. Any vacancy in any office because of death,
resignation, removal or otherwise may be filled by the Board of Directors for
the unexpired portion of the term of such office.
SECTION 5.04 CHAIRMAN OF THE BOARD. The chairman shall be the chief
executive officer of the corporation and shall, subject to the control of the
Board of Directors, have general supervision, direction and control of the
business and affairs of the corporation and shall preside at meetings of the
stockholders and the Board of Directors.
SECTION 5.05 PRESIDENT.
(a) The president shall be the chief operations officer, and if no
chairman is elected, the chief executive officer, of the corporation, subject to
the supervision and control of the Board of Directors, and shall direct the
corporate affairs, with full power to execute all resolutions and orders of the
Board of Directors not expressly delegated to some other officer or agent of the
corporation. If the chairman of the Board of Directors elects not to preside or
is absent, the president shall preside at meetings of the stockholders and Board
of Directors and perform such other duties as shall be prescribed by the Board
of Directors.
-14-
<PAGE>
(b) The president shall have full power and authority on behalf of
the corporation to attend and to act and to vote, or designate such other
officer or agent of the corporation to attend and to act and to vote, at any
meetings of the stockholders of any corporation in which the corporation may
hold stock and, at any such meetings, shall possess and may exercise any and all
rights and powers incident to the ownership of such stock. The Board of
Directors, by resolution from time to time, may confer like powers on any person
or persons in place of the president to exercise such powers for these purposes.
SECTION 5.06 VICE-PRESIDENTS. The Board of Directors may elect one or
more vice-presidents who shall be vested with all the powers and perform all the
duties of the president whenever the president is absent or unable to act and
such other duties as shall be prescribed by the Board of Directors or the
president.
SECTION 5.07 SECRETARY. The secretary shall keep, or cause to be kept,
the minutes of proceedings of the stockholders and the Board of Directors in
books provided for that purpose. The secretary shall attend to the giving and
service of all notices of the corporation, may sign with the president in the
name of the corporation all contracts in which the corporation is authorized to
enter, shall have the custody or designate control of the corporate seal, shall
affix the corporate seal to all certificates of stock duly issued by the
corporation, shall have charge or designate control of stock certificate books,
transfer books and stock ledgers, and such other books and papers as the Board
of Directors or appropriate committee may direct, and shall, in general, perform
all duties incident to the office of the secretary.
SECTION 5.08 ASSISTANT SECRETARIES. The Board of Directors may appoint
one or more assistant secretaries who shall have such powers and perform such
duties as may be prescribed by the Board of Directors or the secretary.
SECTION 5.09 TREASURER. The treasurer shall be the chief financial
officer of the corporation, subject to the supervision and control of the Board
of Directors, and shall have custody of all the funds and securities of the
corporation. When necessary or proper, the treasurer shall endorse on behalf of
the corporation for collection checks, notes, and other obligations, and shall
deposit all monies to the credit of the corporation in such bank or banks or
other depository as the Board of Directors may designate, and shall sign all
receipts and vouchers for payments made by the corporation. Unless otherwise
specified by the Board of Directors, the treasurer may sign with the president
all bills of exchange and promissory notes of the corporation, shall also have
the care and custody of the stocks, bonds, certificates, vouchers, evidence of
debts, securities, and such other property belonging to the corporation as the
Board of Directors shall designate, and shall sign all papers required by law,
by these Bylaws, or by the Board of Directors to be signed by the treasurer.
The treasurer shall enter, or cause to be entered, regularly in the financial
records of the corporation, to be kept for that purpose, full and accurate
accounts of all monies received and paid on account of the corporation and,
whenever required by the Board of Directors, the treasurer shall render a
statement of any or all accounts. The treasurer shall at all reasonable times
exhibit the books of account to any
-15-
<PAGE>
director of the corporation and shall perform all acts incident to the
position of treasurer subject to the control of the Board of Directors.
The treasurer shall, if required by the Board of Directors, give bond to
the corporation in such sum and with such security as shall be approved by the
Board of Directors for the faithful performance of all the duties of treasurer
and for restoration to the corporation, in the event of the treasurer's death,
resignation, retirement or removal from office, of all books, records, papers,
vouchers, money and other property in the treasurer's custody or control and
belonging to the corporation. The expense of such bond shall be borne by the
corporation.
SECTION 5.10 ASSISTANT TREASURERS. The Board of Directors may appoint
one or more assistant treasurers who shall have such powers and perform such
duties as may be prescribed by the Board of Directors or the treasurer. The
Board of Directors may require an assistant treasurer to give a bond to the
corporation in such sum and with such security as it may approve, for the
faithful performance of the duties of assistant treasurer, and for restoration
to the corporation, in the event of the assistant treasurer's death,
resignation, retirement or removal from office, of all books, records, papers,
vouchers, money and other property in the assistant treasurer's custody or
control and belonging to the corporation. The expense of such bond shall be
borne by the corporation.
ARTICLE VI
CAPITAL STOCK
SECTION 6.01 ISSUANCE. Shares of the corporation's authorized stock
shall, subject to any provisions or limitations of the laws of the State of
Nevada, the Articles of Incorporation or any contracts or agreements to which
the corporation may be a party, be issued in such manner, at such times, upon
such conditions and for such consideration as shall be prescribed by the Board
of Directors.
SECTION 6.02 CERTIFICATES. Ownership in the corporation shall be
evidenced by certificates for shares of stock in such form as shall be
prescribed by the Board of Directors, shall be under the seal of the corporation
and shall be manually signed by the president or a vice-president and also by
the secretary or an assistant secretary; provided, however, whenever any
certificate is countersigned or otherwise authenticated by a transfer agent or
transfer clerk, and by a registrar, then a facsimile of the signatures of said
officers may be printed or lithographed upon the certificate in lieu of the
actual signatures. If the Corporation uses facsimile signatures of its officers
on its stock certificates, it shall not act as registrar of its own stock, but
its transfer agent and registrar may be identical if the institution acting in
those dual capacities countersigns any stock certificates in both capacities.
Each certificate shall contain the name of the record holder, the number,
designation, if any, class or series of shares represented, a statement or
summary of any applicable rights, preferences, privileges or restrictions
thereon, and a statement, if applicable, that the shares are assessable. All
certificates shall be consecutively numbered. If provided by the stockholder,
the name, address and federal
-16-
<PAGE>
tax identification number of the stockholder, the number of shares, and the
date of issue shall be entered in the stock transfer records of the
corporation.
SECTION 6.03 SURRENDERED; LOST OR DESTROYED CERTIFICATES. All
certificates surrendered to the corporation, except those representing shares of
treasury stock, shall be canceled and no new certificate shall be issued until
the former certificate for a like number of shares shall have been canceled,
except that in case of a lost, stolen, destroyed or mutilated certificate, a new
one may be issued therefor. However, any stockholder applying for the issuance
of a stock certificate in lieu of one alleged to have been lost, stolen,
destroyed or mutilated shall, prior to the issuance of a replacement, provide
the corporation with his, her or its affidavit of the facts surrounding the
loss, theft, destruction or mutilation and, if required by the Board of
Directors, an indemnity bond in an amount not less than twice the current market
value of the stock, and upon such terms as the treasurer or the Board of
Directors shall require which shall indemnify the corporation against any loss,
damage, cost or inconvenience arising as a consequence of the issuance of a
replacement certificate.
SECTION 6.04 REPLACEMENT CERTIFICATE. When the Articles of Incorporation
are amended in any way affecting the statements contained in the certificates
for outstanding shares of capital stock of the corporation or it becomes
desirable for any reason, in the discretion of the Board of Directors,
including, without limitation, the merger of the corporation with another
corporation or the reorganization of the corporation, to cancel any outstanding
certificate for shares and issue a new certificate therefor conforming to the
rights of the holder, the Board of Directors may order any holders of
outstanding certificates for shares to surrender and exchange the same for new
certificates within a reasonable time to be fixed by the Board of Directors.
The order may provide that a holder of any certificate(s) ordered to be
surrendered shall not be entitled to vote, receive distributions or exercise any
other rights of stockholders of record until the holder has complied with the
order, but the order operates to suspend such rights only after notice and until
compliance.
SECTION 6.05 TRANSFER OF SHARES. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate or shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and the record the
transaction upon its books.
SECTION 6.06 TRANSFER AGENT; REGISTRARS. The Board of Directors may
appoint one or more transfer agents, transfer clerk and registrars of transfer
and may require all certificates for shares of stock to bear the signature of
such transfer agent, transfer clerk and/or registrar of transfer.
SECTION 6.07 STOCK TRANSFER RECORDS. The stock transfer records shall be
closed for a period of at least ten (10) days prior to all meetings of the
stockholders and shall be closed for the payment of distributions as provided in
Article VII hereof and during such periods as, from time to time, may be fixed
by the Board of Directors, and, during such periods, no stock shall
-17-
<PAGE>
be transferable for purposes of Article VII and no voting rights shall be
deemed transferred during such periods. Subject to the forgoing limitations,
nothing contained herein shall cause transfers during such periods to be void
or voidable.
SECTION 6.08 MISCELLANEOUS. The Board of Directors shall have the power
and authority to make such rules and regulations not inconsistent herewith as it
may deem expedient concerning the issue, transfer, and registration of
certificates for shares of the corporation's stock.
ARTICLE VII
DISTRIBUTIONS
Section 7.01 Distributions may be declared, subject to the provisions of
the laws of the State of Nevada and the Articles of Incorporation, by the Board
of Directors at any regular or special meeting and may be paid in cash,
property, shares of corporate stock, or any other medium. The Board of
Directors may fix in advance a record date, as provided in Section 2.06, prior
to the distribution for the purpose of determining stockholders entitled to
receive any distribution. The Board of Directors may close the stock transfer
books for such purpose for a period of not more than ten (10) days prior to the
date of such distribution.
ARTICLE VIII
RECORDS; REPORTS; SEAL; AND FINANCIAL MATTERS
SECTION 8.01 RECORDS. All original records of the corporation, shall be
kept by or under the direction of the secretary or at such places as may be
prescribed by the Board of Directors.
SECTION 8.02 DIRECTORS' AND OFFICERS' RIGHT OF INSPECTION. Every
director and officer shall have the absolute right at any reasonable time for a
purpose reasonably related to the exercise of such individual's duties to
inspect and copy all of the corporation's books, records, and documents of every
kind and to inspect the physical properties of the corporation and/or its
subsidiary corporations. Such inspection may be made in person or by agent or
attorney.
SECTION 8.03 CORPORATE SEAL. The Board of Directors may, by resolution,
authorize a seal, and the seal may be used by causing it, or a facsimile, to be
impressed or affixed or reproduced or otherwise. Except when otherwise
specifically provided herein, any officer of the corporation shall have the
authority to affix the seal to any document requiring it.
SECTION 8.04 FISCAL YEAR-END. The fiscal year-end of the corporation
shall be such date as may be fixed from time to time by resolution of the Board
of Directors.
SECTION 8.05 RESERVES. The Board of Directors may create, by resolution,
such reserves as the directors may, from time to time, in their discretion,
think proper to provide for contingencies, or to equalize distributions or to
repair or maintain any property of the corporation, or for such other purpose as
the Board of Directors may deem beneficial to the
-18-
<PAGE>
corporation, and the directors may modify or abolish any such reserves in the
manner in which they were created.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01 INDEMNIFICATION AND INSURANCE.
(a) INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(i) For purposes of this Article, (A) "Indemnitee" shall mean
each director or officer who was or is a party to, or is threatened to be made a
party to, or is otherwise involved in, any Proceeding (as hereinafter defined),
by reason of the fact that he or she is or was a director or officer of the
corporation or is or was serving in any capacity at the request of the
corporation as a director, officer, employee, agent, partner, or fiduciary of,
or in any other capacity for, another corporation or any partnership, joint
venture, trust, or other enterprise; and (B) "Proceeding" shall mean any
threatened, pending, or completed action, or suit (including without limitation
an action, suit or proceeding by or in the right of the corporation), whether
civil, criminal, administrative, or investigative.
(ii) Each Indemnitee shall be indemnified and held harmless by
the corporation for all actions taken by him or her and for all omissions
(regardless of the date of any such action or omission), to the fullest extent
permitted by Nevada law, against all expense, liability and loss (including
without limitation attorneys' fees, judgments, fines, taxes, penalties, and
amounts paid or to be paid in settlement) reasonably incurred or suffered by the
Indemnitee in connection with any Proceeding.
(iii) Indemnification pursuant to this Section shall continue as
to an Indemnitee who has ceased to be a director or officer and shall inure to
the benefit of his or her heirs, executors and administrators.
(b) INDEMNIFICATION OF EMPLOYEES AND OTHER PERSONS.
The corporation may, by action of its Board of Directors and to
the extent provided in such action, indemnify employees and other persons as
though they were Indemnitees.
(c) NON-EXCLUSIVITY OF RIGHTS.
The rights to indemnification provided in this Article shall not
be exclusive of any other rights that any person may have or hereafter acquire
under any statute, provision of the corporation's Articles of Incorporation or
Bylaws, agreement, vote of stockholders or directors, or otherwise.
-19-
<PAGE>
(d) INSURANCE.
The corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise for any
liability asserted against him or her and liability and expenses incurred by him
or her in his or her capacity as a director, officer, employee or agent, or
arising out of his or her status as such, whether or not the corporation has the
authority to indemnify him or her against such liability and expenses.
(e) OTHER FINANCIAL ARRANGEMENTS.
The other financial arrangements which may be made by the
corporation may include the following (i) the creation of a trust fund; (ii) the
establishment of a program of self-insurance; (iii) the securing of its
obligation of indemnification by granting a security interest or other lien on
any assets of the corporation; (iv) the establishment of a letter of credit,
guarantee or surety. No financial arrangement made pursuant to this subsection
may provide protection for a person adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable for
intentional misconduct, fraud, or a knowing violation of law, except with
respect to advancement of expenses or indemnification ordered by a court.
(f) OTHER MATTERS RELATING TO INSURANCE OR FINANCIAL ARRANGEMENTS.
Any insurance or other financial arrangement made on behalf of a
person pursuant to this section may be provided by the corporation or any other
person approved by the Board of Directors, even if all or part of the other
person's stock or other securities is owned by the corporation. In the absence
of fraud:
(i) the decision of the Board of Directors as to the propriety
of the terms and conditions of any insurance or other financial arrangement made
pursuant to this section and the choice of the person to provide the insurance
or other financial arrangement is conclusive; and
(ii) the insurance or other financial arrangement:
(A) is not void or voidable; and
(B) does not subject any director approving it to personal
liability for his action,
even if a director approving the insurance or other financial arrangement is a
beneficiary of the insurance or other financial arrangement.
-20-
<PAGE>
SECTION 9.02 AMENDMENT. The provisions of this Article IX relating to
indemnification shall constitute a contract between the corporation and each of
its directors and officers which may be modified as to any director or officer
only with that person's consent or as specifically provided in this Section.
Notwithstanding any other provision of these Bylaws relating to their amendment
generally (including, without limitation, Article X below), any repeal or
amendment of this Article IX which is adverse to any director or officer shall
apply to such director or officer only on a prospective basis, and shall not
limit the rights of an Indemnitee to indemnification with respect to any action
or failure to act occurring prior to the time of such repeal or amendment.
Notwithstanding any other provision of these Bylaws, no repeal or amendment of
these Bylaws shall affect any or all of this Article IX so as to limit or reduce
the indemnification in any manner unless adopted by (a) the unanimous vote of
the directors of the corporation then serving, or (b) by the stockholders as set
forth in Article X hereof; provided that no such amendment shall have a
retroactive effect inconsistent with the preceding sentence.
ARTICLE X
AMENDMENT OR REPEAL
SECTION 10.01 AMENDMENT OF BYLAWS. These Bylaws or any provision hereof
may be amended, altered, or repealed (a) by the Board of Directors at an annual
meeting thereof without prior notice or at any special meeting thereof if notice
of such proposed amendment, alteration or repeal is contained in the notice of
such special meeting or (b) by the affirmative vote of at least sixty-six and
two thirds percent (66-2/3%) of the voting power of all the then outstanding
shares of capital stock entitled to vote at any meeting of the stockholders at
which a quorum is present, if notice of such proposed amendment, alteration or
repeal is contained in the notice of such meeting.
SECTION 10.02 ADDITIONAL BYLAWS. Additional bylaws not inconsistent
herewith may be adopted by the Board of Directors. Any bylaws so adopted shall
be subject to alteration, amendment or repeal by the stockholders in accordance
with Section 10.01 of these Bylaws.
ARTICLE XI
CHANGES IN NEVADA LAW
SECTION 11.01 CHANGES IN NEVADA LAW. References in these Bylaws to Nevada
law or to any provision thereof shall be to such law as it existed on the date
these Bylaws were adopted or as such law thereafter may be changed; provided
that (a) in the case of any change which expands the liability of directors or
officers or limits the indemnification rights or the rights to advancement of
expenses which the corporation may provide in Article IX hereof, the rights to
limited liability, to indemnification and to the advancement of expenses
provided in the corporation's Articles of Incorporation and/or these Bylaws
shall continue as theretofore to the extent permitted by law; and (b) if such
change permits the corporation, without the requirement of any further action by
stockholders or directors, to limit further the liability of directors or
officers or to provide broader indemnification rights or rights to the
advancement of expenses than the corporation was permitted to provide prior to
such change, then liability thereupon shall
-21-
<PAGE>
be so limited and the rights to indemnification and the advancement of
expenses shall be so broadened to the extent permitted by law.
CERTIFICATION
The undersigned duly elected secretary of the corporation does hereby
certify that the foregoing Bylaws were adopted by the Board of Directors on the
__th day of January, 1999.
----------------------------------
Kelvin L. Davis, Secretary
<PAGE>
EXHIBIT 10.4
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made as of this
_____ day of January, 1999, by and between HARVEYS ACQUISITION CORPORATION, a
Nevada corporation (the "Company"), and ________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the substantial level of
corporate litigation in general, subjecting officers, directors and key
employees to expensive litigation risks while the availability and coverage
of liability insurance is severely limited;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers,
directors and key employees of the Company and to indemnify its officers,
directors and key employees so as to provide them with the maximum protection
permitted by law.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the Company and Indemnitee hereby agree as
follows:
l. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative, or investigative, (other than an action by or in
the right of the Company) by reason of the fact that Indemnitee or a person
of whom Indemnitee is the legal representative is or was a director, officer,
employee, or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of the Indemnitee while an
officer, director, or key employee, or by reason of the fact that Indemnitee
is or was serving at the request of the Company as an officer, director,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, to the fullest extent permitted by law, against all
expenses, liability and loss (including attorney fees, judgments, fines and
amounts paid or to be paid in settlement) reasonably incurred or suffered by
Indemnitee in connection with the action, suit or proceeding.
The indemnification above provided shall include, but not be limited to,
reimbursement of all fees, including amounts paid in settlement and
attorneys' fees actually and reasonably incurred, in connection with the
defense or settlement of any action or suit if
1
<PAGE>
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed
to be in or not opposed to the best interests of the company, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Indemnitee reasonably believed to be in or not opposed to
the best interests of the Company, and that with respect to any criminal
action or proceeding, he or she had no reasonable cause to believe that
Indemnitee's conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened
to be made a party to or is involved in any action, suit, or proceeding by or
in the right of the Company or any subsidiary of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee or a person of
whom indemnitee is the legal representative is or was a director, officer,
employee or agent of the Company or any subsidiary of the Company, by reason
of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, to the
fullest extent permitted by law, against all expenses, liability and loss
(including attorneys fees, judgments, fines and amounts paid in settlement)
in each case, to the extent actually and reasonably incurred by Indemnitee in
connection with the defense or settlement of such action, suit, or proceeding
if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company and
its shareholders, except that no indemnification shall be made in respect of
any claim, issue or matter as to which Indemnitee shall have been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom,
to be liable to the Company or for amounts paid in settlement to the Company
in the performance of Indemnitee's duty to the Company and its shareholders
unless and only to the extent that the court in which such action, suit or
proceeding is or was pending shall determine upon application that, in view
of all of the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses as the court deems and then only to
the extent that the court shall determine.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all
expenses incurred by Indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action or proceeding
referenced in Section 1(a) or (b) hereof (but not amounts actually paid in
settlement of any such action or proceeding) and to the extent consistent
with the Articles of Incorporation and Bylaws of the Company. Indemnitee
hereby undertakes to repay such amounts advanced if, and to the extent that,
it shall ultimately be determined by a court of competent jurisdiction that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the
2
<PAGE>
Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be
sought under this Agreement. Notice to the Company shall be directed to the
President/Chief Executive Officer of the Company, with a copy to the
Company's counsel, at the addresses shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the
date postmarked if sent by domestic, certified or registered mail, properly
addressed; otherwise notice shall be deemed received when such notice shall
actually be received by said parties. In addition, Indemnitee shall give the
company such information and cooperation as it may reasonably require as
shall be within Indemnitee's power.
(c) PROCEDURE. Any indemnification provided for in Section 1
shall be made no later than forty-five (45) days after receipt of the written
request of Indemnitee. If a claim under this Agreement, under any statute or
under any provision of the Company's Articles of Incorporation or Bylaws
providing for indemnification is not paid in full by the Company within
forty-five (45) days after a written request for payment therefor has first
been received by the company, then Indemnitee may, but need not, at any time
thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 14 of this Agreement, Indemnitee shall
also be entitled to be paid for the expenses (including attorneys' fees) of
bringing such action. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in connection with
any action or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under
applicable law or this Agreement for the Company to indemnify Indemnitee for
the amount claimed, but the burden of proving such defense shall be on the
Company, and Indemnitee shall be entitled to receive interim payments of
expenses pursuant to Subsection 3(a) unless and until such defense may be
finally adjudicated by court order or judgment from which no further right of
appeal exists. It is the parties intention that if the Company contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be for the court to decide, and neither the failure of
the Company (including its Board of Directors, any committee or subgroup of
its Board of Directors, its independent legal counsel or its shareholders) to
have made a determination that indemnification of Indemnitee is proper in the
circumstances because Indemnitee has met the applicable standard of conduct
required by the applicable law or this Agreement, nor an actual determination
by the Company (its Board of Directors, any committee or subgroup, its Board
of Directors, its independent legal counsel or its shareholders) that
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that Indemnitee has or has not met the applicable standard of
conduct.
(d) NOTICE TO INSURERS. If, at the time of the receipt of a
notice of a claim pursuant to section 3(b) hereof, the Company has director
and officer liability insurance in effect, then the Company shall give prompt
notice of the commencement of such proceeding to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter
3
<PAGE>
take all necessary or appropriate action to cause such insurers to pay, on
behalf of Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. If the Company shall be obligated under
Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee,
then the Company, if appropriate, shall be entitled to assume the defense of
such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written
notice of its election so to do. After delivery of such notice, approval of
such counsel by Indemnitee and the retention of such counsel by the Company,
the Company will not be liable to Indemnitee under this Agreement for any
fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided, that (i) Indemnitee shall have the right to employ
Indemnitee's counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee
in the conduct of any such defense or (C) the Company shall not have employed
counsel to assume the defense of such proceeding, then the fees and expenses
of Indemnitee's counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION OF RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the
Company's Articles of Incorporation, the Company's Bylaws or by statute. In
the event of any change, after the date of this Agreement, in any applicable
law, statute or rule which expands the right of a Nevada corporation to
indemnify a member of its board of directors or an officer, such changes
shall be, ipso facto, within the purview of Indemnitee's rights and Company's
obligations, under this Agreement. In the event of any change in any
applicable law, statute or rule which narrows the right of a Nevada
corporation to indemnify a member of its Board of Directors or an officer,
such statute or rule to be applied to this Agreement shall have no effect on
this Agreement or the parties, rights and obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may
be entitled under the Company's Articles of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the General
Corporation Law of the State of Nevada (the "NGCL") or otherwise, both as to
action in Indemnitee's official capacity and as to action in another capacity
while holding such office. The indemnification provided under this Agreement
shall continue as to the Indemnitee for any action taken or not taken while
serving in an indemnified capacity even though Indemnitee may have ceased to
serve in such capacity at the time of any action or other covered proceeding.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments,
4
<PAGE>
fines, penalties actually or reasonably incurred by Indemnitee on
investigation, defense, appeal or settlement of any civil or criminal action
or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
5. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, U.S. Federal law or applicable public policy may
prohibit the Company from indemnifying its directors and officers under this
Agreement or otherwise. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
Securities and Exchange Commission to submit the question of indemnification
to a court in certain circumstances for a determination of the Company's
right under public policy to indemnify Indemnitee.
6. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs
of obtaining such insurance coverage against the protection afforded by such
coverage. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium
costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions
so as to provide an insufficient benefit or if Indemnitee is covered by
similar insurance maintained by a subsidiary or parent of the Company.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable
as provided in this Section 7. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full extent permitted
by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement shall not have been so
invalidated and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) EXCLUDED ACTS. To indemnify Indemnitee for any acts or
omissions or transactions from which a director or officer may not be
relieved of liability under the NGCL;
5
<PAGE>
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise
as required under Section 78.751 of the NGCL or the Articles of Incorporation
or Bylaws of the Company, but such indemnification or advancement of expenses
may be provided by the Company in specific cases if the Board of Directors
has approved the initiation or bringing of such suit;
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceedings instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by
Indemnitee in such proceeding was not made in good faith or was frivolous;
(d) INSURED CLAIMS. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) which have been paid
directly to Indemnitee by an insurance carrier under a policy of director and
officer liability insurance maintained by the Company; or
(e) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. EFFECTIVENESS OF AGREEMENT. To the extent that the indemnification
permitted under the terms of certain provisions of this Agreement exceeds the
scope of the indemnification provided for in the NGCL, such provisions shall
not be effective unless and until the Company's Articles of Incorporation or
Bylaws authorize such additional rights of indemnification. In all other
respects, the balance of this Agreement shall be effective as of the date set
forth on the first page and may apply to acts or omissions of Indemnitee
which occurred prior to such date if Indemnitee was an officer, director,
employee or other agent of the Company, or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise at the time such act or
omission occurred.
10. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to "Company" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees
or agents, so that if Indemnitee is or was a director, officer, employee, or
agent of such constituent corporation or is or was serving at the request of
such constituent corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other enterprise,
then Indemnitee shall
6
<PAGE>
stand in the same position under the provisions of this Agreement with
respect to the resulting or surviving corporation as Indemnitee would have
with respect to such constituent corporation if its separate existence had
continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to an
employee benefit plan; and references to "serving at the request of the
Company" shall include any service as a director, officer, employee or agent
of the Company which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or its beneficiaries.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, and all of which
shall constitute one and the same agreement.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of
the business and/or assets of the Company, spouses, heirs, and personal and
legal representatives. The Company shall require and cause any successor
(whether direct or indirect by purchase, merger, consolidation or otherwise)
to all or substantially all, or a substantial part of the business or assets
of the Company, by written agreement in the form and substance satisfactory
to Indemnitee, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform if no such succession had taken place. This Agreement shall continue
in effect regardless of whether Indemnitee continues to serve as a director,
officer, or agent of the Company or of any other enterprise at the Company's
request.
13. ATTORNEYS FEES. In the event that any action is instituted by the
Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, the court determines that each
of the material assertions made by Indemnitee as a basis for such action were
not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to
enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action were not made in good faith or were frivolous. In
the event of an action instituted by or in the name of the company under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made
in such action), unless as a part of such action, the court determines that
each of Indemnitee's material defenses to such action were not made in
7
<PAGE>
good faith or were frivolous.
14. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i)
if delivered by hand and receipted for by the party addressee on the date of
such receipt, or (ii) if mailed by domestic certified or registered mail with
postage prepaid on the third business day after the date postmarked.
Addresses for notice to either party are as shown on the signature page of
this Agreement, or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction and venue of the courts of the County
of Douglas, State of Nevada for all purposes in connection with any action or
proceeding which arises out of or relates to this Agreement.
16. CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above-written.
HARVEYS CASINO RESORTS
P.O. Box 128
Highway 50 and Stateline Avenue
Stateline, Nevada 89449
By:________________________________
________________________________
Chairman of the Board
With a copy to:
___________________________________
___________________________________
___________________________________
AGREED TO AND ACCEPTED: INDEMNITEE:
___________________________________
Address:___________________________
___________________________________
8
