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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
FILE NO. 0-25093
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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HARVEYS ACQUISITION CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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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)
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Registrant's telephone number, including area code:
310-282-8820
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Copies of correspondence to:
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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
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NOT APPLICABLE NOT APPLICABLE
Title of each class Name of each exchange on which
to be so registered each class to be registered
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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TABLE OF CONTENTS
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Item 1. Business......................................................... 1
Item 2. Financial Information............................................ 22
Item 3. Properties....................................................... 37
Item 4. Security Ownership of Certain Beneficial Owners and Management... 38
Item 5. Directors and Executive Officers................................. 39
Item 6. Executive Compensation........................................... 41
Item 7. Certain Relationships and Related Transactions................... 48
Item 8. Legal Proceedings................................................ 50
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.................................. 50
Item 10. Recent Sales of Unregistered Securities.......................... 50
Item 11. Description of Registrant's Securities to be Registered.......... 50
Item 12. Indemnification of Directors and Officers........................ 53
Item 13. Financial Statements and Supplementary Data...................... 53
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 53
Item 15. Financial Statements and Exhibits................................ 54
Index to Financial Statements............................................. F-1
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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
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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 Company is also issuing 10 shares of its 13 1/2% Series A Senior
Redeemable Convertible Cumulative Preferred Stock (the "Series A Preferred") to
Voteco and 99,990 shares of its 13 1/2% Series B Senior Redeemable Convertible
Cumulative Preferred Stock (the "Series B Preferred" and, together with the
Series A Preferred, the "Preferred Stock") to Colony III for an aggregate price
of $55 million in cash. The Series A Preferred and Series B Preferred each will
be entitled to quarterly cumulative dividends at an annual rate of 13 1/2% of
their $550 per share liquidation value. The Series A Preferred and Series B
Preferred are convertible into Class A Common and Class B Common, respectively,
prior to February 1, 2002 so long as such Series A Preferred and Series B
Preferred have not been transferred to third parties, other than certain related
parties of Voteco or Colony III. The powers, preferences, rights,
qualifications, limitations and restrictions of the Series A Preferred and
Series B Preferred are more fully described in "Item 11. Description of
Registrant's Securities to be Registered" below.
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
Gaming Commission (the "Nevada Commission"), upon the recommendation of the
Nevada State Gaming Control Board (the "Nevada Board"), to acquire control of
Harveys through the Merger. In connection with such approval, Voteco must be
registered as a holding company and found suitable as a shareholder and
controlling shareholder of Harveys, and Mr. Barrack and Mr. Davis must each be
licensed as members of Voteco and found suitable as shareholders and controlling
shareholders of Harveys. On January 13, 1999, the Nevada Board unanimously voted
to recommend that the Nevada Commission grant such approval, registration,
findings of suitability and licenses. On January 28, 1999, the Nevada Commission
approved such recommendation and issued a revised order of registration of
Harveys (the "Final Order"). The Final Order (1) prohibits Colony III, Voteco or
their respective affiliates from selling, assigning, transferring, pledging or
otherwise disposing of shares of Common Stock or any other
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security convertible into or exchangeable for Common Stock, (2) prohibits
Harveys from declaring cash
dividends on any class of stock of Harveys beneficially owned in whole or in
part by Colony III, Voteco or their respective affiliates and (3) prohibits any
sale of all or substantially all of the assets of Harveys' Lake Tahoe operating
subsidiary, in each case without the prior approval of the Nevada Commission.
The Final Order would become effective upon the Effective Time. The proposed
change of control in Harveys resulting from the Merger required the approval of
the Colorado Limited Gaming Control Commission (the "Colorado Commission"), and
Voteco, Colony III, Mr. Barrack, Mr. Davis, 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) and the direct and
indirect general partners of Colony III were each required to be found suitable
to be associated persons of Harveys' Colorado operating subsidiary. Such
approval has been received from the Colorado Commission. The proposed Merger
required the approval of the Iowa Racing and Gaming Commission, which was
granted following background investigations of Voteco, Colony III, Mr. Barrack,
Mr. Davis, Mr. Hedstrom and the direct and indirect general partners of Colony
III. See "--Regulatory Matters."
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 (President & COO of Colony Capital, Inc.) and Mr. Barrack (Chairman &
CEO of Colony Capital, Inc.) each is a co-owner, member and manager 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]
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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 (President & COO of Colony Capital, Inc.) and Mr. Barrack (Chairman &
CEO of Colony Capital, Inc.) each is a co-owner, member and manager 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 of $301 million in the aggregate to public
and certain management stockholders and option holders of Harveys]
Shares of Class A Common and Series A Preferred 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 or Series A Preferred
from Voteco in connection with sales of Class B Common or Series B Preferred,
respectively, 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 or Series A Preferred 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 Series A Preferred 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 or Series A Preferred, as the case
may be, 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
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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."
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 A Common to Voteco and
Class B Common to Colony III, (2) proceeds from the issuance of Series A
Preferred to Voteco and Series B Preferred to Colony III, (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,
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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.
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.
Upon the effectiveness of this Registration Statement, the Class A Common
would be registered under Section 12(g) of the Exchange Act. In the Merger, the
capitalization of the Company would become the capitalization of Harveys, which
would be the surviving corporation in the Merger. Accordingly, the Class A
Common would become capital stock of Harveys. Because such Class A Common would
be registered under the Exchange Act, Harveys would be a "publicly traded
corporation" under the Nevada Act. Any beneficial owner of Harveys' voting
securities or other equity securities may be required to file an application, be
investigated, and have such holder's suitability as a beneficial owner 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. However, as
Harveys would be a publicly traded corporation, the Nevada Commission has
currently required only that the beneficial owners of the Harveys' voting stock
be found suitable, and has not required that beneficial owners of Harveys'
non-voting stock be found suitable. Therefore, the Nevada Commission has
required only Voteco and its members Mr. Barrack and Mr. Davis to be found
suitable in connection with the Merger. On January 28, 1999, the Nevada
Commission approved the registration of Harveys as a publicly traded corporation
after the Merger and issued findings of suitability for Voteco, Mr. Barrack and
Mr. Davis. See "--Regulatory Matters--Nevada Gaming Laws and Regulations."
Following effectiveness of this Registration Statement, the Company will be
required and expects to file annual, quarterly and current reports, proxy
statements and other information with the SEC. Following the Merger, Harveys, as
the surviving corporation, will be required and is expected to file such
reports, proxy statements and other information. You may read and copy any
reports, statements or other information filed by the Company at the SEC's
public reference facilities at 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 and Harveys' 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
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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 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
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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.
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
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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 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.
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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.
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.
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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 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
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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 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.
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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.
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.
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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 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 Preferred Stock, 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.
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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
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
15
<PAGE>
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 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.
16
<PAGE>
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.
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;
17
<PAGE>
(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 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
18
<PAGE>
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.
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.
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<PAGE>
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 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
20
<PAGE>
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 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.
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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.
22
<PAGE>
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 A Common to Voteco and Class B Common to Colony III, (b) gross proceeds
of $55.0 million from the issuance of Series A Preferred to Voteco and Series B
Preferred to Colony III, (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 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 18,155 19,077 24,207
Merger-related costs.................................... 1,103 1,103 2,690 2,690
----------- ----------- ----------- -----------
Total costs and expenses.............................. 197,013 198,641 242,283 246,785
----------- ----------- ----------- -----------
Operating income.......................................... 35,944 34,316 41,280 36,778
----------- ----------- ----------- -----------
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 10,776 49,673 33,050
Income tax provision...................................... (9,571) (5,020) (18,898) 14,157
----------- ----------- ----------- -----------
Income before extraordinary item.......................... $ 14,355 $ 5,756 $ 30,775 $ 18,893
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
23
<PAGE>
<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 $ 55,896
Goodwill............................................................................ -- 56,557
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.
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.
24
<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>
25
<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 $47.1 million (excluding merger related costs of approximately $1.2
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............................................ $ 67,299
Total debt........................................................... $ 150,220
</TABLE>
26
<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>
27
<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
28
<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%.
29
<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.
30
<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
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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.
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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 proceeds from the issuances of Common Stock and
Preferred Stock, 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
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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 Preferred Stock prior to 2004 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.
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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.
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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.
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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.
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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(1) CLASS
- --------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Colony HCR Voteco, LLC
1999 Avenue of the Stars, Suite 1200
Los Angeles, California 90067...................................... 38,800 97.0%(2)
Thomas J. Barrack, Jr. (3)........................................... 38,800 97.0
Kelvin L. Davis (3).................................................. 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) (3)................................................... 40,000 100.0%
</TABLE>
- ------------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and excludes grants of phantom stock and options that are not exercisable
currently or within 60 days following the Effective Time.
(2) Pursuant to the Transfer Restriction 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.
(3) 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.
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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.
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<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.
40
<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
41
<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.
42
<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.
43
<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
44
<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 ($) 3 4 5 6 7
- ------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
125,000..................................................... 12,500 25,000 37,500 50,000 62,500
150,000..................................................... 15,000 30,000 45,000 60,000 75,000
175,000..................................................... 17,500 35,000 52,500 70,000 87,500
200,000..................................................... 20,000 40,000 60,000 80,000 100,000
225,000..................................................... 22,500 45,000 67,500 90,000 112,500
250,000..................................................... 25,000 50,000 75,000 100,000 125,000
300,000..................................................... 30,000 60,000 90,000 120,000 150,000
400,000..................................................... 40,000 80,000 120,000 160,000 200,000
450,000..................................................... 45,000 90,000 135,000 180,000 225,000
500,000..................................................... 50,000 100,000 150,000 200,000 250,000
</TABLE>
45
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE
(20 YEAR VESTING)
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS AT AGE 65 FOR
REPRESENTATIVE YEARS OF SERVICE ($)
------------------------------------------
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.
46
<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
47
<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
48
<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.
49
<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) 10 shares of Series A Preferred to
Voteco and 99,990 shares of Series B Preferred to Colony III 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 Section 4(2) of the Securities Act.
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 100,000 shares of
preferred stock will be designated Series A Preferred, and 99,990 shares of
preferred stock will be designated Series B Preferred. At the Effective Time,
40,000 shares of Class A Common, 4,000,000 shares of Class B Common,
50
<PAGE>
10 shares of Series A Preferred and 99,990 shares of Series B 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. The Company expects to designate 100,000 shares of
preferred stock as Series A Preferred and 99,990 shares of preferred stock as
Series B Preferred. The Series A Preferred and Series B Preferred will be
entitled to quarterly dividends at an annual rate of 13 1/2% of the $550 per
share liquidation value (the "Liquidation Value"). To the extent not paid in
cash, dividends will cumulate and compound quarterly at an annual rate of
13 1/2% of the Liquidation Value. The Series A Preferred and Series B Preferred
will be subject to mandatory redemption on February 1, 2011 for cash at the
Liquidation Value plus any accrued and unpaid dividends, out of any funds
legally available therefor. Harveys will have
51
<PAGE>
the right to redeem the Series A Preferred and the Series B Preferred at any
time for cash at the Liquidation Value plus any accrued and unpaid dividends. If
a Change of Control (as defined in the certificate of designation for the
Preferred Stock) of Harveys occurs, Harveys will be required to offer to
purchase all outstanding shares of the Series A Preferred and Series B Preferred
(the "Change of Control Offer") for cash at a price of 101% of the Liquidation
Value plus any accrued and unpaid dividends. However, Harveys will not be
required to make the Change of Control Offer on or prior to the earlier of (a)
the date on which all of Harveys' Notes have been repaid, repurchased or
redeemed in full, and (b) June 1, 2006, the date the Notes mature. The
certificate of designation for the Preferred Stock will contain covenants which
limit restricted payments or investments; limit consolidation, merger and the
sale of assets; mandate the provision of financial reports; and limit business
activities. In the event of a sale or other disposition of all but not less than
all of the Series A Preferred and Series B Preferred by the original holders
and/or certain related parties (but not any other transferees) to one or more
persons other than the original holders and certain related parties, the
dividend rate and other rights, preferences and privileges of the Series A
Preferred and Series B Preferred may, at the election of the holders of a
majority of the Series A Preferred, be amended pursuant to procedures to be
specified at the time of issuance of the Series A Preferred and Series B
Preferred so that the Series A Preferred and Series B Preferred would, in the
opinion of an independent financial advisor chosen by the electing holders, have
a market value of 100% of the Liquidation Value thereof plus any accrued and
unpaid dividends; PROVIDED that in no event shall the reset dividend rate exceed
15 1/2% per annum. Alternatively, the electing holders may effectuate the
foregoing by exchanging all of the Series A Preferred and Series B Preferred for
a new class of preferred stock having terms to which the Series A Preferred and
Series B Preferred would have been reset as aforesaid. Upon the receipt of all
applicable gaming approvals the Series A Preferred and Series B Preferred will
be convertible, at the option of the original holders and certain related
parties (but not any other transferees), at any time on or prior to February 1,
2002, into Class A Common and Class B Common, respectively, at the per share
rate of 28.73787 shares of Common Stock, subject to customary anti-dilution
adjustments. Any accrued and unpaid dividends at the time of a conversion will
be required to be paid in cash or, at Harveys' election, may be satisfied with
additional shares of Common Stock in an amount to be determined in accordance
with the conversion rate.
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.
RESTRICTIONS IMPOSED BY NEVADA AUTHORITIES ON CAPITAL STOCK OWNED BY VOTECO OR
COLONY III
The Final Order of the Nevada Commission approving Voteco's acquisition of
control of Harveys, (1) prohibits Colony III, Voteco or their respective
affiliates from selling, assigning, transferring, pledging or otherwise
disposing of shares of Common Stock or any other security convertible into or
exchangeable for Common Stock and (2) prohibits Harveys from declaring cash
dividends on any class of stock of Harveys beneficially owned in whole or in
part by Colony III, Voteco or their respective affiliates, in each
52
<PAGE>
case without the prior approval of the Nevada Commission. Such Final Order would
become effective upon the Effective Time.
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.
53
<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 with, and incorporated herein by reference to, Registration
Statement on Form 10 of Harveys Acquisition Corporation, File no. 0-25093,
filed November 20, 1998
** Previously filed with, and incorporated herein by reference to, Amendment
No. 1 to Registration Statement on Form 10 of Harveys Acquisition
Corporation, File no. 0-25093, filed January 7, 1999
54
<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 28, 1999 By: /s/ KELVIN L. DAVIS
-----------------------------------------
Name: Kelvin L. Davis
Title: PRESIDENT AND SECRETARY
</TABLE>
55
<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 13 1/2% Series A Senior Redeemable
Convertible Cumulative Preferred Stock and 13 1/2% Series B Senior Redeemable
Convertible Cumulative Preferred Stock (collectively, the "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) $ 55,896
(301,101)(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 (327,349) 70,098
Property and equipment............................. 316,658 88,344(d) 405,002
Deferred financing costs........................... 5,946 (1,300)(b) 7,104
2,458(e)
Other assets....................................... 11,594 (2,446)(d) 9,728
580(d)
Goodwill........................................... 56,557(d) 56,557
----------- --------------- ----------------- -------------
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 (1,300)(b) --
(23,790)(c)
(128,177)(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 2,514(g) 18,155
Merger-related costs........................................... 1,103 1,103
----------- -------------- -----------
Total costs and expenses..................................... 197,013 1,628 198,641
----------- -------------- -----------
Operating income................................................. 35,944 (1,628) 34,316
----------- -------------- -----------
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 (13,150) 10,776
Income tax provision............................................. (9,571) 4,551(j) (5,020)
----------- -------------- -----------
Net income....................................................... $ 14,355 $ (8,599) $ 5,756
----------- -------------- -----------
----------- -------------- -----------
Income per common share
Basic.......................................................... $ 1.43 $ (0.21)
----------- -----------
----------- -----------
Diluted........................................................ $ 1.41 $ (0.21)
----------- -----------
----------- -----------
Weighted average common shares used in calculating income per
common share
Basic.......................................................... 10,009,086 3,943,040
----------- -----------
----------- -----------
Diluted........................................................ 10,213,456 4,040,000
----------- -----------
----------- -----------
</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 5,130(l) 24,207
Business development costs................................ 2,690 2,690
---------- -------------- -----------
Total costs and expenses................................ 242,283 4,502 246,785
---------- -------------- -----------
Operating income............................................ 41,280 (4,502) 36,778
---------- -------------- -----------
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 (16,623) 33,050
Income tax provision........................................ (18,898) 4,741(o) (14,157)
---------- -------------- -----------
Income before extraordinary item............................ $ 30,775 $ (11,882) $ 18,893
---------- -------------- -----------
---------- -------------- -----------
Income before extraordinary item per common share
Basic..................................................... $ 3.13 $ 2.83
---------- -----------
---------- -----------
Diluted................................................... $ 3.13 $ 2.74
---------- -----------
---------- -----------
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 $56.6 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 Preferred
Stock, (3) borrowings of $175.0 million under an Amended and Restated Credit
Facility.
(b) To eliminate approximately $1.3 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 $9.8 million in related financial
advisory fees and other costs. To allocate, on a preliminary basis, the
total payment of approximately $301.1 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 $171.5 million and (7) recognizing as goodwill the
approximately $56.6 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 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.
F-10
<PAGE>
(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 $5.1 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 $ 5,756
Effect of dividends on Preferred Stock.... -- (6,577)
--------- ---------
Income available to common shares......... $ 14,355 10,009,086 $ 1.43 $ (821) 3,943,040 $ (0.21)
----- -----------
----- -----------
Effect of dilutive securities............. 204,370 96,960
--------- ------------ --------- ----------
Diluted net income per common share....... $ 14,355 10,213,456 $ 1.41 $ (821) 4,040,000 $ (0.21)
--------- ------------ ----- --------- ---------- -----------
--------- ------------ ----- --------- ---------- -----------
</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 $ 18,893
Effect of dividends on Preferred
Stock.................................... -- (7,809)
--------- ---------
Income before extraordinary item available
to common shares......................... $ 30,775 9,826,636 $ 3.13 $ 11,084 3,918,800 $ 2.83
----- -----
----- -----
Effect of dilutive securities.............. 17,235 121,200
--------- ---------- --------- ----------
Diluted income before extraordinary item
per common share......................... $ 30,775 9,843,871 $ 3.13 $ 11,084 4,040,000 $ 2.74
--------- ---------- ----- --------- ---------- -----
--------- ---------- ----- --------- ---------- -----
</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*
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* Previously filed with, and incorporated herein by reference to, Registration
Statement on Form 10 of Harveys Acquisition Corporation, File no. 0-25093,
filed November 20, 1998
** Previously filed with, and incorporated herein by reference to, Amendment
No. 1 to Registration Statement on Form 10 of Harveys Acquisition
Corporation, File no. 0-25093, filed January 7, 1999
