<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________________
Commission file number 1-12802
HARVEYS CASINO RESORTS
(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0066882
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 50 & Stateline Avenue
P.O. Box 128
Lake Tahoe, Nevada 89449
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 588-2411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
On October 9, 1998 the registrant had outstanding 10,065,336 shares of its $.01
par value, common stock.
<PAGE>
HARVEYS CASINO RESORTS
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
August 31, 1998 and November 30, 1997 3
Condensed Consolidated Statements of
Income For the Three Months Ended
and the Nine Months Ended August 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows For the Nine Months Ended August 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HARVEYS CASINO RESORTS
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
-------- ---------
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.
3
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HARVEYS CASINO RESORTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended August 31, Ended August 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Casino $68,030 $63,148 $183,501 $162,397
Lodging 10,447 10,199 26,157 24,659
Food and beverage 13,726 13,378 35,479 33,380
Other 2,203 2,099 5,583 5,267
Management fees and
joint venture -- 1,251 -- 3,920
Less: Casino
promotional allowances (6,783) (6,399) (17,763) (16,092)
-------- -------- -------- --------
Total net revenues 87,623 83,676 232,957 213,531
-------- -------- -------- --------
Costs and expenses
Casino 30,653 27,306 86,310 75,168
Lodging 3,673 3,524 10,299 10,051
Food and beverage 8,305 8,461 22,664 22,595
Other operating 808 806 2,230 2,145
Selling, general and
administrative 20,636 20,541 58,766 55,432
Depreciation and
amortization 5,276 5,043 15,641 13,987
Merger related costs 1,103 - 1,103 -
-------- -------- -------- --------
Total costs and expenses 70,454 65,681 197,013 179,378
-------- -------- -------- --------
Operating income 17,169 17,995 35,944 34,153
-------- -------- -------- --------
Other income (expense)
Interest income 591 81 1,495 245
Interest expense (4,477) (4,929) (13,390) (14,776)
Other, net (63) (166) (123) 49
-------- -------- -------- --------
Total other income (expense) (3,949) (5,014) (12,018) (14,482)
-------- -------- -------- --------
Income before income taxes 13,220 12,981 23,926 19,671
Income tax provision (5,288) (5,257) (9,571) (7,965)
-------- -------- -------- --------
Net income $ 7,932 $ 7,724 $14,355 $ 11,706
-------- -------- -------- --------
-------- -------- -------- --------
Income per common share
Basic $ 0.79 $ 0.79 $ 1.43 $ 1.19
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.77 $ 0.78 $ 1.41 $ 1.19
-------- -------- -------- --------
-------- -------- -------- --------
Dividends declared
per common share $ 0.05 $ 0.05 $ 0.15 $ 0.15
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common
shares used in calculating
income per common share
Basic 10,065,851 9,832,206 10,009,086 9,822,667
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Diluted 10,265,027 9,851,443 10,213,456 9,835,297
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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HARVEYS CASINO RESORTS
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.
5
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HARVEYS CASINO RESORTS
NOTES TO 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 controlled affiliate of Colony Capital, Inc. of Los Angeles,
6
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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 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.
7
<PAGE>
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
------- ---------- ------- ------- --------- -------
------- ---------- ------- ------- --------- -------
Nine Months Nine Months
Ended August 31, 1998 Ended August 31, 1997
--------------------- ---------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------- ---------- -------- ------ --------- -------
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 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
8
<PAGE>
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.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The Company currently owns and operates: (a) Harveys Resort Hotel/Casino on
the south shore of Lake Tahoe, Nevada, (b) Harveys Wagon Wheel Hotel/Casino
in Central City, Colorado and (c) Harveys Casino Hotel in Council Bluffs,
Iowa. Until October 24, 1997, the Company, through its wholly-owned
subsidiary, HLVMC, owned 40% of the equity interest in 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.
The following table presents certain operating results for the Company's
properties. The operating results for Harveys Resort Hotel/Casino, which,
since June 1, 1997, has been owned and operated by the Company's 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". The operating
results of HLVMC, for the three months and nine months ended August 31, 1997,
include the fees earned by such entity 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>
Results of Operations Three Months Nine Months
Ended August 31, Ended August 31,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Net Revenues
Harveys Resort Hotel/Casino $ 42,287 $ 42,339 $101,739 $ 98,390
Harveys Wagon Wheel Hotel/Casino 16,263 13,919 47,035 36,350
Harveys Casino Hotel - Iowa 29,073 26,167 84,183 74,871
Harveys L. V. Management Company -- 1,251 -- 3,920
Operating Income (Loss)
Harveys Resort Hotel/Casino $ 11,967 $ 11,946 $ 19,424 $ 18,298
Harveys Wagon Wheel Hotel/Casino 3,593 2,852 11,002 7,215
Harveys Casino Hotel - Iowa 5,772 4,754 15,928 13,423
Harveys L. V. Management Company -- 1,196 -- 3,754
Corporate and Development (4,163) (2,753) (10,410) (8,537)
EBITDA (1)
Harveys Resort Hotel/Casino $ 14,274 $ 14,217 $ 26,529 $ 24,546
Harveys Wagon Wheel Hotel/Casino 4,493 3,704 13,716 9,573
Harveys Casino Hotel - Iowa 7,701 6,481 21,340 18,230
Harveys L. V. Management Company -- 1,251 -- 3,920
Corporate and Development (2,921) (2,615) (8,898) (8,129)
</TABLE>
Note to the operating results
(1) EBITDA (operating income plus depreciation and amortization and merger
related costs) should not be construed as an indicator of the Company's
operating performance, or as an alternative to cash flows from operating
activities as a measure of liquidity. The Company has presented EBITDA
solely as supplemental disclosure because the Company believes that it
enhances the understanding of the financial performance of companies
with substantial depreciation and amortization.
10
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COMPARISON OF THE QUARTER ENDED AUGUST 31, 1998 TO THE QUARTER ENDED AUGUST
31, 1997
The Company's consolidated net revenues for the third quarter of fiscal 1998
amounted to approximately $87.6 million, a new record for the Company's third
quarter and an increase of $3.9 million, or 4.7%, over net revenues recorded
in the third quarter of fiscal 1997. The improvement was substantially
attributable to the $2.9 million increase in net revenues recognized at
Harveys Casino Hotel in Iowa, due in part to expanded gaming facilities which
opened near the end of the first fiscal quarter and increased the slot
machine count by approximately 180 machines. Harveys Wagon Wheel Hotel/Casino
recorded an increase in net revenues of $2.3 million. The increase at the
Colorado property was attributable to an increase in the number of casino
patrons. Net revenues from the Company's Lake Tahoe property equaled its net
revenues for the third quarter of fiscal 1997. The revenue contribution from
the management fees and equity in earnings from the Hard Rock Hotel and
Casino declined by $1.3 million, as a result of the sale of the Company's
interests in the Hard Rock Hotel and Casino in October 1997.
Casino revenues for the third quarter of fiscal 1998 amounted to
approximately $68.0 million, an improvement of $4.9 million, or 7.7%, over
the comparable quarter of the prior year. The expanded gaming facilities at
the Council Bluffs property produced an increase of approximately $3.0
million in casino revenues. The increased customer count at Harveys Wagon
Wheel Hotel/Casino produced an increase of approximately $2.4 million in
casino revenues over the prior year comparable quarter. The Company's Lake
Tahoe casino revenues declined by approximately $0.5 million due to a decline
in slot machine volume and slot hold percentage. Companywide, casino costs
and expenses increased for the comparable periods, up $3.3 million to $30.6
million. The Council Bluffs casino accounted for $2.0 million of the
increase while the Colorado operations accounted for approximately $1.3
million of the increase. The Lake Tahoe property's casino expenses equaled
its expenses for the third quarter of fiscal 1997. The increase in casino
costs and expenses at the Iowa and Colorado operations 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 third quarter improved by approximately
$0.2 million, or 2.4%, over the prior year third quarter and amounted to
$10.4 million. The hotel facility in Lake Tahoe, the company's largest,
contributed the majority of the quarter-over-quarter increase. An
improvement in the occupancy rate was recognized at all properties. Lodging
profits improved by approximately $0.1 million.
Food and beverage revenues for the current fiscal year third quarter amounted
to approximately $13.7 million, an improvement of over $0.3 million, or 2.6%,
over prior year third quarter. Food and beverage revenues from the Council
Bluffs property contributed an increase of over $0.2 million and the Lake
Tahoe property contributed an increase of over $0.1 million. Food and
beverage profits and margins increased for the quarter-to-quarter comparison
due to the increased revenues at the Iowa and Nevada properties and the
improvement in variable costs at the Iowa property.
11
<PAGE>
The combination of other revenues and the contribution from management fees
and equity in the earnings from the Hard Rock Hotel and Casino decreased
approximately $1.1 million, or 34.2%, primarily as a result of the October,
1997 sale of the Company's interests in the Hard Rock Hotel and Casino.
Selling, general and administrative expenses remained relatively level, up by
approximately $0.1 million, or 0.5%, to $20.6 million for the current fiscal
year third quarter. The Lake Tahoe operations recognized an improvement of
approximately $0.4 million in overall selling, general and administrative
expenses and the Council Bluffs operations recognized an improvement of
approximately $0.1 million. These expenses increased by $0.3 million at the
Central City property. Corporate expenses increased by approximately $0.3
million.
Depreciation and amortization expenses increased by approximately $0.2
million, or 4.6 percent. The increase was attributable to replacements and
improvements at the operating properties.
In the current fiscal year third quarter, the Company recognized
approximately $1.1 million of financial consulting, legal and accounting
expenses related to the pending Merger. The Company expects to incur
additional expenses in the fourth quarter and at the closing of the Merger
including financial consulting fees of approximately $2.2 million, additional
legal and accounting fees and compensation costs relative to the termination
of certain long-term compensation plans.
Interest expense, net of interest income and interest capitalized, decreased
by approximately $1.0 million, or 19.8%, to $3.9 million for the third
quarter of fiscal 1998. The decrease was attributable to the use of the
proceeds from the Company's October 1997 sale of its interests in the Hard
Rock Hotel and Casino. A portion of the proceeds was used to pay off the
outstanding balance under the Company's reducing revolving credit agreement
with a consortium of banks (the "Credit Facility"), thereby reducing interest
expenses. The balance of the proceeds was invested in cash equivalents,
resulting in an increase in interest income. Approximately $0.1 million of
interest expense was capitalized in the third quarter of fiscal 1997 in
connection with the construction of the parking facility in Central City. No
interest was capitalized in the third quarter of fiscal 1998.
As a result of the above, net income for the third quarter of fiscal 1998
amounted to $7.9 million compared to $7.7 million for the third quarter of
fiscal 1997, an increase of 2.7 percent.
COMPARISON OF THE NINE MONTHS ENDED AUGUST 31, 1998 TO THE NINE MONTHS ENDED
AUGUST 31, 1997
The Company's 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 Hotel/Casino 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
12
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casino expansion. Net revenues from the Company's Lake Tahoe 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 sale of the Company's
interests in the Hard Rock Hotel and Casino 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 Hotel/Casino 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. The Company's Lake Tahoe
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
the Company's 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
13
<PAGE>
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
percent. 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 Company's October 1997 sale of its interests in the Hard Rock Hotel and
Casino. A portion of the proceeds was used to pay the outstanding balance
under the 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 percent.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources during the
first nine months of fiscal 1998 have been 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 the Company's common
stock.
During the first nine months of fiscal 1998, the Company expended
approximately $9.8 million in cash for income taxes. Additionally, the
Company 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.
14
<PAGE>
At August 31, 1998, the Company 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.
The Company expects that its primary capital needs for the remainder of
fiscal year 1998 will include approximately $6.4 million of capital
expenditures at the Company's current facilities, dividend payments and debt
service.
The Company's debt at August 31, 1998 amounted to $150.2 million and
consisted of $150 million of Senior Subordinated Notes and approximately $0.2
million of other debt.
The maximum available principal balance under the Credit Facility at August
31, 1998 was $115 million, reduced by outstanding borrowings and letter of
credit exposure. At August 31, 1998 there were no outstanding borrowings
under the Credit Facility, letter of credit exposure was $2.0 million and the
maximum amount available was approximately $113.0 million, subject to
compliance with financial covenants.
The maximum available principal balance reduces on October 1 of each year
beginning in 1998 and continuing through 2001. The maximum available
principal balance outstanding under the Credit Facility reduces to $103.5
million in 1998, $92 million in 1999, $74.75 million in 2000 and $57.5
million in 2001. The Company is required to make payments reducing the
principal balance outstanding under the Credit Facility to the applicable
maximum permitted principal balance on October 1 of each of 1998, 1999, 2000
and 2001. 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 wholly-owned subsidiary of 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 wholly-owned subsidiary of the Company. Interest on
borrowings outstanding under the Credit Facility is payable, at the Company's
option, at either the London Inter-Bank Offering Rate ("LIBOR") or the prime
rate of Wells Fargo Bank, National Association ("Wells Fargo"), in each case
plus an applicable margin. The applicable margins as of August 31, 1998 were
1.50% with respect to the LIBOR based interest rate, and 0.00%, with respect
to the Wells Fargo prime rate based interest rate.
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 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 August 31, 1998.
15
<PAGE>
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. At August 31,
1998, the guaranteeing Restricted Subsidiaries were HCCMC, HIMC, HLVMC and
HTMC.
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. If the Merger is consummated, a Change of Control will be
deemed to have occurred and the holders of the Senior Subordinated Notes will
be able to require the Company to effect such a repurchase.
The Indenture contains certain covenants that impose limitations on, among
other things, (a) the incurrance of additional indebtedness by the Company 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 the Company or any
Restricted Subsidiary, (d) mergers, consolidations and sales of assets by the
Company or any Restricted Subsidiary, (e) the creation or incurrance 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 August 31, 1998.
The Company believes that its existing cash and cash equivalents, cash flows
from operations and its borrowing capacity under the Credit Facility are
sufficient to meet the cash requirements of its existing operations during
the next twelve months, including capital improvements and replacements at
the operating properties, dividends and debt service requirements.
Unless a significant number of holders of the Senior Subordinated Notes
exercise their rights to effect a repurchase of the Senior Subordinated Notes
upon the consummation of the Merger, which the Company does not consider
likely, the existing sources of cash also provide the Company some
flexibility in potential expansion of current operations or in its pursuit of
new gaming opportunities in existing and emerging jurisdictions. The
realization of such expansion opportunities may require capital investments
in excess of current resources and additional financing may be required. The
16
<PAGE>
Company believes that additional funds could be obtained through additional
debt or equity financing. However, any such financing would require the
consent of Harveys Acquisition Corporation under the terms of the Merger
Agreement and no assurance can be made that such consent would be granted or
that such financing would be available at terms acceptable to the Company, if
at all.
YEAR 2000
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".
The Company has completed an inventory and evaluation of the hardware,
software and components (the "Systems") that it utilizes in order to identify
those Systems that may not be Year 2000 compliant. The evaluation included
reviews and testing of the Systems as well as inquiries of third parties that
supplied or that maintain the Systems.
As a result of the evaluation, the Company has developed a corrective action
plan including prioritized timelines and estimated costs. The corrective
action plan includes modifications, upgrades or replacements of the
non-compliant Systems.
The Company has also initiated a more limited review of the Year 2000 Problem
as it relates to business associates of the Company including material
vendors, suppliers, financial institutions and utility and communications
providers. The scope of the review has generally been limited to inquiries
of such business associates. The Company expects that the review will be
completed by November 30, 1998. Based on the information received to date,
the Company is not aware of any Year 2000 Problem impact on a material
business associate that would have a material adverse affect on the Company's
business operations. However, there can be no assurances that all of the
Company's material business associates will be Year 2000 compliant in a
timely manner.
The Company is in the process of implementing its corrective action plan.
The Company is utilizing internal resources and external resources to achieve
the plan objectives. The Company 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 year end. The Company believes
that its corrective action plan, including the timelines, is adequate and
realistic. Nevertheless, if one or more of the Company's Systems has been
overlooked or if implementation of the corrective action plan fails to
achieve Year 2000 compliance for one or more Systems, there could be a
material adverse impact on the Company's business operations or financial
performance.
17
<PAGE>
The Company 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. The
Company has not developed a comprehensive contingency plan, although a number
of Systems, including the Casino System, are "backed up" by manual procedures
that have been employed during times of Systems being unavailable. The
Company 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.
The Company estimates that the costs to achieve Year 2000 compliance,
including those costs that are capitalizable, will be approximately $4.1
million and will be expended through 2000. The Company has incurred costs of
approximately $1.0 million to date in fiscal year 1998, including
approximately $0.7 million that has been capitalized. The Company believes
it will expend an additional $0.1 million during the remainder of fiscal
1998, none of which will be capitalized. The Company expects to incur an
additional cost of approximately $3.0 million in fiscal 1999, approximately
$2.6 million of which will be for capital acquisitions. The Company
believes that its expenditures in fiscal 2000 will not be material. These
estimates are based on the Company's 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 it is possible that actual costs could materially differ
from the estimate.
18
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This document includes various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Sections 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs concerning future events.
Statements containing expressions such as "believes", "anticipates", or
"expects" used in the Company's press releases and periodic reports on Forms
10-K and 10-Q filed with the Securities and Exchange Commission are intended
to identify forward-looking statements. All forward-looking statements
involve risks and uncertainties. Although the Company believes its
expectations are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurances that
actual results will not materially differ from expected results. The Company
cautions that these and similar statements included in this report and in
previously filed periodic reports, including reports filed on Forms 10-K and
10-Q, are further qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statements.
Such factors include, without limitation, the following: increased
competition in existing markets or the opening of new gaming jurisdictions; a
decline in the public acceptance of gaming; the limitation, conditioning or
suspension of any of the Company's gaming licenses; increases in or new taxes
imposed on gaming revenues or gaming devices; a finding of unsuitability by
regulatory authorities with respect to the Company's officers, directors or
key employees; loss or retirement of key executives; significant increases in
fuel or transportation prices; adverse economic conditions in the company's
key markets; severe and unusual weather in the Company's key markets; adverse
results of significant litigation matters. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of
the date thereof. The Company undertakes no obligation to publicly release
any revision to such forward-looking statements to reflect events or
circumstances after the date thereof.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2 Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See attached Exhibit Index
(b) Reports on Form 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARVEYS CASINO RESORTS
----------------------
Registrant
Date: October 13, 1998 /s/ JOHN J. McLAUGHLIN
------------------------------------
John J. McLaughlin,
Senior Vice President,
Chief Financial Officer andTreasurer
(Authorized Officer and Principal
Financial Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated February 1, 1998 (1)
3.1 Restated Articles of Incorporation of the Registrant (2)
3.2 Sixth Amended Bylaws of the Registrant (3)
4.1 Form of Stock Certificate of the Registrant (2)
4.2 Indenture, dated as of May 15, 1996 by and among the Registrant
(the "Issuer") Harveys Wagon Wheel Casino Limited Liability
Company, Harveys C. C. Management Company, Inc., Harveys Iowa
Management Company, Inc. and Harveys L. V. Management Company, Inc.
(the "Guarantors") and IBJ Schroder Bank & Trust Company as Trustee
(including form of Note) (4)
4.3 First Supplemental Indenture, dated as of June 5, 1996,
supplementing the Indenture as of May 15, 1996 among the Registrant
(the "Issuer"), Harveys Wagon Wheel Casino Limited Liability
Company, Harveys C. C. Management Company, Inc., Harveys Iowa
Management Company, Inc. and Harveys L.V. Management Company, Inc.
(the "Guarantors"), and IBJ Schroder Bank and Trust Company as
Trustees (5)
4.4 Second Supplemental Indenture, dated as of May 22, 1997,
supplementing the Indenture as of May 15, 1996 among the Registrant
(the "Issuer"), Harveys C. C. Management Company, Inc., Harveys
Wagon Wheel Casino Limited Liability Company, Harveys Iowa
Management Company, Inc., and Harveys L. V. Management Company,
Inc. (the "Guarantors"), and IBJ Schroder Bank and Trust Company as
Trustee (6).
27.1 Financial Data Schedule (7)
(1) Incorporated herein by reference to Registrant's Current Report on
Form 8-K filed February 3, 1998
(2) Incorporated herein by reference to Registration Statement
No. 33-70670.
(3) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended May 31, 1996.
(4) Incorporated herein by reference to Registration Statement
No. 333-3576.
(5) Incorporated herein by reference to Registrant's Current Report of
Form 8-K filed June 14, 1996.
(6) Incorporated herein by reference to Registrant's Quarterly Report
on Form 10-Q for the period ended August 31, 1997.
(7) Filed herewith
22
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