Exhibit 10.1
MEMORANDUM OF UNDERSTANDING
February 1, 1998
THIS MEMORANDUM OF UNDERSTANDING confirms the agreements among
Charles W. Scharer, Stephen L. Cavallaro and John J. McLaughlin
(collectively, the "EXECUTIVES"), and Harveys Acquisition Corporation, a
Nevada corporation ("ACQ CORP") recently organized by Colony Capital, Inc., a
Delaware corporation ("COLONY"), with respect to a contemplated proposal by
Acq Corp to acquire Harveys Casino Resorts, a Nevada corporation (including,
as the context may require, after giving affect to an Acquisition Transaction
(as defined below), the "COMPANY"). For all purposes herein (including the
schedules hereto), references to the Executives' employment agreements
(including all forms of compensation due thereunder) shall be deemed to
include adjustments, amendments or restatements thereof to the extent such
adjustments, amendments or restatements are permitted by the terms of the
documents governing an Acquisition Transaction or are otherwise agreed to in
writing by Acq Corp. prior to the consummation of such Acquisition
Transaction.
1. GENERAL STATEMENT OF PURPOSE. The Executives and Acq Corp
have conducted discussions with respect to an acquisition by merger of all of
the outstanding shares of Company (an "ACQUISITION TRANSACTION"). The
Executives and Acq Corp have concluded it would be desirable to effect an
Acquisition Transaction. To that end, the parties hereto have executed this
Memorandum of Understanding to confirm their binding agreements. The
Executives and Acq Corp agree that this Memorandum of Understanding shall
terminate and cease to be of effect upon the termination of the merger
agreement being executed as of the date hereof in connection with an
Acquisition Transaction.
2. AGREEMENTS WITH THE EXECUTIVES. If the contemplated
Acquisition Transaction is consummated, then, at the closing (the "CLOSING"):
(a) Each option to purchase common stock, par value $.01 per
share, of Company ("COMPANY COMMON STOCK") held by each of the Executives, as
specified in Schedule A hereto, whether vested or unvested, shall be
cancelled in exchange for a payment equal to the product of the number of
shares of Company Common Stock subject to such option and (i) the excess, if
any, of(ii) 1) the price per share of Company Common Stock to be paid by Acq
Corp in the Acquisition
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Transaction for a share of Company Common Stock over 2) the exercise price
per share of Company Common Stock of such option.
(b) Each share of Company Common Stock held by each of the
Executives, as specified in Schedule B hereto, shall be acquired by Acq Corp
at the same price per share to be paid by Acq Corp for each of the other
shares of Company Common Stock in the Acquisition Transaction.
(c) The Company's Long-Term Incentive Plan (the "LTIP"), as in
effect on the date hereof, all current performance periods thereunder, and
the rights of Messrs. Scharer, Cavallaro and McLaughlin (as well as all other
participants) to participate therein, shall be terminated in exchange for
lump sum payments pursuant to the terms of the LTIP, as specified in Schedule
C attached hereto.
(d) The rights of Messrs. Scharer, Cavallaro and McLaughlin to
participate in the Company's Management Incentive Plan (the "MIP"), as in
effect on the date hereof, shall be terminated in exchange for lump sum
payments pursuant to the terms of the MIP, as specified in Schedule D
attached hereto. Participants in the MIP other than Messrs. Scharer,
Cavallaro and McLaughlin shall be entitled to continue to participate therein
for the duration of 1998. At the election of the Company following an
Acquisition Transaction, the MIP may thereafter be maintained for an
additional period or replaced with a new bonus or equivalent plan having a
similar structure to the MIP and providing for maximum aggregate annual
payments no less in the aggregate than amounts actually paid under the MIP in
1997, but with thresholds and triggering events for payment being determined
by the Company's Board of Directors (the "BOARD") using targets established
based on an annual business plan.
(e) The severance compensation provisions of the Company's Change
of Control Plan shall remain in effect following consummation of the
Acquisition Transaction, either pursuant to that plan or a replacement change
of control plan reasonably acceptable to the Executives. If reasonably
requested by Acq Corp, a document shall be executed and delivered by the
Executives to clarify that no separate severance rights remain under Messrs.
Scharer, Cavallaro and McLaughlin's existing employment agreements with the
Company, and the Change of Control Plan shall be amended to clarify that no
dual severance rights shall apply to any participant in the plan. The Change
of Control Plan shall also be amended to clarify that non-competition
agreements between the Company and plan participants shall be enforceable.
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(f) The rights of Messrs. Scharer, Cavallaro and McLaughlin to
participate in the Company's Supplemental Executive Retirement Plan ("SERP")
shall be terminated. It is agreed that the accrued SERP benefits for such
individuals as of the Closing shall be $1,261,435, $701,454 and $450,000,
respectively. At the Closing, one-half of each such amount shall be paid in
a lump sum to Messrs. Scharer, Cavallaro and McLaughlin. The parties will
endeavor in good faith to achieve a reasonably satisfactory approach pursuant
to which the remaining amounts, rather than being distributed, shall be
rolled over into an unfunded phantom stock account, Rabbi Trust or similar
deferral arrangement and shall be deemed to be invested in Company Common
Stock at the Implied Price (as hereinafter defined) and otherwise on
substantially the same terms as contemplated with respect to the Base Stock
Grant Shares under Section 4 hereof, except that appropriate deferral
mechanisms consistent with a SERP or other deferred compensation plan shall
be implemented so that no adverse tax consequences will result to the
Executives from the rolled-over amounts. Otherwise, such remaining amounts
will be distributed and reinvested in Company Common Stock at the Implied
Price and otherwise on substantially the same terms as contemplated with
respect to the Base Stock Grant Shares under Section 4 hereof.
(g) Each of the Executives shall enter into a non-competition
agreement with the Company, pursuant to which each Executive shall agree not
to (i) engage in owning, operating and developing casinos or hotels
associated or materially competitive with casinos, except in connection with
such Executive's employment with the Company, (ii) solicit any employee,
agent or consultant of the Company to terminate such person's relationship
with the Company or (iii) solicit any counterparty to any contract with the
Company to terminate such counterparty's contract or other relationship with
the Company. Such non-competition agreements shall have a term of (i) twelve
months following any termination of such Executive's employment with the
Company in the case of clause (i) of the first sentence of this paragraph and
(ii) two years following any termination of such Executive's employment with
the Company in the case of clauses (ii) and (iii) of the first sentence of
this paragraph. Reasonable exceptions to the non-competition restrictions
will be provided in respect of (i) hospitality activities not materially
competitive with gaming, (ii) passive ownership of less than 5% of public
companies and (iii) investments in enterprises which are principally
bar/restaurant enterprises containing no more than 50 gaming positions.
(h) Each of the Executives shall enter into a new employment
agreement with the Company containing mutually acceptable terms based on
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reasonable and customary provisions in comparable agreements in addition to
the provisions expressly contemplated herein. The employment agreements
shall have a term of five years from the Closing and provide for, without
limitation, (i) annual base salaries of $500,000, $400,000 and $300,000 for
Messrs. Scharer, Cavallaro and McLaughlin, respectively, to be reviewed no
less than annually relative to specified performance-based criteria
determined by the Board, (ii) annual year-end incentive payments under the
MIP or such other plan as may be implemented consistent with Section 2(d)
hereof, the payment and amount of which are to be based on the achievement of
the annual budget submitted to the Board and business plan targets to be
determined by the Board following the Acquisition Transaction, based on such
budget, (iii) the continuation of perquisites in effect with respect to the
Executives as of the date hereof, (iv) the immediate vesting of all options
and restricted stock grants upon a change of control, (v) 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 supercede 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, (vi) five weeks vacation time for each of the
Executives (PROVIDED that Messrs. Cavallaro and McLaughlin shall each be
entitled to four weeks vacation during the first three years of the term of
such employment agreements), (vii) reasonable notice and cure provisions in
the event of breaches, (viii) geographic location rights consistent with
those in the Company's existing employment agreements with respect to Messrs.
Scharer and Cavallaro, and similar to those contained in Mr. Scharer's
employment agreement, with respect to Mr. McLaughlin, (ix) "for cause"
definitions consistent with those in the Company's existing employment
agreements with the Executives, except that "for cause" shall also include
instances of a conviction of a felony and the definition of "dishonest"
contained therein shall be clarified to include instances of fraud, and (x)
trade secret protection agreements.
3. MANAGEMENT STRUCTURE AND COMPENSATION; BOARD DESIGNATION.
Upon the consummation of the contemplated Acquisition Transaction, Messrs.
Scharer, Cavallaro and McLaughlin shall remain the President and Chief
Executive Officer, the Chief Operating Officer and the Senior Vice President
and Chief Financial Officer, respectively, of the Company immediately
following the
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Acquisition Transaction. The other officers of the Company shall be
appointed by Mr. Scharer, with the approval of the Board.
Prior to the contemplated Acquisition Transaction, the members of
Acq Corp's Board of Directors shall be designated by Colony. Upon
consummation of the contemplated Acquisition Transaction, such Acq Corp
directors, together with Messrs. Scharer and Cavallaro, shall initially
comprise the Board.
4. MANAGEMENT STOCK OWNERSHIP; MANAGEMENT INCENTIVE PROGRAMS.
The Company shall grant to the Executives, the general managers of the
Company's facilities located in each of Nevada, Iowa and Colorado as of the
date hereof, the vice president of human resources, the vice president of
marketing as of the date hereof, the vice president of business development
as of the date hereof and such others as are mutually determined by Mr.
Scharer and the Board (collectively with the Executives, the "KEY MANAGERS")
the number of shares of the Company Common Stock that is equivalent in the
aggregate to three percent of the Company Common Stock outstanding at the
Closing (the "BASE STOCK GRANT SHARES"). Except as otherwise provided
herein, twenty percent of the Base Stock Grant Shares granted to each Key
Manager shall vest on each of the first through fifth anniversaries of the
Closing, in accordance with each Key Manager's employment agreement to the
extent applicable.
If, prior to the fifth anniversary of the Closing, the Company
opens one or more new gaming facilities (each, a "NEW PROJECT"), and, for
each of any four consecutive fiscal quarters within the first two years
following the opening thereof, (a) the ratio of (i) any such New Project's
net income, before interest expenses, income taxes, depreciation,
amortization and pre-opening expenses ("EBITDA") to (ii) such New Project's
aggregate invested development, construction and pre-opening costs, including
transaction costs, is at least seventeen and one half percent, and (b) such
New Project's EBITDA for those four quarters is at least $25 million, then
the Company shall grant to such of the Key Managers and such others as are
mutually determined by Mr. Scharer and the Board the number of shares of the
Company Common Stock that is equivalent in the aggregate to an additional two
percent of the Company Common Stock outstanding at the Closing (the
"INCENTIVE STOCK GRANT SHARES"). The Incentive Stock Grant Shares shall vest
on the same schedule as the Base Stock Grant Shares as if such Incentive
Stock Grant Shares had been granted at the Closing, in accordance with each
Key Manager's employment agreement to the extent applicable.
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The Company shall grant to the Key Managers options to acquire, at
the price per share (the "IMPLIED PRICE") obtained by dividing Colony's
initial common stock investment in the Acquisition Transaction by the number
of shares of Company Common Stock acquired by Acq Corp thereby, the number of
shares of the Company Common Stock that is equivalent in the aggregate to
five percent of the Company Common Stock outstanding at the Closing (the
"MANAGEMENT OPTIONS"). Twenty percent of the Management Options shall vest on
each of the first through fifth anniversaries of the Closing, in accordance
with each Key Manager's employment agreement.
The Base Stock Grant Shares, the Incentive Stock Grant Shares and
the Management Options shall be subject to other terms and provisions,
including customary transfer restrictions and provisions pursuant to which
two-thirds of all vested options and grants and all unvested options and
grants will be forfeited without compensation (except that shares acquired
pursuant to Section 2(f) will be cashed out at the lesser of (A) fair market
value and (B) the invested amount as increased at a cumulative rate of 8% per
year), effective upon termination by the Company for cause or resignation by
the Key Managers. The parties agree to negotiate in good faith to provide
alternative provisions for the payment of taxes by the Executives resulting
from the receipt of such shares or options, PROVIDED that the Company will
not be required to suffer additional costs or other adverse consequences in
connection therewith beyond reasonable administrative costs associated with
any alternative provision that may be agreed upon and de minimus consequences
not otherwise reasonably avoidable, including, without limitation: (i) An
IRC Section 83(b) election at Closing, (ii) a Company agreement to provide
tax liquidity at such time as income is recognized by the Executive, or (iii)
adoption of a deferred compensation arrangement, such as a Rabbi Trust,
effective at such time as income is recognized by the Executive, to further
defer the payment of tax until the Company Common Stock becomes liquid.
Stock grant shares (whether or not vested) shall be deemed to be outstanding
for purposes of the receipt of any dividends on such class of stock. Option
conversions will receive customary economic anti-dilution protection.
All issuances hereunder of Company Common Stock shall be comprised
of a combination of voting and non-voting securities so that each such class
of security constitutes the applicable percentage of all such shares of such
class of security outstanding at the time of issuance.
The Board will consider future increases of the Company's stock
option plan and stock grant plan to attract and hire new executive officers
in connection with
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future property additions. So long as the Company is a private company, the
Board will consider in good faith reasonable requests to grant options as
"Incentive Stock Options" (and not "Non-Qualified Stock Options") to the
maximum extent permitted by law.
Any Company Common Stock or options issued hereunder shall be
subject to a Stockholders Agreement containing customary transfer
restrictions and other terms and provisions reasonably satisfactory to the
parties. The Stockholders Agreement shall also provide for (a) a right of
first refusal with respect to prospective transfers of any Company Common
Stock owned by any of the Key Managers, whether such securities are owned
outright or are Base Stock Grant Shares or Incentive Stock Grant Shares
subject to vesting, (b) mutually acceptable "piggyback" registration rights
with respect to the sale of Company Common Stock by Key Managers and (c)
mutually acceptable "tag-along" rights with respect to the sale of Company
Common Stock by Colony.
5. COMMITMENT TO SUPPORT ACQUISITION TRANSACTION; NO SOLICITATION
OF ALTERNATIVE TRANSACTIONS. Subject to his fiduciary duties under
applicable law as advised by counsel, each of the Executives agrees (a) that
he shall use his best efforts to assist in the consummation of the
contemplated Acquisition Transaction and shall act in good faith in such
process (including, without limitation, by voting his shares of Company
Common Stock in favor of such transaction if it is presented for a
shareholder vote and by cooperating with Acq Corp in preparing and filing any
filings required under the Securities Exchange Act of 1934, as amended, the
Securities Act of 1933, as amended, any laws relating to the current or
contemplated gaming activities and operations of Colony, Acq Corp or the
Company, or any other Federal, state or local laws relating to the
Acquisition Transaction and the transactions contemplated thereby) and (b)
that he shall not, directly or indirectly, solicit or initiate the submission
of proposals or offers from any person relating to any acquisition or
purchase of all or (other than in the ordinary course of business) a material
portion of the assets of, or any equity interest in, Company or any of its
subsidiaries or any merger, consolidation or business combination with
Company or any such subsidiary.
6. DISCLOSURE REQUIREMENTS. In connection with their execution
and delivery of this Memorandum, the Executives acknowledge and agree to
comply with all applicable disclosure requirements relating thereto imposed
under Federal and state securities laws.
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7. FEES AND EXPENSES. The Executives, on the one hand (jointly
and severally), and Acq Corp, on the other hand, shall each be responsible
for their respective expenses incurred in connection with the consideration
of the contemplated Acquisition Transaction, PROVIDED, that Acq Corp shall
pay up to $35,000 in the aggregate of the Executives' reasonably documented
expenses.
8. BINDING AGREEMENT; STANDARD OF CONDUCT. The terms of the
agreements herein shall be more fully set forth in definitive documentation,
which each of the parties hereto agrees to negotiate in good faith. The
Company will gross up payments made hereunder to account for the payment of
IRC Section 4999 excise taxes as well as taxes imposed on the gross up
payments, and will provide reasonable and customary indemnity in respect of
the same. Subject to the negotiation and execution of such definitive
documentation and the reaching of agreement on other matters contemplated but
not specifically addressed herein, each of the parties hereto acknowledges
and agrees that this Memorandum of Understanding is intended as a binding
agreement among them with respect to the matters set forth herein.
9. PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by reason of this
Agreement except as specifically referred to in connection with Colony.
Neither this Agreement nor any of the rights, interests or obligations under
this Agreement shall be assigned, in whole or in part, by operation of law or
otherwise by any of the parties without the prior written consent of the
other parties, except that Acq Corp may assign, in its sole discretion, any
or all of its rights, interests and obligations under this Agreement to any
controlled affiliate of Colony. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEVADA, WITHOUT REGARD
TO ANY APPLICABLE CONFLICTS OF LAW.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, each of the parties hereto has executed this
Memorandum of Understanding as of the date first above written.
HARVEYS ACQUISITION CORPORATION
By: /s/ Kelvin L. Davis
-----------------------------------
Name: Kelvin L. Davis
Title: President
/s/ Charles W. Scharer
---------------------------------------
CHARLES W. SCHARER
/s/ Stephen L. Cavallaro
---------------------------------------
STEPHEN L. CAVALLARO
/s/ John J. McLaughlin
---------------------------------------
JOHN J. MCLAUGHLIN
SCHEDULE A (1)
OPTIONS TO PURCHASE COMPANY COMMON STOCK HELD BY EXECUTIVES
CHARLES W. SCHARER
215,500 Options Purchased at $28 less Exercise Price
183,500 Options at $16.4375 Exercise Price
32,000 Options at $14.00 Exercise Price
183,500 x (28 - 16.4375) = $ 2,121,719
32,000 x (28 - 14.00) = $ 448.000
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Total Payment $ 2,569,719
STEPHEN L. CAVALLARO
78,800 Options Purchased at $28 less Exercise Price
48,800 Options at $16.4375 Exercise Price
30,000 Options at $14.00 Exercise Price
48,800 x (28 - 16.4375) = $ 564,250
30,000 x (28 - 14.00) = 420,000
---------
Total Payment $ 984,250
JOHN J. MCLAUGHLIN
41,000 Options Purchased at $28 less Exercise Price
41,000 x (28 - 16.4375) = $474,063
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(1) This Schedule assumes a purchase price for the Company Common Stock
of $28 per share. If the purchase price per share is other than $28, this
Schedule shall be revised accordingly.
SCHEDULE B (2)
GRANTS OF RESTRICTED COMPANY COMMON STOCK HELD BY EXECUTIVES
CHARLES W. SCHARER
$28 x 18,000 Shares = $504,000
STEPHEN L. CAVALLARO
$28 x 15,000 Shares = $420,000
JOHN J. MCLAUGHLIN
$28 x 10,000 Shares = $280,000
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(2) This Schedule assumes a purchase price for the Company Common Stock
of $28 per share. If the purchase price per share is other than $28, this
Schedule shall be revised accordingly.
SCHEDULE C
PAYMENTS TO BE MADE TO EXECUTIVES PURSUANT TO COMPANY'S
LONG-TERM INCENTIVE PLAN
Charles W. Scharer $1,081,988
Stephen L. Cavallaro $ 531,018
John L. McLaughlin $ 332,063
SCHEDULE D
PAYMENTS TO BE MADE TO EXECUTIVES PURSUANT TO COMPANY'S
MANAGEMENT INCENTIVE PLAN
Charles W. Scharer $467,500
Stephen L. Cavallaro $232,500
John L. McLaughlin $187,500