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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to____________
COMMISSION FILE NUMBER 1-9728
JACKPOT ENTERPRISES,INC.
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 88-0169922
________________________________ ___________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1110 Palms Airport Drive, Las Vegas, Nevada 89119
___________________________________________ ____________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 263-5555
____________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
_______________________________________ _______________________
Common Stock - Par value $.01 per share, New York Stock Exchange
which include certain preferred stock
purchase rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes x No
___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K: x
___
As of August 30, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $93,000,000.
As of August 30, 1996, there were 9,355,995 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
PART I
Item 1. Business
________
General
_______
Jackpot Enterprises, Inc., a Nevada corporation, ("Jackpot" or the
"Company") has been actively engaged, through its subsidiaries, in the
gaming industry for over 30 years. The Company is one of the largest
gaming machine route operators in the State of Nevada, operating, as
of June 30, 1996, 4,211 state-of-the-art video poker and other gaming
machines in 439 locations. Jackpot is an established leader in the
operation of gaming machines in multiple retail locations ("gaming
machine route operations"). Jackpot also operated, as of June 30,
1996, two casinos with 183 gaming machines; however, such operations
will be disposed of as soon as is practical, subject to market
conditions.
As of June 30, 1996, Jackpot operated 4,394 gaming machines in 441
locations. Approximately 94% of the gaming machines were video poker
and 6% were reel-type slot and other machines. In fiscal 1996, 92% of
total revenues were derived from Jackpot's gaming machine route
operations and 8% from casino operations. Because of the integrated
nature of such operations, Jackpot is considered to be engaged in one
2industry segment.
Jackpot's gaming machine route operations are subject to seasonal
fluctuations. The gaming play for such operations is generally greater
in the second and fourth quarters of Jackpot's fiscal year. Unless the
context indicates otherwise, references to "Jackpot" and the "Company"
include its direct and indirect subsidiaries.
Business Development Strategy
_____________________________
The Company's business strategy is to enhance its position as a leader
in the Nevada gaming machine route market both through internal growth and
acquisition and to apply its gaming management expertise and its regulatory
experience to pursue strategic gaming activities and other value oriented
nongaming opportunities. Specifically, the Company's business strategy
includes the following:
Enhance Gaming Route Operations. The Company intends to enhance its
position as a leader in the Nevada gaming machine route business by
continuing to provide high levels of service and popular gaming
products, cultivating its existing relationships with major customers
and expanding its gaming machine route operations through the
selective addition of new locations and/or the consolidation of other
route operators. The expected continued economic and population
growth in Nevada may also benefit the Company. In addition, as
appropriate, the Company will explore the possibility of expanding its
gaming machine route business to other jurisdictions.
Pursue Other Strategic Gaming and Nongaming Opportunities. Jackpot
continually reviews and evaluates potential opportunities, in both
gaming and nongaming. The Company's strong financial position and
access to capital represent a competitive advantage which will enable
management to explore potential acquisitions and strategic
combinations. Jackpot is committed to pursue all such opportunities
in order to improve future earnings and enhance shareholder value. In
evaluating such potential opportunities the Company is looking for
candidates with either a value orientation or sustainable rates of
growth.
Although Jackpot is exploring expansion and acquisition opportunities,
there can be no assurance that such opportunities will be available on
terms acceptable to Jackpot or that if completed that such opportunities
will be successful.
Gaming Machine Route Operations
_______________________________
Gaming machine route operations involve the installation, operation
and service of gaming machines owned by Jackpot in licensed, leased or
subleased space in retail stores (supermarkets, drug stores, merchandise
stores and convenience stores), bars and restaurants. With respect to
retail stores, Jackpot generally licenses, leases or subleases space in
stores which are part of a chain of stores and installs gaming machines and
a change booth near the store's entrance, where customer traffic is
greatest. The number of gaming machines per store is determined by
licensing limitations, available space and license, lease or sublease
negotiations.
In fiscal 1996, approximately 75% of Jackpot's gaming machine route
revenues were generated by southern Nevada operations and 25% by northern
Nevada operations. Management believes that Jackpot has a substantial
market share of gaming machine operations in supermarkets, drug stores and
merchandise stores in Nevada, and that its customers are primarily local
Nevada residents.
As of June 30, 1996, Jackpot operated in its gaming machine route
business 4,211 gaming machines at 439 locations; 114 of the locations
contained 15 gaming machines, 43 of the locations contained more than
15 machines and 282 of the locations contained fewer than 15 machines.
Change booths are operated at retail store locations with generally 15
gaming machines or more during all store business hours by employees
of Jackpot who provide coins and tokens to players of the gaming
machines in exchange for currency. On a regular basis, coins and
tokens are removed from the gaming machines and the coin and token
supply of the change booth is replenished.
Gaming machines are routinely serviced, repaired, and maintained
by mechanics employed by Jackpot. In the opinion of management, Jackpot's
gaming machines and associated equipment are well-maintained, adequately
insured, and in good working condition.
The following table sets forth certain historical data showing the
changes to the number of machines and locations in Jackpot's gaming
machine route operations through June 30, 1996:
As of June 30,
_________________________________________
1996 1995 1994 1993 1992
_____ _____ _____ _____ _____
Number of machines on location 4,211 4,284 4,072 4,488 2,776
Number of locations 439 452 434 486 294
Jackpot's agreements for its locations generally are in the form
of written license, lease, sublease or revenue sharing contract and
generally give Jackpot the exclusive right to install gaming machines
at such locations. License, lease and sublease agreements accounting
for approximately 64% of total gaming machine route operations
revenues in fiscal 1996 required payments of fixed monthly fees based
upon the amount of space used and/or the number of gaming machines
placed at the location. The remainder provided for the payment to the
location owner of a rental fee or a revenue sharing arrangement based
upon a percentage of the revenues generated by Jackpot's gaming
machines at such location. A location owner is not permitted to
receive gaming machine revenues (lease or otherwise) based upon a
percentage of revenues unless such owner is licensed by the Nevada
Gaming Commission. The renewal or extension of agreements at existing
locations have generally resulted in increased monthly fees.
Prior to negotiating licenses, leases and subleases and installing
machines, Jackpot performs a study of market potential, customer base,
and comparative route locations in order to determine the appropriate type
and denominations of gaming machines to be installed in each new location.
This evaluation is ongoing at all locations and machine mix changes are
made accordingly to maximize the operating performance of each location.
Licenses, leases and subleases have a wide range of terms and
maturities, with expiration dates extending from 1996 to 2004. Jackpot has
a significant amount of its gaming machine route operations at retail
stores which are part of a group of affiliated store chains. Gaming
machine route operations from two groups of affiliated store chains in
fiscal 1996, 1995 and 1994 each accounted for more than 10% of Jackpot's
total revenues in such fiscal years. The largest six store chains
(Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation, Lucky
Stores, Inc., Thrifty PayLess, Inc. and Warehouse Markets, Inc.) accounted
for approximately 54% of Jackpot's total revenues in fiscal 1996. Leases
covering the six store chains have a wide range of terms and maturities,
with expiration dates extending from 1997 to 1999. The loss or nonrenewal
of any of these leases could have a material adverse effect on the
Company's future results of operations.
License, lease and sublease agreements representing approximately 22%
of fiscal 1996 gaming machine route operations revenues have terms expiring
in fiscal 1997. Included in the 22% are three agreements, which expire on
June 30, 1997, with three of Jackpot's largest six retail chain store
customers representing 16% of fiscal 1996 gaming machine route operations
revenues. Jackpot anticipates the renewal of these agreements will be
offered on a competitive basis. While the Company intends to actively seek
to renew these agreements, there is no assurance that the Company will be
able to renew or extend such agreements or that these agreements will be
renewed upon terms that Jackpot will find acceptable.
Most of Jackpot's licenses, leases and subleases with major retail
chains cover a number of specified stores in Nevada and usually provide
Jackpot with an option to install gaming machines at any new stores of the
retail chain opened in the state. All of the licenses, leases and
subleases require Jackpot to pay all installation, maintenance and
insurance expenses and all taxes in connection with Jackpot's operations at
the location. Some of the Company's license, lease or sublease agreements
require fixed periodic increases in monthly fees during the term of the
contract. Jackpot's license, lease and sublease agreements generally
provide that in the event that Jackpot fails to pay the required rental or
license fees under such license, lease or sublease or defaults in the
performance of any of its other obligations thereunder, the store operator
can terminate the license, lease or sublease, usually after notice and a
cure period of between 10 and 30 days. These agreements generally also
provide that if the store operator terminates its business at a location,
the license, lease or sublease is automatically terminated as to that
location. Jackpot believes that it is not in default under any of its
present licenses, leases or subleases. See Note 9 of Notes to Consolidated
Financial Statements.
Through fiscal 1995, the Company has historically been able to renew
or substantially replace revenues from expiring gaming machine route
agreements with revenues generated by renewal or replacement agreements.
However, increased competitive pressures in connection with the renewal or
replacement of agreements has, and continues to result in higher lease
payments as a percentage of gaming machine route operations revenues,
thereby decreasing the Company's operating margin. In order to optimize
its operating performance, the Company is engaged in a continual evaluation
of leases. As a result of such evaluation, strict adherence to
management's pricing guidelines and competitive pressure, certain
agreements for non-chain locations were not renewed in fiscal 1996. In a
potential effort to counter this trend and to possibly leverage off
Jackpot's existing infrastructure, the Company's growth strategy may
include the acquisition of other gaming machine route operators.
Casino Operations
_________________
On August 13, 1996, Jackpot's Board of Directors approved a plan to
dispose of Jackpot Owl, Inc. ( the "Owl Club") and Jackpot's Highway 93
Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos,
as part of its strategy to exit its casino operations. This decision was
reached after considering that these casino operations generated
unacceptably low returns on capital, possessed limited growth prospects and
commanded a disproportionately high amount of management time. Jackpot
intends to dispose of these casino properties as soon as is practical,
subject to market conditions.
The Owl Club, as of June 30, 1996, operated 89 gaming machines and two
live table games in Battle Mountain, Nevada. The Owl Club also has a
beverage operation incident to the conduct of gaming activities, a
restaurant operation and an eighteen room motel. Jackpot owns the land and
buildings used in the Owl Club's casino and motel operations. The Owl Club
primarily serves local residents and markets with its food and informal and
congenial atmosphere.
Jackpot manages the casino operations of the Pony Express Casino in
Jackpot, Nevada under a five-year space lease agreement, which Jackpot may
cancel upon ninety days written notice to the lessor. As of June 30, 1996,
Jackpot operated 94 gaming machines in approximately 2,600 square feet of
casino space. The Pony Express Casino attracts hotel guests, local
residents and tourists, primarily from the Idaho market.
Prior to the Board's approval to dispose of Jackpot's two remaining
casinos, Jackpot permanently ceased its casino operations at the Debbie
Reynolds' Hotel and Casino in Las Vegas due to the termination of the
management agreement between the parties, effective March 31, 1996.
Jackpot, through its operating subsidiary, Debbie's Casino, Inc.
("Debbie's"), had operated approximately 182 gaming machines and two live
table games in approximately 5,000 square feet of casino space. In
addition, Jackpot sold its 88.9% interest in Jackpot City, Inc. (the
"Nugget") effective June 30, 1996. The Nugget, which was acquired by
Jackpot on November 1, 1989, operated 181 gaming machines at a 10,000
square foot leased location in downtown Reno, Nevada during fiscal 1996.
For additional information concerning Jackpot's operations, see Item
7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Suppliers
_________
Jackpot purchases a variety of models and styles of gaming machines
primarily from one manufacturer. Jackpot is not dependent upon this
manufacturer, although it did purchase approximately 80% of its gaming
machines from such manufacturer in fiscal 1996. Each gaming machine
accepts only one denomination of coin and, with minor exceptions, each
location will have a variety of machines requiring different denominations
of coins. Gaming machines operated by Jackpot are multiple coin play.
Multiple coin play allows a player to wager several coins of the same
denomination on each play. Jackpot continues to test machines from various
gaming machine manufacturers to determine which games and models are best
suited for its customers.
Employees
_________
As of June 30, 1996, Jackpot employed approximately 875 persons,
the substantial portion of whom are non-management personnel. None of
Jackpot's employees are covered by a collective bargaining agreement
and Jackpot believes that it has satisfactory employee relations.
Competition
___________
Gaming machines and gaming of all types are available in Nevada in
casinos and hotel casinos, as well as in locations similar to those of
Jackpot, all of which compete directly or indirectly with Jackpot.
Jackpot has been and is subject to substantial direct competition for
the operation of gaming machines in approved locations from numerous
small gaming machine route operators and some large operators, located
principally in Las Vegas, Reno and their surrounding areas.
Management believes at least one of these competitors has more gaming
machines or locations than Jackpot. In addition, a limited number of
these competitors manufacture gaming machines. The principal methods
of competition for gaming machine locations are the lease, sublease,
license or revenue sharing terms, the service provided by the route
operator and the experience, reputation and financial strength of the
route operator. In recent years Jackpot has faced increased
competition in its gaming machine route operations, and as certain of
its licenses, leases and subleases have begun to expire, it has faced
strong competition from other route operators who have attempted or
captured locations by offering more favorable terms to retail store
owners.
Regulation and Licensing Requirements
_____________________________________
Nevada
The ownership and operation of casino gaming facilities and gaming
routes in Nevada are subject to: (i) the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, "Nevada Act"); and (ii)
various local regulations. The Company's gaming machine operations are
subject to the licensing and regulatory control of the Nevada Gaming
Commission ("Nevada Commission"), the Nevada State Gaming Control Board
("Nevada Board"), and local regulatory authorities. The Nevada Commission,
the Nevada Board and the local regulatory authorities are collectively
referred to 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: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity; (ii) the establishment and
maintenance of responsible accounting practice and procedures; (iii) 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; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local
revenues through taxation and licensing fees. Change in such laws,
regulations and procedures could have an adverse effect on the Company's
gaming operations.
Corporations that operate casinos and gaming machine routes in Nevada
are required to be licensed by the Nevada Gaming Authorities. A gaming
license requires the periodic payment of fees and taxes and is not
transferable. The Company is registered by the Nevada Commission as a
publicly traded corporation ("Registered Corporation") and as such, it is
required periodically to submit detailed financial and operating reports to
the Nevada Commission and furnish any other information which the Nevada
Commission may require. The Company has been found suitable by the Nevada
Commission to own the stock of Cardivan, CUI, CCI, and CCCI (the "Route
Subsidiaries") and Jackpot Gaming, Inc. Jackpot Gaming, Inc. is registered
as a holding corporation and is approved by the Nevada Gaming Authorities
to own the stock of the Owl Club, the Pony Express Casino and Debbie's (the
"Casino Subsidiaries"). No person may become a stockholder of, or receive
any percentage of profits from, the Route Subsidiaries, Jackpot Gaming,
Inc., or the Casino Subsidiaries without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company, the Route
Subsidiaries, Jackpot Gaming, Inc. and the Casino Subsidiaries have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming
activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or any
of its subsidiaries 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 the Route
Subsidiaries and the Casino Subsidiaries must file applications with the
Nevada Gaming Authorities and may be required to be licensed or be found
suitable by the Nevada Gaming Authorities. Officers, directors and key
employees of the Company who are actively and directly involved in gaming
activities of the Company or its subsidiaries 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 the Company or any of its subsidiaries, the companies
involved would have to sever all relationships with such person. In
addition, the Nevada Commission may require the Company and its
subsidiaries 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.
The Company, Jackpot Gaming, Inc., the Route Subsidiaries and the
Casino Subsidiaries 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 the
Company and its subsidiaries must be reported to, or approved by, the
Nevada Commission.
If it were determined that the Nevada Act was violated by the Company
or any of its subsidiaries, the gaming licenses and approvals they hold
could be limited, conditioned, suspended or revoked, subject to compliance
with certain statutory and regulatory procedures. In addition, the
Company, the subsidiary involved, and the persons involved could be subject
to substantial fines 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 the Company's gaming
properties and, under certain circumstances, earnings generated during
the supervisor's appointment (except for the reasonable rental value of the
Company's gaming properties) 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 the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless
of the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the
Company's voting securities determined if the Nevada Commission has reason
to believe that such ownership would otherwise be inconsistent with the
declared policies of the State of Nevada. The applicant must pay all costs
of investigation incurred by the Nevada Gaming Authorities in conducting
any such investigation.
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than
10% of the Company's 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 the Company's
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 the Company, any change in the Company's corporate
charter, bylaws, management, policies or operations of the Company, or any
of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be
inconsistent with holding voting securities for investment purposes only
include: (i) voting on all matters voted on by stockholders; (ii) 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 (iii) 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
requests, 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. The Company 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 the Company or any of its subsidiaries, the
Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that
person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to
require such unsuitable person to relinquish his 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 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 the loss of its
approvals, if without the prior approval of the Nevada Commission, it: (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation,
or similar transaction.
The Company 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. The Company is also
required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has required that the Company's
stock certificates bear a legend indicating that the securities are subject
to the Nevada Act.
The Company 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. Such approval, if given, does not constitute a
finding, recommendation or approval by the Nevada Commission or the Nevada
Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the
prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the
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.
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: (i) assure the financial stability of
corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environmental for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company 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 the
Company's 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 upon the
type of gaming or activity involved, are payable to the State of Nevada and
to the local jurisdictions. Depending upon the particular fee or tax
involved, these fees and taxes are payable either monthly, quarterly or
annually and are based upon any of: (i) a percentage of the gross revenues
received; (ii) the number of gaming devices operated; or (iii) the number
of table games operated. A casino entertainment tax is also paid by casino
operations where entertainment is furnished in connection with the selling
of food or refreshments. Nevada licensees that hold a license as an
operator of a slot route, or a manufacturer's or distributor's license,
also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is 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. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any
laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fail to conduct the foreign gaming operation in accordance with
the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or
its ability to collect gaming taxes and fees, or employ 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 the Company's casinos is subject to
licensing, control and regulation by the applicable local authorities. All
licenses are revocable and are not transferable. The agencies involved
have 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 the Company's casinos.
Federal Regulation
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes
it unlawful, in general, for a person to manufacture, deliver, or
receive gaming machines, gaming machine type devices, and components
thereof across interstate lines or to operate gaming machines unless
that person has first registered with the Attorney General of the
United States. Jackpot's subsidiaries have so registered and must
renew their registration annually. In addition, various record
keeping and equipment identification requirements are imposed by the
Federal Act. Violation of the Federal Act may result in seizure and
forfeiture of equipment, as well as other penalties.
Other Jurisdictions
Other jurisdictions also require various licenses, permits, and
approvals in connection with the ownership and operation of gaming
facilities. The operation of gaming devices and lottery devices is
subject to extensive licensing requirements and regulatory compliance.
If Jackpot proceeds with expansion into any other state or foreign
jurisdiction, it will also be necessary for the appropriate officers,
employees, corporate subsidiaries and other persons or entities to
apply for and obtain all necessary gaming and distributing licenses.
As in Nevada, state agencies and the local authorities having
jurisdiction over such activities have full power and discretion to
limit, condition, suspend and revoke such licenses or approvals and
any disciplinary action against Jackpot's affiliates in such
jurisdictions could (and revocation would) have a material adverse
effect on the operations of Jackpot in such states or local
jurisdictions.
Other
Jackpot maintains rigorous internal accounting controls in
accordance with the regulations of the Nevada Commission. Jackpot
carries insurance of such types and in such amounts as management
determines to be prudent from time to time.
Item 2. Properties
__________
Jackpot's corporate headquarters are located in Las Vegas, Nevada
with approximately 34,000 square feet of office, warehouse and shop
space under a lease which expires in 2006, with certain options for
renewal. Jackpot believes its properties are adequate and suitable
for its purposes. See Note 3 of Notes to Consolidated Financial
Statements for additional information as to Jackpot's properties in
Battle Mountain, Nevada and Jackpot, Nevada. The following table sets
forth the location, use, size, and percentage utilization of Jackpot's
properties:
Approximate Percentage
Location Use Size Utilization
________ ______________ ____________ ___________
OWNED PROPERTIES:
Battle Mountain, Nevada Casino and motel
operations 10,000 sq. ft. 100%
LEASED PROPERTIES:
Las Vegas, Nevada Executive offices,
warehouse and shop 34,000 sq. ft. 80%
Reno, Nevada Offices and shop 10,000 sq. ft. 100%
Throughout Nevada Gaming machine
operations various sq. ft.
per location 100%
Jackpot, Nevada Casino operations 2,600 sq. ft. 100%
Item 3. Legal Proceedings
_________________
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
Not applicable.
Executive Officers of the Registrant
____________________________________
The executive officers of Jackpot are appointed by the Board of
Directors for an unspecified term and can be terminated at the Board's
discretion; however, Mr. Kornstein has an employment agreement with
Jackpot which currently expires on September 30, 1999. The agreement
is automatically extended for additional one year periods on each
October 1 unless, not later than the March 31, immediately preceding
each October 1, notice is given by Jackpot or Mr. Kornstein. The
current executive officers of Jackpot (none of whom has a family
relationship with one another), their ages and positions are as
follows:
Year Became An
Name Age Position Executive Officer
________________ ___ __________________________ _________________
Don R. Kornstein 44 President, Chief Executive 1994
Officer and Director
George Congdon 47 Senior Vice President - 1995
Operations
Bob Torkar 45 Senior Vice President -
Finance, Treasurer and
Chief Accounting Officer 1991
Don R. Kornstein was appointed President, Chief Executive Officer and
a director of Jackpot on September 8, 1994. Prior to his appointment with
Jackpot, Mr. Kornstein was a Senior Managing Director of Bear, Stearns &
Co. Inc., a leading worldwide investment banking firm where he had been
employed since 1977. Mr. Kornstein was in such firm's Investment Banking
Department and was head of that firm's gaming industry group.
George Congdon was appointed Senior Vice President - Operations of
Jackpot on May 11, 1995. From October 1990 to May 1995, Mr. Congdon held
various management positions with certain of Jackpot's subsidiaries
including Vice President of Route Operations and Senior Vice President of
Operations. Prior to October 1990, Mr. Congdon was employed for over
sixteen years in various operating positions by Bally Manufacturing, Inc.
and Bally Distributing, Inc., gaming machine manufacturers and
distributors.
Bob Torkar was appointed Vice President - Finance, Treasurer and Chief
Accounting Officer of Jackpot on July 1, 1991 and Senior Vice President on
October 15, 1993. From February 1991 to June 1991, Mr. Torkar was a
financial consultant to Jackpot. Prior to the consulting assignment with
Jackpot, Mr. Torkar was Vice President and Chief Financial Officer with
Furnishings 2000, Inc., a publicly traded retail furnishings company in San
Diego, California, having spent seven years (1983-1990) with such
corporation.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
_____________________________________________________________
Jackpot's common stock, par value $.01 per share (the "Common Stock"),
is listed on the New York Stock Exchange (NYSE) with the trading symbol
"J". The following table sets forth the range of high and low prices for
shares of the Common Stock for the fiscal quarters indicated, as furnished
by the NYSE, and the per share cash dividends paid during those fiscal
quarters.
JACKPOT COMMON STOCK
______________________________________________________________________________
Dividends
High Low Paid
______________________________________________________________________________
Fiscal 1995
First Quarter $10.50 $ 7.88 $.08
Second Quarter 9.75 7.00 .08
Third Quarter 10.38 7.75 .08
Fourth Quarter 11.88 8.25 .08
______________________________________________________________________________
Fiscal 1996
First Quarter $11.25 $ 9.38 $.08
Second Quarter 13.88 10.75 .08
Third Quarter 12.63 10.75 .08
Fourth Quarter 13.88 10.75 .08
______________________________________________________________________________
As of September 3, 1996 there were approximately 2,300 holders of
record of Common Stock. The number of holders of record of Jackpot's
Common Stock on September 3, 1996 was computed by a count of record
holders.
A policy of quarterly cash dividends was adopted by Jackpot's Board of
Directors in July 1987. However, there is no assurance that quarterly cash
dividends, if any, will continue to be paid in the future since such cash
dividends are dependent upon earnings, the financial condition of Jackpot
and other factors. In each of fiscal 1995 and fiscal 1996, Jackpot paid
four quarterly cash dividends of $.08 per share to its stockholders of
record.
On January 31, 1996, 1,588,076 warrants to purchase Common Stock,
which had been distributed in connection with a special rights issuance on
July 1, 1992, expired pursuant to their terms.
Item 6. Selected Financial Data
_______________________
The following information has been derived from Jackpot's consolidated
financial statements:
Years Ended June 30,
____________________________________________________
1996 1995 1994 1993 1992
_______ _______ _______ _______ _______
(Dollars and shares in thousands, except per share data)
OPERATING DATA:
Total revenues $91,108 $96,853 $98,335 $83,271 $62,723
____________________________________________________________________________
Operating income $ 7,094(1) $ 8,968 $ 9,409(1) $11,251 $ 6,810
____________________________________________________________________________
Income (loss) before
extraordinary gain $ 5,855 $ 6,616 $(4,584) $ 6,506 $ 2,844
____________________________________________________________________________
Net income (loss) $ 5,855(2) $ 6,616 $(4,584)(2) $ 6,506 $ 3,048(2)
____________________________________________________________________________
Earnings (loss) per common
and common equivalent
share (3)(4):
Income (loss) before
extraordinary gain $ .63 $ .72 $ (.50) $ .80 $ .46
Net income (loss) $ .63 $ .72 $ (.50) $ .80 $ .49
____________________________________________________________________________
Earnings (loss) per common
share - assuming full
dilution (3)(5):
Income (loss) before
extraordinary gain $ .63 $ .72 $ (.50) $ .78 $ .46
Net income (loss) $ .63 $ .72 $ (.50) $ .78 $ .49
____________________________________________________________________________
Dividends declared per
share (3) $ .32 $ .32 $ .31 $ .38 $ .27
____________________________________________________________________________
Average primary common
equivalent shares (3) 9,307 9,235 9,211 8,532 6,400
____________________________________________________________________________
OTHER DATA:
EBITDA (6) $17,093 $18,125 $18,896 $19,338 $13,248
Net cash provided by
operating activities$12,778 $18,068 $18,367 $17,707 $10,200
Net cash used in
investing activities$(3,091) $(4,330) $(9,689) $(8,338) $(4,999)
Net cash provided by
(used in) financing
activities $(3,579) $(4,365) $(4,128) $ 890 $(2,752)
Capital expenditures $ 4,267 $ 4,044 $13,452(7) $ 3,187 $ 1,983
Amortization $ 2,199 $ 2,880 $ 2,916 $ 2,326 $ 2,133
Depreciation $ 4,284 $ 5,349 $ 5,813 $ 4,922 $ 3,560
____________________________________________________________________________
BALANCE SHEET DATA(at end of period):
Working capital $40,336 $31,640 $22,022 $28,614 $18,106(8)
____________________________________________________________________________
Total assets $70,742 $71,959 $73,459 $76,752 $63,009
____________________________________________________________________________
Long-term debt, net of
current portion $ $ 271 $ 1,403 $ 2,584 $ 573
____________________________________________________________________________
8.75% convertible
subordinated
debentures $ $ $ $ $29,921
____________________________________________________________________________
Stockholders' equity $63,495 $60,216 $56,266 $63,361 $23,051
____________________________________________________________________________
(1) Operating income includes: in 1996, a pretax loss of $2.2 million from
the write-down and sale of certain casino properties (see Note 3 of Notes
to Consolidated Financial Statements); in 1994, a pretax cost of $1.3
million in connection with the severance agreement with Jackpot's former
chief executive officer (see Note 9 of Notes to Consolidated Financial
Statements).
(2) Net income (loss) includes: in 1996, a pretax loss of $2.2 million from
the write-down and sale of certain casino properties (see Note 3 of Notes
to Consolidated Financial Statements); in 1994, a pretax loss of $16.9
million ($11.0 million after tax, or $1.20 per share) for Jackpot's share
of the closing costs, write-down of certain assets and operating loss in
a dockside casino facility in Tunica, Mississippi (see Note 4 of Notes to
Consolidated Financial Statements); and, in 1992, an extraordinary gain
($204,000 or $.03 per share) from repurchases of the 8.75% convertible
subordinated debentures.
(3) All share and per share amounts have been retroactively adjusted in 1993
and 1992 for a 10% stock dividend declared July 1, 1993 and a 5% stock
dividend declared July 1, 1992.
(4) Earnings per share calculations in 1993 and 1992 have been based on
weighted average shares outstanding adjusted for the number of common
share equivalents attributable to stock options and warrants.
(5) Earnings per share - assuming full dilution in 1993 includes the assumed
conversion of the 8.75% convertible subordinated debentures. The average
common and common equivalent shares outstanding assuming full dilution was
10.0 million shares in 1993.
(6) EBITDA represents earnings before interest expense, income tax,
depreciation, amortization and other non-cash items. EBITDA should
not be construed as an alternative to operating income or net income
(as determined in accordance with generally accepted accounting
principles), as an indicator of the Company's operating performance,
as an alternative to cash flows provided by operating activities (as
determined in accordance with generally accepted accounting principles),
or as a measure of liquidity. EBITDA is presented solely as a
supplemental disclosure because management believes that it enhances
the understanding of the financial performance of a company with
substantial amortization and depreciation expense.
(7) Capital expenditures in 1994 includes purchases of $9.0 million of
property in connection with a dockside casino facility in Tunica,
Mississippi.
(8) Working capital at June 30, 1992 includes $5.9 million of cash
equivalents and short-term investments reserved for gaming acquisitions.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
___________________________________________________________
Capital Resources and Liquidity
_______________________________
Cash Flows:
Jackpot's principal sources of cash for fiscal years ended June 30, 1996,
1995 and 1994 (referred to herein as "1996," "1995" and "1994," respectively),
consisted of the cash flows from operating activities and its available cash,
cash equivalents and short-term investments.
Net cash provided by operating activities in 1996 was approximately
$12.8 million. Net cash used in investing activities in 1996 was approximately
$3.1 million which included cash used of approximately $4.7 million and cash
received of approximately $1.6 million. The $4.7 million of cash used
included payments of approximately $4.3 million primarily for purchases of
property and equipment in connection with Jackpot's gaming machine route
operations. The $1.6 million of cash received from investing activities
consisted primarily of aggregate proceeds from sales of other non-current
assets.
Net cash used in financing activities in 1996 was approximately $3.6
million which consisted primarily of the repayment of approximately $.9 million
of long-term debt, the payment of approximately $3.0 million of dividends,
net of approximately $.3 million of proceeds from the issuance of common stock
upon the exercise of stock options.
As a result of the combination of net cash provided by operating
activities of approximately $12.8 million less net cash used in investing
and financing activities of approximately $3.1 million and $3.6 million,
respectively, cash and cash equivalents in 1996 increased approximately
$6.1 million.
Net cash provided by operating activities in 1995 was approximately
$18.1 million. Net cash used in investing activities in 1995 was approximately
$4.3 million which included cash used of approximately $6.0 million and cash
received of approximately $1.7 million. The $6.0 million of cash used
included payments of approximately $4.0 million primarily for purchases of
property and equipment in connection with Jackpot's Nevada operations, and
approximately $1.5 million used for advances to the dockside casino facility
in Tunica County, Mississippi (the "Tunica Facility"), which closed permanently
on July 8, 1994. Such advances to the Tunica Facility were used for payment
toward Jackpot's share of unpaid liabilities and estimated closing costs,
which were fully accrued as of June 30, 1994. The $1.7 million of cash
received from investing activities included aggregate proceeds from sales
of short-term investments and sales of certain assets.
Net cash used in financing activities in 1995 was approximately $4.4
million which consisted primarily of the repayment of approximately $1.4
million of long-term debt and the payment of approximately $3.0 million of
dividends.
As a result of the combination of net cash provided by operating
activities of approximately $18.1 million less net cash used in investing
and financing activities of approximately $4.3 million and $4.4 million,
respectively, cash and cash equivalents in 1995 increased approximately
$9.4 million.
Net cash provided by operating activities in 1994 was approximately $18.4
million. Net cash used in investing activities in 1994 was approximately $9.7
million which included cash received of approximately $12.3 million and cash
used of approximately $22.0 million. The $12.3 million of cash received
consisted primarily of proceeds from sales of short-term investments. The
$22.0 million of cash used included payments of approximately $4.9 million
primarily in connection with new lease agreements, payments of approximately
$4.5 million for the purchase of property and equipment in connection with
Jackpot's Nevada operations and expenditures and advances of $12.4 million in
connection with the development and operation of the Tunica Facility.
Net cash used in financing activities in 1994 was approximately $4.1
million which resulted from the repayment of approximately $1.3 million of
long-term debt, the payment of approximately $2.9 million of dividends and
the payment of approximately $.6 million for other financing activities,
net of approximately $.3 million of proceeds from long-term debt and $.4
million of proceeds from the issuance of common stock upon the exercise
of stock options and warrants.
As a result of the combination of net cash provided by operating
activities of approximately $18.4 million less net cash used in investing
and financing activities of approximately $9.7 million and $4.1 million,
respectively, cash and cash equivalents in 1994 increased approximately
$4.6 million.
Liquidity:
As described above, in 1996, Jackpot purchased approximately $4.3 million
of property and equipment. Approximately $3.8 million of the $4.3 million
was associated with equipment purchased for gaming locations. Management
anticipates that Jackpot will purchase approximately $5.1 million of property
and equipment, exclusive of business acquisitions, if any, for the fiscal
year ending June 30, 1997 ("1997").
At June 30, 1996, Jackpot had cash and cash equivalents of approximately
$39.0 million, an increase of approximately $6.1 million, or 19%, from the
beginning of 1996. Jackpot's working capital and current ratio were
approximately $40.3 million and 11.2 to 1, respectively, at June 30, 1996,
which increased from $31.6 million and 6.6 to 1, respectively, at June 30, 1995
primarily as a result of the activities described above.
On May 24, 1995, Jackpot notified Phar-Mor, Inc. ("Phar-Mor"), a large
chain store, that it was in default under the terms of certain agreements.
On July 25, 1995, Phar-Mor notified Jackpot that it disagreed with Jackpot's
position and asserted that Jackpot was in default under the terms of an
amended agreement. On or about March 7, 1996, Phar-Mor filed a lawsuit
against Jackpot in the United States Bankruptcy Court for the Northern
District of Ohio, claiming it is owed approximately $1 million under the
amended agreement. Jackpot has filed an answer and counterclaim reflecting
its position that under an original agreement Jackpot is owed in excess of
$3 million. Jackpot, based upon discussions with counsel, does not believe
it is probable that Phar-Mor will prevail in this matter. If Phar-Mor were
to prevail, Jackpot could be liable for certain obligations up to $1 million.
If Jackpot were to prevail, it would become an unsecured creditor of Phar-Mor
in an amount in excess of $3 million. For further information concerning
this matter, see Note 9 of Notes to Consolidated Financial Statements.
Management believes Jackpot's working capital and cash provided by
operations will be sufficient to enable Jackpot to meet its planned capital
expenditures and other cash requirements in 1997.
Jackpot continues to selectively explore expansion opportunities, both in
and outside Nevada, and various potential acquisitions, both gaming and
nongaming. Management believes working capital and cash provided by
operations will be sufficient to enable Jackpot to pursue expansion
opportunities; however, Jackpot may seek additional debt or equity financing
to facilitate expansion opportunities and potential acquisitions.
Results of Operations
_____________________
Since fiscal 1994, gaming machine route operations revenues have decreased
approximately $6.7 million (from $90.2 million in 1994 to $83.5 million in
1996) due primarily to (i) the loss of a major retail chain store customer
on June 30, 1994, (ii) the loss of a retail chain store customer due to the
permanent closing of its three locations in Nevada in connection with such
customer's bankruptcy reorganization plan, (iii) the loss, based on
management's commitment to maintain pricing discipline, of certain non-chain
locations, and (iv) a decrease in revenues at certain existing locations in
1996 due, in management's opinion, to growth in the number of casinos and
other locations with gaming machines in residential areas of Nevada.
Jackpot has a significant amount of its gaming machine route operations at
retail stores which are part of a group of affiliated store chains, subject
to various leases. Gaming machine route operations from two groups of
affiliated store chains in 1996, 1995 and 1994 each accounted for more than
10% of Jackpot's total revenues in such years. The largest six store
chains accounted for approximately 54% of Jackpot's total revenues in 1996.
Leases covering the six store chains have a wide range of terms and maturities,
with expiration dates extending from 1997 to 1999. The loss or nonrenewal of
any of these leases could have a material adverse effect on the Company's
future results of operations.
License, lease and sublease agreements representing approximately 22% of
1996 gaming machine route operations revenues have terms expiring in fiscal
1997. Included in the 22% are three agreements, which expire on June 30, 1997,
with three of Jackpot's largest six retail chain store customers representing
16% of 1996 gaming machine route operations revenues. Jackpot anticipates the
renewal of these agreements will be offered on a competitive basis. While
the Company intends to actively seek to renew these agreements, there is no
assurance that the Company will be able to renew or extend such agreements or
that these agreements will be renewed upon terms that Jackpot will find
acceptable.
The renewal or extension of agreements at existing locations have
generally resulted in increased monthly fees. These contracts often require
fixed periodic increases in monthly fees during the term of the contract.
With respect to the accounting treatment of fixed periodic increases in
monthly fees associated with these contracts, the Company is required to
average annual lease costs over the term of the contract. As a result of
such accounting treatment, annual lease costs generally increase significantly
in the first year of an extended contract for the respective locations
covered by the contract and, thereafter, remain constant for existing
locations during the term of the contract.
Through 1995, the Company has historically been able to renew or
substantially replace revenues from expiring gaming machine route agreements
with revenues generated by renewal or replacement agreements. However,
increased competitive pressures in connection with the renewal or replacement
of agreements has, and continues to result in higher lease payments as
a percentage of gaming machine route operations revenues, thereby decreasing
the Company's operating margin. In order to optimize its operating
performance, the Company is engaged in a continual evaluation of leases.
As a result of such evaluation, strict adherence to management's pricing
guidelines and competitive pressure, certain agreements for non-chain
locations were not renewed in 1996. In a potential effort to counter this
trend and to possibly leverage off Jackpot's existing infrastructure, the
Company's growth strategy may include the acquisition of other gaming machine
route operators.
The table below presents the changes in comparative financial data from
1994 to 1996 (dollars in thousands).
Years Ended June 30,
___________________________________________________________________
1996 1995 1994
_________________________ _________________________ _____________
Percent Percent Percent Percent Percent
of Increase of Increase of
Amount Revenues(Decrease)Amount Revenues (Decrease) Amount Revenues
______ ________ ________ ______ ________ _________ ______ ________
Revenues:
Route
operations $83,533 91.7% (5.0)% $87,892 90.7 (2.5)% $ 90,168 91.7%
Casino
operations 7,575 8.3 (15.5) 8,961 9.3 9.7 8,167 8.3
_______ _____ _____ _______ _____ ____ ________ _____
Totals 91,108 100.0 (5.9) 96,853 100.0 (1.5) 98,335 100.0
_______ _____ _____ _______ _____ ____ ________ _____
Costs and
expenses:
Route
operations 64,460 70.8 (2.8) 66,342 68.5 1.0 65,656 66.8
Casino
operations 6,661 7.3 (15.7) 7,904 8.1 15.5 6,842 7.0
Amortization 2,199 2.4 (23.6) 2,880 3.0 (1.2) 2,916 3.0
Depreciation 4,284 4.7 (19.9) 5,349 5.5 (8.0) 5,813 5.9
General
and admin-
istrative 4,163 4.5 (23.0) 5,410 5.6 (29.7) 7,699 7.8
Loss from
write-down
and sale of
casino
properties 2,247 2.5
_______ _____ _____ _______ _____ _____ ________ _____
Totals 84,014 92.2 (4.4) 87,885 90.7 (1.2) 88,926 90.5
_______ _____ _____ _______ _____ _____ ________ _____
Operating
income 7,094 7.8 (20.9) 8,968 9.3 (4.7) 9,409 9.5
Other income
(expense),
net 1,516 1.7 67.1 907 .9 105.5 (16,461)(16.7)
_______ _____ _____ _______ _____ _____ ________ _____
Income
(loss)
before
income
tax 8,610 9.5 (12.8) 9,875 10.2 240.0 (7,052) (7.2)
Provision
(credit)
for income
tax 2,755 3.1 (15.5) 3,259 3.4 232.0 (2,468) (2.5)
_______ _____ _____ _______ _____ _____ ________ _____
Net income
(loss) $ 5,855 6.4% (11.5)% $ 6,616 6.8% 244.3% $ (4,584) (4.7)%
======= ==== ===== ======= ===== ===== ======== =====
Revenues generated from gaming machine route operations are
attributable to fixed payment leases and revenue sharing contracts.
The amount of revenues attributable to fixed payment leases and
revenue sharing contracts in 1996, 1995 and 1994 are summarized below
(dollars in thousands):
1996 1995 1994
____________________ __________________ __________________
Percent Percent Percent
of route of route of route
operations operations operations
Amount revenues Amount revenues Amount revenues
_______ __________ _______ __________ _______ __________
Route operations:
Fixed payment
leases $53,258 63.8% $54,386 61.9% $59,424 65.9%
Revenue sharing
contracts 30,275 36.2 33,506 38.1 30,744 34.1
_______ _____ _______ _____ _______ _____
$83,533 100.0% $87,892 100.0% $90,168 100.0%
======= ===== ======= ===== ======= =====
1996 compared to 1995
_____________________
General:
On August 13, 1996, Jackpot's Board of Directors approved a plan to
dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93
Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos,
as part of its strategy to exit its casino operations. This decision was
reached after considering that these casino operations generated unacceptably
low returns on capital, possessed limited growth prospects and commanded a
disproportionately high amount of management time.
Prior to the Board's approval to dispose of Jackpot's two remaining
casinos, Jackpot sold its interest in Jackpot City, Inc. (the "Nugget"),
a casino operation located in Reno, Nevada, effective June 30, 1996.
As a result of Jackpot's decision to dispose of its remaining casinos and
the sale of the Nugget, a charge of approximately $2.2 million was recorded
in the fourth quarter of 1996. The charge consisted primarily of the
write-down of the carrying amount of certain long-lived assets of the
Owl Club to fair value. Principally, as a result of this charge, net income
in 1996 decreased 11.5%, from $6.6 million in 1995 to $5.9 million in 1996.
Revenues:
Total revenues in 1996 decreased approximately $5.8 million, from $96.9
million in 1995 to $91.1 million in 1996. The decrease in total revenues of
$5.8 million was the net result of a decrease of $4.4 million (from $87.9
million in 1995 to $83.5 million in 1996) in gaming machine route operations
revenues and a decrease of $1.4 million (from $9.0 million in 1995 to $7.6
million in 1996) in casino operations revenues.
The decrease in gaming machine route operations revenues of $4.4 million
was due primarily to the closing or loss, based on management's commitment
to maintain pricing discipline, of certain non-chain locations and to the
loss of the Company's right to operate at all three Phar-Mor locations in
Nevada due to the permanent closing by Phar-Mor of such locations in
connection with Phar-Mor's bankruptcy reorganization plan. The decrease in
gaming machine route operations revenues resulted from a combination of
additional revenues generated from new locations, net of lost revenues from
terminated locations and a decrease in revenues at existing locations. In
1996, new locations generated revenues of approximately $4.4 million.
Terminated locations had generated revenues of $6.7 million in 1995, while
revenues at existing locations decreased $2.1 million in 1996.
As described previously, a significant amount of Jackpot's gaming
machine route operations revenues is derived from six retail chain store
customers pursuant to license, lease or sublease agreements. As of June 30,
1996, such agreements involved the operation of 1,692 machines in 105
locations.
The decrease in casino operations revenues in 1996 of approximately $1.4
million was due principally to the decline in revenues generated at the Debbie
Reynolds' Hotel and Casino. Such decline was due to the ceasing of Jackpot's
casino operations at the location, effective March 31, 1996 and to a decrease
in revenues in the nine months ended March 31, 1996. The Company, through its
operating subsidiary Debbie's Casino, Inc. ("Debbie's"), had operated
approximately 175 gaming machines at this location.
Costs and expenses:
Route operations expenses in 1996 decreased approximately $1.9 million
(from $66.3 million in 1995 to $64.4 million in 1996) and, as a percentage of
route operations revenues, route operations expenses increased to 77.2% in
1996 from 75.5% in 1995. The decrease of $1.9 million in 1996 over 1995 was
attributable to decreases of $.8 million in location rent expense, $.2 million
in payroll costs, $.4 million in workers' compensation costs and $.5 million
in other route operations expenses. Route operations expenses in 1996
increased as a percentage of route operations revenues primarily because of
the loss of the right to operate at the Phar-Mor locations, with which route
operations expenses were lower as a percentage of route operations revenues
than Jackpot's overall percentage, from the decrease in revenues at existing
fixed payment lease locations and from the increase in location rent expense,
as a percentage of route operations revenues, attributable to revenue sharing
contracts. In general, the costs associated with revenues generated at new
locations have been greater as a percentage of revenues than have the costs
associated with the lost revenues.
Casino operations expenses in 1996 decreased approximately $1.2 million
(from $7.9 million in 1995 to $6.7 million in 1996) and, as a percentage of
casino operations revenues, casino operations expenses decreased to 87.9% in
1996 from 88.2% in 1995 due primarily to the closing in February 1995 of
operations of Water Street Casino, Inc. dba the Post Office Casino (the "Post
Office Casino"). With respect to casino operations expenses, 1995 included
approximately $.9 million of costs and expenses incurred by the Post Office
Casino.
Amortization expense decreased approximately $.7 million in 1996 (from
$2.9 million in 1995 to $2.2 million in 1996). The decrease in amortization
expense in 1996 was primarily attributable to the decrease in amortization
expense related to the three Phar-Mor locations. As a result of the permanent
closing of Phar-Mor's three locations in Nevada, Jackpot wrote off all
remaining lease acquisition costs related to Phar-Mor in the three months
ended June 30, 1995.
Depreciation expense in 1996 decreased approximately $1.1 million (from
$5.4 million in 1995 to $4.3 million in 1996). The decrease in depreciation
expense in 1996 was primarily attributable to gaming machines acquired in
connection with the purchase of a gaming machine route business in 1992,
which had become fully depreciated in the three months ended September 30,
1995.
General and administrative expenses in 1996 decreased approximately $1.2
million (from $5.4 million in 1995 to $4.2 million in 1996) primarily as a
result of decreases in payroll and other compensation related costs in
connection with a reduction in personnel.
Operating income decreased approximately $1.9 million in 1996 (from $9.0
million in 1995 to $7.1 million in 1996). The decrease in operating income of
$1.9 million was due primarily to the loss from the write-down and sale of
casino properties of approximately $2.2 million as previously described.
Other income (expense):
Other income in 1996 increased approximately $.6 million (from $.9 million
in 1995 to $1.5 million in 1996) primarily from the increase in the net gain
on sales of certain non-operating assets and from the increase in interest
income as a result of the increase in available cash and cash equivalents.
Other:
The effective tax rate in 1996 was approximately 32%, which was
slightly lower than the 33% rate in 1995 primarily because of the increase
in tax benefits from tax-exempt interest income in 1996. Earnings per
common share in 1996 was $.63 compared to earnings per share of $.72 in 1995.
1995 compared to 1994
_____________________
General:
The 1995 net income of $6.6 million, the highest in Jackpot's history,
represented an increase of approximately $11.2 million from the net loss of
$4.6 million in 1994. The net loss in 1994 included an after-tax loss of
approximately $11.0 million for Jackpot's share of closing costs, write-down
of certain assets and the operating loss of the Tunica Facility. The 1995 net
income does not have any losses from the Tunica Facility because, as previously
described, Jackpot permanently closed the Tunica Facility on July 8, 1994 and
had accrued as of June 30, 1994 an estimate for all anticipated closing costs
associated with the closure. A portion of the increase in net income in 1995
was also due to an improvement in operating results of gaming machine route
operations despite the expiration of the Company's right to operate at certain
locations of a major retail chain store customer (the "Customer") on June 30,
1994. Jackpot generated approximately 9% of its total revenues and a
significantly greater percentage of its total operating income from operations
at locations of the Customer in 1994.
Revenues:
Total revenues in 1995 decreased approximately $1.5 million, from $98.4
million in 1994 to $96.9 million in 1995. The decrease in total revenues of
$1.5 million was the net result of a decrease of $2.3 million (from $90.2
million in 1994 to $87.9 million in 1995) in gaming machine route operations
revenues and an increase of $.8 million (from $8.2 million in 1994 to $9.0
million in 1995) in casino operations revenues.
The decrease in gaming machine route operations revenues of $2.3 million
resulted from a combination of additional revenues generated from existing
and new locations, net of lost revenues from terminated locations. In 1995,
new locations generated approximately $7.7 million of revenues, while existing
locations generated approximately $4.2 million in additional revenues.
Terminated locations had generated $14.2 million in revenues in 1994. The
loss of the revenues generated at the terminated locations was primarily due
to the expiration of the Company's right to operate at certain locations of
the Customer on June 30, 1994.
As described previously, a significant amount of Jackpot's gaming machine
route revenues is derived from six retail chain store customers pursuant to
license, lease or sublease agreements. As of June 30, 1995, such agreements
involved the operation of 1,615 machines in 100 locations.
The increase in casino operations revenues in 1995 of approximately $.8
million was primarily due to the commencement in January 1995 of operations
of the Pony Express Casino.
Costs and expenses:
Route operations expenses in 1995 increased approximately $.7 million
(from $65.6 million in 1994 to $66.3 million in 1995) and, as a percentage
of route operations revenues, route operations expenses increased to 75.5%
in 1995 from 72.8% in 1994. The increase of $.7 million in 1995 over 1994
was attributable to an increase of $.4 million in location rent expense,
an increase of $.5 million in payroll costs, net of an overall decrease of
$.2 million in other expenses. Route operations expenses increased as a
percentage of route operations revenues primarily because of the loss of
the Customer, with which route operations expenses were lower as a
percentage of route operations revenues than Jackpot's overall percentage.
Although Jackpot was able to replace a substantial portion of the revenues
lost with revenues generated by new and existing locations, generally the
costs associated with revenues generated at new locations have been greater
as a percentage of revenues than have the costs associated with the lost
revenues.
Casino operations expenses in 1995 increased approximately $1.1 million
(from $6.8 million in 1994 to $7.9 million in 1995) and, as a percentage of
casino operations revenues, casino operations expenses increased to 88.2% in
1995 from 83.8% in 1994 due to the lower than expected revenues of the
Post Office Casino, which commenced operations in July 1994. As a result of
the continuation of the poor operating performance of the Post Office Casino,
which generated an operating loss of approximately $.4 million in 1995
including a one-time charge of approximately $.2 million in connection
with the reduction in the size of gaming operations at the location from 175
gaming machines to 70 gaming machines and the change in operations from a
casino location to a gaming machine route location, Jackpot terminated the
operating agreement and sublease with the lessor and ceased operations at
the Post Office Casino in February 1995.
Amortization expense in 1995 remained constant at approximately $2.9
million compared to 1994. Depreciation expense in 1995 decreased approximately
$.5 million (from $5.8 million in 1994 to $5.3 million in 1995). The
decrease in depreciation expense was primarily due to the reduction in
depreciation expense of certain assets associated with the Tunica Facility.
General and administrative expenses in 1995 decreased approximately $2.3
million (from $7.7 million in 1994 to $5.4 million in 1995) primarily as a
result of decreases of $1.1 million in severance costs, $.5 million in
connection with the cancellation of a proposed public offering in 1994, $.4
million of unsuccessful development costs and $.3 million in other general
and administrative expenses.
Operating income decreased approximately $.4 million in 1995 (from
$9.4 million in 1994 to $9.0 million in 1995). The decrease in operating
income of $.4 million was due primarily to the combination of the previously
described effect on gaming machine route operations of the expiration
of the Company's right to operate at certain locations of the Customer
on June 30, 1994, net of the effect of the decrease of certain
nonrecurring general and administrative expenses described above.
Other income (expense):
With respect to other non-operating income and expense, 1994 included a
pretax loss of approximately $16.9 million for Jackpot's share of closing
costs, write-down of certain assets and the operating loss of the Tunica
Facility.
Other:
The effective tax rate was approximately 33% in 1995, which was lower
than the 35% rate in 1994 primarily because of the tax benefits from
tax-exempt interest income. Earnings per common share in 1995 was $.72
compared to the loss per common share in 1994 of $.50 per share.
Item 8. Financial Statements and Supplementary Data
___________________________________________
The Financial Statements and Supplementary Data required by this
Item 8 are set forth as indicated in Item 14(a)(1).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
________________________________________________
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
__________________________________________________
Item 11. Executive Compensation
______________________
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________
Item 13. Certain Relationships and Related Transactions
______________________________________________
The information required by items 10, 11, 12 and 13 are
incorporated by reference from the 1996 Proxy Statement to be
filed with the Securities and Exchange Commission within 120
days of the end of the fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
____________________________________________________
(a) (1) and (2) Consolidated Financial Statements and Schedules
For a list of the consolidated financial statements
and consolidated financial statement schedules filed
as a part of this annual report on Form 10-K, see
"Index to Financial Statements, Supplementary Data
and Financial Statement Schedules" on page F-1.
(a)(3) The exhibits filed and incorporated by reference are
listed in the index of Exhibits required by Item 601
of Regulation S-K at Item (c) below.
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended June 30,
1996, Jackpot filed no reports on Form 8-K.
(c) Exhibits
3(i) Articles of Incorporation of the Registrant, as amended (C)
3(ii) By-laws of the Registrant, as amended (C)
3(iii) Form of Amendment to Articles of Incorporation of Registrant (L)
4.1 Form of Amended and Restated Warrant agreement between the
Registrant and Continental Stock Transfer & Trust Company,
including form of Warrant (I)
4.2 Stockholder Rights Agreement dated as of July 11, 1994
between the Registrant and Continental Stock Transfer &
Trust Company, as Rights Agent (M)
10.1 Employment and consulting agreement with Neil Rosenstein
(B), as amended (E), and as further amended (F)(R)
10.2 License agreements with Albertson's, Inc. (A)(J)
10.3 Agreement with K Mart Corporation, as revised on November
1, 1990 (E)
10.4 License agreement with Longs Drug Stores California, Inc. (A)
10.5 License agreements with Lucky Stores, Inc., as revised on
October 31, 1991 (F)
10.6 License agreements with American Drug Stores, Inc.,
formerly Osco Drug, Inc., as revised on October 31, 1991 (F)
10.7 License agreement with Pay Less Drug Stores Northwest,
Inc., as revised on April 14, 1992 (F)
10.8 License agreement with Safeway Stores, Inc. (A)
10.9 Agreement with Warehouse Markets (A)
10.10 1990 Incentive and Nonqualified Stock Option Plan (D)(R)
10.11 Employment Agreement with Frederick Sandvick (E)(R)
10.12 Indemnification Agreement (Sample) (E)
10.13 Salary Continuation Plan for Executives (E)(R)
10.14 Form of Retirement Plan for Directors (F)
10.15 Amendment No. 2 to Employment Agreement with Neil
Rosenstein (E)(R)
10.16 1992 Incentive and Non-qualified Stock Option Plan (G)(R)
10.17 Employment Agreement with John F. O'Reilly (J)(R)
10.18 Employment Agreement with Jeffrey L. Gilbert (H)(R)
10.19 Form of First Amendment to Retirement Plan for Directors (K)
10.20 Settlement Agreement with John F. O'Reilly (N)
10.21 Employment Agreement dated as of September 8, 1994 with Don
R. Kornstein (O)(R)
10.22 Settlement Agreement by and among Winners Entertainment,
Inc. (formerly Excalibur Holding Corporation), Mountaineer
Park, Inc. and Jackpot Enterprises, Inc. (P)
11.1 Computation of Earnings (Loss) per Common Share (Q)
22.1 List of Registrant's subsidiaries (Q)
23.1 Consent of Deloitte & Touche LLP (Q)
25.1 Statement of Eligibility and Qualification of Bankers Trust
Company as Trustee on Form T.1 (A)
27.1 Financial Data Schedule (EDGAR version only)
(A) Incorporated by reference to Registrant's Registration
Statement on Form S-2 dated May 4, 1989 (Registration
No. 33-27614).
(B) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended June 30, 1988.
(C) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended June 30, 1989.
(D) Incorporated by reference to Registrant's Registration
Statement on Form S-3 dated December 12, 1990 (Registration
No. 33-38210).
(E) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended June 30, 1991.
(F) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended June 30, 1992.
(G) Incorporated by reference to Registrant's 1992 Proxy
Statement.
(H) Incorporated by reference to Registrant's Form 10-Q for
the quarter ended March 31, 1993.
(I) Incorporated by reference to Registrant's Registration
Statement on Form S-3 dated July 8, 1993 (Registration
No. 33-61624).
(J) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended June 30, 1993.
(K) Incorporated by reference to Registrant's Form 10-Q for
the quarter ended September 30, 1993.
(L) Incorporated by reference to Registrant's 1993 Proxy
Statement.
(M) Incorporated by reference to Registrant's Form 8-A dated
July 12, 1994.
(N) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended June 30, 1994.
(O) Incorporated by reference to Registrant's Form 10-Q for
the quarter ended September 30, 1994.
(P) Incorporated by reference to Registrant's Form 10-Q for
the quarter ended March 31, 1995.
(Q) Included herein.
(R) Management contract or compensatory plan or arrangement
which is separately identified in accordance with Item
14(a)(3) of Form 10-K.
(d) Schedules
For a list of the financial statement schedules filed as a
part of this annual report on Form 10-K, see "Index to Financial
Statements, Supplementary Data and Financial Statement
Schedules" on page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 25, 1996 JACKPOT ENTERPRISES, INC.
(Registrant)
By: /s/Don R. Kornstein
______________________
Don R. Kornstein
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
_________ _____ ____
/s/Don R. Kornstein
__________________________ President, Chief Executive
Don R. Kornstein Officer and Director September 25, 1996
(Principal Executive Officer)
/s/ Bob Torkar
__________________________ Senior Vice President-Finance, September 25, 1996
Bob Torkar Treasurer and Chief Accounting
Officer (Principal Financial and
Accounting Officer)
/s/ Allan R. Tessler
__________________________ Chairman of the Board September 25, 1996
Allan R. Tessler
/s/ David R. Markin
__________________________ Director September 25, 1996
David R. Markin
/s/ Robert L. McDonald, Sr.
___________________________ Director September 25, 1996
Robert L. McDonald, Sr.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 8 AND 14(a)]
(1) FINANCIAL STATEMENTS:
Independent Auditors' Report
Consolidated Balance Sheets
June 30, 1996 and 1995
Consolidated Statements of Operations
Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows
Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information
Years Ended June 30, 1996 and 1995
(3) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the consolidated financial statements or notes
thereto.
INDEPENDENT AUDITORS' REPORT
Jackpot Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Jackpot
Enterprises, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on the 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 Jackpot Enterprises, Inc.
and subsidiaries at June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 9, 1996
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995
(Dollars in thousands)
ASSETS 1996 1995
______ ________ ________
Current assets:
Cash and cash equivalents $ 39,024 $ 32,916
Prepaid expenses 1,740 1,703
Other current assets 3,515 2,637
________ ________
Total current assets 44,279 37,256
________ ________
Property and equipment, at cost:
Land and buildings 1,535 2,656
Gaming equipment 27,839 26,676
Other equipment 4,282 4,328
Leasehold improvements 336 713
________ ________
33,992 34,373
Less accumulated depreciation (20,697) (19,322)
________ ________
13,295 15,051
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$5,142 and $6,061 4,749 7,292
Goodwill, net of accumulated
amortization of $2,382 and
$2,341 4,240 5,289
Lease and other security deposits 3,436 3,490
Other non-current assets 743 3,581
________ ________
Total assets $ 70,742 $ 71,959
======== ========
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995
(Dollars in thousands, except share data)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
____________________________________ _______ _______
Current liabilities:
Current portion of long-term debt $ 678
Accounts payable $ 504 566
Other current liabilities 3,439 4,372
_______ _______
Total current liabilities 3,943 5,616
Long-term debt, less current portion 271
Deferred rent 3,025 3,506
Accrued pension and other liabilities 279 2,350
_______ _______
Total liabilities 7,247 11,743
_______ _______
Commitments and contingencies
Stockholders' equity:
Preferred stock - authorized
1,000,000 shares of $1 par value;
none issued
Common stock - authorized
30,000,000 shares of $.01 par
value; 9,631,278 and 9,595,388
shares issued 96 96
Additional paid-in capital 64,129 63,935
Retained earnings (accumulated deficit) 2,905 (180)
Less 293,748 and 293,741 shares of
common stock in treasury, at cost (3,635) (3,635)
_______ _______
Total stockholders' equity 63,495 60,216
_______ _______
Total liabilities and
stockholders' equity $70,742 $71,959
======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)
1996 1995 1994
_______ _______ ________
Revenues:
Route operations $83,533 $87,892 $ 90,168
Casino operations 7,575 8,961 8,167
_______ _______ ________
Totals 91,108 96,853 98,335
_______ _______ ________
Costs and expenses:
Route operations 64,460 66,342 65,656
Casino operations 6,661 7,904 6,842
Amortization 2,199 2,880 2,916
Depreciation 4,284 5,349 5,813
General and administrative 4,163 5,410 7,699
Loss from write-down and sale
of casino properties 2,247
_______ _______ ________
Totals 84,014 87,885 88,926
_______ _______ ________
Operating income 7,094 8,968 9,409
_______ _______ ________
Other income (expense):
Interest and other income 1,538 1,053 758
Interest expense (22) (146) (329)
Equity investment:
Loss from operations of
equity investee (3,647)
Loss from write-down of property
and provision for closing costs (13,243)
_______ _______ ________
Totals 1,516 907 (16,461)
_______ _______ ________
Income (loss) before income tax 8,610 9,875 (7,052)
_______ _______ ________
Provision (credit) for
Federal income tax:
Current 2,421 (588) 3,202
Deferred 334 3,847 (5,670)
_______ _______ ________
Totals 2,755 3,259 (2,468)
_______ _______ ________
Net income (loss) $ 5,855 $ 6,616 $ (4,584)
======= ======= ========
Earnings (loss) per common share $ .63 $ .72 $ (.50)
======= ======= ========
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(Dollars and shares in thousands, except per share data)
Retained
Additional Earnings Treasury Total
Common Stock Paid-In (Accumulated Stock Stockholders'
______________ _____________
Shares Amount Capital Deficit) Shares Amount Equity
______ ______ __________ ___________ ______ ______ ____________
Balance
July 1,
1993 9,247 $92 $64,258 $ - (66) $ (989) $63,361
Tax
benefit
from stock
options 147 147
Cash
dividends
($.31
per
share) (668) (2,212) (2,880)
Issuance and
receipt of
shares on
exercise
of stock
options 89 1 970 (49) (752) 219
Issuance of
shares on
exercise of
warrants 9 137 137
Receipt of
shares in
connection
with legal
settlement (10) (134) (134)
Net loss (4,584) (4,584)
_____ ___ _______ _______ ____ _______ _______
Balance June
30, 1994 9,345 93 64,844 (6,796) (125) (1,875) 56,266
Tax benefit
from stock
options 277 277
Cash
dividends
($.32 per
share) (2,950) (2,950)
Issuance and
receipt of
shares on
exercise of
stock options 250 3 1,764 (169) (1,760) 7
Net income 6,616 6,616
_____ ___ _______ _______ ____ _______ _______
Balance June
30, 1995 9,595 96 63,935 (180) (294) (3,635) 60,216
Tax benefit
from stock
options 54 54
Cash dividends
($.32 per
share) (201) (2,770) (2,971)
Issuance of
shares on
exercise of
stock options 36 341 341
Net income 5,855 5,855
_____ ___ _______ _______ ____ _______ _______
Balance June
30, 1996 9,631 $96 $64,129 $ 2,905 (294) $(3,635) $63,495
===== === ======= ======= ==== ======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(Dollars in thousands)
1996 1995 1994
_______ _______ _______
Operating activities:
Net income (loss) $ 5,855 $ 6,616 $(4,584)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 6,483 8,229 8,729
Deferred Federal income tax 334 3,847 (5,670)
Loss from operations of equity investee 3,647
Write-down of properties and provision
for closing costs 2,247 13,243
Other, net (393) (410) 571
Increase (decrease) from changes in:
Prepaid expenses and other current
assets 200 (384) 339
Other non-current assets 69 108 516
Accounts payable and other current
liabilities (860) (1,269) 513
Deferred rent and other liabilities (683) 1,331 1,063
Assets and liabilities of sold
subsidiary, net (474)
_______ _______ _______
Net cash provided by operating
activities 12,778 18,068 18,367
_______ _______ _______
Investing activities:
Proceeds from sales of short-term
investments, net 509 11,892
Proceeds from sales of equipment and other
non-current assets 1,390 1,053 465
Purchases of property and equipment (4,267) (4,044) (13,452)
Increase in lease acquisition costs and
other intangible assets (433) (501) (2,721)
Lease and other security deposits 27 (2,156)
Advances to equity investee (1,498) (3,425)
Other, net 219 124 (292)
_______ _______ _______
Net cash used in investing activities (3,091) (4,330) (9,689)
_______ _______ _______
Financing activities:
Repayments of long-term debt (949) (1,422) (1,305)
Proceeds from long-term debt 275
Proceeds from issuance of common stock 341 7 356
Dividends paid (2,971) (2,950) (2,880)
Other (574)
_______ _______ _______
Net cash used in financing activities (3,579) (4,365) (4,128)
Net increase in cash and cash equivalents 6,108 9,373 4,550
Cash and cash equivalents at beginning of year 32,916 23,543 18,993
_______ _______ _______
Cash and cash equivalents at end of year $39,024 $32,916 $23,543
======= ======= =======
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Interest $ 22 $ 146 $ 329
Federal income tax $ 1,800 $ 2,900
Non-cash investing and financing activities:
Common stock surrendered on exercise of
stock options $ 1,760 $ 752
Tax benefit from exercise of stock options $ 54 $ 277 $ 147
Reduction of debt upon sale of other
non-current asset $ 479
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Jackpot Enterprises, Inc. and its controlled
subsidiaries ("Jackpot"). All material intercompany accounts and
transactions are eliminated. In September 1993, Jackpot entered
into an agreement with President Riverboat Casinos - Mississippi,
Inc. ("President") which provided for the joint management of a
dockside casino facility in Tunica County, Mississippi (the "Tunica
Facility") under a wholly-owned subsidiary of Jackpot. Under this
arrangement, Jackpot did not have ultimate control over the Tunica
Facility and, therefore, for financial statement purposes, accounted
for the Tunica Facility under the equity method (see Note 4).
Business:
Jackpot, which was organized in 1980, conducts business in the
gaming industry and generates revenues from gaming machine route
operations and casino operations (see Note 3). Gaming machine route
operations involve the installation, operation and service of gaming
machines owned by Jackpot that are located in licensed, leased or
subleased space in retail stores (supermarkets, drug stores, merchandise
stores and convenience stores), bars and restaurants throughout Nevada.
Cash equivalents:
Cash equivalents are liquid investments with a maturity of three
months or less when acquired and are considered cash equivalents for
purposes of the consolidated statements of cash flows. Cash
equivalents are stated at cost which approximates fair value due to
their short maturity.
Revenue recognition:
In accordance with industry practice, Jackpot recognizes as gaming
revenues the net wins from gaming activities, which is the
difference between gaming wins and losses. Route operations'
revenues include the net wins generated under revenue-sharing
agreements. Revenue-sharing payments to route locations are recorded
as costs of route operations. Revenues from casino operations are
gaming wins less losses. Complimentary food and beverage furnished
gratuitously by casino operations to customers is not material.
Location rent expense:
Fixed rental payments (including scheduled increases) are recorded on a
straight-line basis over the agreement term including any optional
extension periods which are expected to be exercised. Contingent
payments are expensed in the period incurred. Renewal agreements
are considered new agreements and accounted for as described above over
the new agreement term.
Preopening costs:
Certain costs incurred prior to and in connection with the opening
of a casino operation are capitalized and expensed upon the opening of
the casino.
Depreciation of property and equipment:
Depreciation is provided using the straight-line method for property
and equipment, including property held for rental. Estimated useful
lives, limited as to leasehold improvements by the term of the lease,
range as follows:
Buildings 30 to 40 years
Gaming equipment 4 to 7 years
Other equipment 3 to 7 years
Leasehold improvements 1 to 12 years
Lease acquisition costs and other intangible assets:
Significant incremental costs associated with the acquisition of
location leases are capitalized. Incremental costs capitalized and
amounts allocated to lease acquisition costs are amortized on a
straight-line basis over the term of the related leases, including
expected renewals, which range from 1 to 12 years. Lease
acquisition costs and other intangible assets include lease
acquisition costs, net of accumulated amortization, of $3,934,000
and $5,968,000 as of June 30, 1996 and 1995.
Goodwill:
Goodwill represents the excess of the costs of acquired businesses
over the fair value of their net assets when acquired and is
amortized on a straight-line basis over a period of 40 years.
Income tax:
A deferred tax liability or asset is recognized at each balance
sheet date that represents the amount of tax expected to be payable
or refundable in future years as a result of temporary differences
between the tax bases of assets and liabilities and their financial
reporting amounts, using current tax rates and laws. The deferred
portion of the tax provision or benefit is the result of changes in
the net deferred tax asset or liability for the period.
Earnings (loss) per common share:
Earnings (loss) per common share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding.
Stock options and warrants have been excluded from the computations
in 1996 and 1995 because they had no effect on earnings per common
share. The weighted average number of common shares outstanding was
9,307,000, 9,235,000 and 9,211,000 in 1996, 1995 and 1994 .
Note 2 - Cash and cash equivalents:
Cash equivalents are comprised primarily of marketable municipal
bonds and money market accounts. Cash and cash equivalents include
cash equivalents of $29,716,000 and $23,707,000 at June 30, 1996 and
1995.
Note 3 - Casino operations:
On August 13, 1996, Jackpot's Board of Directors approved a plan to
dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway
93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining
casinos, as part of Jackpot's strategy to exit its casino operations.
This decision was reached after considering that these casino operations
generated unacceptably low returns on capital, possessed limited growth
prospects and commanded a disproportionately high amount of management
time. Jackpot intends to dispose of these properties as soon as is
practical, subject to market conditions.
The Owl Club, as of June 30, 1996, operated 89 gaming machines and
two live table games in Battle Mountain, Nevada. The Owl Club also
has a beverage operation incident to the conduct of gaming
activities, a restaurant operation and an eighteen room motel.
Jackpot owns the land and buildings used in the Owl Club's casino
and motel operations. Jackpot manages the operations of the Pony
Express Casino in Jackpot, Nevada under a five-year space lease
agreement, which Jackpot may cancel upon ninety days written notice
to the lessor. As of June 30, 1996, Jackpot operated 94 gaming
machines at this location.
Prior to the Board's approval to dispose of Jackpot's remaining two
casinos, Jackpot sold its 88.9% interest in Jackpot City, Inc.
(the "Nugget"), a casino operation located in Reno,
Nevada, effective June 30, 1996. As a result of Jackpot's decision to
dispose of its two remaining casinos and the sale of the Nugget, a
charge of $2,247,000 was recorded in the fourth quarter of fiscal
1996, which consisted primarily of the write-down to fair value of
$1,978,000 for certain long-lived assets of the Owl Club, including
the remaining carrying value of $858,000 for goodwill. As of June
30, 1996, the carrying value of assets to be disposed of
associated with the Owl Club and the Pony Express Casino was
approximately $1,700,000. The results of operations of the Owl Club
and the Pony Express Casino were not material in 1996, 1995 and
1994.
Note 4 - Other transactions:
South Dakota:
As a result of continuous evaluation of market and gaming conditions
in Deadwood, South Dakota, management determined in the third
quarter of fiscal 1995 that the value of Jackpot's investments in
its South Dakota properties had been further impaired. Accordingly,
Jackpot wrote down its assets by $800,000 in the third quarter of
fiscal 1995. On June 30, 1995 Jackpot permanently closed all
operations in South Dakota. During fiscal 1996, Jackpot sold its
remaining assets in South Dakota for approximately $785,000 which
approximated the carrying value of such assets.
Tunica, Mississippi dockside gaming facility:
In September 1993, Jackpot entered into an agreement with President
whereby Jackpot agreed to provide the necessary improvements to a
site leased by Jackpot in Tunica, Mississippi and President agreed
to provide to Jackpot the use of a riverboat, fully converted to a
gaming configuration, and a floating restaurant with meeting
facilities for the Tunica Facility. The Tunica Facility, which
commenced operations in December 1993, permanently closed on
July 8, 1994. As a result of the permanent closure of the Tunica
Facility, Jackpot recorded a charge of $13,243,000 in the fourth
quarter of fiscal 1994, which included the write down to estimated
recoverable value of $11,371,000 for the remaining carrying value
of its assets associated with the Tunica Facility and the provision
of $1,872,000 for closing costs.
The results of operations for 100% of the Tunica Facility before
closing costs and write down of assets to net recoverable value for
the period from December 6, 1993 (date of commencement) to June 30,
1994 is summarized below (dollars in thousands):
1994
_______
Revenues $14,650
Costs 24,451
_______
Operating loss $ 9,801
=======
The operating loss of $9,801,000 in 1994 includes the write-off of
approximately $3,024,000 of preopening costs and does not include
income taxes. Pursuant to the terms of the agreement between
Jackpot and President, Jackpot's share of the operating loss was
$3,647,000, which excludes $894,000 of related expenses incurred by
Jackpot. Interest expense incurred during the construction period
was not capitalized because it was not material.
In the third quarter of fiscal 1995, Jackpot sold certain assets
associated with the Tunica Facility. The gain from the sale of such
assets, net of the write-down of the South Dakota properties
described above was $75,000 and is included in fiscal 1995 under the
caption "interest and other income" in the accompanying consolidated
statements of operations.
Note 5 - Other current liabilities:
Other current liabilities consist of the following (dollars in thousands):
June 30,
________________
1996 1995
______ ______
Accrued employee benefits $1,733 $2,340
Accrued professional fees 244 276
Accrued progressive jackpots 454 434
Outstanding token liability 94 318
Other 914 1,004
______ ______
Totals $3,439 $4,372
====== ======
Note 6 - Long-term debt:
Long-term debt was comprised of the following (dollars in thousands):
June 30,
________________
1996 1995
______ ______
Amounts payable in forty monthly
installments of $126 to
International Game Technology from
August 1992 through December 1995,
net of unamortized discount (computed
at 8.5% interest rate) of $16 at
June 30, 1995 $ $ 661
Other 288
______ ______
Totals 949
Less current portion 678
______ ______
Non-current portion $ $ 271
====== ======
Note 7 - Stockholders' equity:
Authorized common stock:
On January 6, 1994, Jackpot's stockholders approved an increase in
the number of authorized shares of common stock from 15,000,000 to
30,000,000.
Shares reserved for issuance:
Shares of common stock were reserved for the exercise of the
following (shares in thousands):
June 30,
______________
1996 1995
_____ _____
Nonqualified and incentive
stock option plans:
Outstanding 1,670 1,669
Available for grant 1,074 1,130
Other nonqualified stock options 429 429
Warrants 1,747
_____ _____
Totals 3,173 4,975
===== =====
Stock option plans:
On December 7, 1990, Jackpot's stockholders approved the 1990
Incentive and Nonqualified Stock Option Plan (the "1990 Plan"),
which became retroactively effective on June 27, 1990. Under the
1990 Plan, Jackpot's Board of Directors (the "Board") may grant
"incentive" or "nonqualified" stock options up to 929,846 shares of
Jackpot's common stock (the "Common Stock"). On September 30, 1992,
the Board adopted the 1992 Incentive and Non-qualified Stock Option
Plan (the "1992 Plan") which was approved by Jackpot's stockholders
on January 12, 1993. The 1992 Plan is administered by a committee
of the Board (the "Committee"). On August 17, 1994, the Board
adopted certain amendments (the "Amendments") to the 1992 Plan which
were approved by Jackpot's stockholders on January 10, 1995. The
Amendments increased the number of shares of Common Stock authorized
for issuance pursuant to the 1992 Plan from 1,045,000 shares to
2,545,000.
The 1990 Plan provides that the Board may grant options with an
exercise period of up to ten years from date of grant to directors,
officers and other employees who own less than 10% and five years
from date of grant to directors, officers and other employees who
own more than 10% of Common Stock. The 1992 Plan provides that the
Committee may grant nonqualified stock options with an exercise
period of up to ten years from date of grant. Incentive stock
options may be granted with an exercise period of up to ten years
from date of grant to officers and other employees who own less than
10% of the Common Stock and five years to officers and other
employees who own more than 10% of the Common Stock. Under both the
1990 Plan and 1992 Plan, incentive stock options may not be granted
at an exercise price less than 100% of the fair market value of the
Common Stock at the time the option is granted to an individual who
owns less than 10% of the Common Stock and 110% of the fair market
value to an individual who owns more than 10% of the Common Stock.
Nonqualified stock options may not be granted at an exercise price
less than 50% of the fair market value of the Common Stock at the
time the option is granted.
The 1992 Plan provides that each individual who is a member of the
Board on June 30 of any year, including any future director on any
such date, will automatically be granted nonqualified stock options
to purchase 27,500 shares of Common Stock on each such June 30. The
option price for each June 30 grant will be 100% of the fair market
value of the Common Stock on the following September 30. Each
option granted to a director will become exercisable after September
30 of each year, and expire five years from the date of grant. The
exercise price of the June 30, 1996 option grants will be determined
September 30, 1996, at which time the options become exercisable.
At June 30, 1996, options granted to Jackpot's directors to purchase an
aggregate of 467,500 shares of Common Stock were outstanding, of which
357,500 were exercisable.
The 1990 Plan and 1992 Plan terminate on the earlier of (i) when all
shares subject to the 1990 Plan and 1992 Plan have been issued
pursuant to the exercise of options granted under the 1990 Plan and
1992 Plan and (ii) June 26, 2000 and September 30, 2002,
respectively, or on such earlier date as the Board or the Committee
may determine. Any option outstanding at the respective Plan
termination date remains outstanding until it has either expired or
has been exercised.
Changes in options outstanding under the stock option plans are
summarized below (shares in thousands):
Number of Shares Per Share
Incentive Nonqualified Exercise Price
_________ ____________ _______________
Outstanding at July 1, 1993 41 958 $ 5.79 to $15.05
Automatic grant to directors 82 $ 9.50
Other grants 368 $11.63 to $20.88
Exercised (4) (17) $ 9.61
Canceled (4) (55) $15.05 to $15.88
___ _____
Outstanding at June 30, 1994 33 1,336 $ 5.79 to $20.88
Automatic grant to directors 110 $10.75
Other grants 872 $ 8.50 to $ 9.25
Exercised (155) $ 6.10 to $ 8.50
Canceled (2) (525) $ 5.79 to $20.88
___ _____
Outstanding at June 30, 1995 31 1,638 $ 6.10 to $20.88
Automatic grant to directors 110 (A)
Exercised (4) (36) $ 6.10 to $11.63
Canceled (18) (51) $ 6.10 to $11.63
--- _____
Outstanding at June 30, 1996 9 1,661 $ 6.10 to $20.88
(1,032 shares exercisable) === =====
(A) To be determined on September 30, 1996.
Other nonqualified stock options:
The Board has granted other nonqualified stock options to directors,
certain officers, other employees and advisors at exercise prices
equal to or greater than the fair market value of the underlying
shares at the date of grant. Generally, options become exercisable
immediately and expire no later than five years from the date of
grant.
Changes in other nonqualified stock options are summarized below (shares
in thousands):
Number Per Share
of Shares Exercise Price
_________ ________________
Outstanding at July 1, 1993 545 $ 6.28 to $11.25
Granted 600 $15.00 to $20.91
Exercised (67) $11.25
_____
Outstanding at June 30, 1994 1,078 $ 6.28 to $20.91
Exercised (95) $ 6.28
Canceled (554) $10.87 to $20.91
_____
Outstanding and exercisable
at June 30, 1996 and 1995 429 $ 9.19 to $15.00
=====
Preferred stock purchase rights:
In June 1994, the Board approved a Stockholder Rights Plan and on
July 11, 1994, declared a dividend distribution of one Preferred
Stock purchase right (the "Rights") payable on each outstanding share
of Common Stock, as of July 15, 1994. On July 15, 1994, there were
approximately 9,220,000 Rights to purchase Series A Junior Preferred
Stock outstanding.
The Rights become exercisable only in the event, with certain
exceptions, an acquiring party accumulates 15% or more of Jackpot's
voting stock, or if a party announces an offer to acquire 30% or more
of Jackpot's voting stock. The Rights will expire on July 15, 2004.
Each Right will entitle the holder to purchase one-hundredth of a share
of a Series A Junior Preferred Stock at a price of $30. In addition,
upon the occurrence of certain events, holders of the Rights will be
entitled to purchase either Jackpot's Preferred Stock or shares in an
"acquiring entity" at half of market value.
The Rights may be redeemed by Jackpot at $.01 per Right prior to the
close of business on the tenth day after a public announcement that
beneficial ownership of 15% or more of Jackpot's shares of voting stock
has been accumulated by a single acquiror or a group (with certain
exceptions), under circumstances set forth in the Rights Agreement.
At June 30, 1996 and 1995, 150,000 shares of Series A Junior Preferred
Stock were authorized, but unissued, and were reserved for issuance upon
exercise of the Rights. The issuance of the Rights did not have a
dilutive effect on earnings (loss) per share in 1996, 1995 and 1994.
Common Stock warrants:
On January 31, 1996, 1,588,076 warrants to purchase Common Stock, which
had been distributed in connection with a special rights issuance
declared by the Board of Directors on July 1, 1992, expired pursuant to
their terms.
Note 8 - Related party transactions:
One director of Jackpot is a partner in a law firm that has provided
various legal services for which Jackpot accrued legal fees aggregating
approximately $110,000, $163,000 and $275,000 in 1996, 1995 and 1994.
Note 9 - Commitments and contingencies:
Leases:
Jackpot has noncancelable location license, lease and sublease agreements
(referred to as "leases") for space at various locations for its gaming
machines with terms expiring at various dates through 2004. Leases are
generally at fixed rentals, although certain leases require payments
based on percentages of revenues generated by gaming machines at the
leased locations. In addition, office and warehouse space is utilized
under noncancelable leases with terms expiring at various dates through
2006.
Future minimum lease payments (dollars in thousands) under such non-
cancelable operating leases or licenses aggregated approximately
$59,058 at June 30, 1996, payable as follows: $25,180 in 1997;
$22,545 in 1998; $8,732 in 1999; $479 in 2000; $411 in 2001; and
$1,711 thereafter.
Rent expense was comprised as follows (dollars in thousands):
1996 1995 1994
_______ _______ _______
Location leases:
Fixed rentals $25,633 $24,986 $26,530
Percentage rentals 20,243 21,920 19,526
Office and equipment leases 452 472 301
_______ _______ _______
Totals $46,328 $47,378 $46,357
======= ======= =======
Employment agreements:
Jackpot has an employment agreement with Don R. Kornstein, President,
Chief Executive Officer and Director which currently expires on
September 30, 1999. The agreement is automatically extended for
additional one year periods on each October 1 unless, not later than
March 31, immediately preceding each October 1, notice is given
by Jackpot or Mr. Kornstein.
Mr. Kornstein's employment agreement provides for an annual bonus
based on various percentages of certain amounts by which earnings
before interest, taxes, depreciation, amortization and certain other
items, as defined in the agreement, exceed certain levels for
such fiscal year. Mr. Kornstein's bonus was $205,000 and $220,000 in
1996 and 1995. The aggregate commitment for future salaries at June 30,
1996, excluding bonuses, under Mr. Kornstein's agreement is approximately
$2,347,000. In the event of termination of Mr. Kornstein's employment,
as defined in the employment agreement, Mr. Kornstein, or his beneficiary,
would receive a severance payment. Such amount, depending upon the
circumstance, would be determined pursuant to the terms of the employment
agreement. The minimum contingent liability at June 30, 1996 under
Jackpot's employment and severance agreements was approximately $2,610,000.
On April 20, 1995 Jeffrey L. Gilbert and Frederick Sandvick resigned
as Executive Vice President and Chief Operating Officer and Executive
Vice President and Chief Financial Officer, respectively. In
connection with the termination of their respective employment
agreements, which was effective April 28, 1995, Jackpot paid Messrs.
Gilbert and Sandvick an aggregate of approximately $770,000 in
consideration for the termination of employment and the cancellation
of certain nonqualified stock options in full satisfaction of all rights
under their respective employment agreements including, but not limited
to, severance compensation and accrued vacation. Options to purchase
an aggregate of 475,085 shares of Common Stock held by such persons
were cancelled on April 28, 1995.
On May 3, 1994 (the "Resignation Date"), John F. O'Reilly resigned
as Chairman of the Board of Directors and Chief Executive Officer of
Jackpot. Pursuant to the terms of Mr. O'Reilly's employment
agreement and settlement agreement with Jackpot, Jackpot paid Mr.
O'Reilly approximately $1,256,000 in respect of (i) the present value
of his salary through June 30, 1996, the expiration of the term of
Mr. O'Reilly's employment agreement, and (ii) certain other
compensation and life insurance premiums, and granted to Mr. O'Reilly
options to purchase 50,000 shares of Common Stock at an exercise
price of $15.00 per share exercisable for three years from the
Resignation Date. The fair market value of the Common Stock based
on the closing market price on the date of Mr. O'Reilly's resignation
was $10.00 per share. Other options to purchase an aggregate of
550,000 shares of Common Stock held by Mr. O'Reilly expired on August
1, 1994.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject Jackpot to
concentrations of credit risk consist principally of cash, cash
equivalents, certain receivables and lease and other security
deposits. Jackpot maintains cash and certain cash equivalents with
financial institutions in amounts, which at times may be in excess
of the FDIC insurance limits. Jackpot's cash equivalents are invested
in several high-grade securities which limits Jackpot's exposure to
concentrations of credit risk.
A substantial portion of Jackpot's business activity is with
customers who frequent retail stores (supermarkets, drugstores,
merchandise stores and convenience stores) in Nevada. Generally,
Jackpot leases space in stores which are part of a large chain of
stores. At June 30, 1996, Jackpot had unsecured lease and other
security deposits of $3,436,000 held primarily by two publicly-held
chain stores.
Legal matters:
On August 17, 1992, Phar-Mor, Inc. ("Phar-Mor"), a large chain store,
announced that it had filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Jackpot operated 51 gaming machines at three
Phar-Mor store locations in Nevada under a license agreement dated
February 10, 1990 (the "Original Agreement"). Under the Original
Agreement, Jackpot made certain advances to Phar-Mor. Thereafter,
Jackpot and Phar-Mor, subject to bankruptcy court approval, entered
into an amended license agreement, dated January 1, 1993 (the
"Amended Agreement"). If the Amended Agreement were to become final,
Jackpot would receive credits for certain prepaid sums but would be
required to pay certain additional obligations.
On May 12, 1995, Phar-Mor announced the closing of 41 stores,
including its three stores in Nevada. On May 24, 1995 Jackpot
notified Phar-Mor that it was in default under (i) the Original
Agreement, and (ii) the Amended Agreement to the extent applicable.
Jackpot has taken the position that the Amended Agreement has not
become operative and has not replaced the Original Agreement.
Jackpot has claimed monetary damages in excess of several millions
of dollars resulting from Phar-Mor's alleged default, consisting of,
but not limited to certain refundable monies, prepaid license fees, lost
profits and other consequential and incidental damages.
On July 25, 1995, Phar-Mor notified Jackpot that it disagreed with
Jackpot's position that Phar-Mor has defaulted under the terms of
either the Original Agreement or the Amended Agreement. Phar-Mor
maintains that the Amended Agreement is the operative agreement
and is seeking to enforce its rights thereunder. On or about March 7,
1996, Phar-Mor filed a lawsuit against Jackpot in the United States
Bankruptcy Court for the Northern District of Ohio, claiming it is
owed approximately $1 million under the Amended Agreement. Jackpot
has filed an answer and counterclaim reflecting its position that under
the Original Agreement Jackpot is owed in excess of $3 million. Jackpot,
based upon discussions with counsel, does not believe it is probable that
Phar-Mor will prevail in this matter. If Phar-Mor were to prevail
and the Amended Agreement is determined to be the operative agreement,
Jackpot could be liable for certain obligations under the Amended Agreement
up to approximately $1 million. If Jackpot were to prevail, it would
become an unsecured creditor with respect to its claims against Phar-Mor
which exceed $3 million.
As result of Phar-Mor's announcement, Jackpot wrote-off all
remaining costs related to lease deposits, prepaid rent and other
lease connected expenditures for Phar-Mor and adjusted certain
amounts due Phar-Mor pursuant to terms of the Original Agreement in
the fourth quarter of fiscal 1995. The write-down of the above mentioned
assets, net of certain liability adjustments did not have a material
effect on Jackpot's financial position or its fiscal 1995 results of
operations.
Jackpot is a party to various other claims, legal actions and complaints
arising in the ordinary course of business or asserted by way of defense
or counterclaim in actions filed by Jackpot. Management believes that
its defenses are substantial in each of these matters and that Jackpot's
legal position can be successfully defended without material adverse
effect on its consolidated financial statements.
Note 10 - Revenues derived from major locations:
Gaming machine operations at two groups of affiliated store chains
in 1996, 1995 and 1994 accounted for more than 10% of Jackpot's total
revenues. Revenues for Jackpot's top two affiliated store chains
were approximately $23,000,000 and $12,000,000, respectively in 1996,
$22,000,000 and $12,000,000, respectively in 1995 and $21,000,000 and
$10,000,000, respectively in 1994. Each individual store chain
included in an affiliated group of store chains has a separate lease
with Jackpot.
Note 11 - Federal income tax:
A reconciliation of the Federal statutory income tax rate to the
effective income tax rate based on income (loss) before income tax follows:
1996 1995 1994
____ ____ _____
Statutory rate 35.0% 35.0% (35.0)%
Increase (decrease) in
tax resulting from:
Surtax exemption (1.0) (1.0) 1.0
Tax-exempt interest (4.0) (2.6) (0.9)
Amortization of goodwill 0.7 0.6 0.8
Other, net 1.3 1.0 (0.9)
____ ____ _____
Effective rate 32.0% 33.0% (35.0)%
==== ==== =====
The tax items comprising Jackpot's net deferred tax asset as of June
30, 1996, 1995 and 1994 are as follows (dollars in thousands):
1996 1995 1994
______ ______ ______
Deferred tax assets:
Write-down of assets and losses
from Tunica Facility $ 105 $5,045
Deferred rent $1,041 1,205 808
Other accrued liabilities 556 646 736
Retirement plans 73 663 527
Other 456 293 156
______ ______ ______
Totals 2,126 2,912 7,272
______ ______ ______
Deferred tax liabilities:
Difference between book and tax
basis of property 527 842 1,545
Economic performance accruals 491 500 630
Other 676 804 475
______ ______ ______
Totals 1,694 2,146 2,650
______ ______ ______
Net deferred tax asset $ 432 $ 766 $4,622
====== ====== ======
Jackpot realized tax benefits of $54,000, $277,000 and $147,000 in
1996, 1995 and 1994 as a result of the exercise of certain incentive
and nonqualified stock options. The tax benefits have been reflected
as a decrease in current income tax payable and an increase in
additional paid-in capital.
Note 12 - Benefit plans:
Jackpot terminated a deferred profit sharing plan (the "Profit
Sharing Plan"), effective March 31, 1996. Contributions to the
Profit Sharing Plan, which covered substantially all employees, were
at the discretion of the Board, subject to limitations based on
profits as specified in the Profit Sharing Plan. The Profit Sharing
Plan had no expense in 1996. The Profit Sharing Plan expense was
$100,000 in both 1995 and 1994.
On May 14, 1996, Jackpot terminated the Jackpot Retirement Plan for
Directors, as amended (the "Retirement Plan"). In consideration for
the termination of the Retirement Plan, three directors received a
lump sum distribution of accrued benefits in an aggregate amount of
$1,485,000 ($495,000 each) in May 1996. Pursuant to the terms of the
Retirement Plan, the amount of each director's distribution was equal
to the aggregate of the annual base retainer paid to the respective
director for years of service on the Board, including service prior
to the implementation of the Retirement Plan on October 1, 1990,
except for certain years that the directors waived such benefit.
Interest was added to the accounts of each director quarterly, using
the one-year Treasury bill rate.
The funding of the accrued benefits under the Retirement Plan was
made from a restricted trust. The amount of the distributions
approximated the fair value of the investments in the trust. As a
result of the termination of the Retirement Plan and the lump sum
distributions in May 1996, there is no remaining obligations or
liability under the Retirement Plan at June 30, 1996.
On August 13, 1996, the Board approved the termination of the Salary
Continuation Plan for Executives (the "Continuation Plan"). The
Continuation Plan provides certain senior executives with a
retirement benefit, which is based on compensation, to be paid over
a period of up to 15 years beginning at normal retirement age. The
Continuation Plan requires certain vesting periods and allows reduced
benefits at certain early retirement ages and pre-retirement
survivors' benefits. The Continuation Plan was unfunded at June 30,
1996 and 1995. The Company has entered into settlement agreements with
substantially all of the individuals covered under the Continuation
Plan. The accrued pension liability in connection with these agreements
was $279,000 at June 30, 1996. The accumulated and projected benefit
obligations for the remaining executives covered under the Continuation
Plan was not material at June 30, 1996.
The Board waived current service benefits that would have accrued in
1996, 1995 and 1994 pursuant to the Retirement Plan and the Continuation
Plan, other than the interest earned on accrued benefits. The Retirement
Plan and the Continuation Plan, both defined benefit plans, had no plan
assets. Interest cost on accrued benefits is included in general and
administrative costs and expenses and the amortization of unrecognized
prior service cost is included in amortization expense in the accompanying
consolidated statements of operations. The unrecognized prior service cost
has been fully amortized at June 30, 1996 and was $253,000 at June 30,
1995. The accrued pension liability under the Retirement Plan and
Continuation Plan was $279,000 and $2,257,000 at June 30, 1996 and 1995,
respectively. The pension expense for Jackpot's defined benefit plans
for 1996, 1995 and 1994 includes the following components (dollars in
thousands):
1996 1995 1994
____ ____ ____
Amortization of prior service cost $253 $240 $240
Interest cost on accrued benefits 69 83 118
____ ____ ____
Net pension expense $322 $323 $358
==== ==== ====
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 1996 and 1995 follows:
Quarter
__________________________________________
1996 First Second Third Fourth
____ _______ _______ ______ _______
Revenues $22,801 $22,384 $22,846 $23,077
Gross operating income (A) 3,692 3,718 3,432 3,603
Income before income tax 2,650 2,752 2,708 500 (B)
Net income 1,802 1,871 1,842 340
Earnings per share:
Primary .19 .20 .20 .04
Fully diluted .19 .20 .20 .04
1995
____
Revenues $23,623 $23,779 $24,237 $25,214
Gross operating income (A) 3,643 3,978 3,918 3,966
Income before income tax 2,177 2,440 2,497 2,761
Net income 1,437 1,656 1,672 1,851
Earnings per share:
Primary .16 .18 .18 .20
Fully diluted .16 .18 .18 .20
(A) Gross operating income is revenues less route and casino expenses,
deprecation associated with gaming machine operations and amortization
associated with lease acquisition costs.
(B) Includes a charge of $2.2 million from the write-down and sale of
certain casino properties. See Note 3 of Notes to Consolidated
Financial Statements.