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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Commission File Number 1-9728
JACKPOT ENTERPRISES, INC.
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 88-0169922
___________________________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 September 1, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $92,916,033.
As of September 1, 1997, there were 9,082,035 shares of the
Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Proxy Statement relating to the 1997 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, 1997, 4,075 gaming machines in 419
locations. Jackpot is an established leader in the operation of
gaming machines in multiple retail locations ("gaming machine route
operations"). In addition to its gaming machine route operations,
Jackpot, as of June 30, 1997, operated two casinos with 184 gaming
machines. However, as part of its strategy to exit its remaining
casino operations, Jackpot continues to market such properties for
sale.
As of June 30, 1997, Jackpot operated 4,259 gaming machines in
421 locations. Approximately 96% of the gaming machines were video
poker and 4% were reel-type slot and other machines. For the
fiscal year ended June 30, 1997 ("1997"), 97% of total revenues
were derived from Jackpot's gaming machine route operations and 3%
from its casino operations. Because of the integrated nature of
such operations, Jackpot is considered to be engaged in one
industry 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 continually seeks
to enhance its position as a leader in the Nevada gaming
machine route business by providing 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
should 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 throughout Nevada. 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 1997, approximately 77% of Jackpot's gaming machine route
operations revenues were generated by southern Nevada operations
and 23% 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, 1997, Jackpot operated in its gaming machine
route business 4,075 gaming machines at 419 locations; 129 of the
locations contained 15 gaming machines, 44 of the locations
contained more than 15 machines and 246 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, 1997:
As of June 30,
1997(a) 1996 1995 1994 1993
______ _____ _____ _____ _____
Number of machines
on location 4,075 4,211 4,284 4,072 4,488
Number of locations 419 439 452 434 486
(a) Excludes 272 machines at 16 locations due to the expiration of
a contract with a store chain on June 30, 1997.
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, which accounted for approximately 68% of total gaming
machine route operations revenues in 1997, require 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
provide 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. Licenses, leases and
subleases have a wide range of terms and maturities, with
expiration dates, including option periods, extending from 1997 to
2008. License, lease and sublease agreements representing
approximately 4% of 1997 gaming machine route operations revenues
have terms expiring in fiscal 1998.
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.
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 1997, 1996 and 1995 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 60% of Jackpot's total revenues in 1997.
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 Nevada. 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 7 of Notes to Consolidated
Financial Statements.
The renewal or extension of agreements with major retail
chains have generally resulted in increased monthly fees. These
contracts often require fixed periodic increases in monthly fees
during the term of the contract. In 1997, Jackpot entered into
agreements for long-term contract extensions, which became
effective July 1, 1997, with four of its largest retail chain
store customers, two of which were not due to expire on June 30,
1997. A very competitive pricing environment caused the Company to
offer significant increases in location rent over the existing
agreements. Such agreements provide Jackpot the continued right to
operate gaming machines at certain existing locations and future
locations, if any, of such customers. As of June 30, 1997, these
agreements involve the operation of approximately 1,174 gaming
machines in 76 locations.
Despite a long-term relationship with Warehouse Markets, Inc.
Jackpot was not willing to agree with the terms sought for a
contract extension, which management believed were uneconomic. The
agreement, which expired on June 30, 1997, involved the operation
of approximately 272 gaming machines in 16 locations. In 1997,
Jackpot generated approximately 6% of its total revenues and a
significant amount of operating income from operations at such
customer's locations.
With respect to fiscal 1998, the Company's results of
operations will be adversely affected compared to 1997 due to the
intensely competitive market conditions prevailing for gaming
machine route operators, the loss of a significant chain store
customer described above and to significant increases in location
rent, effective July 1, 1997, in connection with long-term contract
renewals with four of Jackpot's largest chain store customers.
However, management believes that the following may lessen the
adverse effects described above: (i) increased revenues at
existing locations as a result of the maturing of several recently
opened new chain store locations, (ii) additional revenues from new
locations scheduled to be opened by Jackpot's largest chain store
customers, (iii) increased revenues at existing locations due to
capital improvements or replacements of gaming machines, and (iv)
certain cost reductions based on potential improvements to current
operating information systems. While management believes that
these events will occur, they are, in part, based upon factors that
are outside the Company's control. Accordingly, no assurance can
be given that such benefits will occur.
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.
During 1997, Jackpot entered into definitive agreements to
sell the Owl Club and the Pony Express Casino, subject to the
potential purchaser obtaining Nevada gaming regulatory approvals
and licenses. However, as a result of such potential purchaser's
withdrawal of his gaming application with the Nevada gaming
authorities in August 1997, such transactions did not occur. The
Company continues to market its two remaining casinos for sale.
However, unless Jackpot is able to enter into agreements for the
sale of these properties, on terms acceptable to Jackpot, no
assurance can be given that such disposals will occur.
The Owl Club, as of June 30, 1997, operated 90 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 terminate after September 15, 1997 upon fifteen
days written notice to the lessor. As of June 30, 1997, 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.
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, International Game
Technology ("IGT"). Although the Company purchased approximately
90% of its gaming machines from IGT in 1997, Jackpot does not
believe it is dependent upon IGT for future purchases. Jackpot
does not have a contractual commitment for future purchases with
IGT, or any other manufacturer. 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 continually tests, on
a trial basis, new machines from various gaming machine
manufacturers to determine which games and models will appeal to
its customers to enhance play levels.
Employees
_________
As of June 30, 1997, 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. As a result of such competition, along with
the Company's continual evaluation of leases and strict adherence
to management's pricing guidelines, revenues generated from route
operations, which are attributable to revenue sharing contracts,
have decreased from $33.5 million in 1995 to $28.8 million in 1997.
For additional information concerning Jackpot's operations, see
Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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 practices
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 Company, Corral Coin, Inc.,
Corral Country Coin, Inc., and Corral United, Inc.
(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
and the Pony Express Casino (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 environment 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, Casino and motel 10,000 sq. ft. 100%
Nevada operations
LEASED PROPERTIES:
Las Vegas, Nevada Executive offices, 34,000 sq. ft. 100%
warehouse and shop
Reno, Nevada Offices and shop 10,000 sq. ft. 100%
Throughout Nevada Gaming machine various sq. ft. 100%
operations per location
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,
2000. 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 45 President, 1994
Chief Executive Officer
and Director
George Congdon 48 Senior Vice President - 1995
Operations
Bob Torkar 46 Senior Vice President - 1991
Finance, Treasurer and
Chief Accounting Officer
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 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
___________________________________________________________________
Fiscal 1997
First Quarter $12.75 $ 9.63 $.08
Second Quarter 11.25 9.63 .08
Third Quarter 10.75 9.75 -
Fourth Quarter 12.75 9.63 -
___________________________________________________________________
As of September 5, 1997 there were approximately 2,000 holders
of record of Common Stock. The number of holders of record of
Jackpot's Common Stock on September 5, 1997 was computed by a count
of record holders.
A policy of quarterly cash dividends, which had been effective
since July 1987, was suspended on October 29, 1996 by Jackpot's
Board of Directors. Future payment of quarterly cash dividends, if
any, is subject to periodic review and reconsideration. Jackpot
paid two quarterly cash dividends and four quarterly cash dividends
of $.08 per share to its stockholders of record in fiscal 1997 and
1996, respectively.
Item 6. Selected Financial Data
_______________________
The following information has been derived from Jackpot's
consolidated financial statements:
Years Ended June 30,
_______________________________________________
1997 1996 1995 1994 1993
_______ _______ _______ _______ _______
(Dollars and shares in thousands, except per share data)
OPERATING DATA:
Total revenues $91,904 $91,108 $96,853 $98,335 $83,271
___________________________________________________________________
Operating income $ 9,822 $ 7,094(1) $ 8,968 $ 9,409(1) $11,251
___________________________________________________________________
Income (loss) from
continuing
operations $11,368 $ 8,610 $ 9,875 $(7,052)(2)$10,018
___________________________________________________________________
Net income (loss) $ 7,844 $ 5,855(3) $ 6,616 $(4,584)(3)$ 6,506
___________________________________________________________________
Earnings (loss)
per common and
common equivalent
share (4)(5):
Net income
(loss) $ .85 $ .63 $ .72 $ (.50) $ .80
___________________________________________________________________
Earnings (loss)
per common share -
assuming full
dilution (4)(6):
Net income
(loss) $ .85 $ .63 $ .72 $ (.50) $ .78
___________________________________________________________________
Dividends declared
per share (4) $ .16 $ .32 $ .32 $ .31 $ .38
___________________________________________________________________
Average primary
common equivalent
shares (4) 9,237 9,307 9,235 9,211 8,532
___________________________________________________________________
OTHER DATA:
EBITDA (7) $16,557 $17,093 $18,125 $18,896 $19,338
Net cash
provided by
operating
activities $14,584 $12,778 $18,068 $18,367 $17,707
Net cash used
in investing
activities $(1,557) $(3,091) $(4,330) $(9,689) $(8,338)
Net cash
provided by
(used in)
financing
activities $(4,106) $(3,579) $(4,365) $(4,128) $ 890
Capital
expenditures $ 3,393 $ 4,267 $ 4,044 $13,452(8) $ 3,187
Amortization $ 1,728 $ 2,199 $ 2,880 $ 2,916 $ 2,326
Depreciation $ 3,461 $ 4,284 $ 5,349 $ 5,813 $ 4,922
_____________________________________________________________________
BALANCE SHEET DATA
(at end of period):
Working capital $46,329 $40,336 $31,640 $22,022 $28,614
_____________________________________________________________________
Total assets $75,267 $70,742 $71,959 $73,459 $76,752
_____________________________________________________________________
Long-term debt,
net of
current portion $ $ $ 271 $ 1,403 $ 2,584
_____________________________________________________________________
Stockholders'
equity $67,281 $63,495 $60,216 $56,266 $63,361
_____________________________________________________________________
(See notes on following page)
(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.
(2) Income (loss) from continuing operations includes: 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.
(3) 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.
(4) All share and per share amounts have been retroactively
adjusted in 1993 for a 10% stock dividend declared July 1,
1993.
(5) Earnings per share calculations in 1993 have been based on
weighted average shares outstanding adjusted for the number
of common share equivalents attributable to stock options and
warrants.
(6) Earnings per share - assuming full dilution in 1993 includes
the assumed conversion of certain convertible subordinated
debentures. The average common and common equivalent shares
outstanding assuming full dilution was 10.0 million shares in
1993.
(7) 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.
(8) Capital expenditures in 1994 includes purchases of $9.0
million of property in connection with a dockside casino
facility in Tunica, Mississippi.
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 the fiscal years
ended June 30, 1997, 1996 and 1995 (referred to herein as "1997",
"1996" and "1995", respectively), consisted of the cash flows from
operating activities and its available cash and cash equivalents.
Net cash provided by operating activities in 1997 increased
$1.8 million, from $12.8 million in 1996 to $14.6 million in 1997.
The increase of $1.8 million was due primarily to the increase
from the change in other current liabilities. Net cash used in
investing activities in 1997 was approximately $1.6 million which
included cash used of approximately $3.9 million and cash received
of approximately $2.3 million. The $3.9 million of cash used
included payments of approximately $3.4 million primarily for
purchases of property and equipment in connection with Jackpot's
gaming machine route operations ("route operations"). The $2.3
million of cash received from investing activities consisted
primarily of the proceeds from the sale of Jackpot's interest in
Jackpot City, Inc. (the "Nugget"), a casino operation located in
Reno, Nevada and aggregate proceeds from sales of other non-
current assets.
Net cash used in financing activities in 1997 was
approximately $4.1 million which resulted from payments for
repurchases of common stock and dividends of approximately $2.8
million and $1.5 million, respectively, net of approximately $.2
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 $14.6 million less net cash
used in investing and financing activities of approximately $1.6
million and $4.1 million, respectively, cash and cash equivalents
in 1997 increased approximately $8.9 million.
Net cash provided by operating activities in 1996 decreased
$5.3 million, from $18.1 million in 1995 to $12.8 million in 1996.
The decrease of $5.3 million resulted primarily from a decrease of
$2.5 million in the route operations margin (from $21.6 million in
1995 to $19.1 million in 1996) and an increase of $1.8 million for
payments of Federal income tax. 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
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
route 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.
Liquidity:
In 1997, Jackpot purchased approximately $3.4 million of
property and equipment, as described above. Approximately $3.0
million of the $3.4 million was associated with equipment
purchased for gaming locations. Management anticipates that
Jackpot will purchase approximately $8.5 million of property and
equipment, exclusive of business acquisitions, if any, for the
fiscal year ending June 30, 1998 ("1998").
At June 30, 1997, Jackpot had cash and cash equivalents of
approximately $47.9 million, an increase of approximately $8.9
million, or 23%, from the beginning of 1997. Jackpot had working
capital of approximately $46.3 million at June 30, 1997, which
increased from $40.3 million at June 30, 1996 primarily as a
result of the activities described above.
On October 29, 1996, Jackpot's Board of Directors announced
that it would suspend future payment of quarterly cash dividends,
subject to periodic review and reconsideration. Further, the
Board authorized Jackpot's management to repurchase up to 500,000
shares of its common stock, from time to time, at prevailing
market prices. Since such authorization, Jackpot has repurchased
283,771 shares of common stock at a cost of approximately $2.8
million.
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. All discovery
has been completed and the parties have filed cross motions for
summary judgment. The Court has not yet ruled upon such motions.
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 7 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 1998. 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.
Recently Issued Accounting Standards:
In March 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which is
effective for fiscal years beginning after December 15, 1995.
SFAS 121 requires that long-lived assets and certain identifiable
intangible assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. The adoption of
SFAS 121, which was effective July 1, 1996, had no effect on the
consolidated financial statements.
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal years
beginning after December 15, 1995. Although SFAS 123 encourages
an entity to measure compensation by applying the fair value
method of accounting for employee stock-based compensation
arrangements, it permits an entity to continue to account for
employee stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion 25 ("APB 25").
Jackpot has elected to continue to account for stock-based compensation
in accordance with APB 25. The pro forma effect on net income and
earnings per share, as if the fair value recognition provisions
had been applied, is provided in a note to the consolidated
financial statements, as required by SFAS 123. See Note 5 of Notes
to Consolidated Financial Statements.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which is effective for periods, including interim periods, ending
after December 15, 1997. Earlier adoption of the statement is not
permitted. SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS"), including the replacement
of the presentation of primary EPS with the presentation of basic
EPS, as defined. Upon adoption of SFAS 128, all prior-period EPS
data presented shall be restated to conform with the provisions of
the statement. As required by SFAS 128, Jackpot will adopt this
statement for the three month period ending December 31, 1997.
Management believes that the implementation of SFAS 128 will not
have a significant impact on EPS.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"), which is effective for periods
ending after December 15, 1997. SFAS 129 establishes standards
for disclosing information about an entity's capital structure.
Management intends to comply with the disclosure requirements of
this statement.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which is effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires companies to classify items
of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. Management does not believe this statement
will have a material impact on the consolidated financial
statements.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"), which is
effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes additional standards for segment reporting in
the financial statements. Management has not determined the
extent of the disclosure required by SFAS 131.
Overview
________
Jackpot has a significant amount of its route operations at
retail stores which are part of a group of affiliated store
chains. Route operations from two groups of affiliated store
chains in 1997, 1996 and 1995 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 60% of
Jackpot's total revenues in 1997. The renewal or extension of
agreements with such customers 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.
In 1997, Jackpot entered into agreements for long-term
contract extensions, which became effective July 1, 1997, with
four of its largest retail chain store customers, two of which
were not due to expire on June 30, 1997. A very competitive
pricing environment caused the Company to offer significant
increases in location rent over the existing agreements. Such
agreements provide Jackpot the continued right to operate gaming
machines at certain existing locations and future locations, if
any, of such customers. As of June 30, 1997, these agreements
involve the operation of approximately 1,174 gaming machines in 76
locations.
Despite a long-term relationship with Warehouse Markets, Inc.
Jackpot was not willing to agree with the terms sought for a
contract extension, which management believed were uneconomic.
The agreement, which expired on June 30, 1997, involved
the operation of approximately 272 gaming machines in 16
locations. In 1997, Jackpot generated approximately 6% of its
total revenues and a significant amount of operating income from
operations at such customer's locations.
With respect to 1998, the Company's results of operations
will be adversely affected compared to 1997 due to the intensely
competitive market conditions prevailing for gaming machine route
operators, the loss of a significant chain store customer
described above and to significant increases in location rent,
effective July 1, 1997, in connection with long-term contract
renewals with four of Jackpot's largest chain store customers.
However, management believes that the following may lessen
the adverse effects described above: (i) increased revenues at
existing locations as a result of the maturing of several recently
opened new chain store locations, (ii) additional revenues from
new locations scheduled to be opened by Jackpot's largest chain
store customers, (iii) increased revenues at existing locations
due to capital improvements or replacements of gaming machines,
and (iv) certain cost reductions based on potential improvements
to current operating information systems. While management
believes that these events will occur, they are, in part, based
upon factors that are outside the Company's control. Accordingly,
no assurance can be given that such benefits will occur.
Results of Operations
_____________________
The table below presents the changes in comparative financial data from
1995 to 1997 (dollars in thousands):
Years Ended June 30,
___________________________________________________________________
1997 1996 1995
________________________ __________________________ ______________
Percent Percent Percent Percent Percent
of Increase of Increase of
Amount Revenues(Decrease)Amount Revenues (Decrease) Amount Revenues
______ ________ ________ ______ ________ ________ ______ ________
Revenues:
Route
operations $88,895 96.7% 6.4% $83,533 91.7% (5.0)% $ 87,892 90.7%
Casino
operations 3,009 3.3 (60.3) 7,575 8.3 (15.5) 8,961 9.3
_______ _____ _____ _______ _____ _____ ________ _____
Totals 91,904 100.0 .9 91,108 100.0 (5.9) 96,853 100.0
_______ _____ _____ _______ _____ _____ ________ _____
Costs
and
expenses:
Route
operations 69,905 76.0 8.4 64,460 70.8 (2.8) 66,342 68.5
Casino
operations 2,835 3.1 (57.4) 6,661 7.3 (15.7) 7,904 8.1
Amortization 1,728 1.9 (21.4) 2,199 2.4 (23.6) 2,880 3.0
Depreciation 3,461 3.8 (19.2) 4,284 4.7 (19.9) 5,349 5.5
General and
admin-
istrative 4,153 4.5 (.2) 4,163 4.5 (23.0) 5,410 5.6
Loss from
write-down
and sale
of casino
properties 2,247 2.5
_______ _____ _____ _______ _____ _____ _______ _____
Totals 82,082 89.3 (2.3) 84,014 92.2 (4.4) 87,885 90.7
_______ _____ _____ _______ _____ _____ _______ _____
Operating
income 9,822 10.7 38.5 7,094 7.8 (20.9) 8,968 9.3
Other
income, net 1,546 1.6 2.0 1,516 1.7 67.1 907 .9
_______ _____ _____ _______ ____ _____ _______ _____
Income
before
income tax 11,368 12.3 32.0 8,610 9.5 (12.8) 9,875 10.2
Provision
for
income tax 3,524 3.8 27.9 2,755 3.1 (15.5) 3,259 3.4
_______ _____ _____ _______ ____ _____ _______ _____
Net income $ 7,844 8.5% 34.0% $ 5,855 6.4% (11.5)% $ 6,616 6.8%
======= ===== ===== ======= ==== ===== ======= =====
Revenues generated from route operations are attributable to fixed
payment leases and revenue sharing contracts. Such revenues for 1997,
1996 and 1995 are summarized below (dollars in thousands):
1997 1996 1995
___________________ ___________________ ____________________
Percent Percent Percent
of route of route of route
operations operation operations
Amount revenues Amount revenues Amount revenues
_______ ___________ _______ __________ _______ ____________
Route
operations:
Fixed
payment
leases $60,106 67.6% $53,258 63.8% $54,386 61.9%
Revenue
sharing
contracts 28,789 32.4 30,275 36.2 33,506 38.1
_______ _____ _______ _____ _______ _____
$88,895 100.0% $83,533 100.0% $87,892 100.0%
======= ===== ======= ===== ======= =====
1997 compared to 1996
_____________________
Revenues:
Total revenues in 1997 increased $.8 million, from $91.1
million in 1996 to $91.9 million in 1997. The increase in total
revenues of $.8 million was the net result of an increase of $5.4
million (from $83.5 million in 1996 to $88.9 million in 1997) in
route operations revenues and a decrease of $4.6 million (from
$7.6 million in 1996 to $3.0 million in 1997) in casino operations
revenues.
The increase in route operations revenues of $5.4 million,
which represented a 6.4% increase, resulted from a combination of
additional revenues generated from new and existing locations, net
of lost revenues from terminated locations. In 1997, new
locations generated revenues of $6.3 million and existing
locations generated additional revenues of $2.9 million.
Terminated locations had generated revenues of $3.8 million in
1996.
As described previously, a significant amount of Jackpot's
route operations revenues is derived from five retail chain store
customers pursuant to license or lease agreements. As of June 30,
1997, such agreements involved the operation of 1,539 machines in
98 locations.
The decrease in casino operations revenues in 1997 of $4.6
million was due primarily to the ceasing of operations at the
Debbie Reynolds' Hotel and Casino ("Debbie's Casino"), effective
March 31, 1996, and the sale of Jackpot's interest in the Nugget
on June 30, 1996. 1996 includes revenues of $4.3 million
generated at these two locations.
Costs and expenses:
Route operations expenses in 1997 increased $5.4 million
(from $64.5 million in 1996 to $69.9 million in 1997) and, as a
percentage of route operations revenues, increased to 78.6% in
1997 from 77.2% in 1996. The increase of $5.4 million in 1997 was
attributable to increases of $2.9 million in location rent
expense, which was principally related to new chain locations,
$1.3 million in workers' compensation and group health costs, $.4
million in payroll costs and $.8 million in other route operations
expenses. Route operations expenses in 1997 increased as a
percentage of route operations revenues primarily because of an
increase in location rent, as a percentage of revenues,
attributable to revenue sharing contracts and to increases in the
costs and expenses described above. In general, the costs
associated with revenues generated at new revenue sharing
locations have been greater as a percentage of revenues than have
the costs associated with the lost revenues.
Casino operations expenses in 1997 decreased $3.8 million,
from $6.6 million in 1996 to $2.8 million in 1997. With respect
to casino operations expenses, 1996 includes $3.8 million of costs
and expenses incurred by the Nugget and Jackpot's casino
operations at Debbie's Casino.
Amortization expense decreased $.5 million in 1997, from $2.2
million in 1996 to $1.7 million in 1997. The decrease in
amortization expense in 1997 was primarily attributable to
reductions in amortization expense related to lease acquisition
costs and prior service costs associated with the Jackpot
Retirement Plan for Directors. 1997 did not include any
amortization expense of prior service costs as all such costs have
been fully amortized at June 30, 1996.
Depreciation expense in 1997 decreased $.8 million, from $4.3
million in 1996 to $3.5 million in 1997. The decrease in
depreciation expense in 1997 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 1996.
General and administrative expenses in 1997 remained constant
at approximately $4.2 million compared to 1996.
Other income (expense):
Other income (expense) in 1997, which consists primarily of
tax-exempt interest income, remained constant at approximately
$1.5 million compared to 1996.
Other:
The effective tax rate in 1997 was approximately 31%, which
was slightly lower than the 32% rate in 1996 primarily because of
the increase in the tax benefit from tax-exempt interest income in
1997.
General:
Operating income in 1997 increased $2.7 million, from $7.1
million in 1996 to $9.8 million in 1997. Operating income in 1996
includes a charge of approximately $2.2 million, which consisted
primarily of the write-down of the carrying amount of certain
long-lived assets of Jackpot Owl, Inc. (the "Owl Club") to fair
value. The remainder of the increase in operating income of
approximately $.5 million resulted primarily from a decrease in
amortization and depreciation expenses of approximately $1.3
million, net of a decrease in the casino operations operating
margin of $.7 million. The decrease of $.7 million (from $.9
million in 1996 to $.2 million in 1997) was due primarily to the
ceasing of Jackpot's operations at Debbie's Casino and the sale of
Jackpot's interest in the Nugget, as previously described.
Net income in 1997 increased $2.0 million (from $5.8 million
in 1996 to a record $7.8 million in 1997) and earnings per share
in 1997 was a record $.85, versus earnings per share in 1996 of
$.63 due primarily to the results of the operations described
above.
1996 compared to 1995
_____________________
General:
On August 13, 1996, Jackpot's Board of Directors approved a
plan to dispose of 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 the Nugget
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 and earnings per share in 1996 decreased to $5.9 million
and $.63, respectively, from $6.6 million and $.72, respectively,
in 1995.
Revenues:
Total revenues in 1996 decreased $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
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 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 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.
The decrease in casino operations revenues in 1996 of
approximately $1.4 million was due principally to the decline in
Jackpot's revenues generated at Debbie's Casino. Such decline was
due to the ceasing of Jackpot's casino operations at the location,
effective March 31, 1996, and also to a decrease in revenues for
the nine months ended March 31, 1996, versus the comparable prior
year period. Jackpot had operated approximately 175 gaming
machines at this location.
Costs and expenses:
Route operations expenses in 1996 decreased $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 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 $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
includes approximately $.9 million of costs and expenses incurred
by the Post Office Casino.
Amortization expense in 1996 decreased $.7 million, 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 fourth quarter of
1995.
Depreciation expense in 1996 decreased $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 1996.
General and administrative expenses in 1996 decreased $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.
Other income (expense):
Other income (expense) in 1996 increased $.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.
Operating income in 1996 decreased $1.9 million, 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 previously described.
Forward-looking statements:
Certain information included in this Form 10-K and other
materials filed or to be filed by the Company with the Securities
and Exchange Commission contains statements that may be considered
forward-looking. In addition, from time to time, the Company may
release or publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms
of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance,
development and results of the Company's business include, but are
not limited to, competitive pressures, the loss or nonrenewal of
any of Jackpot's significant contracts, conditioning or suspension
of any gaming license, adverse results of significant litigation
matters, possible future financial difficulties of a significant
customer and the continued growth of the gaming industry and
population in Nevada. Readers are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of
the date thereof. The Company assumes no obligation to update or
supplement forward-looking statements as a result of new
circumstances or subsequent events.
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)(2).
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 1997 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, 1997, Jackpot filed no reports
on Form 8-K.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant,
as amended (C)
3.2 By-laws of the Registrant, as amended (C)
3.3 Form of Amendment to Articles of Incorporation
of Registrant (J)
4.1 Stockholder Rights Agreement dated as of July
11, 1994 between the Registrant and
Continental Stock Transfer & Trust Company, as
Rights Agent (K)
10.1 Employment and consulting agreement with Neil
Rosenstein (B), as amended (E), and as further
amended (F)(N)
10.2 License agreement with Albertson's, Inc. (H)
10.3 License agreement with Thrifty PayLess, Inc.
(F)
10.4 License agreement with Safeway Stores, Inc.
(A)
10.5 1990 Incentive and Nonqualified Stock Option
Plan (D)(N)
10.6 Indemnification Agreement (Sample) (E)
10.7 Salary Continuation Plan for Executives (E)(N)
10.8 Form of Retirement Plan for Directors (F)
10.9 Amendment No. 2 to Employment Agreement with
Neil Rosenstein (E)(N)
10.10 1992 Incentive and Non-qualified Stock Option
Plan (G)(N)
10.11 Form of First Amendment to Retirement Plan for
Directors (I)
10.12 Employment Agreement with Don R. Kornstein
(L)(N)
10.13 License agreement with American Drug Stores,
Inc. (M)
10.14 License agreement with American Drug Stores,
Inc. (M)
10.15 License agreement with Kmart Corporation (M)
10.16 License agreement with Lucky Stores, Inc. (M)
10.17 Amendments to License agreement with Thrifty
PayLess, Inc. (M)
11.1 Computation of Earnings Per Common Share (M)
21.1 List of Registrant's subsidiaries (M)
23.1 Consent of Deloitte & Touche LLP (M)
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
Annual Report on Form 10-K for the year
ended June 30, 1993.
(I) Incorporated by reference to Registrant's
Form 10-Q for the quarter ended September
30, 1993.
(J) Incorporated by reference to Registrant's
1993 Proxy Statement.
(K) Incorporated by reference to Registrant's
Form 8-A dated July 12, 1994.
(L) Incorporated by reference to Registrant's
Form 10-Q for the quarter ended September
30, 1994.
(M) Included herein.
(N) 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 23, 1997 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 September 23, 1997
___________________________ Executive Officer
Don R. Kornstein and Director
(Principal Executive
Officer)
/s/ Bob Torkar Senior Vice President- September 23, 1997
___________________________ Finance,
Bob Torkar Treasurer and Chief
Accounting Officer
(Principal Financial
and Accounting Officer)
/s/ Allan R. Tessler Chairman of the Board September 23, 1997
___________________________
Allan R. Tessler
/s/ David R. Markin Director September 23, 1997
___________________________
David R. Markin
/s/ Robert L. McDonald, Sr. Director September 23, 1997
___________________________
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, 1997 and 1996
Consolidated Statements of Income
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows
Years Ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information
Years Ended June 30, 1997 and 1996
(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 provided 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 (the "Company") as of
June 30, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company'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, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
August 1, 1997
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
(Dollars in thousands)
ASSETS 1997 1996
______ ________ ________
Current assets:
Cash and cash equivalents $ 47,945 $ 39,024
Prepaid expenses 1,438 1,740
Other current assets 1,728 3,515
________ ________
Total current assets 51,111 44,279
________ ________
Property and equipment, at cost:
Land and buildings 1,535 1,535
Gaming equipment 28,202 27,839
Other equipment 4,595 4,282
Leasehold improvements 339 336
________ ________
34,671 33,992
Less accumulated depreciation (21,582) (20,697)
________ ________
13,089 13,295
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$6,198 and $5,142 3,596 4,749
Goodwill, net of accumulated
amortization of $2,547 and
$2,382 4,074 4,240
Lease and other security deposits 2,959 3,436
Other non-current assets 438 743
________ ________
Total assets $ 75,267 $ 70,742
======== ========
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
(Dollars in thousands, except share data)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
____________________________________ _______ _______
Current liabilities:
Accounts payable $ 375 $ 504
Other current liabilities 4,407 3,439
_______ _______
Total current liabilities 4,782 3,943
Deferred rent 2,510 3,025
Deferred income tax 633
Other liabilities 61 279
_______ _______
Total liabilities 7,986 7,247
_______ _______
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; 9,823,993 and 9,631,278
shares issued 98 96
Additional paid-in capital 66,033 64,129
Retained earnings 9,253 2,905
Less 741,958 and 293,748 shares of
common stock in treasury, at cost (8,103) (3,635)
_______ _______
Total stockholders' equity 67,281 63,495
_______ _______
Total liabilities and
stockholders' equity $75,267 $70,742
======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(Dollars in thousands, except per share data)
1997 1996 1995
_______ _______ _______
Revenues:
Route operations $88,895 $83,533 $87,892
Casino operations 3,009 7,575 8,961
_______ _______ _______
Totals 91,904 91,108 96,853
_______ _______ _______
Costs and expenses:
Route operations 69,905 64,460 66,342
Casino operations 2,835 6,661 7,904
Amortization 1,728 2,199 2,880
Depreciation 3,461 4,284 5,349
General and administrative 4,153 4,163 5,410
Loss from write-down and sale
of casino properties 2,247
_______ _______ _______
Totals 82,082 84,014 87,885
_______ _______ _______
Operating income 9,822 7,094 8,968
_______ _______ _______
Other income (expense):
Interest and other income 1,546 1,538 1,053
Interest expense (22) (146)
_______ _______ _______
Totals 1,546 1,516 907
_______ _______ _______
Income before income tax 11,368 8,610 9,875
_______ _______ _______
Provision (credit) for
Federal income tax:
Current 3,086 2,421 (588)
Deferred 438 334 3,847
_______ _______ _______
Totals 3,524 2,755 3,259
_______ _______ _______
Net income $ 7,844 $ 5,855 $ 6,616
======= ======= =======
Earnings per common share $ .85 $ .63 $ .72
======= ======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(Dollars and shares in thousands, except per share data)
Retained Treasury
Common Stock Additional Earnings Stock Total
_____________ Paid-in (Accumulated ______________ Stockholders'
Shares Amount Capital Deficit) Shares Amount Equity
______ ______ __________ ____________ ______ _______ _____________
Balance
July 1,
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
($.32
per share) (201) (2,770) (2,971)
Issuance
of shares
on
exercise
of stock
options 36 341 341
Net
income 5,855 5,855
_____ ___ _______ _______ ____ _______ _______
Balance
June 30,
1996 9,631 96 64,129 2,905 (294) (3,635) 63,495
Tax
benefit
from
stock
options 48 48
Cash
dividends
($.16
per share) (1,496) (1,496)
Issuance
and
receipt
of
shares on
exercise
of stock
options 193 2 1,856 (164) (1,665) 193
Repurchase
of common
stock (284) (2,803) (2,803)
Net
income 7,844 7,844
_____ ___ _______ _______ ____ _______ _______
Balance
June 30,
1997 9,824 $98 $66,033 $ 9,253 (742) $(8,103) $67,281
===== === ======= ======= ==== ======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(Dollars in thousands)
1997 1996 1995
_______ _______ _______
Operating activities:
Net income $ 7,844 $ 5,855 $ 6,616
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,189 6,483 8,229
Deferred Federal income tax 438 334 3,847
Write-down and sale of casino properties 2,247
Other, net (393) (410)
Increase (decrease) from changes in:
Prepaid expenses and other current assets 174 200 (384)
Other non-current assets (51) 69 108
Accounts payable and other current liabilities 1,585 (860) (1,269)
Deferred rent and other liabilities (595) (683) 1,331
Assets and liabilities of sold subsidiary, net (474)
_______ _______ _______
Net cash provided by operating activities 14,584 12,778 18,068
_______ _______ _______
Investing activities:
Proceeds from sales of short-term investments, net 509
Proceeds from sales of equipment and other
non-current assets 1,625 1,390 1,053
Purchases of property and equipment (3,393) (4,267) (4,044)
Increase in lease acquisition costs and other
intangible assets (524) (433) (501)
Lease and other security deposits 477 27
Advances to equity investee (1,498)
Other, net 258 219 124
_______ _______ _______
Net cash used in investing activities (1,557) (3,091) (4,330)
_______ _______ _______
Financing activities:
Repayments of long-term debt (949) (1,422)
Proceeds from issuance of common stock 193 341 7
Repurchases of common stock (2,803)
Dividends paid (1,496) (2,971) (2,950)
_______ _______ _______
Net cash used in financing activities (4,106) (3,579) (4,365)
_______ _______ _______
Net increase in cash and cash equivalents 8,921 6,108 9,373
Cash and cash equivalents at beginning of year 39,024 32,916 23,543
_______ _______ _______
Cash and cash equivalents at end of year $47,945 $39,024 $32,916
======= ======= =======
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Interest $ - $ 22 $ 146
Federal income tax $ 1,840 $ 1,800 $ -
Non-cash investing and financing activities:
Common stock surrendered on exercise of
stock options $ 1,665 $ - $ 1,760
Tax benefit from exercise of stock options $ 48 $ 54 $ 277
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:
Business:
Jackpot Enterprises, Inc., 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.
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.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the accompanying consolidated financial
statements and notes. Actual results could differ from those
estimates.
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. 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. Revenue-sharing payments to route locations
are recorded as location rent expense.
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 $3,029,000 and $3,934,000 as of June 30,
1997 and 1996.
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 per common share:
Earnings per common share are computed by dividing net income
by the weighted average number of common shares outstanding.
Stock options and warrants have been excluded from the
computations in 1997, 1996 and 1995 because they had no
effect on earnings per common share. The weighted average
number of common shares outstanding was 9,237,000, 9,307,000
and 9,235,000 in 1997, 1996 and 1995.
Recently issued accounting standards:
In March 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which is effective for fiscal years beginning after December
15, 1995. SFAS 121 requires that long-lived assets and
certain identifiable intangible assets to be held and used by
an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount
may not be recoverable. The adoption of SFAS 121, which was
effective July 1, 1996, had no effect on the consolidated
financial statements.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which is effective for periods, including interim
periods, ending after December 15, 1997. Earlier adoption of
the statement is not permitted. SFAS 128 establishes
standards for computing and presenting earnings per share
("EPS"), including the replacement of the presentation of
primary EPS with the presentation of basic EPS, as defined.
Upon adoption of SFAS 128, all prior-period EPS data
presented shall be restated to conform with the provisions of
the statement. As required by SFAS 128, Jackpot will adopt
this statement for the three month period ending December 31,
1997. Management believes that the implementation of SFAS
128 will not have a significant impact on EPS.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"), which is effective for
periods ending after December 15, 1997. SFAS 129 establishes
standards for disclosing information about an entity's
capital structure. Management intends to comply with the
disclosure requirements of this statement.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 requires
companies to classify items of other comprehensive income by
their nature in a financial statement and display the
accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
Management does not believe this statement will have a
material impact on the consolidated financial statements.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosure About Segments of
an Enterprise and Related Information" ("SFAS 131"), which is
effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes additional standards for segment
reporting in the financial statements. Management has not
determined the extent of the disclosure required by SFAS 131.
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 $34,499,000 and
$29,716,000 at June 30, 1997 and 1996.
Note 3 - Casino operations:
On August 13, 1996, Jackpot's Board of Directors (the "Board")
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
continues to market such properties for sale. However,
unless Jackpot is able to enter into agreements for the sale
of these properties, on terms acceptable to Jackpot, no
assurance can be given that such disposals will occur.
The Owl Club, as of June 30, 1997, operated 90 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 terminate after September 15, 1997 upon fifteen days
written notice to the lessor. As of June 30, 1997, 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, 1997, the carrying value of assets
to be disposed of associated with the Owl Club and the Pony
Express Casino was approximately $1,500,000. The results of
operations of the Owl Club and the Pony Express Casino were
not material in 1997, 1996 and 1995.
Note 4 - Other current liabilities:
Other current liabilities consist of the following (dollars
in thousands):
June 30,
________________
1997 1996
______ ______
Accrued employee benefits $1,740 $1,733
Accrued professional fees 468 244
Accrued progressive jackpots 528 454
Federal income tax payable 362
Accrued rent 258 283
Other 1,051 725
______ ______
Totals $4,407 $3,439
====== ======
Note 5 - Stockholders' equity:
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
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,
1997 and 1996, 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 per share
in 1997, 1996 and 1995.
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, 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 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, 1997 option grants
will be determined September 30, 1997, at which time the
options become exercisable. At June 30, 1997, options
granted to Jackpot's directors to purchase an aggregate of
577,500 shares of Common Stock were outstanding, of which
467,500 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, or (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, 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 $10.00
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
Automatic grant
to directors 110 (A)
Other grants 20 $11.00
Exercised (3) (190) $ 8.50 to $10.75
Canceled (6) (21) $ 6.10 to $11.63
___ _____
Outstanding at
June 30, 1997 0 1,580 $ 8.50 to $20.88
=== =====
(1,217 shares
exercisable)
(A) To be determined on September 30, 1997.
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, 1994 1,078 $ 6.28 to $20.91
Exercised (95) $ 6.28
Canceled (554) $10.87 to $20.91
_____
Outstanding at June 30, 1995 429 $ 9.19 to $15.00
Transactions -
_____
Outstanding at June 30, 1996 429 $ 9.19 to $15.00
Canceled (50) $15.00
_____
Outstanding and exercisable
at June 30, 1997 379 $ 9.19 to $10.63
=====
Accounting for stock-based compensation:
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal
years beginning after December 15, 1995. Although SFAS 123
encourages an entity to measure compensation by applying the
fair value method of accounting for employee stock-based
compensation arrangements, it permits an entity to continue to
account for employee stock-based compensation arrangements
under the provisions of Accounting Principles Board Opinion 25
("APB 25").
Jackpot has elected to continue to account for stock-based
compensation in accordance with APB 25. Under APB 25,
generally only stock options that have intrinsic value at the
date of grant are considered compensatory. Intrinsic value
represents the excess, if any, of the market price of the
stock at the grant date over the exercise price of the option.
Under SFAS 123, all stock option grants are considered
compensatory. Compensation cost is measured at the date of
grant based on the estimated fair value of the options
determined using an option pricing model. The model takes
into account the stock price at the grant date, the exercise
price, the expected life of the option, the volatility of the
stock, expected dividends on the stock and the risk-free
interest rate over the expected life of the option.
The following table discloses Jackpot's pro forma net
income and net income per share for 1997 and 1996 assuming
compensation cost for employee stock options had been
determined using the fair value-based method prescribed by
SFAS 123. The table also discloses the weighted average
assumptions used in estimating the fair value of each option
grant on the date of grant using the Black-Scholes option
pricing model, and the estimated weighted average fair value
of the options granted. The model assumes no expected future
dividend payments on Jackpot's Common Stock for the
options granted in both 1997 and 1996 (dollars in thousands,
except per share data):
1997 1996
______ ______
Net income:
As reported $7,844 $5,855
Pro forma 7,571 5,855
Net income per share:
As reported $ .85 $ .63
Pro forma .82 .63
Weighted average assumptions:
Expected stock price
volatility 35.0% 39.1%
Risk-free interest rate 6.1% 6.2%
Expected option lives
(in years) 2.5 2.5
Estimated fair value of
options granted $ 3.18 $ 3.04
Because the accounting method prescribed by SFAS 123 is not
applicable to options granted prior to July 1, 1995, the
compensation cost reflected in the pro forma amounts shown
above may not be representative of that to be expected in
future years.
Shares reserved for issuance:
Shares of Common Stock were reserved for the exercise of the
following (in thousands):
June 30,
________________
1997 1996
_____ _____
Stock option plans:
Outstanding 1,580 1,670
Available for grant 956 1,074
Other nonqualified
stock options 379 429
_____ _____
Totals 2,915 3,173
===== =====
Common stock in treasury:
In 1997, Jackpot purchased 283,771 shares of its Common Stock
at the market price on the date of purchase for a total cost
of approximately $2,803,000, or an average of $9.88 per share.
Such purchases include 55,174 shares acquired from American
Country Insurance Company for approximately $545,000 (the
market price on the date of purchase). Two directors of
Jackpot were directors and indirect beneficial owners of an
aggregate of more than 51% of the common stock of such
insurance company at the time of such purchase.
Note 6 - Related party transactions:
One director of Jackpot is a partner in a law firm that has
provided various legal services for which Jackpot incurred
legal fees aggregating approximately $179,000, $110,000 and
$163,000 in 1997, 1996 and 1995. Also, see Note 5.
Note 7 - 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.
In 1997, Jackpot entered into four agreements for long-
term contract extensions which became effective July 1, 1997.
Each agreement provides Jackpot the continued right to operate
at certain existing locations and future locations, if any, of
such customers. Presently, these agreements involve the
operation of approximately 1,174 gaming machines in 76
locations.
Future minimum payments (dollars in thousands) under such
noncancelable operating leases or licenses, including the
agreements mentioned above, aggregated approximately $168,595
at June 30, 1997, payable as follows: $32,614 in 1998;
$32,943 in 1999; $25,658 in 2000; $25,819 in 2001; $25,816 in
2002; and $25,745 thereafter.
Rent expense was comprised as follows (dollars in thousands):
1997 1996 1995
_______ _______ _______
Location leases:
Fixed rentals $28,125 $25,633 $24,986
Percentage rentals 19,994 20,243 21,920
Office and equipment leases 453 452 472
_______ _______ _______
Totals $48,572 $46,328 $47,378
======= ======= =======
Employment and severance agreements:
Jackpot has an employment agreement with Don R. Kornstein,
President, Chief Executive Officer and Director which
currently expires on September 30, 2000. 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 $169,000, $205,000 and $220,000 in 1997, 1996 and 1995.
The aggregate commitment for future salaries at June 30, 1997,
excluding bonuses, under Mr. Kornstein's agreement is
approximately $2,356,000. 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. The aggregate contingent liability at June
30, 1997 under Jackpot's employment and severance agreements
is approximately $2,900,000.
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, 1997, Jackpot
had unsecured lease and other security deposits of $2,959,000
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 had 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. All discovery has been completed and the parties
have filed cross motions for summary judgment. The Court has
not yet ruled upon such motions. 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 a 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 8 - Revenues derived from major locations:
Gaming machine operations at two groups of affiliated store
chains in 1997, 1996 and 1995 accounted for more than 10% of
Jackpot's total revenues. Revenues for Jackpot's top two
affiliated store chains were approximately $27,000,000 and
$15,000,000, respectively, in 1997, $23,000,000 and
$12,000,000, respectively in 1996, $22,000,000 and $12,000,000,
respectively in 1995. Each individual store chain included
in an affiliated group of store chains has a separate lease
with Jackpot.
Note 9 - Federal income tax:
A reconciliation of the Federal statutory income tax rate to
the effective income tax rate based on income before income
tax follows:
1997 1996 1995
____ ____ ____
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 (3.7) (4.0) (2.6)
Amortization of goodwill 0.4 0.7 0.6
Other, net 0.3 1.3 1.0
____ ____ ____
Effective rate 31.0% 32.0% 33.0%
==== ==== ====
The tax items comprising Jackpot's net deferred tax asset
(liability) as of June 30, 1997, 1996 and 1995 are as follows
(dollars in thousands):
1997 1996 1995
______ ______ ______
Deferred tax assets:
Write-down of assets $ 381 $ 381 $ 105
Deferred rent 854 1,041 1,205
Other accrued liabilities 520 556 646
Retirement plans 9 73 663
Other 98 75 293
______ ______ ______
Totals 1,862 2,126 2,912
______ ______ ______
Deferred tax liabilities:
Difference between book and tax
basis of property 987 527 842
Economic performance accruals 481 491 500
Other 1,027 676 804
______ ______ ______
Totals 2,495 1,694 2,146
______ ______ ______
Net deferred tax asset (liability) $ (633) $ 432 $ 766
====== ====== ======
Jackpot realized tax benefits of $48,000, $54,000 and $277,000
in 1997, 1996 and 1995 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 10 - 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 expense in 1995 was
$100,000. The Profit Sharing Plan had no expense in 1997 and
1996.
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.
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,
1997 and 1996. The Company has entered into settlement
agreements with substantially all of the individuals covered
under the Continuation Plan. The accumulated and projected
benefit obligations for the remaining executives covered under
the Continuation Plan is not material at June 30, 1997.
The Board waived current service benefits that would have
accrued in 1997, 1996 and 1995 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 income.
The unrecognized prior service cost has been fully amortized
at June 30, 1996. The accrued pension liability under the
Continuation Plan was $279,000 at June 30, 1996 and was not
material at June 30, 1997. The pension expense for Jackpot's
defined benefit plans for 1997, 1996 and 1995 includes the
following components (dollars in thousands):
1997 1996 1995
____ ____ ____
Amortization of prior service cost $ - $253 $240
Interest cost on accrued benefits - 69 83
____ ____ ____
Net pension expense $ - $322 $323
==== ==== ====
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 1997 AND 1996
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 1997 and 1996
follows:
Quarter
_______________________________
First Second Third Fourth
_______ _______ _______ _______
1997
____
Revenues $21,955 $22,560 $22,947 $24,442
Gross operating income (A) 3,050 3,521 3,553 4,435
Income before income tax 2,279 2,810 2,856 3,423
Net income 1,573 1,938 1,971 2,362
Earnings per share:
Primary .17 .21 .21 .26
Fully diluted .17 .21 .21 .26
1996
____
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
(A) Gross operating income is revenues less route and casino
operations' costs and expenses, deprecation associated with
route and casino 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.