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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Commission File Number 1-9728
JACKPOT ENTERPRISES, INC.
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 88-0169922
________________________________________________ _______________________
(State or other jurisdiction of incorporation or (I.R.S. Employer
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 August 31, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $80,414,574.
As of September 18, 1998, there were 8,625,780 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Proxy Statement relating to the 1998 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,
1998, 4,097 gaming machines in 412 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, 1998, operated two casinos with an
aggregate of 187 gaming machines. However, as part of its strategy to exit
its remaining casino operations, Jackpot continues to market the casino
properties for sale.
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. For the fiscal
year ended June 30, 1998, 97% of total revenues were derived from Jackpot's
gaming machine route operations and 3% from its casino operations. As of
June 30, 1998, Jackpot operated 4,284 gaming machines in 414 locations.
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 gaming and nongaming
opportunities. The Company's strong financial position and potential
access to capital represent a competitive advantage which enables
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 service center near the store's entrance, where customer traffic is
greatest. The number of gaming machines per store is determined by
licensing limitations, available space and license, lease or sublease
negotiations.
In fiscal 1998, approximately 84% of Jackpot's gaming machine route
operations revenues were generated by southern Nevada operations and
approximately 16% 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, 1998, Jackpot operated 4,097 gaming machines at 412
locations in its gaming machine route business; 136 of the locations
contained 15 gaming machines, 33 of the locations contained more than 15
machines and 243 of the locations contained fewer than 15 machines. Service
centers are operated at retail store locations with generally 15 gaming
machines or more during all store business hours by employees of Jackpot who
provide coin, currency and other services to players of the gaming machines.
On a regular basis, money is removed from the gaming machines and the
service center is replenished with coin and currency.
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, 1998:
As of June 30,
_________________________________
1998 1997 1996 1995 1994
_____ _____ _____ _____ _____
Number of machines on location 4,097 4,075 4,211 4,284 4,072
Number of locations 412 419 439 452 434
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 75% of total gaming machine route operations revenues in
fiscal 1998, 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 1998 to
2010.
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
for the fiscal years ended June 30, 1998, 1997 and 1996 each accounted for
more than 10% of Jackpot's total revenues in such fiscal years. The largest
five store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart
Corporation, Lucky Stores, Inc. and Rite Aid Corporation) accounted for
approximately 64% of Jackpot's total revenues in fiscal 1998. Agreements
with these five customers have expiration dates ranging from 2003 to 2010.
Such agreements provide Jackpot the continued right to operate gaming
machines at certain existing locations and future locations in Nevada, if
any, of such customers. The loss or nonrenewal of any of these leases could
have a material adverse effect on the Company's future results of
operations.
In August 1998, Albertson's, Inc. and American Stores Company (the
parent company of Lucky Stores, Inc. and American Drug Stores, Inc.)
announced that the companies have entered into a definitive merger
agreement. Per the announcement, such transaction is expected to close in
early calendar 1999, subject to various approvals. Route operations
revenues generated at the locations of the combined entities represent a
significant portion of Jackpot's total revenues, and if such transaction had
occurred at the beginning of fiscal 1998, such revenues would have accounted
for approximately 55% of Jackpot's total revenues in fiscal 1998.
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 8 of Notes to Consolidated Financial Statements.
Despite a long-term relationship with Warehouse Markets, Inc., a
significant customer, 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 fiscal 1997, Jackpot
generated approximately 6% of its total revenues and a significant amount of
operating income from operations at such customer's locations.
The renewal or extension of agreements with major retail chains has
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. While fiscal 1998
was adversely affected by the loss of Warehouse Markets, Inc. and by
significant increases in location rent, such effect was principally offset
by increases in revenues generated at existing and new route operations
locations.
In September 1998, Jackpot entered into an agreement for a long-term
contract extension with one of its largest retail store customers. Pursuant
to the terms of the new agreement, which will become effective July 1, 1999,
rent expense will increase significantly over the previous agreement. Such
increase could adversely affect the Company's results of operations for the
year ending June 30, 2000. Excluding the aforementioned long-term
extension, license, lease and sublease agreements, representing 41
agreements and approximately 4% of fiscal 1998 route operations revenues,
have terms expiring during fiscal 1999.
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. Although the
Company continues to market these two casinos for sale, no assurance can be
given that such disposals will occur.
The Owl Club, as of June 30, 1998, operated 93 gaming machines and two
table games in Battle Mountain, Nevada. The Owl Club also has 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 month to month space lease agreement. As of June
30, 1998, 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 98% of its gaming machines from
IGT in fiscal 1998, 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, 1998, Jackpot employed approximately 850 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
and Reno and their surrounding areas. Management believes at least one of
these competitors has more gaming machines or locations than Jackpot. In
addition, certain of such 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
adherence to management's pricing guidelines, revenues generated from route
operations, which are attributable to revenue sharing contracts, have
decreased since fiscal 1995. For additional information concerning
Jackpot's revenue sharing contracts, 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 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, Nevada Casino and motel 10,000 sq. ft. 100%
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, 2001. 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 46 President, 1994
Chief Executive Officer
and Director
George Congdon 49 Senior Vice President - 1995
Operations
Bob Torkar 47 Senior Vice President - Finance, 1991
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 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 -
___________________________________________________________________________
Fiscal 1998
First Quarter $12.19 $10.63 -
Second Quarter 13.00 10.75 -
Third Quarter 13.94 11.00 -
Fourth Quarter 13.19 11.75 -
___________________________________________________________________________
As of September 4, 1998 there were 1,676 holders of record of Common
Stock. The number of holders of record of Jackpot's Common Stock on
September 4, 1998 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 of
$.08 per share to its stockholders of record during fiscal 1997.
Item 6. Selected Financial Data
_______________________
The following information has been derived from Jackpot's consolidated
financial statements:
Years Ended June 30,
_________________________________________
1998 1997 1996 1995 1994
_______ _______ _______ _______ _______
(Dollars and shares in thousands, except per share data)
OPERATING DATA:
Total revenues $93,013 $91,904 $91,108 $96,853 $98,335
_________________________________________________________________________
Operating income $ 7,963 $ 9,822 $ 7,094(1)$ 8,968 $ 9,409 (1)
_________________________________________________________________________
Income (loss) from continuing
operations $ 9,881 $11,368 $ 8,610 $ 9,875 $(7,052)(2)
_________________________________________________________________________
Net income (loss) $ 7,213 $ 7,844 $ 5,855(3)$ 6,616 $(4,584)(3)
_________________________________________________________________________
Basic earnings (loss)
per share (4):
Net income (loss) $ .80 $ .85 $ .63 $ .72 $ (.50)
_________________________________________________________________________
Diluted earnings (loss)
per share (4):
Net income (loss) $ .79 $ .84 $ .62 $ .71 $ (.50)
_________________________________________________________________________
Dividends declared per share $ - $ .16 $ .32 $ .32 $ .31
_________________________________________________________________________
Average common shares
outstanding 8,991 9,237 9,307 9,235 9,211
_________________________________________________________________________
Average common shares and
common share equivalents
outstanding 9,187 9,317 9,481 9,272 9,211
_________________________________________________________________________
OTHER DATA:
EBITDA (5) $14,762 $16,557 $17,093 $18,125 $18,896
Net cash provided by
operating activities $11,836 $14,584 $12,778 $18,068 $18,367
Net cash used in
investing activities $ 5,883 $ 1,557 $ 3,091 $ 4,330 $ 9,689
Net cash used in
financing activities $ 3,623 $ 4,106 $ 3,579 $ 4,365 $ 4,128
Capital expenditures $ 6,235 $ 3,393 $ 4,267 $ 4,044 $13,452 (6)
Amortization $ 1,141 $ 1,728 $ 2,199 $ 2,880 $ 2,916
Depreciation $ 3,740 $ 3,461 $ 4,284 $ 5,349 $ 5,813
_________________________________________________________________________
BALANCE SHEET DATA
(at end of period):
Working capital $49,152 $46,329 $40,336 $31,640 $22,022
_________________________________________________________________________
Total assets $79,100 $75,267 $70,742 $71,959 $73,459
_________________________________________________________________________
Long-term debt, net of
current portion $ - $ - $ - $ 271 $ 1,403
_________________________________________________________________________
Stockholders' equity $70,871 $67,281 $63,495 $60,216 $56,266
_________________________________________________________________________
(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 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 (the
"Tunica Facility").
(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 the Tunica Facility.
(4) In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which became effective for periods ending after December 15,
1997. All prior-period earnings per share data presented has been
restated to conform to the provisions of such statement.
(5) 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.
(6) Capital expenditures includes purchases of $9.0 million of property in
connection with the Tunica Facility.
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, 1998, 1997 and 1996 (referred to herein as "1998", "1997" and "1996",
respectively), consisted of the cash flows from operating activities and its
available cash and cash equivalents. Net cash provided by operating
activities in 1998 decreased $2.8 million, from $14.6 million in 1997 to
$11.8 million in 1998. The decrease of $2.8 million was primarily due to a
decrease in the gaming machine route operations ("route operations")
operating margin of $2.6 million, from $19.0 million in 1997 to $16.4
million in 1998.
Net cash used in investing activities in 1998 increased $4.3 million,
from $1.6 million in 1997 to $5.9 million in 1998. 1997 includes the
receipt of $1.3 million from the sale of Jackpot's interest in Jackpot City,
Inc. (the "Nugget"), a casino operation located in Reno, Nevada. Cash used
for purchases of property and equipment increased $2.8 million, from $3.4
million in 1997 to $6.2 million in 1998. Primarily, as a result of these
transactions, net cash used in investing activities increased $4.3 million.
Net cash used in financing activities in 1998 was $3.6 million, and
resulted from payments for repurchases of common stock of $4.0 million, net
of proceeds received of approximately $.4 million 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 $11.8 million less net cash used in investing and financing
activities of $5.9 million and $3.6 million, respectively, cash and cash
equivalents in 1998 increased $2.3 million.
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 primarily due to the increase from the change in other
current liabilities. Net cash used in investing activities in 1997 was $1.6
million which included cash used of $3.9 million and cash received of $2.3
million. The $3.9 million of cash used included payments of $3.4 million
primarily for purchases of property and equipment. The $2.3 million of cash
received from investing activities consisted primarily of the proceeds from
the sale of Jackpot's interest in the Nugget and aggregate proceeds from
sales of other non-current assets.
Net cash used in financing activities in 1997 was $4.1 million which
resulted from payments for repurchases of common stock and dividends of
$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 $14.6 million less net cash used in investing and financing
activities of $1.6 million and $4.1 million, respectively, cash and cash
equivalents in 1997 increased $8.9 million.
Net cash provided by operating activities in 1996 decreased $5.3
million, from $18.1 million for the fiscal year ended June 30, 1995 ("1995")
to $12.8 million in 1996. The decrease of $5.3 million resulted primarily
from a decrease in the route operations operating margin of $2.5 million,
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 $3.1 million which included cash used of $4.7 million
and cash received of $1.6 million. The $4.7 million of cash used included
payments of $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 $3.6 million which
consisted primarily of the repayment of $.9 million of long-term debt, the
payment of $3.0 million of dividends, net of $.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 $12.8 million less net cash used in investing and financing
activities of $3.1 million and $3.6 million, respectively, cash and cash
equivalents in 1996 increased $6.1 million.
Liquidity:
In 1998, Jackpot purchased $6.2 million of property and equipment, as
described above. Approximately $5.6 million of the $6.2 million was
associated with equipment purchased for existing and new gaming locations.
Management anticipates, based on its review of capital expenditure
requirements for existing and projected new locations, that Jackpot will
purchase approximately $8.4 million of property and equipment, exclusive of
business acquisitions, if any, for the fiscal year ending June 30, 1999
("1999").
At June 30, 1998, Jackpot had cash and cash equivalents of $50.3
million, an increase of approximately $2.3 million from June 30, 1997.
Jackpot's working capital increased to $49.2 million at June 30, 1998, from
$46.3 million at June 30, 1997 primarily as a result of the activities
described above.
On October 29, 1996, Jackpot's Board of Directors authorized
management to repurchase up to 500,000 shares of Jackpot's common stock at
prevailing market prices. Subsequently, on January 22, 1998, such
authorization was increased from 500,000 to 1,000,000 shares. From October
29, 1996 through August 31, 1998, Jackpot has repurchased approximately
740,000 shares at an aggregate cost of approximately $8.0 million.
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 1999. 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 June 1997, the Financial Accounting Standards Board (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 intends to comply with the
disclosure requirements of SFAS 130 in 1999.
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 begun its
review of SFAS 131, however it has not made a final determination of the
extent of the disclosure required by this statement.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for fiscal years beginning
after June 15, 1999. SFAS 133 establishes additional accounting and
reporting standards for derivative instruments and hedging activities.
Management does not believe the Company has any derivative instruments, or
that Jackpot participates in hedging activities. Accordingly, SFAS 133 is
not expected to have a significant effect on the results of operations or
related disclosures.
Overview
________
Route operations:
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 1998, 1997 and 1996
each accounted for more than 10% of Jackpot's total revenues in such fiscal
years. The largest five store chains (Albertson's, Inc., American Drug
Stores, Inc., Kmart Corporation, Lucky Stores, Inc. and Rite Aid
Corporation) accounted for approximately 64% of Jackpot's total revenues in
1998. Agreements with these five customers have expiration dates ranging
from 2003 to 2010. Such agreements provide Jackpot the continued right to
operate gaming machines at certain existing locations and future locations
in Nevada, if any, of such customers. The loss or nonrenewal of any of
these agreements could have a material adverse effect on the Company's
future results of operations.
In August 1998, Albertson's, Inc. and American Stores Company (the
parent company of Lucky Stores, Inc. and American Drug Stores, Inc.)
announced that the companies have entered into a definitive merger
agreement. Per the announcement, such transaction is expected to close in
early calendar 1999, subject to various approvals. Route operations
revenues generated at the locations of the combined entities represent a
significant portion of Jackpot's total revenues, and if such transaction had
occurred at the beginning of fiscal 1998, such revenues would have accounted
for approximately 55% of Jackpot's total revenues in 1998.
The renewal or extension of agreements with the customers mentioned
above 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.
Despite a long-term relationship with Warehouse Markets, Inc., a
significant customer, 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.
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.
While 1998 was adversely affected by the loss of Warehouse Markets, Inc. and
by significant increases in location rent, such effect was principally
offset by increases in revenues generated at existing and new route
operations locations.
In September 1998, Jackpot entered into an agreement for a long-term
contract extension with one of its largest retail store customers. Pursuant
to the terms of the new agreement, which will become effective July 1, 1999,
rent expense will increase significantly over the previous agreement. Such
increase could adversely affect the Company's results of operations for the
year ending June 30, 2000. Excluding the aforementioned long-term
extension, license, lease and sublease agreements, representing 41
agreements and approximately 4% of 1998 route operations revenues, have
terms expiring during 1999.
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. Although the
Company continues to market these two casinos for sale, no assurance can be
given that such disposals will occur.
Results of Operations
_____________________
The table below presents the changes in comparative financial data from
1996 to 1998 (dollars in thousands):
Years Ended June 30,
____________________________________________________________________
1998 1997 1996
_________________________ _________________________ ________________
Percent Percent Percent Percent Percent
of Increase of Increase of
Amount Revenues(Decrease)Amount Revenues(Decrease)Amount Revenues
_______ ________ ________ _______ ________ ________ _______ ________
Revenues:
Route
operations $90,331 97.1% 1.6% $88,895 96.7% 6.4% $83,533 91.7%
Casino
operations 2,682 2.9 (10.9) 3,009 3.3 (60.3) 7,575 8.3
_______ _____ _____ _______ _____ _____ _______ _____
Totals 93,013 100.0 1.2 91,904 100.0 .9 91,108 100.0
_______ _____ _____ _______ _____ _____ _______ _____
Costs and
expenses:
Route
operations 73,927 79.5 5.8 69,905 76.0 8.4 64,460 70.8
Casino
operations 2,499 2.7 (11.9) 2,835 3.1 (57.4) 6,661 7.3
Amortization 1,141 1.2 (34.0) 1,728 1.9 (21.4) 2,199 2.4
Depreciation 3,740 4.0 8.1 3,461 3.8 (19.2) 4,284 4.7
General and
administra-
tive 3,743 4.0 (9.9) 4,153 4.5 (.2) 4,163 4.5
Loss from
write-down
and sale of
casino
properties 2,247 2.5
_______ _____ _____ _______ _____ _____ _______ _____
Totals 85,050 91.4 3.6 82,082 89.3 (2.3) 84,014 92.2
_______ _____ _____ _______ _____ _____ _______ _____
Operating
income 7,963 8.6 (18.9) 9,822 10.7 38.5 7,094 7.8
Other
income,
net 1,918 2.0 24.1 1,546 1.6 2.0 1,516 1.7
_______ _____ _____ _______ _____ _____ _______ _____
Income
before
income
tax 9,881 10.6 (13.1) 11,368 12.3 32.0 8,610 9.5
Provision
for
income
tax 2,668 2.8 (24.3) 3,524 3.8 27.9 2,755 3.1
_______ _____ _____ _______ _____ _____ _______ _____
Net income $ 7,213 7.8% (8.0)% $ 7,844 8.5% 34.0% $ 5,855 6.4%
======= ===== ===== ======= ===== ===== ======= =====
Route operations revenues attributable to fixed payment leases and
revenue sharing contracts for 1998, 1997 and 1996 are summarized below
(dollars in thousands):
1998 1997 1996
____________________ __________________ __________________
Percent Percent Percent
of route of route of route
operations operations operations
Amount revenues Amount revenues Amount revenues
_______ __________ _______ __________ _______ __________
Route operations:
Fixed payment
leases $67,380 74.6% $60,106 67.6% $53,258 63.8%
Revenue
sharing
contracts 22,951 25.4 28,789 32.4 30,275 36.2
_______ _____ _______ _____ _______ _____
$90,331 100.0% $88,895 100.0% $83,533 100.0%
======= ====== ======= ===== ======= =====
The decrease in route operations revenues attributable to revenue
sharing contracts of $5.8 million (from $28.8 million in 1997 to $23.0 million
in 1998) was principally due to the loss of Warehouse Markets, Inc. on
June 30, 1997.
1998 compared to 1997
_____________________
Revenues:
Total revenues increased $1.1 million, from $91.9 million in 1997 to
$93.0 million in 1998. The increase in total revenues of $1.1 million was
the net result of an increase of $1.4 million (from $88.9 million in 1997 to
$90.3 million in 1998) in route operations revenues and a decrease of $.3
million (from $3.0 million in 1997 to $2.7 million in 1998) in casino
operations revenues.
The increase in route operations revenues of $1.4 million resulted
from a combination of additional revenues generated from new and existing
locations, net of lost revenues from terminated locations. In 1998, new and
existing locations generated additional revenues of $5.7 million and $6.0
million, respectively, while terminated locations generated revenues of
$10.3 million in 1997. The loss of revenues generated at terminated locations
was primarily due to the expiration of Jackpot's right to operate
at the locations of Warehouse Markets, Inc., as previously described, on
June 30, 1997. In 1997, Jackpot generated approximately 6% of its total
revenues and a significant amount of operating income from operations at
such customer's locations.
Costs and expenses:
Route operations expenses increased $4.0 million, from $69.9 million
in 1997 to $73.9 million in 1998 and, as a percentage of route operations
revenues, increased to 81.8% in 1998 from 78.6% in 1997. Such increases
were principally attributable to an increase in location rent. As
previously mentioned, Jackpot entered into agreements for long-term
extensions with four of its largest retail chain store customers during
1997. A very competitive pricing environment caused Jackpot to offer
significant increases in location rent, which is the single largest route
operations expense, over the existing agreements. Such extensions became
effective July 1, 1997.
The increase in route operations expenses of $4.0 million resulted
primarily from a combination of an increase of $7.6 million in location rent
for locations of existing chain store customers, which was related to the
four chain store renewals described above, an increase of $2.4 million in
location rent for new locations of existing chain store customers, net of
decreases in location rent for lost chain store customers and other route
operations expenses of $3.8 million and $2.2 million, respectively.
Amortization expense decreased $.6 million, from $1.7 million in 1997
to $1.1 million in 1998. The decrease in amortization expense was primarily
attributable to reductions in amortization expense related to lease
acquisition costs.
Depreciation expense increased $.2 million, from $3.5 million in 1997
to $3.7 million in 1998. The increase in depreciation expense was
principally attributable to new gaming machines purchased during 1998.
General and administrative expense decreased $.4 million, from $4.1
million in 1997 to $3.7 million in 1998. The decrease in general and
administrative expense was principally due to cost reductions in
professional services and acquisition related activities.
Other income (expense):
Other income (expense) increased $.4 million, from $1.5 million in
1997 to $1.9 million in 1998. The increase in other income was primarily
due to the increase in interest income earned from cash equivalents and to
the receipt of approximately $.1 million for liquidated damages from the
potential purchaser of Jackpot's remaining two casinos. Jackpot received
such amount as a result of the potential purchaser's withdrawal of his
gaming application with the Nevada Gaming Authorities.
Federal income tax:
The effective tax rate in 1998 was 27%, which was lower than the 31%
rate in 1997 primarily because of the increase in the tax benefit from tax-
exempt interest income.
General:
Operating income decreased $1.8 million, from $9.8 million in 1997 to
$8.0 million in 1998. The decrease in operating income in 1998 resulted
primarily from a decrease in the route operations operating margin of $2.6
million and an increase in depreciation expense of $.2 million, offset
partially by a decrease in amortization and general and administrative
expenses of $1.0 million. The decrease in the route operations operating
margin of $2.6 million (from $19.0 million in 1997 to $16.4 million in 1998)
was principally due to the increase in location rent expense for existing
locations as previously described.
Net income decreased $.6 million from a record $7.8 million in 1997 to
$7.2 million in 1998, and basic earnings per share in 1998 was $.80, versus
basic earnings per share in 1997 of $.85 primarily due to the results of
the operations described above.
1997 compared to 1996
_____________________
Revenues:
Total revenues 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 resulted
from a combination of additional revenues generated from new and existing
locations, net of lost revenues from terminated locations. In 1997, new and
existing locations generated additional revenues of $6.3 million and $2.9
million, respectively, while terminated locations generated revenues of $3.8
million in 1996.
The decrease in casino operations revenues in 1997 of $4.6 million was
primarily due 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 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 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 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, from $2.2 million in 1996
to $1.7 million in 1997. The decrease in amortization expense 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 decreased $.8 million, from $4.3 million in 1996
to $3.5 million in 1997. The decrease in depreciation expense 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 expense 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.
Federal income tax:
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 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 consists primarily of the write-down of
the carrying amount of certain long-lived assets of 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 primarily due
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 increased $2.0 million, from $5.8 million in 1996 to a
record $7.8 million in 1997, and basic earnings per share in 1997 was a
record $.85, versus basic earnings per share in 1996 of $.63 primarily due
to the results of the operations described above.
Year 2000
_________
In the past, many computer software programs were written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation is generally referred to as the "Year
2000 Problem". If such situation occurs, the potential exists for computer
system failures or miscalculations by computer programs, which could disrupt
operations.
Jackpot has conducted a comprehensive review of its computer systems
and other systems for the purpose of assessing its potential Year 2000
Problem, and is in the process of modifying or replacing those systems which
are not Year 2000 compliant. Based upon this review, management believes
such systems will be compliant by mid-calendar 1999. However, if
modifications are not made or not completed timely, the Year 2000 Problem
could have a significant adverse impact on the Company's operations.
In addition, Jackpot has communicated with its major vendors and
suppliers to determine their state of readiness relative to the Year 2000
Problem and Jackpot's possible exposure to Year 2000 issues of such third
parties. However, there can be no guarantee that the systems of other
companies, which the Company's systems may rely upon, will be timely
converted or representations made to Jackpot by these parties are accurate.
As a result, the failure of a major vendor or supplier to adequately address
their Year 2000 Problem could have a significant adverse impact on the
Company's operations.
Planning for the Year 2000 Problem, including contingency planning, is
significantly complete and will be revised, if necessary. All costs related
to the Year 2000 Problem are expensed as incurred, while the cost of new
hardware is capitalized and amortized over its expected useful life. The
costs associated with Year 2000 compliance have not been and are not
anticipated to be material to the Company's financial position or results of
operations. As of June 30, 1998, the Company has incurred costs of
approximately $30,000 (primarily for internal labor) related to the system
applications and anticipates spending an additional $150,000 to become Year
2000 compliant. The estimated completion date and remaining costs are based
upon management's best estimates, as well as third party modification plans
and other factors. However, there can be no guarantee that such estimates
will occur and actual results could differ.
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, unfavorable changes in gaming regulations,
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 7A. Quantitative and Qualitative Disclosure About Market Risk
_________________________________________________________
Jackpot invests its available cash in marketable municipal bonds and
money market funds. No trading portfolios are available for the sale of
investments. Therefore, Item 7A is not applicable.
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 1998 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,
1998, Jackpot filed no reports on Form 8-K.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant, as amended (B)
3.2 By-laws of the Registrant, as amended (B)
3.3 Form of Amendment to Articles of Incorporation of Registrant
(G)
4.1 Stockholder Rights Agreement dated as of July 11, 1994 between
the Registrant and Continental Stock Transfer & Trust
Company, as Rights Agent (H)
10.1 License agreement with Thrifty PayLess, Inc. (E)
10.2 License agreement with Safeway Stores, Inc. (A)
10.3 1990 Incentive and Nonqualified Stock Option Plan (C)(L)
10.4 Indemnification Agreement (Sample) (D)
10.5 1992 Incentive and Non-qualified Stock Option Plan (F)(L)
10.6 Employment Agreement with Don R. Kornstein (I)(L)
10.7 License agreement with American Drug Stores, Inc. (J)
10.8 License agreement with American Drug Stores, Inc. (J)
10.9 License agreement with Lucky Stores, Inc. (J)
10.10 Amendments to License agreement with Thrifty PayLess, Inc. (J)
10.11 License agreement with Kmart Corporation (K)
10.12 License agreement with Albertson's, Inc. (K)
21.1 List of Registrant's subsidiaries (K)
23.1 Consent of Deloitte & Touche LLP (K)
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, 1989.
(C) Incorporated by reference to Registrant's Registration
Statement on Form S-3 dated December 12, 1990
(Registration No. 33-38210).
(D) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 1991.
(E) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 1992.
(F) Incorporated by reference to Registrant's 1992 Proxy
Statement.
(G) Incorporated by reference to Registrant's 1993 Proxy
Statement.
(H) Incorporated by reference to Registrant's Form 8-A dated
July 12, 1994.
(I) Incorporated by reference to Registrant's Form 10-Q for
the quarter ended September 30, 1994.
(J) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 1997.
(K) Included herein.
(L) 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, 1998 JACKPOT ENTERPRISES, INC.
(Registrant)
By: /s/ Don R. Kornstein
________________________________
Don R. Kornstein
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
___________________________ _____________________________ __________________
/s/ Don R. Kornstein President, Chief Executive September 23, 1998
___________________________ Officer and Director
Don R. Kornstein (Principal Executive Officer)
/s/ Bob Torkar Senior Vice President-Finance, September 23, 1998
___________________________ Treasurer and Chief Accounting
Bob Torkar Officer (Principal Financial
and Accounting Officer)
/s/ Allan R. Tessler Chairman of the Board September 23, 1998
___________________________
Allan R. Tessler
/s/ David R. Markin Director September 23, 1998
___________________________
David R. Markin
/s/ Robert L. McDonald, Sr. Director September 23, 1998
___________________________
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, 1998 and 1997
Consolidated Statements of Income
Years Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years Ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information
Years Ended June 30, 1998 and 1997
(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, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1998. 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 the Company at June 30, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
September 21, 1998
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1998 AND 1997
(Dollars in thousands)
ASSETS 1998 1997
______ ________ ________
Current assets:
Cash and cash equivalents $ 50,275 $ 47,945
Prepaid expenses 1,594 1,438
Other current assets 2,225 1,728
________ ________
Total current assets 54,094 51,111
________ ________
Property and equipment, at cost:
Land and buildings 1,535 1,535
Gaming equipment 28,988 28,202
Other equipment 4,758 4,595
Leasehold improvements 354 339
________ ________
35,635 34,671
Less accumulated depreciation (19,850) (21,582)
________ ________
15,785 13,089
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$4,607 and $6,198 2,231 3,596
Goodwill, net of accumulated
amortization of $2,713 and
$2,547 3,908 4,074
Lease and other security deposits 3,082 2,959
Other non-current assets 438
________ ________
Total assets $ 79,100 $ 75,267
======== ========
See Notes to Consolidated Financial Statements.
/TABLE
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1998 AND 1997
(Dollars in thousands, except share data)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
____________________________________ _______ _______
Current liabilities:
Accounts payable $ 1,434 $ 375
Other current liabilities 3,508 4,407
_______ _______
Total current liabilities 4,942 4,782
Deferred rent 2,377 2,510
Deferred income tax 849 633
Other liabilities 61 61
_______ _______
Total liabilities 8,229 7,986
_______ _______
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; 9,854,327 and 9,823,993
shares issued 99 98
Additional paid-in capital 66,376 66,033
Retained earnings 16,466 9,253
Less 1,080,372 and 741,958 shares of
common stock in treasury, at cost (12,070) (8,103)
_______ _______
Total stockholders' equity 70,871 67,281
_______ _______
Total liabilities and
stockholders' equity $79,100 $75,267
======= =======
See Notes to Consolidated Financial Statements.
/TABLE
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
1998 1997 1996
_______ _______ _______
Revenues:
Route operations $90,331 $88,895 $83,533
Casino operations 2,682 3,009 7,575
_______ _______ _______
Totals 93,013 91,904 91,108
_______ _______ _______
Costs and expenses:
Route operations 73,927 69,905 64,460
Casino operations 2,499 2,835 6,661
Amortization 1,141 1,728 2,199
Depreciation 3,740 3,461 4,284
General and administrative 3,743 4,153 4,163
Loss from write-down and sale
of casino properties 2,247
_______ _______ _______
Totals 85,050 82,082 84,014
______ ______ _______
Operating income 7,963 9,822 7,094
_______ _______ _______
Other income (expense):
Interest and other income 1,918 1,546 1,538
Interest expense (22)
_______ _______ _______
Totals 1,918 1,546 1,516
_______ _______ _______
Income before income tax 9,881 11,368 8,610
_______ _______ _______
Provision for Federal income tax:
Current 2,452 3,086 2,421
Deferred 216 438 334
_______ _______ _______
Totals 2,668 3,524 2,755
_______ _______ _______
Net income $ 7,213 $ 7,844 $ 5,855
======= ======= =======
Basic earnings per share $ .80 $ .85 $ .63
======= ======= =======
Dilutive earnings per share $ .79 $ .84 $ .62
======= ======= =======
See Notes to Consolidated Financial Statements.
/TABLE
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(Dollars and shares in thousands, except per share data)
Retained
Additional Earnings Treasury Total
Common Stock Paid-In (Accumulated) Stock Stockholders'
_____________ Capital Deficit) _______________ Equity
Shares Amount Shares Amount
______ ______ _________ ____________ ______ ________ _____________
Balance
July 1,
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
Repurchases
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
Issuance
of shares on
exercise of
stock options 30 1 343 344
Repurchases
of common
stock (338) (3,967) (3,967)
Net
income 7,213 7,213
_____ ___ _______ _______ _____ ________ _______
Balance
June 30,
1998 9,854 $99 $66,376 $16,466 (1,080) $(12,070) $70,871
===== === ======= ======= ===== ======== =======
See Notes to Consolidated Financial Statements.
/TABLE
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(Dollars in thousands)
1998 1997 1996
_______ _______ _______
Operating activities:
Net income $ 7,213 $ 7,844 $ 5,855
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,881 5,189 6,483
Deferred Federal income tax 216 438 334
Write-down and sale of casino properties 2,247
Other, net (393)
Increase (decrease) from changes in:
Prepaid expenses and other current assets (373) 174 200
Other non-current assets 52 (51) 69
Accounts payable and other current
liabilities (621) 1,585 (860)
Deferred rent and other liabilities 468 (595) (683)
Assets and liabilities of sold subsidiary,
net (474)
_______ _______ _______
Net cash provided by operating
activities 11,836 14,584 12,778
_______ _______ _______
Investing activities:
Proceeds from sales of equipment and other
non-current assets 403 1,625 1,390
Purchases of property and equipment (6,235) (3,393) (4,267)
Increase in lease acquisition costs and
other intangible assets (211) (524) (433)
Lease and other security deposits 477
Other, net 160 258 219
_______ _______ _______
Net cash used in investing activities (5,883) (1,557) (3,091)
_______ _______ _______
Financing activities:
Repayments of long-term debt (949)
Proceeds from issuance of common stock 344 193 341
Repurchases of common stock (3,967) (2,803)
Dividends paid (1,496) (2,971)
_______ _______ _______
Net cash used in financing activities (3,623) (4,106) (3,579)
_______ _______ _______
Net increase in cash and cash equivalents 2,330 8,921 6,108
Cash and cash equivalents at beginning of year 47,945 39,024 32,916
_______ _______ _______
Cash and cash equivalents at end of year $50,275 $47,945 $39,024
======= ======= =======
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Interest $ - $ - $ 22
Federal income tax $ 2,750 $ 1,840 $ 1,800
Non-cash investing and financing activities:
Common stock surrendered on exercise of
stock options $ - $ 1,665 $ -
Tax benefit from exercise of stock options $ - $ 48 $ 54
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 ("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" or the "Company"). All material
intercompany accounts and transactions are eliminated. Unless
the context indicates otherwise, references to "1998", "1997" and
"1996" are for the fiscal years ended June 30, 1998, 1997
and 1996, respectively.
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.
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 $1,907,000
and $3,029,000 as of June 30, 1998 and 1997.
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.
Recently issued accounting standards:
In June 1997, the Financial Accounting Standards Board (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 intends to comply with the disclosure requirements of
SFAS 130 for the year ending June 30, 1999.
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 begun its review of SFAS
131, however it has not made a final determination of the extent
of the disclosure required by this statement.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which is effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes
additional accounting and reporting standards for derivative
instruments and hedging activities. Management does not believe
the Company has any derivative instruments, or that Jackpot
participates in hedging activities. Accordingly, SFAS 133
is not expected to have a significant effect on the results of
operations or related disclosures.
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 $38,728,000 and $34,499,000 at June
30, 1998 and 1997.
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. As of June 30,
1998, the carrying value of assets to be disposed of associated
with the Owl Club and the Pony Express Casino was approximately
$1,400,000. The results of operations of the Owl Club and the
Pony Express Casino were not material in 1998, 1997 and 1996.
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.
Note 4 - Other current liabilities:
Other current liabilities consist of the following (dollars in
thousands):
June 30,
__________________
1998 1997
______ ______
Accrued employee benefits $1,714 $1,740
Accrued professional fees 334 468
Accrued progressive jackpots 464 528
Federal income tax payable 362
Other 996 1,309
______ ______
Totals $3,508 $4,407
====== ======
Note 5 - Earnings per share:
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. As required by SFAS 128, Jackpot
adopted this statement for the quarter ended December 31, 1997
and year ended June 30, 1998. 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. All prior-period EPS data
presented has been restated to conform to the provisions of the
statement.
Basic EPS for 1998, 1997 and 1996 is computed by dividing net
income by the weighted average number of common shares
outstanding for the respective period. Diluted EPS for 1998,
1997 and 1996 is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding
for the respective period. Options and warrants to purchase
common stock, whose exercise price was greater than the average
market price for the respective period, have been excluded from
the computation of diluted EPS. Such antidilutive options and
warrants outstanding for 1998, 1997 and 1996 were 159,000,
743,000 and 1,512,000, respectively. The following is the amount
of income and number of shares used in the basic and diluted EPS
computations (dollars and shares in thousands, except per share
data):
1998 1997 1996
______ ______ ______
Basic earnings per share:
Earnings:
Income available to common stockholders $7,213 $7,844 $5,855
====== ====== ======
Shares:
Weighted average number of common
shares outstanding 8,991 9,237 9,307
====== ====== ======
Basic earnings per share $ .80 $ .85 $ .63
====== ====== ======
Diluted earnings per share:
Earnings:
Income available to common stockholders $7,213 $7,844 $5,855
Effect of dilutive securities - - -
______ ______ ______
Income, as adjusted $7,213 $7,844 $5,855
====== ====== ======
Shares:
Weighted average number of common
shares outstanding 8,991 9,237 9,307
Common shares issuable upon assumed
exercise of dilutive stock options 1,726 1,316 1,588
Less common shares assumed to be
repurchased by application of the treasury
stock method to the proceeds using the
average market price for the period (1,530) (1,236) (1,414)
______ ______ ______
Weighted average number of common shares
and common share equivalents outstanding 9,187 9,317 9,481
====== ====== ======
Diluted earnings per share $ .79 $ .84 $ .62
====== ====== ======
Note 6 - Stockholders' equity:
Rights plan:
In June 1994, the Board approved a Stockholder Rights Plan. On
July 11, 1994, Jackpot 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. 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. 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, which expire on July 15, 2004, 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. As of June 30, 1998 and 1997, 150,000 shares of
unissued Series A Junior Preferred Stock were authorized and
reserved for issuance upon exercise of the Rights. The issuance
of the Rights had no effect on dilutive earnings per share in
1998, 1997 and 1996.
Stock option plans:
On December 7, 1990, Jackpot's stockholders approved the 1990
Incentive and Nonqualified Stock Option Plan (the "1990 Plan").
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 January 12, 1993,
Jackpot's stockholders approved the 1992 Incentive and Non-
qualified Stock Option Plan (the "1992 Plan"). 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 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. At June 30, 1998, options
granted to Jackpot's directors to purchase an aggregate of
522,500 shares of Common Stock were outstanding, of
which 412,500 were exercisable.
The 1990 Plan and 1992 Plan terminate on the earlier of (i) the
date all shares subject to the 1990 Plan and the 1992 Plan have
been issued upon the exercise of options granted under such
plans, or (ii) June 26, 2000 and September 30, 2002,
respectively, or on such earlier date as the Board may
determine. Any option outstanding at the respective 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
_________________________ Exercise Price
Incentive Nonqualified
_________ ____________ ________________
Outstanding at
July 1, 1995 31 1,638 $ 6.10 to $20.88
Exercised (4) (36) $ 6.10 to $11.63
Canceled (18) (51) $ 6.10 to $11.63
Automatic grant
to directors 110 $10.00
___ _____
Outstanding at
June 30, 1996 9 1,661 $ 6.10 to $20.88
Granted 20 $11.00
Exercised (3) (190) $ 8.50 to $10.75
Canceled (6) (21) $ 6.10 to $11.63
Automatic grant
to directors 110 $11.50
___ _____
Outstanding at
June 30, 1997 0 1,580 $ 8.50 to $20.88
Granted 60 $11.00
Exercised (30) $ 8.50 to $11.63
Cancelled (234) $ 8.50 to $15.88
Automatic grant
to directors 110 (A)
___ _____
Outstanding at
June 30, 1998 0 1,486 $ 8.50 to $20.88
(1,336 shares === =====
exercisable)
(A) To be determined on September 30, 1998.
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, 1995 429 $ 9.19 to $15.00
Transactions -
___
Outstanding at June 30, 1996 429 $ 9.19 to $15.00
Canceled (50) $15.00
___
Outstanding at June 30, 1997 379 $ 9.19 to $10.75
Canceled (27) $ 6.10 to $10.75
___
Outstanding and exercisable
at June 30, 1998 352 $ 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"). 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 elected and continues 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 pro forma amounts for net income
and basic and dilutive earnings per share for 1998, 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 1998, 1997
and 1996 (dollars in thousands, except per share data):
1998 1997 1996
______ ______ ______
Net income:
As reported $7,213 $7,844 $5,855
Pro forma $6,837 $7,571 $5,855
Basic earnings per share:
As reported or restated $ .80 $ .85 $ .63
Pro forma $ .76 $ .82 $ .63
Diluted earnings per share:
As reported or restated $ .79 $ .84 $ .62
Pro forma $ .74 $ .81 $ .62
Weighted average assumptions:
Expected stock price
volatility 30.0% 35.0% 39.1%
Risk-free interest rate 5.8% 6.1% 6.2%
Expected option lives
(in years) 2.5 2.5 2.5
Estimated fair value of
options granted $ 2.99 $ 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,
______________
1998 1997
_____ _____
Stock option plans:
Outstanding 1,486 1,580
Available for grant 1,020 956
Other nonqualified stock options 352 379
_____ _____
Totals 2,858 2,915
===== =====
Common stock in treasury:
Jackpot purchased 338,414 and 283,771 shares of its Common Stock
at the market price on the date of purchase for a total cost of
approximately $3,967,000 and $2,803,000, or an average of $11.72
and $9.88 per share in 1998 and 1997, respectively. In addition,
Jackpot purchased 118,100 shares at a total cost of approximately
$1,268,000, or an average of $10.74 per share during the two
months ended August 31, 1998. Purchases in 1997 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 on the
date of purchase.
Note 7 - 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 $121,000, $179,000 and $110,000 in
1998, 1997 and 1996. Also, see Note 6.
Note 8 - 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 2010. 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 agreements, which became
effective July 1, 1997, for long-term contract extensions with
four of its largest chain store customers. In addition,
Jackpot entered into an agreement for a long-term contract
extension with another significant chain store customer in
September 1998. Such agreement will become effective July 1,
1999. These five agreements provide Jackpot the continued right
to operate at certain existing locations and future locations
in Nevada, if any, of such customers.
Future minimum payments (dollars in thousands) under such non
cancelable operating leases or licenses (including the above
mentioned contract extension) aggregated approximately
$224,442 at June 30, 1998, payable as follows: $36,165 in 1999;
$38,026 in 2000; $38,794 in 2001; $38,744 in 2002; $38,845 in
2003; and $33,868 thereafter.
Rent expense was comprised as follows (dollars in thousands):
1998 1997 1996
_______ _______ _______
Location leases:
Fixed rentals $36,866 $28,125 $25,633
Percentage rentals 16,883 19,994 20,243
Office and equipment leases 453 453 452
_______ _______ _______
Totals $54,202 $48,572 $46,328
======= ======= =======
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, 2001. 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 $97,000,
$169,000 and $205,000 in 1998, 1997 and 1996. The aggregate
commitment for future salaries at June 30, 1998, excluding
bonuses, under Mr. Kornstein's agreement is $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, 1998 under Jackpot's employment and
severance agreements is approximately $2,700,000.
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, 1998, Jackpot had unsecured lease and other
security deposits of $3,082,000 held primarily by two publicly-
held chain stores.
Legal matters:
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 9 - Litigation settlement:
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. In March 1996, Phar-Mor filed a lawsuit against
Jackpot in the United States Bankruptcy Court for the Northern
District of Ohio, and Jackpot filed an answer and counterclaim.
In order to avoid further litigation and to finally and
fully resolve all claims between the parties, Jackpot entered
into a settlement agreement and mutual release with Phar-Mor,
effective February 6, 1998. Pursuant to the terms of the
agreement, both the Original Agreement and the Amended Agreement
are terminated and neither party has any remaining rights or
continuing obligations to the other under the Original Agreement,
the Amended Agreement or the proofs of claim. The cost of the
settlement to Jackpot was paid in February 1998.
Note 10 - Revenues derived from major locations:
Route operations revenues at two groups of affiliated store
chains in 1998, 1997 and 1996 accounted for more than 10% of
Jackpot's total revenues. Revenues for Jackpot's top two
affiliated store chains were approximately $34,000,000 and
$17,000,000, respectively, in 1998, $27,000,000 and $15,000,000,
respectively, in 1997, $23,000,000 and $12,000,000, respectively,
in 1996. Each individual store chain included in an
affiliated group of store chains has a separate lease with
Jackpot.
Note 11 - Federal income tax:
A reconciliation of the Federal statutory income tax rate to the
effective income tax rate based on income before income tax
follows:
1998 1997 1996
____ ____ ____
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 (5.0) (3.7) (4.0)
Amortization of goodwill .6 .4 .7
Other, net (2.6) .3 1.3
____ ____ ____
Effective rate 27.0% 31.0% 32.0%
==== ==== ====
The tax items comprising Jackpot's net deferred tax asset
(liability) as of June 30, 1998, 1997 and 1996 are as follows
(dollars in thousands):
1998 1997 1996
______ ______ ______
Deferred tax assets:
Write-down of assets $ 381 $ 381 $ 381
Deferred rent 809 854 1,041
Other accrued liabilities 459 520 556
Retirement plans 9 9 73
Other 45 98 75
______ ______ ______
Totals 1,703 1,862 2,126
______ ______ ______
Deferred tax liabilities:
Difference between book and tax
basis of property 1,280 987 527
Economic performance accruals 542 481 491
Other 730 1,027 676
______ ______ ______
Totals 2,552 2,495 1,694
______ ______ ______
Net deferred tax asset (liability) $ (849) $ (633) $ 432
====== ====== ======
Jackpot realized tax benefits of $48,000 and $54,000 in 1997 and
1996 as a result of the exercise of certain incentive and
nonqualified stock options. The tax benefits have been reflected
as a decrease in current income tax payable and an increase in
additional paid-in capital.
Note 12 - Benefit plans:
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, 1998 and 1997. 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, 1998.
The Board waived current service benefits that would have accrued
in 1996 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 and
the amortization of unrecognized prior service cost is included
in general and administrative expense and amortization expense,
respectively, in the accompanying consolidated statements of
income. The unrecognized prior service cost was fully amortized
at June 30, 1996. The accrued pension liability under the
Continuation Plan was not material at June 30, 1998 and 1997.
The pension expense for Jackpot's defined benefit plans for 1996
includes the following components (dollars in thousands):
Amortization of prior service cost $253
Interest cost on accrued benefits 69
____
Net pension expense $322
====
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 1998 and 1997 follows:
Quarter
_____________________________________
First Second Third Fourth
_______ _______ _______ _______
1998
____
Revenues $22,667 $23,610 $23,371 $23,365
Gross operating income (A) 2,651 3,268 3,320 3,039
Income before income tax 2,153 2,615 2,620 2,493
Net income 1,572 1,909 1,912 1,820
Earnings per share:
Basic .17 .21 .21 .21
Diluted .17 .21 .21 .20
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:
Basic .17 .21 .21 .26
Diluted .17 .21 .21 .26
(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.