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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, 1999
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, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $72,226,672.
As of September 17, 1999, there were 8,616,537 shares of the
Registrant's common stock outstanding.
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, and is an established
leader in the operation of gaming machines in multiple retail locations
("gaming machine route operations"). 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.
In addition to its gaming machine route operations, Jackpot, as of June
30, 1999, operated one casino with an aggregate of 94 gaming machines.
For the fiscal year ended June 30, 1999, 98% of total revenues were
derived from Jackpot's gaming machine route operations and 2% from its
casino operations. As of June 30, 1999, Jackpot operated 3,909 gaming
machines at 385 locations; 108 of the locations contained 15 gaming
machines, 29 of the locations contained more than 15 machines and 248 of
the locations contained fewer than 15 machines. 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.
At various times during the past several years, the Company has
engaged in the active consideration of potential acquisitions and
expansion opportunities in both the gaming and nongaming markets,
including most recently in 1999 in connection with the potential
acquisition of Players International, Inc. ("Players") and CRC Holdings,
Inc. d/b/a Carnival Resorts & Casinos ("CRC"), a privately owned company
(see "Terminated Merger Agreements" below for a discussion of those
proposed transactions). Subsequent to the termination of the merger
agreement with Players, Jackpot's Board of Directors authorized
management to retain an investment banker to assist the Company in
evaluating strategic alternatives. The Company regularly devotes
significant management and other resources to these efforts and incurs
substantial expenses in connection with such activities. These expenses
have in the past been charged against operating income. The Company
anticipates that, as it continues to engage in such activities in the
future, it will periodically incur comparable expenses that may have a
material effect on the Company's operating income.
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 undertaken 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 1999, approximately 86% of Jackpot's gaming machine route
operations revenues were generated by southern Nevada operations and
approximately 14% 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.
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. 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.
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, 1999:
As of June 30,
_____________________________________
1999 1998 1997 1996 1995
_____ _____ _____ _____ _____
Number of machines on location 3,909 4,097 4,075 4,211 4,284
Number of locations 385 412 419 439 452
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 1999, 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 1999 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 route operations at retail
stores which are part of a group of affiliated store chains. Route
operations revenues at two groups of affiliated store chains (i.e.
Albertson's, Inc. and American Stores Company, which was the parent
company of American Drug Stores, Inc. and Lucky Stores, Inc. until June
1999) each accounted for more than 10% of Jackpot's total revenues in
each of fiscal 1999, 1998 and 1997. The largest four store chains
(Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation and
Lucky Stores, Inc.) accounted for approximately 63% of Jackpot's total
revenues in 1999. Agreements with these four 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. ("Albertson's") and American
Stores Company ("American Stores"), entered into a merger agreement that
provided for the acquisition of American Stores by Albertson's.
Approximately 57% and 55% of Jackpot's total revenues for 1999 and 1998,
respectively, were generated at the locations of those two entities.
The merger of Albertson's and American Stores was completed on June 23,
1999. As a condition to obtaining approval of the merger by the Federal
Trade Commission and the Attorneys General of California, Nevada and
New Mexico, Albertson's agreed to divest certain of its stores,
including 19 stores in southern Nevada. Those locations have been taken
over by Raley's, Inc. ("Raley's"). Jackpot operates in 15 of those
locations.
The existing slot route operator for Raley's northern Nevada stores
has filed applications with the Nevada Gaming Control Board to operate
the gaming machines at the southern Nevada Albertson's stores which are
being divested. Of the 19 stores in southern Nevada taken over by
Raley's, Jackpot currently maintains 246 gaming machines at the 15
locations which it operates pursuant to a long term agreement with
Albertson's. Jackpot believes that there is no proper basis to
terminate such agreement and Jackpot's attendant right to occupy the
subject premises for purposes of operating gaming machines. These 15
locations generated approximately 16% and 15% of Jackpot's total
revenues for 1999 and 1998, respectively, and a significantly greater
percentage of Jackpot's total operating income for 1999 and 1998.
On August 30, 1999, Jackpot commenced litigation in federal
district court for the District of Nevada against Albertson's and
Raley's to enforce its rights under its agreement with Albertson's. On
September 14, 1999, Jackpot obtained a preliminary injunction to prevent
Albertson's and Raley's from interfering with its right to occupy
the subject premises and conduct gaming operations. The Court for
purposes of its decision ruled that Jackpot's license was coupled to the
lease relating to the stores. The injunction permits Jackpot to remain
at the stores pending resolution of the dispute. In granting the
preliminary injunction, the court required Jackpot to post a $50,000
bond. Albertson's has now made an application to increase the bond to
$9 million. In addition, Albertson's and Raley's have made motions for
summary judgment. Furthermore, on September 23, 1999, Raley's existing
slot route operator commenced an action in Nevada state court against
Jackpot, Albertson's, Raley's and the slot route operator at the four
other Albertson's southern Nevada locations seeking declaratory and
injunctive relief and money damages. The allegations against Jackpot
are for alleged fortuitous interference with contract and prospective
economic advantage and abuse of process. Jackpot intends to vigorously
defend this action.
No assurance can be given that such litigation will result in
Jackpot retaining the right to operate at the 15 stores or not incurring
liability as a defendant in the state action. The loss of the 15
locations could have a material adverse effect on the Company's future
results of operations. Jackpot's operations in Albertson's stores in
other areas of Nevada, as well as new store openings statewide, are
unaffected.
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.
The renewal or extension of agreements with major retail chains has
generally resulted in increased monthly fees payable by Jackpot. These
contracts often require fixed periodic increases in monthly fees during
the term of the contract. In September 1998, Jackpot entered into an
agreement for a long-term contract extension with one of its largest
retail store customers. A very competitive pricing environment caused
the Company to offer a significant increase in location rent over the
existing agreement. Pursuant to the terms of the new agreement, which
became effective July 1, 1999, rent expense will increase significantly
over the previous agreement. Such increase could have a material adverse
effect on the Company's results of operations for the year ending
June 30, 2000. License, lease and sublease agreements, representing 38
agreements and approximately 1% of fiscal 1999 route operations revenues,
have terms expiring during fiscal 2000.
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"), the two casinos then operated
by Jackpot, 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. Since that time, Jackpot has been unsuccessful in disposing of
its operations at either casino on terms acceptable to Jackpot.
Although the Company continues to market these two properties for sale,
no assurance can be given that such disposals will occur. Jackpot
elected to close the Owl Club on June 29, 1999. The Owl Club, which is
located in Battle Mountain, Nevada, operated 93 gaming machines and two
table games at the time of closing, and had a restaurant operation and
an eighteen room motel. Jackpot owns the land and buildings used in the
Owl Club's casino and motel operations.
Jackpot manages the casino operations of the Pony Express Casino in
Jackpot, Nevada under a month to month space lease agreement. As of
June 30, 1999, 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 97% of its gaming machines
from IGT in fiscal 1999, 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 for
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, 1999, Jackpot employed approximately 750 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 to capture or have 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."
Terminated Merger Agreements
____________________________
On February 8, 1999, Jackpot and Players entered into a definitive
Agreement and Plan of Merger (the "Agreement"), which was subject to a
number of conditions. On August 16, 1999, Jackpot received a notice
from Players terminating the Agreement. Such notice contained the terms
of a merger offer for Players from Harrah's Entertainment, Inc. On
August 19, 1999, pursuant to the terms of the Agreement, Jackpot
received a break-up fee of $13.5 million.
On February 17, 1999, Jackpot signed a definitive agreement to
acquire CRC. The agreement was subject to various conditions, including
the assignment to Jackpot of the management agreement relating to a
casino managed by CRC in Ontario, Canada. Because of CRC's inability to
obtain the necessary consent of the Ontario Casino Corporation
(the "OCC"), one of the casino's owners, the agreement was terminated by
the mutual agreement of Jackpot and CRC on April 15, 1999. The decision
by the OCC, which is not the gaming licensing authority in Ontario, was
made without any inquiry of Jackpot and prior to the filing of Jackpot's
gaming application with the Ontario Gaming Control Commission. As a
result of the termination of the agreement, capitalized costs incurred
in connection with the proposed acquisition of CRC of $.9 million were
expensed in the quarter ended June 30, 1999.
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 Pony Express Casino (the
"Casino Subsidiary"). No person may become a stockholder of, or receive
any percentage of profits from, the Route Subsidiaries, Jackpot Gaming,
Inc., or the Casino Subsidiary without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company, the Route
Subsidiaries, Jackpot Gaming, Inc. and the Casino Subsidiary 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 Subsidiary 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 Subsidiary 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 casino 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 casino.
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
________ ___________________ _______________ ____________
LEASED PROPERTIES:
Las Vegas, Nevada Executive offices,
warehouse and shop 34,000 sq. ft. 100%
Reno, Nevada Offices and shop 10,000 sq. ft. 100%
Throughout Nevada Gaming machine various sq. ft.
operations per location. 100%
Jackpot, Nevada Casino operations 2,600 sq. ft. 100%
OWNED PROPERTIES:
Battle Mountain,
Nevada Closed. Held for sale 10,000 sq. ft. -
Item 3. Legal Proceedings
_________________
See "Item 1. Business" for a description of the litigation
relating to the right of Jackpot to continue to operate in 15
stores in Nevada which have been taken over by Raley's.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
Not applicable.
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) under 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. No cash dividends were paid
during those fiscal quarters. Future payment of quarterly cash
dividends, if any, is subject to periodic review and reconsideration by
Jackpot's Board of Directors.
JACKPOT COMMON STOCK
_______________________________________________________________________
High Low
_______________________________________________________________________
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
_______________________________________________________________________
Fiscal 1999
First Quarter $12.56 $ 9.38
Second Quarter 11.50 9.13
Third Quarter 9.63 7.63
Fourth Quarter 9.00 7.50
_______________________________________________________________________
As of September 17, 1999 there were 1,533 holders of record of
Common Stock. The number of holders of record of Jackpot's Common Stock
on September 17, 1999 was computed by a count of record holders.
Item 6. Selected Financial Data
_______________________
The following information has been derived from Jackpot's
consolidated financial statements:
Years Ended June 30,
_______________________________________________________
1999 1998 1997 1996 1995
_______ _______ _______ _______ _______
(Dollars and shares in thousands, except per share data)
OPERATING DATA:
Total revenues $95,669 $93,013 $91,904 $91,108 $96,853
_______________________________________________________________________________
Operating income $ 5,002 (1) $ 7,963 $ 9,822 $ 7,094 (1) $ 8,968
_______________________________________________________________________________
Income from continuing
operations $ 6,393 (1) $ 9,881 $11,368 $ 8,610 (1) $ 9,875
_______________________________________________________________________________
Net income $ 4,603 (1) $ 7,213 $ 7,844 $ 5,855 (1) $ 6,616
_______________________________________________________________________________
Basic earnings
per share (2):
Net income $ .53 $ .80 $ .85 $ .63 $ .72
_______________________________________________________________________________
Diluted earnings
per share (2):
Net income $ .53 $ .79 $ .84 $ .62 $ .71
_______________________________________________________________________________
Dividends declared
per share $ - $ - $ .16 $ .32 $ .32
_______________________________________________________________________________
Average common
shares outstanding 8,641 8,991 9,237 9,307 9,235
_______________________________________________________________________________
Average common shares
and common share
equivalents
outstanding 8,659 9,187 9,317 9,481 9,272
_______________________________________________________________________________
OTHER DATA:
Adjusted EBITDA (3) $12,862 $14,762 $16,557 $17,093 $18,125
Net cash provided by
operating
activities $11,007 $11,836 $14,584 $12,778 $18,068
Net cash used in
investing
activities $12,006 $ 5,883 $ 1,557 $ 3,091 $ 4,330
Net cash used in
financing
activities $ 1,639 $ 3,623 $ 4,106 $ 3,579 $ 4,365
Capital expenditures $ 5,655 $ 6,235 $ 3,393 $ 4,267 $ 4,044
Amortization $ 1,261 $ 1,141 $ 1,728 $ 2,199 $ 2,880
Depreciation $ 4,108 $ 3,740 $ 3,461 $ 4,284 $ 5,349
_______________________________________________________________________________
BALANCE SHEET DATA
(at end of period):
Working capital $53,635 $49,152 $46,329 $40,336 $31,640
_______________________________________________________________________________
Total assets $82,295 $79,100 $75,267 $70,742 $71,959
_______________________________________________________________________________
Long-term debt, net of
current portion $ - $ - $ - $ - $ 271
_______________________________________________________________________________
Stockholders' equity $74,614 $70,871 $67,281 $63,495 $60,216
_______________________________________________________________________________
(1) Includes: in 1999, a pretax loss of $2.1 million from the write-
down in connection with the closing of the Owl Club and the costs
associated with the termination of the agreement with CRC;
in 1996, a pretax loss of $2.2 million from the write-down and sale
of certain casino properties.
(2) 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.
(3) Adjusted EBITDA represents earnings before interest expense, income
tax, depreciation, amortization and other non-cash items. Adjusted
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. Adjusted 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. Jackpot's
definition of Adjusted EBITDA may not be the same as that of
similarly captioned measures used by other companies.
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, 1999, 1998 and 1997 (referred to herein as "1999", "1998" and
"1997", respectively), consisted of the cash flows from operating
activities and its available cash and cash equivalents.
Net cash provided by operating activities in 1999 decreased $.8 million,
from $11.8 million in 1998 to $11.0 million in 1999. The decrease of
$.8 million was due primarily to a decrease in the gaming machine route
operations ("route operations") operating margin of $.4 million, from
$16.4 million in 1998 to $16.0 million in 1999.
Net cash used in investing activities in 1999 was $12.0 million,
and resulted primarily from the purchase of marketable securities of
$6.1 million, purchases of property and equipment of $5.6 million, $2.1
million for lease acquisition costs and other intangible and non-current
assets, net of proceeds from sales of property and equipment of $1.8
million. Primarily as a result of the purchase of marketable
securities, net cash used in investing activities increased $6.1
million, from $5.9 million in 1998 to $12.0 million in 1999.
Net cash used in financing activities in 1999 was $1.6 million, and
resulted from payments for repurchases of common stock of $1.7 million,
net of proceeds received of approximately $.1 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 $11.0 million less net cash used in investing and
financing activities of $12.0 million and $1.6 million, respectively,
cash and cash equivalents decreased $2.6 million in 1999. Such decrease
was due principally to the purchase of marketable securities described
above.
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 due primarily to a decrease in the 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 for the fiscal year ended June 30, 1996 to
$14.6 million in 1997. The increase of $1.8 million was due primarily
to the increase from the change in other current liabilities. Net cash
used in investing activities in 1997 was $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.
Liquidity:
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, 1999, Jackpot has repurchased
785,527 shares at an aggregate cost of approximately $8.5 million.
On February 17, 1999, Jackpot signed a definitive agreement to
acquire CRC. The agreement was subject to various conditions, including
the assignment to Jackpot of the management agreement relating to a
casino managed by CRC in Ontario, Canada. Because of CRC's inability to
obtain the necessary consent of the Ontario Casino Corporation
(the "OCC"), one of the casino's owners, the agreement was terminated by
the mutual agreement of Jackpot and CRC on April 15, 1999. The decision
by the OCC, which is not the gaming licensing authority in Ontario, was
made without any inquiry of Jackpot and prior to the filing of Jackpot's
gaming application with the Ontario Gaming Control Commission. As a
result of the termination of the agreement, capitalized costs incurred
in connection with the proposed acquisition of CRC of $.9 million were
expensed in the quarter ended June 30, 1999.
On February 8, 1999, Jackpot and Players entered into a definitive
Agreement and Plan of Merger (the "Agreement"), which was subject to a
number of conditions. On August 16, 1999, Jackpot received a notice
from Players terminating the Agreement. Such notice contained the terms
of a merger offer for Players from Harrah's Entertainment, Inc. On
August 19, 1999, pursuant to the terms of the Agreement, Jackpot
received a break-up fee of $13.5 million. As a result of the
termination of the Agreement, all capitalized costs incurred in
connection with the proposed acquisition of Players will be expensed.
Such costs, which are estimated to be $2.5 million, and the break-up fee
will be recorded in the quarter ending September 30, 1999.
Jackpot's working capital increased $4.4 million in 1999, from
$49.2 million at June 30, 1998 to $53.6 million at June 30, 1999.
Included in working capital at June 30, 1999 are marketable securities
at fair value of $7.3 million. Such securities consist of 1,014,400
shares of Players common stock, which Jackpot purchase at $6.04 per
share on March 10, 1999.
In 1999, Jackpot purchased $5.6 million of property and equipment,
as described above. Approximately $4.7 million of the $5.6 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 $5.0 million of property and
equipment, exclusive of business acquisitions, if any, for the fiscal
year ending June 30, 2000 ("2000").
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 2000. Jackpot
continues to selectively explore additional gaming acquisition
opportunities, 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 April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities".
This standard provides guidance on the financial reporting for start-up
costs and organization costs. This standard requires costs of start-up
activities and organization costs to be expensed as incurred, and is
effective for fiscal years beginning after December 15, 1998, although
earlier application is encouraged. The Company adopted this standard on
July 1, 1999. This statement will not have a significant effect on
Jackpot's results of operations or its financial position.
In June 1998, the Financial Accounting Standards Board 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, 2000. SFAS 133
establishes additional accounting and reporting standards for derivative
instruments and hedging activities. Presently, Jackpot does not have
any derivative instruments, nor does the Company participate in hedging
activities. Accordingly, SFAS 133 is not expected to have a significant
effect on the results of operations or related disclosures.
Results of Operations
_____________________
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 revenues at two groups of affiliated
store chains (i.e. Albertson's, Inc. and American Stores Company, which
was the parent company of American Drug Stores, Inc. and Lucky Stores,
Inc. until June 1999) each accounted for more than 10% of Jackpot's
total revenues in each of fiscal 1999, 1998 and 1997. The largest four
store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart
Corporation and Lucky Stores, Inc.) accounted for approximately 63% of
Jackpot's total revenues in 1999. Agreements with these four 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
entered into a merger agreement that provided for the acquisition of
American Stores by Albertson's. Approximately 57% and 55% of Jackpot's
total revenues for 1999 and 1998, respectively, were generated at the
locations of those two entities. The merger of Albertson's and
American Stores was completed on June 23, 1999. As a condition to
obtaining approval of the merger by the Federal Trade Commission and the
Attorneys General of California, Nevada and New Mexico, Albertson's
agreed to divest certain of its stores, including 19 stores in southern
Nevada. These locations have been taken over by Raley's, Inc. Jackpot
operates in 15 of the locations.
The existing slot route operator for Raley's northern Nevada stores
has filed applications with the Nevada Gaming Control Board to operate
the gaming machines at the southern Nevada Albertson's stores which are
being divested. Of the 19 stores in southern Nevada taken over by
Raley's, Jackpot currently maintains 246 gaming machines at the 15
locations which it operates pursuant to a long term agreement with
Albertson's. Jackpot believes that there is no proper basis to
terminate such agreement and Jackpot's attendant right to occupy the
subject premises for purposes of operating gaming machines. These 15
locations generated approximately 16% and 15% of Jackpot's total
revenues for 1999 and 1998, respectively, and a significantly greater
percentage of Jackpot's total operating income for 1999 and 1998.
On August 30, 1999, Jackpot commenced litigation in federal
district court for the District of Nevada against Albertson's and
Raley's to enforce its rights under its agreement with Albertson's. On
September 14, 1999, Jackpot obtained a preliminary injunction to prevent
Albertson's and Raley's from interfering with its right to occupy
the subject premises and conduct gaming operations. The Court for
purposes of its decision ruled that Jackpot's license was coupled to the
lease relating to the stores. The injunction permits Jackpot to remain
at the stores pending resolution of the dispute. In granting the
preliminary injunction, the court required Jackpot to post a $50,000
bond. Albertson's has now made an application to increase the bond to
$9 million. In addition, Albertson's and Raley's have made motions for
summary judgment. Furthermore, on September 23, 1999, Raley's existing
slot route operator commenced an action in Nevada state court against
Jackpot, Albertson's, Raley's and the slot route operator at the four
other Albertson's southern Nevada locations seeking declaratory and
injunctive relief and money damages. The allegations against Jackpot
are for alleged fortuitous interference with contract and prospective
economic advantage and abuse of process. Jackpot intends to vigorously
defend this action.
No assurance can be given that such litigation will result in
Jackpot retaining the right to operate at the 15 stores or not incurring
liability as a defendant in the state action. The loss of the 15
locations could have a material adverse effect on the Company's future
results of operations. Jackpot's operations in Albertson's stores in
other areas of Nevada, as well as new store openings statewide, are
unaffected.
The renewal or extension of agreements with major retail chains
has generally resulted in increased monthly fees payable by
Jackpot. These contracts often require fixed periodic increases in
monthly fees during the term of the contract. With respect to the
accounting treatment of fixed periodic increases in monthly fees
associated with these contracts, the Company is required to average
annual lease costs over the term of the contract. As a result of such
accounting treatment, annual lease costs generally increase
significantly in the first year of an extended contract for the
respective locations covered by the contract and, thereafter, remain
constant for existing locations during the term of the contract.
In 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 became effective July
1, 1999, rent expense will increase significantly over the previous
agreement. Such increase could have a material adverse effect on the
Company's results of operations for the year ending June 30, 2000.
License, lease and sublease agreements, representing 38 agreements
and approximately 1% of 1999 route operations revenues, have terms
expiring during 2000.
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.
Casino Operations. On August 13, 1996, Jackpot's Board of
Directors approved a plan to dispose of the Owl Club and the Pony
Express Casino, the two casinos then operated by Jackpot, 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. On June 29, 1999,
Jackpot closed the Owl Club. Although the Company continues to market
these two properties for sale, no assurance can be given that such
disposals will occur.
Financial Data.
_______________
The table below presents the changes in comparative financial data from
1997 to 1999 (dollars in thousands):
Years Ended June 30,
______________________________________________________________________
1999 1998 1997
___________________________ __________________________ _______________
Percent Percent Percent Percent Percent
of Increase of Increase of
Amount Revenues (Decrease) Amount Revenues (Decrease) Amount Revenues
______ ________ __________ _______ ________ __________ _______ _______
Revenues:
Route
oper-
ations $93,717 98.0% 3.8% $90,331 97.1% 1.6% $88,895 96.7%
Casino
oper-
ations 1,952 2.0 (27.2) 2,682 2.9 (10.9) 3,009 3.3
_______ _____ _____ _______ _____ _____ _______ _____
Totals 95,669 100.0 2.9 93,013 100.0 1.2 91,904 100.0
_______ _____ _____ _______ _____ _____ _______ _____
Costs
and
expen-
ses:
Route
oper-
ations 77,765 81.3 5.2 73,927 79.5 5.8 69,905 76.0
Casino
oper-
ations 1,878 2.0 (24.8) 2,499 2.7 (11.9) 2,835 3.1
Amor-
tiza-
tion 1,261 1.3 10.5 1,141 1.2 (34.0) 1,728 1.9
Depre-
ciation 4,108 4.3 9.8 3,740 4.0 8.1 3,461 3.8
General
and
admin-
istra-
tive 3,555 3.7 (5.0) 3,743 4.0 (9.9) 4,153 4.5
Write-
down of
closed
casino 1,200 1.3 -
Costs
of
term-
inated
merger 900 .9 -
_______ _____ _____ _______ _____ _____ _______ _____
Totals 90,667 94.8 6.6 85,050 91.4 3.6 82,082 89.3
_______ _____ _____ _______ _____ _____ _______ _____
Oper-
ating
in-
come 5,002 5.2 (37.2) 7,963 8.6 (18.9) 9,822 10.7
Other
income 1,391 1.5 (27.5) 1,918 2.0 24.1 1,546 1.6
_______ _____ _____ _______ _____ _____ _______ _____
Income
before
income
tax 6,393 6.7 (35.3) 9,881 10.6 (13.1) 11,368 12.3
Pro-
vision
for
income
tax 1,790 1.9 (32.9) 2,668 2.8 (24.3) 3,524 3.8
_______ _____ _____ _______ _____ _____ _______ _____
Net
income $ 4,603 4.8% (36.2)% $ 7,213 7.8% (8.0)% $ 7,844 8.5%
======= ===== ===== ======= ===== ===== ======= ====
Route operations revenues attributable to fixed payment leases and
revenue sharing contracts for 1999, 1998 and 1997 are summarized below
(dollars in thousands):
1999 1998 1997
_____________________ __________________ __________________
Percent Percent Percent
of route of route of route
operations operations operations
Amount revenues Amount revenues Amount revenues
_______ ___________ _______ __________ _______ __________
Route operations:
Fixed payment
leases $69,990 74.7% $67,380 74.6% $60,106 67.6%
Revenue sharing
contracts 23,727 25.3 22,951 25.4 28,789 32.4
_______ _____ _______ _____ _______ _____
$93,717 100.0% $90,331 100.0% $88,895 100.0%
======= ===== ======= ===== ======= =====
The decrease in route operations revenues attributable to revenue
sharing contracts in 1998 of $5.8 million (from $28.8 million in 1997 to
$23.0 million in 1998) was due principally to the loss of Warehouse
Markets, Inc. on June 30, 1997.
1999 compared to 1998
_____________________
Revenues:
Total revenues increased $2.7 million, from $93.0 million in 1998
to $95.7 million in 1999. The increase in total revenues of $2.7
million was the net result of an increase of $3.4 million (from $90.3
million in 1998 to $93.7 million in 1999) in route operations revenues
and a decrease of $.7 million (from $2.7 million in 1998 to $2.0 million
in 1999) in casino operations revenues.
The increase in route operations revenues of $3.4 million resulted
from a combination of additional revenues generated from new and
existing locations, net of lost revenues from terminated locations. In
1999, new and existing locations generated additional revenues of $5.4
million and $.5 million, respectively, while terminated locations
generated revenues of $2.5 million in 1998.
Costs and expenses:
Route operations costs and expenses increased $3.9 million, from
$73.9 million in 1998 to $77.8 million in 1999 and, as a percentage of
route operations revenues, increased to 83.0% in 1999 from 81.8% in
1998. The increase in route operations costs and expenses of $3.9
million resulted primarily from a combination of an increase of $3.1
million in location rent, which consisted principally of location rent
for new locations of existing chain store customers, an increase in
payroll costs of $.3 million and an increase in other route operations
expenses of $.5 million.
Amortization expense increased $.1 million, from $1.2 million in
1998 to $1.3 million in 1999, while depreciation expense increased $.4
million, from $3.7 million in 1998 to $4.1 million in 1999. The
increase in depreciation expense was principally attributable to new
gaming machines purchased in 1998. General and administrative expense
decreased $.1 million, from $3.7 million in 1998 to $3.6 million in
1999.
During the quarter ended June 30, 1999, an agreement which provided
for the acquisition of CRC by Jackpot was terminated by the parties.
In addition, Jackpot closed the Owl Club. As a result of the termination
of the agreement and the closing of the Owl Club, pretax charges aggregating
$2.1 million were recorded in the quarter ended June 30, 1999. Of the
$2.1 million, approximately $1.1 million of such charges were non-cash.
Other income:
Other income decreased $.5 million, from $1.9 million in 1998 to
$1.4 million in 1999. The decrease was primarily from a reduction in
other income earned from non-recurring transactions.
Federal income tax:
The effective tax rate in 1999 was 28%. Such rate, which
approximated the effective tax rate in 1998, was lower than the Federal
Statutory rate of 35% primarily because of the tax benefits realized
from tax-exempt interest income.
General:
Principally as a result of the charges associated with the closing
of the Owl Club and the termination of the CRC agreement, operating income
in 1999 decreased $3.0 million, from $8.0 million in 1998 to $5.0 million
in 1999. Excluding these charges, operating income in 1999 was $7.1 million,
which represented a decrease of $.9 million from 1998. Such decrease was
due primarily to an increase of $.5 million in amortization and depreciation
expense, and to a decrease of $.4 million in the route operations margin,
from $16.4 million in 1998 to $16.0 million in 1999.
Also principally as a result of the Owl Club and CRC charges, net income
and diluted earnings per share in 1999 decreased to $4.6 million and $.53 per
share, respectively, from $7.2 million and $.79 per share in 1998.
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 due primarily 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 due principally to cost reductions in
professional services and acquisition related activities.
Other income:
Other income increased $.4 million, from $1.5 million in 1997 to
$1.9 million in 1998. The increase in other income was due primarily 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 due principally 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.
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 this situation occurs, the potential exists
for computer system failures or miscalculations by computer programs,
which could disrupt operations.
Jackpot has conducted a 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
that the Company's essential systems will be compliant on or about
September 30, 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.
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,
1999, the Company had incurred costs of approximately $180,000
principally for internal costs and system applications, and anticipates
spending an additional $100,000 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, the consolidation or disposition of
selected locations as a result of the merger of Albertson's, Inc. and
American Stores Company (each of which was a significant customer of the
Company during the past three fiscal years) 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
_________________________________________________________
On March 10, 1999, the Company purchased a total of 1,014,400
shares of common stock of Players in an open market transaction. The
Company acquired the shares of Players common stock because the purchase
price for those shares was significantly below the per share
consideration which the Company had agreed to pay for all outstanding
shares of Players pursuant to the Agreement and Plan of Merger dated as
of February 8, 1999, which provided for the merger of Players into a
wholly-owned subsidiary of the Company. For further information
concerning the termination of the merger with Players and the purchase
of Players common stock by the Company, see Note 11 of Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K.
The shares of Players which the Company acquired are being held by
the Company pending consummation of the merger with Harrah's
Entertainment, Inc. and Players. However, unless and until the merger
is consummated or the Company sells the Players shares in the open
market prior to the consummation of the merger, the Company is exposed
to equity price risk on those shares. The Company has not attempted to
reduce or eliminate its market exposure on those shares. A 10% adverse
change in the price of the Players common stock from the price at June
30, 1999 would result in a decrease of approximately $729,000 in the
fair value of Players common stock owned by the Company at June 30,
1999.
Except for the purchase described above, Jackpot invests its
available cash in marketable municipal bonds and money market funds. No
trading portfolios are available for the sale of these investments.
Therefore, Item 7A disclosure is not applicable for these investments.
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
__________________________________________________
Directors of the Registrant
___________________________
At the Special Meeting of Stockholders on September 14, 1999, four
directors were elected to serve and hold office (subject to Jackpot's
By-Laws) until the next annual meeting of stockholders and until a
respective successor is elected and qualified.
The directors of Jackpot (none of whom has a family relationship
with one another) are as follows:
Name Age Position
_______________________ ___ __________________________________
Allan R. Tessler 62 Chairman of the Board
Don R. Kornstein 47 President, Chief Executive Officer
and Director
David R. Markin 68 Director
Robert L. McDonald, Sr. 79 Director
Allan R. Tessler has served as Chairman of the Board since May 1994
and has been a director of Jackpot since 1980. Mr. Tessler also served
as Secretary of Jackpot from 1980 through August 1993. He has been
Chairman and Chief Executive Officer of International Financial Group,
Inc., an international merchant banking firm, since 1987. He has been
Co-Chairman and Co-Chief Executive Officer of Data Broadcasting
Corporation, a securities market data supplier, since June 1992. Mr.
Tessler has been Chairman of the Board of Enhance Financial Services,
Inc., an insurance holding company, since 1986, and was Chairman of the
Board of Great Dane Holdings Inc., a diversified holding company, from
1987 through December 1996. He is also a director of The Limited, Inc.,
Allis-Chalmers Corporation and Marketwatch.com Inc.
Don R. Kornstein has served as President, Chief Executive Officer
and a director of Jackpot since September 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. Mr. Kornstein is also a director of Riddell Sports
Inc., a manufacturer of athletic equipment.
David R. Markin has been a director of Jackpot since 1980. Mr.
Markin has been Chairman of the Board, Chief Executive Officer and
President of Checker Motors Corporation ("Checker"), an automobile parts
manufacturer and taxicab fleet operator since 1970. Mr. Markin is also
presently President of Checker Holdings Corp. IV, the parent company of
Checker. Mr. Markin was President and Chief Executive Officer of Great
Dane Holdings Inc. from 1989 through December 1996. Mr. Markin is also
a director of Enhance Financial Services, Inc. and Data Broadcasting
Corporation.
Robert L. McDonald, Sr. has been a director of Jackpot since 1980.
Mr. McDonald is a senior partner in the law firm of McDonald Carano
Wilson McCune Bergin Frankovich & Hicks LLP, counsel to Jackpot. Mr.
McDonald is a principal stockholder, executive officer and a director of
Little Bonanza, Inc., the corporate operator of the Bonanza Casino
located in Reno, Nevada.
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, 2002. 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 47 President, Chief Executive
Officer and Director 1994
George Congdon 50 Senior Vice President -
Operations 1995
Bob Torkar 48 Senior Vice President -
Finance, Treasurer and
Chief Accounting Officer 1991
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.
Item 11. Executive Compensation
______________________
The following table sets forth certain information concerning
compensation for those persons who were (i) the Chief Executive Officer,
and (ii) the other most highly paid executive officers whose total
annual salary and bonus exceeded $100,000 (collectively, the "Named
Executives") for service provided for the fiscal years ended June 30,
1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
_______________________________ _______________________
AWARDS PAYOUTS
___________ _______
Stock
Name and Other Option
Principal Fiscal Annual Awards
Position Year Salary Bonus Compensation (in LTIP All Other
(1) shares)Payout Compensation
(2)
_________ ______ ________ ________ ____________ _______ ______ ____________
Don R.
Kornstein 1999 $725,000 $350,000(3) -- 27,500 -- $7,217(6)
President 1998 $725,000 $ 97,000(4) $98,603(5) 27,500 -- $9,228(6)
and Chief 1997 $715,695 $169,000(4) -- 27,500 -- $7,500(6)
Executive
Officer
George
Congdon 1999 $160,000 $ 90,000(7) -- 25,000 -- --
Senior Vice 1998 $145,000 $ 65,000(7) -- 30,000 -- --
President- 1997 $115,000 $ 75,000(7) -- 10,000 -- --
Operations
Bob Torkar
Senior Vice
President- 1999 $150,000 $ 90,000(7) -- 20,000 -- --
Finance, 1998 $145,000 $ 55,000(7) -- 30,000 -- --
Treasurer 1997 $115,000 $ 75,000(7) -- 10,000 -- --
and Chief
Accounting
Officer
_____________________________________
(1) The Named Executives each received certain perquisites, the
aggregate value of which did not exceed, except as indicated, as to
any Named Executive in any of the last three fiscal years, the
lesser of $50,000 or 10% of such Named Executive's annual salary and
bonus.
(2) Represents the number of shares subject to options granted during
such fiscal year.
(3) Includes incentive compensation of $60,000 based on a predetermined
formula with respect to fiscal 1999 and an additional bonus of
$290,000 which, although it was discretionary, was awarded in part
because of the Company's receipt of a break-up fee as a result of
termination of the merger agreement with Players.
(4) Represents incentive compensation based on a predetermined formula.
(5) Includes $78,867 for reimbursement by Jackpot to Mr. Kornstein for
relocation related costs associated with the sale of Mr. Kornstein's
residence. Pursuant to his employment agreement, such reimbursement
includes $32,375 for taxes.
(6) Represents premiums paid by Jackpot for term life insurance for the
benefit of Mr. Kornstein.
(7) Represents a discretionary bonus awarded based on performance.
Option Grants
_____________
The following table summarizes information concerning individual
grants of options, including the potential realizable dollar value of
grants of options made during the fiscal year ended June 30, 1999,
to each Named Executive, assuming that the market value of the
underlying security appreciates in value, from the date of grant to the
end of the option term, at the assumed rates indicated in the
following table.
FISCAL 1999 OPTION GRANTS
Potential Realizable Value
At Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term (1)
______________________________________________________________________________
Number of
Securities Percent of Total
Underlying Options Granted Exercise
Options to Employees in Price Expiration
Name Granted (#) Fiscal Year (2) ($/Share) Date 5%($) 10%($)
______________________________________________________________________________
Don R.
Kornstein 27,500 (3) 17% $ (3) 6/30/04 $64,625 $142,175
George
Congdon 25,000 (4) 15% $12.25 7/20/03 $84,500 $187,000
Bob
Torkar 20,000 (4) 12% $12.25 7/20/03 $67,600 $149,600
___________________
(1) The dollar amounts under these columns are the result of
calculations at annualized rates of 5% and 10%, respectively, which
were established by rules promulgated by the Securities and
Exchange Commission and therefore are not intended to forecast
possible future appreciation, if any, of Jackpot's Common Stock
price.
(2) Total options granted include options to purchase an aggregate of
110,000 shares of Common Stock granted to the Board of Directors.
(3) As a member of the Board of Directors on June 30, 1999, Mr.
Kornstein was automatically granted an option to purchase 27,500
shares of Common Stock on such date. Pursuant to the 1992 Incentive
and Non-qualified Stock Option Plan, the exercise price for each
June 30 automatic grant will be the fair market value of the Common
Stock on the following September 30. For purposes of computing the
potential realizable value of stock price appreciation for Mr.
Kornstein's 1999 option grant, an exercise price of $9.00 was
assumed. Such price was the fair market value of the Common
Stock on September 22, 1999.
(4) Such option vests as to one-half of the securities underlying the
option on July 20, 1999 and 2000, respectively.
Option Exercises and Fiscal Year-End Values
___________________________________________
The following table summarizes information with respect to the
exercise of options to purchase Common Stock of Jackpot during the last
fiscal year by each of the Named Executives and the value of unexercised
options held by each of them as of the end of fiscal 1999. None of the
Named Executives exercised any options during fiscal 1999.
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
Number of Shares
Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at Fiscal Year-End(#) at Fiscal Year-End($)
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (1)
__________ ___________ ________ _____________________ _____________________
Don R.
Kornstein - - 810,000/27,500 $0/0
George
Congdon - - 40,000/35,000 $0/0
Bob Torkar - - 40,000/30,000 $0/0
_____________________________________
(1) Based on the closing price of $8.50 for Jackpot's Common Stock on
the New York Stock Exchange on June 30, 1999.
Director Compensation
_____________________
Directors who are not salaried employees of the Company receive
annual fees of $32,000. In addition, a director who serves as a member
of the Compensation Committee and/or Audit Committee is entitled to
receive $10,800 and $7,200 per year, respectively. For the fiscal year
ended June 30, 1999, Messrs. Tessler, Markin and McDonald received
aggregate fees of $50,000, $50,000 and $42,800, respectively. Mr.
Kornstein did not receive any fees for service on the Board of Directors
during fiscal 1999.
The 1992 Incentive and Non-qualified Stock Option Plan (the "1992
Plan") provides that each individual who is a member of the Board of
Directors on June 30 of any year, including any future director on any
such date, will automatically be granted a nonqualified option to
purchase 27,500 shares of Common Stock on each such June 30. The
exercise 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. On June 30, 1999
options to purchase an aggregate of 110,000 shares of Common Stock
(27,500 each to Messrs. Tessler, Kornstein, Markin and McDonald) were
automatically granted pursuant to the terms of the 1992 Plan.
Employment Agreements
_____________________
Jackpot has an employment agreement (the "Agreement") with Mr.
Kornstein, which became effective on September 8, 1994, and currently
expires on September 30, 2002. 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 either the Company or Mr. Kornstein. From September 19, 1994
through September 7, 1996, Mr. Kornstein's annual base salary was
$675,000. Presently, Mr. Kornstein's annual base salary, which became
effective September 8, 1996, is $725,000.
The Agreement provides for an annual bonus for each fiscal year
equal to (i) 2% of the amount up to the first $5 million by which the
Company's earnings before interest, taxes, depreciation, amortization
and certain other items, as defined in the Agreement ("EBITDA") for such
fiscal year exceeds $10 million, (ii) 4% of the amount up to the first
$5 million by which EBITDA for such fiscal year exceeds $15 million,
(iii) 5% of the amount up to the first $5 million by which EBITDA for
such fiscal year exceeds $20 million, (iv) 6% of the amount up to the
first $5 million by which EBITDA for such fiscal year exceeds $25
million, plus, and (v) 7% of the amount by which EBITDA for such fiscal year
exceeds $30 million. The Board of Directors may, in its discretion,
grant Mr. Kornstein additional bonuses. From the inception of the
Agreement through fiscal 1998, no such additional bonuses were granted
to Mr. Kornstein. For the fiscal year ended June 30, 1999, the Board
granted an additional bonus of $290,000 to Mr. Kornstein, which,
although it was discretionary, was awarded in part because of the
Company's receipt of a break-up fee as a result of termination of the
merger agreement with Players. In addition, the Company, at its cost,
provides term life and disability insurance to Mr. Kornstein in the
amount of $5 million and $25,000 per month, respectively.
As part of the Agreement, Mr. Kornstein was granted an option under
the 1992 Plan to acquire 700,000 shares of Common Stock at $9.25 per
share (the closing price on the effective date of the Agreement). The
option, which expires on September 8, 2004, vested as to one-third of
the shares on September 8, 1995, 1996 and 1997, respectively. Under
certain circumstances, such option is exercisable for a period of 18
months following the termination of the Agreement, but in no event
beyond the expiration of the term of such option.
In the event Mr. Kornstein is disabled during the term of the
Agreement, he will receive his full base salary for the first six months
of such disability. At the end of such six month period or upon his
death, Mr. Kornstein, or his beneficiary, will receive a payment for
accrued salary, if any, and a pro rata bonus, as defined in the
Agreement, through such date. In addition, Mr. Kornstein or his
beneficiary will receive a lump sum payment equal to the sum of (i) Mr.
Kornstein's base salary, which would have been in effect for the twelve
months following the date of disability or death, and (ii) the average
bonus, as defined in the Agreement, for the prior three fiscal years.
In the event of a termination of the Agreement by the Company
without cause (as defined in the Agreement), for "Good Reason", or a
"Change in Control" (as described below), Mr. Kornstein would receive a
lump sum amount equal to his base salary, which would have been in
effect for the three year period commencing on the date of termination,
plus his bonus for a three year period, pursuant to a formula, as well
certain pension and welfare benefit coverage to the extent not provided
to Mr. Kornstein by a subsequent employer. Assuming such termination
occurred on or about September 28, 1999 such lump sum payment would be
approximately $2.8 million. In addition, Mr. Kornstein would receive
any amount necessary to reimburse him for any excise tax imposed under
the Internal Revenue Code, including any tax payable by reason of such
reimbursement. Mr. Kornstein agreed that for a period of three years
following the termination of his employment, for any reason, he will not
compete with Jackpot or its subsidiaries.
For purposes of the Agreement, Mr. Kornstein shall have "Good
Reason" to terminate his employment (i) upon a failure by the Company to
comply with a material provision of the Agreement, (ii) upon a
diminution of Mr. Kornstein's title or authority, or (iii) upon receipt
by Mr. Kornstein of a notice from the Company indicating that the
contract term is not being automatically extended.
For a period of time of up to one year after a Change in Control of
Jackpot, Mr. Kornstein has the option of terminating the Agreement. As
defined in the Agreement, Change in Control occurs when (i) any person
or group of persons become the beneficial owner of 20% or more of the
outstanding voting securities of Jackpot, (ii) during any two
consecutive years, the individuals who constituted the Board of
Directors of Jackpot at the beginning of such period cease for any
reason to constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of the period was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period, (iii) certain
mergers or consolidations, and (iv) a liquidation of the Company or a
sale of all or substantially all of the Company's assets.
Compensation Committee Interlocks and Insider Participation
___________________________________________________________
The Compensation Committee consists of three non-employee
directors. Currently the members of the Compensation Committee are
Messrs. Tessler, Markin and McDonald. See "Item 13. Certain Relationships
and Related Transactions", for a description of transactions and
agreements in which members of the Compensation Committee and their
associates were involved. None of the executive officers of Jackpot
serves as a director of another corporation in a case where an executive
officer of such other corporation serves as a director of Jackpot.
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________
The following table sets forth as of September 1, 1999, certain
information regarding the shares of Common Stock beneficially owned by
(i) each beneficial holder of more than five percent of the outstanding
shares of Common Stock ("Beneficial Holder"), (ii) each director, (iii)
each Named Executive, and (iv) all directors and executive officers of
Jackpot as a group.
OWNERSHIP OF JACKPOT COMMON STOCK
________________________________________________________________________
Amount and Nature
Name of Beneficial Holder, of Beneficial
Director, Named Executive Ownership of Percent of
or Identity of Group Common Stock (6) of Class (6)
________________________________________________________________________
Beneficial Holders:
___________________
Don R. Kornstein (1) 837,500 8.86%
Gabelli Funds, Inc. 516,000 (2) 5.99%
Dimensional Fund Advisors Inc. 492,878 (3) 5.72%
Private Capital Management, Inc. 473,600 (4) 5.50%
The Pavia and Powers Group 465,700 (5) 5.40%
Directors other than Mr. Kornstein:
___________________________________
David R. Markin 438,553 4.98%
Allan R. Tessler 388,031 4.40%
Robert L. McDonald, Sr. 301,652 3.42%
Named Executives other than Mr. Kornstein:
__________________________________________
George Congdon 52,500 *
Bob Torkar 50,000 *
All directors and executive
officers as a group (6 persons) 2,068,236 20.38%
________________________________________________________________________
*less than one percent
(1) Mr. Kornstein has an address in care of the Company at 1110 Palms
Airport Drive, Las Vegas, Nevada 89119.
(2) Based solely upon a Schedule 13D dated January 22, 1998, which was
filed by Mario J. Gabelli and various entities which Mr. Gabelli
directly or indirectly controls or for which he acts as chief
investment officer, and a Schedule 13F for the period ended June 30,
1998. The address of Gabelli Funds, Inc. is One Corporate Center,
Rye, NY 10580.
(3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of
492,878 shares of Jackpot's Common Stock, all of which shares are
held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA
Group Trust and DFA Participation Group Trust, investment vehicles
for qualified employee benefit plans, all of which Dimensional Fund
Advisors Inc. serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares. All of the above
information has been provided by Dimensional and is based solely
upon a Schedule 13G, dated February 9, 1998 and an amendment thereto
filed on February 11, 1999. The address of Dimensional's principal
business office is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA
90401.
(4) Based solely upon a Schedule 13G, dated February 16, 1999, Private
Capital Management, Inc., a registered investment advisor, and Bruce
S. Sherman are deemed to have beneficial ownership of an aggregate
of 473,600 shares of Jackpot's common stock. Bruce S. Sherman is
President of Private Capital Management, Inc. and exercises shared
dispositive power with respect to the shares held by it on behalf of
its clients. Mr. Sherman disclaims the existence of a group. The
address of Private Capital Management, Inc.'s principal business
office is 3003 Tamiami Trial North, Naples, Florida 34109.
(5) Based solely upon Schedule 13D (Amendment No. 2), dated May 21,
1998, which states Bolero Investment Group, L.P. ("Bolero"), Kenneth
W. Pavia, Sr. ("Mr. Pavia"), FHI, Inc. ("FHI"), Florence Partners,
Inc. ("Florence Partners") and Charles Powers ("Mr. Powers") (the
"Reporting Persons", and collectively the "Pavia and Powers Group")
may be deemed a group pursuant to the provisions of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended
(the "Act"). By reason of the provisions of Rule 13d-5 under the
Act, any member of the Pavia and Powers Group may be deemed to own
all shares beneficially owned by such group. Florence Partners and
Mr. Powers do not affirm the existence of such a group and disclaim
beneficial ownership of shares beneficially owned by Bolero, FHI and
Mr. Pavia. Bolero, FHI and Mr. Pavia also do not affirm the
existence of such a group and disclaim beneficial ownership of
shares beneficially owned by Florence Partners and Mr. Powers.
The address of the Pavia and Powers Group is Ingraham Building, 25
S.E. 2nd Avenue, Suite 720, Miami, FL 33131.
(6) Includes shares of Common Stock which may be acquired upon the
exercise of vested options held by the following: Mr. Tessler
(197,668), Mr. Kornstein (837,500), Mr. Markin (197,668),
Mr. McDonald (197,668), Mr. Congdon (52,500), Mr. Torkar (50,000)
and all directors and executive officers as a group (1,533,004).
Excludes shares of Common Stock which may be acquired upon the
exercise of unvested options held by the following: Mr. Congdon
(42,500), Mr. Torkar (40,000) and all directors and executive
officers as a group (82,500). The nature of the beneficial
ownership for all the shares is sole voting and investment power.
Item 13. Certain Relationships and Related Transactions
______________________________________________
Robert L. McDonald, Sr., a director of Jackpot, is a senior partner
in the law firm of McDonald Carano Wilson McCune Bergin Frankovich &
Hicks LLP ("McDonald Carano"), counsel to Jackpot. In addition, A. J.
Hicks, a partner in McDonald Carano, is the Secretary of Jackpot. For
the fiscal year ended June 30, 1999, the amount of fees paid by the
Company to McDonald Carano, based on representations provided by
McDonald Carano to the Company, did not exceed 5% of the gross revenues
of such firm for its last full fiscal year. The Company believes that
the amount and terms of payment for the services provided by McDonald
Carano were at least as favorable to the Company as the amount and terms
of payment for such services that could have been obtained from
unaffiliated third parties.
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, 1999, Jackpot filed no reports on Form 8-K.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant, as
amended (A)
3.2 By-laws of the Registrant, as amended (A)
3.3 Form of Amendment to Articles of Incorporation of
Registrant (E)
4.1 Stockholder Rights Agreement dated as of July 11,
1994 between the Registrant and Continental Stock
Transfer & Trust Company, as Rights Agent (F)
10.1 1990 Incentive and Nonqualified Stock Option Plan (B)(L)
10.2 Indemnification Agreement (Sample) (C)
10.3 1992 Incentive and Non-qualified Stock Option Plan (D)(L)
10.4 Employment Agreement with Don R. Kornstein (G)(L)
10.5 License agreement with American Drug Stores, Inc. (H)
10.6 License agreement with American Drug Stores, Inc. (H)
10.7 License agreement with Lucky Stores, Inc. (H)
10.8 License agreement with Kmart Corporation (I)
10.9 License agreement with Albertson's, Inc. (I)
10.10 License agreement with Rite Aid Corporation (J)
10.11 License agreement with Rite Aid Corporation (J)
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 Annual
Report on Form 10-K for the year ended June 30, 1989.
(B) Incorporated by reference to Registrant's
Registration Statement on Form S-3 dated
December 12, 1990 (Registration No. 33-38210).
(C) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1991.
(D) Incorporated by reference to Registrant's 1992
Proxy Statement.
(E) Incorporated by reference to Registrant's 1993
Proxy Statement.
(F) Incorporated by reference to Registrant's Form
8-A dated July 12, 1994.
(G) Incorporated by reference to Registrant's Form
10-Q for the quarter ended September 30, 1994.
(H) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1997.
(I) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1998.
(J) Incorporated by reference to Registrant's Form
10-Q for the quarter ended March 31, 1999.
(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 28, 1999 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 Officer
Don R. Kornstein and Director
(Principal Executive
Officer) September 28, 1999
/s/ Bob Torkar Senior Vice President-
___________________________ Finance, Treasurer and
Bob Torkar Chief Accounting Officer
(Principal Financial and
Accounting Officer) September 28, 1999
/s/ Allan R. Tessler Chairman of the Board September 28, 1999
___________________________
Allan R. Tessler
/s/ David R. Markin Director September 28, 1999
___________________________
David R. Markin
/s/ Robert L. McDonald, Sr. Director September 28, 1999
___________________________
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, 1999 and 1998
Consolidated Statements of Income
Years Ended June 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information
Years Ended June 30, 1999 and 1998
(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, 1999 and
1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
June 30, 1999. 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,
1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
September 24, 1999
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1999 AND 1998
(Dollars in thousands)
ASSETS 1999 1998
______ ________ ________
Current assets:
Cash and cash equivalents $ 47,637 $ 50,275
Short-term investments, at fair value 7,292 -
Prepaid expenses 1,515 1,594
Other current assets 1,985 2,225
________ ________
Total current assets 58,429 54,094
________ ________
Property and equipment, at cost:
Land and buildings 435 1,535
Gaming equipment 29,418 28,988
Other equipment 4,546 4,758
Leasehold improvements 368 354
________ ________
34,767 35,635
Less accumulated depreciation (21,010) (19,850)
________ ________
13,757 15,785
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$3,404 and $4,607 3,119 2,231
Goodwill, net of accumulated
amortization of $2,879 and $2,713 3,743 3,908
Lease and other security deposits 1,242 3,082
Other non-current assets 2,005 -
________ ________
Total assets $ 82,295 $ 79,100
======== ========
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1999 AND 1998
(Dollars in thousands, except share data)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
____________________________________ ________ ________
Current liabilities:
Accounts payable $ 1,794 $ 1,434
Other current liabilities 3,000 3,508
________ ________
Total current liabilities 4,794 4,942
Deferred rent 2,554 2,377
Deferred income tax 333 849
Other liabilities - 61
________ ________
Total liabilities 7,681 8,229
________ ________
Commitments and contingencies (Note 8)
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; 9,860,252 and 9,854,327
shares issued 99 99
Additional paid-in capital 66,465 66,376
Retained earnings 21,069 16,466
Less 1,243,714 and 1,080,372 shares of
common stock in treasury, at cost (13,776) (12,070)
Unrealized gain on available-for-sale
securities, net of tax 757 -
________ ________
Total stockholders' equity 74,614 70,871
________ ________
Total liabilities and
stockholders' equity $ 82,295 $ 79,100
======== ========
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)
1999 1998 1997
_______ _______ _______
Revenues:
Route operations $93,717 $90,331 $88,895
Casino operations 1,952 2,682 3,009
_______ _______ _______
Totals 95,669 93,013 91,904
_______ _______ _______
Costs and expenses:
Route operations 77,765 73,927 69,905
Casino operations 1,878 2,499 2,835
Amortization 1,261 1,141 1,728
Depreciation 4,108 3,740 3,461
General and administrative 3,555 3,743 4,153
Write-down of closed casino 1,200 - -
Costs of terminated merger 900 - -
_______ _______ _______
Totals 90,667 85,050 82,082
_______ _______ _______
Operating income 5,002 7,963 9,822
_______ _______ _______
Other income:
Interest and other income 1,391 1,918 1,546
_______ _______ _______
Totals 1,391 1,918 1,546
_______ _______ _______
Income before income tax 6,393 9,881 11,368
_______ _______ _______
Provision for Federal income tax:
Current 2,306 2,452 3,086
Deferred (516) 216 438
_______ _______ _______
Totals 1,790 2,668 3,524
_______ _______ _______
Net income $ 4,603 $ 7,213 $ 7,844
======= ======= =======
Basic earnings per share $ .53 $ .80 $ .85
======= ======= =======
Dilutive earnings per share $ .53 $ .79 $ .84
======= ======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(Dollars and shares in thousands, except per share data)
Accumu-
lated
Treasury Other
Common Stock Additional Stock Compre-
_____________ Paid-In Retained _______________ hensive
Shares Amount Capital Earnings Shares Amount Income Totals
______ ______ _________ ____________ ______ ________ ________ _______
[S] [C] [C] [C] [C] [C] [C] [C] [C]
Balance
July 1,
1996 9,631 $96 $64,129 $ 2,905 (294) $ (3,635) $63,495
Compre-
hensive
income:
Net
income 7,844 7,844
Other
compre-
hensive
income - -
Compre-
hensive _______
income 7,844
Tax ben-
efit
from
stock
options 48 48
Cash
divi-
dends
($.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
Re-
purchases
of common
stock (284) (2,803) (2,803)
_____ ___ _______ _______ ______ ________ ____ _______
Balance
June 30,
1997 9,824 98 66,033 9,253 (742) (8,103) 67,281
Compre-
hensive
income:
Net
income 7,213 7,213
Other
compre
hensive
income - -
_______
Compre-
hensive
income 7,213
Issuance
of shares
on
exercise
of stock
options 30 1 343 344
Re-
purchases
of
common
stock (338) (3,967) (3,967)
_____ ___ _______ _______ ______ ________ ____ ______
Balance
June 30,
1998 9,854 99 66,376 16,466 (1,080) (12,070) 70,871
Compre-
hensive
income:
Net
income 4,603 4,603
Other
compre-
hensive
income:
Unrealized
gain on
available-
for-sale
securi-
ties,
net of
tax
of $408 $757 757
_______
Compre-
hensive
income 5,360
Tax
benefit
from
stock
options 22 22
Issuance
of shares
on
exercise
of stock
options 6 67 67
Re-
purchases
of common
stock (164) (1,706) (1,706)
_____ ___ _______ _______ ______ ________ ____ ______
Balance
June 30,
1999 9,860 $99 $66,465 $21,069 (1,244) $(13,776) $757 $74,614
===== === ======= ======= ====== ======== ==== =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(Dollars in thousands)
1999 1998 1997
________ ________ ________
Operating activities:
Net income $ 4,603 $ 7,213 $ 7,844
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,369 4,881 5,189
Deferred Federal income tax (516) 216 438
Write-down of closed casino 1,200 - -
Increase (decrease) from changes in:
Prepaid expenses and other current
assets 261 (373) 174
Other non-current assets 1,244 52 (51)
Accounts payable and other current
liabilities (1,270) (621) 1,585
Deferred rent and other liabilities 116 468 (595)
________ ________ ________
Net cash provided by operating
activities 11,007 11,836 14,584
________ ________ ________
Investing activities:
Purchase of marketable securities (6,127) - -
Proceeds from sales of equipment and other
non-current assets 1,757 403 1,625
Purchases of property and equipment (5,655) (6,235) (3,393)
Increase in lease acquisition costs and
other intangible and non-current assets (2,061) (211) (524)
Lease and other security deposits - - 477
Other, net 80 160 258
________ ________ ________
Net cash used in investing
activities (12,006) (5,883) (1,557)
________ ________ ________
Financing activities:
Proceeds from issuance of common stock 67 344 193
Repurchases of common stock (1,706) (3,967) (2,803)
Dividends paid (1,496)
________ ________ ________
Net cash used in financing
activities (1,639) (3,623) (4,106)
________ ________ ________
Net increase (decrease) in cash and
cash equivalents (2,638) 2,330 8,921
Cash and cash equivalents at
beginning of year 50,275 47,945 39,024
________ ________ ________
Cash and cash equivalents at end of year $ 47,637 $ 50,275 $ 47,945
======== ======== ========
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Federal income tax $ 2,400 $ 2,750 $ 1,840
Non-cash investing and financing activities:
Common stock surrendered on exercise of
stock options $ - $ - $ 1,665
Tax benefit from exercise of stock options $ 22 $ - $ 48
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 "1999", "1998" and "1997" are for the fiscal years ended
June 30, 1999, 1998 and 1997, 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 comprised primarily of
marketable municipal bonds and money market accounts with maturities 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. Cash and cash equivalents include cash equivalents of
$35,489,000 and $38,728,000 at June 30, 1999 and 1998.
Investments:
Jackpot accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair
values and for all investments in debt securities, and requires such
securities be classified as either held to maturity, trading, or
available-for-sale. Management determines the appropriate classification
of its investments in securities at the time of purchase and reevaluates
such classification at each balance sheet date. SFAS 115 requires that
available-for-sale securities be carried at fair value with unrealized
gains, net of tax, reported as a separate component of stockholders'
equity. Unrealized gains and losses for available-for-sale securities
are excluded from earnings. There were no realized gains or losses from
sales of investment securities in 1999, 1998 and 1997.
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 $3,119,000 and $1,907,000 as of June 30,
1999 and 1998.
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. 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. Jackpot adopted this statement on July 1,
1998. SFAS 131 had no impact on the Company's disclosures.
In April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement of
Position No. 98-5, "Reporting on the Costs of Start-Up Activities".
This standard provides guidance on the financial reporting for start-up
costs and organization costs. This standard requires costs of start-up
activities and organization costs to be expensed as incurred, and is
effective for fiscal years beginning after December 15, 1998, although
earlier application is encouraged. The Company adopted this standard on
July 1, 1999. This statement will not have a significant effect on
Jackpot's results of operations or its financial position.
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, 2000. SFAS 133 establishes additional accounting and
reporting standards for derivative instruments and hedging activities.
Presently, Jackpot does not have any derivative instruments, nor does the
Company participate in hedging activities. Accordingly, SFAS 133 is not
expected to have a significant effect on the results of operations or
related disclosures.
Note 2 - Comprehensive income:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" 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
the balance sheet. Jackpot adopted this statement on July 1, 1999.
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. On June 29, 1999, Jackpot closed the Owl Club. As a result
of Jackpot's decision to close the Owl Club, a charge of $1,200,000 was
recorded in the quarter ended June 30, 1999. Such charge consisted
primarily of the write-down to fair value of certain long-lived assets.
Excluding such write-down, the results of operations of the Owl Club and
the Pony Express Casino were not material in 1999, 1998 and 1997. As of
June 30, 1999, the carrying value of assets to be disposed of associated
with the Owl Club and the Pony Express Casino was not material.
Note 4 - Other current liabilities:
Other current liabilities consist of the following (dollars in
thousands):
June 30,
________________
1999 1998
______ ______
Accrued employee benefits $1,287 $1,714
Accrued professional fees 386 334
Accrued progressive jackpots 121 464
Other 1,206 996
______ ______
Totals $3,000 $3,508
====== ======
Note 5 - Earnings per share:
Basic earnings per share for 1999, 1998 and 1997 is computed by
dividing net income by the weighted average number of common shares
outstanding for the respective period. Diluted earnings per share for
1999, 1998 and 1997 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
earnings per share. Such antidilutive options and warrants outstanding
for 1999, 1998 and 1997 were 806,000, 159,000 and 743,000, respectively.
The following is the amount of income and number of shares used in the
basic and diluted earnings per share computations (dollars and shares in
thousands, except per share data):
1999 1998 1997
______ ______ ______
Basic earnings per share:
Earnings:
Income available to common stockholders $4,603 $7,213 $7,844
====== ====== ======
Shares:
Weighted average number of common
shares outstanding 8,641 8,991 9,237
====== ====== ======
Basic earnings per share $ .53 $ .80 $ .85
====== ====== ======
Diluted earnings per share:
Earnings:
Income available to common stockholders $4,603 $7,213 $7,844
Effect of dilutive securities - - -
______ ______ ______
Income, as adjusted $4,603 $7,213 $7,844
====== ====== ======
Shares:
Weighted average number of common
shares outstanding 8,641 8,991 9,237
Common shares issuable upon assumed
exercise of dilutive stock options 965 1,726 1,316
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 (947) (1,530) (1,236)
______ ______ ______
Weighted average number of common shares
and common share equivalents outstanding 8,659 9,187 9,317
====== ====== ======
Diluted earnings per share $ .53 $ .79 $ .84
====== ====== ======
Note 6 - Stockholders' equity:
Authorized common stock:
On September 14, 1999, Jackpot's stockholders approved an increase
in the number of authorized shares of common stock from 30,000,000 to
60,000,000.
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, 1999 and
1998, 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
1999, 1998 and 1997.
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. Under the 1992 Plan, options
granted to Jackpot's directors to purchase an aggregate of 550,000 shares
of Common Stock were outstanding, of which 440,000 were exercisable
at June 30, 1999.
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
Incentive Nonqualified Exercise Price
_________ ____________ ________________
Outstanding at July 1, 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
Canceled (234) $ 8.50 to $15.88
Automatic grant to
directors 110 $ 9.94
___ _____
Outstanding at June 30, 1998 0 1,486 $ 8.50 to $20.88
Granted 55 $12.25
Exercised (6) $ 8.50 to $11.63
Canceled (223) $ 8.50 to $20.88
Automatic grant to
directors 110 (A)
___ _____
Outstanding at June 30, 1999 0 1,422 $ 8.50 to $12.25
=== =====
(1,289 shares exercisable)
(A) To be determined on September 30, 1999.
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, 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 at June 30, 1998 352 $ 9.19 to $10.63
Canceled (131) $10.63
___
Outstanding and exercisable
at June 30, 1999 221 $ 9.19
===
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 1999, 1998 and 1997 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 1999, 1998
and 1997 (dollars in thousands, except per share data):
1999 1998 1997
______ ______ ______
Net income:
As reported $4,603 $7,213 $7,844
Pro forma $4,167 $6,837 $7,571
Basic earnings per share:
As reported $ .53 $ .80 $ .85
Pro forma $ .48 $ .76 $ .82
Diluted earnings per share:
As reported $ .53 $ .79 $ .84
Pro forma $ .48 $ .74 $ .81
Weighted average assumptions:
Expected stock price volatility 30.0% 30.0% 35.0%
Risk-free interest rate 5.6% 5.8% 6.1%
Expected option lives (in years) 3.0 2.5 2.5
Estimated fair value of options
granted $ 3.02 $ 2.99 $ 3.18
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,
________________
1999 1998
_____ _____
Stock option plans:
Outstanding 1,422 1,486
Available for grant 1,078 1,020
Other nonqualified stock options 221 352
_____ _____
Totals 2,721 2,858
===== =====
Common stock in treasury:
Jackpot purchased 163,200, 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 $1,706,000, $3,967,000 and $2,803,000 in 1999, 1998 and
1997. 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 $170,000, $121,000 and $179,000 in 1999, 1998 and 1997.
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.
Future minimum payments (dollars in thousands) under noncancelable
operating leases or licenses aggregated approximately $225,655
at June 30, 1999, payable as follows: $42,909 in 2000; $43,449 in 2001;
$43,091 in 2002; $43,270 in 2003; $21,355 in 2004; and $31,581
thereafter.
Rent expense was comprised as follows (dollars in thousands):
1999 1998 1997
_______ _______ _______
Location leases:
Fixed rentals $39,689 $36,866 $28,125
Percentage rentals 17,181 16,883 19,994
Office and equipment leases 442 453 453
_______ _______ _______
Totals $57,312 $54,202 $48,572
======= ======= =======
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, 2002. 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.
The aggregate commitment for future salaries at June 30, 1999,
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, 1999
under Jackpot's employment and severance agreements is approximately
$2,900,000.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject Jackpot to
concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, 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,
1999, Jackpot had unsecured lease and other security deposits of
$1,172,000 held by a publicly-held chain store.
Legal matters:
In August 1998 Albertson's, Inc. ("Albertson's") and American Stores
Company ("American Stores") entered into a merger agreement that provided
for the acquisition of American Stores by Albertson's. The merger of
Albertson's and American Stores was completed on June 23, 1999. As a
condition to obtaining approval of the merger by the Federal Trade
Commission and the Attorneys General of California, Nevada and New Mexico,
Albertson's agreed to divest certain of its stores, including 19 stores in
southern Nevada. Those locations have been taken over by Raley's, Inc.
("Raley's").
The existing slot route operator for Raley's northern Nevada stores has
filed applications with the Nevada Gaming Control Board to operate the
gaming machines at the southern Nevada Albertson's stores which are being
divested. Of the 19 stores in southern Nevada taken over by Raley's,
Jackpot currently maintains 246 gaming machines at the 15 locations which
it operates pursuant to a long term agreement with Albertson's. Jackpot
believes that there is no proper basis to terminate such agreement and
Jackpot's attendant right to occupy the subject premises for purposes of
operating gaming machines.
On August 30, 1999, Jackpot commenced litigation in federal district
court for the District of Nevada against Albertson's and Raley's to
enforce its rights under its agreement with Albertson's. On September
14, 1999, Jackpot obtained a preliminary injunction to prevent
Albertson's and Raley's from interfering with its right to occupy the
subject premises and conduct gaming operations. The Court for purposes of
its decision ruled that Jackpot's license was coupled to the lease
relating to the stores. The injunction permits Jackpot to remain at the
stores pending resolution of the dispute. In granting the preliminary
injunction, the court required Jackpot to post a $50,000 bond.
Albertson's has now made an application to increase the
bond to $9 million. In addition, Albertson's and Raley's have
made motions for summary judgment. Furthermore, on September 23, 1999,
Raley's existing slot route operator commenced an action in Nevada state
court against Jackpot, Albertson's, Raley's and the slot route operator
at the four other Albertson's southern Nevada locations seeking
declaratory and injunctive relief and money damages. The allegations
against Jackpot are for alleged fortuitous interference with contract and
prospective economic advantage and abuse of process. Jackpot intends to
vigorously defend this action.
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 - Revenues derived from major locations:
Route operations revenues at two groups of affiliated store chains in
1999, 1998 and 1997 each accounted for more than 10% of Jackpot's total
revenues. Revenues for Jackpot's top two affiliated store chains were
approximately $36,000,000 and $18,000,000, respectively, in 1999,
$34,000,000 and $17,000,000, respectively, in 1998, and $27,000,000 and
$15,000,000, respectively, in 1997. Each individual store chain included
in an affiliated group of store chains has a separate lease with Jackpot.
Note 10 - 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:
1999 1998 1997
____ ____ ____
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 (7.3) (5.0) (3.7)
Amortization of goodwill .8 .6 .4
Other, net .5 (2.6) .3
____ ____ ____
Effective rate 28.0% 27.0% 31.0%
==== ==== ====
The tax items comprising Jackpot's net deferred tax liability
as of June 30, 1999, 1998 and 1997 are as follows (dollars in thousands):
1999 1998 1997
______ ______ ______
Deferred tax assets:
Write-down of assets $ 755 $ 381 $ 381
Deferred rent 869 809 854
Other accrued liabilities 402 459 520
Other 343 54 107
______ ______ _______
Totals 2,369 1,703 1,862
______ ______ _______
Deferred tax liabilities:
Difference between book and tax
basis of property 1,354 1,280 987
Unrealized gain on
available-for-sale
securities 408 - -
Economic performance accruals 515 542 481
Other 833 730 1,027
______ ______ _______
Totals 3,110 2,552 2,495
______ ______ _______
Net deferred tax liability $ (741) $ (849) $ (633)
====== ====== ======
Jackpot realized tax benefits of $22,000 and $48,000 in 1999 and 1997
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 11 - Other events
On February 17, 1999, Jackpot and CRC Holdings, Inc. d/b/a Carnival
Resorts & Casinos ("CRC"), a privately owned company, entered into a
definitive agreement providing for the acquisition of CRC by Jackpot.
On April 15, 1999, Jackpot and CRC mutually agreed to terminate the
agreement. As a result of the termination of the agreement, capitalized
costs incurred in connection with the proposed acquisition of CRC of
$900,000 were expensed in the quarter ended June 30, 1999.
On February 8, 1999, Jackpot and Players International, Inc. ("Players")
entered into a definitive Agreement and Plan of Merger (the "Agreement"),
which was subject to a number of conditions. On August 16, 1999, Jackpot
received a notice from Players terminating the Agreement. Such notice
contained the terms of a merger offer for Players from Harrah's
Entertainment, Inc. On August 19, 1999, pursuant to the terms of the
Agreement, Jackpot received a break-up fee of $13.5 million. As a result
of the termination of the Agreement, all capitalized costs incurred in
connection with the proposed acquisition of Players will be expensed.
Such costs, which are estimated to be $2,500,000, and the break-up fee
will be recorded in the quarter ending September 30, 1999.
On March 10, 1999, Jackpot purchased 1,014,400 shares of Players
common stock at $6.04 per share for a total cost of $6,127,000. For
purposes of SFAS 115, the investment in Players common stock is
classified as available-for-sale securities, and carried at fair value.
"Short-term investments, at fair value" in the accompanying consolidated
balance sheets consist entirely of Jackpot's investment in Players common
stock. As of June 30, 1999, the gross unrealized gain was $1,165,000.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 1999 and 1998 follows:
Quarter
________________________________________
First Second Third Fourth
_______ _______ _______ _______
1999
____
Revenues $22,207 $23,747 $24,576 $25,139
Gross operating income (A) 2,186 2,637 3,171 3,208
Income before income tax 1,539 1,930 2,515 409 (B)
Net income 1,108 1,390 1,811 294
Earnings per share:
Basic .13 .16 .21 .03
Diluted .13 .16 .21 .03
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
(A) Gross operating income is revenues less route and casino operations'
costs and expenses, deprecation associated with route and casino
operations and amortization associated with lease acquisition costs.
(B) Includes charges aggregating $2.1 million from the write-down in
connection with the closing of the Owl Club and the costs associated
with the termination of the agreement with CRC.