-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NxVTlMH340EywL2iGilJyipaiFoZXqhkjHZicS7nZKjFO6nW41WUvMsB94tkEoe7 JINQDoE2G7QJrsTe2jKLRg== /in/edgar/work/0000351903-00-000065/0000351903-00-000065.txt : 20001115 0000351903-00-000065.hdr.sgml : 20001115 ACCESSION NUMBER: 0000351903-00-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACKPOT ENTERPRISES INC CENTRAL INDEX KEY: 0000351903 STANDARD INDUSTRIAL CLASSIFICATION: [7990 ] IRS NUMBER: 880169922 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09728 FILM NUMBER: 765714 BUSINESS ADDRESS: STREET 1: 1110 PALMS AIRPORT DR CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7022635555 MAIL ADDRESS: STREET 1: 1110 PALMS AIRPORT DRIVE STREET 2: 1110 PALMS AIRPORT DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89119 10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 no. 1-9728 JACKPOT ENTERPRISES, INC. ____________________________________________________________________________ (Exact name of registrant as specified in its charter) NEVADA 88-0169922 _______________________________ ____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1110 Palms Airport Drive, Las Vegas, Nevada 89119 ____________________________________________ __________ (Address of principal executive offices) (Zip Code) 702-263-5555 ___________________________________________________ (Registrant's telephone number, including area code) 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 _____ _____ There were 8,974,846 shares of the Registrant's common stock outstanding as of November 3, 2000. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) - September 30, 2000 and June 30, 2000 Condensed Consolidated Statements of Operations (Unaudited) - Three Months Ended September 30, 2000 and 1999 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Three Months Ended September 30, 2000 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended September 30, 2000 and 1999 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Part II. Other Information Item 6. Exhibits and Reports on Form 8-K JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) September 30, June 30, ASSETS 2000 2000 ______ _____________ _________ Current assets: Cash and cash equivalents $ 58,674 $ 60,090 Other current assets 481 697 Net assets of discontinued operations 15,888 16,645 ________ ________ Total current assets 75,043 77,432 ________ ________ Notes receivable - related parties 1,250 1,000 Investments in internet-related businesses 32,280 24,136 Excess of costs over equity in underlying net assets of investments in internet-related businesses, net of amortization 1,638 1,657 Other non-current assets 854 510 ________ ________ Total assets $111,065 $104,735 ======== ======== See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) (Concluded) September 30, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2000 ____________________________________ _____________ _________ Current liabilities: Accounts payable $ 9 $ - Other current liabilities 1,103 799 ________ ________ Total current liabilities 1,112 799 Convertible subordinated notes, net of amortized discount of $2,948 and $2,500 20,802 12,750 Deferred income tax 22 762 Minority interest in subsidiary 2,514 2,514 ________ ________ Total liabilities and minority interest 24,450 16,825 ________ ________ Commitments and contingencies Stockholders' equity: Preferred stock - authorized 1,000,000 shares of $1 par value; none issued Common stock - authorized 60,000,000 shares of $.01 par value; 10,233,470 shares issued 102 102 Additional paid-in capital 75,250 73,875 Retained earnings 25,275 27,710 Less 1,258,624 shares of common stock in treasury, at cost (13,777) (13,777) Unrealized loss on available-for-sale securities of equity investee, net of tax (235) - ________ ________ Total stockholders' equity 86,615 87,910 ________ ________ Total liabilities and stockholders' equity $111,065 $104,735 ======== ======== See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 and 1999 (Dollars in thousands, except per share data) (Unaudited) 2000 1999 _______ ________ Costs and expenses: Amortization $ 79 $ - General and administrative 1,191 679 _______ _______ Totals 1,270 679 _______ _______ Operating loss from continuing operations 1,270 679 _______ _______ Other income (expense): Net fee from terminated merger - 11,000 Equity in loss of internet-related businesses (1,786) - Interest and other income 933 467 Interest expense (1,244) - _______ _______ Totals (2,097) 11,467 _______ _______ Income (loss) from continuing operations before provision (benefit) for income tax (3,367) 10,788 _______ _______ Provision (benefit) for Federal income tax: (800) 3,351 _______ _______ Net income (loss) from continuing operations (2,567) 7,437 Income (loss) from discontinued operations, net of tax 132 (144) _______ _______ Net income (loss) $(2,435) $ 7,293 ======= ======= Basic earnings (loss) per share: Income (loss) from continuing operations $ (.29) $ .86 Income (loss) from discontinued operations .02 (.01) _______ _______ $ (.27) $ .85 ======= ======= Dilutive earnings (loss) per share: Income (loss) from continuing operations $ (.29) $ .86 Income (loss) from discontinued operations .02 (.01) _______ _______ $ (.27) $ .85 ======= ======= See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED SEPTEMBER 30, 2000 (Dollars and shares in thousands) (Unaudited) Accumu- lated Addi- Other Common Stock tional Treasury Stock Compre- _____________ Paid-In Retained ________________ hensive Shares Amount Capital Earnings Shares Amount Income Totals ______ ______ _______ ________ ______ ________ _______ _______ Balance July 1, 2000 10,233 $102 $73,875 $27,710 (1,259) $(13,777) $ - $87,910 Comprehensive loss: Net loss from continuing operations (2,567) (2,567) Income from discontinued operations, net of tax 132 132 Other comprehensive loss: Unrealized loss on available-for-sale securities of equity investee, net of tax (235) (235) _______ Comprehensive loss (2,670) Amount allocated to additional paid-in capital in connection with the issuance of the 8% convertible subordinated notes (See Note 2) 1,375 1,375 ______ ____ _______ _______ ______ ________ _____ _______ Balance September 30, 2000 10,233 $102 $75,250 $25,275 (1,259) $(13,777) $(235) $86,615 ====== ==== ======= ======= ====== ======== ===== ======= See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in thousands) (Unaudited) 2000 1999 ________ ________ Operating activities: Net income (loss) $ (2,435) $ 7,293 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Income (loss) from discontinued operations, net of tax (132) 144 Net fee from terminated merger - (11,000) Equity in loss of internet-related businesses 1,786 - Amortization 79 - Deferred Federal income tax (740) 1 Gain on sale of short-term investments - (16) Increase (decrease) from changes in: Prepaid expenses and other current assets 216 55 Other non-current assets (162) - Accounts payable and other current liabilities 484 2,842 Other liabilities 927 - ________ ________ Net cash provided by (used in) continuing operations 23 (681) Net cash provided by discontinued operations 1,323 752 ________ ________ Net cash provided by operating activities 1,346 71 ________ ________ Investing activities: Investments in internet-related businesses (10,409) - Break-up fee from terminated merger - 13,500 Proceeds from sale of short-term investments - 76 Increase in lease acquisition costs and other intangible and non-current assets (138) (598) ________ ________ Net cash provided by (used in) continuing operations (10,547) 12,978 Net cash used in discontinued operations (434) (422) ________ ________ Net cash provided by (used in) investing activities (10,981) 12,556 ________ ________ Financing activities: Proceeds from convertible subordinated notes 8,250 - Other (31) - ________ ________ Net cash provided by financing activities of continuing operations 8,219 - ________ ________ Net increase (decrease) in cash and cash equivalents (1,416) 12,627 Cash and cash equivalents of continuing operations at beginning of period 60,090 44,137 ________ ________ Cash and cash equivalents of continuing operations at end of period $ 58,674 $ 56,764 ======== ======== Supplemental disclosures of cash flow data: Cash paid during the period for: Interest $ - $ - Federal income tax $ - $ - Non-cash investing and financing activities: Debt discount on convertible subordinated notes $ 1,375 $ - Note receivable - related party $ 250 $ - See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business: Business: On March 8, 2000, Jackpot Enterprises, Inc. ("Jackpot" or the "Company"), announced a series of actions designed to transform the Company from a gaming entity into an Internet infrastructure provider and a manager of technology funds (the "Internet-Related Businesses"). On March 10, 2000, the Company formed J Net Ventures I, LLC ("Venture I"), an entity that will invest primarily in Internet-Related Businesses. As of September 30, 2000, the Company owned 100% of Venture I. Venture I is managed by J Net Venture Partners, LLC (the "Manager"), an affiliate of the Company. Allan R. Tessler, the Company's Chief Executive Officer, is the Chairman of the Manager and Keith Meister and Todd Meister are Co-Presidents of the Manager. In addition, the Board of Directors has unanimously adopted a resolution to change the name of the Company to J Net Enterprises, Inc. Such change is subject to the approval of the Company's stockholders at the Company's Annual Meeting on December 6, 2000. Business segments: As of September 30, 2000, the Company operated in a single business segment, its Internet-Related Business segment. During the three months ended June 30, 2000 management formalized its plan to sell the gaming machine route operations segment ("Route Operations") and commenced activities to dispose of the subsidiaries identified with that segment. On July 8, 2000, the Company entered into a definitive agreement to sell its Route Operations (see Note 7). The Company's Route Operations segment has been reported as discontinued operations. Basis of presentation: The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position as of September 30, 2000, the results of its operations for the three months ended September 30, 2000 and 1999 and its cash flows for the three months ended September 30, 2000 and 1999. The results for the three months ended September 30, 2000 and 1999 are not necessarily indicative of results for a full year. Information included in the condensed consolidated balance sheet as of June 30, 2000 has been derived from the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 2000 (the "2000 Form 10-K"). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the 2000 Form 10-K. Investments in Internet-Related Businesses: The various interests that the Company acquires in Internet-Related Businesses are accounted for under one of three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on the Company's voting interest and its ability to influence or control the Internet-Related Business. For investments accounted for under the equity method, the excess of the cost of the investment over the Company's equity in the underlying net assets of such investment is amortized on a straight-line basis over 5 years. Such amortization is included in the line captioned equity in loss of internet-related businesses in the accompanying consolidated statements of operations. Investments in debt and equity securities: The Company 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 and losses, net of tax, reported as a separate component of stockholders' equity. Unrealized gains and losses for available-for-sale securities are recorded as comprehensive income and are excluded from earnings. The unrealized gain on available-for-sale securities, net of tax and comprehensive income for the three months ended September 30, 1999 was $135,000 and $7,428,000, respectively. Recently issued accounting standards: In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, 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. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position. This statement also defines and allows companies to apply hedge accounting to its designated derivatives under certain instances. It also requires that all derivatives be marked to market on an ongoing basis. This applies whether the derivatives are stand- alone instruments, such as warrants or interest rate swaps, or embedded derivatives, such as call options contained in convertible debt investments. Along with the derivatives, in the case of qualifying hedges, the underlying hedged items are also to be marked to market. These market value adjustments are to be included either in the income statement or other comprehensive income, depending on the nature of the hedged transaction. The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over the counter market. In cases where derivatives relate to financial instruments of non public companies, or where quoted market prices are otherwise not available, such as for derivative financial instruments, fair value is based on estimates using present value or other valuation techniques. Based on management's review, the Company has determined that the warrant purchased by the Company in connection with the Company's purchase of an interest in Series B Preferred Stock of TechTrader, Inc. is a derivative as defined in SFAS 133. On July 1, 2000, the Company adopted SFAS 133 and recorded this derivative at fair market value. The cumulative effect of the change in accounting principle for the three months ended September 30, 2000 was not significant. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 clarifies existing accounting principles related to revenue recognition in financial statements. The Company is required to comply with the provisions of SAB 101 in its three months ending June 30, 2001. Based upon the current nature of the Company's continuing operations, management does not believe that SAB 101 will have a significant impact on the Company's results of operations. In March 2000, the FASB issued FASB Interpretation 44 "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44"), which provides clarification on the application of Accounting Principals Board Opinion No. 25 "Accounting for Stock Issued to Employees". The Company adopted the provisions of FIN 44 on July 1, 2000. Such adoption had no effect on the Company's results of operations. Note 2 - Convertible subordinated notes: On October 2, 2000, the Company completed its offering of approximately $28 million of unregistered 8% convertible subordinated notes (the "Notes") to a small group of investors. Certain of the investors include officers and directors of the Company or entities controlled by such directors and the Co-Presidents of the Manager. As of September 30, 2000, the Company had raised $23,750,000 from the issuance of the Notes. Subsequently, Mariner LLC ("Mariner"), an unaffiliated entity, purchased an additional $4 million of the Notes. Including this transaction, the Company has raised $27,750,000 from the issuance of the Notes. In connection with the Mariner purchase, Mark W. Hobbs, President and Chief Operating Officer of the Company entered into an agreement with Mariner with respect to Mr. Hobbs' participation in the ownership of $2 million of the $4 million Note. Pursuant to the arrangement, Mr. Hobbs obtains the full economic benefit with respect to $1 million of the Notes including the interest thereon and the potential upside upon conversion to common stock and the sale thereof. With respect to an additional $1 million Mr. Hobbs obtained the potential upside upon conversion to common stock and the sale thereof. Mr. Hobbs is at risk in the event of default on the two million dollar original purchase price and has pledged his limited partnership interests in Mariner GP, L.P. as collateral against such default. Mariner GP, L.P., a Delaware limited partnership is the general partner of Mariner Partners, L.P. In connection with such transaction, Mr. Hobbs waived his right under his employment agreement to receive up to a $1 million loan from the Company to purchase up to $2 million of the Notes. For information regarding Jackpot's investment in Mariner Partners, L.P., see Note 8. For financial statement purposes, as of June 30, 2000, $15,250,000 of the Notes were deemed to have been beneficially converted as the conversion feature was in-the-money at the commitment date. The Company has calculated the beneficial conversion feature as the difference between the fair value of the common stock at the commitment date and the initial conversion price, multiplied by the number of shares into which the debt is convertible. Approximately $2,500,000 of the proceeds from issuance of the Notes, equal to the intrinsic value, was recorded as debt discount and allocated to additional paid-in capital as of June 30, 2000. During the three months ended September 30, 2000, the Company raised an additional $8,500,000 through the issuance of the Notes. A substantial portion of these Notes was also deemed to have been beneficially converted as described above. As a result, an additional $1,375,000 of the proceeds was recorded as debt discount and allocated to paid-in capital. The terms of this issuance were identical to the Notes issued in June 2000. Because the debt is not convertible until June 1, 2001, the debt discount is amortized to interest expense from the date of issuance of the Note through June 1, 2001 using the interest method. As of September 30, 2000, three directors of Jackpot or entities controlled by such directors, the adult children of certain directors or entities controlled by such children, Meister Brothers Holdings, LLC, and one officer of the Company have invested $3 million, $4 million, $3 million, and $.5 million, respectively, in the Notes. In connection with the issuance of the Notes, the Company loaned $1 million and $250,000 to Meister Brothers Holdings, LLC and the officer, respectively. Interest on the loans accrues at 8% per annum. The principal amount and accrued interest is payable on June 30, 2002. Both obligations are secured by the right, title and interest in and to the Notes. For the three months ended September 30, 2000, interest expense related to the Notes was $1,244,000. Of such amount, approximately $928,000 was from the amortization of the debt discount and the remaining $316,000 represented interest payable to the Note holders at 8% on the principal amount. For further information concerning the Notes, see Note 2 of Notes to Consolidated Financial statements in the 2000 Form 10-K. Note 3 - Investments in Internet-Related Businesses: As of September 30, 2000, all of the Company's investments in Internet-Related Businesses were in non public companies. Such investments under the applicable accounting methods are summarized as follows (dollars in thousands): September 30, 2000 June 30, 2000 __________________ _____________ Consolidation $ 2,540 $ 2,540 Equity method 11,521 13,544 Cost method 18,219 8,052 _______ _______ Total $32,280 $24,136 ======= ======= During the three months ended September 30, 2000, the Company, on behalf of Venture I, acquired interests in Jasmine Networks, Inc., Estara, Inc. and Tellme Networks, Inc. for $5 million, $2.7 million and $2 million, respectively. Such companies are non public development stage companies. The Company accounts for these investments under the cost method. For the three months ended September 30, 2000, the Company's equity in losses of its investments in Internet-Related Businesses accounted for under the equity method aggregated $1,786,000. Such amount consisted of the Company's share of the operating loss incurred by Digital Boardwalk, LLC, Alistia, Inc. and TechTrader, Inc. of $626,000, $278,000, and $882,000, respectively. For additional information concerning the Company's investments in Internet-Related Businesses, see Note 3 of Notes to Consolidated Financial Statements in the 2000 Form 10-K. Note 4 - Earnings (loss) per share: Basic earnings (loss) per share from continuing operations for the three months ended September 30, 2000 and 1999 and diluted loss per share from continuing operations for the three months ended September 30, 2000 are computed by dividing net income (loss) from continuing operations by the weighted average number of common shares outstanding for the respective period. Diluted earnings per share from continuing operations for the three months ended September 30, 1999 is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Options and warrants to purchase common stock, whose exercise price was greater than the average market price for the three months ended September 30, 1999, have been excluded from the computation of diluted earnings per share from continuing operations. Such antidilutive options and warrants were 1,675,000. Because the three months ended September 30, 2000 had a loss from continuing operations, no potential common shares from the assumed exercise of stock options and the put option and the assumed conversion of the 8% convertible subordinated notes have been included in the diluted loss per share from continuing operations computation pursuant to accounting principles generally accepted in the United States of America. The following is the amount of income (loss) and the number of shares used in the basic and diluted earnings (loss) per share computations for continuing operations (dollars and shares in thousands, except per share data): Three months ended September 30, ___________________ 2000 1999 _______ ______ Basic earnings (loss) per share from continuing operations: Earnings (loss): Income (loss) available to common stockholders $(2,567) $7,437 ======= ====== Shares: Weighted average number of common shares outstanding 8,975 8,617 ======= ====== Basic earnings (loss) per share from continuing operations $ (.29) $ .86 ======= ====== Diluted earnings (loss) per share from continuing operations: Earnings (loss): Income (loss) available to common stockholders $(2,567) $ 7,437 Effect of dilutive securities - - _______ ______ Income (loss), as adjusted $(2,567) $7,437 ======= ====== Shares: Weighted average number of common shares outstanding 8,975 8,617 Common shares issuable upon assumed exercise of dilutive stock options - 23 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 - 23 Common shares issuable upon assumed conversion of the 8% convertible subordinated notes - - Common shares issuable upon assumed exercise of put option - - _______ ______ Weighted average number of common shares and common share equivalents outstanding 8,975 8,617 ======= ====== Diluted earnings (loss) per share from continuing operations $ (.29) $ .86 ======= ====== Note 5 - The 1992 Incentive and Non-qualified Stock Option Plan: On September 29, 2000, the exercise price of the June 30, 2000 grant of nonqualified stock options to purchase an aggregate of 110,000 shares of common stock (27,500 each to four directors) was vested at $9.50 per share, the fair market value of the stock on that date, pursuant to the terms of the 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan"). See Note 6 of Notes to Consolidated Financial Statements in the 2000 Form 10-K for further information regarding the 1992 Plan and option grants. Note 6 - Commitments and contingencies: Employment agreements: Jackpot entered into employment agreements with Mark W. Hobbs, President and Chief Operating Officer, and Steven L. Korby, Executive Vice President and Chief Financial Officer on October 1, 2000. Such agreements expire on June 21, 2003. Jackpot also has employment agreements with George Congdon, Senior Vice President - Operations and Bob Torkar, Senior Vice President - Finance, which expire on June 30, 2001. In the event of termination of employment, as defined in each employment agreement, such officers would receive severance payments. The aggregate contingent liability at September 30, 2000 under such agreements is $1,690,000. The aggregate commitment for future salaries at September 30, 2000, excluding bonuses, under the above four employment agreements is approximately $1.8 million. Note 7 - Discontinued operations: Definitive agreement: On July 8, 2000, the Company entered into a definitive agreement to sell its Route Operations for $45 million in cash. As a result of management's plan to dispose of the Route Operations and of the sale, which is subject to closing conditions and regulatory and other approvals, the financial position and the results of operations for the Route Operations have been reported as discontinued operations. In accordance with accounting principles applicable to discontinued operations, previously reported financial statements have been reclassified to reflect the Route Operations as discontinued. On October 30, 2000, the Company agreed to a conditional modification of the agreement due to issues relating to the purchaser's financing. The modification will reduce the net after-tax cash proceeds from the sale by approximately $4.5 million. The Company expects to complete the closing of the sale on these revised terms during the three months ending December 31, 2000. Settlement with Rite Aid Corporation: On March 27, 2000, Jackpot entered into amendments to its two license agreements with Rite Aid Corporation ("Rite Aid"). As a result of the subsequent receipt of certain administrative approvals from the Nevada State Gaming Control Board ("Nevada Board") for 31 Rite Aid locations, such amendments became effective October 9, 2000. Pursuant to the terms of the amendments, license fees payable to Rite Aid were reduced by approximately $2.5 million annually over the remaining term of the amended agreements. Such reductions were effective March 1, 2000. All disputes between the parties, including Jackpot's lawsuit against Rite Aid have been resolved or settled as a result of the filing by the parties of the Stipulation for Dismissal on October 16, 2000. For the fiscal year ended June 30, 2000, the Company incurred an operating loss of approximately $3.4 million at the Rite Aid locations. As a result of the reduction in license fees described above, the Company's operating loss at the Rite Aid locations for the three months ended September 30, 2000 was reduced substantially. However, even with the license fee reductions, management believes that the Company will continue to incur losses, and such losses may be significant, unless revenues increase significantly at these locations. The following are the summary operating results of the discontinued operations (dollars in thousands): Three Months Ended September 30, ____________________ 2000 1999 _______ _______ Revenues $19,232 $22,800 Costs and expenses 19,022 23,036 _______ _______ Operating income (loss) 210 (236) Other income 8 18 _______ _______ Income (loss) before provision (benefit) for income tax 218 (218) Provision (benefit) for income tax 86 (74) ________ ________ Income (loss) from discontinued operations, net of tax $ 132 $ (144) ======== ======== The following are the net assets of the discontinued operations (dollars in thousands): September 30, 2000 June 30, 2000 ___________________ ______________ Assets: Cash $ 3,500 $ 3,500 Prepaid expenses 1,151 1,209 Other current assets 1,062 1,020 Deferred income tax 541 384 Property and equipment at cost, net 10,965 11,907 Lease acquisition costs and other intangible assets, net 5,371 5,190 _______ _______ Total assets $22,590 $23,210 ======= ======= Liabilities: Accounts payable and other current liabilities $ 2,580 $ 2,516 Deferred rent 4,122 4,049 _______ _______ Total liabilities 6,702 6,565 _______ _______ Net assets of discontinued operations $15,888 $16,645 ======= ======= Note 8 - Subsequent events: Acquisition of InterWorld Corporation: On October 12, 2000, Jackpot and InterWorld Corporation ("InterWorld") entered into a definitive Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the terms of the Purchase Agreement, Jackpot purchased $20 million in aggregate principal amount of Series A Preferred Stock of InterWorld (the "Series A Preferred Stock") on November 10, 2000. Each share of Series A Preferred Stock is initially convertible into shares of Common Stock of InterWorld (the "Common Stock") at a conversion price of $6.25 per share (the "Conversion Price"), subject to adjustment on the six month anniversary of the date of issue, to 90% of the average daily closing price of Common Stock for such six-month period, but in no event less than $2.00 per share. Furthermore, on April 12, 2001, Jackpot, at its sole discretion, shall have the option to require InterWorld to redeem the Series A Preferred Stock for cash at 150% of the purchase price; provided that such right will expire if InterWorld consummates a change of control transaction with Jackpot on or prior to such date. In connection with the issuance of the Series A Preferred Stock, InterWorld shall issue to Jackpot warrants to purchase shares of Common Stock at an exercise price of $7.25 per share, subject to adjustment, exercisable at any time until October 12, 2005, equal to 19.999% of the current outstanding shares of Common Stock less the amount of shares issuable upon the conversion of the Series A Preferred Stock. In addition, on October 12, 2000 Jackpot, on behalf of Venture I, entered into a Loan and Forbearance Agreement with Michael Donahue, Chairman of InterWorld, pursuant to which Jackpot purchased from Salomon Smith Barney ("SSB") a loan from SSB to Mr. Donahue in the amount of approximately $12,445,500. The loan is secured by 4,270,406 shares of Common Stock. In connection therewith Jackpot entered into a Call/Participation Agreement with Mr. Donahue whereby he agreed that Jackpot would share in the profit on a portion of the stock securing the loan once certain conditions, including the repayment of the loan, were met. Mr. Donahue has sole power to vote and dispose of such shares. Investment in Mariner Partners, L.P.: In October and November 2000, the Company invested $15 million in Mariner Partners, L.P. (the "Partnership"), a private investment fund which primarily trades in a variety of hedged investment strategies. Mariner GP, L.P., a Delaware limited partnership, is the general partner of the Partnership. According to the Partnership, its primary focus is on hedged arbitrage trading utilizing a variety of trading strategies. The strategies include arbitrage trading in the following instruments: U.S. Treasury securities and related futures, U.S. and foreign convertible bonds and preferred stock and their related common stocks, European government securities and related futures contracts, mortgage-backed securities, corporate bonds, bank debt and common stocks in global equity markets. However, the General Partner has the discretion to cause the Partnership to invest in all forms of securities, swaps, commodity futures products and related derivative instruments, including equities, equity related securities, bonds and other fixed income securities, options, repurchase agreements, futures and forward contracts and currencies, in both domestic and foreign markets and in any instrument or product commodity traded as a medium of investment. The Partnership is permitted to engage in a highly diverse range of investment and trading strategies, including those involving derivative and hybrid instruments. Generally, at the end of each fiscal quarter of the Partnership and upon 45 days' prior written notice, Jackpot has the right to withdraw any portion of its capital account (but at least $100,000) or to withdraw from the Partnership. Item 2. Management's Discussion and Analysis of Financial Condition and _______________________________________________________________ Results of Operations _____________________ Forward-Looking Statements; Risks and Uncertainties ___________________________________________________ Certain information included in this Form 10-Q 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. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "should" and similar expressions are intended to identify forward-looking statements. 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 Internet-Related Businesses include, but are not limited to, the ability of the Company to identify and negotiate on terms acceptable to the Company an acquisition of a systems development or other internet infrastructure company and the ability to successfully integrate and grow such business if acquired, the success of those entities in which the Company has invested, the ability of those entities, in which the Company has existing minority investments, to raise additional capital on terms that such entities find attractive to themselves and to the Company or to otherwise monetize their securities, and the ability of the Company to raise additional outside capital for J Net Ventures I, LLC or for any future funds to be established. The risks and uncertainties that may affect the operations, performance, development and results of the Company's discontinued Route Operations 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, possible future financial difficulties of any 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. Overview ________ On March 8, 2000, Jackpot Enterprises, Inc. ("Jackpot" or the "Company"), which has operated as one business segment since it was organized in 1980, announced a series of actions designed to transform the Company from a gaming entity into a high growth, technology, Internet infrastructure provider and fund manager ("Internet-Related Businesses"). On March 10, 2000, the Company formed J Net Ventures I, LLC ("Venture I"), an entity that will invest primarily in Internet- Related Businesses. As of September 30, 2000, the Company owned 100% of Venture I. Venture I is managed by J Net Venture Partners, LLC (the "Manager"). Allan R. Tessler, the Company's Chief Executive Officer is the Chairman of the Manager and Keith Meister and Todd Meister are Co- Presidents of the Manager. The Company will at all times own at least 51% of the Manager. In addition, the Board of Directors has unanimously adopted a resolution to change the name of the Company to J Net Enterprises, Inc. Such change is subject to the approval of the Company's stockholders at the Company's Annual Meeting on December 6, 2000. Venture I will be a $75 million fund. Of the $75 million, the Company has committed $55 million and entities associated with Gilbert Global Equity, a private equity partnership, have committed $15 million. The remaining $5 million will be funded by certain other investors, subject to the completion of the agreement between such investors and Venture I. A portion of the $55 million was derived from the sale of 8% convertible subordinated notes (the "Notes"). The investors in such Notes include officers and directors of the Company or entities controlled by such directors and the Co-Presidents of the Manager. As of October 2, 2000, the Company has raised approximately $28 million through the issuance of the Notes. For financial statement purposes, certain of the Notes were deemed to have been beneficially converted as the conversion feature was in-the- money at the commitment date. Approximately $3.9 million of the proceeds from the issuance of the Notes, equal to the intrinsic value, has been recorded as debt discount and allocated to additional paid-in capital. Of the $3.9 million, $2.5 million was recorded on June 28, 2000, and the remaining $1.4 million was recorded in the three months ended September 30, 2000. Because the debt is not convertible until June 1, 2001, the debt discount is amortized to interest expense from the date of issuance of the Notes through June 1, 2001 using the interest method. As a result of the issuance of the Notes, interest expense for the year ending June 30, 2001 will increase substantially. For further information concerning the Notes, see Note 2 of Notes to Condensed Consolidated Financial Statements. Venture I will make investments primarily in early stage ventures (first and second round financing) exhibiting reasonable risk adjusted valuations. Additionally, Venture I may invest in public companies when an opportunity exists for value creation. It is anticipated that individual investments will range from $1 million to $10 million and will consist of the following: (1) New companies primarily in the business-to-business segment; (2) Established "brick and mortar" companies who have established brand identities but have not yet developed, deployed or migrated their businesses to the Internet; (3) Technology and infrastructure opportunities which capitalize on the growth of Internet traffic and the proliferation of Internet ready devices; (4) Broadband technologies and related content driven opportunities; and (5) Opportunistic turn-around situations. As of September 30, 2000, the Company had invested approximately $34 million in Internet-Related Businesses. Of the $34 million, the Company invested approximately $20 million on behalf of Venture I. Prior to the Company's change in business strategy, the Company had 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 ("Route Operations"). In connection with its change in business strategy, the Company has retained the investment banking firm of Koffler & Company to advise the Company on the disposition of its gaming business segment. During the three months ended June 30, 2000, management formalized its plan to sell the Route Operations and commenced activities to dispose of such operations. On July 8, 2000, the Company entered into a definitive agreement to sell its Route Operations for $45 million in cash. As a result of management's plan to dispose of the Route Operations and of the sale, which is subject to closing conditions and regulatory and other approvals, the financial position and results of operations of the Route Operations have been reported as discontinued operations. In accordance with accounting principles generally accepted in the United States of America applicable to discontinued operations, previously reported financial statements have been reclassified to reflect the Route Operations as discontinued. On October 30, 2000, the Company agreed to a conditional modification of the agreement due to issues relating to the purchaser's financing. The modification will reduce the net after-tax cash proceeds from the sale by approximately $4.5 million. The Company expects to complete the closing of the sale on these revised terms during the three months ending December 31, 2000. At various times during the past several years, the Company 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. The Company devoted significant management and other resources to these efforts and incurred substantial expenses in connection with such activities. The discussion that follows is based on giving retroactive effect to the discontinued operations. Since the Route Operations was the Company's only business segment from its inception through February 2000, the following discussion focuses primarily on Jackpot's continuing operations, which consisted primarily of general and administrative activities of the parent company and since March 2000, Jackpot's Internet-Related Businesses segment. Results of Operations _____________________ Revenues: The Company had no revenues from continuing operations for the three months ended September 30, 2000 and 1999 (referred to herein as the "2000 three months" and the "1999 three months", respectively). Costs and expenses: Costs and expenses of Jackpot's continuing operations, consisted principally of general and administrative activities of the parent company and since March 2000, Jackpot's Internet-Related Businesses segment, increased $.6 million, from $.7 million for the 1999 three months to $1.3 million for the 2000 three months. The increase was due primarily to payroll costs incurred for additional personnel in connection with the Internet-Related Businesses segment. Other income (expense): Other income (expense) decreased $13.6 million, from $11.5 million of other income, net to $2.1 million of other expense, net. Other income, net for the 1999 three months consisted principally of the net fee of $11.0 million from the terminated merger with Players, while other expense, net for the 2000 three months consisted primarily of the Company's equity in losses of its investments in Internet-Related Businesses of $1.8 million and interest expense related to the Notes of $1.2 million, net of interest income of $.9 million. Income (loss) from continuing operations before provision (benefit) for income tax: Income (loss) from continuing operations before provision (benefit) for income tax increased $14.2 million, from income before income tax of $10.8 million for the 1999 three months to a loss before income tax of $3.4 million for the 2000 three months. Excluding the net fee from the terminated merger of $11.0 million described above, such loss increased $3.2 million. The $3.2 million consisted principally of the Company's equity in losses of its investments in Internet-Related Businesses accounted for under the equity method of $1.8 million and interest expense related to the Notes of $1.2 million. The equity loss of $1.8 million consisted of the Company's share of the operating loss incurred by Digital Boardwalk, LLC, Alistia, Inc. and TechTrader, Inc. of $.6 million, $.3 million, and $.9 million, respectively. Net income (loss): Net loss increased $9.7 million, from net income of $7.3 million for the 1999 three months to a net loss of $2.4 million for the 2000 three months. Diluted earnings (loss) per share for the 2000 three months was $(.27) versus $.85 for the 1999 three months. Such decreases were due primarily to the combination of significant items described above. Capital Resources and Liquidity _______________________________ 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 September 30, 2000, Jackpot repurchased 800,437 shares at an aggregate cost of approximately $8.5 million. On October 12, 2000, Jackpot and InterWorld Corporation ("InterWorld") entered into a definitive Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the terms of the Purchase Agreement, Jackpot purchased $20 million in aggregate principal amount of Series A Preferred Stock of InterWorld (the "Series A Preferred Stock") on November 10, 2000. In addition, on October 12, 2000, Jackpot, on behalf of Venture I, entered into a Loan and Forbearance Agreement with Michael Donahue, Chairman of InterWorld, pursuant to which Jackpot purchased from Salomon Smith Barney ("SSB") a loan from SSB to Mr. Donahue in the amount of approximately $12,445,500. The loan is secured by 4,270,406 shares of InterWorld common stock. As described previously, the Company has recently raised approximately $28 million through the issuance of the Notes. As a result of the successful completion of such financing, management believes the Company's working capital will be sufficient to enable Jackpot to fund its $55 million commitment to Venture I, and to meet its operating and other cash requirements for the year ending June 30, 2001. With respect to the Company's $55 million commitment to Venture I, the Company has invested $32 million on behalf of Venture I as of October 12, 2000. Cash Flows: Jackpot's principle sources of cash for the 2000 three months consisted of the proceeds of $8.2 million received from the issuance of the Notes and its available cash and cash equivalents which, at June 30, 2000, was $60.1 million and at September 30, 2000 was $58.7 million. Net cash used in investing activities was $11.0 million for the 2000 three months, and consisted primarily of cash used of $10.4 million for investments in Internet-Related Businesses. As a result of the combination of net cash provided by operating and financing activities of $1.4 million and $8.2 million, respectively, less cash used in investing activities of $11.0 million, cash and cash equivalents decreased $1.4 million in the 2000 three months. Recently Issued Accounting Standards: In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 clarifies existing accounting principles related to revenue recognition in financial statements. The Company is required to comply with the provisions of SAB 101 in its three months ending June 30, 2001. Based upon the current nature of the Company's continuing operations, management does not believe that SAB 101 will have a significant impact on the Company's results of operations. Factors Which May Affect Future Results _______________________________________ With its change in business strategy, the Company will be operating in a significantly different environment that involves a number of risks and uncertainties. Some factors including, but not limited to the following, may affect the Company's future results of operations: (1) the Company's ability to successfully execute its new business model; (2) the development of the Internet and the infrastructure that supports it; (3) the Company's success may depend greatly on increased use of the Internet by businesses and individuals; (4) the ability of the Company's investees to compete against direct and indirect competitors; (5) the Company's ability to acquire interests in additional Internet-Related Businesses, (6) the ability of the Company's investees to raise additional capital, and (7) changes in the market for securities of Internet-Related Businesses in general and for initial public offerings of Internet companies in particular. By their very nature, the entities in which the Company has and will be investing capital will be in an earlier stage of development and maturity, and therefore a different level of risk and reward. Except for the acquisition of InterWorld Corporation (See Note 8 of Notes to Condensed Consolidated Financial Statements), all of the Company's investments in Internet-Related Businesses are in non public companies. Substantially all such companies are development stage companies and are presently incurring operating losses. There can be no assurance that such companies will generate operating income in the future. Item 3. Quantitative and Qualitative Disclosure About Market Risk _________________________________________________________ The Company is generally exposed to market risk from adverse changes in interest rates. The Company's interest income is affected by changes in the general level of U.S. interest rates. Changes in U.S. interest rates could affect interest earned on the Company's cash equivalents, debt instruments and money market funds. A majority of the interest earning instruments earn a fixed rate of interest over short periods (7-35 days). Based upon the invested balances at September 30, 2000, a 10% drop in interest rates would reduce pretax interest income by approximately $300,000 per year. Therefore, the Company does not anticipate that exposure to interest rate market risk will have a material impact on the Company due to the nature of the Company's investments. From June 2000 through October 2, 2000, the Company raised approximately $28 million from the issuance of unregistered 8% convertible subordinated notes ("the Notes"). The principal amount of the Notes is payable on March 31, 2007 and bears interest at 8% per annum, payable on a quarterly basis. For financial statement purposes, certain of the Notes were deemed to have been beneficially converted as the conversion feature was in-the-money at the commitment date. The Company has calculated the beneficial conversion feature as the difference between the fair value of the common stock at the commitment date and the initial conversion price, multiplied by the number of shares into which the debt is convertible. Approximately $3.9 million of the proceeds from issuance of the Notes, equal to the intrinsic value, has been recorded as debt discount and allocated to additional paid-in capital. Management believes that the carrying value of the Notes approximates fair value as of September 30, 2000. On July 1, 2000, the Company adopted SFAS 133. As of September 30, 2000, the Company has one derivative instrument in the form of a warrant to purchase common stock in a non public company. There is currently no public market for this warrant. However, a 10% change in the value of the warrant based upon the Company's valuation of the warrant using Black Scholes valuation techniques would affect earnings by $160,000. PART II. OTHER INFORMATION _________________ Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.25 - Employment Agreement between the Registrant and Mark W. Hobbs. 10.26 - Employment Agreement between the Registrant and Steven L. Korby. 10.27 - Securities Purchase Agreement dated October 12, 2000 by and among Jackpot Enterprises, Inc. and InterWorld Corporation. (A) 10.28 - Loan Assumption and Forbearance Agreement dated October 12, 2000 by and between Michael Donahue and Jackpot Enterprises, Inc. (A) 10.29 - Call/Profit Participation Agreement dated October 12, 2000 by and between Michael Donahue and Jackpot Enterprises, Inc. (A) 10.30 - Modification letter dated October 30, 2000 to Stock Purchase Agreement between E-T-T, Inc. and the Registrant. 27.1 - Financial Data Schedule. (A) Incorporated by reference to Registrant's Form 8-K dated October 25, 2000. (b) Reports on Form 8-K: During the three months ended September 30, 2000, Jackpot filed one report on Form 8-K, dated October 25, 2000. The Form reported on "Item 5 - Other Events," the proposed acquisition of InterWorld Corporation. Signature _________ Pursuant to the requirements 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. JACKPOT ENTERPRISES, INC. _________________________ (Registrant) By: /s/ Bob Torkar _________________________ BOB TORKAR Senior Vice President - Finance, Treasurer and Chief Accounting Officer Date: November 14, 2000
EX-10 2 0002.txt EXHIBIT 10.25 EMPLOYMENT AGREEMENT MARK W. HOBBS THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is made as of October 1, 2000, by and between, JACKPOT ENTERPRISES, INC., a Nevada corporation, with its principal office at 1110 Palms Airport Drive, Las Vegas, Nevada 89119 (the "COMPANY"), and MARK W. HOBBS residing at 5124 N. Meadow Ridge Circle, McKinney, Texas 75070 ("EXECUTIVE"). WITNESSETH: WHEREAS, effective June 21, 2000 (the "COMMENCEMENT DATE"), the Company employed Executive as its President and Chief Operating Officer, and Executive accepted such employment; and WHEREAS, the Company and Executive desire to enter into this Agreement as to the terms of his employment by the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a three (3) year term (the "EMPLOYMENT TERM") commencing on the Commencement Date and ending on June 21, 2003 (the "EXPIRATION DATE"). 2. Position. (a) Executive shall serve as the President and Chief Operating Officer of the Company (the "PRESIDENT"), reporting directly to the Chief Executive Officer of the Company (the "CHIEF EXECUTIVE OFFICER"). If requested by the Board of Directors of the Company (the "BOARD") or the Chief Executive Officer, Executive shall also serve on the Board and committees thereof, as an executive, officer and director of subsidiaries of the Company and/or as a director of associated companies of the Company without additional compensation and subject to any policy of the Compensation Committee of the Company's Board (the "COMPENSATION COMMITTEE") with regard to retention or turnover of the director's fees. (b) Executive shall have such duties and authority, consistent with his position, as shall be assigned to him from time to time by the Chief Executive Officer. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder. Nothing contained herein shall be construed to prohibit Executive from (i) owning less than ten percent (10%) of the outstanding securities of any publicly traded entity, (ii) pursuing any business opportunity that is not in Competition, as such term is defined in Section 10(b) below, with the Company or its subsidiaries or any portfolio company in which the Company or its subsidiaries hold securities (other than entities in which the Company or its subsidiaries make a nominal investment) (provided the time devoted by Executive to such personal investment does not materially interfere with Executive's duties hereunder), (iii) continuing service as a managing director, manager, partner, or member, directly or indirectly, of any investment management business in which Executive serves in such capacity on the Commencement Date, (iv) continuing service on any board of directors on which Executive serves as of the Commencement Date or service as a director of a company that is not in Competition with the Company or its subsidiaries or any portfolio company in which the Company or its subsidiaries hold securities (other than entities in which the Company or its subsidiaries make a nominal investment), provided, however, that Executive shall not hold more than three (3) board seats at any time exclusive of his membership (if any) on the Board or the board of directors of any subsidiary or affiliate of the Company, or (v) service on the boards of directors of a reasonable number of charitable organizations so long as such service is not inconsistent with his position and duties hereunder (such activities described in clause (i), (ii), (iii), (iv) or (v) immediately preceding being herein referred to as the "ALLOWED ACTIVITIES"). Executive shall be entitled to retain any consideration that he receives from service permitted by clauses (iii) and (iv) of the immediately preceding sentence on any board of directors of a corporation unrelated to the Company. For purposes hereof, a "nominal investment" of the Company or its subsidiaries will be determined in relation to the size of investments made from time to time by the Company or its subsidiaries in its portfolio companies (including, without limitation, investments made in exchange for cash, securities or services rendered). 3. Base Salary. During the Employment Term, the Company shall pay Executive a Base Salary at the annual rate of Three Hundred Thousand Dollars ($300,000). Base Salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary may be reviewed annually by the Board or the Compensation Committee and may be increased, but not decreased, from time to time by the Board or the Compensation Committee. The Base Salary as determined as aforesaid, from time to time for the applicable fiscal year shall constitute "BASE SALARY" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, Executive shall be entitled to participate in an incentive bonus plan established by the Company on such terms and conditions, and subject to such standards, as shall be determined from time to time in the sole discretion of the Board or the Compensation Committee. Such incentive bonus for any such fiscal year shall be payable in cash and shall not be greater than fifty percent (50%) of Executive's rate of Base Salary in effect for the fiscal year to which such incentive bonus relates. During the Employment Term, the Company shall maintain an incentive bonus plan providing a target bonus equal to not less than fifty percent (50%) of Executive's rate of Base Salary in effect for the fiscal year to which the bonus relates. (b) Stock Options. Executive acknowledges that as of the Commencement Date the Stock Option Committee of the Board authorized the issuance to Executive stock options (the "STOCK OPTIONS") to purchase 300,000 shares of Common Stock of the Company. The Stock Options were granted pursuant to a stock option award agreement or agreements between Executive and the Company. The exercise price for such Stock Options was $13.125 per share of Common Stock. Subject to the terms and provisions of the Stock Option Grants, the Stock Options shall become exercisable on the dates indicated below as to that number of shares of Common Stock of the Company as set forth below opposite each such date. June 21, 2001 100,000 shares June 21, 2002 100,000 shares June 21, 2003 100,000 shares The foregoing schedule to the contrary notwithstanding, the Stock Options shall become fully and immediately exercisable in the event the Employment Term terminates prior to the Expiration Date by reason of termination of the Executive's employment hereunder by Executive for Good Reason or by the Company without Cause (as such terms are hereinafter defined). The Stock Options shall in all events expire on the date ten years after the Commencement Date, if not terminated or canceled earlier. The Executive shall be permitted to transfer the Stock Options to the Executive's immediate family members and/or lineal descendents (or a trust or family limited partnership established solely for the benefit of any such immediate family member and/or lineal descendent). Notwithstanding anything in the Stock Option Grants to the contrary, to the extent any provisions contained therein are inconsistent with or differ from the explicit terms and conditions of this Agreement, the terms and conditions of this Agreement shall control. To the extent this Agreement does not specifically address an issue or term set forth in the Stock Option Grants, then the provisions and terms of the Stock Option Grants shall apply. (c) Adjustments. As more fully specified in the Stock Option Grants, the number of shares covered by, and the option price per share of, the Stock Options will be subject to adjustment by the Company for any stock split, reclassification, combination or similar change in the Company's capital stock. (d) In addition the Company will loan the Executive up to $1,000,000 in connection with his purchase of the Company's convertible notes. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, profit sharing, long-term incentive compensation, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites generally maintained by the Company from time to time for the benefit of senior executive officers of the Company of a comparable level, in each case in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive or that applies on a grandfathered basis). Without limiting the foregoing, the Company shall pay all premiums for Executive and his dependent family members under health, hospitalization, disability, dental, life and other employee benefit plans that the Company may have in effect from time to time. Executive acknowledges that the Company does not currently provide a profit sharing plan, and has no current intention of providing profit sharing benefits to its employees. (b) During the Employment Term, Executive shall be entitled to at least three (3) weeks paid vacation each year in accordance with the Company's policies in effect from time to time. Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company to its senior executive employees. 6. Business Expenses. The Company shall reimburse Executive for the reasonable travel, entertainment and other business expenses incurred by Executive, subject to such pre-approval procedures as may be established from time to time by the Board, in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive and the Employment Term shall terminate as provided in Section 1 hereof or, if earlier, upon the earliest to occur of any of the following events: (i) the death of Executive; (ii) the termination of Executive's employment by the due to Executive's Disability (as defined "Exhibit A") pursuant to Section 7(b) hereof; (iii) the termination of Executive's employment by for Good Reason (as defined in "Exhibit A") pursuant to Section 7(c) hereof, (iv) termination of Executive's employment by the Company without Cause (as defined in "Exhibit A") to Section 7(e) hereof; (v) termination of employment by Executive without Good Reason upon thirty (30) days prior written pursuant to Section 7(f) hereof; or (vi) termination of Executive's employment by the Company for Cause pursuant to Section 7(d) hereof. (b) Disability. If Executive is unable to perform his material duties hereunder due to a physical or mental condition and the Company desires to terminate Executive's employment for Disability (as defined in "Exhibit A"), the Company shall deliver to Executive a written Notice of Disability Termination (herein so called), effective upon the date (the "DISABILITY TERMINATION DATE") which is the later of (i) the date such condition becomes a Disability or (ii) thirty (30) days following the delivery of the Notice of Disability Termination; provided that the Disability Termination Date shall be suspended, and the Employment Term shall not terminate, so long as Executive returns to the full performance of his duties by and following such date. (c) Termination for Good Reason. A Termination for Good Reason (herein so called) means a termination by Executive by written notice given within thirty (30) days after Executive knows of the occurrence of the Good Reason event, unless such circumstances are corrected prior to the date of termination specified in the Notice of Termination for Good Reason and the Company informs Executive of such correction prior to such date. In such event, the Employment Term shall not terminate. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific Good Reason event in Section (d) of "Exhibit A" relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than thirty (30) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given. (d) Cause. Subject to the notification provisions of this Section 7(d), Executive's employment hereunder may be terminated by the Company for Cause. A Notice of Termination for Cause (herein so called) shall mean a notice that shall indicate the specific termination provision in Section (a) of "Exhibit A" relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. The effective date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court by a non-appealable final judgment not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a termination by the Company without Cause. (e) Termination without Cause. The Company may terminate its employment of Executive for reasons other than Cause at any time upon thirty (30) days prior written notice. (f) Voluntary Resignation. Executive may terminate his employment with the Company at any time upon thirty (30) days prior written notice. 8. Consequences of Termination of Employment. Executive shall be entitled to the following compensation from the Company (in lieu of all other sums owed or payable to Executive) upon the termination of employment as described below: (a) Death, Disability, Voluntary Resignation without Good Reason or by the Company with Cause. If Executive's employment and the Employment Term are terminated (1) by reason of Executive's death or Disability, (2) by Executive without Good Reason or (3) by the Company for Cause, the employment period under this Agreement shall terminate without further obligations to Executive or Executive's legal representatives under this Agreement except for: (i) any Base Salary earned but unpaid, any accrued but unused vacation pay payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 (which amounts, in the case of the death of Executive, shall be promptly paid in a lump sum to Executive's estate), (ii) any other amounts or benefits earned, accrued and owing to Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company, including, without limitation, any earned but unpaid incentive bonus for any prior completed fiscal year, and (iii) except in the case of a termination by the Company for Cause or by Executive without Good Reason, a pro-rata portion (based on the number of days Executive is employed by the Company during the fiscal year of such termination) of Executive's incentive bonus earned for the fiscal year in which termination occurs, which, in any case, shall be paid in accordance with the applicable plans, programs and agreements, and any unpaid reimbursable business expenses (such amounts referred to in clauses (i) and (ii), collectively, the "ACCRUED AMOUNTS"). (b) Termination by Executive for Good Reason or Termination by Company without Cause. If Executive's employment and the Employment Term are terminated (i) by Executive for Good Reason, or (ii) by the Company without Cause (and other than for Disability or as a result of expiration of the Employment Term), Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b), 9(c) and 10 hereof, be entitled to receive equal monthly payments of an amount equal to his monthly rate of Base Salary in effect at the time of such termination plus his incentive bonus paid for the most recently ended fiscal year (provided, however, if Executive was employed hereunder for only a portion of such prior fiscal year, such bonus shall be annualized for purposes of this calculation, and, if no bonus was paid for such prior fiscal year, the current fiscal year's bonus, at 100 percent of target, shall be deemed to be the incentive bonus paid for the most recently ended fiscal year for purposes of this calculation) divided by twelve (12) for a period equal to the greater of (x) twelve (12) months or (y) the remaining period of time from the date of such termination through the Expiration Date. Notwithstanding the immediately preceding sentence to the contrary, (1) if Executive's employment is terminated by the Company without Cause (and other than for Disability or as a result of expiration of the Employment Term), or if Executive terminates his employment for Good Reason, other than Good Reason as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A", the Severance Payments shall be paid to Executive in a lump-sum following such termination, and (2) if Executive terminates his employment for Good Reason as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A", he shall, following the date which is six (6) months following the date of such termination, upon his request, receive payment in a lump-sum of the Severance Payments remaining unpaid on such date. (c) Termination Upon Expiration of Employment Term. If Executive's employment with the Company terminates on the Expiration Date by reason of expiration of the Employment Term, Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b), 9(c) and 10 hereof, be entitled to receive equal monthly payments of an amount equal to his monthly rate of Base Salary in effect immediately prior to the Expiration Date plus his incentive bonus paid for the most recently ended fiscal year divided by twelve (12) for a period of twelve (12) months. 9. No Mitigation; No Set-Off. (a) In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) (i) Executive agrees that, as a condition to receiving the payments and benefits provided under Section 8(b) or (c) hereunder he will execute, deliver and not revoke (within the time period permitted by applicable law) a release of all claims of any kind whatsoever against the Company, its affiliates, officers, directors, employees, agents and shareholders in the then standard form being used by the Company for senior executives (but without release of the right of indemnification hereunder or under the Company's By-laws or rights under benefit or equity plans that by their terms are intended to survive termination of his employment or claims that the Company fulfill its obligations under this Agreement). (ii) The Company agrees that, as a condition to Executive's agreements under Section 10 hereof, the Company will execute and deliver a release of all claims of any kind whatsoever against Executive (but without release of claims that Executive fulfill his obligations under this Agreement). The Company's release under this paragraph (b)(ii) of this Section 9 shall be executed and delivered simultaneously with the execution and delivery of Executive's release under paragraph (b)(i) of this Section 9. The releases referred to in this paragraph (b) of this Section 9 shall apply to all claims described in this paragraph existing from the beginning of time through the date of each party's execution of his or its release. (c) Upon any termination of employment, Executive hereby resigns as an officer and director of the Company, any subsidiary and any affiliate and as a fiduciary of any benefit plan of any of the foregoing. Executive shall promptly execute any further documentation thereof as requested by the Company and, if Executive is to receive any payments from the Company, execution of such further documentation shall be a condition thereof. 10. Confidential Information, Non-Competition and Non-Solicitation of the Company. (a) (i) Executive acknowledges that as a result of his employment by the Company, Executive will obtain secret and confidential information as to the Company and its affiliates and create relationships with customers, suppliers and other persons dealing with the Company and its affiliates and the Company and its affiliates will suffer irreparable damage, which would be difficult to ascertain, if Executive should use such confidential information or take advantage of such relationships and that because of the nature of the information that will be known to or obtained by Executive and the relationships created it is necessary for the Company and its affiliates to be protected by the prohibition against Competition as set forth herein, as well as the confidentiality restrictions set forth herein. (ii) Executive acknowledges (A) that the retention of non clerical employees, employed by the Company and its affiliates in which the Company and its affiliates have invested training and depends on for the operation of their businesses, is important to the businesses of the Company and its affiliates, and (B) that Executive will obtain unique information as to such employees as an executive of the Company and will develop a unique relationship with such persons as a result of being an executive of the Company. Therefore, it is necessary for the Company and its affiliates to be protected from Executive's Solicitation (defined below) of such employees as set forth below. (iii) Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and its affiliates and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 10. (b) COMPETITION shall mean: participating, directly or indirectly, as an individual proprietor, partner, stockholder, officer, employee, director, joint venturer, investor, lender with equity participation, consultant or in any capacity whatsoever (within the United States of America, or in any country where the Company or its affiliates do business) in a Competing Business; provided, however, that such participation shall not include (i) the ownership of not more than ten percent (10%) of the total outstanding stock of a publicly held company; (ii) following a termination of Executive's employment thereunder, the ownership of not more than five percent (5%) of the total outstanding stock of a private company if Executive is neither a member of, or represented on, the board of directors of such private company and does not have an executive officer role in such private company; (iii) the Allowed Activities; or (iv) any activity engaged in with the prior written approval of the Board. As used herein, "Competing Business" means any business that the Company and/or its subsidiaries and/or any entity in which the Company and/or its subsidiaries holds securities (other than entities in which the Company or its subsidiaries make a "nominal investment" (determined as described in Section 2(c) hereof)) are engaged in (I) from time to time(while Executive is employed by the Company) or (II) at the time of termination (upon termination of Executive's employment) (consisting principally of the services described in the Company's Registration Statement on Form 10 under the Securities Exchange Act of 1934, as amended, and any amendments thereof). For purposes of the immediately preceding sentence, but solely following a termination of Executive's employment hereunder, the Company and its subsidiaries shall be deemed to have made a "nominal investment" in an entity if, at the time of such termination of employment, the Company and its subsidiaries own or control less than ten percent (10%) of the outstanding equity interests, on a fully diluted basis, of such entity and are not represented on the board of directors of such entity. The Company shall furnish Executive with a list of all Competing Businesses on or promptly following termination of his employment hereunder. (c) SOLICITATION shall mean: recruiting, soliciting or inducing, of any non clerical employee or employees of the Company or its affiliates to terminate their employment with the Company or its affiliates or hiring or assisting another person or entity to hire any nonclerical employee of the Company or its affiliates or any person who within twelve (12) months before had been a nonclerical employee of the Company or its affiliates and were recruited or solicited for such employment or other retention while an employee of the Company, provided, however, that solicitation shall not include any of the foregoing activities engaged in with the prior written approval of the Board. (d) If any restriction set forth with regard to Competition or Solicitation is found by any court of competent jurisdiction, or in arbitration, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. In the event that the agreements in this Section 10shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, they shall be interpreted to extend only over the maximum period of time for which they may be enforceable and/or over the maximum geographical area as to which they may be enforceable and/or to the maximum extent in all other respects as to which they may be enforceable, all as determined by such court in such action. (e) During the Employment Term and for two (2) years following a termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non- extension of the Employment Term, Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates all secret or confidential information, knowledge or data relating to the Company and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates, (i) obtained by Executive during his employment by the Company and its affiliates and (ii) not otherwise public knowledge or known within the applicable industry. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order and he shall cooperate fully with the Company in protecting such information (at the Company's expense) to the extent possible under applicable law. (f) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents(whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (g) During the Employment Term and for two (2) years following a termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non- extension of the Employment Term, Executive will not engage in Solicitation. (h) During the Employment Term and for the Restricted Period (as hereinafter defined) following a termination of Executive's employment, Executive will not enter into Competition with the Company. The Restricted Period shall be (i) for a termination for Cause, twelve(12) months following the date of termination, (ii) for termination without Cause by the Company, or by Executive for Good Reason, as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A", the period in which the Company is making payments to Executive as specified in Section 8(b) above, (iii) for a termination as a result of the voluntary resignation of Executive without Good Reason, twelve (12)months from the date of termination; and (iv) termination as a result of expiration or non-renewal of this Agreement, after the Company has made a good faith offer for continued employment, nine (9) months following the date of termination. For avoidance of doubt, there shall be no Restricted Period following termination of Executive's employment without Cause by the Company (and other than for Disability or as a result of expiration of the Employment Term) or for Good Reason by Executive (other than as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A"), or if the Employment Term expires and the Company fails to make a good faith offer for continued employment. (i) In the event of a breach or potential breach of this Section 10, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 10 enforced. It is hereby acknowledged that the provisions of this Section 10 are for the benefit of the Company and all of the affiliates of the Company and each such entity may enforce the provisions of this Section 10 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. (j) Furthermore, in addition to and not in limitation of another remedies provided herein or at law or in equity, in the event of breach of this Section 10 by Executive, while he is receiving amounts under Section 8(b) or (c) hereof, Executive shall not be entitled to receive any future amounts pursuant to Section 8(b) or (c) hereof after the earlier to occur of (i) ninety (90) days following the Company's notification of Executive of its good faith determination of such breach, specifying in reasonable detail the grounds for such determination, and (ii) a final determination by an arbitrator or court of competent jurisdiction of such breach, and, upon such final determination, which is not appealable, he shall reimburse the Company for any amounts previously paid to Executive pursuant to Section 8(b) or (c) hereof. 11. Indemnification. The Company shall indemnify and hold harmless Executive to the extent provided in the Certificate of Incorporation, the By-Laws of the Company and the Delaware General Corporation Law as amended and as applicable, for any action or inaction of Executive while serving as an officer and director of the Company or, at the Company's request, as an officer or director of any subsidiary or affiliate of the Company, as a fiduciary of any benefit plan or as a director of any entity in which the Company or any of its affiliates has made an investment . The Company shall cover Executive under directors and officers liability insurance both during and, while potential liability exists, after the Employment Term in the same amount and to the same extent as the Company covers its other officers and directors. 12. Intellectual Property. (a) Executive shall disclose promptly to the Company copyrights, trade secrets, proprietary information, patents, unpatented inventions, trademarks, service marks, processes, techniques, methods, know-how, flow charts, diagrams, computer programs and/or databases, and any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not (all of the foregoing, collectively, "INTELLECTUAL PROPERTY"), which are conceived, created, developed or made by Executive, solely or jointly with another, during the period of employment or within one (1) year thereafter, and which are substantially related to the business or activities of the Company or its subsidiaries which Executive conceived, created, developed or made as a result of his employment by the Company or any of its subsidiaries. Executive hereby assigns and agrees to assign all of his right, title and interest throughout the world in any Intellectual Property to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain registrations of copyrights or marks, or Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest in Intellectual Property. (b) Executive agrees that he will not, during or after the Employment Term, disclose the specific terms of the Company's relationships or agreements with its significant vendors or customers or any other significant material trade secrets of the Company, whether in existence or proposed (other than any of the foregoing that becomes public knowledge other than through disclosure by Executive), to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except as is disclosed in the ordinary course of business, unless compelled by a court order upon advice of counsel. 13. Legal and Other Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred in such dispute unless the finder of fact determines that the Company is the prevailing party in such dispute. 14. Certain Additional Payments. Executive shall be grossed up for any excise tax payable under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), in accordance with "Exhibit B" attached hereto. 15. Resolution of Disputes. The parties shall use their best efforts and good will to settle all disputes by amicable negotiations. The Company and Executive agree, for purposes of the resolution of any disputes under this Agreement, that such disputes shall be settled by arbitration in Dallas, Texas, or such other place agreed to by the parties, in accordance with the rules and procedures of the American Arbitration Association, as follows: (a) Any such arbitration shall be heard before a panel consisting of one to three arbitrators, each of who shall be impartial. All arbitrators shall be appointed in the first instance by agreement between the parties hereto. If the parties cannot agree upon a single arbitrator, each of the Company and the Executive shall be entitled to appoint one arbitrator. These two appointed arbitrators shall then appoint a third arbitrator by their mutual agreement. (b) An arbitration may be commenced by either party to this Agreement by the service of a written request for arbitration upon the other affected party. Such request for arbitration shall summarize the controversy or claim to be arbitrated. If the panel of arbitrators is not appointed within thirty (30) days following such service, either party may apply to any court within the State of Texas for an order appointing arbitrators qualified as set forth below. No request for arbitration shall be valid if it relates to a claim, dispute, disagreement or controversy that would have been time barred under the applicable statute of limitations had such claim, dispute, disagreement or controversy been submitted to the courts of the State of Texas. (c) The parties hereby expressly waive punitive damages, and under no circumstances shall an award contain any amount that in anyway reflects punitive damages. (d) Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 16. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) Construction and Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired, and the parties undertake to implement all efforts which are necessary, desirable and sufficient to amend, supplement or substitute all and any such invalid, illegal or unenforceable provisions with enforceable and valid provisions which would produce as nearly as may be possible the result previously intended by the parties without renegotiation of any material terms and conditions stipulated herein. (d) No Waiver. Any failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (e) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an entity which is owned, directly or indirectly, in whole or in part by the Company or by any successor to the Company or an acquirer of all or substantially all of the assets of the Company or all or substantially all of the assets of a group of subsidiaries and divisions of the Company, provided such entity or acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to Executive and otherwise complies with the provisions hereof with regard to such assumption. Upon such assignment and assumption, all references to the Company herein shall be to such assignee. (f) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the beneficiaries and permitted assignees of the parties hereto. In the event of Executive's death while receiving amounts payable pursuant to Section 8(b) hereof, any remaining amounts shall be paid to Executive's estate. (g) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the General Counsel and Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (h) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (i) Survivorship. The respective rights and obligations of the parties hereunder, including without limitation Section 10 and Section11 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (j) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (k) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (l) Executive's Representation. Executive represents and warrants to the Company that there is no legal impediment to him entering into this Agreement, and entering into this Agreement will not violate any agreement to which he is a party or any other legal restrictions, and he has provided to the Company true and complete copies of any agreements or covenants to which he is a party that could restrict or adversely affect his performance under this Agreement. Executive further represents and warrants that in performing his duties hereunder he will not wrongfully use or disclose any confidential information of any prior employer or other person or entity. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. JACKPOT ENTERPRISES, INC., a Nevada corporation By: Name: Title: MARK W. HOBBS "EXHIBIT A" TO THE EMPLOYMENT AGREEMENT BETWEEN JACKPOT ENTERPRISES, INC. AND MARK W. HOBBS DEFINITIONS (a) Cause. For purposes of this Agreement, the term "CAUSE" shall be limited to the following: (i) Executive's willful misconduct with regard to Company or its affiliates or their business, or employees (including, without limitation Executive's fraud or embezzlement), or willful misconduct other than the foregoing, in any case has a material adverse impact on Company or its affiliates, whether economic, reputationwise or otherwise, each as determined the Board, and which is not fully rectified or cured, if susceptible to rectification or cure within thirty (30) days after written notice is given to Executive; provided, however, that this clause (i) shall not include an action or omission of Executive done or omitted to be done in his good faith exercise of business judgment or in good faith reliance on advice of legal counsel to the Company; (ii) Executive's conviction of, or pleading nolo contendere to, a felony or other crime involving fraud or dishonesty; (iii) Executive's refusal or willful failure to follow the lawful written direction of the Board, the Chief Executive Officer or his designee which is not remedied within ten (10) business days after receipt by Executive of a written notice specifying the details thereto; (iv) Executive's breach of Section 10 or Section 12 hereof, which has a material adverse economic impact on the Company or its affiliates, as determined by the Board; or (v) the representations or warranties in Section 16(l) hereof prove false, which has a material adverse economic impact on the Company or its affiliates, as determined by the Board. (vi) Executive being found unsuitable for licensing, by any regulatory agency applicable to the Company; (b) Change in Control. For purposes of this Agreement, the term "CHANGE IN CONTROL" shall mean the occurrence of any of the following: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than (a) Permitted Assignees, (b) the Company, (c) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or (d) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing fifty percent (50 %) or more of the combined voting power of the Company's then outstanding securities. Permitted Assignees shall mean the holders of the equity securities (whether or not voting) of any shareholder of the Company owning more than fifteen percent (15%) of the Company on the date after the date of execution of this Agreement; (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of assets where the proceeds thereof are not retained by the Company, in a single transaction or a series of related transactions, that result in a 66- 2/3 percent or greater decline in the enterprise value of the Company, valued based on the weighted average fair market value of any outstanding class of stock of the Company plus the book value of the outstanding indebtedness of the Company. (c) Disability. For purposes of this Agreement, "DISABILITY" shall mean if Executive is unable to perform his material duties pursuant to this Agreement, as determined by the Board, because of mental or physical incapacity, including, without limitation, alcoholism or drug abuse, which requires a leave of absence in excess of ninety (90) consecutive days in any twelve (12) month period. (d) Good Reason. For purposes of this Agreement, "GOOD REASON" shall mean the occurrence, without Executive's express written consent, in the case of (i), (ii), or (iii), of any of the following circumstances: (i) (a) any material demotion of Executive from his position as President or (b) any assignment of duties to Executive materially and adversely inconsistent with Executive's position as President (except in connection with the termination of Executive's employment for Cause or due to Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence); (ii) a failure by the Company to pay to Executive any amounts due under this Agreement in accordance with the terms hereof, which failure is not cured within fifteen (15) days following receipt by the Company of written notice from Executive of such failure; (iii) any other material breach by the Company of this Agreement that remains uncured for fifteen (15) days after written notice thereof by Executive to the Company; or (iv) a Change in Control. "EXHIBIT B" TO THE EMPLOYMENT AGREEMENT BETWEEN JACKPOT ENTERPRISES, INC. AND MARK W. HOBBS GROSS-UP PAYMENT As provided in Section 14 of the Employment Agreement of which this "Exhibit C" is a part: (a) In the event that Executive shall become entitled to payments and/or benefits provided by this Agreement or any other amounts in the "nature of compensation" (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership or effective control covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of such change in ownership or effective control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to Executive, subject to required withholding, at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Executive, after deduction of any Excise Tax on the Company Payments and on the Gross-Up Payment provided for under this paragraph (a) and any U.S. federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any U.S. federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. (b) In the event that the Excise Tax is subsequently determined by the Company to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and U.S. federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by Executive), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined by the Company or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (c) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following delivery by Executive to the Company of notice that an event that subjects Executive to the Excise Tax has occurred; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) promptly following such time as the amount thereof has been determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (d) In the event of any controversy with the Internal Revenue Service (or other taxing authority) with regard to the Excise Tax, Executive shall permit the Company to control issues related to the Excise Tax, but Executive shall control any other issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Executive shall permit the representative of the Company to accompany Executive, and Executive and Executive's representative shall cooperate with the Company and its representative. (e) The Company and Executive shall promptly deliver to each other copies of any written communications, and summaries of any verbal communications, with any taxing authority regarding the Excise Tax covered by this "Exhibit C". EX-10 3 0003.txt EXHIBIT 10.26 EMPLOYMENT AGREEMENT STEVEN L. KORBY THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is made as of October 1, 2000, by and between, JACKPOT ENTERPRISES, INC., a Nevada corporation, with its principal office at 1110 Palms Airport Drive, Las Vegas, Nevada 89119 (the "COMPANY"), and STEVEN L. KORBY residing at 8838 Farquhar Circle, Dallas, Texas 75209 ("EXECUTIVE"). WITNESSETH: WHEREAS, effective June 21, 2000 (the "COMMENCEMENT DATE"), the Company employed Executive as its President and Chief Operating Officer, and Executive accepted such employment; and WHEREAS, the Company and Executive desire to enter into this Agreement as to the terms of his employment by the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a three (3) year term (the "EMPLOYMENT TERM") commencing on the Commencement Date and ending on June 21, 2003 (the "EXPIRATION DATE"). 2. Position. (a) Executive shall serve as the Executive Vice President and Chief Financial Officer of the Company (the "EXECUTIVE VICE PRESIDENT"), reporting directly to the Chief Operating Officer of the Company and the Chief Executive Officer of the Company. If requested by the Board of Directors of the Company (the "BOARD"), the Chief Executive Officer or the Chief Operating Officer, Executive shall also serve on the Board and committees thereof, as an executive, officer and director of subsidiaries of the Company and/or as a director of associated companies of the Company without additional compensation and subject to any policy of the Compensation Committee of the Company's Board (the "COMPENSATION COMMITTEE") with regard to retention or turnover of the director's fees. (b) Executive shall have such duties and authority, consistent with his position, as shall be assigned to him from time to time by the Chief Executive Officer. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder. Nothing contained herein shall be construed to prohibit Executive from (i) owning less than ten percent (10%) of the outstanding securities of any publicly traded entity, (ii) pursuing any business opportunity that is not in Competition, as such term is defined in Section 10(b) below, with the Company or its subsidiaries or any portfolio company in which the Company or its subsidiaries hold securities (other than entities in which the Company or its subsidiaries make a nominal investment) (provided the time devoted by Executive to such personal investment does not materially interfere with Executive's duties hereunder), (iii) continuing service as a managing director, manager, partner, or member, directly or indirectly, of any investment management business in which Executive serves in such capacity on the Commencement Date, (iv) continuing service on any board of directors on which Executive serves as of the Commencement Date or service as a director of a company that is not in Competition with the Company or its subsidiaries or any portfolio company in which the Company or its subsidiaries hold securities (other than entities in which the Company or its subsidiaries make a nominal investment), provided, however, that Executive shall not hold more than three (3) board seats at any time exclusive of his membership (if any) on the Board or the board of directors of any subsidiary or affiliate of the Company, or (v) service on the boards of directors of a reasonable number of charitable organizations so long as such service is not inconsistent with his position and duties hereunder (such activities described in clause (i), (ii), (iii), (iv) or (v) immediately preceding being herein referred to as the "ALLOWED ACTIVITIES"). Executive shall be entitled to retain any consideration that he receives from service permitted by clauses (iii) and (iv) of the immediately preceding sentence on any board of directors of a corporation unrelated to the Company. For purposes hereof, a "nominal investment" of the Company or its subsidiaries will be determined in relation to the size of investments made from time to time by the Company or its subsidiaries in its portfolio companies (including, without limitation, investments made in exchange for cash, securities or services rendered). 3. Base Salary. During the Employment Term, the Company shall pay Executive a Base Salary at the annual rate of Two Hundred and Fifty Thousand Dollars ($250,000). Base Salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary may be reviewed annually by the Board or the Compensation Committee and may be increased, but not decreased, from time to time by the Board or the Compensation Committee. The Base Salary as determined as aforesaid, from time to time for the applicable fiscal year shall constitute "BASE SALARY" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, Executive shall be entitled to participate in an incentive bonus plan established by the Company on such terms and conditions, and subject to such standards, as shall be determined from time to time in the sole discretion of the Board or the Compensation Committee. Such incentive bonus for any such fiscal year shall be payable in cash and shall not be greater than fifty percent (50%) of Executive's rate of Base Salary in effect for the fiscal year to which such incentive bonus relates. During the Employment Term, the Company shall maintain an incentive bonus plan providing a target bonus equal to not less than fifty percent (50%) of Executive's rate of Base Salary in effect for the fiscal year to which the bonus relates. (b) Stock Options. Executive acknowledges that as of the Commencement Date the Stock Option Committee of the Board authorized the issuance to Executive stock options (the "STOCK OPTIONS") to purchase 200,000 shares of Common Stock of the Company. The Stock Options were granted pursuant to a stock option award agreement or agreements between Executive and the Company. The exercise price for such Stock Options was $13.125 per share of Common Stock. Subject to the terms and provisions of the Stock Option Grants, the Stock Options shall become exercisable on the dates indicated below as to that number of shares of Common Stock of the Company as set forth below opposite each such date. June 21, 2001 66,667 shares June 21, 2002 66,666 shares June 21, 2003 66,666 shares The foregoing schedule to the contrary notwithstanding, the Stock Options shall become fully and immediately exercisable in the event the Employment Term terminates prior to the Expiration Date by reason of termination of the Executive's employment hereunder by Executive for Good Reason or by the Company without Cause (as such terms are hereinafter defined). The Stock Options shall in all events expire on the date ten years after the Commencement Date, if not terminated or canceled earlier. The Executive shall be permitted to transfer the Stock Options to the Executive's immediate family members and/or lineal descendents (or a trust or family limited partnership established solely for the benefit of any such immediate family member and/or lineal descendent). Notwithstanding anything in the Stock Option Grants to the contrary, to the extent any provisions contained therein are inconsistent with or differ from the explicit terms and conditions of this Agreement, the terms and conditions of this Agreement shall control. To the extent this Agreement does not specifically address an issue or term set forth in the Stock Option Grants, then the provisions and terms of the Stock Option Grants shall apply. (c) Adjustments. As more fully specified in the Stock Option Grants, the number of shares covered by, and the option price per share of, the Stock Options will be subject to adjustment by the Company for any stock split, reclassification, combination or similar change in the Company's capital stock. (d) In addition the Company will loan the Executive up to $250,000 in connection with his purchase of the Company's convertible notes. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, profit sharing, long-term incentive compensation, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites generally maintained by the Company from time to time for the benefit of senior executive officers of the Company of a comparable level, in each case in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive or that applies on a grandfathered basis). Without limiting the foregoing, the Company shall pay all premiums for Executive and his dependent family members under health, hospitalization, disability, dental, life and other employee benefit plans that the Company may have in effect from time to time. Executive acknowledges that the Company does not currently provide a profit sharing plan, and has no current intention of providing profit sharing benefits to its employees. (b) During the Employment Term, Executive shall be entitled to at least three (3) weeks paid vacation each year in accordance with the Company's policies in effect from time to time. Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company to its senior executive employees. 6. Business Expenses. The Company shall reimburse Executive for the reasonable travel, entertainment and other business expenses incurred by Executive, subject to such pre-approval procedures as may be established from time to time by the Board, in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive and the Employment Term shall terminate as provided in Section 1 hereof or, if earlier, upon the earliest to occur of any of the following events: (i) the death of Executive; (ii) the termination of Executive's employment by the due to Executive's Disability (as defined "Exhibit A") pursuant to Section 7(b) hereof; (iii) the termination of Executive's employment by for Good Reason (as defined in "Exhibit A") pursuant to Section 7(c) hereof, (iv) termination of Executive's employment by the Company without Cause (as defined in "Exhibit A") to Section 7(e) hereof; (v) termination of employment by Executive without Good Reason upon thirty (30) days prior written pursuant to Section 7(f) hereof; or (vi) termination of Executive's employment by the Company for Cause pursuant to Section 7(d) hereof. (b) Disability. If Executive is unable to perform his material duties hereunder due to a physical or mental condition and the Company desires to terminate Executive's employment for Disability (as defined in "Exhibit A"), the Company shall deliver to Executive a written Notice of Disability Termination (herein so called), effective upon the date (the "DISABILITY TERMINATION DATE") which is the later of (i) the date such condition becomes a Disability or (ii) thirty (30) days following the delivery of the Notice of Disability Termination; provided that the Disability Termination Date shall be suspended, and the Employment Term shall not terminate, so long as Executive returns to the full performance of his duties by and following such date. (c) Termination for Good Reason. A Termination for Good Reason (herein so called) means a termination by Executive by written notice given within thirty (30) days after Executive knows of the occurrence of the Good Reason event, unless such circumstances are corrected prior to the date of termination specified in the Notice of Termination for Good Reason and the Company informs Executive of such correction prior to such date. In such event, the Employment Term shall not terminate. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific Good Reason event in Section (d) of "Exhibit A" relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than thirty (30) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given. (d) Cause. Subject to the notification provisions of this Section 7(d), Executive's employment hereunder may be terminated by the Company for Cause. A Notice of Termination for Cause (herein so called) shall mean a notice that shall indicate the specific termination provision in Section (a) of "Exhibit A" relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. The effective date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court by a non-appealable final judgment not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a termination by the Company without Cause. (e) Termination without Cause. The Company may terminate its employment of Executive for reasons other than Cause at any time upon thirty (30) days prior written notice. (f) Voluntary Resignation. Executive may terminate his employment with the Company at any time upon thirty (30) days prior written notice. 8. Consequences of Termination of Employment. Executive shall be entitled to the following compensation from the Company (in lieu of all other sums owed or payable to Executive) upon the termination of employment as described below: (a) Death, Disability, Voluntary Resignation without Good Reason or by the Company with Cause. If Executive's employment and the Employment Term are terminated (1) by reason of Executive's death or Disability, (2) by Executive without Good Reason or (3) by the Company for Cause, the employment period under this Agreement shall terminate without further obligations to Executive or Executive's legal representatives under this Agreement except for: (i) any Base Salary earned but unpaid, any accrued but unused vacation pay payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 (which amounts, in the case of the death of Executive, shall be promptly paid in a lump sum to Executive's estate), (ii) any other amounts or benefits earned, accrued and owing to Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company, including, without limitation, any earned but unpaid incentive bonus for any prior completed fiscal year, and (iii) except in the case of a termination by the Company for Cause or by Executive without Good Reason, a pro-rata portion (based on the number of days Executive is employed by the Company during the fiscal year of such termination) of Executive's incentive bonus earned for the fiscal year in which termination occurs, which, in any case, shall be paid in accordance with the applicable plans, programs and agreements, and any unpaid reimbursable business expenses (such amounts referred to in clauses (i) and (ii), collectively, the "ACCRUED AMOUNTS"). (b) Termination by Executive for Good Reason or Termination by Company without Cause. If Executive's employment and the Employment Term are terminated (i) by Executive for Good Reason, or (ii) by the Company without Cause (and other than for Disability or as a result of expiration of the Employment Term), Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b), 9(c) and 10 hereof, be entitled to receive equal monthly payments of an amount equal to his monthly rate of Base Salary in effect at the time of such termination plus his incentive bonus paid for the most recently ended fiscal year (provided, however, if Executive was employed hereunder for only a portion of such prior fiscal year, such bonus shall be annualized for purposes of this calculation, and, if no bonus was paid for such prior fiscal year, the current fiscal year's bonus, at 100 percent of target, shall be deemed to be the incentive bonus paid for the most recently ended fiscal year for purposes of this calculation) divided by twelve (12) for a period equal to the greater of (x) twelve (12) months or (y) the remaining period of time from the date of such termination through the Expiration Date. Notwithstanding the immediately preceding sentence to the contrary, (1) if Executive's employment is terminated by the Company without Cause (and other than for Disability or as a result of expiration of the Employment Term), or if Executive terminates his employment for Good Reason, other than Good Reason as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A", the Severance Payments shall be paid to Executive in a lump-sum following such termination, and (2) if Executive terminates his employment for Good Reason as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A", he shall, following the date which is six (6) months following the date of such termination, upon his request, receive payment in a lump-sum of the Severance Payments remaining unpaid on such date. (c) Termination Upon Expiration of Employment Term. If Executive's employment with the Company terminates on the Expiration Date by reason of expiration of the Employment Term, Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b), 9(c) and 10 hereof, be entitled to receive equal monthly payments of an amount equal to his monthly rate of Base Salary in effect immediately prior to the Expiration Date plus his incentive bonus paid for the most recently ended fiscal year divided by twelve (12) for a period of twelve (12) months. 9. No Mitigation; No Set-Off. (a) In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) (i) Executive agrees that, as a condition to receiving the payments and benefits provided under Section 8(b) or (c) hereunder he will execute, deliver and not revoke (within the time period permitted by applicable law) a release of all claims of any kind whatsoever against the Company, its affiliates, officers, directors, employees, agents and shareholders in the then standard form being used by the Company for senior executives (but without release of the right of indemnification hereunder or under the Company's By-laws or rights under benefit or equity plans that by their terms are intended to survive termination of his employment or claims that the Company fulfill its obligations under this Agreement). (ii) The Company agrees that, as a condition to Executive's agreements under Section 10 hereof, the Company will execute and deliver a release of all claims of any kind whatsoever against Executive (but without release of claims that Executive fulfill his obligations under this Agreement). The Company's release under this paragraph (b)(ii) of this Section 9 shall be executed and delivered simultaneously with the execution and delivery of Executive's release under paragraph (b)(i) of this Section 9. The releases referred to in this paragraph (b) of this Section 9 shall apply to all claims described in this paragraph existing from the beginning of time through the date of each party's execution of his or its release. (c) Upon any termination of employment, Executive hereby resigns as an officer and director of the Company, any subsidiary and any affiliate and as a fiduciary of any benefit plan of any of the foregoing. Executive shall promptly execute any further documentation thereof as requested by the Company and, if Executive is to receive any payments from the Company, execution of such further documentation shall be a condition thereof. 10. Confidential Information, Non-Competition and Non-Solicitation of the Company. (a) (i) Executive acknowledges that as a result of his employment by the Company, Executive will obtain secret and confidential information as to the Company and its affiliates and create relationships with customers, suppliers and other persons dealing with the Company and its affiliates and the Company and its affiliates will suffer irreparable damage, which would be difficult to ascertain, if Executive should use such confidential information or take advantage of such relationships and that because of the nature of the information that will be known to or obtained by Executive and the relationships created it is necessary for the Company and its affiliates to be protected by the prohibition against Competition as set forth herein, as well as the confidentiality restrictions set forth herein. (ii) Executive acknowledges (A) that the retention of non clerical employees, employed by the Company and its affiliates in which the Company and its affiliates have invested training and depends on for the operation of their businesses, is important to the businesses of the Company and its affiliates, and (B) that Executive will obtain unique information as to such employees as an executive of the Company and will develop a unique relationship with such persons as a result of being an executive of the Company. Therefore, it is necessary for the Company and its affiliates to be protected from Executive's Solicitation (defined below) of such employees as set forth below. (iii) Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and its affiliates and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 10. (b) COMPETITION shall mean: participating, directly or indirectly, as an individual proprietor, partner, stockholder, officer, employee, director, joint venturer, investor, lender with equity participation, consultant or in any capacity whatsoever (within the United States of America, or in any country where the Company or its affiliates do business) in a Competing Business; provided, however, that such participation shall not include (i) the ownership of not more than ten percent (10%) of the total outstanding stock of a publicly held company; (ii) following a termination of Executive's employment thereunder, the ownership of not more than five percent (5%) of the total outstanding stock of a private company if Executive is neither a member of, or represented on, the board of directors of such private company and does not have an executive officer role in such private company; (iii) the Allowed Activities; or (iv) any activity engaged in with the prior written approval of the Board. As used herein, "Competing Business" means any business that the Company and/or its subsidiaries and/or any entity in which the Company and/or its subsidiaries holds securities (other than entities in which the Company or its subsidiaries make a "nominal investment" (determined as described in Section 2(c) hereof)) are engaged in (I) from time to time(while Executive is employed by the Company) or (II) at the time of termination (upon termination of Executive's employment) (consisting principally of the services described in the Company's Registration Statement on Form 10 under the Securities Exchange Act of 1934, as amended, and any amendments thereof). For purposes of the immediately preceding sentence, but solely following a termination of Executive's employment hereunder, the Company and its subsidiaries shall be deemed to have made a "nominal investment" in an entity if, at the time of such termination of employment, the Company and its subsidiaries own or control less than ten percent (10%) of the outstanding equity interests, on a fully diluted basis, of such entity and are not represented on the board of directors of such entity. The Company shall furnish Executive with a list of all Competing Businesses on or promptly following termination of his employment hereunder. (c) SOLICITATION shall mean: recruiting, soliciting or inducing, of any non clerical employee or employees of the Company or its affiliates to terminate their employment with the Company or its affiliates or hiring or assisting another person or entity to hire any nonclerical employee of the Company or its affiliates or any person who within twelve (12) months before had been a nonclerical employee of the Company or its affiliates and were recruited or solicited for such employment or other retention while an employee of the Company, provided, however, that solicitation shall not include any of the foregoing activities engaged in with the prior written approval of the Board. (d) If any restriction set forth with regard to Competition or Solicitation is found by any court of competent jurisdiction, or in arbitration, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. In the event that the agreements in this Section 10shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, they shall be interpreted to extend only over the maximum period of time for which they may be enforceable and/or over the maximum geographical area as to which they may be enforceable and/or to the maximum extent in all other respects as to which they may be enforceable, all as determined by such court in such action. (e) During the Employment Term and for two (2) years following a termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non- extension of the Employment Term, Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates all secret or confidential information, knowledge or data relating to the Company and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates, (i) obtained by Executive during his employment by the Company and its affiliates and (ii) not otherwise public knowledge or known within the applicable industry. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order and he shall cooperate fully with the Company in protecting such information (at the Company's expense) to the extent possible under applicable law. (f) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents(whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (g) During the Employment Term and for two (2) years following a termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non- extension of the Employment Term, Executive will not engage in Solicitation. (h) During the Employment Term and for the Restricted Period (as hereinafter defined) following a termination of Executive's employment, Executive will not enter into Competition with the Company. The Restricted Period shall be (i) for a termination for Cause, twelve(12) months following the date of termination, (ii) for termination without Cause by the Company, or by Executive for Good Reason, as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A", the period in which the Company is making payments to Executive as specified in Section 8(b) above, (iii) for a termination as a result of the voluntary resignation of Executive without Good Reason, twelve (12)months from the date of termination; and (iv) termination as a result of expiration or non-renewal of this Agreement, after the Company has made a good faith offer for continued employment, nine (9) months following the date of termination. For avoidance of doubt, there shall be no Restricted Period following termination of Executive's employment without Cause by the Company (and other than for Disability or as a result of expiration of the Employment Term) or for Good Reason by Executive (other than as defined in clause (i)(b) or clause (iv) of Section (d) of "Exhibit A"), or if the Employment Term expires and the Company fails to make a good faith offer for continued employment. (i) In the event of a breach or potential breach of this Section 10, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 10 enforced. It is hereby acknowledged that the provisions of this Section 10 are for the benefit of the Company and all of the affiliates of the Company and each such entity may enforce the provisions of this Section 10 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. (j) Furthermore, in addition to and not in limitation of another remedies provided herein or at law or in equity, in the event of breach of this Section 10 by Executive, while he is receiving amounts under Section 8(b) or (c) hereof, Executive shall not be entitled to receive any future amounts pursuant to Section 8(b) or (c) hereof after the earlier to occur of (i) ninety (90) days following the Company's notification of Executive of its good faith determination of such breach, specifying in reasonable detail the grounds for such determination, and (ii) a final determination by an arbitrator or court of competent jurisdiction of such breach, and, upon such final determination, which is not appealable, he shall reimburse the Company for any amounts previously paid to Executive pursuant to Section 8(b) or (c) hereof. 11. Indemnification. The Company shall indemnify and hold harmless Executive to the extent provided in the Certificate of Incorporation, the By-Laws of the Company and the Delaware General Corporation Law as amended and as applicable, for any action or inaction of Executive while serving as an officer and director of the Company or, at the Company's request, as an officer or director of any subsidiary or affiliate of the Company, as a fiduciary of any benefit plan or as a director of any entity in which the Company or any of its affiliates has made an investment . The Company shall cover Executive under directors and officers liability insurance both during and, while potential liability exists, after the Employment Term in the same amount and to the same extent as the Company covers its other officers and directors. 12. Intellectual Property. (a) Executive shall disclose promptly to the Company copyrights, trade secrets, proprietary information, patents, unpatented inventions, trademarks, service marks, processes, techniques, methods, know-how, flow charts, diagrams, computer programs and/or databases, and any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not (all of the foregoing, collectively, "INTELLECTUAL PROPERTY"), which are conceived, created, developed or made by Executive, solely or jointly with another, during the period of employment or within one (1) year thereafter, and which are substantially related to the business or activities of the Company or its subsidiaries which Executive conceived, created, developed or made as a result of his employment by the Company or any of its subsidiaries. Executive hereby assigns and agrees to assign all of his right, title and interest throughout the world in any Intellectual Property to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain registrations of copyrights or marks, or Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest in Intellectual Property. (b) Executive agrees that he will not, during or after the Employment Term, disclose the specific terms of the Company's relationships or agreements with its significant vendors or customers or any other significant material trade secrets of the Company, whether in existence or proposed (other than any of the foregoing that becomes public knowledge other than through disclosure by Executive), to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except as is disclosed in the ordinary course of business, unless compelled by a court order upon advice of counsel. 13. Legal and Other Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred in such dispute unless the finder of fact determines that the Company is the prevailing party in such dispute. 14. Certain Additional Payments. Executive shall be grossed up for any excise tax payable under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), in accordance with "Exhibit B" attached hereto. 15. Resolution of Disputes. The parties shall use their best efforts and good will to settle all disputes by amicable negotiations. The Company and Executive agree, for purposes of the resolution of any disputes under this Agreement, that such disputes shall be settled by arbitration in Dallas, Texas, or such other place agreed to by the parties, in accordance with the rules and procedures of the American Arbitration Association, as follows: (a) Any such arbitration shall be heard before a panel consisting of one to three arbitrators, each of who shall be impartial. All arbitrators shall be appointed in the first instance by agreement between the parties hereto. If the parties cannot agree upon a single arbitrator, each of the Company and the Executive shall be entitled to appoint one arbitrator. These two appointed arbitrators shall then appoint a third arbitrator by their mutual agreement. (b) An arbitration may be commenced by either party to this Agreement by the service of a written request for arbitration upon the other affected party. Such request for arbitration shall summarize the controversy or claim to be arbitrated. If the panel of arbitrators is not appointed within thirty (30) days following such service, either party may apply to any court within the State of Texas for an order appointing arbitrators qualified as set forth below. No request for arbitration shall be valid if it relates to a claim, dispute, disagreement or controversy that would have been time barred under the applicable statute of limitations had such claim, dispute, disagreement or controversy been submitted to the courts of the State of Texas. (c) The parties hereby expressly waive punitive damages, and under no circumstances shall an award contain any amount that in anyway reflects punitive damages. (d) Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 16. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) Construction and Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired, and the parties undertake to implement all efforts which are necessary, desirable and sufficient to amend, supplement or substitute all and any such invalid, illegal or unenforceable provisions with enforceable and valid provisions which would produce as nearly as may be possible the result previously intended by the parties without renegotiation of any material terms and conditions stipulated herein. (d) No Waiver. Any failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (e) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an entity which is owned, directly or indirectly, in whole or in part by the Company or by any successor to the Company or an acquirer of all or substantially all of the assets of the Company or all or substantially all of the assets of a group of subsidiaries and divisions of the Company, provided such entity or acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to Executive and otherwise complies with the provisions hereof with regard to such assumption. Upon such assignment and assumption, all references to the Company herein shall be to such assignee. (f) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the beneficiaries and permitted assignees of the parties hereto. In the event of Executive's death while receiving amounts payable pursuant to Section 8(b) hereof, any remaining amounts shall be paid to Executive's estate. (g) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the General Counsel and Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (h) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (i) Survivorship. The respective rights and obligations of the parties hereunder, including without limitation Section 10 and Section11 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (j) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (k) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (l) Executive's Representation. Executive represents and warrants to the Company that there is no legal impediment to him entering into this Agreement, and entering into this Agreement will not violate any agreement to which he is a party or any other legal restrictions, and he has provided to the Company true and complete copies of any agreements or covenants to which he is a party that could restrict or adversely affect his performance under this Agreement. Executive further represents and warrants that in performing his duties hereunder he will not wrongfully use or disclose any confidential information of any prior employer or other person or entity. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. JACKPOT ENTERPRISES, INC., a Nevada corporation By: Name: Title: STEVEN L. KORBY "EXHIBIT A" TO THE EMPLOYMENT AGREEMENT BETWEEN JACKPOT ENTERPRISES, INC. AND STEVEN L. KORBY DEFINITIONS (a) Cause. For purposes of this Agreement, the term "CAUSE" shall be limited to the following: (i) Executive's willful misconduct with regard to Company or its affiliates or their business, or employees (including, without limitation Executive's fraud or embezzlement), or willful misconduct other than the foregoing, in any case has a material adverse impact on Company or its affiliates, whether economic, reputationwise or otherwise, each as determined the Board, and which is not fully rectified or cured, if susceptible to rectification or cure within thirty (30) days after written notice is given to Executive; provided, however, that this clause (i) shall not include an action or omission of Executive done or omitted to be done in his good faith exercise of business judgment or in good faith reliance on advice of legal counsel to the Company; (ii) Executive's conviction of, or pleading nolo contendere to, a felony or other crime involving fraud or dishonesty; (iii) Executive's refusal or willful failure to follow the lawful written direction of the Board, the Chief Executive Officer or his designee which is not remedied within ten (10) business days after receipt by Executive of a written notice specifying the details thereto; (iv) Executive's breach of Section 10 or Section 12 hereof, which has a material adverse economic impact on the Company or its affiliates, as determined by the Board; or (v) the representations or warranties in Section 16(l) hereof prove false, which has a material adverse economic impact on the Company or its affiliates, as determined by the Board. (vi) Executive being found unsuitable for licensing, by any regulatory agency applicable to the Company; (b) Change in Control. For purposes of this Agreement, the term "CHANGE IN CONTROL" shall mean the occurrence of any of the following: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than (a) Permitted Assignees, (b) the Company, (c) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or (d) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing fifty percent (50 %) or more of the combined voting power of the Company's then outstanding securities. Permitted Assignees shall mean the holders of the equity securities (whether or not voting) of any shareholder of the Company owning more than fifteen percent (15%) of the Company on the date after the date of execution of this Agreement; (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of assets where the proceeds thereof are not retained by the Company, in a single transaction or a series of related transactions, that result in a 66- 2/3 percent or greater decline in the enterprise value of the Company, valued based on the weighted average fair market value of any outstanding class of stock of the Company plus the book value of the outstanding indebtedness of the Company. (c) Disability. For purposes of this Agreement, "DISABILITY" shall mean if Executive is unable to perform his material duties pursuant to this Agreement, as determined by the Board, because of mental or physical incapacity, including, without limitation, alcoholism or drug abuse, which requires a leave of absence in excess of ninety (90) consecutive days in any twelve (12) month period. (d) Good Reason. For purposes of this Agreement, "GOOD REASON" shall mean the occurrence, without Executive's express written consent, in the case of (i), (ii), or (iii), of any of the following circumstances: (i) (a) any material demotion of Executive from his position as President or (b) any assignment of duties to Executive materially and adversely inconsistent with Executive's position as President (except in connection with the termination of Executive's employment for Cause or due to Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence); (ii) a failure by the Company to pay to Executive any amounts due under this Agreement in accordance with the terms hereof, which failure is not cured within fifteen (15) days following receipt by the Company of written notice from Executive of such failure; (iii) any other material breach by the Company of this Agreement that remains uncured for fifteen (15) days after written notice thereof by Executive to the Company; or (iv) a Change in Control. "EXHIBIT B" TO THE EMPLOYMENT AGREEMENT BETWEEN JACKPOT ENTERPRISES, INC. AND STEVEN L. KORBY GROSS-UP PAYMENT As provided in Section 14 of the Employment Agreement of which this "Exhibit C" is a part: (a) In the event that Executive shall become entitled to payments and/or benefits provided by this Agreement or any other amounts in the "nature of compensation" (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership or effective control covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of such change in ownership or effective control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to Executive, subject to required withholding, at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Executive, after deduction of any Excise Tax on the Company Payments and on the Gross-Up Payment provided for under this paragraph (a) and any U.S. federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any U.S. federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. (b) In the event that the Excise Tax is subsequently determined by the Company to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and U.S. federal, state and local income tax imposed on the portion of the Gross- p Payment being repaid by Executive), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is later determined by the Company or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (c) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following delivery by Executive to the Company of notice that an event that subjects Executive to the Excise Tax has occurred; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) promptly following such time as the amount thereof has been determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (d) In the event of any controversy with the Internal Revenue Service (or other taxing authority) with regard to the Excise Tax, Executive shall permit the Company to control issues related to the Excise Tax, but Executive shall control any other issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Executive shall permit the representative of the Company to accompany Executive, and Executive and Executive's representative shall cooperate with the Company and its representative. (e) The Company and Executive shall promptly deliver to each other copies of any written communications, and summaries of any verbal communications, with any taxing authority regarding the Excise Tax covered by this "Exhibit C". EX-10 4 0004.txt EXHIBIT 10.30 JACKPOT ENTERPRISES, INC. 1110 Palms Airport Drive Las Vegas, Nevada 89119 October 30, 2000 E-T-T, Inc. 5195 Las Vegas Boulevard South Las Vegas, Nevada 89119 Attn.: Sean Higgins, Esq. Re: Stock Purchase Agreement ________________________ Dear Mr. Higgins: We write in connection with the Stock Purchase Agreement, dated as of July 8, 2000 (the "Agreement") between E-T-T, Inc. ("E-T-T") and Jackpot Enterprises, Inc, ("Jackpot"). Unless defined herein, capitalized terms used in this letter shall have the meaning assigned to such terms in the Agreement. E-T-T and Jackpot hereby acknowledge that they are executing this letter in an attempt to resolve a dispute that has arisen between them since the execution of the Agreement. Accordingly, unless a closing takes place pursuant to this letter agreement and except for Section (e) below, this letter agreement and the discussions relating thereto constitute settlement discussions under all applicable federal and state laws, and therefore may not be used for any purpose in any judicial proceeding. Jackpot and E-T-T hereby agree to a modification of the Agreement as follows: (a) Jackpot will accept $38 million in cash in full satisfaction of the Purchase Price; (b) E-T-T shall seek approval of the transactions from Clark County on Tuesday, October 31, 2000; from the Nevada Gaming Control Board on November 8, 2000; and from the Nevada Gaming Commission on November 16, 2000; provided that as to the meeting on November 16, 2000 if the Nevada Gaming Commission does not include the approval of the transaction contemplated by the Agreement as amended hereby at such meeting (a "Gaming Delay") E-T-T shall seek such approval at the next regularly scheduled meeting of the Nevada Gaming Commission (the "Next Meeting"); (c) The Purchase Price will be increased by an amount equal to all fixed rent payments (including, but not limited to the one year rent prepayment to Rite Aid) made by Jackpot and/or the Companies after October 31, 2000 and prior to Closing less an amount equal to the per day rent paid for the period prior to transfer of cash described below; plus an amount equal to the per day unpaid rent for the K-Mart locations from the period prior to transfer of cash described below; (d) The transfer of possession of cash as provided in Section 6.11 of the Agreement shall occur at Midnight, Saturday, November 18, 2000 or the Saturday following the Next Meeting in the event of a Gaming Delay, and the Closing must take place no later than Monday, November 20, 2000 or the Monday following the Next Meeting in the event of a Gaming Delay, but in no event later than December 4, 2000 in order for this letter agreement to remain effective; and (e) The reference to "six months from the date of this Agreement" in Section 6.14 of the Agreement shall be changed to December 11, 2000. Jackpot acknowledges that E-T-T is in the process of finalizing its financing for the transaction contemplated by the Agreement as amended hereby and this letter agreement is contingent upon such financing. In the event the Closing does not take place by the close of business Las Vegas time on December 4, 2000, this letter agreement (except for Section (e) above) shall be deemed null and void and the Agreement shall remain in full force and effect as modified by Section (e) above. Except as provided for herein, this letter agreement shall in no way be deemed to affect, release or waive any of Jackpot's or E-T-T's rights or remedies or any of the covenants or conditions in the Agreement in the event the transaction does not close as set forth herein. Except as specifically modified hereby, all of the terms and provisions of the Agreement, without modification, shall remain in full force and effect to the same extent as of the date entered into. If this letter accurately reflects our agreement to modify the Agreement, please so indicate by signing below where indicated and delivering the original executed letter to me. Very truly yours, JACKPOT ENTERPRISES, INC. By: /s/ Mark W. Hobbs _____________________________________________ Name: Mark W. Hobbs Title: President and Chief Operating Officer E-T-T, INC. By: /s/ Edward Herbst _____________________________________________ EX-27 5 0005.txt
5 This schedule contains summary financial information extracted from Jackpot's Consolidated Balance Sheets - September 30, 2000 and June 30, 2000 and its Condensed Consolidated Statements of Operations - three months ended September 30, 2000 and 1999 and is qualified in its entirety to such financial statements. 3-MOS JUN-30-2001 JUL-01-2000 SEP-30-2000 58,674 0 0 0 0 75,043 0 0 111,065 1,112 20,802 0 0 102 86,513 111,065 0 0 0 1,270 0 0 1,244 (3,367) 800 (2,567) 132 0 0 (2,435) (.27) (.27)
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