-----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, IfZVjFgBN76bwq+5JJb4T7idNnOdl4vcSNoHmrx58EuqoFbnyBXR5pY2/BwCz27Q 9UTgcO8EQuMqrUKa1uhrCA== 0000351903-97-000009.txt : 19970924 0000351903-97-000009.hdr.sgml : 19970924 ACCESSION NUMBER: 0000351903-97-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970923 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JACKPOT ENTERPRISES INC CENTRAL INDEX KEY: 0000351903 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880169922 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09728 FILM NUMBER: 97684312 BUSINESS ADDRESS: STREET 1: 1110 PALMS AIRPORT DR CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7023693424 MAIL ADDRESS: STREET 2: 1110 PALMS AIRPORT DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89119 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to____________ Commission File Number 1-9728 JACKPOT ENTERPRISES, INC. _________________________________________________________________ (Exact name of registrant as specified in its charter) Nevada 88-0169922 ___________________________________________ ___________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1110 Palms Airport Drive, Las Vegas, Nevada 89119 ___________________________________________ ___________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 263-5555 ______________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ____________________________________________ _______________________ Common Stock - Par value $.01 per share, New York Stock Exchange which include certain preferred stock purchase rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x ___ As of September 1, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $92,916,033. As of September 1, 1997, there were 9,082,035 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Proxy Statement relating to the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. PART I Item 1. Business ________ General _______ Jackpot Enterprises, Inc., a Nevada corporation, ("Jackpot" or the "Company") has been actively engaged, through its subsidiaries, in the gaming industry for over 30 years. The Company is one of the largest gaming machine route operators in the State of Nevada, operating, as of June 30, 1997, 4,075 gaming machines in 419 locations. Jackpot is an established leader in the operation of gaming machines in multiple retail locations ("gaming machine route operations"). In addition to its gaming machine route operations, Jackpot, as of June 30, 1997, operated two casinos with 184 gaming machines. However, as part of its strategy to exit its remaining casino operations, Jackpot continues to market such properties for sale. As of June 30, 1997, Jackpot operated 4,259 gaming machines in 421 locations. Approximately 96% of the gaming machines were video poker and 4% were reel-type slot and other machines. For the fiscal year ended June 30, 1997 ("1997"), 97% of total revenues were derived from Jackpot's gaming machine route operations and 3% from its casino operations. Because of the integrated nature of such operations, Jackpot is considered to be engaged in one industry segment. Jackpot's gaming machine route operations are subject to seasonal fluctuations. The gaming play for such operations is generally greater in the second and fourth quarters of Jackpot's fiscal year. Unless the context indicates otherwise, references to "Jackpot" and the "Company" include its direct and indirect subsidiaries. Business Development Strategy _____________________________ The Company's business strategy is to enhance its position as a leader in the Nevada gaming machine route market both through internal growth and acquisition and to apply its gaming management expertise and its regulatory experience to pursue strategic gaming activities and other value oriented nongaming opportunities. Specifically, the Company's business strategy includes the following: Enhance Gaming Route Operations. The Company continually seeks to enhance its position as a leader in the Nevada gaming machine route business by providing high levels of service and popular gaming products, cultivating its existing relationships with major customers and expanding its gaming machine route operations through the selective addition of new locations and/or the consolidation of other route operators. The expected continued economic and population growth in Nevada should also benefit the Company. In addition, as appropriate, the Company will explore the possibility of expanding its gaming machine route business to other jurisdictions. Pursue Other Strategic Gaming and Nongaming Opportunities. Jackpot continually reviews and evaluates potential opportunities, in both gaming and nongaming. The Company's strong financial position and access to capital represent a competitive advantage which will enable management to explore potential acquisitions and strategic combinations. Jackpot is committed to pursue all such opportunities in order to improve future earnings and enhance shareholder value. In evaluating such potential opportunities the Company is looking for candidates with either a value orientation or sustainable rates of growth. Although Jackpot is exploring expansion and acquisition opportunities, there can be no assurance that such opportunities will be available on terms acceptable to Jackpot or that if completed that such opportunities will be successful. Gaming Machine Route Operations _______________________________ Gaming machine route operations involve the installation, operation and service of gaming machines owned by Jackpot in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada. With respect to retail stores, Jackpot generally licenses, leases or subleases space in stores which are part of a chain of stores and installs gaming machines and a change booth near the store's entrance, where customer traffic is greatest. The number of gaming machines per store is determined by licensing limitations, available space and license, lease or sublease negotiations. In 1997, approximately 77% of Jackpot's gaming machine route operations revenues were generated by southern Nevada operations and 23% by northern Nevada operations. Management believes that Jackpot has a substantial market share of gaming machine operations in supermarkets, drug stores and merchandise stores in Nevada, and that its customers are primarily local Nevada residents. As of June 30, 1997, Jackpot operated in its gaming machine route business 4,075 gaming machines at 419 locations; 129 of the locations contained 15 gaming machines, 44 of the locations contained more than 15 machines and 246 of the locations contained fewer than 15 machines. Change booths are operated at retail store locations with generally 15 gaming machines or more during all store business hours by employees of Jackpot who provide coins and tokens to players of the gaming machines in exchange for currency. On a regular basis, coins and tokens are removed from the gaming machines and the coin and token supply of the change booth is replenished. Gaming machines are routinely serviced, repaired, and maintained by mechanics employed by Jackpot. In the opinion of management, Jackpot's gaming machines and associated equipment are well-maintained, adequately insured, and in good working condition. The following table sets forth certain historical data showing the changes to the number of machines and locations in Jackpot's gaming machine route operations through June 30, 1997: As of June 30, 1997(a) 1996 1995 1994 1993 ______ _____ _____ _____ _____ Number of machines on location 4,075 4,211 4,284 4,072 4,488 Number of locations 419 439 452 434 486
(a) Excludes 272 machines at 16 locations due to the expiration of a contract with a store chain on June 30, 1997. Jackpot's agreements for its locations generally are in the form of written license, lease, sublease or revenue sharing contract and generally give Jackpot the exclusive right to install gaming machines at such locations. License, lease and sublease agreements, which accounted for approximately 68% of total gaming machine route operations revenues in 1997, require payments of fixed monthly fees based upon the amount of space used and/or the number of gaming machines placed at the location. The remainder provide for the payment to the location owner of a rental fee or a revenue sharing arrangement based upon a percentage of the revenues generated by Jackpot's gaming machines at such location. A location owner is not permitted to receive gaming machine revenues (lease or otherwise) based upon a percentage of revenues unless such owner is licensed by the Nevada Gaming Commission. The renewal or extension of agreements at existing locations have generally resulted in increased monthly fees. Licenses, leases and subleases have a wide range of terms and maturities, with expiration dates, including option periods, extending from 1997 to 2008. License, lease and sublease agreements representing approximately 4% of 1997 gaming machine route operations revenues have terms expiring in fiscal 1998. Prior to negotiating licenses, leases and subleases and installing machines, Jackpot performs a study of market potential, customer base, and comparative route locations in order to determine the appropriate type and denominations of gaming machines to be installed in each new location. This evaluation is ongoing at all locations and machine mix changes are made accordingly to maximize the operating performance of each location. Jackpot has a significant amount of its gaming machine route operations at retail stores which are part of a group of affiliated store chains. Gaming machine route operations from two groups of affiliated store chains in fiscal 1997, 1996 and 1995 each accounted for more than 10% of Jackpot's total revenues in such fiscal years. The largest six store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation, Lucky Stores, Inc., Thrifty PayLess, Inc. and Warehouse Markets, Inc.) accounted for approximately 60% of Jackpot's total revenues in 1997. Most of Jackpot's licenses, leases and subleases with major retail chains cover a number of specified stores in Nevada and usually provide Jackpot with an option to install gaming machines at any new stores of the retail chain opened in Nevada. All of the licenses, leases and subleases require Jackpot to pay all installation, maintenance and insurance expenses and all taxes in connection with Jackpot's operations at the location. Some of the Company's license, lease or sublease agreements require fixed periodic increases in monthly fees during the term of the contract. Jackpot's license, lease and sublease agreements generally provide that in the event that Jackpot fails to pay the required rental or license fees under such license, lease or sublease or defaults in the performance of any of its other obligations thereunder, the store operator can terminate the license, lease or sublease, usually after notice and a cure period of between 10 and 30 days. These agreements generally also provide that if the store operator terminates its business at a location, the license, lease or sublease is automatically terminated as to that location. Jackpot believes that it is not in default under any of its present licenses, leases or subleases. See Note 7 of Notes to Consolidated Financial Statements. The renewal or extension of agreements with major retail chains have generally resulted in increased monthly fees. These contracts often require fixed periodic increases in monthly fees during the term of the contract. In 1997, Jackpot entered into agreements for long-term contract extensions, which became effective July 1, 1997, with four of its largest retail chain store customers, two of which were not due to expire on June 30, 1997. A very competitive pricing environment caused the Company to offer significant increases in location rent over the existing agreements. Such agreements provide Jackpot the continued right to operate gaming machines at certain existing locations and future locations, if any, of such customers. As of June 30, 1997, these agreements involve the operation of approximately 1,174 gaming machines in 76 locations. Despite a long-term relationship with Warehouse Markets, Inc. Jackpot was not willing to agree with the terms sought for a contract extension, which management believed were uneconomic. The agreement, which expired on June 30, 1997, involved the operation of approximately 272 gaming machines in 16 locations. In 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. With respect to fiscal 1998, the Company's results of operations will be adversely affected compared to 1997 due to the intensely competitive market conditions prevailing for gaming machine route operators, the loss of a significant chain store customer described above and to significant increases in location rent, effective July 1, 1997, in connection with long-term contract renewals with four of Jackpot's largest chain store customers. However, management believes that the following may lessen the adverse effects described above: (i) increased revenues at existing locations as a result of the maturing of several recently opened new chain store locations, (ii) additional revenues from new locations scheduled to be opened by Jackpot's largest chain store customers, (iii) increased revenues at existing locations due to capital improvements or replacements of gaming machines, and (iv) certain cost reductions based on potential improvements to current operating information systems. While management believes that these events will occur, they are, in part, based upon factors that are outside the Company's control. Accordingly, no assurance can be given that such benefits will occur. Casino Operations _________________ On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. ( the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. During 1997, Jackpot entered into definitive agreements to sell the Owl Club and the Pony Express Casino, subject to the potential purchaser obtaining Nevada gaming regulatory approvals and licenses. However, as a result of such potential purchaser's withdrawal of his gaming application with the Nevada gaming authorities in August 1997, such transactions did not occur. The Company continues to market its two remaining casinos for sale. However, unless Jackpot is able to enter into agreements for the sale of these properties, on terms acceptable to Jackpot, no assurance can be given that such disposals will occur. The Owl Club, as of June 30, 1997, operated 90 gaming machines and two live table games in Battle Mountain, Nevada. The Owl Club also has a beverage operation incident to the conduct of gaming activities, a restaurant operation and an eighteen room motel. Jackpot owns the land and buildings used in the Owl Club's casino and motel operations. The Owl Club primarily serves local residents and markets with its food and informal and congenial atmosphere. Jackpot manages the casino operations of the Pony Express Casino in Jackpot, Nevada under a five-year space lease agreement, which Jackpot may terminate after September 15, 1997 upon fifteen days written notice to the lessor. As of June 30, 1997, Jackpot operated 94 gaming machines in approximately 2,600 square feet of casino space. The Pony Express Casino attracts hotel guests, local residents and tourists, primarily from the Idaho market. For additional information concerning Jackpot's operations, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Suppliers _________ Jackpot purchases a variety of models and styles of gaming machines primarily from one manufacturer, International Game Technology ("IGT"). Although the Company purchased approximately 90% of its gaming machines from IGT in 1997, Jackpot does not believe it is dependent upon IGT for future purchases. Jackpot does not have a contractual commitment for future purchases with IGT, or any other manufacturer. Each gaming machine accepts only one denomination of coin and, with minor exceptions, each location will have a variety of machines requiring different denominations of coins. Gaming machines operated by Jackpot are multiple coin play. Multiple coin play allows a player to wager several coins of the same denomination on each play. Jackpot continually tests, on a trial basis, new machines from various gaming machine manufacturers to determine which games and models will appeal to its customers to enhance play levels. Employees _________ As of June 30, 1997, Jackpot employed approximately 875 persons, the substantial portion of whom are non-management personnel. None of Jackpot's employees are covered by a collective bargaining agreement and Jackpot believes that it has satisfactory employee relations. Competition ___________ Gaming machines and gaming of all types are available in Nevada in casinos and hotel casinos, as well as in locations similar to those of Jackpot, all of which compete directly or indirectly with Jackpot. Jackpot has been and is subject to substantial direct competition for the operation of gaming machines in approved locations from numerous small gaming machine route operators and some large operators, located principally in Las Vegas, Reno and their surrounding areas. Management believes at least one of these competitors has more gaming machines or locations than Jackpot. In addition, a limited number of these competitors manufacture gaming machines. The principal methods of competition for gaming machine locations are the lease, sublease, license or revenue sharing terms, the service provided by the route operator and the experience, reputation and financial strength of the route operator. In recent years Jackpot has faced increased competition in its gaming machine route operations, and as certain of its licenses, leases and subleases have begun to expire, it has faced strong competition from other route operators who have attempted or captured locations by offering more favorable terms to retail store owners. As a result of such competition, along with the Company's continual evaluation of leases and strict adherence to management's pricing guidelines, revenues generated from route operations, which are attributable to revenue sharing contracts, have decreased from $33.5 million in 1995 to $28.8 million in 1997. For additional information concerning Jackpot's operations, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Regulation and Licensing Requirements _____________________________________ Nevada The ownership and operation of casino gaming facilities and gaming routes in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The Company's gaming machine operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), and local regulatory authorities. The Nevada Commission, the Nevada Board and the local regulatory authorities are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. Corporations that operate casinos and gaming machine routes in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. The Company has been found suitable by the Nevada Commission to own the stock of Cardivan Company, Corral Coin, Inc., Corral Country Coin, Inc., and Corral United, Inc. (the "Route Subsidiaries") and Jackpot Gaming, Inc. Jackpot Gaming, Inc. is registered as a holding corporation and is approved by the Nevada Gaming Authorities to own the stock of the Owl Club and the Pony Express Casino (the "Casino Subsidiaries"). No person may become a stockholder of, or receive any percentage of profits from, the Route Subsidiaries, Jackpot Gaming, Inc., or the Casino Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Route Subsidiaries, Jackpot Gaming, Inc. and the Casino Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or any of its subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Route Subsidiaries and the Casino Subsidiaries must file applications with the Nevada Gaming Authorities and may be required to be licensed or be found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Company or its subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or any of its subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company and its subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company, Jackpot Gaming, Inc., the Route Subsidiaries and the Casino Subsidiaries are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company and its subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Company or any of its subsidiaries, the gaming licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the subsidiary involved, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after requests, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or any of its subsidiaries, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has required that the Company's stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending upon the type of gaming or activity involved, are payable to the State of Nevada and to the local jurisdictions. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon any of: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at the Company's casinos is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company's casinos. Federal Regulation The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it unlawful, in general, for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices, and components thereof across interstate lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. Jackpot's subsidiaries have so registered and must renew their registration annually. In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. Violation of the Federal Act may result in seizure and forfeiture of equipment, as well as other penalties. Other Jurisdictions Other jurisdictions also require various licenses, permits, and approvals in connection with the ownership and operation of gaming facilities. The operation of gaming devices and lottery devices is subject to extensive licensing requirements and regulatory compliance. If Jackpot proceeds with expansion into any other state or foreign jurisdiction, it will also be necessary for the appropriate officers, employees, corporate subsidiaries and other persons or entities to apply for and obtain all necessary gaming and distributing licenses. As in Nevada, state agencies and the local authorities having jurisdiction over such activities have full power and discretion to limit, condition, suspend and revoke such licenses or approvals and any disciplinary action against Jackpot's affiliates in such jurisdictions could (and revocation would) have a material adverse effect on the operations of Jackpot in such states or local jurisdictions. Other Jackpot maintains rigorous internal accounting controls in accordance with the regulations of the Nevada Commission. Jackpot carries insurance of such types and in such amounts as management determines to be prudent from time to time. Item 2. Properties __________ Jackpot's corporate headquarters are located in Las Vegas, Nevada with approximately 34,000 square feet of office, warehouse and shop space under a lease which expires in 2006, with certain options for renewal. Jackpot believes its properties are adequate and suitable for its purposes. See Note 3 of Notes to Consolidated Financial Statements for additional information as to Jackpot's properties in Battle Mountain, Nevada and Jackpot, Nevada. The following table sets forth the location, use, size, and percentage utilization of Jackpot's properties: Approximate Percentage Location Use Size Utilization ________ ________________ _____________ ___________ OWNED PROPERTIES: Battle Mountain, Casino and motel 10,000 sq. ft. 100% Nevada operations LEASED PROPERTIES: Las Vegas, Nevada Executive offices, 34,000 sq. ft. 100% warehouse and shop Reno, Nevada Offices and shop 10,000 sq. ft. 100% Throughout Nevada Gaming machine various sq. ft. 100% operations per location Jackpot, Nevada Casino operations 2,600 sq. ft. 100%
Item 3. Legal Proceedings _________________ Not applicable. Item 4. Submission of Matters to a Vote of Security Holders ___________________________________________________ Not applicable. Executive Officers of the Registrant ____________________________________ The executive officers of Jackpot are appointed by the Board of Directors for an unspecified term and can be terminated at the Board's discretion; however, Mr. Kornstein has an employment agreement with Jackpot which currently expires on September 30, 2000. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than the March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein. The current executive officers of Jackpot (none of whom has a family relationship with one another), their ages and positions are as follows: Year Became An Name Age Position Executive Officer ________________ ___ _______________________ _________________ Don R. Kornstein 45 President, 1994 Chief Executive Officer and Director George Congdon 48 Senior Vice President - 1995 Operations Bob Torkar 46 Senior Vice President - 1991 Finance, Treasurer and Chief Accounting Officer
Don R. Kornstein was appointed President, Chief Executive Officer and a director of Jackpot on September 8, 1994. Prior to his appointment with Jackpot, Mr. Kornstein was a Senior Managing Director of Bear, Stearns & Co. Inc., a leading worldwide investment banking firm where he had been employed since 1977. Mr. Kornstein was in such firm's Investment Banking Department and was head of that firm's gaming industry group. George Congdon was appointed Senior Vice President - Operations of Jackpot on May 11, 1995. From October 1990 to May 1995, Mr. Congdon held various management positions with certain of Jackpot's subsidiaries including Vice President of Route Operations and Senior Vice President of Operations. Prior to October 1990, Mr. Congdon was employed for over sixteen years in various operating positions by Bally Manufacturing, Inc. and Bally Distributing, Inc., gaming machine manufacturers and distributors. Bob Torkar was appointed Vice President - Finance, Treasurer and Chief Accounting Officer of Jackpot on July 1, 1991 and Senior Vice President on October 15, 1993. From February 1991 to June 1991, Mr. Torkar was a financial consultant to Jackpot. Prior to the consulting assignment with Jackpot, Mr. Torkar was Vice President and Chief Financial Officer with Furnishings 2000, Inc., a publicly traded retail furnishings company in San Diego, California, having spent seven years (1983-1990) with such corporation. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters _________________________________________________ Jackpot's common stock, par value $.01 per share (the "Common Stock"), is listed on the New York Stock Exchange (NYSE) with the trading symbol "J". The following table sets forth the range of high and low prices for shares of the Common Stock for the fiscal quarters indicated, as furnished by the NYSE, and the per share cash dividends paid during those fiscal quarters. JACKPOT COMMON STOCK ___________________________________________________________________ Dividends High Low Paid ___________________________________________________________________ Fiscal 1996 First Quarter $11.25 $ 9.38 $.08 Second Quarter 13.88 10.75 .08 Third Quarter 12.63 10.75 .08 Fourth Quarter 13.88 10.75 .08 ___________________________________________________________________ Fiscal 1997 First Quarter $12.75 $ 9.63 $.08 Second Quarter 11.25 9.63 .08 Third Quarter 10.75 9.75 - Fourth Quarter 12.75 9.63 - ___________________________________________________________________
As of September 5, 1997 there were approximately 2,000 holders of record of Common Stock. The number of holders of record of Jackpot's Common Stock on September 5, 1997 was computed by a count of record holders. A policy of quarterly cash dividends, which had been effective since July 1987, was suspended on October 29, 1996 by Jackpot's Board of Directors. Future payment of quarterly cash dividends, if any, is subject to periodic review and reconsideration. Jackpot paid two quarterly cash dividends and four quarterly cash dividends of $.08 per share to its stockholders of record in fiscal 1997 and 1996, respectively. Item 6. Selected Financial Data _______________________ The following information has been derived from Jackpot's consolidated financial statements: Years Ended June 30, _______________________________________________ 1997 1996 1995 1994 1993 _______ _______ _______ _______ _______ (Dollars and shares in thousands, except per share data) OPERATING DATA: Total revenues $91,904 $91,108 $96,853 $98,335 $83,271 ___________________________________________________________________ Operating income $ 9,822 $ 7,094(1) $ 8,968 $ 9,409(1) $11,251 ___________________________________________________________________ Income (loss) from continuing operations $11,368 $ 8,610 $ 9,875 $(7,052)(2)$10,018 ___________________________________________________________________ Net income (loss) $ 7,844 $ 5,855(3) $ 6,616 $(4,584)(3)$ 6,506 ___________________________________________________________________ Earnings (loss) per common and common equivalent share (4)(5): Net income (loss) $ .85 $ .63 $ .72 $ (.50) $ .80 ___________________________________________________________________ Earnings (loss) per common share - assuming full dilution (4)(6): Net income (loss) $ .85 $ .63 $ .72 $ (.50) $ .78 ___________________________________________________________________ Dividends declared per share (4) $ .16 $ .32 $ .32 $ .31 $ .38 ___________________________________________________________________ Average primary common equivalent shares (4) 9,237 9,307 9,235 9,211 8,532 ___________________________________________________________________ OTHER DATA: EBITDA (7) $16,557 $17,093 $18,125 $18,896 $19,338 Net cash provided by operating activities $14,584 $12,778 $18,068 $18,367 $17,707 Net cash used in investing activities $(1,557) $(3,091) $(4,330) $(9,689) $(8,338) Net cash provided by (used in) financing activities $(4,106) $(3,579) $(4,365) $(4,128) $ 890 Capital expenditures $ 3,393 $ 4,267 $ 4,044 $13,452(8) $ 3,187 Amortization $ 1,728 $ 2,199 $ 2,880 $ 2,916 $ 2,326 Depreciation $ 3,461 $ 4,284 $ 5,349 $ 5,813 $ 4,922 _____________________________________________________________________ BALANCE SHEET DATA (at end of period): Working capital $46,329 $40,336 $31,640 $22,022 $28,614 _____________________________________________________________________ Total assets $75,267 $70,742 $71,959 $73,459 $76,752 _____________________________________________________________________ Long-term debt, net of current portion $ $ $ 271 $ 1,403 $ 2,584 _____________________________________________________________________ Stockholders' equity $67,281 $63,495 $60,216 $56,266 $63,361 _____________________________________________________________________ (See notes on following page) (1) Operating income includes: in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties (see Note 3 of Notes to Consolidated Financial Statements); in 1994, a pretax cost of $1.3 million in connection with the severance agreement with Jackpot's former chief executive officer. (2) Income (loss) from continuing operations includes: in 1994, a pretax loss of $16.9 million ($11.0 million after tax, or $1.20 per share) for Jackpot's share of the closing costs, write-down of certain assets and operating loss in a dockside casino facility in Tunica, Mississippi. (3) Net income (loss) includes: in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties (see Note 3 of Notes to Consolidated Financial Statements); in 1994, a pretax loss of $16.9 million ($11.0 million after tax, or $1.20 per share) for Jackpot's share of the closing costs, write-down of certain assets and operating loss in a dockside casino facility in Tunica, Mississippi. (4) All share and per share amounts have been retroactively adjusted in 1993 for a 10% stock dividend declared July 1, 1993. (5) Earnings per share calculations in 1993 have been based on weighted average shares outstanding adjusted for the number of common share equivalents attributable to stock options and warrants. (6) Earnings per share - assuming full dilution in 1993 includes the assumed conversion of certain convertible subordinated debentures. The average common and common equivalent shares outstanding assuming full dilution was 10.0 million shares in 1993. (7) EBITDA represents earnings before interest expense, income tax, depreciation, amortization and other non-cash items. EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles), as an indicator of the Company's operating performance, as an alternative to cash flows provided by operating activities (as determined in accordance with generally accepted accounting principles), or as a measure of liquidity. EBITDA is presented solely as a supplemental disclosure because management believes that it enhances the understanding of the financial performance of a company with substantial amortization and depreciation expense. (8) Capital expenditures in 1994 includes purchases of $9.0 million of property in connection with a dockside casino facility in Tunica, Mississippi. Item 7. Management's Discussion and Analysis of Financial _________________________________________________ Condition and Results of Operations ___________________________________ Capital Resources and Liquidity _______________________________ Cash Flows: Jackpot's principal sources of cash for the fiscal years ended June 30, 1997, 1996 and 1995 (referred to herein as "1997", "1996" and "1995", respectively), consisted of the cash flows from operating activities and its available cash and cash equivalents. Net cash provided by operating activities in 1997 increased $1.8 million, from $12.8 million in 1996 to $14.6 million in 1997. The increase of $1.8 million was due primarily to the increase from the change in other current liabilities. Net cash used in investing activities in 1997 was approximately $1.6 million which included cash used of approximately $3.9 million and cash received of approximately $2.3 million. The $3.9 million of cash used included payments of approximately $3.4 million primarily for purchases of property and equipment in connection with Jackpot's gaming machine route operations ("route operations"). The $2.3 million of cash received from investing activities consisted primarily of the proceeds from the sale of Jackpot's interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada and aggregate proceeds from sales of other non- current assets. Net cash used in financing activities in 1997 was approximately $4.1 million which resulted from payments for repurchases of common stock and dividends of approximately $2.8 million and $1.5 million, respectively, net of approximately $.2 million of proceeds from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of approximately $14.6 million less net cash used in investing and financing activities of approximately $1.6 million and $4.1 million, respectively, cash and cash equivalents in 1997 increased approximately $8.9 million. Net cash provided by operating activities in 1996 decreased $5.3 million, from $18.1 million in 1995 to $12.8 million in 1996. The decrease of $5.3 million resulted primarily from a decrease of $2.5 million in the route operations margin (from $21.6 million in 1995 to $19.1 million in 1996) and an increase of $1.8 million for payments of Federal income tax. Net cash used in investing activities in 1996 was approximately $3.1 million which included cash used of approximately $4.7 million and cash received of approximately $1.6 million. The $4.7 million of cash used included payments of approximately $4.3 million primarily for purchases of property and equipment in connection with Jackpot's route operations. The $1.6 million of cash received from investing activities consisted primarily of aggregate proceeds from sales of other non-current assets. Net cash used in financing activities in 1996 was approximately $3.6 million which consisted primarily of the repayment of approximately $.9 million of long-term debt, the payment of approximately $3.0 million of dividends, net of approximately $.3 million of proceeds from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of approximately $12.8 million less net cash used in investing and financing activities of approximately $3.1 million and $3.6 million, respectively, cash and cash equivalents in 1996 increased approximately $6.1 million. Net cash provided by operating activities in 1995 was approximately $18.1 million. Net cash used in investing activities in 1995 was approximately $4.3 million which included cash used of approximately $6.0 million and cash received of approximately $1.7 million. The $6.0 million of cash used included payments of approximately $4.0 million primarily for purchases of property and equipment in connection with Jackpot's route operations and approximately $1.5 million used for advances to the dockside casino facility in Tunica County, Mississippi (the "Tunica Facility"), which closed permanently on July 8, 1994. Such advances to the Tunica Facility were used for payment toward Jackpot's share of unpaid liabilities and estimated closing costs, which were fully accrued as of June 30, 1994. The $1.7 million of cash received from investing activities included aggregate proceeds from sales of short-term investments and sales of certain assets. Net cash used in financing activities in 1995 was approximately $4.4 million which consisted primarily of the repayment of approximately $1.4 million of long-term debt and the payment of approximately $3.0 million of dividends. As a result of the combination of net cash provided by operating activities of approximately $18.1 million less net cash used in investing and financing activities of approximately $4.3 million and $4.4 million, respectively, cash and cash equivalents in 1995 increased approximately $9.4 million. Liquidity: In 1997, Jackpot purchased approximately $3.4 million of property and equipment, as described above. Approximately $3.0 million of the $3.4 million was associated with equipment purchased for gaming locations. Management anticipates that Jackpot will purchase approximately $8.5 million of property and equipment, exclusive of business acquisitions, if any, for the fiscal year ending June 30, 1998 ("1998"). At June 30, 1997, Jackpot had cash and cash equivalents of approximately $47.9 million, an increase of approximately $8.9 million, or 23%, from the beginning of 1997. Jackpot had working capital of approximately $46.3 million at June 30, 1997, which increased from $40.3 million at June 30, 1996 primarily as a result of the activities described above. On October 29, 1996, Jackpot's Board of Directors announced that it would suspend future payment of quarterly cash dividends, subject to periodic review and reconsideration. Further, the Board authorized Jackpot's management to repurchase up to 500,000 shares of its common stock, from time to time, at prevailing market prices. Since such authorization, Jackpot has repurchased 283,771 shares of common stock at a cost of approximately $2.8 million. On May 24, 1995, Jackpot notified Phar-Mor, Inc. ("Phar- Mor"), a large chain store, that it was in default under the terms of certain agreements. On July 25, 1995, Phar-Mor notified Jackpot that it disagreed with Jackpot's position and asserted that Jackpot was in default under the terms of an amended agreement. On or about March 7, 1996, Phar-Mor filed a lawsuit against Jackpot in the United States Bankruptcy Court for the Northern District of Ohio, claiming it is owed approximately $1 million under the amended agreement. Jackpot has filed an answer and counterclaim reflecting its position that under an original agreement Jackpot is owed in excess of $3 million. All discovery has been completed and the parties have filed cross motions for summary judgment. The Court has not yet ruled upon such motions. Jackpot, based upon discussions with counsel, does not believe it is probable that Phar-Mor will prevail in this matter. If Phar- Mor were to prevail, Jackpot could be liable for certain obligations up to $1 million. If Jackpot were to prevail, it would become an unsecured creditor of Phar-Mor in an amount in excess of $3 million. For further information concerning this matter, see Note 7 of Notes to Consolidated Financial Statements. Management believes Jackpot's working capital and cash provided by operations will be sufficient to enable Jackpot to meet its planned capital expenditures and other cash requirements in 1998. Jackpot continues to selectively explore expansion opportunities, both in and outside Nevada, and various potential acquisitions, both gaming and nongaming. Management believes working capital and cash provided by operations will be sufficient to enable Jackpot to pursue expansion opportunities; however, Jackpot may seek additional debt or equity financing to facilitate expansion opportunities and potential acquisitions. Recently Issued Accounting Standards: In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which is effective for fiscal years beginning after December 15, 1995. SFAS 121 requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The adoption of SFAS 121, which was effective July 1, 1996, had no effect on the consolidated financial statements. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for fiscal years beginning after December 15, 1995. Although SFAS 123 encourages an entity to measure compensation by applying the fair value method of accounting for employee stock-based compensation arrangements, it permits an entity to continue to account for employee stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion 25 ("APB 25"). Jackpot has elected to continue to account for stock-based compensation in accordance with APB 25. The pro forma effect on net income and earnings per share, as if the fair value recognition provisions had been applied, is provided in a note to the consolidated financial statements, as required by SFAS 123. See Note 5 of Notes to Consolidated Financial Statements. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods, including interim periods, ending after December 15, 1997. Earlier adoption of the statement is not permitted. SFAS 128 establishes standards for computing and presenting earnings per share ("EPS"), including the replacement of the presentation of primary EPS with the presentation of basic EPS, as defined. Upon adoption of SFAS 128, all prior-period EPS data presented shall be restated to conform with the provisions of the statement. As required by SFAS 128, Jackpot will adopt this statement for the three month period ending December 31, 1997. Management believes that the implementation of SFAS 128 will not have a significant impact on EPS. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which is effective for periods ending after December 15, 1997. SFAS 129 establishes standards for disclosing information about an entity's capital structure. Management intends to comply with the disclosure requirements of this statement. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Management does not believe this statement will have a material impact on the consolidated financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. Management has not determined the extent of the disclosure required by SFAS 131. Overview ________ Jackpot has a significant amount of its route operations at retail stores which are part of a group of affiliated store chains. Route operations from two groups of affiliated store chains in 1997, 1996 and 1995 each accounted for more than 10% of Jackpot's total revenues in such fiscal years. The largest six store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation, Lucky Stores, Inc., Thrifty PayLess, Inc. and Warehouse Markets, Inc.) accounted for approximately 60% of Jackpot's total revenues in 1997. The renewal or extension of agreements with such customers have generally resulted in increased monthly fees. These contracts often require fixed periodic increases in monthly fees during the term of the contract. With respect to the accounting treatment of fixed periodic increases in monthly fees associated with these contracts, the Company is required to average annual lease costs over the term of the contract. As a result of such accounting treatment, annual lease costs generally increase significantly in the first year of an extended contract for the respective locations covered by the contract and, thereafter, remain constant for existing locations during the term of the contract. In 1997, Jackpot entered into agreements for long-term contract extensions, which became effective July 1, 1997, with four of its largest retail chain store customers, two of which were not due to expire on June 30, 1997. A very competitive pricing environment caused the Company to offer significant increases in location rent over the existing agreements. Such agreements provide Jackpot the continued right to operate gaming machines at certain existing locations and future locations, if any, of such customers. As of June 30, 1997, these agreements involve the operation of approximately 1,174 gaming machines in 76 locations. Despite a long-term relationship with Warehouse Markets, Inc. Jackpot was not willing to agree with the terms sought for a contract extension, which management believed were uneconomic. The agreement, which expired on June 30, 1997, involved the operation of approximately 272 gaming machines in 16 locations. In 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. With respect to 1998, the Company's results of operations will be adversely affected compared to 1997 due to the intensely competitive market conditions prevailing for gaming machine route operators, the loss of a significant chain store customer described above and to significant increases in location rent, effective July 1, 1997, in connection with long-term contract renewals with four of Jackpot's largest chain store customers. However, management believes that the following may lessen the adverse effects described above: (i) increased revenues at existing locations as a result of the maturing of several recently opened new chain store locations, (ii) additional revenues from new locations scheduled to be opened by Jackpot's largest chain store customers, (iii) increased revenues at existing locations due to capital improvements or replacements of gaming machines, and (iv) certain cost reductions based on potential improvements to current operating information systems. While management believes that these events will occur, they are, in part, based upon factors that are outside the Company's control. Accordingly, no assurance can be given that such benefits will occur. Results of Operations _____________________ The table below presents the changes in comparative financial data from 1995 to 1997 (dollars in thousands):
Years Ended June 30, ___________________________________________________________________ 1997 1996 1995 ________________________ __________________________ ______________ Percent Percent Percent Percent Percent of Increase of Increase of Amount Revenues(Decrease)Amount Revenues (Decrease) Amount Revenues ______ ________ ________ ______ ________ ________ ______ ________ Revenues: Route operations $88,895 96.7% 6.4% $83,533 91.7% (5.0)% $ 87,892 90.7% Casino operations 3,009 3.3 (60.3) 7,575 8.3 (15.5) 8,961 9.3 _______ _____ _____ _______ _____ _____ ________ _____ Totals 91,904 100.0 .9 91,108 100.0 (5.9) 96,853 100.0 _______ _____ _____ _______ _____ _____ ________ _____ Costs and expenses: Route operations 69,905 76.0 8.4 64,460 70.8 (2.8) 66,342 68.5 Casino operations 2,835 3.1 (57.4) 6,661 7.3 (15.7) 7,904 8.1 Amortization 1,728 1.9 (21.4) 2,199 2.4 (23.6) 2,880 3.0 Depreciation 3,461 3.8 (19.2) 4,284 4.7 (19.9) 5,349 5.5 General and admin- istrative 4,153 4.5 (.2) 4,163 4.5 (23.0) 5,410 5.6 Loss from write-down and sale of casino properties 2,247 2.5 _______ _____ _____ _______ _____ _____ _______ _____ Totals 82,082 89.3 (2.3) 84,014 92.2 (4.4) 87,885 90.7 _______ _____ _____ _______ _____ _____ _______ _____ Operating income 9,822 10.7 38.5 7,094 7.8 (20.9) 8,968 9.3 Other income, net 1,546 1.6 2.0 1,516 1.7 67.1 907 .9 _______ _____ _____ _______ ____ _____ _______ _____ Income before income tax 11,368 12.3 32.0 8,610 9.5 (12.8) 9,875 10.2 Provision for income tax 3,524 3.8 27.9 2,755 3.1 (15.5) 3,259 3.4 _______ _____ _____ _______ ____ _____ _______ _____ Net income $ 7,844 8.5% 34.0% $ 5,855 6.4% (11.5)% $ 6,616 6.8% ======= ===== ===== ======= ==== ===== ======= =====
Revenues generated from route operations are attributable to fixed payment leases and revenue sharing contracts. Such revenues for 1997, 1996 and 1995 are summarized below (dollars in thousands): 1997 1996 1995 ___________________ ___________________ ____________________ Percent Percent Percent of route of route of route operations operation operations Amount revenues Amount revenues Amount revenues _______ ___________ _______ __________ _______ ____________ Route operations: Fixed payment leases $60,106 67.6% $53,258 63.8% $54,386 61.9% Revenue sharing contracts 28,789 32.4 30,275 36.2 33,506 38.1 _______ _____ _______ _____ _______ _____ $88,895 100.0% $83,533 100.0% $87,892 100.0% ======= ===== ======= ===== ======= =====
1997 compared to 1996 _____________________ Revenues: Total revenues in 1997 increased $.8 million, from $91.1 million in 1996 to $91.9 million in 1997. The increase in total revenues of $.8 million was the net result of an increase of $5.4 million (from $83.5 million in 1996 to $88.9 million in 1997) in route operations revenues and a decrease of $4.6 million (from $7.6 million in 1996 to $3.0 million in 1997) in casino operations revenues. The increase in route operations revenues of $5.4 million, which represented a 6.4% increase, resulted from a combination of additional revenues generated from new and existing locations, net of lost revenues from terminated locations. In 1997, new locations generated revenues of $6.3 million and existing locations generated additional revenues of $2.9 million. Terminated locations had generated revenues of $3.8 million in 1996. As described previously, a significant amount of Jackpot's route operations revenues is derived from five retail chain store customers pursuant to license or lease agreements. As of June 30, 1997, such agreements involved the operation of 1,539 machines in 98 locations. The decrease in casino operations revenues in 1997 of $4.6 million was due primarily to the ceasing of operations at the Debbie Reynolds' Hotel and Casino ("Debbie's Casino"), effective March 31, 1996, and the sale of Jackpot's interest in the Nugget on June 30, 1996. 1996 includes revenues of $4.3 million generated at these two locations. Costs and expenses: Route operations expenses in 1997 increased $5.4 million (from $64.5 million in 1996 to $69.9 million in 1997) and, as a percentage of route operations revenues, increased to 78.6% in 1997 from 77.2% in 1996. The increase of $5.4 million in 1997 was attributable to increases of $2.9 million in location rent expense, which was principally related to new chain locations, $1.3 million in workers' compensation and group health costs, $.4 million in payroll costs and $.8 million in other route operations expenses. Route operations expenses in 1997 increased as a percentage of route operations revenues primarily because of an increase in location rent, as a percentage of revenues, attributable to revenue sharing contracts and to increases in the costs and expenses described above. In general, the costs associated with revenues generated at new revenue sharing locations have been greater as a percentage of revenues than have the costs associated with the lost revenues. Casino operations expenses in 1997 decreased $3.8 million, from $6.6 million in 1996 to $2.8 million in 1997. With respect to casino operations expenses, 1996 includes $3.8 million of costs and expenses incurred by the Nugget and Jackpot's casino operations at Debbie's Casino. Amortization expense decreased $.5 million in 1997, from $2.2 million in 1996 to $1.7 million in 1997. The decrease in amortization expense in 1997 was primarily attributable to reductions in amortization expense related to lease acquisition costs and prior service costs associated with the Jackpot Retirement Plan for Directors. 1997 did not include any amortization expense of prior service costs as all such costs have been fully amortized at June 30, 1996. Depreciation expense in 1997 decreased $.8 million, from $4.3 million in 1996 to $3.5 million in 1997. The decrease in depreciation expense in 1997 was primarily attributable to gaming machines acquired in connection with the purchase of a gaming machine route business in 1992, which had become fully depreciated in 1996. General and administrative expenses in 1997 remained constant at approximately $4.2 million compared to 1996. Other income (expense): Other income (expense) in 1997, which consists primarily of tax-exempt interest income, remained constant at approximately $1.5 million compared to 1996. Other: The effective tax rate in 1997 was approximately 31%, which was slightly lower than the 32% rate in 1996 primarily because of the increase in the tax benefit from tax-exempt interest income in 1997. General: Operating income in 1997 increased $2.7 million, from $7.1 million in 1996 to $9.8 million in 1997. Operating income in 1996 includes a charge of approximately $2.2 million, which consisted primarily of the write-down of the carrying amount of certain long-lived assets of Jackpot Owl, Inc. (the "Owl Club") to fair value. The remainder of the increase in operating income of approximately $.5 million resulted primarily from a decrease in amortization and depreciation expenses of approximately $1.3 million, net of a decrease in the casino operations operating margin of $.7 million. The decrease of $.7 million (from $.9 million in 1996 to $.2 million in 1997) was due primarily to the ceasing of Jackpot's operations at Debbie's Casino and the sale of Jackpot's interest in the Nugget, as previously described. Net income in 1997 increased $2.0 million (from $5.8 million in 1996 to a record $7.8 million in 1997) and earnings per share in 1997 was a record $.85, versus earnings per share in 1996 of $.63 due primarily to the results of the operations described above. 1996 compared to 1995 _____________________ General: On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of the Owl Club and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Prior to the Board's approval to dispose of Jackpot's two remaining casinos, Jackpot sold its interest in the Nugget effective June 30, 1996. As a result of Jackpot's decision to dispose of its remaining casinos and the sale of the Nugget, a charge of approximately $2.2 million was recorded in the fourth quarter of 1996. The charge consisted primarily of the write-down of the carrying amount of certain long-lived assets of the Owl Club to fair value. Principally, as a result of this charge, net income and earnings per share in 1996 decreased to $5.9 million and $.63, respectively, from $6.6 million and $.72, respectively, in 1995. Revenues: Total revenues in 1996 decreased $5.8 million, from $96.9 million in 1995 to $91.1 million in 1996. The decrease in total revenues of $5.8 million was the net result of a decrease of $4.4 million (from $87.9 million in 1995 to $83.5 million in 1996) in route operations revenues and a decrease of $1.4 million (from $9.0 million in 1995 to $7.6 million in 1996) in casino operations revenues. The decrease in route operations revenues of $4.4 million was due primarily to the closing or loss, based on management's commitment to maintain pricing discipline, of certain non-chain locations and to the loss of the Company's right to operate at all three Phar-Mor locations in Nevada due to the permanent closing by Phar-Mor of such locations in connection with Phar-Mor's bankruptcy reorganization plan. The decrease in route operations revenues resulted from a combination of additional revenues generated from new locations, net of lost revenues from terminated locations and a decrease in revenues at existing locations. In 1996, new locations generated revenues of approximately $4.4 million. Terminated locations had generated revenues of $6.7 million in 1995, while revenues at existing locations decreased $2.1 million in 1996. The decrease in casino operations revenues in 1996 of approximately $1.4 million was due principally to the decline in Jackpot's revenues generated at Debbie's Casino. Such decline was due to the ceasing of Jackpot's casino operations at the location, effective March 31, 1996, and also to a decrease in revenues for the nine months ended March 31, 1996, versus the comparable prior year period. Jackpot had operated approximately 175 gaming machines at this location. Costs and expenses: Route operations expenses in 1996 decreased $1.9 million (from $66.3 million in 1995 to $64.4 million in 1996) and, as a percentage of route operations revenues, route operations expenses increased to 77.2% in 1996 from 75.5% in 1995. The decrease of $1.9 million was attributable to decreases of $.8 million in location rent expense, $.2 million in payroll costs, $.4 million in workers' compensation costs and $.5 million in other route operations expenses. Route operations expenses in 1996 increased as a percentage of route operations revenues primarily because of the loss of the right to operate at the Phar-Mor locations, with which route operations expenses were lower as a percentage of route operations revenues than Jackpot's overall percentage, from the decrease in revenues at existing fixed payment lease locations and from the increase in location rent expense, as a percentage of route operations revenues, attributable to revenue sharing contracts. In general, the costs associated with revenues generated at new locations have been greater as a percentage of revenues than have the costs associated with the lost revenues. Casino operations expenses in 1996 decreased $1.2 million (from $7.9 million in 1995 to $6.7 million in 1996) and, as a percentage of casino operations revenues, casino operations expenses decreased to 87.9% in 1996 from 88.2% in 1995 due primarily to the closing in February 1995 of operations of Water Street Casino, Inc. dba the Post Office Casino (the "Post Office Casino"). With respect to casino operations expenses, 1995 includes approximately $.9 million of costs and expenses incurred by the Post Office Casino. Amortization expense in 1996 decreased $.7 million, from $2.9 million in 1995 to $2.2 million in 1996. The decrease in amortization expense in 1996 was primarily attributable to the decrease in amortization expense related to the three Phar-Mor locations. As a result of the permanent closing of Phar-Mor's three locations in Nevada, Jackpot wrote off all remaining lease acquisition costs related to Phar-Mor in the fourth quarter of 1995. Depreciation expense in 1996 decreased $1.1 million, from $5.4 million in 1995 to $4.3 million in 1996. The decrease in depreciation expense in 1996 was primarily attributable to gaming machines acquired in connection with the purchase of a gaming machine route business in 1992, which had become fully depreciated in 1996. General and administrative expenses in 1996 decreased $1.2 million (from $5.4 million in 1995 to $4.2 million in 1996) primarily as a result of decreases in payroll and other compensation related costs in connection with a reduction in personnel. Other income (expense): Other income (expense) in 1996 increased $.6 million (from $.9 million in 1995 to $1.5 million in 1996) primarily from the increase in the net gain on sales of certain non-operating assets and from the increase in interest income as a result of the increase in available cash and cash equivalents. Other: The effective tax rate in 1996 was approximately 32%, which was slightly lower than the 33% rate in 1995 primarily because of the increase in tax benefits from tax-exempt interest income in 1996. Operating income in 1996 decreased $1.9 million, from $9.0 million in 1995 to $7.1 million in 1996. The decrease in operating income of $1.9 million was due primarily to the loss from the write-down and sale of casino properties of approximately $2.2 million previously described. Forward-looking statements: Certain information included in this Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission contains statements that may be considered forward-looking. In addition, from time to time, the Company may release or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, competitive pressures, the loss or nonrenewal of any of Jackpot's significant contracts, conditioning or suspension of any gaming license, adverse results of significant litigation matters, possible future financial difficulties of a significant customer and the continued growth of the gaming industry and population in Nevada. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. The Company assumes no obligation to update or supplement forward-looking statements as a result of new circumstances or subsequent events. Item 8. Financial Statements and Supplementary Data ___________________________________________ The Financial Statements and Supplementary Data required by this Item 8 are set forth as indicated in Item 14(a)(1)(2). Item 9. Changes in and Disagreements with Accountants on ________________________________________________ Accounting and Financial Disclosure ___________________________________ Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant __________________________________________________ Item 11. Executive Compensation ______________________ Item 12. Security Ownership of Certain Beneficial Owners and ___________________________________________________ Management __________ Item 13. Certain Relationships and Related Transactions ______________________________________________ The information required by items 10, 11, 12 and 13 are incorporated by reference from the 1997 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ___________________ (a) (1) and (2) Consolidated Financial Statements and Schedules For a list of the consolidated financial statements and consolidated financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. (a)(3) The exhibits filed and incorporated by reference are listed in the index of Exhibits required by Item 601 of Regulation S-K at Item (c) below. (b) Reports on Form 8-K During the last quarter of the fiscal year ended June 30, 1997, Jackpot filed no reports on Form 8-K. (c) Exhibits 3.1 Articles of Incorporation of the Registrant, as amended (C) 3.2 By-laws of the Registrant, as amended (C) 3.3 Form of Amendment to Articles of Incorporation of Registrant (J) 4.1 Stockholder Rights Agreement dated as of July 11, 1994 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (K) 10.1 Employment and consulting agreement with Neil Rosenstein (B), as amended (E), and as further amended (F)(N) 10.2 License agreement with Albertson's, Inc. (H) 10.3 License agreement with Thrifty PayLess, Inc. (F) 10.4 License agreement with Safeway Stores, Inc. (A) 10.5 1990 Incentive and Nonqualified Stock Option Plan (D)(N) 10.6 Indemnification Agreement (Sample) (E) 10.7 Salary Continuation Plan for Executives (E)(N) 10.8 Form of Retirement Plan for Directors (F) 10.9 Amendment No. 2 to Employment Agreement with Neil Rosenstein (E)(N) 10.10 1992 Incentive and Non-qualified Stock Option Plan (G)(N) 10.11 Form of First Amendment to Retirement Plan for Directors (I) 10.12 Employment Agreement with Don R. Kornstein (L)(N) 10.13 License agreement with American Drug Stores, Inc. (M) 10.14 License agreement with American Drug Stores, Inc. (M) 10.15 License agreement with Kmart Corporation (M) 10.16 License agreement with Lucky Stores, Inc. (M) 10.17 Amendments to License agreement with Thrifty PayLess, Inc. (M) 11.1 Computation of Earnings Per Common Share (M) 21.1 List of Registrant's subsidiaries (M) 23.1 Consent of Deloitte & Touche LLP (M) 27.1 Financial Data Schedule (EDGAR version only) (A) Incorporated by reference to Registrant's Registration Statement on Form S-2 dated May 4, 1989 (Registration No. 33-27614). (B) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1988. (C) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1989. (D) Incorporated by reference to Registrant's Registration Statement on Form S-3 dated December 12, 1990 (Registration No. 33-38210). (E) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1991. (F) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1992. (G) Incorporated by reference to Registrant's 1992 Proxy Statement. (H) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1993. (I) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 1993. (J) Incorporated by reference to Registrant's 1993 Proxy Statement. (K) Incorporated by reference to Registrant's Form 8-A dated July 12, 1994. (L) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 1994. (M) Included herein. (N) Management contract or compensatory plan or arrangement which is separately identified in accordance with Item 14(a)(3) of Form 10-K. (d) Schedules For a list of the financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 23, 1997 JACKPOT ENTERPRISES, INC. (Registrant) By: /s/ Don R. Kornstein ____________________ Don R. Kornstein President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date _________ _____ ____ /s/ Don R. Kornstein President, Chief September 23, 1997 ___________________________ Executive Officer Don R. Kornstein and Director (Principal Executive Officer) /s/ Bob Torkar Senior Vice President- September 23, 1997 ___________________________ Finance, Bob Torkar Treasurer and Chief Accounting Officer (Principal Financial and Accounting Officer) /s/ Allan R. Tessler Chairman of the Board September 23, 1997 ___________________________ Allan R. Tessler /s/ David R. Markin Director September 23, 1997 ___________________________ David R. Markin /s/ Robert L. McDonald, Sr. Director September 23, 1997 ___________________________ Robert L. McDonald, Sr. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULES [ITEMS 8 AND 14(a)] (1) FINANCIAL STATEMENTS: Independent Auditors' Report Consolidated Balance Sheets June 30, 1997 and 1996 Consolidated Statements of Income Years Ended June 30, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity Years Ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows Years Ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) SUPPLEMENTARY DATA: Quarterly Financial Information Years Ended June 30, 1997 and 1996 (3) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements or notes thereto. INDEPENDENT AUDITORS' REPORT Jackpot Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Jackpot Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jackpot Enterprises, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Las Vegas, Nevada August 1, 1997 JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996 (Dollars in thousands) ASSETS 1997 1996 ______ ________ ________ Current assets: Cash and cash equivalents $ 47,945 $ 39,024 Prepaid expenses 1,438 1,740 Other current assets 1,728 3,515 ________ ________ Total current assets 51,111 44,279 ________ ________ Property and equipment, at cost: Land and buildings 1,535 1,535 Gaming equipment 28,202 27,839 Other equipment 4,595 4,282 Leasehold improvements 339 336 ________ ________ 34,671 33,992 Less accumulated depreciation (21,582) (20,697) ________ ________ 13,089 13,295 Lease acquisition costs and other intangible assets, net of accumulated amortization of $6,198 and $5,142 3,596 4,749 Goodwill, net of accumulated amortization of $2,547 and $2,382 4,074 4,240 Lease and other security deposits 2,959 3,436 Other non-current assets 438 743 ________ ________ Total assets $ 75,267 $ 70,742 ======== ========
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996 (Dollars in thousands, except share data) (Concluded) LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ____________________________________ _______ _______ Current liabilities: Accounts payable $ 375 $ 504 Other current liabilities 4,407 3,439 _______ _______ Total current liabilities 4,782 3,943 Deferred rent 2,510 3,025 Deferred income tax 633 Other liabilities 61 279 _______ _______ Total liabilities 7,986 7,247 _______ _______ Commitments and contingencies Stockholders' equity: Preferred stock - authorized 1,000,000 shares of $1 par value; none issued Common stock - authorized 30,000,000 shares of $.01 par value; 9,823,993 and 9,631,278 shares issued 98 96 Additional paid-in capital 66,033 64,129 Retained earnings 9,253 2,905 Less 741,958 and 293,748 shares of common stock in treasury, at cost (8,103) (3,635) _______ _______ Total stockholders' equity 67,281 63,495 _______ _______ Total liabilities and stockholders' equity $75,267 $70,742 ======= =======
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (Dollars in thousands, except per share data) 1997 1996 1995 _______ _______ _______ Revenues: Route operations $88,895 $83,533 $87,892 Casino operations 3,009 7,575 8,961 _______ _______ _______ Totals 91,904 91,108 96,853 _______ _______ _______ Costs and expenses: Route operations 69,905 64,460 66,342 Casino operations 2,835 6,661 7,904 Amortization 1,728 2,199 2,880 Depreciation 3,461 4,284 5,349 General and administrative 4,153 4,163 5,410 Loss from write-down and sale of casino properties 2,247 _______ _______ _______ Totals 82,082 84,014 87,885 _______ _______ _______ Operating income 9,822 7,094 8,968 _______ _______ _______ Other income (expense): Interest and other income 1,546 1,538 1,053 Interest expense (22) (146) _______ _______ _______ Totals 1,546 1,516 907 _______ _______ _______ Income before income tax 11,368 8,610 9,875 _______ _______ _______ Provision (credit) for Federal income tax: Current 3,086 2,421 (588) Deferred 438 334 3,847 _______ _______ _______ Totals 3,524 2,755 3,259 _______ _______ _______ Net income $ 7,844 $ 5,855 $ 6,616 ======= ======= ======= Earnings per common share $ .85 $ .63 $ .72 ======= ======= =======
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (Dollars and shares in thousands, except per share data) Retained Treasury Common Stock Additional Earnings Stock Total _____________ Paid-in (Accumulated ______________ Stockholders' Shares Amount Capital Deficit) Shares Amount Equity ______ ______ __________ ____________ ______ _______ _____________ Balance July 1, 1994 9,345 $93 $64,844 $(6,796) (125) $(1,875) $56,266 Tax benefit from stock options 277 277 Cash dividends ($.32 per share) (2,950) (2,950) Issuance and receipt of shares on exercise of stock options 250 3 1,764 (169) (1,760) 7 Net income 6,616 6,616 _____ ___ _______ _______ ____ _______ _______ Balance June 30, 1995 9,595 96 63,935 (180) (294) (3,635) 60,216 Tax benefit from stock options 54 54 Cash dividends ($.32 per share) (201) (2,770) (2,971) Issuance of shares on exercise of stock options 36 341 341 Net income 5,855 5,855 _____ ___ _______ _______ ____ _______ _______ Balance June 30, 1996 9,631 96 64,129 2,905 (294) (3,635) 63,495 Tax benefit from stock options 48 48 Cash dividends ($.16 per share) (1,496) (1,496) Issuance and receipt of shares on exercise of stock options 193 2 1,856 (164) (1,665) 193 Repurchase of common stock (284) (2,803) (2,803) Net income 7,844 7,844 _____ ___ _______ _______ ____ _______ _______ Balance June 30, 1997 9,824 $98 $66,033 $ 9,253 (742) $(8,103) $67,281 ===== === ======= ======= ==== ======= =======
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (Dollars in thousands) 1997 1996 1995 _______ _______ _______ Operating activities: Net income $ 7,844 $ 5,855 $ 6,616 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,189 6,483 8,229 Deferred Federal income tax 438 334 3,847 Write-down and sale of casino properties 2,247 Other, net (393) (410) Increase (decrease) from changes in: Prepaid expenses and other current assets 174 200 (384) Other non-current assets (51) 69 108 Accounts payable and other current liabilities 1,585 (860) (1,269) Deferred rent and other liabilities (595) (683) 1,331 Assets and liabilities of sold subsidiary, net (474) _______ _______ _______ Net cash provided by operating activities 14,584 12,778 18,068 _______ _______ _______ Investing activities: Proceeds from sales of short-term investments, net 509 Proceeds from sales of equipment and other non-current assets 1,625 1,390 1,053 Purchases of property and equipment (3,393) (4,267) (4,044) Increase in lease acquisition costs and other intangible assets (524) (433) (501) Lease and other security deposits 477 27 Advances to equity investee (1,498) Other, net 258 219 124 _______ _______ _______ Net cash used in investing activities (1,557) (3,091) (4,330) _______ _______ _______ Financing activities: Repayments of long-term debt (949) (1,422) Proceeds from issuance of common stock 193 341 7 Repurchases of common stock (2,803) Dividends paid (1,496) (2,971) (2,950) _______ _______ _______ Net cash used in financing activities (4,106) (3,579) (4,365) _______ _______ _______ Net increase in cash and cash equivalents 8,921 6,108 9,373 Cash and cash equivalents at beginning of year 39,024 32,916 23,543 _______ _______ _______ Cash and cash equivalents at end of year $47,945 $39,024 $32,916 ======= ======= ======= Supplemental disclosures of cash flow data: Cash paid during the year for: Interest $ - $ 22 $ 146 Federal income tax $ 1,840 $ 1,800 $ - Non-cash investing and financing activities: Common stock surrendered on exercise of stock options $ 1,665 $ - $ 1,760 Tax benefit from exercise of stock options $ 48 $ 54 $ 277 Reduction of debt upon sale of other non-current asset $ - $ - $ 479
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business: Business: Jackpot Enterprises, Inc., which was organized in 1980, conducts business in the gaming industry and generates revenues from gaming machine route operations and casino operations (see Note 3). Gaming machine route operations involve the installation, operation and service of gaming machines owned by Jackpot that are located in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada. Principles of consolidation: The accompanying consolidated financial statements include the accounts of Jackpot Enterprises, Inc. and its controlled subsidiaries ("Jackpot"). All material intercompany accounts and transactions are eliminated. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are liquid investments with a maturity of three months or less when acquired and are considered cash equivalents for purposes of the consolidated statements of cash flows. Cash equivalents are stated at cost which approximates fair value due to their short maturity. Revenue recognition: In accordance with industry practice, Jackpot recognizes as gaming revenues the net wins from gaming activities, which is the difference between gaming wins and losses. Route operations' revenues include the net wins generated under revenue-sharing agreements. Revenues from casino operations are gaming wins less losses. Complimentary food and beverage furnished gratuitously by casino operations to customers is not material. Location rent expense: Fixed rental payments (including scheduled increases) are recorded on a straight-line basis over the agreement term including any optional extension periods which are expected to be exercised. Contingent payments are expensed in the period incurred. Renewal agreements are considered new agreements and accounted for as described above over the new agreement term. Revenue-sharing payments to route locations are recorded as location rent expense. Preopening costs: Certain costs incurred prior to and in connection with the opening of a casino operation are capitalized and expensed upon the opening of the casino. Depreciation of property and equipment: Depreciation is provided using the straight-line method for property and equipment, including property held for rental. Estimated useful lives, limited as to leasehold improvements by the term of the lease, range as follows: Buildings 30 to 40 years Gaming equipment 4 to 7 years Other equipment 3 to 7 years Leasehold improvements 1 to 12 years Lease acquisition costs and other intangible assets: Significant incremental costs associated with the acquisition of location leases are capitalized. Incremental costs capitalized and amounts allocated to lease acquisition costs are amortized on a straight-line basis over the term of the related leases, including expected renewals, which range from 1 to 12 years. Lease acquisition costs and other intangible assets include lease acquisition costs, net of accumulated amortization, of $3,029,000 and $3,934,000 as of June 30, 1997 and 1996. Goodwill: Goodwill represents the excess of the costs of acquired businesses over the fair value of their net assets when acquired and is amortized on a straight-line basis over a period of 40 years. Income tax: A deferred tax liability or asset is recognized at each balance sheet date that represents the amount of tax expected to be payable or refundable in future years as a result of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts, using current tax rates and laws. The deferred portion of the tax provision or benefit is the result of changes in the net deferred tax asset or liability for the period. Earnings per common share: Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Stock options and warrants have been excluded from the computations in 1997, 1996 and 1995 because they had no effect on earnings per common share. The weighted average number of common shares outstanding was 9,237,000, 9,307,000 and 9,235,000 in 1997, 1996 and 1995. Recently issued accounting standards: In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which is effective for fiscal years beginning after December 15, 1995. SFAS 121 requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The adoption of SFAS 121, which was effective July 1, 1996, had no effect on the consolidated financial statements. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods, including interim periods, ending after December 15, 1997. Earlier adoption of the statement is not permitted. SFAS 128 establishes standards for computing and presenting earnings per share ("EPS"), including the replacement of the presentation of primary EPS with the presentation of basic EPS, as defined. Upon adoption of SFAS 128, all prior-period EPS data presented shall be restated to conform with the provisions of the statement. As required by SFAS 128, Jackpot will adopt this statement for the three month period ending December 31, 1997. Management believes that the implementation of SFAS 128 will not have a significant impact on EPS. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which is effective for periods ending after December 15, 1997. SFAS 129 establishes standards for disclosing information about an entity's capital structure. Management intends to comply with the disclosure requirements of this statement. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Management does not believe this statement will have a material impact on the consolidated financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. Management has not determined the extent of the disclosure required by SFAS 131. Note 2 - Cash and cash equivalents: Cash equivalents are comprised primarily of marketable municipal bonds and money market accounts. Cash and cash equivalents include cash equivalents of $34,499,000 and $29,716,000 at June 30, 1997 and 1996. Note 3 - Casino operations: On August 13, 1996, Jackpot's Board of Directors (the "Board") approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Jackpot continues to market such properties for sale. However, unless Jackpot is able to enter into agreements for the sale of these properties, on terms acceptable to Jackpot, no assurance can be given that such disposals will occur. The Owl Club, as of June 30, 1997, operated 90 gaming machines and two live table games in Battle Mountain, Nevada. The Owl Club also has a beverage operation incident to the conduct of gaming activities, a restaurant operation and an eighteen room motel. Jackpot owns the land and buildings used in the Owl Club's casino and motel operations. Jackpot manages the operations of the Pony Express Casino in Jackpot, Nevada under a five-year space lease agreement, which Jackpot may terminate after September 15, 1997 upon fifteen days written notice to the lessor. As of June 30, 1997, Jackpot operated 94 gaming machines at this location. Prior to the Board's approval to dispose of Jackpot's remaining two casinos, Jackpot sold its 88.9% interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada, effective June 30, 1996. As a result of Jackpot's decision to dispose of its two remaining casinos and the sale of the Nugget, a charge of $2,247,000 was recorded in the fourth quarter of fiscal 1996, which consisted primarily of the write-down to fair value of $1,978,000 for certain long-lived assets of the Owl Club, including the remaining carrying value of $858,000 for goodwill. As of June 30, 1997, the carrying value of assets to be disposed of associated with the Owl Club and the Pony Express Casino was approximately $1,500,000. The results of operations of the Owl Club and the Pony Express Casino were not material in 1997, 1996 and 1995. Note 4 - Other current liabilities: Other current liabilities consist of the following (dollars in thousands): June 30, ________________ 1997 1996 ______ ______ Accrued employee benefits $1,740 $1,733 Accrued professional fees 468 244 Accrued progressive jackpots 528 454 Federal income tax payable 362 Accrued rent 258 283 Other 1,051 725 ______ ______ Totals $4,407 $3,439 ====== ======
Note 5 - Stockholders' equity: Preferred stock purchase rights: In June 1994, the Board approved a Stockholder Rights Plan and on July 11, 1994, declared a dividend distribution of one Preferred Stock purchase right (the "Rights") payable on each outstanding share of common stock, as of July 15, 1994. On July 15, 1994, there were approximately 9,220,000 Rights to purchase Series A Junior Preferred Stock outstanding. The Rights become exercisable only in the event, with certain exceptions, an acquiring party accumulates 15% or more of Jackpot's voting stock, or if a party announces an offer to acquire 30% or more of Jackpot's voting stock. The Rights expire on July 15, 2004. Each Right will entitle the holder to purchase one-hundredth of a share of a Series A Junior Preferred Stock at a price of $30. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either Jackpot's Preferred Stock or shares in an "acquiring entity" at half of market value. The Rights may be redeemed by Jackpot at $.01 per Right prior to the close of business on the tenth day after a public announcement that beneficial ownership of 15% or more of Jackpot's shares of voting stock has been accumulated by a single acquiror or a group (with certain exceptions), under circumstances set forth in the Rights Agreement. At June 30, 1997 and 1996, 150,000 shares of Series A Junior Preferred Stock were authorized, but unissued, and were reserved for issuance upon exercise of the Rights. The issuance of the Rights did not have a dilutive effect on earnings per share in 1997, 1996 and 1995. Stock option plans: On December 7, 1990, Jackpot's stockholders approved the 1990 Incentive and Nonqualified Stock Option Plan (the "1990 Plan"), which became retroactively effective on June 27, 1990. Under the 1990 Plan, the Board may grant "incentive" or "nonqualified" stock options up to 929,846 shares of Jackpot's common stock (the "Common Stock"). On September 30, 1992, the Board adopted the 1992 Incentive and Non- qualified Stock Option Plan (the "1992 Plan"), which was approved by Jackpot's stockholders on January 12, 1993. The 1992 Plan is administered by a committee of the Board (the "Committee"). On August 17, 1994, the Board adopted certain amendments (the "Amendments") to the 1992 Plan which were approved by Jackpot's stockholders on January 10, 1995. The Amendments increased the number of shares of Common Stock authorized for issuance pursuant to the 1992 Plan from 1,045,000 shares to 2,545,000. The 1992 Plan provides that each individual who is a member of the Board on June 30 of any year, including any future director on any such date, will automatically be granted nonqualified stock options to purchase 27,500 shares of Common Stock on each such June 30. The option price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year, and expire five years from the date of grant. The exercise price of the June 30, 1997 option grants will be determined September 30, 1997, at which time the options become exercisable. At June 30, 1997, options granted to Jackpot's directors to purchase an aggregate of 577,500 shares of Common Stock were outstanding, of which 467,500 were exercisable. The 1990 Plan and 1992 Plan terminate on the earlier of (i) when all shares subject to the 1990 Plan and 1992 Plan have been issued pursuant to the exercise of options granted under the 1990 Plan and 1992 Plan, or (ii) June 26, 2000 and September 30, 2002, respectively, or on such earlier date as the Board or the Committee may determine. Any option outstanding at the respective Plan termination date remains outstanding until it has either expired or has been exercised. Changes in options outstanding under the stock option plans are summarized below (shares in thousands): Number of Shares ________________ Per Share Incentive Nonqualified Exercise Price _________ ____________ _________________ Outstanding at July 1, 1994 33 1,336 $ 5.79 to $20.88 Automatic grant to directors 110 $10.75 Other grants 872 $ 8.50 to $ 9.25 Exercised (155) $ 6.10 to $ 8.50 Canceled (2) (525) $ 5.79 to $20.88 ___ _____ Outstanding at June 30, 1995 31 1,638 $ 6.10 to $20.88 Automatic grant to directors 110 $10.00 Exercised (4) (36) $ 6.10 to $11.63 Canceled (18) (51) $ 6.10 to $11.63 ___ _____ Outstanding at June 30, 1996 9 1,661 $ 6.10 to $20.88 Automatic grant to directors 110 (A) Other grants 20 $11.00 Exercised (3) (190) $ 8.50 to $10.75 Canceled (6) (21) $ 6.10 to $11.63 ___ _____ Outstanding at June 30, 1997 0 1,580 $ 8.50 to $20.88 === ===== (1,217 shares exercisable)
(A) To be determined on September 30, 1997. Other nonqualified stock options: The Board has granted other nonqualified stock options to directors, certain officers, other employees and advisors at exercise prices equal to or greater than the fair market value of the underlying shares at the date of grant. Generally, options become exercisable immediately and expire no later than five years from the date of grant. Changes in other nonqualified stock options are summarized below (shares in thousands): Number Per Share of Shares Exercise Price _________ ________________ Outstanding at July 1, 1994 1,078 $ 6.28 to $20.91 Exercised (95) $ 6.28 Canceled (554) $10.87 to $20.91 _____ Outstanding at June 30, 1995 429 $ 9.19 to $15.00 Transactions - _____ Outstanding at June 30, 1996 429 $ 9.19 to $15.00 Canceled (50) $15.00 _____ Outstanding and exercisable at June 30, 1997 379 $ 9.19 to $10.63 =====
Accounting for stock-based compensation: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for fiscal years beginning after December 15, 1995. Although SFAS 123 encourages an entity to measure compensation by applying the fair value method of accounting for employee stock-based compensation arrangements, it permits an entity to continue to account for employee stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion 25 ("APB 25"). Jackpot has elected to continue to account for stock-based compensation in accordance with APB 25. Under APB 25, generally only stock options that have intrinsic value at the date of grant are considered compensatory. Intrinsic value represents the excess, if any, of the market price of the stock at the grant date over the exercise price of the option. Under SFAS 123, all stock option grants are considered compensatory. Compensation cost is measured at the date of grant based on the estimated fair value of the options determined using an option pricing model. The model takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the stock, expected dividends on the stock and the risk-free interest rate over the expected life of the option. The following table discloses Jackpot's pro forma net income and net income per share for 1997 and 1996 assuming compensation cost for employee stock options had been determined using the fair value-based method prescribed by SFAS 123. The table also discloses the weighted average assumptions used in estimating the fair value of each option grant on the date of grant using the Black-Scholes option pricing model, and the estimated weighted average fair value of the options granted. The model assumes no expected future dividend payments on Jackpot's Common Stock for the options granted in both 1997 and 1996 (dollars in thousands, except per share data): 1997 1996 ______ ______ Net income: As reported $7,844 $5,855 Pro forma 7,571 5,855 Net income per share: As reported $ .85 $ .63 Pro forma .82 .63 Weighted average assumptions: Expected stock price volatility 35.0% 39.1% Risk-free interest rate 6.1% 6.2% Expected option lives (in years) 2.5 2.5 Estimated fair value of options granted $ 3.18 $ 3.04
Because the accounting method prescribed by SFAS 123 is not applicable to options granted prior to July 1, 1995, the compensation cost reflected in the pro forma amounts shown above may not be representative of that to be expected in future years. Shares reserved for issuance: Shares of Common Stock were reserved for the exercise of the following (in thousands): June 30, ________________ 1997 1996 _____ _____ Stock option plans: Outstanding 1,580 1,670 Available for grant 956 1,074 Other nonqualified stock options 379 429 _____ _____ Totals 2,915 3,173 ===== =====
Common stock in treasury: In 1997, Jackpot purchased 283,771 shares of its Common Stock at the market price on the date of purchase for a total cost of approximately $2,803,000, or an average of $9.88 per share. Such purchases include 55,174 shares acquired from American Country Insurance Company for approximately $545,000 (the market price on the date of purchase). Two directors of Jackpot were directors and indirect beneficial owners of an aggregate of more than 51% of the common stock of such insurance company at the time of such purchase. Note 6 - Related party transactions: One director of Jackpot is a partner in a law firm that has provided various legal services for which Jackpot incurred legal fees aggregating approximately $179,000, $110,000 and $163,000 in 1997, 1996 and 1995. Also, see Note 5. Note 7 - Commitments and contingencies: Leases: Jackpot has noncancelable location license, lease and sublease agreements (referred to as "leases") for space at various locations for its gaming machines with terms expiring at various dates through 2004. Leases are generally at fixed rentals, although certain leases require payments based on percentages of revenues generated by gaming machines at the leased locations. In addition, office and warehouse space is utilized under noncancelable leases with terms expiring at various dates through 2006. In 1997, Jackpot entered into four agreements for long- term contract extensions which became effective July 1, 1997. Each agreement provides Jackpot the continued right to operate at certain existing locations and future locations, if any, of such customers. Presently, these agreements involve the operation of approximately 1,174 gaming machines in 76 locations. Future minimum payments (dollars in thousands) under such noncancelable operating leases or licenses, including the agreements mentioned above, aggregated approximately $168,595 at June 30, 1997, payable as follows: $32,614 in 1998; $32,943 in 1999; $25,658 in 2000; $25,819 in 2001; $25,816 in 2002; and $25,745 thereafter. Rent expense was comprised as follows (dollars in thousands): 1997 1996 1995 _______ _______ _______ Location leases: Fixed rentals $28,125 $25,633 $24,986 Percentage rentals 19,994 20,243 21,920 Office and equipment leases 453 452 472 _______ _______ _______ Totals $48,572 $46,328 $47,378 ======= ======= =======
Employment and severance agreements: Jackpot has an employment agreement with Don R. Kornstein, President, Chief Executive Officer and Director which currently expires on September 30, 2000. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein. Mr. Kornstein's employment agreement provides for an annual bonus based on various percentages of certain amounts by which earnings before interest, taxes, depreciation, amortization and certain other items, as defined in the agreement, exceed certain levels for such fiscal year. Mr. Kornstein's bonus was $169,000, $205,000 and $220,000 in 1997, 1996 and 1995. The aggregate commitment for future salaries at June 30, 1997, excluding bonuses, under Mr. Kornstein's agreement is approximately $2,356,000. In the event of termination of Mr. Kornstein's employment, as defined in the employment agreement, Mr. Kornstein, or his beneficiary, would receive a severance payment. The aggregate contingent liability at June 30, 1997 under Jackpot's employment and severance agreements is approximately $2,900,000. Financial instruments with concentration of credit risk: The financial instruments that potentially subject Jackpot to concentrations of credit risk consist principally of cash, cash equivalents, certain receivables and lease and other security deposits. Jackpot maintains cash and certain cash equivalents with financial institutions in amounts, which at times may be in excess of the FDIC insurance limits. Jackpot's cash equivalents are invested in several high-grade securities which limits Jackpot's exposure to concentrations of credit risk. A substantial portion of Jackpot's business activity is with customers who frequent retail stores (supermarkets, drugstores, merchandise stores and convenience stores) in Nevada. Generally, Jackpot leases space in stores which are part of a large chain of stores. At June 30, 1997, Jackpot had unsecured lease and other security deposits of $2,959,000 held primarily by two publicly-held chain stores. Legal matters: On August 17, 1992, Phar-Mor, Inc. ("Phar-Mor"), a large chain store, announced that it had filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Jackpot had operated 51 gaming machines at three Phar-Mor store locations in Nevada under a license agreement dated February 10, 1990 (the "Original Agreement"). Under the Original Agreement, Jackpot made certain advances to Phar-Mor. Thereafter, Jackpot and Phar-Mor, subject to bankruptcy court approval, entered into an amended license agreement, dated January 1, 1993 (the "Amended Agreement"). If the Amended Agreement were to become final, Jackpot would receive credits for certain prepaid sums but would be required to pay certain additional obligations. On May 12, 1995, Phar-Mor announced the closing of 41 stores, including its three stores in Nevada. On May 24, 1995 Jackpot notified Phar-Mor that it was in default under (i) the Original Agreement, and (ii) the Amended Agreement to the extent applicable. Jackpot has taken the position that the Amended Agreement has not become operative and has not replaced the Original Agreement. Jackpot has claimed monetary damages in excess of several millions of dollars resulting from Phar-Mor's alleged default, consisting of, but not limited to certain refundable monies, prepaid license fees, lost profits and other consequential and incidental damages. On July 25, 1995, Phar-Mor notified Jackpot that it disagreed with Jackpot's position that Phar-Mor has defaulted under the terms of either the Original Agreement or the Amended Agreement. Phar-Mor maintains that the Amended Agreement is the operative agreement and is seeking to enforce its rights thereunder. On or about March 7, 1996, Phar-Mor filed a lawsuit against Jackpot in the United States Bankruptcy Court for the Northern District of Ohio, claiming it is owed approximately $1 million under the Amended Agreement. Jackpot has filed an answer and counterclaim reflecting its position that under the Original Agreement Jackpot is owed in excess of $3 million. All discovery has been completed and the parties have filed cross motions for summary judgment. The Court has not yet ruled upon such motions. Jackpot, based upon discussions with counsel, does not believe it is probable that Phar-Mor will prevail in this matter. If Phar-Mor were to prevail and the Amended Agreement is determined to be the operative agreement, Jackpot could be liable for certain obligations under the Amended Agreement up to approximately $1 million. If Jackpot were to prevail, it would become an unsecured creditor with respect to its claims against Phar-Mor which exceed $3 million. As a result of Phar-Mor's announcement, Jackpot wrote-off all remaining costs related to lease deposits, prepaid rent and other lease connected expenditures for Phar-Mor and adjusted certain amounts due Phar-Mor pursuant to terms of the Original Agreement in the fourth quarter of fiscal 1995. The write- down of the above mentioned assets, net of certain liability adjustments did not have a material effect on Jackpot's financial position or its fiscal 1995 results of operations. Jackpot is a party to various other claims, legal actions and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions filed by Jackpot. Management believes that its defenses are substantial in each of these matters and that Jackpot's legal position can be successfully defended without material adverse effect on its consolidated financial statements. Note 8 - Revenues derived from major locations: Gaming machine operations at two groups of affiliated store chains in 1997, 1996 and 1995 accounted for more than 10% of Jackpot's total revenues. Revenues for Jackpot's top two affiliated store chains were approximately $27,000,000 and $15,000,000, respectively, in 1997, $23,000,000 and $12,000,000, respectively in 1996, $22,000,000 and $12,000,000, respectively in 1995. Each individual store chain included in an affiliated group of store chains has a separate lease with Jackpot. Note 9 - Federal income tax: A reconciliation of the Federal statutory income tax rate to the effective income tax rate based on income before income tax follows: 1997 1996 1995 ____ ____ ____ Statutory rate 35.0% 35.0% 35.0% Increase (decrease) in tax resulting from: Surtax exemption (1.0) (1.0) (1.0) Tax-exempt interest (3.7) (4.0) (2.6) Amortization of goodwill 0.4 0.7 0.6 Other, net 0.3 1.3 1.0 ____ ____ ____ Effective rate 31.0% 32.0% 33.0% ==== ==== ====
The tax items comprising Jackpot's net deferred tax asset (liability) as of June 30, 1997, 1996 and 1995 are as follows (dollars in thousands): 1997 1996 1995 ______ ______ ______ Deferred tax assets: Write-down of assets $ 381 $ 381 $ 105 Deferred rent 854 1,041 1,205 Other accrued liabilities 520 556 646 Retirement plans 9 73 663 Other 98 75 293 ______ ______ ______ Totals 1,862 2,126 2,912 ______ ______ ______ Deferred tax liabilities: Difference between book and tax basis of property 987 527 842 Economic performance accruals 481 491 500 Other 1,027 676 804 ______ ______ ______ Totals 2,495 1,694 2,146 ______ ______ ______ Net deferred tax asset (liability) $ (633) $ 432 $ 766 ====== ====== ======
Jackpot realized tax benefits of $48,000, $54,000 and $277,000 in 1997, 1996 and 1995 as a result of the exercise of certain incentive and nonqualified stock options. The tax benefits have been reflected as a decrease in current income tax payable and an increase in additional paid-in capital. Note 10 - Benefit plans: Jackpot terminated a deferred profit sharing plan (the "Profit Sharing Plan"), effective March 31, 1996. Contributions to the Profit Sharing Plan, which covered substantially all employees, were at the discretion of the Board, subject to limitations based on profits as specified in the Profit Sharing Plan. The Profit Sharing Plan expense in 1995 was $100,000. The Profit Sharing Plan had no expense in 1997 and 1996. On May 14, 1996, Jackpot terminated the Jackpot Retirement Plan for Directors, as amended (the "Retirement Plan"). In consideration for the termination of the Retirement Plan, three directors received a lump sum distribution of accrued benefits in an aggregate amount of $1,485,000 ($495,000 each) in May 1996. Pursuant to the terms of the Retirement Plan, the amount of each director's distribution was equal to the aggregate of the annual base retainer paid to the respective director for years of service on the Board, including service prior to the implementation of the Retirement Plan on October 1, 1990, except for certain years that the directors waived such benefit. Interest was added to the accounts of each director quarterly, using the one-year Treasury bill rate. The funding of the accrued benefits under the Retirement Plan was made from a restricted trust. The amount of the distributions approximated the fair value of the investments in the trust. As a result of the termination of the Retirement Plan and the lump sum distributions in May 1996, there is no remaining obligations or liability under the Retirement Plan. On August 13, 1996, the Board approved the termination of the Salary Continuation Plan for Executives (the "Continuation Plan"). The Continuation Plan provides certain senior executives with a retirement benefit, which is based on compensation, to be paid over a period of up to 15 years beginning at normal retirement age. The Continuation Plan requires certain vesting periods and allows reduced benefits at certain early retirement ages and pre-retirement survivors' benefits. The Continuation Plan was unfunded at June 30, 1997 and 1996. The Company has entered into settlement agreements with substantially all of the individuals covered under the Continuation Plan. The accumulated and projected benefit obligations for the remaining executives covered under the Continuation Plan is not material at June 30, 1997. The Board waived current service benefits that would have accrued in 1997, 1996 and 1995 pursuant to the Retirement Plan and the Continuation Plan, other than the interest earned on accrued benefits. The Retirement Plan and the Continuation Plan, both defined benefit plans, had no plan assets. Interest cost on accrued benefits is included in general and administrative costs and expenses and the amortization of unrecognized prior service cost is included in amortization expense in the accompanying consolidated statements of income. The unrecognized prior service cost has been fully amortized at June 30, 1996. The accrued pension liability under the Continuation Plan was $279,000 at June 30, 1996 and was not material at June 30, 1997. The pension expense for Jackpot's defined benefit plans for 1997, 1996 and 1995 includes the following components (dollars in thousands): 1997 1996 1995 ____ ____ ____ Amortization of prior service cost $ - $253 $240 Interest cost on accrued benefits - 69 83 ____ ____ ____ Net pension expense $ - $322 $323 ==== ==== ====
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL INFORMATION YEARS ENDED JUNE 30, 1997 AND 1996 (Dollars in thousands, except per share data) (Unaudited) Summarized quarterly financial information for 1997 and 1996 follows: Quarter _______________________________ First Second Third Fourth _______ _______ _______ _______ 1997 ____ Revenues $21,955 $22,560 $22,947 $24,442 Gross operating income (A) 3,050 3,521 3,553 4,435 Income before income tax 2,279 2,810 2,856 3,423 Net income 1,573 1,938 1,971 2,362 Earnings per share: Primary .17 .21 .21 .26 Fully diluted .17 .21 .21 .26 1996 ____ Revenues $22,801 $22,384 $22,846 $23,077 Gross operating income (A) 3,692 3,718 3,432 3,603 Income before income tax 2,650 2,752 2,708 500 (B) Net income 1,802 1,871 1,842 340 Earnings per share: Primary .19 .20 .20 .04 Fully diluted .19 .20 .20 .04 (A) Gross operating income is revenues less route and casino operations' costs and expenses, deprecation associated with route and casino operations and amortization associated with lease acquisition costs. (B) Includes a charge of $2.2 million from the write-down and sale of certain casino properties. See Note 3 of Notes to Consolidated Financial Statements.
EX-10.13 2 EXHIBIT 10.13 "RCT" means the material omitted has been filed with the Securities & Exchange Commission with an application requesting confidential treatment. LICENSE AGREEMENT THIS AGREEMENT is entered into as of the 24th day of April 1997, between American Drug Stores, Inc., an Illinois corporation ("Licensor"), and Cardivan Company, a Nevada corporation ("Licensee"). Licensee and Licensor are collectively referred to as "the Parties". 1. Purpose. This Agreement sets forth the terms and conditions under which the Licensee shall have the exclusive right to operate certain gaming devices (the "Devices") (i) within each of the stores operated by Licensor in the State of Nevada which are designated on Exhibit "A" attached hereto and incorporated herein by reference (the "Existing Locations"), and (ii) in any additional stores opened or acquired by Licensor or an affiliate of Licensor for business to the public in the state of Nevada during the term of this Agreement which become subject to this Agreement pursuant to Section 4(d) hereof (the "New Locations", together with the Existing Locations, the "Licensed Locations"). Notwithstanding the foregoing, an off-site replacement of a Licensed Location which constitutes a "replacement store" in accordance with Licensor's internal policies, which opens concurrently with the closing of the Licensed Location it is replacing, and which is located not more than one mile from the Licensed Location it is replacing, shall not constitute a New Location for purposes of this Agreement. 2. License. Licensor hereby grants to Licensee the use of such amount of space (the "Gaming Space") as is reasonably required to set up the number of Devices currently permitted at such Licensed Location. For purposes of illustration, the Gaming Space at a Licensed Location in which 15 bill validator-equipped Devices are located would not be required to contain more than 450 square feet of space. The Gaming Space shall be located as close to the entrance and checkstand of the Licensed Location as is reasonably practicable with the exact location and square footage of the Gaming Space to be determined by mutual agreement of the parties. Licensee is also hereby granted an exclusive right to operate up to the maximum number of Devices currently allowed by the State of Nevada in each of the Licensed Locations. Notwithstanding the foregoing, the size of the Gaming Space and the location of the Devices in each of the Existing Locations shall be continued in the same manner as at the time of the execution of this Agreement except as changes thereto are made from time to time by mutual agreement between Licensor and Licensee. Licensor agrees to use its best efforts to expand the size of the Gaming Space at the Existing Locations where such expansion is required in order to replace the Devices currently located in such Existing Locations with an equal number of Devices containing bill validators and shall use its best efforts to complete any such required expansions by April 30, 1998. In the event that Licensor is not able to complete any such required expansions by April 30, 1998, the parties shall negotiate in good faith to arrive at an appropriate adjustment to the monthly fees payable hereunder; provided, that in no event shall the fee for any Licensed Location be reduced to an amount less than RCT per month. 3. Term. The term of the license for each Licensed Location shall begin on July 1, 1997 and shall expire at midnight on RCT. In addition, Licensee may, at its sole option, extend the term of this Agreement for an additional period of RCT commencing on RCT and expiring at RCT (the "Option Period") by giving written notice to Licensor of its intention to do so no earlier than RCT and no later than RCT; provided, that such option may only be exercised if (i) Licensee concurrently exercises its option to extend the term of that certain License Agreement between Licensee and Lucky Stores, Inc. dated of even date herewith, and (ii) Corral United, Inc. concurrently exercises its option to extend the term of that certain License Agreement between Corral United, Inc. and Licensor dated of even date herewith. Licensee shall have no option to renew or extend this License Agreement beyond RCT. 4. Fees. a. During the initial term of this License Agreement, Licensee agrees to pay Licensor the following amount per Licensed Location per month: Period Per Licensed Location Per Month ______ _______________________________ RCT RCT b. During the Option Period the Licensee agrees to pay Licensor the following amount per Licensed Location per month: Option Period Per Licensed Location Per Month _____________ _______________________________ RCT RCT c. The monthly amounts set forth above shall be subject to increase from time to time during the term of this Agreement and any extension hereof as follows. During the one-month period prior to RCT, Licensee shall determine the average monthly fee per Device being paid by Licensee to other customers pursuant to written contracts having a remaining duration of one year or more, or which may be paid pursuant to contracts under negotiation, for comparable store locations (the "Comparable Rent"). If the Comparable Rent is greater than the fee provided for above by more than 5%, the monthly fee shall be increased to the Comparable Rent for the duration of the applicable period. d. During the term of this Agreement, if Licensor opens or acquires any New Location and Licensor determines to include Devices at such New Location, Exhibit A hereto shall be amended to include such New Location and the monthly fees payable hereunder shall be adjusted accordingly. In the case of a New Location opened or acquired on or after RCT, the fees due pursuant to this Section 4 with respect to such New Location shall be RCT fee during the RCT period following the date such New Location is opened for business by Licensor; provided, that if Licensor has not taken all steps required to be taken by it to permit Licensee to commence operations at such New Location, the RCT period shall not commence until all such actions have been taken. In addition, in the event an Existing Location is closed for renovation for a period of RCT or more, the Fees with respect to such renovated Existing Location shall be RCT fee due pursuant to this Section 4 during the RCT period following the date such renovated Existing Location is reopened for business by Licensor; provided, that if Licensor has not taken all steps required to be taken by it to permit Licensee to recommence operations at such Existing Location, the RCT period shall not commence until all such actions have been taken. e. The above fee shall be due and payable on the first day of every month. If any of the above fees are not paid when due or within fifteen (15) days thereafter, Licensee shall pay Licensor interest on all amounts delinquent from the date of delinquency until paid at a rate equal to 150 percent of the prime rate charged preferred customers by Bank of America Nevada, determined as of the first day of the month preceding such delinquency and adjusted as of the first day of each month during the period of such delinquency, but not to exceed the greater of 24 percent per annum or the highest rate permitted by applicable law. f. In the event that (i) Licensor should effect a material reduction in the hours of operation of the Licensed Locations, considered as a whole, from the hours of operation in effect on the date of this Agreement, or (ii) there should be a change in the laws or regulations applicable to the operation of gaming devices in retail food and drug facilities which has the effect of materially reducing the revenues received by Licensee from its operation of the Devices hereunder, the parties shall negotiate in good faith to arrive at an equitable adjustment to the terms of the Agreement. 5. Taxes. Licensee agrees to pay all taxes (other than real estate taxes) payable in connection with the conduct of its business in the Licensed Locations, including personal property taxes levied against the Devices, fixtures, and other personal property of the Licensee in the Licensed Locations. Licensee will pay all social security, unemployment, and old age benefit taxes, state, federal, and local, or other similar taxes due with respect to employees or wages paid to employees of the Licensee in the Licensed Locations. Licensee will maintain and pay all license fees, federal, state, county, or city, necessary for its operations in the Licensed Locations. 6. Use and Operation. Licensee agrees to use the Gaming Space within the Licensed Locations as a department for the sole purpose of operating the Devices in such space and will at all times conduct said department and all branches of its business in a first-class business like and attractive high-grade and proper manner, including, without limitation, (1) maintaining the Devices in good condition and repair at its own expense and at no expense to Licensor; (2) replacing any out of date Devices at its own expense with modern, up-to-date Devices from time to time; (3) employing a change cashier or installing money changing devices so that the store cashiers in the Licensed Location will not be required to make change for the operation of the Devices; and (4) not employing any person or persons within the Licensed Locations deemed objectionable by Licensor, Licensee agreeing upon request of Licensor to remove any such objectionable employee as quickly as reasonably possible under existing federal, state, and local laws. Signs of such type and size as may be mutually agreed upon by Licensor and Licensee shall be placed by Licensee in a conspicuous place at each of the Licensed Locations stating that Licensee is the owner and operator of the Devices. Licensor shall not change the smoking policies in the Gaming Spaces from those currently in effect without the prior written consent of Licensee, unless and to the extent such change is required by law or regulation. 7. Title to Property. All personal property (including, without limitation, the Devices) placed on the Licensed Locations by Licensee shall be and remain the personal property of Licensee (except as provided in Section 12 with respect to default) and, upon the expiration or earlier termination of this Agreement, Licensee shall within ten (10) days thereafter and at its sole expense, remove from the Licensed Locations all such personal property and restore such Licensed Locations to their original conditions, ordinary wear and tear excepted. 8. General Covenants. Licensee agrees to comply with all applicable laws, ordinances, and governmental regulations now in force or hereafter enacted relating to the business operations of the Licensee in the Licensed Locations; to make any and all alterations, repairs, and changes, at its expense, required by any such laws, ordinances, or governmental regulations; to maintain the Gaming Space occupied by Licensee within each of the Licensed Locations in a clean state and in good condition and repair; not to make any alterations in such space without the prior written consent of Licensor; and at the expiration or termination of this Agreement, to surrender peaceable possession thereof to Licensor in as good condition as it received the same, loss or damage by fire (except if caused by the act or neglect of Licensee or its employees) and wear and tear resulting from reasonable use excepted. 9. Indemnification and Insurance. Licensee agrees to indemnify and hold Licensor harmless from all claims, demands, causes of action, losses, damages, and liability, including costs and expenses and reasonable attorneys' fees incurred by Licensor in connection with any claim by third parties, including employees of Licensee, for injury to or death or damage to property occurring in or on or about the portions of the Licensed Locations licensed to Licensee or arising out of operations conducted by Licensee. Licensee, at its own cost and expense, shall maintain commercial general liability and automobile liability insurance with a limit of not less than $1,000,000 applicable to any one occurrence. Such insurance shall name Licensor as an additional insured with respect to operations conducted in connection with this Agreement. Licensee shall maintain Workers' Compensation insurance for its employees in the form required by the State of Nevada or provide Workers' Compensation on a self-insured basis in compliance with applicable Nevada regulations. Licensee shall, upon request, provide Licensor with certificate(s) evidencing the foregoing insurance coverages. Whether or not it elects to insure its personal property at locations covered by this Agreement, Licensee hereby waives any right of recovery from Licensor for any loss or damage to such property resulting from any of the perils insured against in the standard form fire insurance policy with Extended Coverages and Vandalism and Malicious Mischief Endorsements. To the extent that any insurance maintained by Licensee includes coverage against additional perils, this waiver shall apply with respect to loss damage resulting from such other perils. 10. Termination of License. If Licensor ceases to do business in any of the Licensed Locations for any reason whatsoever, this License Agreement shall terminate as to the Licensed Locations where such business is discontinued, effective at the time of such discontinuance, and thereafter the license fees payable under this Agreement will be reduced pro rata for the affected Licensed Locations. This License Agreement will continue to apply to all remaining Licensed Locations. 11. Interruption of Business. If the business of any Licensed Locations subject to this Agreement is substantially interrupted by reason of a major remodeling, fire, other casualty, or any other cause not the fault of Licensee, and such interruption substantially and adversely affects the business of Licensee in such Licensed Location, then, from and after such interruption and until the cause thereof has been corrected or eliminated, the fees due Licensor hereunder for such Licensed Locations shall be equitably reduced or abated to the extent agreed between the parties. 12. Default. If Licensee (i) defaults in the payment of the fees payable by it hereunder or fails to perform any other of its obligations under this Agreement, and Licensee fails to cure such default within a period of fifteen (15) days after written notice from Licensor, or (ii) Licensee defaults in the payment of fees or performance of its other obligations under that certain License Agreement between Licensee and Lucky Stores, Inc. dated of even date herewith, and such default is not cured within the grace period provided therein, or (iii) Corral United, Inc., an affiliate of Licensee, defaults in the payment of fees or performance of its obligations under that certain License Agreement between Corral United, Inc. and Licensor dated of even date herewith and such default is not cured within the applicable grace period provided therein, then, in any of such events, Licensor shall have all rights and remedies now or hereafter provided by law and, in addition, may do any one or more of the following: (a) Terminate this Agreement by giving written notice to Licensee; resume possession of the space occupied by Licensee in the Licensed Locations; retain all Devices, fixtures, and other personal property of Licensee remaining on such space and full right and authority to sell, lease, or otherwise dispose of the same or to store the same, all at the expense of Licensee; and to recover from Licensee all fees due under this Agreement had it not been terminated, less the net amount realized by Licensor from any such sale, lease, or other disposition. (b) Without terminating this Agreement, reenter and assume possession of the space so licensed and of all Devices, fixtures, and other personal property of Licensee located therein and relet the space and sell, lease, or otherwise dispose of the Devices, fixtures, and other personal property, all on such terms and conditions as Licensor deems advisable, and in any such event, Licensee shall pay promptly upon demand the difference between the fees due under this Agreement for the period of such reletting (but not beyond the term of this Agreement) and the net amount received by Licensor from such reletting and from such sale, lease, or other disposition. (c) To treat all amounts due and not paid by Licensee to the date of such default, together with all amounts payable under this Agreement during the remaining term of this Agreement following such default, as an indebtedness of Licensee immediately due and payable to Licensor and recover the same, together with interest thereof at the rate of 150 percent of the prime rate charged preferred customers by Bank of America Nevada, determined as of the first day of the month preceding such default and adjusted as of the first day of each month during the period of such default, both before and after judgment from the date of such default until paid, but not to exceed the greater of 24 percent per annum or the highest amount permitted by applicable law. In the event of any such default, Licensee shall have no right to remove any Devices, fixtures, or other personal property of Licensee from the space licensed, and Licensor shall have a lien thereon as security for the payment of all amounts due Licensor under the Agreement. 13. Assignment and Subletting, Successors and Assigns. Licensee may not assign this Agreement or sublet any of the space within any of the Licensed Locations covered by this Agreement, whether by operation of law or otherwise without prior written approval of Licensor, except that Licensee may assign this Agreement to a wholly-owned subsidiary of Jackpot Enterprises, Inc. without such prior written approval; provided, that such assignee agrees to be bound by all of the terms and conditions of this Agreement and Licensee guarantees the payment and performance by such assignee of its obligations hereunder during the remaining term hereof. Subject to such provision, this Agreement shall bind and its benefits shall inure to the parties hereto, their successors, and assigns. 14. Notices and Demands. All notices and demands made pursuant to this Agreement shall be sufficient if made in writing and delivered personally or by registered or certified mail to American Drug Stores, Inc., C/O American Stores Properties, Inc., 6565 Knott Avenue, Buena Park, California 90260-1158, Attention: Dennis N. Palmer, Senior Vice President - Markets West, or to Licensee at 1110 Palms Airport Drive, Las Vegas, Nevada 89119. All notices mailed shall be deemed given when mailed. 15. Relationship Between the Parties. The relationship of Licensor and Licensee shall be solely that of licensor and licensee and nothing herein contained shall be construed to constitute Licensor and Licensee as landlord and tenant, sublandlord and subtenant, partners, joint venturers or any other relationship whatsoever. 16. Confidentiality. This Agreement and the information contained herein, including but not limited to the fees payable to Licensor by Licensee, is confidential and shall not be disclosed to any person except the gaming licensing authorities of the State of Nevada upon proper request, unless and to the extent required by laws or regulations applicable to the parties. 17. Prior Agreement. This Agreement shall supersede and replaces the License Agreement dated October 31, 1991, as amended, between Licensor and Licensee at the time the initial term of this Agreement commences on July 1, 1997. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. AMERICAN DRUG STORES, INC. By /s/ Mark N. Schneider ______________________________ Mark N. Schneider Vice President CARDIVAN COMPANY By /s/ George Congdon ______________________________ George Congdon President EXHIBIT A TO LICENSE AGREEMENT BETWEEN AMERICAN DRUG STORES, INC. AND CARDIVAN COMPANY DATED APRIL 24, 1997 Location No. of Machines Store Hours ________ _______________ ___________ 1. Savon Store No. 19-2022 16 7 a.m. to 10 p.m. (M-Sat.) 1812 E. Charleston 8 a.m. to 7 p.m. (Sun.) Las Vegas, NV 2. Savon Store No. 19-2049 2011 E. Lake Mead Las Vegas, NV 15 24 hours 3. Savon Store No. 19-2215 268 N. Jones Blvd. Las Vegas, NV 16 7 a.m. to 10 p.m. (M-Sat.) 8 a.m. to 7 p.m. (Sun.) 4. Savon Store No. 19-2224 3550 W. Sahara Las Vegas, NV 16 24 hours 5. Savon Store No. 19-2054 9100 W. Sahara Las Vegas, NV 16 7 a.m. to 10 p.m. (M-Sat.) 8 a.m. to 7 p.m. (Sun.) 6. Savon Store No. 19-2121 4730 E. Flamingo Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 7. Savon Store No. 19-2081 154 N. Boulder Highway Henderson, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 8. Savon Store No. 19-3042 2855 S. Nellis Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 9. Savon Store No. 19-2418 2560 E. Desert Inn Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 10. Savon Store No. 19-2416 3421 S. Jones Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 11. Savon Store No. 2415 3250 Las Vegas Blvd. No. Las Vegas, NV 12 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 12. Savon Store No. 19-2417 160 S. Rainbow Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 13. Savon Store No. 19-2087 4410 E. Bonanza Las Vegas, NV 15 24 hours 14. Savon Store No. 19-3082 6150 W. Lake Mead Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 15. Savon Store No. 19-3032 7251 S. Eastern Las Vegas, NV 15 24 hours 16. Savon Store No. 19-2176 8320 W. Cheyenne Las Vegas, NV 15 24 hours 17. Savon Store No. 19-3234 5985 W. Tropicana Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 18. Savon Store No. 19-3242 1408 Craig Road Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 19. Savon Store No. 19-2003 680 N. McCarran Sparks, NV 20 24 hours 20. Savon Store No. 19-2006 285 E. Plumb Lane Reno, NV 20 8 a.m. to 9 p.m. (M-Sat) 9 a.m. to 6 p.m. (Sun.) 21. Savon Store No. 19-2046 10550 N. McCarran Reno, NV 10 8 a.m. to 9 p.m. (M-Sat.) 9 a.m. to 6 p.m. (Sun.) 22. Savon Store No. 19-2041 1250 W. Seventh Reno, NV 17 8 a.m. to 9 p.m. (M-Sat.) 9 a.m. to 6 p.m. (Sun.) 23. Savon Store No. 19-2207 250 Fairview Carson City, NV 15 8 a.m. to 9 p.m. (M-Sat.) 8 a.m. to 6 p.m. (Sun.) 24. Savon Store No. 19-2605 48 West Idaho Street Elko, NV 5 8 a.m. to 9 p.m. (M-Sat.) 9:30 a.m. to 6 p.m. (Sun.)
EX-10.14 3 EXHIBIT 10.14 "RCT" means the material omitted has been filed with the Securities & Exchange Commission with an application requesting confidential treatment. LICENSE AGREEMENT THIS AGREEMENT is entered into as of the 24th day of April 1997, between American Drug Stores, Inc., an Illinois corporation ("Licensor"), and Corral United, Inc., a Nevada corporation ("Licensee"). Licensee and Licensor are collectively referred to as "the Parties". 1. Purpose. This Agreement sets forth the terms and conditions under which the Licensee shall have the exclusive right to operate certain gaming devices (the "Devices") (i) within each of the stores operated by Licensor in the State of Nevada which are designated on Exhibit "A" attached hereto and incorporated herein by reference (the "Existing Locations"), and (ii) in any additional stores opened or acquired by Licensor or an affiliate of Licensor for business to the public in the state of Nevada during the term of this Agreement which become subject to this Agreement pursuant to Section 4(d) hereof (the "New Locations", together with the Existing Locations, the "Licensed Locations"). Notwithstanding the foregoing, an off-site replacement of a Licensed Location which constitutes a "replacement store" in accordance with Licensor's internal policies, which opens concurrently with the closing of the Licensed Location it is replacing, and which is located not more than one mile from the Licensed Location it is replacing, shall not constitute a New Location for purposes of this Agreement. 2. License. Licensor hereby grants to Licensee the use of such amount of space (the "Gaming Space") as is reasonably required to set up the number of Devices currently permitted at such Licensed Location. For purposes of illustration, the Gaming Space at a Licensed Location in which 15 bill validator-equipped Devices are located would not be required to contain more than 450 square feet of space. The Gaming Space shall be located as close to the entrance and checkstand of the Licensed Location as is reasonably practicable with the exact location and square footage of the Gaming Space to be determined by mutual agreement of the parties. Licensee is also hereby granted an exclusive right to operate up to the maximum number of Devices currently allowed by the State of Nevada in each of the Licensed Locations. Notwithstanding the foregoing, the size of the Gaming Space and the location of the Devices in each of the Existing Locations shall be continued in the same manner as at the time of the execution of this Agreement except as changes thereto are made from time to time by mutual agreement between Licensor and Licensee. Licensor agrees to use its best efforts to expand the size of the Gaming Space at the Existing Locations where such expansion is required in order to replace the Devices currently located in such Existing Locations with an equal number of Devices containing bill validators and shall use its best efforts to complete any such required expansions by April 30, 1998. In the event that Licensor is not able to complete any such required expansions by April 30, 1998, the parties shall negotiate in good faith to arrive at an appropriate adjustment to the monthly fees payable hereunder; provided, that in no event shall the fee for any Licensed Location be reduced to an amount less than RCT per month. 3. Term. The term of the license for each Licensed Location shall begin on July 1, 1997 and shall expire at midnight on RCT. In addition, Licensee may, at its sole option, extend the term of this Agreement for an additional period of RCT commencing on RCT and expiring at RCT (the "Option Period") by giving written notice to Licensor of its intention to do so no earlier than RCT and no later than RCT; provided, that such option may only be exercised if Cardivan Company, an affiliate of Licensee ("Cardivan"), concurrently exercises its option to extend the term of (i) that certain License Agreement between Cardivan and Lucky Stores, Inc. dated of even date herewith and (ii) that certain License Agreement between Cardivan and Licensor dated of even date herewith. Licensee shall have no option to renew or extend this License Agreement beyond RCT. 4. Fees. a. During the initial term of this License Agreement, Licensee agrees to pay Licensor the following amount per Licensed Location per month: Period Per Licensed Location Per Month ______ _______________________________ RCT RCT b. During the Option Period the Licensee agrees to pay Licensor the following amount per Licensed Location per month: Option Period Per Licensed Location Per Month _____________ _______________________________ RCT RCT c. The monthly amounts set forth above shall be subject to increase from time to time during the term of this Agreement and any extension hereof as follows. During the one-month period prior to RCT, Licensee shall determine the average monthly fee per Device being paid by Licensee to other customers pursuant to written contracts having a remaining duration of one year or more, or which may be paid pursuant to contracts under negotiation, for comparable store locations (the "Comparable Rent"). If the Comparable Rent is greater than the fee provided for above by more than 5%, the monthly fee shall be increased to the Comparable Rent for the duration of the applicable period. d. During the term of this Agreement, if Licensor opens or acquires any New Location and Licensor determines to include Devices at such New Location, Exhibit A hereto shall be amended to include such New Location and the monthly fees payable hereunder shall be adjusted accordingly. In the case of a New Location opened or acquired on or after RCT, the fees due pursuant to this Section 4 with respect to such New Location shall be RCT fee during the RCT period following the date such New Location is opened for business by Licensor; provided, that if Licensor has not taken all steps required to be taken by it to permit Licensee to commence operations at such New Location, the RCT period shall not commence until all such actions have been taken. In addition, in the event an Existing Location is closed for renovation for a period of RCT or more, the Fees with respect to such renovated Existing Location shall be RCT fee due pursuant to this Section 4 during the RCT period following the date such renovated Existing Location is reopened for business by Licensor; provided, that if Licensor has not taken all steps required to be taken by it to permit Licensee to recommence operations at such Existing Location, the RCT period shall not commence until all such actions have been taken. e. The above fee shall be due and payable on the first day of every month. If any of the above fees are not paid when due or within fifteen (15) days thereafter, Licensee shall pay Licensor interest on all amounts delinquent from the date of delinquency until paid at a rate equal to 150 percent of the prime rate charged preferred customers by Bank of America Nevada, determined as of the first day of the month preceding such delinquency and adjusted as of the first day of each month during the period of such delinquency, but not to exceed the greater of 24 percent per annum or the highest rate permitted by applicable law. f. In the event that (i) Licensor should effect a material reduction in the hours of operation of the Licensed Locations, considered as a whole, from the hours of operation in effect on the date of this Agreement, or (ii) there should be a change in the laws or regulations applicable to the operation of gaming devices in retail food and drug facilities which has the effect of materially reducing the revenues received by Licensee from its operation of the Devices hereunder, the parties shall negotiate in good faith to arrive at an equitable adjustment to the terms of the Agreement. 5. Taxes. Licensee agrees to pay all taxes (other than real estate taxes) payable in connection with the conduct of its business in the Licensed Locations, including personal property taxes levied against the Devices, fixtures, and other personal property of the Licensee in the Licensed Locations. Licensee will pay all social security, unemployment, and old age benefit taxes, state, federal, and local, or other similar taxes due with respect to employees or wages paid to employees of the Licensee in the Licensed Locations. Licensee will maintain and pay all license fees, federal, state, county, or city, necessary for its operations in the Licensed Locations. 6. Use and Operation. Licensee agrees to use the Gaming Space within the Licensed Locations as a department for the sole purpose of operating the Devices in such space and will at all times conduct said department and all branches of its business in a first-class business like and attractive high-grade and proper manner, including, without limitation, (1) maintaining the Devices in good condition and repair at its own expense and at no expense to Licensor; (2) replacing any out of date Devices at its own expense with modern, up-to-date Devices from time to time; (3) employing a change cashier or installing money changing devices so that the store cashiers in the Licensed Location will not be required to make change for the operation of the Devices; and (4) not employing any person or persons within the Licensed Locations deemed objectionable by Licensor, Licensee agreeing upon request of Licensor to remove any such objectionable employee as quickly as reasonably possible under existing federal, state, and local laws. Signs of such type and size as may be mutually agreed upon by Licensor and Licensee shall be placed by Licensee in a conspicuous place at each of the Licensed Locations stating that Licensee is the owner and operator of the Devices. Licensor shall not change the smoking policies in the Gaming Spaces from those currently in effect without the prior written consent of Licensee, unless and to the extent such change is required by law or regulation. 7. Title to Property. All personal property (including, without limitation, the Devices) placed on the Licensed Locations by Licensee shall be and remain the personal property of Licensee (except as provided in Section 12 with respect to default) and, upon the expiration or earlier termination of this Agreement, Licensee shall within ten (10) days thereafter and at its sole expense, remove from the Licensed Locations all such personal property and restore such Licensed Locations to their original conditions, ordinary wear and tear excepted. 8. General Covenants. Licensee agrees to comply with all applicable laws, ordinances, and governmental regulations now in force or hereafter enacted relating to the business operations of the Licensee in the Licensed Locations; to make any and all alterations, repairs, and changes, at its expense, required by any such laws, ordinances, or governmental regulations; to maintain the Gaming Space occupied by Licensee within each of the Licensed Locations in a clean state and in good condition and repair; not to make any alterations in such space without the prior written consent of Licensor; and at the expiration or termination of this Agreement, to surrender peaceable possession thereof to Licensor in as good condition as it received the same, loss or damage by fire (except if caused by the act or neglect of Licensee or its employees) and wear and tear resulting from reasonable use excepted. 9. Indemnification and Insurance. Licensee agrees to indemnify and hold Licensor harmless from all claims, demands, causes of action, losses, damages, and liability, including costs and expenses and reasonable attorneys' fees incurred by Licensor in connection with any claim by third parties, including employees of Licensee, for injury to or death or damage to property occurring in or on or about the portions of the Licensed Locations licensed to Licensee or arising out of operations conducted by Licensee. Licensee, at its own cost and expense, shall maintain commercial general liability and automobile liability insurance with a limit of not less than $1,000,000 applicable to any one occurrence. Such insurance shall name Licensor as an additional insured with respect to operations conducted in connection with this Agreement. Licensee shall maintain Workers' Compensation insurance for its employees in the form required by the State of Nevada or provide Workers' Compensation on a self-insured basis in compliance with applicable Nevada regulations. Licensee shall, upon request, provide Licensor with certificate(s) evidencing the foregoing insurance coverages. Whether or not it elects to insure its personal property at locations covered by this Agreement, Licensee hereby waives any right of recovery from Licensor for any loss or damage to such property resulting from any of the perils insured against in the standard form fire insurance policy with Extended Coverages and Vandalism and Malicious Mischief Endorsements. To the extent that any insurance maintained by Licensee includes coverage against additional perils, this waiver shall apply with respect to loss damage resulting from such other perils. 10. Termination of License. If Licensor ceases to do business in any of the Licensed Locations for any reason whatsoever, this License Agreement shall terminate as to the Licensed Locations where such business is discontinued, effective at the time of such discontinuance, and thereafter the license fees payable under this Agreement will be reduced pro rata for the affected Licensed Locations. This License Agreement will continue to apply to all remaining Licensed Locations. 11. Interruption of Business. If the business of any Licensed Locations subject to this Agreement is substantially interrupted by reason of a major remodeling, fire, other casualty, or any other cause not the fault of Licensee, and such interruption substantially and adversely affects the business of Licensee in such Licensed Location, then, from and after such interruption and until the cause thereof has been corrected or eliminated, the fees due Licensor hereunder for such Licensed Locations shall be equitably reduced or abated to the extent agreed between the parties. 12. Default. If Licensee (i) defaults in the payment of the fees payable by it hereunder or fails to perform any other of its obligations under this Agreement, and Licensee fails to cure such default within a period of fifteen (15) days after written notice from Licensor, or (ii) Cardivan Company, an affiliate of Licensee ("Cardivan"), defaults in the payment of fees or performance of its other obligations under that certain License Agreement between Cardivan and Lucky Stores, Inc. dated of even date herewith, and such default is not cured within the grace period provided therein, or (iii) Cardivan defaults in the payment of fees or performance of its obligations under that certain License Agreement between Cardivan and Licensor dated of even date herewith and such default is not cured within the applicable grace period provided therein, then, in any of such events, Licensor shall have all rights and remedies now or hereafter provided by law and, in addition, may do any one or more of the following: (a) Terminate this Agreement by giving written notice to Licensee; resume possession of the space occupied by Licensee in the Licensed Locations; retain all Devices, fixtures, and other personal property of Licensee remaining on such space and full right and authority to sell, lease, or otherwise dispose of the same or to store the same, all at the expense of Licensee; and to recover from Licensee all fees due under this Agreement had it not been terminated, less the net amount realized by Licensor from any such sale, lease, or other disposition. (b) Without terminating this Agreement, reenter and assume possession of the space so licensed and of all Devices, fixtures, and other personal property of Licensee located therein and relet the space and sell, lease, or otherwise dispose of the Devices, fixtures, and other personal property, all on such terms and conditions as Licensor deems advisable, and in any such event, Licensee shall pay promptly upon demand the difference between the fees due under this Agreement for the period of such reletting (but not beyond the term of this Agreement) and the net amount received by Licensor from such reletting and from such sale, lease, or other disposition. (c) To treat all amounts due and not paid by Licensee to the date of such default, together with all amounts payable under this Agreement during the remaining term of this Agreement following such default, as an indebtedness of Licensee immediately due and payable to Licensor and recover the same, together with interest thereof at the rate of 150 percent of the prime rate charged preferred customers by Bank of America Nevada, determined as of the first day of the month preceding such default and adjusted as of the first day of each month during the period of such default, both before and after judgment from the date of such default until paid, but not to exceed the greater of 24 percent per annum or the highest amount permitted by applicable law. In the event of any such default, Licensee shall have no right to remove any Devices, fixtures, or other personal property of Licensee from the space licensed, and Licensor shall have a lien thereon as security for the payment of all amounts due Licensor under the Agreement. 13. Assignment and Subletting, Successors and Assigns. Licensee may not assign this Agreement or sublet any of the space within any of the Licensed Locations covered by this Agreement, whether by operation of law or otherwise without prior written approval of Licensor, except that Licensee may assign this Agreement to a wholly-owned subsidiary of Jackpot Enterprises, Inc. without such prior written approval; provided, that such assignee agrees to be bound by all of the terms and conditions of this Agreement and Cardivan Company, an affiliate of Licensee, guarantees the payment and performance by such assignee of its obligations hereunder during the remaining term hereof. Subject to such provision, this Agreement shall bind and its benefits shall inure to the parties hereto, their successors, and assigns. 14. Notices and Demands. All notices and demands made pursuant to this Agreement shall be sufficient if made in writing and delivered personally or by registered or certified mail to American Drug Stores, Inc., C/O American Stores Properties, Inc., 6565 Knott Avenue, Buena Park, California 90260-1158, Attention: Dennis N. Palmer, Senior Vice President - Markets West, or to Licensee at 1110 Palms Airport Drive, Las Vegas, Nevada 89119. All notices mailed shall be deemed given when mailed. 15. Relationship Between the Parties. The relationship of Licensor and Licensee shall be solely that of licensor and licensee and nothing herein contained shall be construed to constitute Licensor and Licensee as landlord and tenant, sublandlord and subtenant, partners, joint venturers or any other relationship whatsoever. 16. Confidentiality. This Agreement and the information contained herein, including but not limited to the fees payable to Licensor by Licensee, is confidential and shall not be disclosed to any person except the gaming licensing authorities of the State of Nevada upon proper request, unless and to the extent required by laws or regulations applicable to the parties. 17. Prior Agreement. This Agreement shall supersede and replaces the License Agreement dated October 31, 1991, as amended, between Licensor and Licensee at the time the initial term of this Agreement commences on July 1, 1997. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. AMERICAN DRUG STORES, INC. By /s/ Mark N. Schneider ______________________________ Mark N. Schneider Vice President CORRAL UNITED, INC. By /s/ George Congdon _____________________________ George Congdon President EXHIBIT A TO LICENSE AGREEMENT BETWEEN AMERICAN DRUG STORES, INC. AND CORRAL UNITED, INC. DATED APRIL 24, 1997 Location No. of Machines Store Hours ________ _______________ ___________ [S] [C] [C] 1. Savon Store No. 19-3235 1360 E. Flamingo Las Vegas, NV 15 24 hours 2. Savon Store No. 19-3237 562 N. Eastern Las Vegas, NV 16 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 3. Savon Store No. 19-3247 3345 E. Tropicana Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 4. Savon Store No. 19-3249 4014 S. Rainbow Las Vegas, NV 15 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) 5. Savon Store No. 19-3289 4600 Meadow Lane Las Vegas, NV 16 7 a.m. to 10 p.m. (M-Sat) 8 a.m. to 7 p.m. (Sun.) EX-10.15 4 EXHIBIT 10.15 "RCT" means the material omitted has been filed with the Securities and Exchange Commission with an application requesting confidential treatment. AGREEMENT THIS AGREEMENT entered into as of the 1st day of September 1997 by and between KMART CORPORATION, a Michigan corporation located at 3100 West Big Beaver Road, Troy, Michigan 48084 (hereinafter referred to as "Kmart") and CARDIVAN COMPANY, a Nevada corporation, located at 1110 Palms Airport Drive, Las Vegas, Nevada, 89119 (hereinafter referred to as "Cardivan"). WHEREAS, Kmart desires Cardivan to continue the installation, operation, maintenance and servicing of gaming devices (the "Devices") in all stores of Kmart in the State of Nevada; and WHEREAS, Cardivan agrees to take all necessary steps to install, operate and maintain Devices pursuant to the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: 1.Cardivan shall install, operate, service and remove subject to the terms hereof, Devices at the Kmart store locations set forth on the attached Exhibit A. Should Kmart open or acquire additional stores within the State of Nevada during the term of this Agreement, Kmart will use its best efforts to provide to Cardivan adequate space for the installation and operation of the maximum number of Devices allowable by law. Cardivan will accept existing space allocations within existing Kmart stores. However should Kmart reduce the space allocation in an existing store, a per Device monthly rent adjustment will be required during the term of this Agreement. The minimum number of Devices to be installed and operated in each existing store is detailed on Exhibit A. Cardivan may elect to reduce or add to the number of Devices at any location subject to the terms of this Agreement. Installation, maintenance, removal and replacement of said Devices shall be performed only at the time specified by the Kmart district manager of the store involved. The area in which Devices shall be located in the stores shall be mutually agreed upon between Kmart and Cardivan. 2.In full consideration for the rights hereby granted, Cardivan shall pay to Kmart the amounts set forth in the attached Exhibit B for each existing store as of September 1, 1997. All payments will be made on the first day of each month for the previous month. The minimum amount to be paid by Cardivan to Kmart for each store shall be based on the minimum number of Devices listed in Exhibit B for each store. The minimum monthly fees per store will be paid by Cardivan even if Cardivan elects to reduce the number of Devices in a store below the minimum number provided in Exhibit B. Provided, if Cardivan elects to install additional Devices in a store above the minimum number listed in Exhibit B for a store, Cardivan agrees to pay to Kmart an additional amount for each such Device based on the monthly fee per Device listed in Exhibit B for the store in which the additional Device(s) is installed and operated. Should Kmart open or acquire additional stores in the State of Nevada during the term of this Agreement, Cardivan shall have the option within thirty (30) days of notification by Kmart to Cardivan to exercise its exclusive right to operate Devices within each of the stores under the terms and conditions of this Agreement. During the term of this Agreement, the fees due with respect to such new locations will be based on the actual number of Devices at such locations at the then applicable monthly fee. For the RCT period following the date such new location is open for business by Kmart, the monthly fee per Device shall be RCT; provided that if Kmart has not taken all steps required to be taken by it to permit Cardivan to commence operations at such New Location, the RCT period shall not commence until all such actions have been taken. In addition, upon the later of October 1, 1997 or the execution of this Agreement by the parties, Cardivan agrees to prepay RCT of fees due under the Agreement (based on the minimum number of Devices per store) in the total amount of RCT to Kmart. This figure excludes the Kmart store #3894 located in Elko, Nevada. Upon receiving licensing for store #3894, Cardivan agrees to prepay RCT of fees for said store due under this agreement. 3.Payments by Cardivan shall be mailed or delivered to Kmart Corporation at 3100 West Big Beaver Road, Troy, MI 48084, Accounts Receivable - Attn: D. Matyanowski. Kmart may direct Cardivan to send payments to another address by giving Cardivan written notice at least thirty days in advance of such address change. All payments made by Cardivan hereunder shall be accompanied by a report giving a breakdown by store of the amount paid and the calendar month to which the payment relates. Notification of the installation of any new Devices (except Devices installed to replace old Devices) shall be given to Kmart at the then current address for payments not less than thirty (30) days prior to the installation. 4.All Devices installed by Cardivan hereunder and subject to this Agreement, together with the contents of their cash boxes shall remain the sole property of Cardivan and Kmart shall acquire no ownership interest therein. All taxes and assessments of any kind by reason of or as a condition precedent to the ownership or operation of Devices by Cardivan in the stores shall be paid promptly and in full by Cardivan, but Cardivan shall not be liable for any tax measured by Kmart's income. Cardivan warrants that prior to installation of any Device hereunder it shall have paid the proper licensing agency or agencies the licensing fee or fees necessary for operation of Devices and that it shall have procured from said agency or agencies all licenses necessary for operation of Devices. Cardivan agrees that it shall maintain in force such licenses and pay any and all license fees as they become due during the term of this Agreement. Cardivan agrees to reimburse, indemnify, defend and hold Kmart harmless from and against any damage, loss, expense or penalty or any claim or action therefore: (1) by or on behalf of any taxing authority arising out of Cardivan's payment or failure of payment of any taxes and/or assessments (including license fees) imposed by reason of or as a condition precedent to the ownership or operation of the Devices covered hereunder, and (2) as a result of Cardivan's failure to obtain and/or maintain in force any licenses necessary for the operation of Devices covered hereunder. 5.All costs and expenses incurred for the installing, maintaining and removing of said Devices shall be paid by Cardivan, together with the costs of restoring to their condition on the date of installation, reasonable wear and tear excepted, the areas in the stores occupied by said Devices, which restoration Cardivan hereby agrees to perform promptly after the removal of any or all of said Devices and/or upon termination of this Agreement. If Cardivan fails or refuses to so remove and restore for more than thirty (30) consecutive calendar days after termination of this Agreement or its receipt of directions from Kmart to do so, Kmart may so remove and restore and may place said removed Devices in public storage in Clark County, Nevada for Cardivan's account and at Cardivan's risk. 6.Cardivan shall, at its own expense, employ a sufficient number of persons to supply change or coins (furnished by Cardivan) to patrons of the Devices at each of the stores covered by this Agreement. In the event that Kmart deems one or more of Cardivan's Change Persons or other employees working at a Location or Locations is conducting themselves in a manner that is unsatisfactory to Kmart, Kmart may inform Cardivan verbally or in writing of such conduct. Cardivan shall address the matter within twenty-four (24) hours with the Affected Employee and correct the violation. If Kmart notifies Cardivan, verbally or in writing, of a second incident by the Affected Employee, Cardivan shall replace the Affected Employee as quickly as possible subject to existing federal, state and local laws. 7.Cardivan shall service said Devices, and its employees shall be present to render change service, during the hours when said store is open to the public. 8.In the event an Existing Location is closed for renovation for a period of thirty (30) days or more, the Fees with respect to such renovated Existing Location shall be RCT monthly fee RCT following the date such renovated Existing Location is reopened for business by Kmart; provided that if Kmart has not taken all steps required to be taken by it to permit Cardivan to recommence operations at such Existing Location, the RCT period shall not commence until all such actions have been taken. Should Cardivan decline to exercise such option Kmart may license another operator of Devices for such new store. 9.Cardivan shall be responsible for and does represent that it shall comply with all federal, state and local laws, rules and regulations applicable to its operations under this Agreement. 10.Cardivan is and at all times shall be an independent contractor in the performance of this Agreement. Cardivan will exercise control over its employees and shall be solely responsible for the payment of any wages, salaries or other remuneration of its employees and for the payment of any payroll taxes, contributions for unemployment insurance, social security, pensions or annuities which are imposed as a result of the employment of its employees. 11.The risk of loss, damage, destruction or disappearance of any property of Cardivan on the premises shall, as between Kmart and Cardivan, be exclusively that of Cardivan. 12.Cardivan shall not advertise the presence of the Devices covered by this Agreement, except in accordance with Kmart's prior written approval. 13.If Kmart decides to alter its smoking policies in the Gaming Spaces from those currently in effect, Kmart agrees to discuss the need for such change with Cardivan and to secure Cardivan's prior written consent for such change, unless and to the extent such change is required by law or regulation. 14.Cardivan shall reimburse, indemnify, defend and hold Kmart harmless from and against any damage, loss, expense or penalty or any claim, demand, action or proceeding therefor by or on behalf of any person or entity (including Cardivan employees), arising out of the installation, maintenance, service, existence, operation, repair or removal of Devices including but not limited to claims of libel, slander, assault, false arrest, bodily injury or property damage (hereinafter "such claims"), provided Kmart gives Cardivan reasonable notice of any such claims made or brought against Kmart. Cardivan shall assume the defense or other disposition of any such claims within a reasonable period of time after notice of same. 15.Cardivan shall provide and maintain in effect during the term hereof and any extension thereof workers' compensation insurance covering all employees engaged in its business and in the installation, maintenance, service, operation, repair or removal of said Devices, or provide workers' compensation on a self- insured basis in compliance with applicable Nevada regulations, and shall likewise provide and maintain public liability insurance with policy limits of $2,000,000 per occurrence and aggregate combined for bodily injury and property damages. Kmart shall be named as an additional insured under said policy or policies. Such insurance shall specifically protect Cardivan and Kmart as its interest may appear against the contractual liability assumed by Cardivan hereunder, and certificates of such insurance shall be promptly delivered to Kmart. 16.Cardivan will indemnify and save Kmart harmless from and against all claims, demands or actions arising out of infringement or alleged infringement of U.S. Patents, copyrights, trademark or servicemark rights if such claims, demands or actions are made or brought against Kmart as a result of the presence of said Devices in its stores. 17.Notices hereunder for Cardivan shall be directed to it at 1110 Palms Airport Drive, Las Vegas, Nevada 89119, Attn: Senior Vice President - Operations and notices for Kmart shall be directed to it at 3100 West Big Beaver Road, Troy, Michigan 48084, Attn: General Counsel or to such other addresses as either party may hereafter specify in writing. Notices shall be effective on the date recipient signs for receipt of said notice. 18.The entire understanding of the parties with relation to the subject matter hereof is contained herein. No modification of this Agreement shall be effective unless made in writing and signed by both parties. Neither party shall assign this Agreement or any interest in it or assign or subcontract the performance of any obligation hereunder without the prior written consent of the other party; subject to such prior written consent, this Agreement shall bind the successors and assigns of both parties. 19.This Agreement shall become effective as of September 1, 1997 and shall expire on RCT. Either party may terminate this Agreement at any time during the term if the other party breaches or is in default of the performance of its obligations hereunder, and such breach or default continues for thirty (30) consecutive days after written notice thereof is mailed to the party breaching or in default, such termination to be effective on said thirtieth (30th) day. In the event any of the Kmart stores covered by this Agreement close, Cardivan's gaming operations as to such store only shall be suspended during such closing, if temporary and, if permanent, Cardivan's gaming operations as to such store only shall terminate effective as of the date of the store closing. Termination shall not affect rights or obligations accrued hereunder prior to the effective date of termination. In addition, in the event that (i) Kmart should effect a material reduction in the hours of operation of the locations, from the hours of operation in effect on the date of this Agreement, or (ii) there should be a change in the laws or regulations applicable to the operation of gaming devices in retail facilities which has the effect of materially reducing the revenues received by Cardivan from its operation of the Devices hereunder, the parties shall negotiate in good faith to arrive at an equitable adjustment to the terms of the Agreement. 20.Both of the parties hereto agree that they will be bound by and comply with any rule, regulation or statute of the State of Nevada relating to Devices herein described; together with city and county ordinance pertaining to Devices. 21.Notwithstanding the provisions of paragraph 19 above, this Agreement shall terminate on the effective date of any law, ordinance, regulations or final judicial decision which, directly or in effect, renders operations hereunder unlawful, or requires Kmart to meet the licensing of the Nevada Gaming Commission. Should a new tax or a current tax increase be imposed on the gaming operations (other than increases in rate of income, sales or excise taxes which are of general application to persons in addition to those dealing with Devices) during the term of this Agreement that has the effect of materially reducing the operating income earned by Cardivan from its operation of Devices at Kmart stores, Kmart and Cardivan agree to negotiate in good faith to arrive at an equitable adjustment to the terms of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of this 2nd day of September, 1997. CARDIVAN COMPANY KMART CORPORATION By: /s/ George Congdon By: /s/ Paul Hueber _________________________ _____________________ Its: George Congdon, President Its: Paul Hueber _________________________ _____________________ Senior Vice President A:\XHIBIT10.15.wpd August 26, 1997 EXHIBIT A Min. # of Hours of Store # Location Devices Operation ________________________________________________________________________ Super Kmart 4933 4855 Summit Ridge, Reno, Nv 89503 15 24 hours 4943 3456 North Carson Street, Carson City, NV 89706 15 24 hours Kmart 3095 2671 Las Vegas Blvd. N., N. Las Vegas, NV 89030 15 8a-10p 3110 3800 Kietzke Lane, Reno, NV 89502 16 8a-10p 3592 5050 E. Bonanza Road, Las Vegas, NV 89110 16 8a-10p 3680 3760 E. Sunset Road, Las Vegas, NV 89120 15 8a-10p 3719 4500 N. Rancho Drive, Las Vegas, NV 89130 16 8a-10p 3857 732 S. Racetrack Road, Henderson, NV 89015 15 8a-10p 3894 2450 Mountain City Hwy., Elko, NV 89801 15(A) 8a-10p M-Sa 8a-9p Sun. 4151 2125 Oddie Blvd., Sparks, NV 89431 16 8a-10p 4369 2975 E. Sahara Avenue, Las Vegas, NV 89104 15 8a-10p 7586 3455 S. Rainbow Blvd., Las Vegas, NV 89102 15 8a-10p
(A) Subject to Cardivan obtaining all the necessary regulatory approvals and licenses August 15, 1997 EXHIBIT B For the Period RCT Store Monthly Fee per Device # of Devices Total Due Per Month _____ ______________________ ____________ ___________________ Super Kmart ___________ Store # _______ 4933 RCT 15 RCT 4943 RCT 15 RCT Kmart Store # _____________ 3095 RCT 15 RCT 3110 RCT 16 RCT 3592 RCT 16 RCT 3680 RCT 15 RCT 3719 RCT 16 RCT 3857 RCT 15 RCT 3894 RCT 15 RCT 4151 RCT 16 RCT 4369 RCT 15 RCT 7586 RCT 15 RCT Total All: RCT
(A) Subject to Cardivan obtaining all the necessary regulatory approvals and licenses. EXHIBIT B For the Period RCT Store Monthly Fee per Device # of Devices Total Due Per Month _____ ______________________ ____________ ___________________ Super Kmart ___________ Store # _______ 4933 RCT 15 RCT 4943 RCT 15 RCT Kmart Store # _____________ 3095 RCT 15 RCT 3110 RCT 16 RCT 3592 RCT 16 RCT 3680 RCT 15 RCT 3719 RCT 16 RCT 3857 RCT 15 RCT 3894 RCT 15 RCT 4151 RCT 16 RCT 4369 RCT 15 RCT 7586 RCT 15 RCT Total All: RCT
(A) Subject to Cardivan obtaining all the necessary regulatory approvals and licenses. EXHIBIT B For the Period RCT Store Monthly Fee per Device # of Devices Total Due Per Month _____ ______________________ ____________ ___________________ Super Kmart ___________ Store # _______ 4933 RCT 15 RCT 4943 RCT 15 RCT Kmart Store # _____________ 3095 RCT 15 RCT 3110 RCT 16 RCT 3592 RCT 16 RCT 3680 RCT 15 RCT 3719 RCT 16 RCT 3857 RCT 15 RCT 3894 RCT 15 RCT 4151 RCT 16 RCT 4369 RCT 15 RCT 7586 RCT 15 RCT Total All: RCT
(A) Subject to Cardivan obtaining all the necessary regulatory approvals and licenses. EXHIBIT B For the Period RCT Store Monthly Fee per Device # of Devices Total Due Per Month _____ ______________________ ____________ ___________________ Super Kmart ___________ Store # _______ 4933 RCT 15 RCT 4943 RCT 15 RCT Kmart Store # _____________ 3095 RCT 15 RCT 3110 RCT 16 RCT 3592 RCT 16 RCT 3680 RCT 15 RCT 3719 RCT 16 RCT 3857 RCT 15 RCT 3894 RCT 15 RCT 4151 RCT 16 RCT 4369 RCT 15 RCT 7586 RCT 15 RCT Total All: RCT
(A) Subject to Cardivan obtaining all the necessary regulatory approvals and licenses. EX-10.16 5 EXHIBIT 10.16 "RCT" means the material omitted has been filed with the Securities & Exchange Commission with an application requesting confidential treatment. LICENSE AGREEMENT THIS AGREEMENT is entered into as of the 24th day of April 1997, between Lucky Stores, Inc., a Nevada corporation ("Licensor"), and Cardivan Company, a Nevada corporation ("Licensee"). Licensee and Licensor are collectively referred to as "the Parties". 1. Purpose. This Agreement sets forth the terms and conditions under which the Licensee shall have the exclusive right to operate certain gaming devices (the "Devices") (i) within each of the stores operated by Licensor in the State of Nevada which are designated on Exhibit "A" attached hereto and incorporated herein by reference (the "Existing Locations"), and (ii) in any additional stores opened or acquired by Licensor or an affiliate of Licensor for business to the public in the state of Nevada during the term of this Agreement which become subject to this Agreement pursuant to Section 4(d) hereof (the "New Locations", together with the Existing Locations, the "Licensed Locations"). Notwithstanding the foregoing, an off-site replacement of a Licensed Location which constitutes a "replacement store" in accordance with Licensor's internal policies, which opens concurrently with the closing of the Licensed Location it is replacing, and which is located not more than one mile from the Licensed Location it is replacing, shall not constitute a New Location for purposes of this Agreement. 2. License. Licensor hereby grants to Licensee the use of such amount of space (the "Gaming Space") as is reasonably required to set up the number of Devices currently permitted at such Licensed Location. For purposes of illustration, the Gaming Space at a Licensed Location in which 15 bill validator-equipped Devices are located would not be required to contain more than 450 square feet of space. The Gaming Space shall be located as close to the entrance and checkstand of the Licensed Location as is reasonably practicable with the exact location and square footage of the Gaming Space to be determined by mutual agreement of the parties. Licensee is also hereby granted an exclusive right to operate up to the maximum number of Devices currently allowed by the State of Nevada in each of the Licensed Locations. Notwithstanding the foregoing, the size of the Gaming Space and the location of the Devices in each of the Existing Locations shall be continued in the same manner as at the time of the execution of this Agreement except as changes thereto are made from time to time by mutual agreement between Licensor and Licensee. Licensor agrees to use its best efforts to expand the size of the Gaming Space at the Existing Locations where such expansion is required in order to replace the Devices currently located in such Existing Locations with an equal number of Devices containing bill validators and shall use its best efforts to complete any such required expansions by April 30, 1998. In the event that Licensor is not able to complete any such required expansions by April 30, 1998, the parties shall negotiate in good faith to arrive at an appropriate adjustment to the monthly fees payable hereunder; provided, that in no event shall the fee for any Licensed Location be reduced to an amount less than RCT per month. 3. Term. The term of the license for each Licensed Location shall begin on July 1, 1997 and shall expire at midnight on RCT. In addition, Licensee may, at its sole option, extend the term of this Agreement for an additional period of RCT commencing on RCT and expiring at midnight on RCT (the "Option Period") by giving written notice to Licensor of its intention to do so no earlier than RCT and no later than RCT; provided, that such option may only be exercised if (i) Licensee concurrently exercises its option to extend the term of that certain License Agreement between Licensee and American Drug Stores, Inc. ("ADS") dated of even date herewith, and (ii) Corral United, Inc. concurrently exercises its option to extend the term of that certain License Agreement between Corral United, Inc. and ADS dated of even date herewith. Licensee shall have no option to renew or extend this License Agreement beyond RCT. 4. Fees. a. During the initial term of this License Agreement, Licensee agrees to pay Licensor the following amount per Licensed Location per month: Period Per Licensed Location Per Month ______ _______________________________ RCT RCT RCT RCT b. During the Option Period the Licensee agrees to pay Licensor the following amount per Licensed Location per month: Option Period Per Licensed Location Per Month _____________ _______________________________ RCT RCT RCT RCT c. The monthly amounts set forth above shall be subject to increase from time to time during the term of this Agreement and any extension hereof as follows. During the one-month period prior to each of RCT and RCT, respectively, Licensee shall determine the average monthly fee per Device being paid by Licensee to other customers pursuant to written contracts having a remaining duration of one year or more, or which may be paid pursuant to contracts under negotiation, for comparable store locations (the "Comparable Rent"). If the Comparable Rent is greater than the fee provided for above by more than 5%, the monthly fee shall be increased to the Comparable Rent for the duration of the applicable period. d. During the term of this Agreement, if Licensor opens or acquires any New Location and Licensor determines to include Devices at such New Location, Exhibit A hereto shall be amended to include such New Location and the monthly fees payable hereunder shall be adjusted accordingly. In the case of a New Location opened or acquired on or after RCT, the fees due pursuant to this Section 4 with respect to such New Location shall be RCT fee during the RCT period following the date such New Location is opened for business by Licensor; provided, that if Licensor has not taken all steps required to be taken by it to permit Licensee to commence operations at such New Location, the RCT period shall not commence until all such actions have been taken. In addition, in the event an Existing Location is closed for renovation for a period of RCT or more, the Fees with respect to such renovated Existing Location shall be RCT fee due pursuant to this Section 4 during the RCT period following the date such renovated Existing Location is reopened for business by Licensor; provided, that if Licensor has not taken all steps required to be taken by it to permit Licensee to recommence operations at such Existing Location, the RCT period shall not commence until all such actions have been taken. e. The above fee shall be due and payable on the first day of every month. If any of the above fees are not paid when due or within fifteen (15) days thereafter, Licensee shall pay Licensor interest on all amounts delinquent from the date of delinquency until paid at a rate equal to 150 percent of the prime rate charged preferred customers by Bank of America Nevada, determined as of the first day of the month preceding such delinquency and adjusted as of the first day of each month during the period of such delinquency, but not to exceed the greater of 24 percent per annum or the highest rate permitted by applicable law. f. Licensor and Licensee agree that as of June 30, 1997, Licensor will hold a security deposit (the "Security Deposit") in the amount of RCT pursuant to agreements previously entered into between the parties, which amount consists of the principal amount of the original security deposit together with interest accrued thereon through June 30, 1997. Commencing July 1, 1997, no further interest shall be payable by Licensor to Licensee with respect to the Security Deposit and commencing June 1, 1998 and on each June 1, thereafter, RCT of such Security Deposit shall be applied as an offset against the monthly fees payable by Licensee under this Agreement until such time as the Security Deposit has been exhausted. g. In the event that (i) Licensor should effect a material reduction in the hours of operation of the Licensed Locations, considered as a whole, from the hours of operation in effect on the date of this Agreement, or (ii) there should be a change in the laws or regulations applicable to the operation of gaming devices in retail food and drug facilities which has the effect of materially reducing the revenues received by Licensee from its operation of the Devices hereunder, the parties shall negotiate in good faith to arrive at an equitable adjustment to the terms of the Agreement. 5. Taxes. Licensee agrees to pay all taxes (other than real estate taxes) payable in connection with the conduct of its business in the Licensed Locations, including personal property taxes levied against the Devices, fixtures, and other personal property of the Licensee in the Licensed Locations. Licensee will pay all social security, unemployment, and old age benefit taxes, state, federal, and local, or other similar taxes due with respect to employees or wages paid to employees of the Licensee in the Licensed Locations. Licensee will maintain and pay all license fees, federal, state, county, or city, necessary for its operations in the Licensed Locations. 6. Use and Operation. Licensee agrees to use the Gaming Space within the Licensed Locations as a department for the sole purpose of operating the Devices in such space and will at all times conduct said department and all branches of its business in a first-class business like and attractive high-grade and proper manner, including, without limitation, (1) maintaining the Devices in good condition and repair at its own expense and at no expense to Licensor; (2) replacing any out of date Devices at its own expense with modern, up-to-date Devices from time to time; (3) employing a change cashier or installing money changing devices so that the store cashiers in the Licensed Location will not be required to make change for the operation of the Devices; and (4) not employing any person or persons within the Licensed Locations deemed objectionable by Licensor, Licensee agreeing upon request of Licensor to remove any such objectionable employee as quickly as reasonably possible under existing federal, state, and local laws. Signs of such type and size as may be mutually agreed upon by Licensor and Licensee shall be placed by Licensee in a conspicuous place at each of the Licensed Locations stating that Licensee is the owner and operator of the Devices. Licensor shall not change the smoking policies in the Gaming Spaces from those currently in effect without the prior written consent of Licensee, unless and to the extent such change is required by law or regulation. 7. Title to Property. All personal property (including, without limitation, the Devices) placed on the Licensed Locations by Licensee shall be and remain the personal property of Licensee (except as provided in Section 12 with respect to default) and, upon the expiration or earlier termination of this Agreement, Licensee shall within ten (10) days thereafter and at its sole expense, remove from the Licensed Locations all such personal property and restore such Licensed Locations to their original conditions, ordinary wear and tear excepted. 8. General Covenants. Licensee agrees to comply with all applicable laws, ordinances, and governmental regulations now in force or hereafter enacted relating to the business operations of the Licensee in the Licensed Locations; to make any and all alterations, repairs, and changes, at its expense, required by any such laws, ordinances, or governmental regulations; to maintain the Gaming Space occupied by Licensee within each of the Licensed Locations in a clean state and in good condition and repair; not to make any alterations in such space without the prior written consent of Licensor; and at the expiration or termination of this Agreement, to surrender peaceable possession thereof to Licensor in as good condition as it received the same, loss or damage by fire (except if caused by the act or neglect of Licensee or its employees) and wear and tear resulting from reasonable use excepted. 9. Indemnification and Insurance. Licensee agrees to indemnify and hold Licensor harmless from all claims, demands, causes of action, losses, damages, and liability, including costs and expenses and reasonable attorneys' fees incurred by Licensor in connection with any claim by third parties, including employees of Licensee, for injury to or death or damage to property occurring in or on or about the portions of the Licensed Locations licensed to Licensee or arising out of operations conducted by Licensee. Licensee, at its own cost and expense, shall maintain commercial general liability and automobile liability insurance with a limit of not less than $1,000,000 applicable to any one occurrence. Such insurance shall name Licensor as an additional insured with respect to operations conducted in connection with this Agreement. Licensee shall maintain Workers' Compensation insurance for its employees in the form required by the State of Nevada or provide Workers' Compensation on a self-insured basis in compliance with applicable Nevada regulations. Licensee shall, upon request, provide Licensor with certificate(s) evidencing the foregoing insurance coverages. Whether or not it elects to insure its personal property at locations covered by this Agreement, Licensee hereby waives any right of recovery from Licensor for any loss or damage to such property resulting from any of the perils insured against in the standard form fire insurance policy with Extended Coverages and Vandalism and Malicious Mischief Endorsements. To the extent that any insurance maintained by Licensee includes coverage against additional perils, this waiver shall apply with respect to loss damage resulting from such other perils. 10. Termination of License. If Licensor ceases to do business in any of the Licensed Locations for any reason whatsoever, this License Agreement shall terminate as to the Licensed Locations where such business is discontinued, effective at the time of such discontinuance, and thereafter the license fees payable under this Agreement will be reduced pro rata for the affected Licensed Locations. This License Agreement will continue to apply to all remaining Licensed Locations. 11. Interruption of Business. If the business of any Licensed Locations subject to this Agreement is substantially interrupted by reason of a major remodeling, fire, other casualty, or any other cause not the fault of Licensee, and such interruption substantially and adversely affects the business of Licensee in such Licensed Location, then, from and after such interruption and until the cause thereof has been corrected or eliminated, the fees due Licensor hereunder for such Licensed Locations shall be equitably reduced or abated to the extent agreed between the parties. 12. Default. If Licensee (i) defaults in the payment of the fees payable by it hereunder or fails to perform any other of its obligations under this Agreement, and Licensee fails to cure such default within a period of fifteen (15) days after written notice from Licensor, or (ii) Licensee defaults in the payment of fees or performance of its other obligations under that certain License Agreement between Licensee and American Drug Stores, Inc. ("ADS") dated of even date herewith, and such default is not cured within the grace period provided therein, or (iii) Corral United, Inc., an affiliate of Licensee, defaults in the payment of fees or performance of its obligations under that certain License Agreement between Corral United, Inc. and ADS dated of even date herewith and such default is not cured within the applicable grace period provided therein, then, in any of such events, Licensor shall have all rights and remedies now or hereafter provided by law and, in addition, may do any one or more of the following: (a) Terminate this Agreement by giving written notice to Licensee; resume possession of the space occupied by Licensee in the Licensed Locations; retain all Devices, fixtures, and other personal property of Licensee remaining on such space and full right and authority to sell, lease, or otherwise dispose of the same or to store the same, all at the expense of Licensee; and to recover from Licensee all fees due under this Agreement had it not been terminated, less the net amount realized by Licensor from any such sale, lease, or other disposition. (b) Without terminating this Agreement, reenter and assume possession of the space so licensed and of all Devices, fixtures, and other personal property of Licensee located therein and relet the space and sell, lease, or otherwise dispose of the Devices, fixtures, and other personal property, all on such terms and conditions as Licensor deems advisable, and in any such event, Licensee shall pay promptly upon demand the difference between the fees due under this Agreement for the period of such reletting (but not beyond the term of this Agreement) and the net amount received by Licensor from such reletting and from such sale, lease, or other disposition. (c) To treat all amounts due and not paid by Licensee to the date of such default, together with all amounts payable under this Agreement during the remaining term of this Agreement following such default, as an indebtedness of Licensee immediately due and payable to Licensor and recover the same, together with interest thereof at the rate of 150 percent of the prime rate charged preferred customers by Bank of America Nevada, determined as of the first day of the month preceding such default and adjusted as of the first day of each month during the period of such default, both before and after judgment from the date of such default until paid, but not to exceed the greater of 24 percent per annum or the highest amount permitted by applicable law. In the event of any such default, Licensee shall have no right to remove any Devices, fixtures, or other personal property of Licensee from the space licensed, and Licensor shall have a lien thereon as security for the payment of all amounts due Licensor under the Agreement. 13. Assignment and Subletting, Successors and Assigns. Licensee may not assign this Agreement or sublet any of the space within any of the Licensed Locations covered by this Agreement, whether by operation of law or otherwise without prior written approval of Licensor, except that Licensee may assign this Agreement to a wholly-owned subsidiary of Jackpot Enterprises, Inc. without such prior written approval; provided, that such assignee agrees to be bound by all of the terms and conditions of this Agreement and Licensee guarantees the payment and performance by such assignee of its obligations hereunder during the remaining term hereof. Subject to such provision, this Agreement shall bind and its benefits shall inure to the parties hereto, their successors, and assigns. 14. Notices and Demands. All notices and demands made pursuant to this Agreement shall be sufficient if made in writing and delivered personally or by registered or certified mail to Lucky Stores, Inc., C/O American Stores Properties, Inc., 6565 Knott Avenue, Buena Park, California 90260-1158, Attention: Dennis N. Palmer, Senior Vice President - Markets West, or to Licensee at 1110 Palms Airport Drive, Las Vegas, Nevada 89119. All notices mailed shall be deemed given when mailed. 15. Relationship Between the Parties. The relationship of Licensor and Licensee shall be solely that of licensor and licensee and nothing herein contained shall be construed to constitute Licensor and Licensee as landlord and tenant, sublandlord and subtenant, partners, joint venturers or any other relationship whatsoever. 16. Confidentiality. This Agreement and the information contained herein, including but not limited to the fees payable to Licensor by Licensee, is confidential and shall not be disclosed to any person except the gaming licensing authorities of the State of Nevada upon proper request, unless and to the extent required by laws or regulations applicable to the parties. 17. Prior Agreement. This Agreement shall supersede and replaces the License Agreement dated October 31, 1991, as amended, between Licensor and Licensee at the time the initial term of this Agreement commences on July 1, 1997. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. LUCKY STORES, INC. By /s/ Mark N. Schneider _________________________ Mark N. Schneider Vice President CARDIVAN COMPANY By /s/ George Congdon _________________________ George Congdon President EXHIBIT A TO LICENSE AGREEMENT BETWEEN LUCKY STORES, INC. AND CARDIVAN COMPANY DATED APRIL 24, 1997 Location No. of Machines Store Hours ________ _______________ ___________ 1. Lucky Store No. 121-681 4500 East Tropicana Las Vegas, NV 15 24 hours 2. Lucky Store No. 121-684 610 N. Nellis Blvd. Las Vegas, NV 16 6 a.m. to 12 a.m. 3. Lucky Store No. 121-685 4801 W. Spring Mtn. Road Las Vegas, NV 15 24 hours 4. Lucky Store No. 121-704 4120 South Rainbow Las Vegas, NV 15 6 a.m. to 12 a.m. 5. Lucky Store No. 121-732 2400 East Bonanza Las Vegas, NV 17 6 a.m. to 12 a.m. 6. Lucky Store No. 121-733 2747 S. Maryland Parkway Las Vegas, NV 15 24 hours 7. Lucky Store No. 121-734 3736 East Desert Inn Las Vegas, NV 15 6 a.m. to 12 a.m. 8. Lucky Store No. 121-735 1200 South Decatur Las Vegas, NV 17 6 a.m. to 12 a.m. 9. Lucky Store No. 121-697 2021 E. Lake Mead Blvd. Las Vegas, NV 15 6 a.m. to 12 a.m. 10. Lucky Store No. 121-739 1300 E. Flamingo Rd. Las Vegas, NV 15 24 hours 11. Lucky Store No. 121-587 2300 E. Tropicana Las Vegas, NV 15 24 hours 12. Lucky Store No. 121-784 2851 Green Valley Pkwy. Las Vegas, NV 15 24 hours 13. Lucky Store No. 121-785 724 Boulder Hwy. Las Vegas, NV 15 24 hours 14. Lucky Store No. 121-786 1760 E. Charleston Las Vegas, NV 17 6 a.m. to 12 a.m. 15. Lucky Store No. 121-787 1001 S. Rainbow Blvd. Las Vegas, NV 20 24 hours 16. Lucky Store No. 121-683 7271 S. Eastern Ave. Las Vegas, NV 15 24 hours 17. Lucky Store No. 121-585 6850 W. Spring Mtn. Rd. Las Vegas, NV 15 24 hours 18. Lucky Store No. 121-586 4420 E. Bonanza Las Vegas, NV 20 24 hours 19. Lucky Store No. 121-687 2835 S. Nellis Las Vegas, NV 15 24 hours 20. Lucky Store No. 121-788 6140 W. Lake Mead Las Vegas, NV 15 24 hours 21. Lucky Store No. 121-590 2550 S. Fort Apache Las Vegas, NV 15 6 a.m. to 12 a.m. 22. Lucky Store No. 121-589 8350 W. Cheyenne Las Vegas, NV 15 24 hours 23. Lucky Store No. 121-721 5975 W. Tropicana Las Vegas, NV 15 24 hours 24. Lucky Store No. 121-742 1324 W. Craig Rd. Las Vegas, NV 15 6 a.m. to 12 a.m.
EX-10.17 6 EXHIBIT 10.17 "RCT" means the material omitted has been filed with the Securities & Exchange Commission with an application requesting confidential treatment. April 9, 1997 Mr. Elliot Gerson Senior Vice President Assistant Chief Legal Counsel Rite Aid Corporation P. O. Box 3165 Harrisburg, PA 17105 Dear Mr. Gerson: Reference is made to the License Agreement, dated as of April 14, 1992 (the "License Agreement"), between Payless Drug Stores Northwest, Inc. now Thrifty Payless, Inc. ("Payless") and Corral Coin, Inc., a Nevada corporation ("Corral"), a subsidiary of Jackpot Enterprises, Inc. ("Jackpot"). This is to confirm that following our discussions with you over the past several months, Payless and Corral have agreed that the License Agreement is hereby amended to reflect the term sheet attached hereto as Exhibit A. If you are in agreement with the foregoing, please execute a copy of this letter and return it to me. AGREED AND ACCEPTED: JACKPOT ENTERPRISES, INC. RITE AID CORPORATION By: /s/ Don R. Kornstein By: /s/ Elliot Gerson ________________________ ________________________ Don R. Kornstein Elliot Gerson Sr. Vice President CORRAL COIN, INC. THRIFTY PAYLESS, INC. By: /s/ George Congdon By: /s/ Elliot Gerson ___________________________ ________________________ George Congdon Elliot Gerson Sr. Vice President EXHIBIT A TERM SHEET BETWEEN JACKPOT ENTERPRISES, INC. AND RITE AID CORPORATION Term: RCT Commencing July 1, 1997 Rent: Existing Stores: See schedule below New Stores: RCT RCT RCT RCT Existing Stores ___________________________________ Rent Rent Rent RCT RCT RCT Current Total ___________ ___________ ___________ # Stores Rent/Month Monthly Rent Store Total Store Total Store Total ________ __________ ____________ _____ _____ _____ _____ _____ _____ [S] [C] [C] [C] [C] [C] [C] [C] [C] 5 RCT RCT RCT RCT RCT RCT RCT RCT 1 RCT RCT RCT RCT RCT RCT RCT RCT 3 RCT RCT RCT RCT RCT RCT RCT RCT 1 RCT RCT RCT RCT RCT RCT RCT RCT 1 RCT RCT RCT RCT RCT RCT RCT RCT 1 RCT RCT RCT RCT RCT RCT RCT RCT __ 12 RCT RCT RCT RCT April 24, 1997 Mr. Elliot Gerson Senior Vice President Assistant Chief Legal Counsel Rite Aid Corporation P. O. Box 3165 Harrisburg, PA 17105 Dear Mr. Gerson: Reference is made to the License Agreement, dated as of June 19, 1990 (the "License Agreement"), between Payless Drug Stores, Inc. now Thrifty Payless, Inc. ("Payless") and Cardivan Company, a Nevada corporation ("Cardivan"), a subsidiary of Jackpot Enterprises, Inc. ("Jackpot"), and the Letter Agreement dated as of April 9, 1997 (the "Letter Agreement") between Payless and Corral Coin, Inc., a Nevada corporation and Jackpot. This is to confirm that following our discussions with you over the past several months, Payless and Cardivan have agreed that the License Agreement is hereby amended to reflect the term sheet attached hereto as Exhibit A, and that Rite Aid store #6121 (1327 Highway 395 South, Gardnerville, Nevada) is deleted from and not covered by the Letter Agreement. If you are in agreement with the foregoing, please execute a copy of this letter and return it to me. AGREED AND ACCEPTED: JACKPOT ENTERPRISES, INC. RITE AID CORPORATION By: /s/ Don R. Kornstein By: /s/ Elliot Gerson ________________________ ________________________ Don R. Kornstein Elliot Gerson Sr. Vice President CARDIVAN COMPANY THRIFTY PAYLESS, INC. By: /s/ George Congdon By: /s/ Elliot Gerson ___________________________ ________________________ George Congdon Elliot Gerson Sr. Vice President EXHIBIT A TERM SHEET BETWEEN JACKPOT ENTERPRISES, INC. AND RITE AID CORPORATION Company: Cardivan Company Term: RCT commencing July 1, 1997 Store No. ________________ Current Rent Rent Rent Rite Aid Payless Address Rent/Month RCT RCT RCT ________ _______ _________________________ __________ ____ ____ ____ 6121 (None) 1327 S. Highway 395, RCT RCT RCT RCT Gardnerville EX-11.1 7 EXHIBIT 11.1 JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (A) YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (Dollars and shares in thousands, except per share data) Years Ended June 30, _________________________ 1997 1996 1995 ______ _______ _______ Primary: Earnings: Net income $7,844 $ 5,855 $ 6,616 ====== ======= ======= Shares: Weighted average number of common shares outstanding (B) 9,237 9,307 9,235 ====== ======= ======= Primary earnings per share $ .85 $ .63 $ .72 ====== ======= ======= Fully diluted (C): Earnings: Net income $7,844 $ 5,855 $ 6,616 Add after-tax interest, net (D) 171 813 1,762 ______ _______ _______ Net income, as adjusted $8,015 $ 6,668 $ 8,378 ====== ======= ======= Shares: Weighted average number of common shares outstanding 9,237 9,307 9,235 Common shares issuable upon exercise of stock options and warrants, net of common shares assumed to be repurchased from the proceeds using the greater of the average market price for the period or the period-end price 242 1,229 2,398 ______ _______ _______ Weighted average number of common shares and common share equivalents outstanding 9,479 10,536 11,633 ====== ======= ======= Fully diluted earnings per share $ .85 $ .63 $ .72 ====== ======= =======
________________________________ (A) See Notes 1 and 5 of Notes to Consolidated Financial Statements. (B) Common shares issuable upon exercise of stock options and warrants, net of common shares assumed to be repurchased from the proceeds at the average market price for the period have been excluded from the computations in 1997, 1996 and 1995 because they had no effect on primary earnings per share. (C) The calculations for 1997, 1996 and 1995 are submitted in accordance with Regulation S-K Item 601 (b)(ii) although not required by Footnote 2 to paragraph 14 of APB Opinion No. 15 because they had no effect on earnings per share. (D) Amounts represent a decrease in interest expense and an increase in interest income as a result of the assumed reduction in borrowings and increase in investments in U.S. government securities from the application of the portion of the proceeds from the assumed exercise of stock options and warrants which were not applied towards the repurchase of outstanding common shares (equivalent to 20% of the common shares outstanding at the end of the applicable period). EX-21.1 8 EXHIBIT 21.1 SUBSIDIARIES OF JACKPOT ENTERPRISES, INC. STATE OF COMPANY %OWNED INCORPORATION 1.Cardivan Company 100% Nevada 2.Corral Coin, Inc. 100% Nevada 3.Corral Country Coin, Inc. 100% Nevada 4.Corral United, Inc. 100% Nevada 5.Jackpot Gaming, Inc. 100% Nevada 6.Jackpot Owl, Inc. 100% Nevada 7.Jackpot's Highway 93 Casino, Inc. 100% Nevada
EX-23.1 9 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-22990, 33-38210, 33-51588 and 33-61624 on Forms S-3 and in Registration Statement Nos. 2-83273, 2-98984, 33-27288, 33-38209 and 33-86078 on Forms S-8 of Jackpot Enterprises, Inc. of our report dated August 1, 1997, appearing in this Annual Report on Form 10-K of Jackpot Enterprises, Inc. for the year ended June 30, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Las Vegas, Nevada September 22, 1997 EX-27.1 10
5 This schedule contains summary financial information extracted from Jackpot's Consolidated Balance Sheets - June 30, 1997 and 1996 and its Consolidated Statements of Income - years ended June 30, 1997, 1996 and 1995 and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 47,945 0 0 0 0 51,111 34,671 21,582 75,267 4,782 0 0 0 98 67,281 75,267 0 91,904 0 72,740 4,605 0 0 11,368 3,524 0 0 0 0 7,844 .85 .85
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