-----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, NM/Ysvy8DGZYBQPZxm8nUaW3bOvNzAMTBLYB1GlfuJxtvpyObYsgoztS6Bso2xvt 4b/uC4fN/b9D8EP56zEY4g== 0000351903-98-000009.txt : 19980924 0000351903-98-000009.hdr.sgml : 19980924 ACCESSION NUMBER: 0000351903-98-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980923 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: 98713325 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to____________ Commission File Number 1-9728 JACKPOT ENTERPRISES, INC. __________________________________________________________________________ (Exact name of registrant as specified in its charter) Nevada 88-0169922 ________________________________________________ _______________________ (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) 1110 Palms Airport Drive, Las Vegas, Nevada 89119 ________________________________________________ _______________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 263-5555 _______________________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ________________________________________________ _______________________ Common Stock - Par value $.01 per share, New York Stock Exchange which include certain preferred stock purchase rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x ___ As of August 31, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $80,414,574. As of September 18, 1998, there were 8,625,780 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Proxy Statement relating to the 1998 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. PART I Item 1. Business ________ General _______ Jackpot Enterprises, Inc., a Nevada corporation, ("Jackpot" or the "Company") has been actively engaged, through its subsidiaries, in the gaming industry for over 30 years. The Company is one of the largest gaming machine route operators in the State of Nevada, operating, as of June 30, 1998, 4,097 gaming machines in 412 locations. Jackpot is an established leader in the operation of gaming machines in multiple retail locations ("gaming machine route operations"). In addition to its gaming machine route operations, Jackpot, as of June 30, 1998, operated two casinos with an aggregate of 187 gaming machines. However, as part of its strategy to exit its remaining casino operations, Jackpot continues to market the casino properties for sale. Jackpot's gaming machine route operations are subject to seasonal fluctuations. The gaming play for such operations is generally greater in the second and fourth quarters of Jackpot's fiscal year. For the fiscal year ended June 30, 1998, 97% of total revenues were derived from Jackpot's gaming machine route operations and 3% from its casino operations. As of June 30, 1998, Jackpot operated 4,284 gaming machines in 414 locations. Unless the context indicates otherwise, references to "Jackpot" and the "Company" include its direct and indirect subsidiaries. Business Development Strategy _____________________________ The Company's business strategy is to enhance its position as a leader in the Nevada gaming machine route market both through internal growth and acquisition and to apply its gaming management expertise and its regulatory experience to pursue strategic gaming activities and other value oriented nongaming opportunities. Specifically, the Company's business strategy includes the following: Enhance Gaming Route Operations. The Company continually seeks to enhance its position as a leader in the Nevada gaming machine route business by providing high levels of service and popular gaming products, cultivating its existing relationships with major customers and expanding its gaming machine route operations through the selective addition of new locations and/or the consolidation of other route operators. The expected continued economic and population growth in Nevada should also benefit the Company. In addition, as appropriate, the Company will explore the possibility of expanding its gaming machine route business to other jurisdictions. Pursue Other Strategic Gaming and Nongaming Opportunities. Jackpot continually reviews and evaluates potential gaming and nongaming opportunities. The Company's strong financial position and potential access to capital represent a competitive advantage which enables management to explore potential acquisitions and strategic combinations. Jackpot is committed to pursue all such opportunities in order to improve future earnings and enhance shareholder value. In evaluating such potential opportunities the Company is looking for candidates with either a value orientation or sustainable rates of growth. Although Jackpot is exploring expansion and acquisition opportunities, there can be no assurance that such opportunities will be available on terms acceptable to Jackpot or that if completed that such opportunities will be successful. Gaming Machine Route Operations _______________________________ Gaming machine route operations involve the installation, operation and service of gaming machines owned by Jackpot in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada. With respect to retail stores, Jackpot generally licenses, leases or subleases space in stores which are part of a chain of stores and installs gaming machines and a service center near the store's entrance, where customer traffic is greatest. The number of gaming machines per store is determined by licensing limitations, available space and license, lease or sublease negotiations. In fiscal 1998, approximately 84% of Jackpot's gaming machine route operations revenues were generated by southern Nevada operations and approximately 16% by northern Nevada operations. Management believes that Jackpot has a substantial market share of gaming machine operations in supermarkets, drug stores and merchandise stores in Nevada, and that its customers are primarily local Nevada residents. As of June 30, 1998, Jackpot operated 4,097 gaming machines at 412 locations in its gaming machine route business; 136 of the locations contained 15 gaming machines, 33 of the locations contained more than 15 machines and 243 of the locations contained fewer than 15 machines. Service centers are operated at retail store locations with generally 15 gaming machines or more during all store business hours by employees of Jackpot who provide coin, currency and other services to players of the gaming machines. On a regular basis, money is removed from the gaming machines and the service center is replenished with coin and currency. Gaming machines are routinely serviced, repaired, and maintained by mechanics employed by Jackpot. In the opinion of management, Jackpot's gaming machines and associated equipment are well-maintained, adequately insured, and in good working condition. The following table sets forth certain historical data showing the changes to the number of machines and locations in Jackpot's gaming machine route operations through June 30, 1998: As of June 30, _________________________________ 1998 1997 1996 1995 1994 _____ _____ _____ _____ _____ Number of machines on location 4,097 4,075 4,211 4,284 4,072 Number of locations 412 419 439 452 434
Jackpot's agreements for its locations generally are in the form of written license, lease, sublease or revenue sharing contract and generally give Jackpot the exclusive right to install gaming machines at such locations. License, lease and sublease agreements, which accounted for approximately 75% of total gaming machine route operations revenues in fiscal 1998, require payments of fixed monthly fees based upon the amount of space used and/or the number of gaming machines placed at the location. The remainder provide for the payment to the location owner of a rental fee or a revenue sharing arrangement based upon a percentage of the revenues generated by Jackpot's gaming machines at such location. A location owner is not permitted to receive gaming machine revenues (lease or otherwise) based upon a percentage of revenues unless such owner is licensed by the Nevada Gaming Commission. The renewal or extension of agreements at existing locations have generally resulted in increased monthly fees. Licenses, leases and subleases have a wide range of terms and maturities, with expiration dates, including option periods, extending from 1998 to 2010. Prior to negotiating licenses, leases and subleases and installing machines, Jackpot performs a study of market potential, customer base, and comparative route locations in order to determine the appropriate type and denominations of gaming machines to be installed in each new location. This evaluation is ongoing at all locations and machine mix changes are made accordingly to maximize the operating performance of each location. Jackpot has a significant amount of its gaming machine route operations at retail stores which are part of a group of affiliated store chains. Gaming machine route operations from two groups of affiliated store chains for the fiscal years ended June 30, 1998, 1997 and 1996 each accounted for more than 10% of Jackpot's total revenues in such fiscal years. The largest five store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation, Lucky Stores, Inc. and Rite Aid Corporation) accounted for approximately 64% of Jackpot's total revenues in fiscal 1998. Agreements with these five customers have expiration dates ranging from 2003 to 2010. Such agreements provide Jackpot the continued right to operate gaming machines at certain existing locations and future locations in Nevada, if any, of such customers. The loss or nonrenewal of any of these leases could have a material adverse effect on the Company's future results of operations. In August 1998, Albertson's, Inc. and American Stores Company (the parent company of Lucky Stores, Inc. and American Drug Stores, Inc.) announced that the companies have entered into a definitive merger agreement. Per the announcement, such transaction is expected to close in early calendar 1999, subject to various approvals. Route operations revenues generated at the locations of the combined entities represent a significant portion of Jackpot's total revenues, and if such transaction had occurred at the beginning of fiscal 1998, such revenues would have accounted for approximately 55% of Jackpot's total revenues in fiscal 1998. Most of Jackpot's licenses, leases and subleases with major retail chains cover a number of specified stores in Nevada and usually provide Jackpot with an option to install gaming machines at any new stores of the retail chain opened in Nevada. All of the licenses, leases and subleases require Jackpot to pay all installation, maintenance and insurance expenses and all taxes in connection with Jackpot's operations at the location. Some of the Company's license, lease or sublease agreements require fixed periodic increases in monthly fees during the term of the contract. Jackpot's license, lease and sublease agreements generally provide that in the event that Jackpot fails to pay the required rental or license fees under such license, lease or sublease or defaults in the performance of any of its other obligations thereunder, the store operator can terminate the license, lease or sublease, usually after notice and a cure period of between 10 and 30 days. These agreements generally also provide that if the store operator terminates its business at a location, the license, lease or sublease is automatically terminated as to that location. Jackpot believes that it is not in default under any of its present licenses, leases or subleases. See Note 8 of Notes to Consolidated Financial Statements. Despite a long-term relationship with Warehouse Markets, Inc., a significant customer, Jackpot was not willing to agree with the terms sought for a contract extension, which management believed were uneconomic. The agreement, which expired on June 30, 1997, involved the operation of approximately 272 gaming machines in 16 locations. In fiscal 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. The renewal or extension of agreements with major retail chains has generally resulted in increased monthly fees. These contracts often require fixed periodic increases in monthly fees during the term of the contract. In 1997, Jackpot entered into agreements for long-term contract extensions, which became effective July 1, 1997, with four of its largest retail chain store customers, two of which were not due to expire on June 30, 1997. A very competitive pricing environment caused the Company to offer significant increases in location rent over the existing agreements. While fiscal 1998 was adversely affected by the loss of Warehouse Markets, Inc. and by significant increases in location rent, such effect was principally offset by increases in revenues generated at existing and new route operations locations. In September 1998, Jackpot entered into an agreement for a long-term contract extension with one of its largest retail store customers. Pursuant to the terms of the new agreement, which will become effective July 1, 1999, rent expense will increase significantly over the previous agreement. Such increase could adversely affect the Company's results of operations for the year ending June 30, 2000. Excluding the aforementioned long-term extension, license, lease and sublease agreements, representing 41 agreements and approximately 4% of fiscal 1998 route operations revenues, have terms expiring during fiscal 1999. Casino Operations _________________ On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Although the Company continues to market these two casinos for sale, no assurance can be given that such disposals will occur. The Owl Club, as of June 30, 1998, operated 93 gaming machines and two table games in Battle Mountain, Nevada. The Owl Club also has a restaurant operation and an eighteen room motel. Jackpot owns the land and buildings used in the Owl Club's casino and motel operations. The Owl Club primarily serves local residents and markets with its food and informal and congenial atmosphere. Jackpot manages the casino operations of the Pony Express Casino in Jackpot, Nevada under a month to month space lease agreement. As of June 30, 1998, Jackpot operated 94 gaming machines in approximately 2,600 square feet of casino space. The Pony Express Casino attracts hotel guests, local residents and tourists, primarily from the Idaho market. For additional information concerning Jackpot's operations, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Suppliers _________ Jackpot purchases a variety of models and styles of gaming machines primarily from one manufacturer, International Game Technology ("IGT"). Although the Company purchased approximately 98% of its gaming machines from IGT in fiscal 1998, Jackpot does not believe it is dependent upon IGT for future purchases. Jackpot does not have a contractual commitment for future purchases with IGT, or any other manufacturer. Each gaming machine accepts only one denomination of coin and, with minor exceptions, each location will have a variety of machines requiring different denominations of coins. Gaming machines operated by Jackpot are multiple coin play. Multiple coin play allows a player to wager several coins of the same denomination on each play. Jackpot continually tests, on a trial basis, new machines from various gaming machine manufacturers to determine which games and models will appeal to its customers to enhance play levels. Employees _________ As of June 30, 1998, Jackpot employed approximately 850 persons, the substantial portion of whom are non-management personnel. None of Jackpot's employees are covered by a collective bargaining agreement and Jackpot believes that it has satisfactory employee relations. Competition ___________ Gaming machines and gaming of all types are available in Nevada in casinos and hotel casinos, as well as in locations similar to those of Jackpot, all of which compete directly or indirectly with Jackpot. Jackpot has been and is subject to substantial direct competition for the operation of gaming machines in approved locations from numerous small gaming machine route operators and some large operators, located principally in Las Vegas and Reno and their surrounding areas. Management believes at least one of these competitors has more gaming machines or locations than Jackpot. In addition, certain of such competitors manufacture gaming machines. The principal methods of competition for gaming machine locations are the lease, sublease, license or revenue sharing terms, the service provided by the route operator and the experience, reputation and financial strength of the route operator. In recent years Jackpot has faced increased competition in its gaming machine route operations, and as certain of its licenses, leases and subleases have begun to expire, it has faced strong competition from other route operators who have attempted or captured locations by offering more favorable terms to retail store owners. As a result of such competition, along with the Company's continual evaluation of leases and adherence to management's pricing guidelines, revenues generated from route operations, which are attributable to revenue sharing contracts, have decreased since fiscal 1995. For additional information concerning Jackpot's revenue sharing contracts, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Regulation and Licensing Requirements _____________________________________ Nevada The ownership and operation of casino gaming facilities and gaming routes in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board") and local regulatory authorities. The Nevada Commission, the Nevada Board and the local regulatory authorities are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. Corporations that operate casinos and gaming machine routes in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. The Company has been found suitable by the Nevada Commission to own the stock of Cardivan Company, Corral Coin, Inc., Corral Country Coin, Inc. and Corral United, Inc. (the "Route Subsidiaries") and Jackpot Gaming, Inc. Jackpot Gaming, Inc. is registered as a holding corporation and is approved by the Nevada Gaming Authorities to own the stock of the Owl Club and the Pony Express Casino (the "Casino Subsidiaries"). No person may become a stockholder of, or receive any percentage of profits from, the Route Subsidiaries, Jackpot Gaming, Inc., or the Casino Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Route Subsidiaries, Jackpot Gaming, Inc. and the Casino Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or any of its subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Route Subsidiaries and the Casino Subsidiaries must file applications with the Nevada Gaming Authorities and may be required to be licensed or be found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Company or its subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or any of its subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company and its subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company, Jackpot Gaming, Inc., the Route Subsidiaries and the Casino Subsidiaries are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company and its subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Company or any of its subsidiaries, the gaming licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the subsidiary involved, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after requests, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or any of its subsidiaries, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has required that the Company's stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending upon the type of gaming or activity involved, are payable to the State of Nevada and to the local jurisdictions. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon any of: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at the Company's casinos is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company's casinos. Federal Regulation The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it unlawful, in general, for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices, and components thereof across interstate lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. Jackpot's subsidiaries have so registered and must renew their registration annually. In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. Violation of the Federal Act may result in seizure and forfeiture of equipment, as well as other penalties. Other Jurisdictions Other jurisdictions also require various licenses, permits, and approvals in connection with the ownership and operation of gaming facilities. The operation of gaming devices and lottery devices is subject to extensive licensing requirements and regulatory compliance. If Jackpot proceeds with expansion into any other state or foreign jurisdiction, it will also be necessary for the appropriate officers, employees, corporate subsidiaries and other persons or entities to apply for and obtain all necessary gaming and distributing licenses. As in Nevada, state agencies and the local authorities having jurisdiction over such activities have full power and discretion to limit, condition, suspend and revoke such licenses or approvals and any disciplinary action against Jackpot's affiliates in such jurisdictions could (and revocation would) have a material adverse effect on the operations of Jackpot in such states or local jurisdictions. Other Jackpot maintains rigorous internal accounting controls in accordance with the regulations of the Nevada Commission. Jackpot carries insurance of such types and in such amounts as management determines to be prudent from time to time. Item 2. Properties __________ Jackpot's corporate headquarters are located in Las Vegas, Nevada with approximately 34,000 square feet of office, warehouse and shop space under a lease which expires in 2006, with certain options for renewal. Jackpot believes its properties are adequate and suitable for its purposes. See Note 3 of Notes to Consolidated Financial Statements for additional information as to Jackpot's properties in Battle Mountain, Nevada and Jackpot, Nevada. The following table sets forth the location, use, size, and percentage utilization of Jackpot's properties: Approximate Percentage Location Use Size Utilization _______________________ ________________ _____________ ___________ OWNED PROPERTIES: Battle Mountain, Nevada Casino and motel 10,000 sq. ft. 100% operations LEASED PROPERTIES: Las Vegas, Nevada Executive offices, 34,000 sq. ft. 100% warehouse and shop Reno, Nevada Offices and shop 10,000 sq. ft. 100% Throughout Nevada Gaming machine various sq. ft. 100% operations per location Jackpot, Nevada Casino operations 2,600 sq. ft. 100%
Item 3. Legal Proceedings _________________ Not applicable. Item 4. Submission of Matters to a Vote of Security Holders ___________________________________________________ Not applicable. Executive Officers of the Registrant ____________________________________ The executive officers of Jackpot are appointed by the Board of Directors for an unspecified term and can be terminated at the Board's discretion; however, Mr. Kornstein has an employment agreement with Jackpot which currently expires on September 30, 2001. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than the March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein. The current executive officers of Jackpot (none of whom has a family relationship with one another), their ages and positions are as follows: Year Became An Name Age Position Executive Officer ________________ ___ ________________________________ _________________ Don R. Kornstein 46 President, 1994 Chief Executive Officer and Director George Congdon 49 Senior Vice President - 1995 Operations Bob Torkar 47 Senior Vice President - Finance, 1991 Treasurer and Chief Accounting Officer
Don R. Kornstein was appointed President, Chief Executive Officer and a director of Jackpot on September 8, 1994. Prior to his appointment with Jackpot, Mr. Kornstein was a Senior Managing Director of Bear, Stearns & Co. Inc., a leading worldwide investment banking firm where he had been employed since 1977. Mr. Kornstein was in such firm's Investment Banking Department and was head of that firm's gaming industry group. George Congdon was appointed Senior Vice President - Operations of Jackpot on May 11, 1995. From October 1990 to May 1995, Mr. Congdon held various management positions with certain of Jackpot's subsidiaries including Vice President of Route Operations and Senior Vice President of Operations. Prior to October 1990, Mr. Congdon was employed for over sixteen years in various operating positions by Bally Manufacturing, Inc. and Bally Distributing, Inc., gaming machine manufacturers and distributors. Bob Torkar was appointed Vice President - Finance, Treasurer and Chief Accounting Officer of Jackpot on July 1, 1991 and Senior Vice President on October 15, 1993. From February 1991 to June 1991, Mr. Torkar was a financial consultant to Jackpot. Prior to the consulting assignment with Jackpot, Mr. Torkar was Vice President and Chief Financial Officer with Furnishings 2000, Inc., a publicly traded retail furnishings company in San Diego, California, having spent seven years (1983-1990) with such corporation. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters _________________________________________ Jackpot's common stock, par value $.01 per share (the "Common Stock"), is listed on the New York Stock Exchange (NYSE) with the trading symbol "J". The following table sets forth the range of high and low prices for shares of the Common Stock for the fiscal quarters indicated, as furnished by the NYSE, and the per share cash dividends paid during those fiscal quarters. JACKPOT COMMON STOCK ___________________________________________________________________________ Dividends High Low Paid ___________________________________________________________________________ Fiscal 1997 First Quarter $12.75 $ 9.63 $.08 Second Quarter 11.25 9.63 .08 Third Quarter 10.75 9.75 - Fourth Quarter 12.75 9.63 - ___________________________________________________________________________ Fiscal 1998 First Quarter $12.19 $10.63 - Second Quarter 13.00 10.75 - Third Quarter 13.94 11.00 - Fourth Quarter 13.19 11.75 - ___________________________________________________________________________
As of September 4, 1998 there were 1,676 holders of record of Common Stock. The number of holders of record of Jackpot's Common Stock on September 4, 1998 was computed by a count of record holders. A policy of quarterly cash dividends, which had been effective since July 1987, was suspended on October 29, 1996 by Jackpot's Board of Directors. Future payment of quarterly cash dividends, if any, is subject to periodic review and reconsideration. Jackpot paid two quarterly cash dividends of $.08 per share to its stockholders of record during fiscal 1997. Item 6. Selected Financial Data _______________________ The following information has been derived from Jackpot's consolidated financial statements: Years Ended June 30, _________________________________________ 1998 1997 1996 1995 1994 _______ _______ _______ _______ _______ (Dollars and shares in thousands, except per share data) OPERATING DATA: Total revenues $93,013 $91,904 $91,108 $96,853 $98,335 _________________________________________________________________________ Operating income $ 7,963 $ 9,822 $ 7,094(1)$ 8,968 $ 9,409 (1) _________________________________________________________________________ Income (loss) from continuing operations $ 9,881 $11,368 $ 8,610 $ 9,875 $(7,052)(2) _________________________________________________________________________ Net income (loss) $ 7,213 $ 7,844 $ 5,855(3)$ 6,616 $(4,584)(3) _________________________________________________________________________ Basic earnings (loss) per share (4): Net income (loss) $ .80 $ .85 $ .63 $ .72 $ (.50) _________________________________________________________________________ Diluted earnings (loss) per share (4): Net income (loss) $ .79 $ .84 $ .62 $ .71 $ (.50) _________________________________________________________________________ Dividends declared per share $ - $ .16 $ .32 $ .32 $ .31 _________________________________________________________________________ Average common shares outstanding 8,991 9,237 9,307 9,235 9,211 _________________________________________________________________________ Average common shares and common share equivalents outstanding 9,187 9,317 9,481 9,272 9,211 _________________________________________________________________________ OTHER DATA: EBITDA (5) $14,762 $16,557 $17,093 $18,125 $18,896 Net cash provided by operating activities $11,836 $14,584 $12,778 $18,068 $18,367 Net cash used in investing activities $ 5,883 $ 1,557 $ 3,091 $ 4,330 $ 9,689 Net cash used in financing activities $ 3,623 $ 4,106 $ 3,579 $ 4,365 $ 4,128 Capital expenditures $ 6,235 $ 3,393 $ 4,267 $ 4,044 $13,452 (6) Amortization $ 1,141 $ 1,728 $ 2,199 $ 2,880 $ 2,916 Depreciation $ 3,740 $ 3,461 $ 4,284 $ 5,349 $ 5,813 _________________________________________________________________________ BALANCE SHEET DATA (at end of period): Working capital $49,152 $46,329 $40,336 $31,640 $22,022 _________________________________________________________________________ Total assets $79,100 $75,267 $70,742 $71,959 $73,459 _________________________________________________________________________ Long-term debt, net of current portion $ - $ - $ - $ 271 $ 1,403 _________________________________________________________________________ Stockholders' equity $70,871 $67,281 $63,495 $60,216 $56,266 _________________________________________________________________________
(See notes on following page) (1) Operating income includes: in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties (see Note 3 of Notes to Consolidated Financial Statements); in 1994, a pretax cost of $1.3 million in connection with the severance agreement with Jackpot's former chief executive officer. (2) Income (loss) from continuing operations includes a pretax loss of $16.9 million ($11.0 million after tax, or $1.20 per share) for Jackpot's share of the closing costs, write-down of certain assets and operating loss in a dockside casino facility in Tunica, Mississippi (the "Tunica Facility"). (3) Net income (loss) includes: in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties (see Note 3 of Notes to Consolidated Financial Statements); in 1994, a pretax loss of $16.9 million ($11.0 million after tax, or $1.20 per share) for Jackpot's share of the closing costs, write-down of certain assets and operating loss in the Tunica Facility. (4) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share", which became effective for periods ending after December 15, 1997. All prior-period earnings per share data presented has been restated to conform to the provisions of such statement. (5) EBITDA represents earnings before interest expense, income tax, depreciation, amortization and other non-cash items. EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles), as an indicator of the Company's operating performance, as an alternative to cash flows provided by operating activities (as determined in accordance with generally accepted accounting principles), or as a measure of liquidity. EBITDA is presented solely as a supplemental disclosure because management believes that it enhances the understanding of the financial performance of a company with substantial amortization and depreciation expense. (6) Capital expenditures includes purchases of $9.0 million of property in connection with the Tunica Facility. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations _______________________________________________________________ Capital Resources and Liquidity _______________________________ Cash Flows: Jackpot's principal sources of cash for the fiscal years ended June 30, 1998, 1997 and 1996 (referred to herein as "1998", "1997" and "1996", respectively), consisted of the cash flows from operating activities and its available cash and cash equivalents. Net cash provided by operating activities in 1998 decreased $2.8 million, from $14.6 million in 1997 to $11.8 million in 1998. The decrease of $2.8 million was primarily due to a decrease in the gaming machine route operations ("route operations") operating margin of $2.6 million, from $19.0 million in 1997 to $16.4 million in 1998. Net cash used in investing activities in 1998 increased $4.3 million, from $1.6 million in 1997 to $5.9 million in 1998. 1997 includes the receipt of $1.3 million from the sale of Jackpot's interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada. Cash used for purchases of property and equipment increased $2.8 million, from $3.4 million in 1997 to $6.2 million in 1998. Primarily, as a result of these transactions, net cash used in investing activities increased $4.3 million. Net cash used in financing activities in 1998 was $3.6 million, and resulted from payments for repurchases of common stock of $4.0 million, net of proceeds received of approximately $.4 million from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of $11.8 million less net cash used in investing and financing activities of $5.9 million and $3.6 million, respectively, cash and cash equivalents in 1998 increased $2.3 million. Net cash provided by operating activities in 1997 increased $1.8 million, from $12.8 million in 1996 to $14.6 million in 1997. The increase of $1.8 million was primarily due to the increase from the change in other current liabilities. Net cash used in investing activities in 1997 was $1.6 million which included cash used of $3.9 million and cash received of $2.3 million. The $3.9 million of cash used included payments of $3.4 million primarily for purchases of property and equipment. The $2.3 million of cash received from investing activities consisted primarily of the proceeds from the sale of Jackpot's interest in the Nugget and aggregate proceeds from sales of other non-current assets. Net cash used in financing activities in 1997 was $4.1 million which resulted from payments for repurchases of common stock and dividends of $2.8 million and $1.5 million, respectively, net of approximately $.2 million of proceeds from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of $14.6 million less net cash used in investing and financing activities of $1.6 million and $4.1 million, respectively, cash and cash equivalents in 1997 increased $8.9 million. Net cash provided by operating activities in 1996 decreased $5.3 million, from $18.1 million for the fiscal year ended June 30, 1995 ("1995") to $12.8 million in 1996. The decrease of $5.3 million resulted primarily from a decrease in the route operations operating margin of $2.5 million, from $21.6 million in 1995 to $19.1 million in 1996 and an increase of $1.8 million for payments of Federal income tax. Net cash used in investing activities in 1996 was $3.1 million which included cash used of $4.7 million and cash received of $1.6 million. The $4.7 million of cash used included payments of $4.3 million primarily for purchases of property and equipment in connection with Jackpot's route operations. The $1.6 million of cash received from investing activities consisted primarily of aggregate proceeds from sales of other non-current assets. Net cash used in financing activities in 1996 was $3.6 million which consisted primarily of the repayment of $.9 million of long-term debt, the payment of $3.0 million of dividends, net of $.3 million of proceeds from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of $12.8 million less net cash used in investing and financing activities of $3.1 million and $3.6 million, respectively, cash and cash equivalents in 1996 increased $6.1 million. Liquidity: In 1998, Jackpot purchased $6.2 million of property and equipment, as described above. Approximately $5.6 million of the $6.2 million was associated with equipment purchased for existing and new gaming locations. Management anticipates, based on its review of capital expenditure requirements for existing and projected new locations, that Jackpot will purchase approximately $8.4 million of property and equipment, exclusive of business acquisitions, if any, for the fiscal year ending June 30, 1999 ("1999"). At June 30, 1998, Jackpot had cash and cash equivalents of $50.3 million, an increase of approximately $2.3 million from June 30, 1997. Jackpot's working capital increased to $49.2 million at June 30, 1998, from $46.3 million at June 30, 1997 primarily as a result of the activities described above. On October 29, 1996, Jackpot's Board of Directors authorized management to repurchase up to 500,000 shares of Jackpot's common stock at prevailing market prices. Subsequently, on January 22, 1998, such authorization was increased from 500,000 to 1,000,000 shares. From October 29, 1996 through August 31, 1998, Jackpot has repurchased approximately 740,000 shares at an aggregate cost of approximately $8.0 million. Management believes Jackpot's working capital and cash provided by operations will be sufficient to enable Jackpot to meet its planned capital expenditures and other cash requirements in 1999. Jackpot continues to selectively explore expansion opportunities, both in and outside Nevada, and various potential acquisitions, both gaming and nongaming. Management believes working capital and cash provided by operations will be sufficient to enable Jackpot to pursue expansion opportunities; however, Jackpot may seek additional debt or equity financing to facilitate expansion opportunities and potential acquisitions. Recently Issued Accounting Standards: In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Management intends to comply with the disclosure requirements of SFAS 130 in 1999. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. Management has begun its review of SFAS 131, however it has not made a final determination of the extent of the disclosure required by this statement. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal years beginning after June 15, 1999. SFAS 133 establishes additional accounting and reporting standards for derivative instruments and hedging activities. Management does not believe the Company has any derivative instruments, or that Jackpot participates in hedging activities. Accordingly, SFAS 133 is not expected to have a significant effect on the results of operations or related disclosures. Overview ________ Route operations: Jackpot has a significant amount of its route operations at retail stores which are part of a group of affiliated store chains. Route operations from two groups of affiliated store chains in 1998, 1997 and 1996 each accounted for more than 10% of Jackpot's total revenues in such fiscal years. The largest five store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation, Lucky Stores, Inc. and Rite Aid Corporation) accounted for approximately 64% of Jackpot's total revenues in 1998. Agreements with these five customers have expiration dates ranging from 2003 to 2010. Such agreements provide Jackpot the continued right to operate gaming machines at certain existing locations and future locations in Nevada, if any, of such customers. The loss or nonrenewal of any of these agreements could have a material adverse effect on the Company's future results of operations. In August 1998, Albertson's, Inc. and American Stores Company (the parent company of Lucky Stores, Inc. and American Drug Stores, Inc.) announced that the companies have entered into a definitive merger agreement. Per the announcement, such transaction is expected to close in early calendar 1999, subject to various approvals. Route operations revenues generated at the locations of the combined entities represent a significant portion of Jackpot's total revenues, and if such transaction had occurred at the beginning of fiscal 1998, such revenues would have accounted for approximately 55% of Jackpot's total revenues in 1998. The renewal or extension of agreements with the customers mentioned above have generally resulted in increased monthly fees. These contracts often require fixed periodic increases in monthly fees during the term of the contract. With respect to the accounting treatment of fixed periodic increases in monthly fees associated with these contracts, the Company is required to average annual lease costs over the term of the contract. As a result of such accounting treatment, annual lease costs generally increase significantly in the first year of an extended contract for the respective locations covered by the contract and, thereafter, remain constant for existing locations during the term of the contract. Despite a long-term relationship with Warehouse Markets, Inc., a significant customer, Jackpot was not willing to agree with the terms sought for a contract extension, which management believed were uneconomic. The agreement, which expired on June 30, 1997, involved the operation of approximately 272 gaming machines in 16 locations. In 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. In 1997, Jackpot entered into agreements for long-term contract extensions, which became effective July 1, 1997, with four of its largest retail chain store customers, two of which were not due to expire on June 30, 1997. A very competitive pricing environment caused the Company to offer significant increases in location rent over the existing agreements. While 1998 was adversely affected by the loss of Warehouse Markets, Inc. and by significant increases in location rent, such effect was principally offset by increases in revenues generated at existing and new route operations locations. In September 1998, Jackpot entered into an agreement for a long-term contract extension with one of its largest retail store customers. Pursuant to the terms of the new agreement, which will become effective July 1, 1999, rent expense will increase significantly over the previous agreement. Such increase could adversely affect the Company's results of operations for the year ending June 30, 2000. Excluding the aforementioned long-term extension, license, lease and sublease agreements, representing 41 agreements and approximately 4% of 1998 route operations revenues, have terms expiring during 1999. Casino operations: On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Although the Company continues to market these two casinos for sale, no assurance can be given that such disposals will occur. Results of Operations _____________________ The table below presents the changes in comparative financial data from 1996 to 1998 (dollars in thousands): Years Ended June 30, ____________________________________________________________________ 1998 1997 1996 _________________________ _________________________ ________________ Percent Percent Percent Percent Percent of Increase of Increase of Amount Revenues(Decrease)Amount Revenues(Decrease)Amount Revenues _______ ________ ________ _______ ________ ________ _______ ________ Revenues: Route operations $90,331 97.1% 1.6% $88,895 96.7% 6.4% $83,533 91.7% Casino operations 2,682 2.9 (10.9) 3,009 3.3 (60.3) 7,575 8.3 _______ _____ _____ _______ _____ _____ _______ _____ Totals 93,013 100.0 1.2 91,904 100.0 .9 91,108 100.0 _______ _____ _____ _______ _____ _____ _______ _____ Costs and expenses: Route operations 73,927 79.5 5.8 69,905 76.0 8.4 64,460 70.8 Casino operations 2,499 2.7 (11.9) 2,835 3.1 (57.4) 6,661 7.3 Amortization 1,141 1.2 (34.0) 1,728 1.9 (21.4) 2,199 2.4 Depreciation 3,740 4.0 8.1 3,461 3.8 (19.2) 4,284 4.7 General and administra- tive 3,743 4.0 (9.9) 4,153 4.5 (.2) 4,163 4.5 Loss from write-down and sale of casino properties 2,247 2.5 _______ _____ _____ _______ _____ _____ _______ _____ Totals 85,050 91.4 3.6 82,082 89.3 (2.3) 84,014 92.2 _______ _____ _____ _______ _____ _____ _______ _____ Operating income 7,963 8.6 (18.9) 9,822 10.7 38.5 7,094 7.8 Other income, net 1,918 2.0 24.1 1,546 1.6 2.0 1,516 1.7 _______ _____ _____ _______ _____ _____ _______ _____ Income before income tax 9,881 10.6 (13.1) 11,368 12.3 32.0 8,610 9.5 Provision for income tax 2,668 2.8 (24.3) 3,524 3.8 27.9 2,755 3.1 _______ _____ _____ _______ _____ _____ _______ _____ Net income $ 7,213 7.8% (8.0)% $ 7,844 8.5% 34.0% $ 5,855 6.4% ======= ===== ===== ======= ===== ===== ======= =====
Route operations revenues attributable to fixed payment leases and revenue sharing contracts for 1998, 1997 and 1996 are summarized below (dollars in thousands): 1998 1997 1996 ____________________ __________________ __________________ Percent Percent Percent of route of route of route operations operations operations Amount revenues Amount revenues Amount revenues _______ __________ _______ __________ _______ __________ Route operations: Fixed payment leases $67,380 74.6% $60,106 67.6% $53,258 63.8% Revenue sharing contracts 22,951 25.4 28,789 32.4 30,275 36.2 _______ _____ _______ _____ _______ _____ $90,331 100.0% $88,895 100.0% $83,533 100.0% ======= ====== ======= ===== ======= =====
The decrease in route operations revenues attributable to revenue sharing contracts of $5.8 million (from $28.8 million in 1997 to $23.0 million in 1998) was principally due to the loss of Warehouse Markets, Inc. on June 30, 1997. 1998 compared to 1997 _____________________ Revenues: Total revenues increased $1.1 million, from $91.9 million in 1997 to $93.0 million in 1998. The increase in total revenues of $1.1 million was the net result of an increase of $1.4 million (from $88.9 million in 1997 to $90.3 million in 1998) in route operations revenues and a decrease of $.3 million (from $3.0 million in 1997 to $2.7 million in 1998) in casino operations revenues. The increase in route operations revenues of $1.4 million resulted from a combination of additional revenues generated from new and existing locations, net of lost revenues from terminated locations. In 1998, new and existing locations generated additional revenues of $5.7 million and $6.0 million, respectively, while terminated locations generated revenues of $10.3 million in 1997. The loss of revenues generated at terminated locations was primarily due to the expiration of Jackpot's right to operate at the locations of Warehouse Markets, Inc., as previously described, on June 30, 1997. In 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. Costs and expenses: Route operations expenses increased $4.0 million, from $69.9 million in 1997 to $73.9 million in 1998 and, as a percentage of route operations revenues, increased to 81.8% in 1998 from 78.6% in 1997. Such increases were principally attributable to an increase in location rent. As previously mentioned, Jackpot entered into agreements for long-term extensions with four of its largest retail chain store customers during 1997. A very competitive pricing environment caused Jackpot to offer significant increases in location rent, which is the single largest route operations expense, over the existing agreements. Such extensions became effective July 1, 1997. The increase in route operations expenses of $4.0 million resulted primarily from a combination of an increase of $7.6 million in location rent for locations of existing chain store customers, which was related to the four chain store renewals described above, an increase of $2.4 million in location rent for new locations of existing chain store customers, net of decreases in location rent for lost chain store customers and other route operations expenses of $3.8 million and $2.2 million, respectively. Amortization expense decreased $.6 million, from $1.7 million in 1997 to $1.1 million in 1998. The decrease in amortization expense was primarily attributable to reductions in amortization expense related to lease acquisition costs. Depreciation expense increased $.2 million, from $3.5 million in 1997 to $3.7 million in 1998. The increase in depreciation expense was principally attributable to new gaming machines purchased during 1998. General and administrative expense decreased $.4 million, from $4.1 million in 1997 to $3.7 million in 1998. The decrease in general and administrative expense was principally due to cost reductions in professional services and acquisition related activities. Other income (expense): Other income (expense) increased $.4 million, from $1.5 million in 1997 to $1.9 million in 1998. The increase in other income was primarily due to the increase in interest income earned from cash equivalents and to the receipt of approximately $.1 million for liquidated damages from the potential purchaser of Jackpot's remaining two casinos. Jackpot received such amount as a result of the potential purchaser's withdrawal of his gaming application with the Nevada Gaming Authorities. Federal income tax: The effective tax rate in 1998 was 27%, which was lower than the 31% rate in 1997 primarily because of the increase in the tax benefit from tax- exempt interest income. General: Operating income decreased $1.8 million, from $9.8 million in 1997 to $8.0 million in 1998. The decrease in operating income in 1998 resulted primarily from a decrease in the route operations operating margin of $2.6 million and an increase in depreciation expense of $.2 million, offset partially by a decrease in amortization and general and administrative expenses of $1.0 million. The decrease in the route operations operating margin of $2.6 million (from $19.0 million in 1997 to $16.4 million in 1998) was principally due to the increase in location rent expense for existing locations as previously described. Net income decreased $.6 million from a record $7.8 million in 1997 to $7.2 million in 1998, and basic earnings per share in 1998 was $.80, versus basic earnings per share in 1997 of $.85 primarily due to the results of the operations described above. 1997 compared to 1996 _____________________ Revenues: Total revenues increased $.8 million, from $91.1 million in 1996 to $91.9 million in 1997. The increase in total revenues of $.8 million was the net result of an increase of $5.4 million (from $83.5 million in 1996 to $88.9 million in 1997) in route operations revenues and a decrease of $4.6 million (from $7.6 million in 1996 to $3.0 million in 1997) in casino operations revenues. The increase in route operations revenues of $5.4 million resulted from a combination of additional revenues generated from new and existing locations, net of lost revenues from terminated locations. In 1997, new and existing locations generated additional revenues of $6.3 million and $2.9 million, respectively, while terminated locations generated revenues of $3.8 million in 1996. The decrease in casino operations revenues in 1997 of $4.6 million was primarily due to the ceasing of operations at the Debbie Reynolds' Hotel and Casino ("Debbie's Casino"), effective March 31, 1996, and the sale of Jackpot's interest in the Nugget on June 30, 1996. 1996 includes revenues of $4.3 million generated at these two locations. Costs and expenses: Route operations expenses increased $5.4 million, from $64.5 million in 1996 to $69.9 million in 1997 and, as a percentage of route operations revenues, increased to 78.6% in 1997 from 77.2% in 1996. The increase of $5.4 million was attributable to increases of $2.9 million in location rent expense, which was principally related to new chain locations, $1.3 million in workers' compensation and group health costs, $.4 million in payroll costs and $.8 million in other route operations expenses. Route operations expenses in 1997 increased as a percentage of route operations revenues primarily because of an increase in location rent, as a percentage of revenues, attributable to revenue sharing contracts and to increases in the costs and expenses described above. In general, the costs associated with revenues generated at new revenue sharing locations have been greater as a percentage of revenues than have the costs associated with the lost revenues. Casino operations expenses decreased $3.8 million, from $6.6 million in 1996 to $2.8 million in 1997. With respect to casino operations expenses, 1996 includes $3.8 million of costs and expenses incurred by the Nugget and Jackpot's casino operations at Debbie's Casino. Amortization expense decreased $.5 million, from $2.2 million in 1996 to $1.7 million in 1997. The decrease in amortization expense was primarily attributable to reductions in amortization expense related to lease acquisition costs and prior service costs associated with the Jackpot Retirement Plan for Directors. 1997 did not include any amortization expense of prior service costs as all such costs have been fully amortized at June 30, 1996. Depreciation expense decreased $.8 million, from $4.3 million in 1996 to $3.5 million in 1997. The decrease in depreciation expense was primarily attributable to gaming machines acquired in connection with the purchase of a gaming machine route business in 1992, which had become fully depreciated in 1996. General and administrative expense in 1997 remained constant at approximately $4.2 million compared to 1996. Other income (expense): Other income (expense) in 1997, which consists primarily of tax-exempt interest income, remained constant at approximately $1.5 million compared to 1996. Federal income tax: The effective tax rate in 1997 was approximately 31%, which was slightly lower than the 32% rate in 1996 primarily because of the increase in the tax benefit from tax-exempt interest income in 1997. General: Operating income increased $2.7 million, from $7.1 million in 1996 to $9.8 million in 1997. Operating income in 1996 includes a charge of approximately $2.2 million, which consists primarily of the write-down of the carrying amount of certain long-lived assets of the Owl Club to fair value. The remainder of the increase in operating income of approximately $.5 million resulted primarily from a decrease in amortization and depreciation expenses of approximately $1.3 million, net of a decrease in the casino operations operating margin of $.7 million. The decrease of $.7 million (from $.9 million in 1996 to $.2 million in 1997) was primarily due to the ceasing of Jackpot's operations at Debbie's Casino and the sale of Jackpot's interest in the Nugget, as previously described. Net income increased $2.0 million, from $5.8 million in 1996 to a record $7.8 million in 1997, and basic earnings per share in 1997 was a record $.85, versus basic earnings per share in 1996 of $.63 primarily due to the results of the operations described above. Year 2000 _________ In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This situation is generally referred to as the "Year 2000 Problem". If such situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations. Jackpot has conducted a comprehensive review of its computer systems and other systems for the purpose of assessing its potential Year 2000 Problem, and is in the process of modifying or replacing those systems which are not Year 2000 compliant. Based upon this review, management believes such systems will be compliant by mid-calendar 1999. However, if modifications are not made or not completed timely, the Year 2000 Problem could have a significant adverse impact on the Company's operations. In addition, Jackpot has communicated with its major vendors and suppliers to determine their state of readiness relative to the Year 2000 Problem and Jackpot's possible exposure to Year 2000 issues of such third parties. However, there can be no guarantee that the systems of other companies, which the Company's systems may rely upon, will be timely converted or representations made to Jackpot by these parties are accurate. As a result, the failure of a major vendor or supplier to adequately address their Year 2000 Problem could have a significant adverse impact on the Company's operations. Planning for the Year 2000 Problem, including contingency planning, is significantly complete and will be revised, if necessary. All costs related to the Year 2000 Problem are expensed as incurred, while the cost of new hardware is capitalized and amortized over its expected useful life. The costs associated with Year 2000 compliance have not been and are not anticipated to be material to the Company's financial position or results of operations. As of June 30, 1998, the Company has incurred costs of approximately $30,000 (primarily for internal labor) related to the system applications and anticipates spending an additional $150,000 to become Year 2000 compliant. The estimated completion date and remaining costs are based upon management's best estimates, as well as third party modification plans and other factors. However, there can be no guarantee that such estimates will occur and actual results could differ. Forward-looking statements __________________________ Certain information included in this Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission contains statements that may be considered forward-looking. In addition, from time to time, the Company may release or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, competitive pressures, the loss or nonrenewal of any of Jackpot's significant contracts, conditioning or suspension of any gaming license, unfavorable changes in gaming regulations, adverse results of significant litigation matters, possible future financial difficulties of a significant customer and the continued growth of the gaming industry and population in Nevada. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. The Company assumes no obligation to update or supplement forward-looking statements as a result of new circumstances or subsequent events. Item 7A. Quantitative and Qualitative Disclosure About Market Risk _________________________________________________________ Jackpot invests its available cash in marketable municipal bonds and money market funds. No trading portfolios are available for the sale of investments. Therefore, Item 7A is not applicable. Item 8. Financial Statements and Supplementary Data ___________________________________________ The Financial Statements and Supplementary Data required by this Item 8 are set forth as indicated in Item 14(a)(1)(2). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure _______________________________________________________________ Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant __________________________________________________ Item 11. Executive Compensation ______________________ Item 12. Security Ownership of Certain Beneficial Owners and Management ___________________________________________________ Item 13. Certain Relationships and Related Transactions ______________________________________________ The information required by items 10, 11, 12 and 13 are incorporated by reference from the 1998 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ________________________________________________________________ (a) (1) and (2) Consolidated Financial Statements and Schedules For a list of the consolidated financial statements and consolidated financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. (a)(3) The exhibits filed and incorporated by reference are listed in the index of Exhibits required by Item 601 of Regulation S-K at Item (c) below. (b) Reports on Form 8-K During the last quarter of the fiscal year ended June 30, 1998, Jackpot filed no reports on Form 8-K. (c) Exhibits 3.1 Articles of Incorporation of the Registrant, as amended (B) 3.2 By-laws of the Registrant, as amended (B) 3.3 Form of Amendment to Articles of Incorporation of Registrant (G) 4.1 Stockholder Rights Agreement dated as of July 11, 1994 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (H) 10.1 License agreement with Thrifty PayLess, Inc. (E) 10.2 License agreement with Safeway Stores, Inc. (A) 10.3 1990 Incentive and Nonqualified Stock Option Plan (C)(L) 10.4 Indemnification Agreement (Sample) (D) 10.5 1992 Incentive and Non-qualified Stock Option Plan (F)(L) 10.6 Employment Agreement with Don R. Kornstein (I)(L) 10.7 License agreement with American Drug Stores, Inc. (J) 10.8 License agreement with American Drug Stores, Inc. (J) 10.9 License agreement with Lucky Stores, Inc. (J) 10.10 Amendments to License agreement with Thrifty PayLess, Inc. (J) 10.11 License agreement with Kmart Corporation (K) 10.12 License agreement with Albertson's, Inc. (K) 21.1 List of Registrant's subsidiaries (K) 23.1 Consent of Deloitte & Touche LLP (K) 27.1 Financial Data Schedule (EDGAR version only) (A) Incorporated by reference to Registrant's Registration Statement on Form S-2 dated May 4, 1989 (Registration No. 33-27614). (B) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1989. (C) Incorporated by reference to Registrant's Registration Statement on Form S-3 dated December 12, 1990 (Registration No. 33-38210). (D) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1991. (E) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1992. (F) Incorporated by reference to Registrant's 1992 Proxy Statement. (G) Incorporated by reference to Registrant's 1993 Proxy Statement. (H) Incorporated by reference to Registrant's Form 8-A dated July 12, 1994. (I) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 1994. (J) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1997. (K) Included herein. (L) Management contract or compensatory plan or arrangement which is separately identified in accordance with Item 14(a)(3) of Form 10-K. (d) Schedules For a list of the financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 23, 1998 JACKPOT ENTERPRISES, INC. (Registrant) By: /s/ Don R. Kornstein ________________________________ Don R. Kornstein President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date ___________________________ _____________________________ __________________ /s/ Don R. Kornstein President, Chief Executive September 23, 1998 ___________________________ Officer and Director Don R. Kornstein (Principal Executive Officer) /s/ Bob Torkar Senior Vice President-Finance, September 23, 1998 ___________________________ Treasurer and Chief Accounting Bob Torkar Officer (Principal Financial and Accounting Officer) /s/ Allan R. Tessler Chairman of the Board September 23, 1998 ___________________________ Allan R. Tessler /s/ David R. Markin Director September 23, 1998 ___________________________ David R. Markin /s/ Robert L. McDonald, Sr. Director September 23, 1998 ___________________________ Robert L. McDonald, Sr.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULES [ITEMS 8 AND 14(a)] (1) FINANCIAL STATEMENTS: Independent Auditors' Report Consolidated Balance Sheets June 30, 1998 and 1997 Consolidated Statements of Income Years Ended June 30, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity Years Ended June 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows Years Ended June 30, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) SUPPLEMENTARY DATA: Quarterly Financial Information Years Ended June 30, 1998 and 1997 (3) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements or notes thereto. INDEPENDENT AUDITORS' REPORT Jackpot Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Jackpot Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Las Vegas, Nevada September 21, 1998 JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1998 AND 1997 (Dollars in thousands) ASSETS 1998 1997 ______ ________ ________ Current assets: Cash and cash equivalents $ 50,275 $ 47,945 Prepaid expenses 1,594 1,438 Other current assets 2,225 1,728 ________ ________ Total current assets 54,094 51,111 ________ ________ Property and equipment, at cost: Land and buildings 1,535 1,535 Gaming equipment 28,988 28,202 Other equipment 4,758 4,595 Leasehold improvements 354 339 ________ ________ 35,635 34,671 Less accumulated depreciation (19,850) (21,582) ________ ________ 15,785 13,089 Lease acquisition costs and other intangible assets, net of accumulated amortization of $4,607 and $6,198 2,231 3,596 Goodwill, net of accumulated amortization of $2,713 and $2,547 3,908 4,074 Lease and other security deposits 3,082 2,959 Other non-current assets 438 ________ ________ Total assets $ 79,100 $ 75,267 ======== ======== See Notes to Consolidated Financial Statements. /TABLE JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1998 AND 1997 (Dollars in thousands, except share data) (Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ____________________________________ _______ _______ Current liabilities: Accounts payable $ 1,434 $ 375 Other current liabilities 3,508 4,407 _______ _______ Total current liabilities 4,942 4,782 Deferred rent 2,377 2,510 Deferred income tax 849 633 Other liabilities 61 61 _______ _______ Total liabilities 8,229 7,986 _______ _______ Commitments and contingencies Stockholders' equity: Preferred stock - authorized 1,000,000 shares of $1 par value; none issued Common stock - authorized 30,000,000 shares of $.01 par value; 9,854,327 and 9,823,993 shares issued 99 98 Additional paid-in capital 66,376 66,033 Retained earnings 16,466 9,253 Less 1,080,372 and 741,958 shares of common stock in treasury, at cost (12,070) (8,103) _______ _______ Total stockholders' equity 70,871 67,281 _______ _______ Total liabilities and stockholders' equity $79,100 $75,267 ======= ======= See Notes to Consolidated Financial Statements. /TABLE JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (Dollars in thousands, except per share data)
1998 1997 1996 _______ _______ _______ Revenues: Route operations $90,331 $88,895 $83,533 Casino operations 2,682 3,009 7,575 _______ _______ _______ Totals 93,013 91,904 91,108 _______ _______ _______ Costs and expenses: Route operations 73,927 69,905 64,460 Casino operations 2,499 2,835 6,661 Amortization 1,141 1,728 2,199 Depreciation 3,740 3,461 4,284 General and administrative 3,743 4,153 4,163 Loss from write-down and sale of casino properties 2,247 _______ _______ _______ Totals 85,050 82,082 84,014 ______ ______ _______ Operating income 7,963 9,822 7,094 _______ _______ _______ Other income (expense): Interest and other income 1,918 1,546 1,538 Interest expense (22) _______ _______ _______ Totals 1,918 1,546 1,516 _______ _______ _______ Income before income tax 9,881 11,368 8,610 _______ _______ _______ Provision for Federal income tax: Current 2,452 3,086 2,421 Deferred 216 438 334 _______ _______ _______ Totals 2,668 3,524 2,755 _______ _______ _______ Net income $ 7,213 $ 7,844 $ 5,855 ======= ======= ======= Basic earnings per share $ .80 $ .85 $ .63 ======= ======= ======= Dilutive earnings per share $ .79 $ .84 $ .62 ======= ======= ======= See Notes to Consolidated Financial Statements. /TABLE JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (Dollars and shares in thousands, except per share data)
Retained Additional Earnings Treasury Total Common Stock Paid-In (Accumulated) Stock Stockholders' _____________ Capital Deficit) _______________ Equity Shares Amount Shares Amount ______ ______ _________ ____________ ______ ________ _____________ Balance July 1, 1995 9,595 $96 $63,935 $ (180) (294) $ (3,635) $60,216 Tax benefit from stock options 54 54 Cash dividends ($.32 per share) (201) (2,770) (2,971) Issuance of shares on exercise of stock options 36 341 341 Net income 5,855 5,855 _____ ___ _______ _______ _____ ________ _______ Balance June 30, 1996 9,631 96 64,129 2,905 (294) (3,635) 63,495 Tax benefit from stock options 48 48 Cash dividends ($.16 per share) (1,496) (1,496) Issuance and receipt of shares on exercise of stock options 193 2 1,856 (164) (1,665) 193 Repurchases of common stock (284) (2,803) (2,803) Net income 7,844 7,844 _____ ___ _______ _______ _____ ________ _______ Balance June 30, 1997 9,824 98 66,033 9,253 (742) (8,103) 67,281 Issuance of shares on exercise of stock options 30 1 343 344 Repurchases of common stock (338) (3,967) (3,967) Net income 7,213 7,213 _____ ___ _______ _______ _____ ________ _______ Balance June 30, 1998 9,854 $99 $66,376 $16,466 (1,080) $(12,070) $70,871 ===== === ======= ======= ===== ======== ======= See Notes to Consolidated Financial Statements. /TABLE JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (Dollars in thousands)
1998 1997 1996 _______ _______ _______ Operating activities: Net income $ 7,213 $ 7,844 $ 5,855 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,881 5,189 6,483 Deferred Federal income tax 216 438 334 Write-down and sale of casino properties 2,247 Other, net (393) Increase (decrease) from changes in: Prepaid expenses and other current assets (373) 174 200 Other non-current assets 52 (51) 69 Accounts payable and other current liabilities (621) 1,585 (860) Deferred rent and other liabilities 468 (595) (683) Assets and liabilities of sold subsidiary, net (474) _______ _______ _______ Net cash provided by operating activities 11,836 14,584 12,778 _______ _______ _______ Investing activities: Proceeds from sales of equipment and other non-current assets 403 1,625 1,390 Purchases of property and equipment (6,235) (3,393) (4,267) Increase in lease acquisition costs and other intangible assets (211) (524) (433) Lease and other security deposits 477 Other, net 160 258 219 _______ _______ _______ Net cash used in investing activities (5,883) (1,557) (3,091) _______ _______ _______ Financing activities: Repayments of long-term debt (949) Proceeds from issuance of common stock 344 193 341 Repurchases of common stock (3,967) (2,803) Dividends paid (1,496) (2,971) _______ _______ _______ Net cash used in financing activities (3,623) (4,106) (3,579) _______ _______ _______ Net increase in cash and cash equivalents 2,330 8,921 6,108 Cash and cash equivalents at beginning of year 47,945 39,024 32,916 _______ _______ _______ Cash and cash equivalents at end of year $50,275 $47,945 $39,024 ======= ======= ======= Supplemental disclosures of cash flow data: Cash paid during the year for: Interest $ - $ - $ 22 Federal income tax $ 2,750 $ 1,840 $ 1,800 Non-cash investing and financing activities: Common stock surrendered on exercise of stock options $ - $ 1,665 $ - Tax benefit from exercise of stock options $ - $ 48 $ 54 See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business: Business: Jackpot Enterprises, Inc., which was organized in 1980, conducts business in the gaming industry and generates revenues from gaming machine route operations and casino operations (see Note 3). Gaming machine route operations ("route operations") involve the installation, operation and service of gaming machines owned by Jackpot that are located in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada. Principles of consolidation: The accompanying consolidated financial statements include the accounts of Jackpot Enterprises, Inc. and its controlled subsidiaries ("Jackpot" or the "Company"). All material intercompany accounts and transactions are eliminated. Unless the context indicates otherwise, references to "1998", "1997" and "1996" are for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are liquid investments with a maturity of three months or less when acquired and are considered cash equivalents for purposes of the consolidated statements of cash flows. Cash equivalents are stated at cost which approximates fair value due to their short maturity. Revenue recognition: In accordance with industry practice, Jackpot recognizes as gaming revenues the net wins from gaming activities, which is the difference between gaming wins and losses. Route operations revenues include the net wins generated under revenue sharing agreements. Revenues from casino operations are gaming wins less losses. Complimentary food and beverage furnished gratuitously by casino operations to customers is not material. Location rent expense: Fixed rental payments (including scheduled increases) are recorded on a straight-line basis over the agreement term including any optional extension periods which are expected to be exercised. Contingent payments are expensed in the period incurred. Renewal agreements are considered new agreements and accounted for as described above over the new agreement term. Revenue sharing payments to route locations are recorded as location rent expense. Depreciation of property and equipment: Depreciation is provided using the straight-line method for property and equipment, including property held for rental. Estimated useful lives, limited as to leasehold improvements by the term of the lease, range as follows: Buildings 30 to 40 years Gaming equipment 4 to 7 years Other equipment 3 to 7 years Leasehold improvements 1 to 12 years
Lease acquisition costs and other intangible assets: Significant incremental costs associated with the acquisition of location leases are capitalized. Incremental costs capitalized and amounts allocated to lease acquisition costs are amortized on a straight-line basis over the term of the related leases, including expected renewals, which range from 1 to 12 years. Lease acquisition costs and other intangible assets include lease acquisition costs, net of accumulated amortization, of $1,907,000 and $3,029,000 as of June 30, 1998 and 1997. Goodwill: Goodwill represents the excess of the costs of acquired businesses over the fair value of their net assets when acquired and is amortized on a straight-line basis over a period of 40 years. Recently issued accounting standards: In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Management intends to comply with the disclosure requirements of SFAS 130 for the year ending June 30, 1999. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. Management has begun its review of SFAS 131, however it has not made a final determination of the extent of the disclosure required by this statement. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal years beginning after June 15, 1999. SFAS 133 establishes additional accounting and reporting standards for derivative instruments and hedging activities. Management does not believe the Company has any derivative instruments, or that Jackpot participates in hedging activities. Accordingly, SFAS 133 is not expected to have a significant effect on the results of operations or related disclosures. Note 2 - Cash and cash equivalents: Cash equivalents are comprised primarily of marketable municipal bonds and money market accounts. Cash and cash equivalents include cash equivalents of $38,728,000 and $34,499,000 at June 30, 1998 and 1997. Note 3 - Casino operations: On August 13, 1996, Jackpot's Board of Directors (the "Board") approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. As of June 30, 1998, the carrying value of assets to be disposed of associated with the Owl Club and the Pony Express Casino was approximately $1,400,000. The results of operations of the Owl Club and the Pony Express Casino were not material in 1998, 1997 and 1996. Prior to the Board's approval to dispose of Jackpot's remaining two casinos, Jackpot sold its 88.9% interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada, effective June 30, 1996. As a result of Jackpot's decision to dispose of its two remaining casinos and the sale of the Nugget, a charge of $2,247,000 was recorded in the fourth quarter of fiscal 1996, which consisted primarily of the write-down to fair value of $1,978,000 for certain long-lived assets of the Owl Club, including the remaining carrying value of $858,000 for goodwill. Note 4 - Other current liabilities: Other current liabilities consist of the following (dollars in thousands): June 30, __________________ 1998 1997 ______ ______ Accrued employee benefits $1,714 $1,740 Accrued professional fees 334 468 Accrued progressive jackpots 464 528 Federal income tax payable 362 Other 996 1,309 ______ ______ Totals $3,508 $4,407 ====== ======
Note 5 - Earnings per share: In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods, including interim periods, ending after December 15, 1997. As required by SFAS 128, Jackpot adopted this statement for the quarter ended December 31, 1997 and year ended June 30, 1998. SFAS 128 establishes standards for computing and presenting earnings per share ("EPS"), including the replacement of the presentation of primary EPS with the presentation of basic EPS, as defined. All prior-period EPS data presented has been restated to conform to the provisions of the statement. Basic EPS for 1998, 1997 and 1996 is computed by dividing net income by the weighted average number of common shares outstanding for the respective period. Diluted EPS for 1998, 1997 and 1996 is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding for the respective period. Options and warrants to purchase common stock, whose exercise price was greater than the average market price for the respective period, have been excluded from the computation of diluted EPS. Such antidilutive options and warrants outstanding for 1998, 1997 and 1996 were 159,000, 743,000 and 1,512,000, respectively. The following is the amount of income and number of shares used in the basic and diluted EPS computations (dollars and shares in thousands, except per share data): 1998 1997 1996 ______ ______ ______ Basic earnings per share: Earnings: Income available to common stockholders $7,213 $7,844 $5,855 ====== ====== ====== Shares: Weighted average number of common shares outstanding 8,991 9,237 9,307 ====== ====== ====== Basic earnings per share $ .80 $ .85 $ .63 ====== ====== ====== Diluted earnings per share: Earnings: Income available to common stockholders $7,213 $7,844 $5,855 Effect of dilutive securities - - - ______ ______ ______ Income, as adjusted $7,213 $7,844 $5,855 ====== ====== ====== Shares: Weighted average number of common shares outstanding 8,991 9,237 9,307 Common shares issuable upon assumed exercise of dilutive stock options 1,726 1,316 1,588 Less common shares assumed to be repurchased by application of the treasury stock method to the proceeds using the average market price for the period (1,530) (1,236) (1,414) ______ ______ ______ Weighted average number of common shares and common share equivalents outstanding 9,187 9,317 9,481 ====== ====== ====== Diluted earnings per share $ .79 $ .84 $ .62 ====== ====== ======
Note 6 - Stockholders' equity: Rights plan: In June 1994, the Board approved a Stockholder Rights Plan. On July 11, 1994, Jackpot declared a dividend distribution of one Preferred Stock purchase right (the "Rights") payable on each outstanding share of common stock, as of July 15, 1994. The Rights become exercisable only in the event, with certain exceptions, an acquiring party accumulates 15% or more of Jackpot's voting stock, or if a party announces an offer to acquire 30% or more of Jackpot's voting stock. Each Right will entitle the holder to purchase one-hundredth of a share of a Series A Junior Preferred Stock at a price of $30. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either Jackpot's Preferred Stock or shares in an "acquiring entity" at half of market value. The Rights, which expire on July 15, 2004, may be redeemed by Jackpot at $.01 per Right prior to the close of business on the tenth day after a public announcement that beneficial ownership of 15% or more of Jackpot's shares of voting stock has been accumulated by a single acquiror or a group (with certain exceptions), under circumstances set forth in the Rights Agreement. As of June 30, 1998 and 1997, 150,000 shares of unissued Series A Junior Preferred Stock were authorized and reserved for issuance upon exercise of the Rights. The issuance of the Rights had no effect on dilutive earnings per share in 1998, 1997 and 1996. Stock option plans: On December 7, 1990, Jackpot's stockholders approved the 1990 Incentive and Nonqualified Stock Option Plan (the "1990 Plan"). Under the 1990 Plan, the Board may grant "incentive" or "nonqualified" stock options up to 929,846 shares of Jackpot's common stock (the "Common Stock"). On January 12, 1993, Jackpot's stockholders approved the 1992 Incentive and Non- qualified Stock Option Plan (the "1992 Plan"). On August 17, 1994, the Board adopted certain amendments (the "Amendments") to the 1992 Plan which were approved by Jackpot's stockholders on January 10, 1995. The Amendments increased the number of shares of Common Stock authorized for issuance pursuant to the 1992 Plan from 1,045,000 to 2,545,000. The 1992 Plan provides that each individual who is a member of the Board on June 30 of any year, including any future director on any such date, will automatically be granted nonqualified stock options to purchase 27,500 shares of Common Stock on each such June 30. The option price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year, and expire five years from the date of grant. At June 30, 1998, options granted to Jackpot's directors to purchase an aggregate of 522,500 shares of Common Stock were outstanding, of which 412,500 were exercisable. The 1990 Plan and 1992 Plan terminate on the earlier of (i) the date all shares subject to the 1990 Plan and the 1992 Plan have been issued upon the exercise of options granted under such plans, or (ii) June 26, 2000 and September 30, 2002, respectively, or on such earlier date as the Board may determine. Any option outstanding at the respective termination date remains outstanding until it has either expired or has been exercised. Changes in options outstanding under the stock option plans are summarized below (shares in thousands): Number of Shares Per Share _________________________ Exercise Price Incentive Nonqualified _________ ____________ ________________ Outstanding at July 1, 1995 31 1,638 $ 6.10 to $20.88 Exercised (4) (36) $ 6.10 to $11.63 Canceled (18) (51) $ 6.10 to $11.63 Automatic grant to directors 110 $10.00 ___ _____ Outstanding at June 30, 1996 9 1,661 $ 6.10 to $20.88 Granted 20 $11.00 Exercised (3) (190) $ 8.50 to $10.75 Canceled (6) (21) $ 6.10 to $11.63 Automatic grant to directors 110 $11.50 ___ _____ Outstanding at June 30, 1997 0 1,580 $ 8.50 to $20.88 Granted 60 $11.00 Exercised (30) $ 8.50 to $11.63 Cancelled (234) $ 8.50 to $15.88 Automatic grant to directors 110 (A) ___ _____ Outstanding at June 30, 1998 0 1,486 $ 8.50 to $20.88 (1,336 shares === ===== exercisable) (A) To be determined on September 30, 1998.
Other nonqualified stock options: The Board has granted other nonqualified stock options to directors, certain officers, other employees and advisors at exercise prices equal to or greater than the fair market value of the underlying shares at the date of grant. Generally, options become exercisable immediately and expire no later than five years from the date of grant. Changes in other nonqualified stock options are summarized below (shares in thousands): Number Per Share of Shares Exercise Price _________ ________________ Outstanding at July 1, 1995 429 $ 9.19 to $15.00 Transactions - ___ Outstanding at June 30, 1996 429 $ 9.19 to $15.00 Canceled (50) $15.00 ___ Outstanding at June 30, 1997 379 $ 9.19 to $10.75 Canceled (27) $ 6.10 to $10.75 ___ Outstanding and exercisable at June 30, 1998 352 $ 9.19 to $10.63 ===
Accounting for stock-based compensation: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Although SFAS 123 encourages an entity to measure compensation by applying the fair value method of accounting for employee stock-based compensation arrangements, it permits an entity to continue to account for employee stock- based compensation arrangements under the provisions of Accounting Principles Board Opinion 25 ("APB 25"). Jackpot elected and continues to account for stock-based compensation in accordance with APB 25. Under APB 25, generally only stock options that have intrinsic value at the date of grant are considered compensatory. Intrinsic value represents the excess, if any, of the market price of the stock at the grant date over the exercise price of the option. Under SFAS 123, all stock option grants are considered compensatory. Compensation cost is measured at the date of grant based on the estimated fair value of the options determined using an option pricing model. The model takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the stock, expected dividends on the stock and the risk-free interest rate over the expected life of the option. The following table discloses pro forma amounts for net income and basic and dilutive earnings per share for 1998, 1997 and 1996 assuming compensation cost for employee stock options had been determined using the fair value-based method prescribed by SFAS 123. The table also discloses the weighted average assumptions used in estimating the fair value of each option grant on the date of grant using the Black-Scholes option pricing model, and the estimated weighted average fair value of the options granted. The model assumes no expected future dividend payments on Jackpot's Common Stock for the options granted in 1998, 1997 and 1996 (dollars in thousands, except per share data): 1998 1997 1996 ______ ______ ______ Net income: As reported $7,213 $7,844 $5,855 Pro forma $6,837 $7,571 $5,855 Basic earnings per share: As reported or restated $ .80 $ .85 $ .63 Pro forma $ .76 $ .82 $ .63 Diluted earnings per share: As reported or restated $ .79 $ .84 $ .62 Pro forma $ .74 $ .81 $ .62 Weighted average assumptions: Expected stock price volatility 30.0% 35.0% 39.1% Risk-free interest rate 5.8% 6.1% 6.2% Expected option lives (in years) 2.5 2.5 2.5 Estimated fair value of options granted $ 2.99 $ 3.18 $ 3.04
Because the accounting method prescribed by SFAS 123 is not applicable to options granted prior to July 1, 1995, the compensation cost reflected in the pro forma amounts shown above may not be representative of that to be expected in future years. Shares reserved for issuance: Shares of Common Stock were reserved for the exercise of the following (in thousands): June 30, ______________ 1998 1997 _____ _____ Stock option plans: Outstanding 1,486 1,580 Available for grant 1,020 956 Other nonqualified stock options 352 379 _____ _____ Totals 2,858 2,915 ===== =====
Common stock in treasury: Jackpot purchased 338,414 and 283,771 shares of its Common Stock at the market price on the date of purchase for a total cost of approximately $3,967,000 and $2,803,000, or an average of $11.72 and $9.88 per share in 1998 and 1997, respectively. In addition, Jackpot purchased 118,100 shares at a total cost of approximately $1,268,000, or an average of $10.74 per share during the two months ended August 31, 1998. Purchases in 1997 include 55,174 shares acquired from American Country Insurance Company for approximately $545,000 (the market price on the date of purchase). Two directors of Jackpot were directors and indirect beneficial owners of an aggregate of more than 51% of the common stock of such insurance company on the date of purchase. Note 7 - Related party transactions: One director of Jackpot is a partner in a law firm that has provided various legal services for which Jackpot incurred legal fees aggregating approximately $121,000, $179,000 and $110,000 in 1998, 1997 and 1996. Also, see Note 6. Note 8 - Commitments and contingencies: Leases: Jackpot has noncancelable location license, lease and sublease agreements (referred to as "leases") for space at various locations for its gaming machines with terms expiring at various dates through 2010. Leases are generally at fixed rentals, although certain leases require payments based on percentages of revenues generated by gaming machines at the leased locations. In addition, office and warehouse space is utilized under noncancelable leases with terms expiring at various dates through 2006. In 1997, Jackpot entered into agreements, which became effective July 1, 1997, for long-term contract extensions with four of its largest chain store customers. In addition, Jackpot entered into an agreement for a long-term contract extension with another significant chain store customer in September 1998. Such agreement will become effective July 1, 1999. These five agreements provide Jackpot the continued right to operate at certain existing locations and future locations in Nevada, if any, of such customers. Future minimum payments (dollars in thousands) under such non cancelable operating leases or licenses (including the above mentioned contract extension) aggregated approximately $224,442 at June 30, 1998, payable as follows: $36,165 in 1999; $38,026 in 2000; $38,794 in 2001; $38,744 in 2002; $38,845 in 2003; and $33,868 thereafter. Rent expense was comprised as follows (dollars in thousands): 1998 1997 1996 _______ _______ _______ Location leases: Fixed rentals $36,866 $28,125 $25,633 Percentage rentals 16,883 19,994 20,243 Office and equipment leases 453 453 452 _______ _______ _______ Totals $54,202 $48,572 $46,328 ======= ======= =======
Employment and severance agreements: Jackpot has an employment agreement with Don R. Kornstein, President, Chief Executive Officer and Director which currently expires on September 30, 2001. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein. Mr. Kornstein's employment agreement provides for an annual bonus based on various percentages of certain amounts by which earnings before interest, taxes, depreciation, amortization and certain other items, as defined in the agreement, exceed certain levels for such fiscal year. Mr. Kornstein's bonus was $97,000, $169,000 and $205,000 in 1998, 1997 and 1996. The aggregate commitment for future salaries at June 30, 1998, excluding bonuses, under Mr. Kornstein's agreement is $2,356,000. In the event of termination of Mr. Kornstein's employment, as defined in the employment agreement, Mr. Kornstein, or his beneficiary, would receive a severance payment. The aggregate contingent liability at June 30, 1998 under Jackpot's employment and severance agreements is approximately $2,700,000. Financial instruments with concentration of credit risk: The financial instruments that potentially subject Jackpot to concentrations of credit risk consist principally of cash, cash equivalents, certain receivables and lease and other security deposits. Jackpot maintains cash and certain cash equivalents with financial institutions in amounts which, at times, may be in excess of the FDIC insurance limits. Jackpot's cash equivalents are invested in several high-grade securities which limits Jackpot's exposure to concentrations of credit risk. A substantial portion of Jackpot's business activity is with customers who frequent retail stores (supermarkets, drugstores, merchandise stores and convenience stores) in Nevada. Generally, Jackpot leases space in stores which are part of a large chain of stores. At June 30, 1998, Jackpot had unsecured lease and other security deposits of $3,082,000 held primarily by two publicly- held chain stores. Legal matters: Jackpot is a party to various other claims, legal actions and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions filed by Jackpot. Management believes that its defenses are substantial in each of these matters and that Jackpot's legal position can be successfully defended without material adverse effect on its consolidated financial statements. Note 9 - Litigation settlement: On August 17, 1992, Phar-Mor, Inc. ("Phar-Mor"), a large chain store, announced that it had filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Jackpot had operated 51 gaming machines at three Phar-Mor store locations in Nevada under a license agreement dated February 10, 1990 (the "Original Agreement"). Under the Original Agreement, Jackpot made certain advances to Phar-Mor. Thereafter, Jackpot and Phar-Mor, subject to bankruptcy court approval, entered into an amended license agreement, dated January 1, 1993 (the "Amended Agreement"). If the Amended Agreement were to become final, Jackpot would receive credits for certain prepaid sums but would be required to pay certain additional obligations. On May 12, 1995, Phar-Mor announced the closing of 41 stores, including its three stores in Nevada. On May 24, 1995 Jackpot notified Phar-Mor that it was in default under (i) the Original Agreement, and (ii) the Amended Agreement to the extent applicable. In March 1996, Phar-Mor filed a lawsuit against Jackpot in the United States Bankruptcy Court for the Northern District of Ohio, and Jackpot filed an answer and counterclaim. In order to avoid further litigation and to finally and fully resolve all claims between the parties, Jackpot entered into a settlement agreement and mutual release with Phar-Mor, effective February 6, 1998. Pursuant to the terms of the agreement, both the Original Agreement and the Amended Agreement are terminated and neither party has any remaining rights or continuing obligations to the other under the Original Agreement, the Amended Agreement or the proofs of claim. The cost of the settlement to Jackpot was paid in February 1998. Note 10 - Revenues derived from major locations: Route operations revenues at two groups of affiliated store chains in 1998, 1997 and 1996 accounted for more than 10% of Jackpot's total revenues. Revenues for Jackpot's top two affiliated store chains were approximately $34,000,000 and $17,000,000, respectively, in 1998, $27,000,000 and $15,000,000, respectively, in 1997, $23,000,000 and $12,000,000, respectively, in 1996. Each individual store chain included in an affiliated group of store chains has a separate lease with Jackpot. Note 11 - Federal income tax: A reconciliation of the Federal statutory income tax rate to the effective income tax rate based on income before income tax follows: 1998 1997 1996 ____ ____ ____ Statutory rate 35.0% 35.0% 35.0% Increase (decrease) in tax resulting from: Surtax exemption (1.0) (1.0) (1.0) Tax-exempt interest (5.0) (3.7) (4.0) Amortization of goodwill .6 .4 .7 Other, net (2.6) .3 1.3 ____ ____ ____ Effective rate 27.0% 31.0% 32.0% ==== ==== ====
The tax items comprising Jackpot's net deferred tax asset (liability) as of June 30, 1998, 1997 and 1996 are as follows (dollars in thousands): 1998 1997 1996 ______ ______ ______ Deferred tax assets: Write-down of assets $ 381 $ 381 $ 381 Deferred rent 809 854 1,041 Other accrued liabilities 459 520 556 Retirement plans 9 9 73 Other 45 98 75 ______ ______ ______ Totals 1,703 1,862 2,126 ______ ______ ______ Deferred tax liabilities: Difference between book and tax basis of property 1,280 987 527 Economic performance accruals 542 481 491 Other 730 1,027 676 ______ ______ ______ Totals 2,552 2,495 1,694 ______ ______ ______ Net deferred tax asset (liability) $ (849) $ (633) $ 432 ====== ====== ======
Jackpot realized tax benefits of $48,000 and $54,000 in 1997 and 1996 as a result of the exercise of certain incentive and nonqualified stock options. The tax benefits have been reflected as a decrease in current income tax payable and an increase in additional paid-in capital. Note 12 - Benefit plans: On May 14, 1996, Jackpot terminated the Jackpot Retirement Plan for Directors, as amended (the "Retirement Plan"). In consideration for the termination of the Retirement Plan, three directors received a lump sum distribution of accrued benefits in an aggregate amount of $1,485,000 ($495,000 each) in May 1996. Pursuant to the terms of the Retirement Plan, the amount of each director's distribution was equal to the aggregate of the annual base retainer paid to the respective director for years of service on the Board, including service prior to the implementation of the Retirement Plan on October 1, 1990, except for certain years that the directors waived such benefit. Interest was added to the accounts of each director quarterly, using the one-year Treasury bill rate. The funding of the accrued benefits under the Retirement Plan was made from a restricted trust. The amount of the distributions approximated the fair value of the investments in the trust. As a result of the termination of the Retirement Plan and the lump sum distributions in May 1996, there is no remaining obligations or liability under the Retirement Plan. On August 13, 1996, the Board approved the termination of the Salary Continuation Plan for Executives (the "Continuation Plan"). The Continuation Plan provides certain senior executives with a retirement benefit, which is based on compensation, to be paid over a period of up to 15 years beginning at normal retirement age. The Continuation Plan requires certain vesting periods and allows reduced benefits at certain early retirement ages and pre-retirement survivors' benefits. The Continuation Plan was unfunded at June 30, 1998 and 1997. The Company has entered into settlement agreements with substantially all of the individuals covered under the Continuation Plan. The accumulated and projected benefit obligations for the remaining executives covered under the Continuation Plan is not material at June 30, 1998. The Board waived current service benefits that would have accrued in 1996 pursuant to the Retirement Plan and the Continuation Plan, other than the interest earned on accrued benefits. The Retirement Plan and the Continuation Plan, both defined benefit plans, had no plan assets. Interest cost on accrued benefits and the amortization of unrecognized prior service cost is included in general and administrative expense and amortization expense, respectively, in the accompanying consolidated statements of income. The unrecognized prior service cost was fully amortized at June 30, 1996. The accrued pension liability under the Continuation Plan was not material at June 30, 1998 and 1997. The pension expense for Jackpot's defined benefit plans for 1996 includes the following components (dollars in thousands): Amortization of prior service cost $253 Interest cost on accrued benefits 69 ____ Net pension expense $322 ====
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL INFORMATION YEARS ENDED JUNE 30, 1998 AND 1997 (Dollars in thousands, except per share data) (Unaudited) Summarized quarterly financial information for 1998 and 1997 follows: Quarter _____________________________________ First Second Third Fourth _______ _______ _______ _______ 1998 ____ Revenues $22,667 $23,610 $23,371 $23,365 Gross operating income (A) 2,651 3,268 3,320 3,039 Income before income tax 2,153 2,615 2,620 2,493 Net income 1,572 1,909 1,912 1,820 Earnings per share: Basic .17 .21 .21 .21 Diluted .17 .21 .21 .20 1997 ____ Revenues $21,955 $22,560 $22,947 $24,442 Gross operating income (A) 3,050 3,521 3,553 4,435 Income before income tax 2,279 2,810 2,856 3,423 Net income 1,573 1,938 1,971 2,362 Earnings per share: Basic .17 .21 .21 .26 Diluted .17 .21 .21 .26
(A) Gross operating income is revenues less route and casino operations' costs and expenses, deprecation associated with route and casino operations and amortization associated with lease acquisition costs. EX-10 2 "RCT" means the material omitted has been filed with the Securities & Exchange Commission with an application requesting confidential treatment. EXHIBIT 10.11 AGREEMENT THIS AGREEMENT, which is effective May 1, 1998, 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 May 1, 1998. 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. Kmart acknowledges that Cardivan has prepaid the monthly fees through July 31, 1998 for the Kmart store #3894 located in Elko, Nevada pursuant to a previous agreement entered into between the parties on September 1, 1997. 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 May 1, 1998 and shall expire on RCT; provided, however, that either party may terminate this Agreement RCT, provided that written notice is given to the non-terminating party by RCT. Further, if Kmart elects to eliminate the Devices in all Kmart stores in Nevada, Kmart may terminate this Agreement RCT of any year commencing RCT, provided that Kmart gives written notice by RCT of same year to Cardivan, and such notice indicates Kmart's intention to eliminate the Devices and any and all gaming operations through RCT. In addition, 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. 22. RCT 23. This Agreement and the information contained herein, including but not limited to the fees payable to Kmart by Cardivan, 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. 24. This Agreement shall supersede and replace the Agreement dated September 1, 1997 between Kmart and Cardivan. IN WITNESS WHEREOF, the parties have executed this Agreement as of this 2nd day of June, 1998. CARDIVAN COMPANY KMART CORPORATION By: /s/ George Congdon By: /s/ D. W. Keeble ________________________ ________________________ Its: President Its: Executive Vice President ________________________ ________________________ 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 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
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
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 /TABLE 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 /TABLE 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
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
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
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
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
EX-10 3 "RCT" means the material omitted has been filed with the Securities & Exchange Commission with an application requesting confidential treatment. EXHIBIT 10.12 LICENSE AGREEMENT (GAMING DEVICES) THIS LICENSE AGREEMENT ("Agreement") is made as of the 16th day of September, 1998, by and between Albertson's, Inc., a Delaware corporation ("Licensor"), and Cardivan Company, a Nevada corporation ("Licensee"). WITNESSETH: WHEREAS, Licensor is the owner and operator of supermarkets in the State of Nevada; and WHEREAS, Licensee is a duly licensed operator of gaming devices in the State of Nevada; and WHEREAS, Licensor desires to grant a license to Licensee to use, and Licensee desires to take from Licensor, on the terms and conditions hereinafter set forth, certain floor space located in Licensor's supermarkets described on Exhibit "A" attached hereto and incorporated herein by this reference, together with certain additional supermarkets opened by Licensor in the State of Nevada during the term of this Agreement, for the operation of gaming devices. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. License. (a) Licensor hereby grants to Licensee a license ("License") for the operation of gaming devices ("Machines") (i) in each of the supermarkets designated on Exhibit "A," together with any additional supermarkets in the State of Nevada opened or acquired by Licensor for business to the public RCT (individually, an "Existing Store" and, collectively, the "Existing Stores"), and (ii) in any additional supermarkets in the State of Nevada opened or acquired by Licensor for business to the public RCT (individually, a "New Store" and, collectively, the "New Stores"). For the purposes of this Agreement, a New Store shall include any remodel, expansion remodel, or an on-site or off-site replacement of either an Existing Store or a New Store; however, neither a New Store nor an Existing Store shall include (A) any remodel, expansion remodel, or on-site or off-site replacement, of any supermarket currently licensed to Anchor Coin, (B) any supermarket, together with any remodel, expansion remodel, or on- site or off-site replacement of such supermarket, which is either (1) acquired by Licensor subject to an agreement for the operation of gaming devices, or (2) subject to an agreement for the operation of gaming devices which is assumed, whether by operation of law or otherwise, by Licensor in connection with an acquisition, or (C) any fuel center, convenience store or other facility of any kind whatsoever owned or operated by Licensor which does not share a common public entrance with a Store ("Other Facility"). RCT. The Existing Stores and New Stores are also hereinafter referred to, individually, as a "Store" and, collectively, as the "Stores." (b) RCT (c) The "Licensed Premises" shall consist of the following: (i) for each Existing Store, the area currently occupied by the existing Machines (or, for any supermarket opened or acquired by Licensor RCT, the area occupied by the Machines in such store RCT, the approximate size of which is shown on Exhibit "A," and (ii) for each New Store, the area shown on the fixture plan approved by Licensor and provided to Licensee. The fixture plan for each New Store shall be designed by Licensor to provide adequate space for the Minimum Number of Machines (as defined in Paragraph 1(d)) with bill validators. Licensee hereby approves the fixture plan shown on Exhibit "B" attached hereto and incorporated herein by this reference. The location of the Licensed Premises may be changed from time to time by Licensor subject to the conditions set forth in Paragraph 3(c) of this Agreement. (d) Unless otherwise agreed by the parties, the License granted herein shall be for the following number of Machines ("Minimum Number of Machines"): (i) for each Existing Store (exclusive of any supermarket opened or acquired by Licensor RCT, the number of Machines designated on Exhibit "A" or such lesser number as are approved or mandated by the applicable local, state or federal governmental authority, (ii) for each Existing Store opened or acquired by Licensor RCT, fifteen (15) or such lesser number as are approved or mandated by the applicable local, state or federal governmental authority, and (iii) for each New Store, fifteen (15) or such lesser number as are approved or mandated by the applicable local, state or federal governmental authority. 2. Term. (a) The term of this Agreement for each Existing Store shall commence on RCT ("Effective Date") and shall terminate at 11:59 p.m. on RCT, or on the date Licensor permanently ceases supermarket operations at all of the Stores, whichever first occurs. (b) The term of this Agreement for each New Store shall commence on the date Licensor first opens or reopens the Store for business to the public and shall terminate at 11:59 p.m. on RCT, or on the date Licensor permanently ceases supermarket operations at the Store, whichever first occurs; provided, however, that, in the event Licensor has not taken all steps required to permit Licensee to commence operations at such Store as of the date specified above, the term of this Agreement for such Store shall not commence until all such steps have been taken. (c) Anything in this Agreement to the contrary notwithstanding, either party shall have the right, in its sole and absolute discretion, to terminate this Agreement as of 11:59 p.m. on RCT, upon not less than RCT prior written notice to the other party. (d) Licensee agrees that Licensor has the right at any time, in its sole and absolute discretion, to temporarily or permanently cease supermarket operations at the Store(s). In the event Licensor permanently ceases supermarket operations at a Store, this Agreement shall terminate as to such Store as of the date of permanent cessation of supermarket operations, and both parties shall thereafter be released from all further obligations hereunder as to such Store. 3. Payment. In consideration of the rights granted herein, Licensee agrees to pay to Licensor during the term of this Agreement the following amounts: (a) RCT, a nonrefundable fee in the amount of RCT. (b) RCT, a security deposit ("Deposit") in the amount of RCT. The parties agree that, effective RCT, and on June 1 of each of the next succeeding RCT, the amount of the Deposit shall be reduced by RCT of the original principal amount of said Deposit, the amount of which reduction shall be paid to Licensor and credited against the license fees otherwise due and payable by Licensee to Licensor for June of the applicable calendar year. The Deposit (or balance thereof) shall be held by Licensor as security for the faithful performance by Licensee of all of the terms, covenants, conditions and agreements of this Agreement. If any amount due and payable by Licensee to Licensor shall be overdue and unpaid, or should Licensor make any payment on behalf of Licensee, or should Licensee default in its performance of any of the terms, covenants, conditions or agreements set forth in this Agreement, Licensor may, in its sole and absolute discretion and without prejudice to any other rights or remedies which Licensor may have on account thereof, apply the Deposit (or balance thereof), or so much thereof as may be necessary, to compensate Licensor for such failure or default, and Licensee shall, within ten (10) days after receipt of written notice from Licensor, restore said Deposit to the same amount as existed immediately prior to the application of such proceeds to compensate Licensor as provided above. Except as otherwise hereinafter set forth, the Deposit (or balance thereof) shall be returned by Licensor to Licensee within ten (10) days after the date of expiration or earlier termination of this Agreement after deduction for any amounts due and payable by Licensee to Licensor hereunder. (c) For each Existing Store, a license fee in the amount designated on Exhibit "C" attached hereto and incorporated herein by this reference. (d) The parties agree and understand that the license fees for each Store as set forth on Exhibit "C" assume that (i) the hours of operation of such Store will not be changed from the hours of operation shown on Exhibit "A," (ii) the location of the Licensed Premises will at all times be located as near as practicable to the Store's public entrances and checkstands, (iii) the size of the Licensed Premises will not be substantially reduced, (iv) the size of the Store will not be substantially changed, (v) smoking will at all times be permitted in the Licensed Premises (but not in the balance of the Store), and (vi) there shall be no change by any local, state or federal governmental authority in any law, rule or regulation specifically affecting the gaming industry (as opposed to any law, rule or regulation of general applicability including, but not limited to, any increase in tax rates based on Licensee's gross income from all sources). In the event of (i) any increase or decrease in the hours of operation of a Store, (ii) change in size or location of the Licensed Premises, (iii) change in size of the Store, (iv) ban on smoking in the Licensed Premises, or (v) change in any law, rule or regulation specifically affecting the gaming industry, which event materially affects Licensee's revenues in the Store, the parties agree to negotiate in good faith an adjustment of the license fees for such Store taking into consideration all relevant factors including, without limitation, customer count, size of Store, and Licensee's revenue per Machine in the Store. In the event either party determines that an adjustment in license fees is required as a result of the occurrence of an event described in this subparagraph (c), such party shall provide written notice of such event to the other party within sixty (60) days after the date of occurrence of such event, failing which any right of adjustment resulting from the occurrence of such event shall be deemed waived. (e) Anything in this Agreement to the contrary notwithstanding, all interest on amounts paid to, or held by, Licensor pursuant to this Paragraph 3 (Payment) shall be retained by Licensor. Licensor shall have no obligation to segregate any amounts paid to, or held by, Licensor pursuant to this Paragraph 3 (Payment). (f) All amounts described in subparagraph (c) of this Paragraph 3 (Payment) shall be due and payable in equal monthly installments in advance without notice or demand on or before the first day of each month. License fees for any partial month shall be prorated. (g) All payments shall be made to Licensor at P.O. Box 20, Boise, Idaho 83726, Attention: Property Accounting, or to such other person or address designated in writing by Licensor. 4. Taxes. Licensee agrees to pay during the term of this Agreement all taxes and assessments levied or assessed against the Machines and any other personal property placed on the Licensed Premises by Licensee, together with all fees and other charges now or hereafter required to be paid to any local, state or federal governmental authority for the ownership, operation, maintenance, repair or replacement of the Machines or any other personal property placed on the Licensed Premises by Licensee. 5. Operation. Licensee agrees, at its sole expense, to maintain and repair the Machines and any other personal property placed on the Licensed Premises by Licensee. Licensee shall keep the Machines in good operating condition. Licensee agrees at all times during the term of this Agreement to keep the Minimum Number of Machines in each of the Stores, which Machines shall be available for use by the public (subject to normal wear and tear and damage due to fire or other casualty) at all times that the Stores are open for business to the public. 6. Change Person. Licensee agrees to have a change person on duty on the Licensed Premises of each Store at all times that the Store is open for business to the public. 7. Title to Fixtures. All personal property (including, without limitation, the Machines) placed on the Licensed Premises by Licensee shall be and remain the personal property of Licensee 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 Store all such personal property and restore the Licensed Premises to its original condition, ordinary wear and tear excepted. 8. Indemnification. Licensee agrees to indemnify, defend and hold harmless Licensor from and against any and all liability, claims, damages, expenses (including reasonable costs and attorneys' fees and reasonable costs and attorneys' fees on any appeal), judgments, proceedings and causes of action of any kind whatsoever, arising out of or in any way connected with (i) the exercise of any of Licensee's rights or privileges granted herein, (ii) the ownership, operation, maintenance, repair or replacement of the Machines or any other personal property placed on the Licensed Premises by Licensee, or (iii) the willful or negligent act or omission of Licensee, its agents, contractors or employees. 9. Insurance. Licensee agrees to provide and maintain during the term of this Agreement, including any and all extensions hereof, commercial general liability insurance (including product liability, contract liability and broad form property damage endorsements) insuring Licensee against claims for personal injury, bodily injury or death, and property damage or destruction, occurring in, on or about the Licensed Premises. Such insurance shall be written as the primary coverage on the Licensed Premises with an insurer licensed to do business in the State of Nevada and with an A.M. Bests rating of A or better. Licensor shall be named on the policy as additional insured. The limits of liability of such insurance shall be not less than $2,000,000 for personal injury or bodily injury or death of any one (1) or more persons in one (1) occurrence and $500,000 with respect to damage to or destruction of property; or, in lieu of such coverage, a combined single limit (covering personal injury, bodily injury or death, and property damage or destruction) with a limit of not less than $5,000,000 per occurrence. Licensee shall furnish Licensor with certificate(s) evidencing such insurance. The policies of such insurance shall provide that the insurance represented by such certificate(s) shall not be canceled or nonrenewed without the giving of thirty (30) days prior written notice to Licensor. 10. Exclusive. Licensee shall have the exclusive right during the term of this Agreement, including any and all extensions hereof, to operate gaming devices in the Stores. No part of any Store shall at any time during the term of this Agreement, including any and all extensions hereof, be used or occupied by any other person for the purpose of operating gaming devices. Anything in this Paragraph 10 (Exclusive) to the contrary notwithstanding, the exclusive right granted in this Paragraph 10 (Exclusive) as to any particular Store or Stores shall not commence until the date specified in Paragraph 2 (Term) and shall terminate upon termination of this Agreement as to such Store or Stores. 11. Attorneys' Fees. If either party to this Agreement initiates or defends litigation with the other party in any way connected with this Agreement, the prevailing party in such litigation, in addition to any other relief which may be granted, whether legal or equitable, shall be entitled to recover from the losing party its reasonable costs and attorneys' fees (including its reasonable costs and attorneys' fees on any appeal). If either party to this Agreement initiates or defends litigation with a third party because of the violation of any term, covenant, condition or agreement contained in this Agreement by the other party to this Agreement, then the party so litigating shall be entitled to recover from the other party to this Agreement its reasonable costs and attorneys' fees (including its reasonable costs and attorneys' fees on any appeal) incurred in connection with such litigation. All such costs and attorneys' fees shall be deemed to have accrued on commencement of any such action or proceeding and shall be enforceable whether or not such action or proceeding is prosecuted to judgment. 12. Assignment. Licensee may not assign this Agreement except to a wholly- owned subsidiary of Jackpot Enterprises, Inc. that agrees in writing to be bound by all of the terms, covenants, conditions and agreements contained herein. 13. Compliance with Law. Licensee shall conduct its business in such a manner as to comply with the requirements of all local, state and federal laws, rules and regulations applicable thereto. Licensee shall not use the Licensed Premises, or permit the Licensed Premises to be used, for any unlawful purpose. 14. Licenses and Permits. Licensee agrees to obtain within one hundred twenty (120) days after Licensee's receipt of written notice from Licensor, as to any New Store, all licenses and permits required for the operation of the Minimum Number of Machines in such Store. Licensee agrees to make timely application for the applicable licenses and permits for each such Store, to diligently and continuously pursue approval and issuance of same, and to provide Licensor copies of all such licenses and permits within ten (10) days after Licensee's receipt of request for same. In the event Licensee fails to obtain all such licenses and permits as to any such Store within the applicable time period set forth above, Licensor shall have the option, at any time thereafter upon ten (10) days written notice to Licensee and provided Licensee does not obtain all such licenses and permits prior to expiration of said ten (10) day period, to terminate this Agreement only as to such Store, in which event this Agreement shall terminate as to such Store as of the date of expiration of such ten (10) day period and both parties shall thereafter be released from all further obligations hereunder as to such Store. Licensee agrees during the term of this Agreement to maintain in good standing all licenses and permits required for the operation of the Minimum Number of Machines in the Stores; provided, however, that in the event any such license or permit is revoked, suspended or otherwise restricted for any reason (other than financial) beyond Licensee's reasonable control to the extent that Licensee is prevented from performing any of the terms, covenants, conditions or agreements contained herein with respect to any Store or Stores, Licensee shall immediately remove all of Licensee's personal property (including, without limitation, the Machines) from such Store or Stores but shall remain liable for the payments described in Paragraph 3 (Payment) for such Store or Stores for a period of sixty (60) days (or such shorter period of time as is required by Licensor to locate another operator and for such operator to open for business in such Store or Stores) after the date of such revocation, suspension or restriction, whereupon (i) this Agreement shall terminate only as to such Store or Stores as of the date of expiration of such sixty (60) day period (or such shorter period of time as is required by Licensor to locate another operator and for such operator to open for business in such Store or Stores), and (ii) both parties shall thereafter be released from all further obligations hereunder as to such Store or Stores. Licensee agrees to provide Licensor with a copy of any notice of revocation, suspension or restriction of any of Licensee's licenses or permits required for the operation of the Machines in the Store within ten (10) days after Licensee's receipt of same. The one hundred twenty (120) day time period set forth in the first grammatical paragraph of this Paragraph 14 (Licenses and Permits) shall be extended for any period or periods of time equal to any period or periods of delay caused by strikes, lockouts, fire or other casualty, the elements or acts of God, refusal or failure of any governmental authority to issue all licenses and permits required for the operation of the Machines in the Stores (provided Licensee makes timely application for all applicable licenses and permits and thereafter diligently and continuously pursues approval and issuance of same), or other causes, other than financial, beyond Licensee's reasonable control. 15. Alterations. Licensee shall not make any additions, alterations or improvements to the Licensed Premises (including, without limitation, installation of wall and/or floor coverings and installation of signs on or about the Machines) ("Alterations") without Licensor's prior written approval, which approval shall not be unreasonably withheld or delayed. Licensee acknowledges that the primary business of the Stores is the operation of a supermarket and agrees that Licensor shall not be deemed to have unreasonably withheld its approval to any Alterations if such Alterations are inconsistent with the general decor of the Store (as determined by Licensor in its sole and absolute discretion) or obstruct the visibility of the Store's interior signage or departments. 16. License Only. Nothing herein contained shall be construed as constituting Licensor and Licensee as landlord and tenant, sublandlord and subtenant, co- partners or joint venturers. 17. Quiet Possession. Licensor covenants as to each Store that, from and after the date of commencement of the term of this Agreement as to such Store and so long as Licensee performs all of the terms, covenants, conditions and agreements of this Agreement, Licensee shall have quiet and peaceful possession of the Licensed Premises in such Store and enjoy all of the rights granted herein without interference from Licensor, or anyone having title paramount to Licensor. 18. Default. A party shall be deemed to be in default of this Agreement only upon the expiration of thirty (30) days (ten (10) days in the event of failure to pay money) from receipt of written notice from the other party specifying the particulars in which such party has failed to perform the obligations of this Agreement unless such party, prior to the expiration of said thirty (30) days (ten (10) days in the event of failure to pay money), has rectified the particulars specified in said notice of default. However, such party shall not be deemed to be in default if such failure (except a failure to pay money) cannot be rectified within said thirty (30) day period and such party is using good faith and its best efforts to rectify the particulars specified in the notice of default. Except where otherwise specifically stated herein to the contrary, in the event of a default by Licensor in the performance of any of the terms, covenants, conditions and agreements contained herein as to any Store or Stores, Licensee may terminate this Agreement as to any such Store or Stores, or as to all Stores, upon ten (10) days prior written notice to Licensor without prejudice to any other rights or remedies provided by law. In the event of any such termination, the Deposit (or balance thereof) shall be returned by Licensor to Licensee within ten (10) days after the date of such termination without deduction for any amounts due and payable by Licensee to Licensor hereunder. Except where otherwise specifically stated herein to the contrary, in the event of a default by Licensee in the performance of any of the terms, covenants, conditions and agreements contained herein as to any Store or Stores, Licensor may terminate this Agreement as to any such Store or Stores, or as to all Stores, upon ten (10) days prior written notice to Licensee, re-enter the Licensed Premises, either with or without process or law, expel and remove from the Licensed Premises all of Licensee's personal property (including, without limitation, the Machines), and repossess and enjoy the Licensed Premises without prejudice to any other rights or remedies provided by law. 19. Waiver. The failure of a party to insist upon strict performance of any of the terms, covenants, conditions or agreements contained herein shall not be deemed a waiver of any rights or remedies that said party may have, and shall not be deemed a waiver of any subsequent breach or default in the performance of any of the terms, covenants, conditions or agreements contained herein by the other party. 20. Additional Remedies. In addition to the remedies set forth in this Agreement, Licensor and Licensee shall have all other remedies provided by law to the same extent as if fully set forth herein word for word. No remedy herein conferred upon, or reserved to Licensor or Licensee, shall exclude any other remedy herein or by law provided, but each shall be cumulative. 21. Notices. All notices given pursuant to this Agreement shall be in writing and shall be given by personal delivery, by United States mail or by United States express mail or other established express delivery service (such as Federal Express), postage or delivery charge prepaid, return receipt requested, addressed to the person and address designated below: Licensor: Albertson's, Inc. 250 Parkcenter Boulevard P.O. Box 20 Boise, ID 83726 Attention: Legal Department Licensee: Cardivan Company 1110 Palms Airport Drive Las Vegas, NV 89119 The person and address to which notices are to be given may be changed at any time by any party upon written notice to the other party. All notices given pursuant to this Agreement shall be deemed given upon receipt. For the purpose of this Agreement, the term "receipt" shall mean the earlier of any of the following: (i) the date of delivery of the notice or other document to the address specified pursuant to this paragraph as shown on the return receipt, (ii) the date of actual receipt of the notice or other document by the person or entity specified pursuant to this paragraph, or (iii) in the case of refusal to accept delivery or inability to deliver the notice or other document, the earlier of (A) the date of the attempted delivery or refusal to accept delivery, (B) the date of the postmark on the return receipt, or (C) the date of receipt of notice of refusal or notice of nondelivery by the sending party. 22. Captions and Headings. The captions and headings in this Agreement are for reference only and shall not be deemed to define or limit the scope or intent of any of the terms, covenants, conditions or agreements contained herein. 23. Entire Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements, oral or written, with respect to the subject matter hereof. The provisions of this Agreement shall be construed as a whole and not strictly for or against either party. 24. Construction. In construing the provisions of this Agreement and whenever the context so requires, the use of a gender shall include all other genders, the use of the singular shall include the plural, and the use of the plural shall include the singular. 25. Joint and Several. In the event any party hereto is composed of more than one person, the obligations of said party shall be joint and several. 26. Third Party Beneficiary. This Agreement is not intended to create, nor shall it be in any way interpreted or construed to create, any third party beneficiary rights in any person not a party hereto unless otherwise expressly provided herein. 27. Confidentiality. From and after the date of this Agreement, the terms of Paragraph 3 (Payment) of this Agreement shall be kept confidential and shall not, except as required by law, be disclosed by either party to any person except (i) such party's agents, representatives or employees (including, without limitation, attorneys, accountants and financial advisors), (ii) gaming licensing authorities of the State of Nevada or any other local, state or federal public or governmental authority to the extent required in the ordinary cause of business, (iii) any actual or prospective landlord, purchaser, lender, tenant or subtenant of all or any part of the real or personal property subject of this Agreement provided such information is tendered to such person with a request that same be held confidential, or (iv) to the extent required by any agreement in effect on the date of this Agreement. 28. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall for all purposes be deemed an original and all of which together shall constitute one and the same instrument, and shall become effective only upon execution and delivery of one or more counterparts (or a telecopy thereof) by each of the parties hereto. 29. Existing Agreement. The parties have heretofore entered into a License Agreement (Gaming Devices) dated March 17, 1993 ("Existing Agreement") for Licensee's operation of gaming devices in Licensor's Stores. As of the Effective Date (as defined in Paragraph 2(a) of this Agreement), the Existing Agreement is terminated. The refundable fee referenced in Paragraph 3(b) of the Existing Agreement shall be retained by Licensor and credited to the nonrefundable fee and Deposit required to be paid by Licensee pursuant to Paragraphs 3(a) and 3(b), respectively, of this Agreement. EXECUTED as of the date first above written. LICENSEE: LICENSOR: Cardivan Company, Albertson's, Inc., a Nevada corporation a Delaware corporation BY: /s/ George Congdon BY: /s/ William H. Arnold ______________________ ______________________ Title: President William H. Arnold Vice President, Real Estate Law GUARANTY The undersigned ("Guarantor") hereby unconditionally guarantees the performance by Licensee of all of its obligations under this Agreement, together with any and all amendments, modifications and supplements thereto hereafter executed by Licensor and Licensee. Guarantor agrees that its liability under this Guaranty shall be primary and that in any right of action which shall accrue to Licensor under this Agreement, Licensor may, at its option, proceed against Guarantor and Licensee, jointly and severally, or proceed against Guarantor without first having commenced any action or having obtained any judgment, against Licensee. Jackpot Enterprises, Inc., a Nevada corporation By: /s/ Don R. Kornstein _____________________ Title: President & CEO EXHIBIT "A" EXISTING STORES Licensed Minimum Hours Building Premises No. of of Store Sq. Ft. Sq. Ft. Machines Operation _______________________________________________________________________________ [S] [C] [C] [C] [C] 149 Keystone Square Reno, NV 32,852 150 16 24 hours 151 W. Sparks Sparks, NV 43,460 150 20 24 hours 155 Elko Elko, NV 49,369 319 15 5:00 a.m. to 1:00 a.m. 170 Kietzke & McCarran Reno, NV 47,334 324 15 24 hours 172 East Sparks Sparks, NV 47,404 324 15 24 hours 173 McCarran & Mae Anne Reno, NV 51,561 312 15 24 hours 175 Lakeside Plaza Reno, NV 50,515 355 20 24 hours 178 E. Carson City Carson City, NV 52,079 312 15 24 hours 179 S. Carson City Carson City, NV 51,985 364 15 24 hours 185 Spanish Springs Sparks, NV (G.O. 11/11/98 [Est.]) 52,368 354 15 24 hours 186 Winnemucca Winnemucca, NV 24,955 376 10 6:00 a.m. to 11:00 p.m. 611 Buffalo & Flamingo Las Vegas, NV 55,886 352 15 24 hours 614 Valle Verde & Lake Mead Henderson, NV 52,215 319 15 24 hours 634 Flamingo & Boulder Las Vegas, NV 30,354 125 15 24 hours 637 Owens & Eastern Las Vegas, NV 35,120 176 18 5:00 a.m. to 1:00 a.m. 686 Henderson Henderson, NV (R-640) 52,323 319 15 24 hours 1606 Vegas & Jones Las Vegas, NV (R-639) 50,320 319 15 24 hours 1616 Rainbow & Cheyenne Las Vegas, NV 42,630 278 20 24 hours 1621 Sahara & Ft. Apache Las Vegas, NV 42,630 278 19 24 hours 1628 Rampart & Lake Mead Las Vegas, NV 44,746 324 20 24 hours 1638 Craig & Decatur Las Vegas, NV 47,506 324 15 24 hours 1659 Eastern & Sahara Las Vegas, NV (R-638) 47,600 319 15 24 hours 1660 Eastern & Windmill Henderson, NV 47,854 319 15 24 hours 1664 Rainbow & Westcliff Las Vegas, NV 42,042 262 21 24 hours 1665 Charleston & Lamb Las Vegas, NV 43,838 200 13 24 hours 1678 Lake Mead & Nellis Las Vegas, NV 43,675 176 15 24 hours EXHIBIT "B" Exhibit "B" is a floorplan of an Albertson's store. EXHIBIT "C" LICENSE FEES License Fee Per Machine Per Month RCT RCT RCT Additional Provisions: ______________________ 1. License fees for New Stores (exclusive of any remodel, expansion remodel, or an on-site or off-site replacement, of an Existing Store or a New Store) during their RCT will be RCT of the applicable monthly fee set forth above; provided, however, that in the event Licensor has not taken all steps required to permit Licensee to commence operations as of the date Licensor first opens any such New Store for business to the public, said RCT period shall not commence until all such steps have been taken. 2. In the event Licensor temporarily ceases supermarket operations at a Store for a period in RCT for any reason which is not the fault of Licensee, its agents, contractors or employees, the license fee for such Store during the RCT after such Store reopens for business will be RCT of the applicable monthly fee set forth above; provided, however, that in the event Licensor has not taken all steps required to permit Licensee to recommence operations as of the date Licensor reopens such Store for business, said RCT period shall not commence until all such steps have been taken. 3. In the event Licensor temporarily ceases supermarket operations at a Store for any reason which is not the fault of Licensee, its agents, contractors or employees, the license fee for such Store shall be abated during the period the Store is closed for business. 4. The license fees for any New Store RCT noted above shall be mutually agreed upon by the parties taking into consideration all relevant factors. In the event the parties have not agreed on the license fees for such New Store at least six (6) months prior to its projected opening date, either party shall have the right to terminate this Agreement as to such New Store (including any remodel, expansion remodel, or on-site or off-site replacement, of such New Store) upon ten (10) days prior written notice to the other party unless, prior to expiration of said ten (10) day period, the parties agree on the licensee fees for such New Store. EX-21 4 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 5 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 September 21, 1998, appearing in this Annual Report on Form 10-K of Jackpot Enterprises, Inc. for the year ended June 30, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Las Vegas, Nevada September 22, 1998 EX-27 6
5 This schedule contains summary financial information extracted from Jackpot's Consolidated Balance Sheets - June 30, 1998 and 1997 and its Consolidated Statements of Income - years ended June 30, 1998, 1997 and 1996 and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 50,275 0 0 0 0 54,094 35,635 19,850 79,100 4,942 0 0 0 99 70,772 79,100 0 93,013 0 76,426 4,309 0 0 9,881 2,668 0 0 0 0 7,213 .80 .79
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