-----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, AX8OzPUEtVnJYRAb3O0hIswOXfG+ykiLJ0/l45kTQTSEi80jMbdfSMvsNxaOuNF1 Cr5QE5mJoZtiGxIBD2vnaA== 0000351903-99-000003.txt : 19990217 0000351903-99-000003.hdr.sgml : 19990217 ACCESSION NUMBER: 0000351903-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 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-Q SEC ACT: SEC FILE NUMBER: 001-09728 FILM NUMBER: 99540521 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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 no. 1-9728 JACKPOT ENTERPRISES, INC. _______________________________________________________________________________ (Exact name of registrant as specified in its charter) NEVADA 88-0169922 _______________________________ ____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1110 Palms Airport Drive, Las Vegas, Nevada 89119 ___________________________________________ __________ (Address of principal executive offices) (Zip Code) 702-263-5555 ____________________________________________________ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ ___ There were 8,616,680 shares of the registrant's common stock outstanding as of February 5, 1999. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1998 and June 30, 1998 (Unaudited) Condensed Consolidated Statements of Income - Three and Six Months Ended December 31, 1998 and 1997 (Unaudited) Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended December 31, 1998 (Unaudited) Condensed Consolidated Statements of Cash Flows - Six Months Ended December 31, 1998 and 1997 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Part II. Other Information Item 6. Exhibits and Reports on Form 8-K JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) December 31, June 30, ASSETS 1998 1998 ______ ____________ ________ Current assets: Cash and cash equivalents $ 50,557 $ 50,275 Prepaid expenses 1,331 1,594 Other current assets 3,249 2,225 ________ ________ Total current assets 55,137 54,094 ________ ________ Property and equipment, at cost: Land and buildings 1,535 1,535 Gaming equipment 28,203 28,988 Other equipment 4,488 4,758 Leasehold improvements 357 354 ________ ________ 34,583 35,635 Less accumulated depreciation (19,972) (19,850) ________ ________ 14,611 15,785 Lease acquisition costs and other intangible assets, net of accumulated amortization of $5,088 and $4,607 3,458 2,231 Goodwill, net of accumulated amortization of $2,796 and $2,713 3,825 3,908 Lease and other security deposits 1,532 3,082 Other non-current assets 309 ________ ________ Total assets $ 78,872 $ 79,100 ======== ========
See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) (Concluded) (Unaudited) December 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998 ____________________________________ ____________ ________ Current liabilities: Accounts payable $ 972 $ 1,434 Other current liabilities 2,778 3,508 ________ ________ Total current liabilities 3,750 4,942 Deferred rent 2,443 2,377 Deferred income tax 949 849 Other liabilities 61 ________ ________ Total liabilities 7,142 8,229 ________ ________ 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; 9,860,252 and 9,854,327 shares issued 99 99 Additional paid-in capital 66,443 66,376 Retained earnings 18,964 16,466 Less 1,243,572 and 1,080,372 shares of common stock in treasury, at cost (13,776) (12,070) ________ ________ Total stockholders' equity 71,730 70,871 ________ ________ Total liabilities and stockholders' equity $ 78,872 $ 79,100 ======== ========
See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (Dollars in thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, __________________ ________________ 1998 1997 1998 1997 _______ _______ _______ _______ Revenues: Route operations $23,256 $22,949 $44,941 $44,867 Casino operations 491 661 1,013 1,410 _______ _______ _______ _______ Totals 23,747 23,610 45,954 46,277 _______ _______ _______ _______ Costs and expenses: Route operations 19,389 18,612 37,779 36,903 Casino operations 505 691 978 1,418 Amortization 292 286 578 562 Depreciation 1,061 897 2,071 1,765 General and administrative 927 961 1,797 1,886 _______ _______ _______ _______ Totals 22,174 21,447 43,203 42,534 _______ _______ _______ _______ Operating income 1,573 2,163 2,751 3,743 _______ _______ _______ _______ Other income: Interest and other income 357 452 718 1,025 _______ _______ _______ _______ Totals 357 452 718 1,025 _______ _______ _______ _______ Income before income tax 1,930 2,615 3,469 4,768 _______ _______ _______ _______ Provision (credit) for Federal income tax: Current 513 826 871 1,243 Deferred 27 (120) 100 44 _______ ________ _______ _______ Totals 540 706 971 1,287 _______ _______ _______ _______ Net income $ 1,390 $ 1,909 $ 2,498 $ 3,481 ======= ======= ======= ======= Basic earnings per share $ .16 $ .21 $ .29 $ .38 ======= ======= ======= ======= Diluted earnings per share $ .16 $ .21 $ .29 $ .38 ======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 1998 (Dollars and shares in thousands) (Unaudited) Treasury Common Stock Additional Stock Total _____________ Paid-in Retained ________________ Stockholders' Shares Amount Capital Earnings Shares Amount Equity ______ ______ ___________ _________ ______ ________ _____________ Balance July 1, 1998 9,854 $99 $66,376 $16,466 (1,080) $(12,070) $70,871 Issuance of shares on exercise of stock options 6 67 67 Repurchases of common stock (164) (1,706) (1,706) Net income 2,498 2,498 _____ ___ _______ _______ ______ ________ _______ Balance December 31, 1998 9,860 $99 $66,443 $18,964 (1,244) $(13,776) $71,730 ===== === ======= ======= ====== ======== =======
See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (Dollars in thousands) (Unaudited) 1998 1997 _______ _______ Operating activities: Net income $ 2,498 $ 3,481 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,649 2,327 Deferred income tax 100 44 Increase (decrease) from changes in: Prepaid expenses and other current assets 863 (350) Other non-current assets 171 (125) Accounts payable and other current liabilities (722) (30) Deferred rent and other liabilities 5 351 _______ _______ Net cash provided by operating activities 5,564 5,698 _______ _______ Investing activities: Net proceeds from location operators (10) 100 Proceeds from sales of property and equipment 58 201 Purchases of property and equipment (3,401) (4,085) Increase in lease acquisition costs and other intangible and non-current assets (290) (42) _______ _______ Net cash used in investing activities (3,643) (3,826) _______ _______ Financing activities: Proceeds from issuance of common stock 67 Repurchases of common stock (1,706) (782) _______ _______ Net cash used in financing activities (1,639) (782) _______ _______ Net increase in cash and cash equivalents 282 1,090 Cash and cash equivalents at beginning of period 50,275 47,945 _______ _______ Cash and cash equivalents at end of period $50,557 $49,035 ======= ======= Supplemental disclosures of cash flow data: Cash paid during the period for: Federal income tax $ 400 $ 1,400
See Notes to Condensed Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - General: The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Jackpot pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly Jackpot's financial position as of December 31, 1998 and the results of its operations for the three and six months ended December 31, 1998 and 1997 and its cash flows for the six months ended December 31, 1998 and 1997. The earnings for the three and six months ended December 31, 1998 and 1997 are not necessarily indicative of results for a full year. Information included in the condensed consolidated balance sheet as of June 30, 1998 has been derived from Jackpot's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 1998 (the "1998 Form 10-K"). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the 1998 Form 10-K. In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. Management has begun its review of SFAS 131, however it has not made a final determination of the extent of the disclosures 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. Presently, Jackpot does not have any derivative instruments, nor does the Company participate in hedging activities. Accordingly, SFAS 133 is not expected to have a significant effect on the results of operations or related disclosures. In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities". This standard provides guidance on the financial reporting for start-up costs and organization costs. This standard requires costs of start-up activities and organization costs to be expensed as incurred, and is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. Upon adoption, this statement will not have a significant effect on Jackpot's results of operations or its financial position. Note 2 - Comprehensive income: In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Jackpot adopted this statement on July 1, 1998. For the three and six months ended December 31, 1998 and 1997, Jackpot did not have any items of other comprehensive income. Comprehensive income for the three and six months ended December 31, 1998 and 1997 is the following (dollars in thousands): Three Months Six Months Ended Ended December 31, December 31, _____________ _____________ 1998 1997 1998 1997 ______ ______ ______ ______ Net income $1,390 $1,909 $2,498 $3,481 Other comprehensive income - - - - ______ ______ ______ ______ Comprehensive income $1,390 $1,909 $2,498 $3,481 ====== ====== ====== ======
Note 3 - Earnings per share: Basic earnings per share ("Basic EPS") for the three and six months ended December 31, 1998 and 1997 is computed by dividing net income by the weighted average number of common shares outstanding for the respective period. Diluted earnings per share ("Diluted EPS") for the three and six months ended December 31, 1998 and 1997 is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding for the respective period. Options to purchase common stock, whose exercise price was greater than the average market price for the respective period, have been excluded from the Diluted EPS computations. Such antidilutive options outstanding for the three months ended December 31, 1998 and 1997 were 707,000 and 137,000, respectively, and for the six months ended December 31, 1998 and 1997 were 495,000 and 445,000, 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): Three Months Ended Six Months Ended December 31, December 31, __________________ ________________ 1998 1997 1998 1997 ______ ______ ______ ______ Basic earnings per share: Earnings: Income available to common stockholders $1,390 $1,909 $2,498 $3,481 ====== ====== ====== ====== Shares: Weighted average number of common shares outstanding 8,617 9,072 8,665 9,077 ====== ====== ====== ====== Basic earnings per share $ .16 $ .21 $ .29 $ .38 ====== ====== ====== ====== Diluted earnings per share: Earnings: Income available to common stockholders $1,390 $1,909 $2,498 $3,481 Effect of dilutive securities - - - - ______ ______ ______ ______ Income, as adjusted $1,390 $1,909 $2,498 $3,481 ====== ====== ====== ====== Shares: Weighted average number of common shares outstanding 8,617 9,072 8,665 9,077 Common shares issuable upon assumed exercise of dilutive stock options 1,047 1,738 1,268 1,492 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 (999) (1,554) (1,179) (1,336) ______ ______ ______ ______ Weighted average number of common shares and common share equivalents outstanding 8,665 9,256 8,754 9,233 ====== ====== ====== ====== Diluted earnings per share $ .16 $ .21 $ .29 $ .38 ====== ====== ====== ======
Note 4 - Stockholders' equity: The 1992 Incentive and Non-qualified Stock Option Plan: On September 30, 1998, the exercise price of the June 30, 1998 grant of nonqualified stock options to purchase an aggregate of 110,000 shares of common stock (27,500 each to four directors) was vested at $9.94 per share, the fair market value of the stock on that date, pursuant to the terms of the 1992 Incentive and Non- qualified Stock Option Plan (the "1992 Plan"). See Note 6 of Notes to Consolidated Financial Statements in the 1998 Form 10-K for further information regarding the 1992 Plan and option grants. Common stock in treasury: Jackpot purchased 163,200 shares of its common stock at the market price on the date of purchase for a total cost of approximately $1,706,000 during the six months ended December 31, 1998. Note 5 - Letter of intent: On October 28, 1998, Jackpot and CRC Holdings, Inc., operating as Carnival Resorts & Casinos ("CRC"), a privately owned company, signed a non-binding letter of intent to merge the companies. Such proposed transaction is subject to the completion of a definitive agreement between the parties and regulatory and other approvals. The proposed transaction, which is still in negotiation, contemplates that Jackpot will acquire all the issued and outstanding common stock of CRC in exchange for approximately 3.5 million shares of Jackpot's common stock, the assumption of approximately $13 million of notes held by CRC stockholders and the issuance of a promissory note in the principal amount of approximately $13 million, subject to a reduction in such consideration under certain conditions. No assurance can be given that the proposed transaction will be consummated or that it will be consummated on the terms described herein. Note 6 - Subsequent event: On February 8, 1999, Jackpot and Players International, Inc. ("Players") entered into a definitive agreement and plan of merger (the "Players Agreement"). Pursuant to the terms of the Players Agreement, Jackpot will acquire Players for $8.25 per share, consisting of $6.75 per share in cash and $1.50 in Jackpot's common stock for each share of Players outstanding common stock. The completion of the merger is subject to a number of conditions, including approval by the stockholders of both companies, receipt of all the necessary regulatory and various approvals, and the financing of the transaction. Item 2. 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 six months ended December 31, 1998 (the "1998 six months"), consisted of the cash flows from operating activities and its available cash and cash equivalents which, at June 30, 1998, was $50.3 million and at December 31, 1998 was $50.6 million. Net cash provided by operating activities for the 1998 six months was $5.6 million compared to $5.7 million for the six months ended December 31, 1997 (the "1997 six months"). Net cash used in investing activities for the 1998 six months was $3.6 million, and resulted primarily from payments of $3.4 million for purchases of property and equipment and $.3 million for lease acquisition costs and other intangible and non-current assets. Net cash used in financing activities for the 1998 six months was $1.6 million, and resulted from payments for repurchases of common stock of $1.7 million, net of proceeds of $.1 million from the issuance of common stock upon the exercise of stock options. Liquidity: During the 1998 six months, Jackpot's cash and cash equivalents increased $.3 million primarily as a result of the activities described above, while working capital increased $2.2 million, from $49.2 million at June 30, 1998 to $51.4 million at December 31, 1998. 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 December 31, 1998, Jackpot repurchased 785,385 shares of common stock at a cost of approximately $8.5 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 for the remainder of the year ending June 30, 1999 ("fiscal 1999"). With respect to planned capital expenditures, management anticipates Jackpot will purchase approximately $4.7 million of property and equipment, exclusive of business acquisitions, if any, in the remainder of fiscal 1999 to be used in existing and currently planned new locations. On October 28, 1998, Jackpot and CRC Holdings, Inc., operating as Carnival Resorts & Casinos ("CRC"), a privately owned company, signed a non-binding letter of intent to merge the companies. Such proposed transaction is subject to the completion of a definitive agreement between the parties and regulatory and other approvals. The proposed transaction, which is still in negotiation, contemplates that Jackpot will acquire all the issued and outstanding common stock of CRC in exchange for approximately 3.5 million shares of Jackpot's common stock, the assumption of approximately $13 million of notes held by CRC stockholders and the issuance of a promissory note in the principal amount of approximately $13 million, subject to a reduction in such consideration under certain conditions. No assurance can be given that the proposed transaction will be consummated or that it will be consummated on the terms described herein. On February 8, 1999, Jackpot and Players International, Inc. ("Players") entered into a definitive agreement and plan of merger (the "Players Agreement"). Pursuant to the terms of the Players Agreement, Jackpot will acquire Players for $8.25 per share, consisting of $6.75 per share in cash and $1.50 in Jackpot's common stock for each share of Players outstanding common stock. The completion of the merger is subject to a number of conditions, including approval by the stockholders of both companies, receipt of all the necessary regulatory and various approvals, and the financing of the transaction. Jackpot continues to explore gaming acquisition opportunities. With respect to the Players Agreement, management intends to obtain financing through bank borrowings and long-term debt, and believes the proceeds received from such financings, along with Jackpot's available working capital and cash provided by operations will be sufficient to enable Jackpot to finance this transaction. However, no assurance can be given that Jackpot will obtain the necessary financing or that such transaction will be successfully consummated. Recently Issued Accounting Standards: In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. 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. Presently, Jackpot does not have any derivative instruments, nor does the Company participate in hedging activities. Accordingly, SFAS 133 is not expected to have a significant effect on the results of operations or related disclosures. In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities". This standard provides guidance on the financial reporting for start-up costs and organization costs. This standard requires costs of start-up activities and organization costs to be expensed as incurred, and is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. Upon adoption, this statement will not have a significant effect on Jackpot's results of operations or its financial position. Results of Operations _____________________ Revenues: Total revenues for the three months ended December 31, 1998 (the "1998 three months") increased $.1 million, from $23.6 million for the three months ended December 31, 1997 (the "1997 three months") to $23.7 million for the 1998 three months, while total revenues for the 1998 six months decreased $.3 million, from $46.3 million for the 1997 six months to $46.0 million for the 1998 six months. The increase in total revenues of $.1 million for the 1998 three months was the net result of an increase of $.3 million (from $22.9 million for the 1997 three months to $23.2 million for the 1998 three months) in gaming machine route operations ("route operations") revenues and a decrease of $.2 million (from $.7 million for the 1997 three months to $.5 million for the 1998 three months) in casino operations revenues. The decrease in total revenues of $.3 million for the 1998 six months was the net result of an increase of $.1 million (from $44.9 million for the 1997 six months to $45.0 million for the 1998 six months) in route operations revenues and a decrease of $.4 million (from $1.4 million for the 1997 six months to $1.0 million for the 1998 six months) in casino operations revenues. The increases in route operations revenues for the 1998 three months and 1998 six months of $.3 million and $.1 million, respectively, resulted from a combination of additional revenues generated from new locations, net of lost revenues from terminated locations and decreases in revenues at existing locations. New locations generated revenues of $1.2 million and $2.3 million, while revenues at existing locations decreased $.2 million and $.6 million for the 1998 three months and 1998 six months, respectively. Terminated locations had generated revenues of $.7 million and $1.6 million for the 1997 three months and 1997 six months, respectively. Route operations revenues attributable to fixed payment leases and revenue sharing contracts for the three and six months ended December 31, 1998 and 1997 are summarized below (dollars in thousands): Three Months Ended December 31, _____________________________________ 1998 1997 __________________ __________________ Percent Percent of route of route operations operations Amount revenues Amount revenues _______ __________ _______ __________ Route operations: Fixed payment leases $17,629 75.8% $16,939 73.8% Revenue sharing contracts 5,627 24.2 6,010 26.2 _______ _____ _______ _____ Totals $23,256 100.0% $22,949 100.0% ======= ===== ======= ===== Six Months Ended December 31, _____________________________________ 1998 1997 __________________ __________________ Percent Percent of route of route operations operations Amount revenues Amount revenues _______ __________ _______ __________ Route operations: Fixed payment leases $33,939 75.5% $33,383 74.4% Revenue sharing contracts 11,002 24.5 11,484 25.6 _______ _____ _______ _____ Totals $44,941 100.0% $44,867 100.0% ======= ===== ======= =====
Costs and expenses: Route operations expenses for the 1998 three months and 1998 six months increased $.8 million (from $18.6 million for the 1997 three months to $19.4 million for the 1998 three months) and $.9 million (from $36.9 million for the 1997 six months to $37.8 million for the 1998 six months) and, as a percentage of route operations revenues, increased to 83.4% and 84.1% for the 1998 three months and 1998 six months, respectively, from 81.1% and 82.2% for the 1997 three months and 1997 six months, respectively. The increase in route operations expenses of $.8 million for the 1998 three months resulted primarily from a combination of an increase of $.5 million in location rent, which consisted principally of location rent for new locations of existing chain store customers, and from increases in payroll costs and other route operations expenses of $.1 million and $.2 million, respectively. The increase in route operations expenses of $.9 million for the 1998 six months resulted primarily from an increase in location rent for new locations of existing chain store customers. With respect to location rent, which is the single largest route operations expense, Jackpot entered into an agreement for a long-term extension with one of its largest retail chain store customers in September 1998. 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. For a further description of the Company's lease and license agreements, see Item 1 - Business - Gaming Machine Route Operations and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview in the 1998 Form 10-K. Amortization expense for the 1998 three months and 1998 six months, compared to the 1997 three months and 1997 six months, remained constant at $.3 million and $.6 million, respectively, while depreciation expense for the 1998 three months and 1998 six months increased $.2 million (from $.9 million for the 1997 three months to $1.1 million for the 1998 three months) and $.3 million (from $1.8 million for the 1997 six months to $2.1 million for the 1998 six months). The increase in depreciation expense for the 1998 three months and the 1998 six months was principally attributable to new gaming machines purchased during the year ended June 30, 1998. General and administrative expense in each of the 1998 three months and 1998 six months decreased $.1 million, from $1.0 million for the 1997 three months to $.9 million for the 1998 three months, and from $1.9 million for the 1997 six months to $1.8 million for the 1998 six months. Other income: Other income for the 1998 three months and 1998 six months decreased $.1 million (from $.5 million for the 1997 three months to $.4 million for the 1998 three months) and $.3 million (from $1.0 million for the 1997 six months to $.7 million for the 1998 six months). Such decreases resulted primarily from reductions in other income earned from nonrecurring transactions. Federal income tax: The effective tax rate for the 1998 three months and 1998 six months was 28%. Such rate, which approximated the effective tax rate for the 1997 three months and 1997 six months, was lower than the Federal Statutory rate of 35% primarily because of the tax benefits realized from tax-exempt interest income. General: Operating income for the 1998 three months and 1998 six months decreased $.6 million (from $2.2 million for the 1997 three months to $1.6 million for the 1998 three months) and $1.0 million (from $3.7 million for the 1997 six months to $2.7 million for the 1998 six months). The decreases in operating income resulted from the combination of decreases in the route operations operating margin of $.5 million and $.8 million, respectively, increases in depreciation expense of $.2 million and $.3 million, respectively, mentioned above, and a decrease in all other operating expenses of $.1 million in each of the 1998 three months and 1998 six months. The declines in the route operations operating margin of $.5 million (from $4.3 million for the 1997 six months to $3.8 million for the 1998 six months) and $.8 million (from $8.0 million for the 1997 six months to $7.2 million for the 1998 six months) were due principally to the decreases in route operations revenues at existing locations previously described, and to the operating results of new locations. Principally as a result of a highly competitive environment, which management believes Jackpot will continue to face during the remainder of fiscal 1999, net income and earnings per share declined in the 1998 three months and 1998 six months compared to the 1997 three months and 1997 six months. Net income decreased $.5 million (from $1.9 million for the 1997 three months to $1.4 million for the 1998 three months) and $1.0 million (from $3.5 million for the 1997 six months to $2.5 million for the 1998 six months). Basic and diluted earnings per share for the 1998 three months and 1998 six months was $.16 and $.29, respectively, versus $.21 and $.38 per share for the 1997 three months and 1997 six months. Year 2000 _________ In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This situation is generally referred to as the "Year 2000 Problem". If this situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations. Jackpot has conducted a 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 depreciated 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 December 31, 1998, the Company has incurred costs of approximately $70,000 (primarily for internal labor) related to the system applications and anticipates spending an additional $110,000 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-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission contains statements that may be considered forward-looking. 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 3. Quantitative and Qualitative Disclosure About Market Risk _________________________________________________________ For the three and six months ended December 31, 1998, there were no changes to the information incorporated by reference in Item 7A of the 1998 Form 10-K. PART II. OTHER INFORMATION _________________ Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27.1 - Financial Data Schedule (EDGAR filing only). (b) Reports on Form 8-K - No Form 8-K was filed for the three months ended December 31, 1998. Signature _________ Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JACKPOT ENTERPRISES, INC. _________________________ (Registrant) By: /s/ Bob Torkar _________________________ BOB TORKAR Senior Vice President - Finance, Treasurer and Chief Accounting Officer Date: February 16, 1999 EX-27 2
5 This schedule contains summary financial information extracted from Jackpot's Consolidated Balance Sheets - December 31, 1998 and June 30, 1998 and its Consolidated Statements of Income - three and six months ended December 31, 1998 and 1997 and is qualified in its entirety by reference to such finanical statements. 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 50,557 0 0 0 0 55,137 34,583 19,972 78,872 3,750 0 0 0 99 71,631 78,872 0 45,954 0 38,757 2,374 0 0 3,469 971 0 0 0 0 2,498 .29 .29
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