-----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, R4zjKl8Me29Urmc4sh5T9RPUn4DrVS6ZnBzLBGhZ+VRygUtlwFmNqY7Y7h2HQaTs 4skbbSSlk9K/QI49QaKMpw== 0000351903-99-000013.txt : 19991227 0000351903-99-000013.hdr.sgml : 19991227 ACCESSION NUMBER: 0000351903-99-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718272 BUSINESS ADDRESS: STREET 1: 1110 PALMS AIRPORT DR CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7022635555 MAIL ADDRESS: STREET 1: 1110 PALMS AIRPORT DRIVE STREET 2: 1110 PALMS AIRPORT DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89119 10-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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to____________ Commission File Number 1-9728 JACKPOT ENTERPRISES, INC. ______________________________________________________________________ (Exact name of registrant as specified in its charter) Nevada 88-0169922 ________________________________________________ __________________ (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) 1110 Palms Airport Drive, Las Vegas, Nevada 89119 ________________________________________________ __________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 263-5555 _______________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered _____________________________________________ _______________________ Common Stock - Par value $.01 per share, New York Stock Exchange which include certain preferred stock purchase rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x ___ As of August 31, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $72,226,672. As of September 17, 1999, there were 8,616,537 shares of the Registrant's common stock outstanding. PART I Item 1. Business ________ General _______ Jackpot Enterprises, Inc., a Nevada corporation ("Jackpot" or the "Company"), has been actively engaged, through its subsidiaries, in the gaming industry for over 30 years. The Company is one of the largest gaming machine route operators in the state of Nevada, and is an established leader in the operation of gaming machines in multiple retail locations ("gaming machine route operations"). Jackpot's gaming machine route operations are subject to seasonal fluctuations. The gaming play for such operations is generally greater in the second and fourth quarters of Jackpot's fiscal year. In addition to its gaming machine route operations, Jackpot, as of June 30, 1999, operated one casino with an aggregate of 94 gaming machines. For the fiscal year ended June 30, 1999, 98% of total revenues were derived from Jackpot's gaming machine route operations and 2% from its casino operations. As of June 30, 1999, Jackpot operated 3,909 gaming machines at 385 locations; 108 of the locations contained 15 gaming machines, 29 of the locations contained more than 15 machines and 248 of the locations contained fewer than 15 machines. Unless the context indicates otherwise, references to "Jackpot" and the "Company" include its direct and indirect subsidiaries. Business Development Strategy _____________________________ The Company's business strategy is to enhance its position as a leader in the Nevada gaming machine route market both through internal growth and acquisition and to apply its gaming management expertise and its regulatory experience to pursue strategic gaming activities and other value oriented nongaming opportunities. Specifically, the Company's business strategy includes the following: . Enhance Gaming Route Operations. The Company continually seeks to enhance its position as a leader in the Nevada gaming machine route business by providing high levels of service and popular gaming products, cultivating its existing relationships with major customers and expanding its gaming machine route operations through the selective addition of new locations and/or the consolidation of other route operators. The expected continued economic and population growth in Nevada should also benefit the Company. In addition, as appropriate, the Company will explore the possibility of expanding its gaming machine route business to other jurisdictions. . Pursue Other Strategic Gaming and Nongaming Opportunities. Jackpot continually reviews and evaluates potential gaming and nongaming opportunities. The Company's strong financial position and potential access to capital represent a competitive advantage which enables management to explore potential acquisitions and strategic combinations. Jackpot is committed to pursue all such opportunities in order to improve future earnings and enhance shareholder value. In evaluating such potential opportunities the Company is looking for candidates with either a value orientation or sustainable rates of growth. At various times during the past several years, the Company has engaged in the active consideration of potential acquisitions and expansion opportunities in both the gaming and nongaming markets, including most recently in 1999 in connection with the potential acquisition of Players International, Inc. ("Players") and CRC Holdings, Inc. d/b/a Carnival Resorts & Casinos ("CRC"), a privately owned company (see "Terminated Merger Agreements" below for a discussion of those proposed transactions). Subsequent to the termination of the merger agreement with Players, Jackpot's Board of Directors authorized management to retain an investment banker to assist the Company in evaluating strategic alternatives. The Company regularly devotes significant management and other resources to these efforts and incurs substantial expenses in connection with such activities. These expenses have in the past been charged against operating income. The Company anticipates that, as it continues to engage in such activities in the future, it will periodically incur comparable expenses that may have a material effect on the Company's operating income. Although Jackpot is exploring expansion and acquisition opportunities, there can be no assurance that such opportunities will be available on terms acceptable to Jackpot or that, if undertaken will be successful. Gaming Machine Route Operations _______________________________ Gaming machine route operations involve the installation, operation and service of gaming machines owned by Jackpot in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada. With respect to retail stores, Jackpot generally licenses, leases or subleases space in stores which are part of a chain of stores and installs gaming machines and a service center near the store's entrance, where customer traffic is greatest. The number of gaming machines per store is determined by licensing limitations, available space and license, lease or sublease negotiations. In fiscal 1999, approximately 86% of Jackpot's gaming machine route operations revenues were generated by southern Nevada operations and approximately 14% by northern Nevada operations. Management believes that Jackpot has a substantial market share of gaming machine operations in supermarkets, drug stores and merchandise stores in Nevada, and that its customers are primarily local Nevada residents. Gaming machines are routinely serviced, repaired, and maintained by mechanics employed by Jackpot. In the opinion of management, Jackpot's gaming machines and associated equipment are well-maintained, adequately insured, and in good working condition. Service centers are operated at retail store locations with generally 15 gaming machines or more during all store business hours by employees of Jackpot who provide coin, currency and other services to players of the gaming machines. On a regular basis, money is removed from the gaming machines and the service center is replenished with coin and currency. The following table sets forth certain historical data showing the changes to the number of machines and locations in Jackpot's gaming machine route operations through June 30, 1999: As of June 30, _____________________________________ 1999 1998 1997 1996 1995 _____ _____ _____ _____ _____ Number of machines on location 3,909 4,097 4,075 4,211 4,284 Number of locations 385 412 419 439 452
Jackpot's agreements for its locations generally are in the form of written license, lease, sublease or revenue sharing contract and generally give Jackpot the exclusive right to install gaming machines at such locations. License, lease and sublease agreements, which accounted for approximately 75% of total gaming machine route operations revenues in fiscal 1999, require payments of fixed monthly fees based upon the amount of space used and/or the number of gaming machines placed at the location. The remainder provide for the payment to the location owner of a rental fee or a revenue sharing arrangement based upon a percentage of the revenues generated by Jackpot's gaming machines at such location. A location owner is not permitted to receive gaming machine revenues (lease or otherwise) based upon a percentage of revenues unless such owner is licensed by the Nevada Gaming Commission. The renewal or extension of agreements at existing locations have generally resulted in increased monthly fees. Licenses, leases and subleases have a wide range of terms and maturities, with expiration dates, including option periods, extending from 1999 to 2010. Prior to negotiating licenses, leases and subleases and installing machines, Jackpot performs a study of market potential, customer base, and comparative route locations in order to determine the appropriate type and denominations of gaming machines to be installed in each new location. This evaluation is ongoing at all locations and machine mix changes are made accordingly to maximize the operating performance of each location. Jackpot has a significant amount of its route operations at retail stores which are part of a group of affiliated store chains. Route operations revenues at two groups of affiliated store chains (i.e. Albertson's, Inc. and American Stores Company, which was the parent company of American Drug Stores, Inc. and Lucky Stores, Inc. until June 1999) each accounted for more than 10% of Jackpot's total revenues in each of fiscal 1999, 1998 and 1997. The largest four store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation and Lucky Stores, Inc.) accounted for approximately 63% of Jackpot's total revenues in 1999. Agreements with these four customers have expiration dates ranging from 2003 to 2010. Such agreements provide Jackpot the continued right to operate gaming machines at certain existing locations and future locations in Nevada, if any, of such customers. The loss or nonrenewal of any of these agreements could have a material adverse effect on the Company's future results of operations. In August 1998, Albertson's, Inc. ("Albertson's") and American Stores Company ("American Stores"), entered into a merger agreement that provided for the acquisition of American Stores by Albertson's. Approximately 57% and 55% of Jackpot's total revenues for 1999 and 1998, respectively, were generated at the locations of those two entities. The merger of Albertson's and American Stores was completed on June 23, 1999. As a condition to obtaining approval of the merger by the Federal Trade Commission and the Attorneys General of California, Nevada and New Mexico, Albertson's agreed to divest certain of its stores, including 19 stores in southern Nevada. Those locations have been taken over by Raley's, Inc. ("Raley's"). Jackpot operates in 15 of those locations. The existing slot route operator for Raley's northern Nevada stores has filed applications with the Nevada Gaming Control Board to operate the gaming machines at the southern Nevada Albertson's stores which are being divested. Of the 19 stores in southern Nevada taken over by Raley's, Jackpot currently maintains 246 gaming machines at the 15 locations which it operates pursuant to a long term agreement with Albertson's. Jackpot believes that there is no proper basis to terminate such agreement and Jackpot's attendant right to occupy the subject premises for purposes of operating gaming machines. These 15 locations generated approximately 16% and 15% of Jackpot's total revenues for 1999 and 1998, respectively, and a significantly greater percentage of Jackpot's total operating income for 1999 and 1998. On August 30, 1999, Jackpot commenced litigation in federal district court for the District of Nevada against Albertson's and Raley's to enforce its rights under its agreement with Albertson's. On September 14, 1999, Jackpot obtained a preliminary injunction to prevent Albertson's and Raley's from interfering with its right to occupy the subject premises and conduct gaming operations. The Court for purposes of its decision ruled that Jackpot's license was coupled to the lease relating to the stores. The injunction permits Jackpot to remain at the stores pending resolution of the dispute. In granting the preliminary injunction, the court required Jackpot to post a $50,000 bond. Albertson's has now made an application to increase the bond to $9 million. In addition, Albertson's and Raley's have made motions for summary judgment. Furthermore, on September 23, 1999, Raley's existing slot route operator commenced an action in Nevada state court against Jackpot, Albertson's, Raley's and the slot route operator at the four other Albertson's southern Nevada locations seeking declaratory and injunctive relief and money damages. The allegations against Jackpot are for alleged fortuitous interference with contract and prospective economic advantage and abuse of process. Jackpot intends to vigorously defend this action. No assurance can be given that such litigation will result in Jackpot retaining the right to operate at the 15 stores or not incurring liability as a defendant in the state action. The loss of the 15 locations could have a material adverse effect on the Company's future results of operations. Jackpot's operations in Albertson's stores in other areas of Nevada, as well as new store openings statewide, are unaffected. Most of Jackpot's licenses, leases and subleases with major retail chains cover a number of specified stores in Nevada and usually provide Jackpot with an option to install gaming machines at any new stores of the retail chain opened in Nevada. All of the licenses, leases and subleases require Jackpot to pay all installation, maintenance and insurance expenses and all taxes in connection with Jackpot's operations at the location. Some of the Company's license, lease or sublease agreements require fixed periodic increases in monthly fees during the term of the contract. Jackpot's license, lease and sublease agreements generally provide that in the event that Jackpot fails to pay the required rental or license fees under such license, lease or sublease or defaults in the performance of any of its other obligations thereunder, the store operator can terminate the license, lease or sublease, usually after notice and a cure period of between 10 and 30 days. These agreements generally also provide that if the store operator terminates its business at a location, the license, lease or sublease is automatically terminated as to that location. Jackpot believes that it is not in default under any of its present licenses, leases or subleases. See Note 8 of Notes to Consolidated Financial Statements. The renewal or extension of agreements with major retail chains has generally resulted in increased monthly fees payable by Jackpot. These contracts often require fixed periodic increases in monthly fees during the term of the contract. In September 1998, Jackpot entered into an agreement for a long-term contract extension with one of its largest retail store customers. A very competitive pricing environment caused the Company to offer a significant increase in location rent over the existing agreement. Pursuant to the terms of the new agreement, which became effective July 1, 1999, rent expense will increase significantly over the previous agreement. Such increase could have a material adverse effect on the Company's results of operations for the year ending June 30, 2000. License, lease and sublease agreements, representing 38 agreements and approximately 1% of fiscal 1999 route operations revenues, have terms expiring during fiscal 2000. Casino Operations _________________ On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), the two casinos then operated by Jackpot, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Since that time, Jackpot has been unsuccessful in disposing of its operations at either casino on terms acceptable to Jackpot. Although the Company continues to market these two properties for sale, no assurance can be given that such disposals will occur. Jackpot elected to close the Owl Club on June 29, 1999. The Owl Club, which is located in Battle Mountain, Nevada, operated 93 gaming machines and two table games at the time of closing, and had a restaurant operation and an eighteen room motel. Jackpot owns the land and buildings used in the Owl Club's casino and motel operations. Jackpot manages the casino operations of the Pony Express Casino in Jackpot, Nevada under a month to month space lease agreement. As of June 30, 1999, Jackpot operated 94 gaming machines in approximately 2,600 square feet of casino space. The Pony Express Casino attracts hotel guests, local residents and tourists, primarily from the Idaho market. For additional information concerning Jackpot's operations, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Suppliers _________ Jackpot purchases a variety of models and styles of gaming machines primarily from one manufacturer, International Game Technology ("IGT"). Although the Company purchased approximately 97% of its gaming machines from IGT in fiscal 1999, Jackpot does not believe it is dependent upon IGT for future purchases. Jackpot does not have a contractual commitment for future purchases with IGT, or any other manufacturer. Each gaming machine accepts only one denomination of coin and, with minor exceptions, each location will have a variety of machines for different denominations of coins. Gaming machines operated by Jackpot are multiple coin play. Multiple coin play allows a player to wager several coins of the same denomination on each play. Jackpot continually tests, on a trial basis, new machines from various gaming machine manufacturers to determine which games and models will appeal to its customers to enhance play levels. Employees _________ As of June 30, 1999, Jackpot employed approximately 750 persons, the substantial portion of whom are non-management personnel. None of Jackpot's employees are covered by a collective bargaining agreement and Jackpot believes that it has satisfactory employee relations. Competition ___________ Gaming machines and gaming of all types are available in Nevada in casinos and hotel casinos, as well as in locations similar to those of Jackpot, all of which compete directly or indirectly with Jackpot. Jackpot has been and is subject to substantial direct competition for the operation of gaming machines in approved locations from numerous small gaming machine route operators and some large operators, located principally in Las Vegas and Reno and their surrounding areas. Management believes at least one of these competitors has more gaming machines or locations than Jackpot. In addition, certain of such competitors manufacture gaming machines. The principal methods of competition for gaming machine locations are the lease, sublease, license or revenue sharing terms, the service provided by the route operator and the experience, reputation and financial strength of the route operator. In recent years Jackpot has faced increased competition in its gaming machine route operations, and as certain of its licenses, leases and subleases have begun to expire, it has faced strong competition from other route operators who have attempted to capture or have captured locations by offering more favorable terms to retail store owners. As a result of such competition, along with the Company's continual evaluation of leases and adherence to management's pricing guidelines, revenues generated from route operations, which are attributable to revenue sharing contracts, have decreased since fiscal 1995. For additional information concerning Jackpot's revenue sharing contracts, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Terminated Merger Agreements ____________________________ On February 8, 1999, Jackpot and Players entered into a definitive Agreement and Plan of Merger (the "Agreement"), which was subject to a number of conditions. On August 16, 1999, Jackpot received a notice from Players terminating the Agreement. Such notice contained the terms of a merger offer for Players from Harrah's Entertainment, Inc. On August 19, 1999, pursuant to the terms of the Agreement, Jackpot received a break-up fee of $13.5 million. On February 17, 1999, Jackpot signed a definitive agreement to acquire CRC. The agreement was subject to various conditions, including the assignment to Jackpot of the management agreement relating to a casino managed by CRC in Ontario, Canada. Because of CRC's inability to obtain the necessary consent of the Ontario Casino Corporation (the "OCC"), one of the casino's owners, the agreement was terminated by the mutual agreement of Jackpot and CRC on April 15, 1999. The decision by the OCC, which is not the gaming licensing authority in Ontario, was made without any inquiry of Jackpot and prior to the filing of Jackpot's gaming application with the Ontario Gaming Control Commission. As a result of the termination of the agreement, capitalized costs incurred in connection with the proposed acquisition of CRC of $.9 million were expensed in the quarter ended June 30, 1999. Regulation and Licensing Requirements _____________________________________ Nevada The ownership and operation of casino gaming facilities and gaming routes in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board") and local regulatory authorities. The Nevada Commission, the Nevada Board and the local regulatory authorities are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. Corporations that operate casinos and gaming machine routes in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. The Company has been found suitable by the Nevada Commission to own the stock of Cardivan Company, Corral Coin, Inc., Corral Country Coin, Inc. and Corral United, Inc. (the "Route Subsidiaries") and Jackpot Gaming, Inc. Jackpot Gaming, Inc. is registered as a holding corporation and is approved by the Nevada Gaming Authorities to own the stock of the Pony Express Casino (the "Casino Subsidiary"). No person may become a stockholder of, or receive any percentage of profits from, the Route Subsidiaries, Jackpot Gaming, Inc., or the Casino Subsidiary without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Route Subsidiaries, Jackpot Gaming, Inc. and the Casino Subsidiary have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or any of its subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Route Subsidiaries and the Casino Subsidiary must file applications with the Nevada Gaming Authorities and may be required to be licensed or be found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Company or its subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or any of its subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company and its subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company, Jackpot Gaming, Inc., the Route Subsidiaries and the Casino Subsidiary are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company and its subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Company or any of its subsidiaries, the gaming licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the subsidiary involved, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after requests, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or any of its subsidiaries, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has required that the Company's stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending upon the type of gaming or activity involved, are payable to the State of Nevada and to the local jurisdictions. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon any of: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at the Company's casino is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company's casino. Federal Regulation The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it unlawful, in general, for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices, and components thereof across interstate lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. Jackpot's subsidiaries have so registered and must renew their registration annually. In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. Violation of the Federal Act may result in seizure and forfeiture of equipment, as well as other penalties. Other Jurisdictions Other jurisdictions also require various licenses, permits, and approvals in connection with the ownership and operation of gaming facilities. The operation of gaming devices and lottery devices is subject to extensive licensing requirements and regulatory compliance. If Jackpot proceeds with expansion into any other state or foreign jurisdiction, it will also be necessary for the appropriate officers, employees, corporate subsidiaries and other persons or entities to apply for and obtain all necessary gaming and distributing licenses. As in Nevada, state agencies and the local authorities having jurisdiction over such activities have full power and discretion to limit, condition, suspend and revoke such licenses or approvals and any disciplinary action against Jackpot's affiliates in such jurisdictions could (and revocation would) have a material adverse effect on the operations of Jackpot in such states or local jurisdictions. Other Jackpot maintains rigorous internal accounting controls in accordance with the regulations of the Nevada Commission. Jackpot carries insurance of such types and in such amounts as management determines to be prudent from time to time. Item 2. Properties __________ Jackpot's corporate headquarters are located in Las Vegas, Nevada with approximately 34,000 square feet of office, warehouse and shop space under a lease which expires in 2006, with certain options for renewal. Jackpot believes its properties are adequate and suitable for its purposes. See Note 3 of Notes to Consolidated Financial Statements for additional information as to Jackpot's properties in Battle Mountain, Nevada and Jackpot, Nevada. The following table sets forth the location, use, size, and percentage utilization of Jackpot's properties: Approximate Percentage Location Use Size Utilization ________ ___________________ _______________ ____________ LEASED PROPERTIES: Las Vegas, Nevada Executive offices, warehouse and shop 34,000 sq. ft. 100% Reno, Nevada Offices and shop 10,000 sq. ft. 100% Throughout Nevada Gaming machine various sq. ft. operations per location. 100% Jackpot, Nevada Casino operations 2,600 sq. ft. 100% OWNED PROPERTIES: Battle Mountain, Nevada Closed. Held for sale 10,000 sq. ft. -
Item 3. Legal Proceedings _________________ See "Item 1. Business" for a description of the litigation relating to the right of Jackpot to continue to operate in 15 stores in Nevada which have been taken over by Raley's. Item 4. Submission of Matters to a Vote of Security Holders ___________________________________________________ Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters _____________________________________________________________ Jackpot's common stock, par value $.01 per share (the "Common Stock"), is listed on the New York Stock Exchange (NYSE) under the trading symbol "J". The following table sets forth the range of high and low prices for shares of the Common Stock for the fiscal quarters indicated, as furnished by the NYSE. No cash dividends were paid during those fiscal quarters. Future payment of quarterly cash dividends, if any, is subject to periodic review and reconsideration by Jackpot's Board of Directors. JACKPOT COMMON STOCK _______________________________________________________________________ High Low _______________________________________________________________________ Fiscal 1998 First Quarter $12.19 $10.63 Second Quarter 13.00 10.75 Third Quarter 13.94 11.00 Fourth Quarter 13.19 11.75 _______________________________________________________________________ Fiscal 1999 First Quarter $12.56 $ 9.38 Second Quarter 11.50 9.13 Third Quarter 9.63 7.63 Fourth Quarter 9.00 7.50 _______________________________________________________________________
As of September 17, 1999 there were 1,533 holders of record of Common Stock. The number of holders of record of Jackpot's Common Stock on September 17, 1999 was computed by a count of record holders. Item 6. Selected Financial Data _______________________ The following information has been derived from Jackpot's consolidated financial statements: Years Ended June 30, _______________________________________________________ 1999 1998 1997 1996 1995 _______ _______ _______ _______ _______ (Dollars and shares in thousands, except per share data) OPERATING DATA: Total revenues $95,669 $93,013 $91,904 $91,108 $96,853 _______________________________________________________________________________ Operating income $ 5,002 (1) $ 7,963 $ 9,822 $ 7,094 (1) $ 8,968 _______________________________________________________________________________ Income from continuing operations $ 6,393 (1) $ 9,881 $11,368 $ 8,610 (1) $ 9,875 _______________________________________________________________________________ Net income $ 4,603 (1) $ 7,213 $ 7,844 $ 5,855 (1) $ 6,616 _______________________________________________________________________________ Basic earnings per share (2): Net income $ .53 $ .80 $ .85 $ .63 $ .72 _______________________________________________________________________________ Diluted earnings per share (2): Net income $ .53 $ .79 $ .84 $ .62 $ .71 _______________________________________________________________________________ Dividends declared per share $ - $ - $ .16 $ .32 $ .32 _______________________________________________________________________________ Average common shares outstanding 8,641 8,991 9,237 9,307 9,235 _______________________________________________________________________________ Average common shares and common share equivalents outstanding 8,659 9,187 9,317 9,481 9,272 _______________________________________________________________________________ OTHER DATA: Adjusted EBITDA (3) $12,862 $14,762 $16,557 $17,093 $18,125 Net cash provided by operating activities $11,007 $11,836 $14,584 $12,778 $18,068 Net cash used in investing activities $12,006 $ 5,883 $ 1,557 $ 3,091 $ 4,330 Net cash used in financing activities $ 1,639 $ 3,623 $ 4,106 $ 3,579 $ 4,365 Capital expenditures $ 5,655 $ 6,235 $ 3,393 $ 4,267 $ 4,044 Amortization $ 1,261 $ 1,141 $ 1,728 $ 2,199 $ 2,880 Depreciation $ 4,108 $ 3,740 $ 3,461 $ 4,284 $ 5,349 _______________________________________________________________________________ BALANCE SHEET DATA (at end of period): Working capital $53,635 $49,152 $46,329 $40,336 $31,640 _______________________________________________________________________________ Total assets $82,295 $79,100 $75,267 $70,742 $71,959 _______________________________________________________________________________ Long-term debt, net of current portion $ - $ - $ - $ - $ 271 _______________________________________________________________________________ Stockholders' equity $74,614 $70,871 $67,281 $63,495 $60,216 _______________________________________________________________________________
(1) Includes: in 1999, a pretax loss of $2.1 million from the write- down in connection with the closing of the Owl Club and the costs associated with the termination of the agreement with CRC; in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties. (2) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share", which became effective for periods ending after December 15, 1997. All prior-period earnings per share data presented has been restated to conform to the provisions of such statement. (3) Adjusted EBITDA represents earnings before interest expense, income tax, depreciation, amortization and other non-cash items. Adjusted EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles), as an indicator of the Company's operating performance, as an alternative to cash flows provided by operating activities (as determined in accordance with generally accepted accounting principles), or as a measure of liquidity. Adjusted EBITDA is presented solely as a supplemental disclosure because management believes that it enhances the understanding of the financial performance of a company with substantial amortization and depreciation expense. Jackpot's definition of Adjusted EBITDA may not be the same as that of similarly captioned measures used by other companies. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ___________________________________________________________ Capital Resources and Liquidity _______________________________ Cash Flows: Jackpot's principal sources of cash for the fiscal years ended June 30, 1999, 1998 and 1997 (referred to herein as "1999", "1998" and "1997", respectively), consisted of the cash flows from operating activities and its available cash and cash equivalents. Net cash provided by operating activities in 1999 decreased $.8 million, from $11.8 million in 1998 to $11.0 million in 1999. The decrease of $.8 million was due primarily to a decrease in the gaming machine route operations ("route operations") operating margin of $.4 million, from $16.4 million in 1998 to $16.0 million in 1999. Net cash used in investing activities in 1999 was $12.0 million, and resulted primarily from the purchase of marketable securities of $6.1 million, purchases of property and equipment of $5.6 million, $2.1 million for lease acquisition costs and other intangible and non-current assets, net of proceeds from sales of property and equipment of $1.8 million. Primarily as a result of the purchase of marketable securities, net cash used in investing activities increased $6.1 million, from $5.9 million in 1998 to $12.0 million in 1999. Net cash used in financing activities in 1999 was $1.6 million, and resulted from payments for repurchases of common stock of $1.7 million, net of proceeds received of approximately $.1 million from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of $11.0 million less net cash used in investing and financing activities of $12.0 million and $1.6 million, respectively, cash and cash equivalents decreased $2.6 million in 1999. Such decrease was due principally to the purchase of marketable securities described above. Net cash provided by operating activities in 1998 decreased $2.8 million, from $14.6 million in 1997 to $11.8 million in 1998. The decrease of $2.8 million was due primarily to a decrease in the route operations operating margin of $2.6 million, from $19.0 million in 1997 to $16.4 million in 1998. Net cash used in investing activities in 1998 increased $4.3 million, from $1.6 million in 1997 to $5.9 million in 1998. 1997 includes the receipt of $1.3 million from the sale of Jackpot's interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada. Cash used for purchases of property and equipment increased $2.8 million, from $3.4 million in 1997 to $6.2 million in 1998. Primarily as a result of these transactions, net cash used in investing activities increased $4.3 million. Net cash used in financing activities in 1998 was $3.6 million, and resulted from payments for repurchases of common stock of $4.0 million, net of proceeds received of approximately $.4 million from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of $11.8 million less net cash used in investing and financing activities of $5.9 million and $3.6 million, respectively, cash and cash equivalents in 1998 increased $2.3 million. Net cash provided by operating activities in 1997 increased $1.8 million, from $12.8 million for the fiscal year ended June 30, 1996 to $14.6 million in 1997. The increase of $1.8 million was due primarily to the increase from the change in other current liabilities. Net cash used in investing activities in 1997 was $1.6 million which included cash used of $3.9 million and cash received of $2.3 million. The $3.9 million of cash used included payments of $3.4 million primarily for purchases of property and equipment. The $2.3 million of cash received from investing activities consisted primarily of the proceeds from the sale of Jackpot's interest in the Nugget and aggregate proceeds from sales of other non-current assets. Net cash used in financing activities in 1997 was $4.1 million which resulted from payments for repurchases of common stock and dividends of $2.8 million and $1.5 million, respectively, net of approximately $.2 million of proceeds from the issuance of common stock upon the exercise of stock options. As a result of the combination of net cash provided by operating activities of $14.6 million less net cash used in investing and financing activities of $1.6 million and $4.1 million, respectively, cash and cash equivalents in 1997 increased $8.9 million. Liquidity: On October 29, 1996, Jackpot's Board of Directors authorized management to repurchase up to 500,000 shares of Jackpot's common stock at prevailing market prices. Subsequently, on January 22, 1998, such authorization was increased from 500,000 to 1,000,000 shares. From October 29, 1996 through August 31, 1999, Jackpot has repurchased 785,527 shares at an aggregate cost of approximately $8.5 million. On February 17, 1999, Jackpot signed a definitive agreement to acquire CRC. The agreement was subject to various conditions, including the assignment to Jackpot of the management agreement relating to a casino managed by CRC in Ontario, Canada. Because of CRC's inability to obtain the necessary consent of the Ontario Casino Corporation (the "OCC"), one of the casino's owners, the agreement was terminated by the mutual agreement of Jackpot and CRC on April 15, 1999. The decision by the OCC, which is not the gaming licensing authority in Ontario, was made without any inquiry of Jackpot and prior to the filing of Jackpot's gaming application with the Ontario Gaming Control Commission. As a result of the termination of the agreement, capitalized costs incurred in connection with the proposed acquisition of CRC of $.9 million were expensed in the quarter ended June 30, 1999. On February 8, 1999, Jackpot and Players entered into a definitive Agreement and Plan of Merger (the "Agreement"), which was subject to a number of conditions. On August 16, 1999, Jackpot received a notice from Players terminating the Agreement. Such notice contained the terms of a merger offer for Players from Harrah's Entertainment, Inc. On August 19, 1999, pursuant to the terms of the Agreement, Jackpot received a break-up fee of $13.5 million. As a result of the termination of the Agreement, all capitalized costs incurred in connection with the proposed acquisition of Players will be expensed. Such costs, which are estimated to be $2.5 million, and the break-up fee will be recorded in the quarter ending September 30, 1999. Jackpot's working capital increased $4.4 million in 1999, from $49.2 million at June 30, 1998 to $53.6 million at June 30, 1999. Included in working capital at June 30, 1999 are marketable securities at fair value of $7.3 million. Such securities consist of 1,014,400 shares of Players common stock, which Jackpot purchase at $6.04 per share on March 10, 1999. In 1999, Jackpot purchased $5.6 million of property and equipment, as described above. Approximately $4.7 million of the $5.6 million was associated with equipment purchased for existing and new gaming locations. Management anticipates, based on its review of capital expenditure requirements for existing and projected new locations, that Jackpot will purchase approximately $5.0 million of property and equipment, exclusive of business acquisitions, if any, for the fiscal year ending June 30, 2000 ("2000"). Management believes Jackpot's working capital and cash provided by operations will be sufficient to enable Jackpot to meet its planned capital expenditures and other cash requirements in 2000. Jackpot continues to selectively explore additional gaming acquisition opportunities, and various potential acquisitions, both gaming and nongaming. Management believes working capital and cash provided by operations will be sufficient to enable Jackpot to pursue expansion opportunities; however, Jackpot may seek additional debt or equity financing to facilitate expansion opportunities and potential acquisitions. Recently Issued Accounting Standards: In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities". This standard provides guidance on the financial reporting for start-up costs and organization costs. This standard requires costs of start-up activities and organization costs to be expensed as incurred, and is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. The Company adopted this standard on July 1, 1999. This statement will not have a significant effect on Jackpot's results of operations or its financial position. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes additional accounting and reporting standards for derivative instruments and hedging activities. Presently, Jackpot does not have any derivative instruments, nor does the Company participate in hedging activities. Accordingly, SFAS 133 is not expected to have a significant effect on the results of operations or related disclosures. Results of Operations _____________________ Overview: Route Operations. Jackpot has a significant amount of its route operations at retail stores which are part of a group of affiliated store chains. Route operations revenues at two groups of affiliated store chains (i.e. Albertson's, Inc. and American Stores Company, which was the parent company of American Drug Stores, Inc. and Lucky Stores, Inc. until June 1999) each accounted for more than 10% of Jackpot's total revenues in each of fiscal 1999, 1998 and 1997. The largest four store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation and Lucky Stores, Inc.) accounted for approximately 63% of Jackpot's total revenues in 1999. Agreements with these four customers have expiration dates ranging from 2003 to 2010. Such agreements provide Jackpot the continued right to operate gaming machines at certain existing locations and future locations in Nevada, if any, of such customers. The loss or nonrenewal of any of these agreements could have a material adverse effect on the Company's future results of operations. In August 1998, Albertson's, Inc. and American Stores Company entered into a merger agreement that provided for the acquisition of American Stores by Albertson's. Approximately 57% and 55% of Jackpot's total revenues for 1999 and 1998, respectively, were generated at the locations of those two entities. The merger of Albertson's and American Stores was completed on June 23, 1999. As a condition to obtaining approval of the merger by the Federal Trade Commission and the Attorneys General of California, Nevada and New Mexico, Albertson's agreed to divest certain of its stores, including 19 stores in southern Nevada. These locations have been taken over by Raley's, Inc. Jackpot operates in 15 of the locations. The existing slot route operator for Raley's northern Nevada stores has filed applications with the Nevada Gaming Control Board to operate the gaming machines at the southern Nevada Albertson's stores which are being divested. Of the 19 stores in southern Nevada taken over by Raley's, Jackpot currently maintains 246 gaming machines at the 15 locations which it operates pursuant to a long term agreement with Albertson's. Jackpot believes that there is no proper basis to terminate such agreement and Jackpot's attendant right to occupy the subject premises for purposes of operating gaming machines. These 15 locations generated approximately 16% and 15% of Jackpot's total revenues for 1999 and 1998, respectively, and a significantly greater percentage of Jackpot's total operating income for 1999 and 1998. On August 30, 1999, Jackpot commenced litigation in federal district court for the District of Nevada against Albertson's and Raley's to enforce its rights under its agreement with Albertson's. On September 14, 1999, Jackpot obtained a preliminary injunction to prevent Albertson's and Raley's from interfering with its right to occupy the subject premises and conduct gaming operations. The Court for purposes of its decision ruled that Jackpot's license was coupled to the lease relating to the stores. The injunction permits Jackpot to remain at the stores pending resolution of the dispute. In granting the preliminary injunction, the court required Jackpot to post a $50,000 bond. Albertson's has now made an application to increase the bond to $9 million. In addition, Albertson's and Raley's have made motions for summary judgment. Furthermore, on September 23, 1999, Raley's existing slot route operator commenced an action in Nevada state court against Jackpot, Albertson's, Raley's and the slot route operator at the four other Albertson's southern Nevada locations seeking declaratory and injunctive relief and money damages. The allegations against Jackpot are for alleged fortuitous interference with contract and prospective economic advantage and abuse of process. Jackpot intends to vigorously defend this action. No assurance can be given that such litigation will result in Jackpot retaining the right to operate at the 15 stores or not incurring liability as a defendant in the state action. The loss of the 15 locations could have a material adverse effect on the Company's future results of operations. Jackpot's operations in Albertson's stores in other areas of Nevada, as well as new store openings statewide, are unaffected. The renewal or extension of agreements with major retail chains has generally resulted in increased monthly fees payable by Jackpot. These contracts often require fixed periodic increases in monthly fees during the term of the contract. With respect to the accounting treatment of fixed periodic increases in monthly fees associated with these contracts, the Company is required to average annual lease costs over the term of the contract. As a result of such accounting treatment, annual lease costs generally increase significantly in the first year of an extended contract for the respective locations covered by the contract and, thereafter, remain constant for existing locations during the term of the contract. In September 1998, Jackpot entered into an agreement for a long- term contract extension with one of its largest retail store customers. Pursuant to the terms of the new agreement, which became effective July 1, 1999, rent expense will increase significantly over the previous agreement. Such increase could have a material adverse effect on the Company's results of operations for the year ending June 30, 2000. License, lease and sublease agreements, representing 38 agreements and approximately 1% of 1999 route operations revenues, have terms expiring during 2000. Despite a long-term relationship with Warehouse Markets, Inc., a significant customer, Jackpot was not willing to agree with the terms sought for a contract extension, which management believed were uneconomic. The agreement, which expired on June 30, 1997, involved the operation of approximately 272 gaming machines in 16 locations. In 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. In 1997, Jackpot entered into agreements for long-term contract extensions, which became effective July 1, 1997, with four of its largest retail chain store customers, two of which were not due to expire on June 30, 1997. A very competitive pricing environment caused the Company to offer significant increases in location rent over the existing agreements. While 1998 was adversely affected by the loss of Warehouse Markets, Inc. and by significant increases in location rent, such effect was principally offset by increases in revenues generated at existing and new route operations locations. Casino Operations. On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of the Owl Club and the Pony Express Casino, the two casinos then operated by Jackpot, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. On June 29, 1999, Jackpot closed the Owl Club. Although the Company continues to market these two properties for sale, no assurance can be given that such disposals will occur. Financial Data. _______________ The table below presents the changes in comparative financial data from 1997 to 1999 (dollars in thousands): Years Ended June 30, ______________________________________________________________________ 1999 1998 1997 ___________________________ __________________________ _______________ Percent Percent Percent Percent Percent of Increase of Increase of Amount Revenues (Decrease) Amount Revenues (Decrease) Amount Revenues ______ ________ __________ _______ ________ __________ _______ _______ Revenues: Route oper- ations $93,717 98.0% 3.8% $90,331 97.1% 1.6% $88,895 96.7% Casino oper- ations 1,952 2.0 (27.2) 2,682 2.9 (10.9) 3,009 3.3 _______ _____ _____ _______ _____ _____ _______ _____ Totals 95,669 100.0 2.9 93,013 100.0 1.2 91,904 100.0 _______ _____ _____ _______ _____ _____ _______ _____ Costs and expen- ses: Route oper- ations 77,765 81.3 5.2 73,927 79.5 5.8 69,905 76.0 Casino oper- ations 1,878 2.0 (24.8) 2,499 2.7 (11.9) 2,835 3.1 Amor- tiza- tion 1,261 1.3 10.5 1,141 1.2 (34.0) 1,728 1.9 Depre- ciation 4,108 4.3 9.8 3,740 4.0 8.1 3,461 3.8 General and admin- istra- tive 3,555 3.7 (5.0) 3,743 4.0 (9.9) 4,153 4.5 Write- down of closed casino 1,200 1.3 - Costs of term- inated merger 900 .9 - _______ _____ _____ _______ _____ _____ _______ _____ Totals 90,667 94.8 6.6 85,050 91.4 3.6 82,082 89.3 _______ _____ _____ _______ _____ _____ _______ _____ Oper- ating in- come 5,002 5.2 (37.2) 7,963 8.6 (18.9) 9,822 10.7 Other income 1,391 1.5 (27.5) 1,918 2.0 24.1 1,546 1.6 _______ _____ _____ _______ _____ _____ _______ _____ Income before income tax 6,393 6.7 (35.3) 9,881 10.6 (13.1) 11,368 12.3 Pro- vision for income tax 1,790 1.9 (32.9) 2,668 2.8 (24.3) 3,524 3.8 _______ _____ _____ _______ _____ _____ _______ _____ Net income $ 4,603 4.8% (36.2)% $ 7,213 7.8% (8.0)% $ 7,844 8.5% ======= ===== ===== ======= ===== ===== ======= ====
Route operations revenues attributable to fixed payment leases and revenue sharing contracts for 1999, 1998 and 1997 are summarized below (dollars in thousands): 1999 1998 1997 _____________________ __________________ __________________ Percent Percent Percent of route of route of route operations operations operations Amount revenues Amount revenues Amount revenues _______ ___________ _______ __________ _______ __________ Route operations: Fixed payment leases $69,990 74.7% $67,380 74.6% $60,106 67.6% Revenue sharing contracts 23,727 25.3 22,951 25.4 28,789 32.4 _______ _____ _______ _____ _______ _____ $93,717 100.0% $90,331 100.0% $88,895 100.0% ======= ===== ======= ===== ======= =====
The decrease in route operations revenues attributable to revenue sharing contracts in 1998 of $5.8 million (from $28.8 million in 1997 to $23.0 million in 1998) was due principally to the loss of Warehouse Markets, Inc. on June 30, 1997. 1999 compared to 1998 _____________________ Revenues: Total revenues increased $2.7 million, from $93.0 million in 1998 to $95.7 million in 1999. The increase in total revenues of $2.7 million was the net result of an increase of $3.4 million (from $90.3 million in 1998 to $93.7 million in 1999) in route operations revenues and a decrease of $.7 million (from $2.7 million in 1998 to $2.0 million in 1999) in casino operations revenues. The increase in route operations revenues of $3.4 million resulted from a combination of additional revenues generated from new and existing locations, net of lost revenues from terminated locations. In 1999, new and existing locations generated additional revenues of $5.4 million and $.5 million, respectively, while terminated locations generated revenues of $2.5 million in 1998. Costs and expenses: Route operations costs and expenses increased $3.9 million, from $73.9 million in 1998 to $77.8 million in 1999 and, as a percentage of route operations revenues, increased to 83.0% in 1999 from 81.8% in 1998. The increase in route operations costs and expenses of $3.9 million resulted primarily from a combination of an increase of $3.1 million in location rent, which consisted principally of location rent for new locations of existing chain store customers, an increase in payroll costs of $.3 million and an increase in other route operations expenses of $.5 million. Amortization expense increased $.1 million, from $1.2 million in 1998 to $1.3 million in 1999, while depreciation expense increased $.4 million, from $3.7 million in 1998 to $4.1 million in 1999. The increase in depreciation expense was principally attributable to new gaming machines purchased in 1998. General and administrative expense decreased $.1 million, from $3.7 million in 1998 to $3.6 million in 1999. During the quarter ended June 30, 1999, an agreement which provided for the acquisition of CRC by Jackpot was terminated by the parties. In addition, Jackpot closed the Owl Club. As a result of the termination of the agreement and the closing of the Owl Club, pretax charges aggregating $2.1 million were recorded in the quarter ended June 30, 1999. Of the $2.1 million, approximately $1.1 million of such charges were non-cash. Other income: Other income decreased $.5 million, from $1.9 million in 1998 to $1.4 million in 1999. The decrease was primarily from a reduction in other income earned from non-recurring transactions. Federal income tax: The effective tax rate in 1999 was 28%. Such rate, which approximated the effective tax rate in 1998, was lower than the Federal Statutory rate of 35% primarily because of the tax benefits realized from tax-exempt interest income. General: Principally as a result of the charges associated with the closing of the Owl Club and the termination of the CRC agreement, operating income in 1999 decreased $3.0 million, from $8.0 million in 1998 to $5.0 million in 1999. Excluding these charges, operating income in 1999 was $7.1 million, which represented a decrease of $.9 million from 1998. Such decrease was due primarily to an increase of $.5 million in amortization and depreciation expense, and to a decrease of $.4 million in the route operations margin, from $16.4 million in 1998 to $16.0 million in 1999. Also principally as a result of the Owl Club and CRC charges, net income and diluted earnings per share in 1999 decreased to $4.6 million and $.53 per share, respectively, from $7.2 million and $.79 per share in 1998. 1998 compared to 1997 _____________________ Revenues: Total revenues increased $1.1 million, from $91.9 million in 1997 to $93.0 million in 1998. The increase in total revenues of $1.1 million was the net result of an increase of $1.4 million (from $88.9 million in 1997 to $90.3 million in 1998) in route operations revenues and a decrease of $.3 million (from $3.0 million in 1997 to $2.7 million in 1998) in casino operations revenues. The increase in route operations revenues of $1.4 million resulted from a combination of additional revenues generated from new and existing locations, net of lost revenues from terminated locations. In 1998, new and existing locations generated additional revenues of $5.7 million and $6.0 million, respectively, while terminated locations generated revenues of $10.3 million in 1997. The loss of revenues generated at terminated locations was due primarily to the expiration of Jackpot's right to operate at the locations of Warehouse Markets, Inc., as previously described, on June 30, 1997. In 1997, Jackpot generated approximately 6% of its total revenues and a significant amount of operating income from operations at such customer's locations. Costs and expenses: Route operations expenses increased $4.0 million, from $69.9 million in 1997 to $73.9 million in 1998 and, as a percentage of route operations revenues, increased to 81.8% in 1998 from 78.6% in 1997. Such increases were principally attributable to an increase in location rent. As previously mentioned, Jackpot entered into agreements for long-term extensions with four of its largest retail chain store customers during 1997. A very competitive pricing environment caused Jackpot to offer significant increases in location rent, which is the single largest route operations expense, over the existing agreements. Such extensions became effective July 1, 1997. The increase in route operations expenses of $4.0 million resulted primarily from a combination of an increase of $7.6 million in location rent for locations of existing chain store customers, which was related to the four chain store renewals described above, an increase of $2.4 million in location rent for new locations of existing chain store customers, net of decreases in location rent for lost chain store customers and other route operations expenses of $3.8 million and $2.2 million, respectively. Amortization expense decreased $.6 million, from $1.7 million in 1997 to $1.1 million in 1998. The decrease in amortization expense was primarily attributable to reductions in amortization expense related to lease acquisition costs. Depreciation expense increased $.2 million, from $3.5 million in 1997 to $3.7 million in 1998. The increase in depreciation expense was principally attributable to new gaming machines purchased during 1998. General and administrative expense decreased $.4 million, from $4.1 million in 1997 to $3.7 million in 1998. The decrease in general and administrative expense was due principally to cost reductions in professional services and acquisition related activities. Other income: Other income increased $.4 million, from $1.5 million in 1997 to $1.9 million in 1998. The increase in other income was due primarily to the increase in interest income earned from cash equivalents and to the receipt of approximately $.1 million for liquidated damages from the potential purchaser of Jackpot's remaining two casinos. Jackpot received such amount as a result of the potential purchaser's withdrawal of his gaming application with the Nevada Gaming Authorities. Federal income tax: The effective tax rate in 1998 was 27%, which was lower than the 31% rate in 1997 primarily because of the increase in the tax benefit from tax-exempt interest income. General: Operating income decreased $1.8 million, from $9.8 million in 1997 to $8.0 million in 1998. The decrease in operating income in 1998 resulted primarily from a decrease in the route operations operating margin of $2.6 million and an increase in depreciation expense of $.2 million, offset partially by a decrease in amortization and general and administrative expenses of $1.0 million. The decrease in the route operations operating margin of $2.6 million (from $19.0 million in 1997 to $16.4 million in 1998) was due principally to the increase in location rent expense for existing locations as previously described. Net income decreased $.6 million from a record $7.8 million in 1997 to $7.2 million in 1998, and basic earnings per share in 1998 was $.80, versus basic earnings per share in 1997 of $.85 primarily due to the results of the operations described above. Year 2000 _________ In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This situation is generally referred to as the "Year 2000 Problem". If this situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations. Jackpot has conducted a review of its computer systems and other systems for the purpose of assessing its potential Year 2000 Problem, and is in the process of modifying or replacing those systems which are not Year 2000 compliant. Based upon this review, management believes that the Company's essential systems will be compliant on or about September 30, 1999. However, if modifications are not made or not completed timely, the Year 2000 Problem could have a significant adverse impact on the Company's operations. In addition, Jackpot has communicated with its major vendors and suppliers to determine their state of readiness relative to the Year 2000 Problem and Jackpot's possible exposure to Year 2000 issues of such third parties. However, there can be no guarantee that the systems of other companies, which the Company's systems may rely upon, will be timely converted or representations made to Jackpot by these parties are accurate. As a result, the failure of a major vendor or supplier to adequately address their Year 2000 Problem could have a significant adverse impact on the Company's operations. All costs related to the Year 2000 Problem are expensed as incurred, while the cost of new hardware is capitalized and amortized over its expected useful life. The costs associated with Year 2000 compliance have not been and are not anticipated to be material to the Company's financial position or results of operations. As of June 30, 1999, the Company had incurred costs of approximately $180,000 principally for internal costs and system applications, and anticipates spending an additional $100,000 to become Year 2000 compliant. The estimated completion date and remaining costs are based upon management's best estimates, as well as third party modification plans and other factors. However, there can be no guarantee that such estimates will occur and actual results could differ. Forward-looking statements __________________________ Certain information included in this Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission contains statements that may be considered forward-looking. In addition, from time to time, the Company may release or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, competitive pressures, the loss or nonrenewal of any of Jackpot's significant contracts, the consolidation or disposition of selected locations as a result of the merger of Albertson's, Inc. and American Stores Company (each of which was a significant customer of the Company during the past three fiscal years) conditioning or suspension of any gaming license, unfavorable changes in gaming regulations, adverse results of significant litigation matters, possible future financial difficulties of a significant customer and the continued growth of the gaming industry and population in Nevada. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. The Company assumes no obligation to update or supplement forward-looking statements as a result of new circumstances or subsequent events. Item 7A. Quantitative and Qualitative Disclosure About Market Risk _________________________________________________________ On March 10, 1999, the Company purchased a total of 1,014,400 shares of common stock of Players in an open market transaction. The Company acquired the shares of Players common stock because the purchase price for those shares was significantly below the per share consideration which the Company had agreed to pay for all outstanding shares of Players pursuant to the Agreement and Plan of Merger dated as of February 8, 1999, which provided for the merger of Players into a wholly-owned subsidiary of the Company. For further information concerning the termination of the merger with Players and the purchase of Players common stock by the Company, see Note 11 of Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. The shares of Players which the Company acquired are being held by the Company pending consummation of the merger with Harrah's Entertainment, Inc. and Players. However, unless and until the merger is consummated or the Company sells the Players shares in the open market prior to the consummation of the merger, the Company is exposed to equity price risk on those shares. The Company has not attempted to reduce or eliminate its market exposure on those shares. A 10% adverse change in the price of the Players common stock from the price at June 30, 1999 would result in a decrease of approximately $729,000 in the fair value of Players common stock owned by the Company at June 30, 1999. Except for the purchase described above, Jackpot invests its available cash in marketable municipal bonds and money market funds. No trading portfolios are available for the sale of these investments. Therefore, Item 7A disclosure is not applicable for these investments. Item 8. Financial Statements and Supplementary Data ___________________________________________ The Financial Statements and Supplementary Data required by this Item 8 are set forth as indicated in Item 14(a)(1)(2). Item 9. Changes in and Disagreements with Accountants on Accounting and _______________________________________________________________ Financial Disclosure ____________________ Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant __________________________________________________ Directors of the Registrant ___________________________ At the Special Meeting of Stockholders on September 14, 1999, four directors were elected to serve and hold office (subject to Jackpot's By-Laws) until the next annual meeting of stockholders and until a respective successor is elected and qualified. The directors of Jackpot (none of whom has a family relationship with one another) are as follows: Name Age Position _______________________ ___ __________________________________ Allan R. Tessler 62 Chairman of the Board Don R. Kornstein 47 President, Chief Executive Officer and Director David R. Markin 68 Director Robert L. McDonald, Sr. 79 Director
Allan R. Tessler has served as Chairman of the Board since May 1994 and has been a director of Jackpot since 1980. Mr. Tessler also served as Secretary of Jackpot from 1980 through August 1993. He has been Chairman and Chief Executive Officer of International Financial Group, Inc., an international merchant banking firm, since 1987. He has been Co-Chairman and Co-Chief Executive Officer of Data Broadcasting Corporation, a securities market data supplier, since June 1992. Mr. Tessler has been Chairman of the Board of Enhance Financial Services, Inc., an insurance holding company, since 1986, and was Chairman of the Board of Great Dane Holdings Inc., a diversified holding company, from 1987 through December 1996. He is also a director of The Limited, Inc., Allis-Chalmers Corporation and Marketwatch.com Inc. Don R. Kornstein has served as President, Chief Executive Officer and a director of Jackpot since September 1994. Prior to his appointment with Jackpot, Mr. Kornstein was a Senior Managing Director of Bear, Stearns & Co. Inc., a leading worldwide investment banking firm where he had been employed since 1977. Mr. Kornstein was in such firm's Investment Banking Department and was head of that firm's gaming industry group. Mr. Kornstein is also a director of Riddell Sports Inc., a manufacturer of athletic equipment. David R. Markin has been a director of Jackpot since 1980. Mr. Markin has been Chairman of the Board, Chief Executive Officer and President of Checker Motors Corporation ("Checker"), an automobile parts manufacturer and taxicab fleet operator since 1970. Mr. Markin is also presently President of Checker Holdings Corp. IV, the parent company of Checker. Mr. Markin was President and Chief Executive Officer of Great Dane Holdings Inc. from 1989 through December 1996. Mr. Markin is also a director of Enhance Financial Services, Inc. and Data Broadcasting Corporation. Robert L. McDonald, Sr. has been a director of Jackpot since 1980. Mr. McDonald is a senior partner in the law firm of McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP, counsel to Jackpot. Mr. McDonald is a principal stockholder, executive officer and a director of Little Bonanza, Inc., the corporate operator of the Bonanza Casino located in Reno, Nevada. Executive Officers of the Registrant ____________________________________ The executive officers of Jackpot are appointed by the Board of Directors for an unspecified term and can be terminated at the Board's discretion; however, Mr. Kornstein has an employment agreement with Jackpot which currently expires on September 30, 2002. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than the March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein. The current executive officers of Jackpot (none of whom has a family relationship with one another), their ages and positions are as follows: Year Became An Name Age Position Executive Officer ________________ ___ __________________________ _________________ Don R. Kornstein 47 President, Chief Executive Officer and Director 1994 George Congdon 50 Senior Vice President - Operations 1995 Bob Torkar 48 Senior Vice President - Finance, Treasurer and Chief Accounting Officer 1991
George Congdon was appointed Senior Vice President - Operations of Jackpot on May 11, 1995. From October 1990 to May 1995, Mr. Congdon held various management positions with certain of Jackpot's subsidiaries, including Vice President of Route Operations and Senior Vice President of Operations. Prior to October 1990, Mr. Congdon was employed for over sixteen years in various operating positions by Bally Manufacturing, Inc. and Bally Distributing, Inc., gaming machine manufacturers and distributors. Bob Torkar was appointed Vice President - Finance, Treasurer and Chief Accounting Officer of Jackpot on July 1, 1991 and Senior Vice President on October 15, 1993. From February 1991 to June 1991, Mr. Torkar was a financial consultant to Jackpot. Prior to the consulting assignment with Jackpot, Mr. Torkar was Vice President and Chief Financial Officer with Furnishings 2000, Inc., a publicly traded retail furnishings company in San Diego, California, having spent seven years (1983-1990) with such corporation. Item 11. Executive Compensation ______________________ The following table sets forth certain information concerning compensation for those persons who were (i) the Chief Executive Officer, and (ii) the other most highly paid executive officers whose total annual salary and bonus exceeded $100,000 (collectively, the "Named Executives") for service provided for the fiscal years ended June 30, 1999, 1998 and 1997. SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation _______________________________ _______________________ AWARDS PAYOUTS ___________ _______ Stock Name and Other Option Principal Fiscal Annual Awards Position Year Salary Bonus Compensation (in LTIP All Other (1) shares)Payout Compensation (2) _________ ______ ________ ________ ____________ _______ ______ ____________ Don R. Kornstein 1999 $725,000 $350,000(3) -- 27,500 -- $7,217(6) President 1998 $725,000 $ 97,000(4) $98,603(5) 27,500 -- $9,228(6) and Chief 1997 $715,695 $169,000(4) -- 27,500 -- $7,500(6) Executive Officer George Congdon 1999 $160,000 $ 90,000(7) -- 25,000 -- -- Senior Vice 1998 $145,000 $ 65,000(7) -- 30,000 -- -- President- 1997 $115,000 $ 75,000(7) -- 10,000 -- -- Operations Bob Torkar Senior Vice President- 1999 $150,000 $ 90,000(7) -- 20,000 -- -- Finance, 1998 $145,000 $ 55,000(7) -- 30,000 -- -- Treasurer 1997 $115,000 $ 75,000(7) -- 10,000 -- -- and Chief Accounting Officer _____________________________________
(1) The Named Executives each received certain perquisites, the aggregate value of which did not exceed, except as indicated, as to any Named Executive in any of the last three fiscal years, the lesser of $50,000 or 10% of such Named Executive's annual salary and bonus. (2) Represents the number of shares subject to options granted during such fiscal year. (3) Includes incentive compensation of $60,000 based on a predetermined formula with respect to fiscal 1999 and an additional bonus of $290,000 which, although it was discretionary, was awarded in part because of the Company's receipt of a break-up fee as a result of termination of the merger agreement with Players. (4) Represents incentive compensation based on a predetermined formula. (5) Includes $78,867 for reimbursement by Jackpot to Mr. Kornstein for relocation related costs associated with the sale of Mr. Kornstein's residence. Pursuant to his employment agreement, such reimbursement includes $32,375 for taxes. (6) Represents premiums paid by Jackpot for term life insurance for the benefit of Mr. Kornstein. (7) Represents a discretionary bonus awarded based on performance. Option Grants _____________ The following table summarizes information concerning individual grants of options, including the potential realizable dollar value of grants of options made during the fiscal year ended June 30, 1999, to each Named Executive, assuming that the market value of the underlying security appreciates in value, from the date of grant to the end of the option term, at the assumed rates indicated in the following table. FISCAL 1999 OPTION GRANTS Potential Realizable Value At Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term (1) ______________________________________________________________________________ Number of Securities Percent of Total Underlying Options Granted Exercise Options to Employees in Price Expiration Name Granted (#) Fiscal Year (2) ($/Share) Date 5%($) 10%($) ______________________________________________________________________________ Don R. Kornstein 27,500 (3) 17% $ (3) 6/30/04 $64,625 $142,175 George Congdon 25,000 (4) 15% $12.25 7/20/03 $84,500 $187,000 Bob Torkar 20,000 (4) 12% $12.25 7/20/03 $67,600 $149,600
___________________ (1) The dollar amounts under these columns are the result of calculations at annualized rates of 5% and 10%, respectively, which were established by rules promulgated by the Securities and Exchange Commission and therefore are not intended to forecast possible future appreciation, if any, of Jackpot's Common Stock price. (2) Total options granted include options to purchase an aggregate of 110,000 shares of Common Stock granted to the Board of Directors. (3) As a member of the Board of Directors on June 30, 1999, Mr. Kornstein was automatically granted an option to purchase 27,500 shares of Common Stock on such date. Pursuant to the 1992 Incentive and Non-qualified Stock Option Plan, the exercise price for each June 30 automatic grant will be the fair market value of the Common Stock on the following September 30. For purposes of computing the potential realizable value of stock price appreciation for Mr. Kornstein's 1999 option grant, an exercise price of $9.00 was assumed. Such price was the fair market value of the Common Stock on September 22, 1999. (4) Such option vests as to one-half of the securities underlying the option on July 20, 1999 and 2000, respectively. Option Exercises and Fiscal Year-End Values ___________________________________________ The following table summarizes information with respect to the exercise of options to purchase Common Stock of Jackpot during the last fiscal year by each of the Named Executives and the value of unexercised options held by each of them as of the end of fiscal 1999. None of the Named Executives exercised any options during fiscal 1999. AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES Number of Shares Underlying Value of Unexercised Shares Unexercised Options In-the-Money Options Acquired Value at Fiscal Year-End(#) at Fiscal Year-End($) on Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable (1) __________ ___________ ________ _____________________ _____________________ Don R. Kornstein - - 810,000/27,500 $0/0 George Congdon - - 40,000/35,000 $0/0 Bob Torkar - - 40,000/30,000 $0/0
_____________________________________ (1) Based on the closing price of $8.50 for Jackpot's Common Stock on the New York Stock Exchange on June 30, 1999. Director Compensation _____________________ Directors who are not salaried employees of the Company receive annual fees of $32,000. In addition, a director who serves as a member of the Compensation Committee and/or Audit Committee is entitled to receive $10,800 and $7,200 per year, respectively. For the fiscal year ended June 30, 1999, Messrs. Tessler, Markin and McDonald received aggregate fees of $50,000, $50,000 and $42,800, respectively. Mr. Kornstein did not receive any fees for service on the Board of Directors during fiscal 1999. The 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan") provides that each individual who is a member of the Board of Directors on June 30 of any year, including any future director on any such date, will automatically be granted a nonqualified option to purchase 27,500 shares of Common Stock on each such June 30. The exercise price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year and expire five years from the date of grant. On June 30, 1999 options to purchase an aggregate of 110,000 shares of Common Stock (27,500 each to Messrs. Tessler, Kornstein, Markin and McDonald) were automatically granted pursuant to the terms of the 1992 Plan. Employment Agreements _____________________ Jackpot has an employment agreement (the "Agreement") with Mr. Kornstein, which became effective on September 8, 1994, and currently expires on September 30, 2002. The Agreement is automatically extended for additional one year periods on each October 1 unless, not later than March 31, immediately preceding each October 1, notice is given by either the Company or Mr. Kornstein. From September 19, 1994 through September 7, 1996, Mr. Kornstein's annual base salary was $675,000. Presently, Mr. Kornstein's annual base salary, which became effective September 8, 1996, is $725,000. The Agreement provides for an annual bonus for each fiscal year equal to (i) 2% of the amount up to the first $5 million by which the Company's earnings before interest, taxes, depreciation, amortization and certain other items, as defined in the Agreement ("EBITDA") for such fiscal year exceeds $10 million, (ii) 4% of the amount up to the first $5 million by which EBITDA for such fiscal year exceeds $15 million, (iii) 5% of the amount up to the first $5 million by which EBITDA for such fiscal year exceeds $20 million, (iv) 6% of the amount up to the first $5 million by which EBITDA for such fiscal year exceeds $25 million, plus, and (v) 7% of the amount by which EBITDA for such fiscal year exceeds $30 million. The Board of Directors may, in its discretion, grant Mr. Kornstein additional bonuses. From the inception of the Agreement through fiscal 1998, no such additional bonuses were granted to Mr. Kornstein. For the fiscal year ended June 30, 1999, the Board granted an additional bonus of $290,000 to Mr. Kornstein, which, although it was discretionary, was awarded in part because of the Company's receipt of a break-up fee as a result of termination of the merger agreement with Players. In addition, the Company, at its cost, provides term life and disability insurance to Mr. Kornstein in the amount of $5 million and $25,000 per month, respectively. As part of the Agreement, Mr. Kornstein was granted an option under the 1992 Plan to acquire 700,000 shares of Common Stock at $9.25 per share (the closing price on the effective date of the Agreement). The option, which expires on September 8, 2004, vested as to one-third of the shares on September 8, 1995, 1996 and 1997, respectively. Under certain circumstances, such option is exercisable for a period of 18 months following the termination of the Agreement, but in no event beyond the expiration of the term of such option. In the event Mr. Kornstein is disabled during the term of the Agreement, he will receive his full base salary for the first six months of such disability. At the end of such six month period or upon his death, Mr. Kornstein, or his beneficiary, will receive a payment for accrued salary, if any, and a pro rata bonus, as defined in the Agreement, through such date. In addition, Mr. Kornstein or his beneficiary will receive a lump sum payment equal to the sum of (i) Mr. Kornstein's base salary, which would have been in effect for the twelve months following the date of disability or death, and (ii) the average bonus, as defined in the Agreement, for the prior three fiscal years. In the event of a termination of the Agreement by the Company without cause (as defined in the Agreement), for "Good Reason", or a "Change in Control" (as described below), Mr. Kornstein would receive a lump sum amount equal to his base salary, which would have been in effect for the three year period commencing on the date of termination, plus his bonus for a three year period, pursuant to a formula, as well certain pension and welfare benefit coverage to the extent not provided to Mr. Kornstein by a subsequent employer. Assuming such termination occurred on or about September 28, 1999 such lump sum payment would be approximately $2.8 million. In addition, Mr. Kornstein would receive any amount necessary to reimburse him for any excise tax imposed under the Internal Revenue Code, including any tax payable by reason of such reimbursement. Mr. Kornstein agreed that for a period of three years following the termination of his employment, for any reason, he will not compete with Jackpot or its subsidiaries. For purposes of the Agreement, Mr. Kornstein shall have "Good Reason" to terminate his employment (i) upon a failure by the Company to comply with a material provision of the Agreement, (ii) upon a diminution of Mr. Kornstein's title or authority, or (iii) upon receipt by Mr. Kornstein of a notice from the Company indicating that the contract term is not being automatically extended. For a period of time of up to one year after a Change in Control of Jackpot, Mr. Kornstein has the option of terminating the Agreement. As defined in the Agreement, Change in Control occurs when (i) any person or group of persons become the beneficial owner of 20% or more of the outstanding voting securities of Jackpot, (ii) during any two consecutive years, the individuals who constituted the Board of Directors of Jackpot at the beginning of such period cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of the period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, (iii) certain mergers or consolidations, and (iv) a liquidation of the Company or a sale of all or substantially all of the Company's assets. Compensation Committee Interlocks and Insider Participation ___________________________________________________________ The Compensation Committee consists of three non-employee directors. Currently the members of the Compensation Committee are Messrs. Tessler, Markin and McDonald. See "Item 13. Certain Relationships and Related Transactions", for a description of transactions and agreements in which members of the Compensation Committee and their associates were involved. None of the executive officers of Jackpot serves as a director of another corporation in a case where an executive officer of such other corporation serves as a director of Jackpot. Item 12. Security Ownership of Certain Beneficial Owners and Management ______________________________________________________________ The following table sets forth as of September 1, 1999, certain information regarding the shares of Common Stock beneficially owned by (i) each beneficial holder of more than five percent of the outstanding shares of Common Stock ("Beneficial Holder"), (ii) each director, (iii) each Named Executive, and (iv) all directors and executive officers of Jackpot as a group. OWNERSHIP OF JACKPOT COMMON STOCK ________________________________________________________________________ Amount and Nature Name of Beneficial Holder, of Beneficial Director, Named Executive Ownership of Percent of or Identity of Group Common Stock (6) of Class (6) ________________________________________________________________________ Beneficial Holders: ___________________ Don R. Kornstein (1) 837,500 8.86% Gabelli Funds, Inc. 516,000 (2) 5.99% Dimensional Fund Advisors Inc. 492,878 (3) 5.72% Private Capital Management, Inc. 473,600 (4) 5.50% The Pavia and Powers Group 465,700 (5) 5.40% Directors other than Mr. Kornstein: ___________________________________ David R. Markin 438,553 4.98% Allan R. Tessler 388,031 4.40% Robert L. McDonald, Sr. 301,652 3.42% Named Executives other than Mr. Kornstein: __________________________________________ George Congdon 52,500 * Bob Torkar 50,000 * All directors and executive officers as a group (6 persons) 2,068,236 20.38% ________________________________________________________________________ *less than one percent
(1) Mr. Kornstein has an address in care of the Company at 1110 Palms Airport Drive, Las Vegas, Nevada 89119. (2) Based solely upon a Schedule 13D dated January 22, 1998, which was filed by Mario J. Gabelli and various entities which Mr. Gabelli directly or indirectly controls or for which he acts as chief investment officer, and a Schedule 13F for the period ended June 30, 1998. The address of Gabelli Funds, Inc. is One Corporate Center, Rye, NY 10580. (3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, is deemed to have beneficial ownership of 492,878 shares of Jackpot's Common Stock, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. All of the above information has been provided by Dimensional and is based solely upon a Schedule 13G, dated February 9, 1998 and an amendment thereto filed on February 11, 1999. The address of Dimensional's principal business office is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. (4) Based solely upon a Schedule 13G, dated February 16, 1999, Private Capital Management, Inc., a registered investment advisor, and Bruce S. Sherman are deemed to have beneficial ownership of an aggregate of 473,600 shares of Jackpot's common stock. Bruce S. Sherman is President of Private Capital Management, Inc. and exercises shared dispositive power with respect to the shares held by it on behalf of its clients. Mr. Sherman disclaims the existence of a group. The address of Private Capital Management, Inc.'s principal business office is 3003 Tamiami Trial North, Naples, Florida 34109. (5) Based solely upon Schedule 13D (Amendment No. 2), dated May 21, 1998, which states Bolero Investment Group, L.P. ("Bolero"), Kenneth W. Pavia, Sr. ("Mr. Pavia"), FHI, Inc. ("FHI"), Florence Partners, Inc. ("Florence Partners") and Charles Powers ("Mr. Powers") (the "Reporting Persons", and collectively the "Pavia and Powers Group") may be deemed a group pursuant to the provisions of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"). By reason of the provisions of Rule 13d-5 under the Act, any member of the Pavia and Powers Group may be deemed to own all shares beneficially owned by such group. Florence Partners and Mr. Powers do not affirm the existence of such a group and disclaim beneficial ownership of shares beneficially owned by Bolero, FHI and Mr. Pavia. Bolero, FHI and Mr. Pavia also do not affirm the existence of such a group and disclaim beneficial ownership of shares beneficially owned by Florence Partners and Mr. Powers. The address of the Pavia and Powers Group is Ingraham Building, 25 S.E. 2nd Avenue, Suite 720, Miami, FL 33131. (6) Includes shares of Common Stock which may be acquired upon the exercise of vested options held by the following: Mr. Tessler (197,668), Mr. Kornstein (837,500), Mr. Markin (197,668), Mr. McDonald (197,668), Mr. Congdon (52,500), Mr. Torkar (50,000) and all directors and executive officers as a group (1,533,004). Excludes shares of Common Stock which may be acquired upon the exercise of unvested options held by the following: Mr. Congdon (42,500), Mr. Torkar (40,000) and all directors and executive officers as a group (82,500). The nature of the beneficial ownership for all the shares is sole voting and investment power. Item 13. Certain Relationships and Related Transactions ______________________________________________ Robert L. McDonald, Sr., a director of Jackpot, is a senior partner in the law firm of McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP ("McDonald Carano"), counsel to Jackpot. In addition, A. J. Hicks, a partner in McDonald Carano, is the Secretary of Jackpot. For the fiscal year ended June 30, 1999, the amount of fees paid by the Company to McDonald Carano, based on representations provided by McDonald Carano to the Company, did not exceed 5% of the gross revenues of such firm for its last full fiscal year. The Company believes that the amount and terms of payment for the services provided by McDonald Carano were at least as favorable to the Company as the amount and terms of payment for such services that could have been obtained from unaffiliated third parties. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on _______________________________________________________ Form 8-K ________ (a) (1) and (2) Consolidated Financial Statements and Schedules For a list of the consolidated financial statements and consolidated financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. (a) (3) The exhibits filed and incorporated by reference are listed in the index of Exhibits required by Item 601 of Regulation S-K at Item (c) below. (b) Reports on Form 8-K During the last quarter of the fiscal year ended June 30, 1999, Jackpot filed no reports on Form 8-K. (c) Exhibits 3.1 Articles of Incorporation of the Registrant, as amended (A) 3.2 By-laws of the Registrant, as amended (A) 3.3 Form of Amendment to Articles of Incorporation of Registrant (E) 4.1 Stockholder Rights Agreement dated as of July 11, 1994 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (F) 10.1 1990 Incentive and Nonqualified Stock Option Plan (B)(L) 10.2 Indemnification Agreement (Sample) (C) 10.3 1992 Incentive and Non-qualified Stock Option Plan (D)(L) 10.4 Employment Agreement with Don R. Kornstein (G)(L) 10.5 License agreement with American Drug Stores, Inc. (H) 10.6 License agreement with American Drug Stores, Inc. (H) 10.7 License agreement with Lucky Stores, Inc. (H) 10.8 License agreement with Kmart Corporation (I) 10.9 License agreement with Albertson's, Inc. (I) 10.10 License agreement with Rite Aid Corporation (J) 10.11 License agreement with Rite Aid Corporation (J) 21.1 List of Registrant's subsidiaries (K) 23.1 Consent of Deloitte & Touche LLP (K) 27.1 Financial Data Schedule (EDGAR version only) (A) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1989. (B) Incorporated by reference to Registrant's Registration Statement on Form S-3 dated December 12, 1990 (Registration No. 33-38210). (C) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1991. (D) Incorporated by reference to Registrant's 1992 Proxy Statement. (E) Incorporated by reference to Registrant's 1993 Proxy Statement. (F) Incorporated by reference to Registrant's Form 8-A dated July 12, 1994. (G) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 1994. (H) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1997. (I) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1998. (J) Incorporated by reference to Registrant's Form 10-Q for the quarter ended March 31, 1999. (K) Included herein. (L) Management contract or compensatory plan or arrangement which is separately identified in accordance with Item 14(a)(3) of Form 10-K. (d) Schedules For a list of the financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 28, 1999 JACKPOT ENTERPRISES, INC. (Registrant) By: /s/ Don R. Kornstein _____________________________ Don R. Kornstein President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date _________ _____ ____ /s/ Don R. Kornstein President, Chief ___________________________ Executive Officer Don R. Kornstein and Director (Principal Executive Officer) September 28, 1999 /s/ Bob Torkar Senior Vice President- ___________________________ Finance, Treasurer and Bob Torkar Chief Accounting Officer (Principal Financial and Accounting Officer) September 28, 1999 /s/ Allan R. Tessler Chairman of the Board September 28, 1999 ___________________________ Allan R. Tessler /s/ David R. Markin Director September 28, 1999 ___________________________ David R. Markin /s/ Robert L. McDonald, Sr. Director September 28, 1999 ___________________________ Robert L. McDonald, Sr.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULES [ITEMS 8 AND 14(a)] (1) FINANCIAL STATEMENTS: Independent Auditors' Report Consolidated Balance Sheets June 30, 1999 and 1998 Consolidated Statements of Income Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows Years Ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (2) SUPPLEMENTARY DATA: Quarterly Financial Information Years Ended June 30, 1999 and 1998 (3) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements or notes thereto. INDEPENDENT AUDITORS' REPORT Jackpot Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Jackpot Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Las Vegas, Nevada September 24, 1999 JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1999 AND 1998 (Dollars in thousands) ASSETS 1999 1998 ______ ________ ________ Current assets: Cash and cash equivalents $ 47,637 $ 50,275 Short-term investments, at fair value 7,292 - Prepaid expenses 1,515 1,594 Other current assets 1,985 2,225 ________ ________ Total current assets 58,429 54,094 ________ ________ Property and equipment, at cost: Land and buildings 435 1,535 Gaming equipment 29,418 28,988 Other equipment 4,546 4,758 Leasehold improvements 368 354 ________ ________ 34,767 35,635 Less accumulated depreciation (21,010) (19,850) ________ ________ 13,757 15,785 Lease acquisition costs and other intangible assets, net of accumulated amortization of $3,404 and $4,607 3,119 2,231 Goodwill, net of accumulated amortization of $2,879 and $2,713 3,743 3,908 Lease and other security deposits 1,242 3,082 Other non-current assets 2,005 - ________ ________ Total assets $ 82,295 $ 79,100 ======== ========
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1999 AND 1998 (Dollars in thousands, except share data) (Concluded) LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ____________________________________ ________ ________ Current liabilities: Accounts payable $ 1,794 $ 1,434 Other current liabilities 3,000 3,508 ________ ________ Total current liabilities 4,794 4,942 Deferred rent 2,554 2,377 Deferred income tax 333 849 Other liabilities - 61 ________ ________ Total liabilities 7,681 8,229 ________ ________ Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock - authorized 1,000,000 shares of $1 par value; none issued Common stock - authorized 30,000,000 shares of $.01 par value; 9,860,252 and 9,854,327 shares issued 99 99 Additional paid-in capital 66,465 66,376 Retained earnings 21,069 16,466 Less 1,243,714 and 1,080,372 shares of common stock in treasury, at cost (13,776) (12,070) Unrealized gain on available-for-sale securities, net of tax 757 - ________ ________ Total stockholders' equity 74,614 70,871 ________ ________ Total liabilities and stockholders' equity $ 82,295 $ 79,100 ======== ========
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Dollars in thousands, except per share data) 1999 1998 1997 _______ _______ _______ Revenues: Route operations $93,717 $90,331 $88,895 Casino operations 1,952 2,682 3,009 _______ _______ _______ Totals 95,669 93,013 91,904 _______ _______ _______ Costs and expenses: Route operations 77,765 73,927 69,905 Casino operations 1,878 2,499 2,835 Amortization 1,261 1,141 1,728 Depreciation 4,108 3,740 3,461 General and administrative 3,555 3,743 4,153 Write-down of closed casino 1,200 - - Costs of terminated merger 900 - - _______ _______ _______ Totals 90,667 85,050 82,082 _______ _______ _______ Operating income 5,002 7,963 9,822 _______ _______ _______ Other income: Interest and other income 1,391 1,918 1,546 _______ _______ _______ Totals 1,391 1,918 1,546 _______ _______ _______ Income before income tax 6,393 9,881 11,368 _______ _______ _______ Provision for Federal income tax: Current 2,306 2,452 3,086 Deferred (516) 216 438 _______ _______ _______ Totals 1,790 2,668 3,524 _______ _______ _______ Net income $ 4,603 $ 7,213 $ 7,844 ======= ======= ======= Basic earnings per share $ .53 $ .80 $ .85 ======= ======= ======= Dilutive earnings per share $ .53 $ .79 $ .84 ======= ======= ======= See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Dollars and shares in thousands, except per share data) Accumu- lated Treasury Other Common Stock Additional Stock Compre- _____________ Paid-In Retained _______________ hensive Shares Amount Capital Earnings Shares Amount Income Totals ______ ______ _________ ____________ ______ ________ ________ _______ [S] [C] [C] [C] [C] [C] [C] [C] [C] Balance July 1, 1996 9,631 $96 $64,129 $ 2,905 (294) $ (3,635) $63,495 Compre- hensive income: Net income 7,844 7,844 Other compre- hensive income - - Compre- hensive _______ income 7,844 Tax ben- efit from stock options 48 48 Cash divi- dends ($.16 per share) (1,496) (1,496) Issuance and receipt of shares on exercise of stock options 193 2 1,856 (164) (1,665) 193 Re- purchases of common stock (284) (2,803) (2,803) _____ ___ _______ _______ ______ ________ ____ _______ Balance June 30, 1997 9,824 98 66,033 9,253 (742) (8,103) 67,281 Compre- hensive income: Net income 7,213 7,213 Other compre hensive income - - _______ Compre- hensive income 7,213 Issuance of shares on exercise of stock options 30 1 343 344 Re- purchases of common stock (338) (3,967) (3,967) _____ ___ _______ _______ ______ ________ ____ ______ Balance June 30, 1998 9,854 99 66,376 16,466 (1,080) (12,070) 70,871 Compre- hensive income: Net income 4,603 4,603 Other compre- hensive income: Unrealized gain on available- for-sale securi- ties, net of tax of $408 $757 757 _______ Compre- hensive income 5,360 Tax benefit from stock options 22 22 Issuance of shares on exercise of stock options 6 67 67 Re- purchases of common stock (164) (1,706) (1,706) _____ ___ _______ _______ ______ ________ ____ ______ Balance June 30, 1999 9,860 $99 $66,465 $21,069 (1,244) $(13,776) $757 $74,614 ===== === ======= ======= ====== ======== ==== ======= See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Dollars in thousands) 1999 1998 1997 ________ ________ ________ Operating activities: Net income $ 4,603 $ 7,213 $ 7,844 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,369 4,881 5,189 Deferred Federal income tax (516) 216 438 Write-down of closed casino 1,200 - - Increase (decrease) from changes in: Prepaid expenses and other current assets 261 (373) 174 Other non-current assets 1,244 52 (51) Accounts payable and other current liabilities (1,270) (621) 1,585 Deferred rent and other liabilities 116 468 (595) ________ ________ ________ Net cash provided by operating activities 11,007 11,836 14,584 ________ ________ ________ Investing activities: Purchase of marketable securities (6,127) - - Proceeds from sales of equipment and other non-current assets 1,757 403 1,625 Purchases of property and equipment (5,655) (6,235) (3,393) Increase in lease acquisition costs and other intangible and non-current assets (2,061) (211) (524) Lease and other security deposits - - 477 Other, net 80 160 258 ________ ________ ________ Net cash used in investing activities (12,006) (5,883) (1,557) ________ ________ ________ Financing activities: Proceeds from issuance of common stock 67 344 193 Repurchases of common stock (1,706) (3,967) (2,803) Dividends paid (1,496) ________ ________ ________ Net cash used in financing activities (1,639) (3,623) (4,106) ________ ________ ________ Net increase (decrease) in cash and cash equivalents (2,638) 2,330 8,921 Cash and cash equivalents at beginning of year 50,275 47,945 39,024 ________ ________ ________ Cash and cash equivalents at end of year $ 47,637 $ 50,275 $ 47,945 ======== ======== ======== Supplemental disclosures of cash flow data: Cash paid during the year for: Federal income tax $ 2,400 $ 2,750 $ 1,840 Non-cash investing and financing activities: Common stock surrendered on exercise of stock options $ - $ - $ 1,665 Tax benefit from exercise of stock options $ 22 $ - $ 48
See Notes to Consolidated Financial Statements. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business: Business: Jackpot Enterprises, Inc., which was organized in 1980, conducts business in the gaming industry and generates revenues from gaming machine route operations and casino operations (see Note 3). Gaming machine route operations ("route operations") involve the installation, operation and service of gaming machines owned by Jackpot that are located in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada. Principles of consolidation: The accompanying consolidated financial statements include the accounts of Jackpot Enterprises, Inc. and its controlled subsidiaries ("Jackpot" or the "Company"). All material intercompany accounts and transactions are eliminated. Unless the context indicates otherwise, references to "1999", "1998" and "1997" are for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are liquid investments comprised primarily of marketable municipal bonds and money market accounts with maturities of three months or less when acquired and are considered cash equivalents for purposes of the consolidated statements of cash flows. Cash equivalents are stated at cost which approximates fair value due to their short maturity. Cash and cash equivalents include cash equivalents of $35,489,000 and $38,728,000 at June 30, 1999 and 1998. Investments: Jackpot accounts for investments in debt and equity securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities, and requires such securities be classified as either held to maturity, trading, or available-for-sale. Management determines the appropriate classification of its investments in securities at the time of purchase and reevaluates such classification at each balance sheet date. SFAS 115 requires that available-for-sale securities be carried at fair value with unrealized gains, net of tax, reported as a separate component of stockholders' equity. Unrealized gains and losses for available-for-sale securities are excluded from earnings. There were no realized gains or losses from sales of investment securities in 1999, 1998 and 1997. Revenue recognition: In accordance with industry practice, Jackpot recognizes as gaming revenues the net wins from gaming activities, which is the difference between gaming wins and losses. Route operations revenues include the net wins generated under revenue sharing agreements. Revenues from casino operations are gaming wins less losses. Complimentary food and beverage furnished gratuitously by casino operations to customers is not material. Location rent expense: Fixed rental payments (including scheduled increases) are recorded on a straight-line basis over the agreement term including any optional extension periods which are expected to be exercised. Contingent payments are expensed in the period incurred. Renewal agreements are considered new agreements and accounted for as described above over the new agreement term. Revenue sharing payments to route locations are recorded as location rent expense. Depreciation of property and equipment: Depreciation is provided using the straight-line method for property and equipment, including property held for rental. Estimated useful lives, limited as to leasehold improvements by the term of the lease, range as follows: Buildings 30 to 40 years Gaming equipment 4 to 7 years Other equipment 3 to 7 years Leasehold improvements 1 to 12 years Lease acquisition costs and other intangible assets: Significant incremental costs associated with the acquisition of location leases are capitalized. Incremental costs capitalized and amounts allocated to lease acquisition costs are amortized on a straight- line basis over the term of the related leases, including expected renewals, which range from 1 to 12 years. Lease acquisition costs and other intangible assets include lease acquisition costs, net of accumulated amortization, of $3,119,000 and $1,907,000 as of June 30, 1999 and 1998. Goodwill: Goodwill represents the excess of the costs of acquired businesses over the fair value of their net assets when acquired and is amortized on a straight-line basis over a period of 40 years. Recently issued accounting standards: In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes additional standards for segment reporting in the financial statements. Jackpot adopted this statement on July 1, 1998. SFAS 131 had no impact on the Company's disclosures. In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities". This standard provides guidance on the financial reporting for start-up costs and organization costs. This standard requires costs of start-up activities and organization costs to be expensed as incurred, and is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. The Company adopted this standard on July 1, 1999. This statement will not have a significant effect on Jackpot's results of operations or its financial position. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes additional accounting and reporting standards for derivative instruments and hedging activities. Presently, Jackpot does not have any derivative instruments, nor does the Company participate in hedging activities. Accordingly, SFAS 133 is not expected to have a significant effect on the results of operations or related disclosures. Note 2 - Comprehensive income: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. Jackpot adopted this statement on July 1, 1999. Note 3 - Casino operations: On August 13, 1996, Jackpot's Board of Directors (the "Board") approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. On June 29, 1999, Jackpot closed the Owl Club. As a result of Jackpot's decision to close the Owl Club, a charge of $1,200,000 was recorded in the quarter ended June 30, 1999. Such charge consisted primarily of the write-down to fair value of certain long-lived assets. Excluding such write-down, the results of operations of the Owl Club and the Pony Express Casino were not material in 1999, 1998 and 1997. As of June 30, 1999, the carrying value of assets to be disposed of associated with the Owl Club and the Pony Express Casino was not material. Note 4 - Other current liabilities: Other current liabilities consist of the following (dollars in thousands): June 30, ________________ 1999 1998 ______ ______ Accrued employee benefits $1,287 $1,714 Accrued professional fees 386 334 Accrued progressive jackpots 121 464 Other 1,206 996 ______ ______ Totals $3,000 $3,508 ====== ======
Note 5 - Earnings per share: Basic earnings per share for 1999, 1998 and 1997 is computed by dividing net income by the weighted average number of common shares outstanding for the respective period. Diluted earnings per share for 1999, 1998 and 1997 is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding for the respective period. Options and warrants to purchase common stock, whose exercise price was greater than the average market price for the respective period, have been excluded from the computation of diluted earnings per share. Such antidilutive options and warrants outstanding for 1999, 1998 and 1997 were 806,000, 159,000 and 743,000, respectively. The following is the amount of income and number of shares used in the basic and diluted earnings per share computations (dollars and shares in thousands, except per share data): 1999 1998 1997 ______ ______ ______ Basic earnings per share: Earnings: Income available to common stockholders $4,603 $7,213 $7,844 ====== ====== ====== Shares: Weighted average number of common shares outstanding 8,641 8,991 9,237 ====== ====== ====== Basic earnings per share $ .53 $ .80 $ .85 ====== ====== ====== Diluted earnings per share: Earnings: Income available to common stockholders $4,603 $7,213 $7,844 Effect of dilutive securities - - - ______ ______ ______ Income, as adjusted $4,603 $7,213 $7,844 ====== ====== ====== Shares: Weighted average number of common shares outstanding 8,641 8,991 9,237 Common shares issuable upon assumed exercise of dilutive stock options 965 1,726 1,316 Less common shares assumed to be repurchased by application of the treasury stock method to the proceeds using the average market price for the period (947) (1,530) (1,236) ______ ______ ______ Weighted average number of common shares and common share equivalents outstanding 8,659 9,187 9,317 ====== ====== ====== Diluted earnings per share $ .53 $ .79 $ .84 ====== ====== ======
Note 6 - Stockholders' equity: Authorized common stock: On September 14, 1999, Jackpot's stockholders approved an increase in the number of authorized shares of common stock from 30,000,000 to 60,000,000. Rights plan: In June 1994, the Board approved a Stockholder Rights Plan. On July 11, 1994, Jackpot declared a dividend distribution of one Preferred Stock purchase right (the "Rights") payable on each outstanding share of common stock, as of July 15, 1994. The Rights become exercisable only in the event, with certain exceptions, an acquiring party accumulates 15% or more of Jackpot's voting stock, or if a party announces an offer to acquire 30% or more of Jackpot's voting stock. Each Right will entitle the holder to purchase one-hundredth of a share of a Series A Junior Preferred Stock at a price of $30. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either Jackpot's Preferred Stock or shares in an "acquiring entity" at half of market value. The Rights, which expire on July 15, 2004, may be redeemed by Jackpot at $.01 per Right prior to the close of business on the tenth day after a public announcement that beneficial ownership of 15% or more of Jackpot's shares of voting stock has been accumulated by a single acquiror or a group (with certain exceptions), under circumstances set forth in the Rights Agreement. As of June 30, 1999 and 1998, 150,000 shares of unissued Series A Junior Preferred Stock were authorized and reserved for issuance upon exercise of the Rights. The issuance of the Rights had no effect on dilutive earnings per share in 1999, 1998 and 1997. Stock option plans: On December 7, 1990, Jackpot's stockholders approved the 1990 Incentive and Nonqualified Stock Option Plan (the "1990 Plan"). Under the 1990 Plan, the Board may grant "incentive" or "nonqualified" stock options up to 929,846 shares of Jackpot's common stock (the "Common Stock"). On January 12, 1993, Jackpot's stockholders approved the 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan"). On August 17, 1994, the Board adopted certain amendments (the "Amendments") to the 1992 Plan which were approved by Jackpot's stockholders on January 10, 1995. The Amendments increased the number of shares of Common Stock authorized for issuance pursuant to the 1992 Plan from 1,045,000 to 2,545,000. The 1992 Plan provides that each individual who is a member of the Board on June 30 of any year, including any future director on any such date, will automatically be granted nonqualified stock options to purchase 27,500 shares of Common Stock on each such June 30. The option price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year, and expire five years from the date of grant. Under the 1992 Plan, options granted to Jackpot's directors to purchase an aggregate of 550,000 shares of Common Stock were outstanding, of which 440,000 were exercisable at June 30, 1999. The 1990 Plan and 1992 Plan terminate on the earlier of (i) the date all shares subject to the 1990 Plan and the 1992 Plan have been issued upon the exercise of options granted under such plans, or (ii) June 26, 2000 and September 30, 2002, respectively, or on such earlier date as the Board may determine. Any option outstanding at the respective termination date remains outstanding until it has either expired or has been exercised. Changes in options outstanding under the stock option plans are summarized below (shares in thousands): Number of Shares _________________________ Per Share Incentive Nonqualified Exercise Price _________ ____________ ________________ Outstanding at July 1, 1996 9 1,661 $ 6.10 to $20.88 Granted 20 $11.00 Exercised (3) (190) $ 8.50 to $10.75 Canceled (6) (21) $ 6.10 to $11.63 Automatic grant to directors 110 $11.50 ___ _____ Outstanding at June 30, 1997 0 1,580 $ 8.50 to $20.88 Granted 60 $11.00 Exercised (30) $ 8.50 to $11.63 Canceled (234) $ 8.50 to $15.88 Automatic grant to directors 110 $ 9.94 ___ _____ Outstanding at June 30, 1998 0 1,486 $ 8.50 to $20.88 Granted 55 $12.25 Exercised (6) $ 8.50 to $11.63 Canceled (223) $ 8.50 to $20.88 Automatic grant to directors 110 (A) ___ _____ Outstanding at June 30, 1999 0 1,422 $ 8.50 to $12.25 === ===== (1,289 shares exercisable)
(A) To be determined on September 30, 1999. Other nonqualified stock options: The Board has granted other nonqualified stock options to directors, certain officers, other employees and advisors at exercise prices equal to or greater than the fair market value of the underlying shares at the date of grant. Generally, options become exercisable immediately and expire no later than five years from the date of grant. Changes in other nonqualified stock options are summarized below (shares in thousands): Number Per Share of Shares Exercise Price _________ ________________ Outstanding at July 1, 1996 429 $ 9.19 to $15.00 Canceled (50) $15.00 ___ Outstanding at June 30, 1997 379 $ 9.19 to $10.75 Canceled (27) $ 6.10 to $10.75 ___ Outstanding at June 30, 1998 352 $ 9.19 to $10.63 Canceled (131) $10.63 ___ Outstanding and exercisable at June 30, 1999 221 $ 9.19 ===
Accounting for stock-based compensation: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Although SFAS 123 encourages an entity to measure compensation by applying the fair value method of accounting for employee stock-based compensation arrangements, it permits an entity to continue to account for employee stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion 25 ("APB 25"). Jackpot elected and continues to account for stock-based compensation in accordance with APB 25. Under APB 25, generally only stock options that have intrinsic value at the date of grant are considered compensatory. Intrinsic value represents the excess, if any, of the market price of the stock at the grant date over the exercise price of the option. Under SFAS 123, all stock option grants are considered compensatory. Compensation cost is measured at the date of grant based on the estimated fair value of the options determined using an option pricing model. The model takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the stock, expected dividends on the stock and the risk-free interest rate over the expected life of the option. The following table discloses pro forma amounts for net income and basic and dilutive earnings per share for 1999, 1998 and 1997 assuming compensation cost for employee stock options had been determined using the fair value-based method prescribed by SFAS 123. The table also discloses the weighted average assumptions used in estimating the fair value of each option grant on the date of grant using the Black-Scholes option pricing model, and the estimated weighted average fair value of the options granted. The model assumes no expected future dividend payments on Jackpot's Common Stock for the options granted in 1999, 1998 and 1997 (dollars in thousands, except per share data): 1999 1998 1997 ______ ______ ______ Net income: As reported $4,603 $7,213 $7,844 Pro forma $4,167 $6,837 $7,571 Basic earnings per share: As reported $ .53 $ .80 $ .85 Pro forma $ .48 $ .76 $ .82 Diluted earnings per share: As reported $ .53 $ .79 $ .84 Pro forma $ .48 $ .74 $ .81 Weighted average assumptions: Expected stock price volatility 30.0% 30.0% 35.0% Risk-free interest rate 5.6% 5.8% 6.1% Expected option lives (in years) 3.0 2.5 2.5 Estimated fair value of options granted $ 3.02 $ 2.99 $ 3.18
Because the accounting method prescribed by SFAS 123 is not applicable to options granted prior to July 1, 1995, the compensation cost reflected in the pro forma amounts shown above may not be representative of that to be expected in future years. Shares reserved for issuance: Shares of Common Stock were reserved for the exercise of the following (in thousands): June 30, ________________ 1999 1998 _____ _____ Stock option plans: Outstanding 1,422 1,486 Available for grant 1,078 1,020 Other nonqualified stock options 221 352 _____ _____ Totals 2,721 2,858 ===== =====
Common stock in treasury: Jackpot purchased 163,200, 338,414 and 283,771 shares of its Common Stock at the market price on the date of purchase for a total cost of approximately $1,706,000, $3,967,000 and $2,803,000 in 1999, 1998 and 1997. Purchases in 1997 include 55,174 shares acquired from American Country Insurance Company for approximately $545,000 (the market price on the date of purchase). Two directors of Jackpot were directors and indirect beneficial owners of an aggregate of more than 51% of the common stock of such insurance company on the date of purchase. Note 7 - Related party transactions: One director of Jackpot is a partner in a law firm that has provided various legal services for which Jackpot incurred legal fees aggregating approximately $170,000, $121,000 and $179,000 in 1999, 1998 and 1997. Also, see Note 6. Note 8 - Commitments and contingencies: Leases: Jackpot has noncancelable location license, lease and sublease agreements (referred to as "leases") for space at various locations for its gaming machines with terms expiring at various dates through 2010. Leases are generally at fixed rentals, although certain leases require payments based on percentages of revenues generated by gaming machines at the leased locations. In addition, office and warehouse space is utilized under noncancelable leases with terms expiring at various dates through 2006. Future minimum payments (dollars in thousands) under noncancelable operating leases or licenses aggregated approximately $225,655 at June 30, 1999, payable as follows: $42,909 in 2000; $43,449 in 2001; $43,091 in 2002; $43,270 in 2003; $21,355 in 2004; and $31,581 thereafter. Rent expense was comprised as follows (dollars in thousands): 1999 1998 1997 _______ _______ _______ Location leases: Fixed rentals $39,689 $36,866 $28,125 Percentage rentals 17,181 16,883 19,994 Office and equipment leases 442 453 453 _______ _______ _______ Totals $57,312 $54,202 $48,572 ======= ======= =======
Employment and severance agreements: Jackpot has an employment agreement with Don R. Kornstein, President, Chief Executive Officer and Director which currently expires on September 30, 2002. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein. The aggregate commitment for future salaries at June 30, 1999, excluding bonuses, under Mr. Kornstein's agreement is $2,356,000. In the event of termination of Mr. Kornstein's employment, as defined in the employment agreement, Mr. Kornstein, or his beneficiary, would receive a severance payment. The aggregate contingent liability at June 30, 1999 under Jackpot's employment and severance agreements is approximately $2,900,000. Financial instruments with concentration of credit risk: The financial instruments that potentially subject Jackpot to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, certain receivables and lease and other security deposits. Jackpot maintains cash and certain cash equivalents with financial institutions in amounts which, at times, may be in excess of the FDIC insurance limits. Jackpot's cash equivalents are invested in several high-grade securities which limits Jackpot's exposure to concentrations of credit risk. A substantial portion of Jackpot's business activity is with customers who frequent retail stores (supermarkets, drugstores, merchandise stores and convenience stores) in Nevada. Generally, Jackpot leases space in stores which are part of a large chain of stores. At June 30, 1999, Jackpot had unsecured lease and other security deposits of $1,172,000 held by a publicly-held chain store. Legal matters: In August 1998 Albertson's, Inc. ("Albertson's") and American Stores Company ("American Stores") entered into a merger agreement that provided for the acquisition of American Stores by Albertson's. The merger of Albertson's and American Stores was completed on June 23, 1999. As a condition to obtaining approval of the merger by the Federal Trade Commission and the Attorneys General of California, Nevada and New Mexico, Albertson's agreed to divest certain of its stores, including 19 stores in southern Nevada. Those locations have been taken over by Raley's, Inc. ("Raley's"). The existing slot route operator for Raley's northern Nevada stores has filed applications with the Nevada Gaming Control Board to operate the gaming machines at the southern Nevada Albertson's stores which are being divested. Of the 19 stores in southern Nevada taken over by Raley's, Jackpot currently maintains 246 gaming machines at the 15 locations which it operates pursuant to a long term agreement with Albertson's. Jackpot believes that there is no proper basis to terminate such agreement and Jackpot's attendant right to occupy the subject premises for purposes of operating gaming machines. On August 30, 1999, Jackpot commenced litigation in federal district court for the District of Nevada against Albertson's and Raley's to enforce its rights under its agreement with Albertson's. On September 14, 1999, Jackpot obtained a preliminary injunction to prevent Albertson's and Raley's from interfering with its right to occupy the subject premises and conduct gaming operations. The Court for purposes of its decision ruled that Jackpot's license was coupled to the lease relating to the stores. The injunction permits Jackpot to remain at the stores pending resolution of the dispute. In granting the preliminary injunction, the court required Jackpot to post a $50,000 bond. Albertson's has now made an application to increase the bond to $9 million. In addition, Albertson's and Raley's have made motions for summary judgment. Furthermore, on September 23, 1999, Raley's existing slot route operator commenced an action in Nevada state court against Jackpot, Albertson's, Raley's and the slot route operator at the four other Albertson's southern Nevada locations seeking declaratory and injunctive relief and money damages. The allegations against Jackpot are for alleged fortuitous interference with contract and prospective economic advantage and abuse of process. Jackpot intends to vigorously defend this action. Jackpot is a party to various other claims, legal actions and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions filed by Jackpot. Management believes that its defenses are substantial in each of these matters and that Jackpot's legal position can be successfully defended without material adverse effect on its consolidated financial statements. Note 9 - Revenues derived from major locations: Route operations revenues at two groups of affiliated store chains in 1999, 1998 and 1997 each accounted for more than 10% of Jackpot's total revenues. Revenues for Jackpot's top two affiliated store chains were approximately $36,000,000 and $18,000,000, respectively, in 1999, $34,000,000 and $17,000,000, respectively, in 1998, and $27,000,000 and $15,000,000, respectively, in 1997. Each individual store chain included in an affiliated group of store chains has a separate lease with Jackpot. Note 10 - Federal income tax: A reconciliation of the Federal statutory income tax rate to the effective income tax rate based on income before income tax follows: 1999 1998 1997 ____ ____ ____ Statutory rate 35.0% 35.0% 35.0% Increase (decrease) in tax resulting from: Surtax exemption (1.0) (1.0) (1.0) Tax-exempt interest (7.3) (5.0) (3.7) Amortization of goodwill .8 .6 .4 Other, net .5 (2.6) .3 ____ ____ ____ Effective rate 28.0% 27.0% 31.0% ==== ==== ====
The tax items comprising Jackpot's net deferred tax liability as of June 30, 1999, 1998 and 1997 are as follows (dollars in thousands): 1999 1998 1997 ______ ______ ______ Deferred tax assets: Write-down of assets $ 755 $ 381 $ 381 Deferred rent 869 809 854 Other accrued liabilities 402 459 520 Other 343 54 107 ______ ______ _______ Totals 2,369 1,703 1,862 ______ ______ _______ Deferred tax liabilities: Difference between book and tax basis of property 1,354 1,280 987 Unrealized gain on available-for-sale securities 408 - - Economic performance accruals 515 542 481 Other 833 730 1,027 ______ ______ _______ Totals 3,110 2,552 2,495 ______ ______ _______ Net deferred tax liability $ (741) $ (849) $ (633) ====== ====== ======
Jackpot realized tax benefits of $22,000 and $48,000 in 1999 and 1997 as a result of the exercise of certain incentive and nonqualified stock options. The tax benefits have been reflected as a decrease in current income tax payable and an increase in additional paid-in capital. Note 11 - Other events On February 17, 1999, Jackpot and CRC Holdings, Inc. d/b/a Carnival Resorts & Casinos ("CRC"), a privately owned company, entered into a definitive agreement providing for the acquisition of CRC by Jackpot. On April 15, 1999, Jackpot and CRC mutually agreed to terminate the agreement. As a result of the termination of the agreement, capitalized costs incurred in connection with the proposed acquisition of CRC of $900,000 were expensed in the quarter ended June 30, 1999. On February 8, 1999, Jackpot and Players International, Inc. ("Players") entered into a definitive Agreement and Plan of Merger (the "Agreement"), which was subject to a number of conditions. On August 16, 1999, Jackpot received a notice from Players terminating the Agreement. Such notice contained the terms of a merger offer for Players from Harrah's Entertainment, Inc. On August 19, 1999, pursuant to the terms of the Agreement, Jackpot received a break-up fee of $13.5 million. As a result of the termination of the Agreement, all capitalized costs incurred in connection with the proposed acquisition of Players will be expensed. Such costs, which are estimated to be $2,500,000, and the break-up fee will be recorded in the quarter ending September 30, 1999. On March 10, 1999, Jackpot purchased 1,014,400 shares of Players common stock at $6.04 per share for a total cost of $6,127,000. For purposes of SFAS 115, the investment in Players common stock is classified as available-for-sale securities, and carried at fair value. "Short-term investments, at fair value" in the accompanying consolidated balance sheets consist entirely of Jackpot's investment in Players common stock. As of June 30, 1999, the gross unrealized gain was $1,165,000. JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL INFORMATION YEARS ENDED JUNE 30, 1999 AND 1998 (Dollars in thousands, except per share data) (Unaudited) Summarized quarterly financial information for 1999 and 1998 follows: Quarter ________________________________________ First Second Third Fourth _______ _______ _______ _______ 1999 ____ Revenues $22,207 $23,747 $24,576 $25,139 Gross operating income (A) 2,186 2,637 3,171 3,208 Income before income tax 1,539 1,930 2,515 409 (B) Net income 1,108 1,390 1,811 294 Earnings per share: Basic .13 .16 .21 .03 Diluted .13 .16 .21 .03 1998 ____ Revenues $22,667 $23,610 $23,371 $23,365 Gross operating income (A) 2,651 3,268 3,320 3,039 Income before income tax 2,153 2,615 2,620 2,493 Net income 1,572 1,909 1,912 1,820 Earnings per share: Basic .17 .21 .21 .21 Diluted .17 .21 .21 .20
(A) Gross operating income is revenues less route and casino operations' costs and expenses, deprecation associated with route and casino operations and amortization associated with lease acquisition costs. (B) Includes charges aggregating $2.1 million from the write-down in connection with the closing of the Owl Club and the costs associated with the termination of the agreement with CRC. EX-21 2 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's Highway 93 Casino, Inc. 100% Nevada EX-23 3 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 24, 1999, appearing in this Annual Report on Form 10-K of Jackpot Enterprises, Inc. for the year ended June 30, 1999. DELOITTE & TOUCHE LLP Las Vegas, Nevada September 24, 1999 EX-27 4
5 This schedule contains summary financial information extracted from Jackpot's Consolidated Balance Sheets - June 30, 1999 and 1998 and its Consolidated Statements of Income - years ended June 30, 1999, 1998 and 1997 and is qualified in its entirety to such financial statements. 1,000 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 47,637 7,292 0 0 0 58,429 34,767 21,010 82,295 4,794 0 0 0 99 74,515 82,295 0 95,669 0 79,643 4,824 0 0 6,393 1,790 0 0 0 0 4,603 .53 .53
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