Item 1. Business ________
General _______
Jackpot Enterprises, Inc., a Nevada corporation, ("Jackpot" or the "Company") has been actively engaged, through its subsidiaries, in the gaming industry for over 30 years. The Company is one of the largest gaming machine route operators in the State of Nevada, operating, as of June 30, 1996, 4,211 state-of-the-art video poker and other gaming machines in 439 locations. Jackpot is an established leader in the operation of gaming machines in multiple retail locations ("gaming machine route operations"). Jackpot also operated, as of June 30, 1996, two casinos with 183 gaming machines; however, such operations will be disposed of as soon as is practical, subject to market conditions.
As of June 30, 1996, Jackpot operated 4,394 gaming machines in 441 locations. Approximately 94% of the gaming machines were video poker and 6% were reel-type slot and other machines. In fiscal 1996, 92% of total revenues were derived from Jackpot's gaming machine route operations and 8% from casino operations. Because of the integrated nature of such operations, Jackpot is considered to be engaged in one 2industry segment.
Jackpot's gaming machine route operations are subject to seasonal fluctuations. The gaming play for such operations is generally greater in the second and fourth quarters of Jackpot's fiscal year. Unless the context indicates otherwise, references to "Jackpot" and the "Company" include its direct and indirect subsidiaries.
Business Development Strategy _____________________________
The Company's business strategy is to enhance its position as a leader in the Nevada gaming machine route market both through internal growth and acquisition and to apply its gaming management expertise and its regulatory experience to pursue strategic gaming activities and other value oriented nongaming opportunities. Specifically, the Company's business strategy includes the following:
Enhance Gaming Route Operations. The Company intends to enhance its position as a leader in the Nevada gaming machine route business by continuing to provide 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 may also benefit the Company. In addition, as appropriate, the Company will explore the possibility of expanding its gaming machine route business to other jurisdictions.
Pursue Other Strategic Gaming and Nongaming Opportunities. Jackpot continually reviews and evaluates potential opportunities, in both gaming and nongaming. The Company's strong financial position and access to capital represent a competitive advantage which will enable management to explore potential acquisitions and strategic combinations. Jackpot is committed to pursue all such opportunities in order to improve future earnings and enhance shareholder value. In evaluating such potential opportunities the Company is looking for candidates with either a value orientation or sustainable rates of growth.
Although Jackpot is exploring expansion and acquisition opportunities, there can be no assurance that such opportunities will be available on terms acceptable to Jackpot or that if completed that such opportunities will be successful.
Gaming Machine Route Operations _______________________________
Gaming machine route operations involve the installation, operation and service of gaming machines owned by Jackpot in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants. With respect to retail stores, Jackpot generally licenses, leases or subleases space in stores which are part of a chain of stores and installs gaming machines and a change booth near the store's entrance, where customer traffic is greatest. The number of gaming machines per store is determined by licensing limitations, available space and license, lease or sublease negotiations.
In fiscal 1996, approximately 75% of Jackpot's gaming machine route revenues were generated by southern Nevada operations and 25% by northern Nevada operations. Management believes that Jackpot has a substantial market share of gaming machine operations in supermarkets, drug stores and merchandise stores in Nevada, and that its customers are primarily local Nevada residents.
As of June 30, 1996, Jackpot operated in its gaming machine route business 4,211 gaming machines at 439 locations; 114 of the locations contained 15 gaming machines, 43 of the locations contained more than 15 machines and 282 of the locations contained fewer than 15 machines. Change booths are operated at retail store locations with generally 15 gaming machines or more during all store business hours by employees of Jackpot who provide coins and tokens to players of the gaming machines in exchange for currency. On a regular basis, coins and tokens are removed from the gaming machines and the coin and token supply of the change booth is replenished.
Gaming machines are routinely serviced, repaired, and maintained by mechanics employed by Jackpot. In the opinion of management, Jackpot's gaming machines and associated equipment are well-maintained, adequately insured, and in good working condition.
The following table sets forth certain historical data showing the changes to the number of machines and locations in Jackpot's gaming machine route operations through June 30, 1996:
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 accounting for approximately 64% of total gaming machine route operations revenues in fiscal 1996 required 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 provided 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.
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.
Licenses, leases and subleases have a wide range of terms and maturities, with expiration dates extending from 1996 to 2004. Jackpot has a significant amount of its gaming machine route operations at retail stores which are part of a group of affiliated store chains. Gaming machine route operations from two groups of affiliated store chains in fiscal 1996, 1995 and 1994 each accounted for more than 10% of Jackpot's total revenues in such fiscal years. The largest six store chains (Albertson's, Inc., American Drug Stores, Inc., Kmart Corporation, Lucky Stores, Inc., Thrifty PayLess, Inc. and Warehouse Markets, Inc.) accounted for approximately 54% of Jackpot's total revenues in fiscal 1996. Leases covering the six store chains have a wide range of terms and maturities, with expiration dates extending from 1997 to 1999. The loss or nonrenewal of any of these leases could have a material adverse effect on the Company's future results of operations.
License, lease and sublease agreements representing approximately 22% of fiscal 1996 gaming machine route operations revenues have terms expiring in fiscal 1997. Included in the 22% are three agreements, which expire on June 30, 1997, with three of Jackpot's largest six retail chain store customers representing 16% of fiscal 1996 gaming machine route operations revenues. Jackpot anticipates the renewal of these agreements will be offered on a competitive basis. While the Company intends to actively seek to renew these agreements, there is no assurance that the Company will be able to renew or extend such agreements or that these agreements will be renewed upon terms that Jackpot will find acceptable.
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 the state. 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 9 of Notes to Consolidated Financial Statements.
Through fiscal 1995, the Company has historically been able to renew or substantially replace revenues from expiring gaming machine route agreements with revenues generated by renewal or replacement agreements. However, increased competitive pressures in connection with the renewal or replacement of agreements has, and continues to result in higher lease payments as a percentage of gaming machine route operations revenues, thereby decreasing the Company's operating margin. In order to optimize its operating performance, the Company is engaged in a continual evaluation of leases. As a result of such evaluation, strict adherence to management's pricing guidelines and competitive pressure, certain agreements for non-chain locations were not renewed in fiscal 1996. In a potential effort to counter this trend and to possibly leverage off Jackpot's existing infrastructure, the Company's growth strategy may include the acquisition of other gaming machine route operators.
Casino Operations _________________
On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. ( the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Jackpot intends to dispose of these casino properties as soon as is practical, subject to market conditions.
The Owl Club, as of June 30, 1996, operated 89 gaming machines and two live table games in Battle Mountain, Nevada. The Owl Club also has a beverage operation incident to the conduct of gaming activities, a restaurant operation and an eighteen room motel. Jackpot owns the land and buildings used in the Owl Club's casino and motel operations. The Owl Club primarily serves local residents and markets with its food and informal and congenial atmosphere.
Jackpot manages the casino operations of the Pony Express Casino in Jackpot, Nevada under a five-year space lease agreement, which Jackpot may cancel upon ninety days written notice to the lessor. As of June 30, 1996, 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.
Prior to the Board's approval to dispose of Jackpot's two remaining casinos, Jackpot permanently ceased its casino operations at the Debbie Reynolds' Hotel and Casino in Las Vegas due to the termination of the management agreement between the parties, effective March 31, 1996. Jackpot, through its operating subsidiary, Debbie's Casino, Inc. ("Debbie's"), had operated approximately 182 gaming machines and two live table games in approximately 5,000 square feet of casino space. In addition, Jackpot sold its 88.9% interest in Jackpot City, Inc. (the "Nugget") effective June 30, 1996. The Nugget, which was acquired by Jackpot on November 1, 1989, operated 181 gaming machines at a 10,000 square foot leased location in downtown Reno, Nevada during fiscal 1996.
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. Jackpot is not dependent upon this manufacturer, although it did purchase approximately 80% of its gaming machines from such manufacturer in fiscal 1996. Each gaming machine accepts only one denomination of coin and, with minor exceptions, each location will have a variety of machines requiring different denominations of coins. Gaming machines operated by Jackpot are multiple coin play. Multiple coin play allows a player to wager several coins of the same denomination on each play. Jackpot continues to test machines from various gaming machine manufacturers to determine which games and models are best suited for its customers.
Employees _________
As of June 30, 1996, Jackpot employed approximately 875 persons, the substantial portion of whom are non-management personnel. None of Jackpot's employees are covered by a collective bargaining agreement and Jackpot believes that it has satisfactory employee relations.
Competition ___________
Gaming machines and gaming of all types are available in Nevada in casinos and hotel casinos, as well as in locations similar to those of Jackpot, all of which compete directly or indirectly with Jackpot. Jackpot has been and is subject to substantial direct competition for the operation of gaming machines in approved locations from numerous small gaming machine route operators and some large operators, located principally in Las Vegas, Reno and their surrounding areas. Management believes at least one of these competitors has more gaming machines or locations than Jackpot. In addition, a limited number of these competitors manufacture gaming machines. The principal methods of competition for gaming machine locations are the lease, sublease, license or revenue sharing terms, the service provided by the route operator and the experience, reputation and financial strength of the route operator. In recent years Jackpot has faced increased competition in its gaming machine route operations, and as certain of its licenses, leases and subleases have begun to expire, it has faced strong competition from other route operators who have attempted or captured locations by offering more favorable terms to retail store owners.
Regulation and Licensing Requirements _____________________________________
Nevada
The ownership and operation of casino gaming facilities and gaming routes in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The Company's gaming machine operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), and local regulatory authorities. The Nevada Commission, the Nevada Board and the local regulatory authorities are collectively referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practice 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, CUI, CCI, and CCCI (the "Route Subsidiaries") and Jackpot Gaming, Inc. Jackpot Gaming, Inc. is registered as a holding corporation and is approved by the Nevada Gaming Authorities to own the stock of the Owl Club, the Pony Express Casino and Debbie's (the "Casino Subsidiaries"). No person may become a stockholder of, or receive any percentage of profits from, the Route Subsidiaries, Jackpot Gaming, Inc., or the Casino Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Route Subsidiaries, Jackpot Gaming, Inc. and the Casino Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or any of its subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Route Subsidiaries and the Casino Subsidiaries must file applications with the Nevada Gaming Authorities and may be required to be licensed or be found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Company or its subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or any of its subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company and its subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
The Company, Jackpot Gaming, Inc., the Route Subsidiaries and the Casino Subsidiaries are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company and its subsidiaries must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company or any of its subsidiaries, the gaming licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the subsidiary involved, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after requests, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or any of its subsidiaries, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has required that the Company's stock certificates bear a legend indicating that the securities are subject to the Nevada Act.
The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environmental for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending upon the type of gaming or activity involved, are payable to the State of Nevada and to the local jurisdictions. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon any of: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at the Company's casinos is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company's casinos.
Federal Regulation
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it unlawful, in general, for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices, and components thereof across interstate lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. Jackpot's subsidiaries have so registered and must renew their registration annually. In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. Violation of the Federal Act may result in seizure and forfeiture of equipment, as well as other penalties.
Other Jurisdictions
Other jurisdictions also require various licenses, permits, and approvals in connection with the ownership and operation of gaming facilities. The operation of gaming devices and lottery devices is subject to extensive licensing requirements and regulatory compliance.
If Jackpot proceeds with expansion into any other state or foreign jurisdiction, it will also be necessary for the appropriate officers, employees, corporate subsidiaries and other persons or entities to apply for and obtain all necessary gaming and distributing licenses.
As in Nevada, state agencies and the local authorities having jurisdiction over such activities have full power and discretion to limit, condition, suspend and revoke such licenses or approvals and any disciplinary action against Jackpot's affiliates in such jurisdictions could (and revocation would) have a material adverse effect on the operations of Jackpot in such states or local jurisdictions.
Other
Jackpot maintains rigorous internal accounting controls in accordance with the regulations of the Nevada Commission. Jackpot carries insurance of such types and in such amounts as management determines to be prudent from time to time.
Item 2.
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:
Item 3.
Item 3. Legal Proceedings _________________
Not applicable.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ___________________________________________________
Not applicable.
Executive Officers of the Registrant ____________________________________
The executive officers of Jackpot are appointed by the Board of Directors for an unspecified term and can be terminated at the Board's discretion; however, Mr. Kornstein has an employment agreement with Jackpot which currently expires on September 30, 1999. 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:
Don R. Kornstein was appointed President, Chief Executive Officer and a director of Jackpot on September 8, 1994. Prior to his appointment with Jackpot, Mr. Kornstein was a Senior Managing Director of Bear, Stearns & Co. Inc., a leading worldwide investment banking firm where he had been employed since 1977. Mr. Kornstein was in such firm's Investment Banking Department and was head of that firm's gaming industry group.
George Congdon was appointed Senior Vice President - Operations of Jackpot on May 11, 1995. From October 1990 to May 1995, Mr. Congdon held various management positions with certain of Jackpot's subsidiaries including Vice President of Route Operations and Senior Vice President of Operations. Prior to October 1990, Mr. Congdon was employed for over sixteen years in various operating positions by Bally Manufacturing, Inc. and Bally Distributing, Inc., gaming machine manufacturers and distributors.
Bob Torkar was appointed Vice President - Finance, Treasurer and Chief Accounting Officer of Jackpot on July 1, 1991 and Senior Vice President on October 15, 1993. From February 1991 to June 1991, Mr. Torkar was a financial consultant to Jackpot. Prior to the consulting assignment with Jackpot, Mr. Torkar was Vice President and Chief Financial Officer with Furnishings 2000, Inc., a publicly traded retail furnishings company in San Diego, California, having spent seven years (1983-1990) with such corporation.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters _____________________________________________________________
Jackpot's common stock, par value $.01 per share (the "Common Stock"), is listed on the New York Stock Exchange (NYSE) with the trading symbol "J". The following table sets forth the range of high and low prices for shares of the Common Stock for the fiscal quarters indicated, as furnished by the NYSE, and the per share cash dividends paid during those fiscal quarters.
As of September 3, 1996 there were approximately 2,300 holders of record of Common Stock. The number of holders of record of Jackpot's Common Stock on September 3, 1996 was computed by a count of record holders.
A policy of quarterly cash dividends was adopted by Jackpot's Board of Directors in July 1987. However, there is no assurance that quarterly cash dividends, if any, will continue to be paid in the future since such cash dividends are dependent upon earnings, the financial condition of Jackpot and other factors. In each of fiscal 1995 and fiscal 1996, Jackpot paid four quarterly cash dividends of $.08 per share to its stockholders of record.
On January 31, 1996, 1,588,076 warrants to purchase Common Stock, which had been distributed in connection with a special rights issuance on July 1, 1992, expired pursuant to their terms.
Item 6.
Item 6. Selected Financial Data _______________________
The following information has been derived from Jackpot's consolidated financial statements:
(1) Operating income includes: in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties (see Note 3 of Notes to Consolidated Financial Statements); in 1994, a pretax cost of $1.3 million in connection with the severance agreement with Jackpot's former chief executive officer (see Note 9 of Notes to Consolidated Financial Statements).
(2) Net income (loss) includes: in 1996, a pretax loss of $2.2 million from the write-down and sale of certain casino properties (see Note 3 of Notes to Consolidated Financial Statements); in 1994, a pretax loss of $16.9 million ($11.0 million after tax, or $1.20 per share) for Jackpot's share of the closing costs, write-down of certain assets and operating loss in a dockside casino facility in Tunica, Mississippi (see Note 4 of Notes to Consolidated Financial Statements); and, in 1992, an extraordinary gain ($204,000 or $.03 per share) from repurchases of the 8.75% convertible subordinated debentures.
(3) All share and per share amounts have been retroactively adjusted in 1993 and 1992 for a 10% stock dividend declared July 1, 1993 and a 5% stock dividend declared July 1, 1992.
(4) Earnings per share calculations in 1993 and 1992 have been based on weighted average shares outstanding adjusted for the number of common share equivalents attributable to stock options and warrants.
(5) Earnings per share - assuming full dilution in 1993 includes the assumed conversion of the 8.75% convertible subordinated debentures. The average common and common equivalent shares outstanding assuming full dilution was 10.0 million shares in 1993.
(6) EBITDA represents earnings before interest expense, income tax, depreciation, amortization and other non-cash items. EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles), as an indicator of the Company's operating performance, as an alternative to cash flows provided by operating activities (as determined in accordance with generally accepted accounting principles), or as a measure of liquidity. EBITDA is presented solely as a supplemental disclosure because management believes that it enhances the understanding of the financial performance of a company with substantial amortization and depreciation expense.
(7) Capital expenditures in 1994 includes purchases of $9.0 million of property in connection with a dockside casino facility in Tunica, Mississippi.
(8) Working capital at June 30, 1992 includes $5.9 million of cash equivalents and short-term investments reserved for gaming acquisitions.
Item 7.
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 fiscal years ended June 30, 1996, 1995 and 1994 (referred to herein as "1996," "1995" and "1994," respectively), consisted of the cash flows from operating activities and its available cash, cash equivalents and short-term investments.
Net cash provided by operating activities in 1996 was approximately $12.8 million. Net cash used in investing activities in 1996 was approximately $3.1 million which included cash used of approximately $4.7 million and cash received of approximately $1.6 million. The $4.7 million of cash used included payments of approximately $4.3 million primarily for purchases of property and equipment in connection with Jackpot's gaming machine route operations. The $1.6 million of cash received from investing activities consisted primarily of aggregate proceeds from sales of other non-current assets.
Net cash used in financing activities in 1996 was approximately $3.6 million which consisted primarily of the repayment of approximately $.9 million of long-term debt, the payment of approximately $3.0 million of dividends, net of approximately $.3 million of proceeds from the issuance of common stock upon the exercise of stock options.
As a result of the combination of net cash provided by operating activities of approximately $12.8 million less net cash used in investing and financing activities of approximately $3.1 million and $3.6 million, respectively, cash and cash equivalents in 1996 increased approximately $6.1 million.
Net cash provided by operating activities in 1995 was approximately $18.1 million. Net cash used in investing activities in 1995 was approximately $4.3 million which included cash used of approximately $6.0 million and cash received of approximately $1.7 million. The $6.0 million of cash used included payments of approximately $4.0 million primarily for purchases of property and equipment in connection with Jackpot's Nevada operations, and approximately $1.5 million used for advances to the dockside casino facility in Tunica County, Mississippi (the "Tunica Facility"), which closed permanently on July 8, 1994. Such advances to the Tunica Facility were used for payment toward Jackpot's share of unpaid liabilities and estimated closing costs, which were fully accrued as of June 30, 1994. The $1.7 million of cash received from investing activities included aggregate proceeds from sales of short-term investments and sales of certain assets.
Net cash used in financing activities in 1995 was approximately $4.4 million which consisted primarily of the repayment of approximately $1.4 million of long-term debt and the payment of approximately $3.0 million of dividends.
As a result of the combination of net cash provided by operating activities of approximately $18.1 million less net cash used in investing and financing activities of approximately $4.3 million and $4.4 million, respectively, cash and cash equivalents in 1995 increased approximately $9.4 million.
Net cash provided by operating activities in 1994 was approximately $18.4 million. Net cash used in investing activities in 1994 was approximately $9.7 million which included cash received of approximately $12.3 million and cash used of approximately $22.0 million. The $12.3 million of cash received consisted primarily of proceeds from sales of short-term investments. The $22.0 million of cash used included payments of approximately $4.9 million primarily in connection with new lease agreements, payments of approximately $4.5 million for the purchase of property and equipment in connection with Jackpot's Nevada operations and expenditures and advances of $12.4 million in connection with the development and operation of the Tunica Facility.
Net cash used in financing activities in 1994 was approximately $4.1 million which resulted from the repayment of approximately $1.3 million of long-term debt, the payment of approximately $2.9 million of dividends and the payment of approximately $.6 million for other financing activities, net of approximately $.3 million of proceeds from long-term debt and $.4 million of proceeds from the issuance of common stock upon the exercise of stock options and warrants.
As a result of the combination of net cash provided by operating activities of approximately $18.4 million less net cash used in investing and financing activities of approximately $9.7 million and $4.1 million, respectively, cash and cash equivalents in 1994 increased approximately $4.6 million.
Liquidity:
As described above, in 1996, Jackpot purchased approximately $4.3 million of property and equipment. Approximately $3.8 million of the $4.3 million was associated with equipment purchased for gaming locations. Management anticipates that Jackpot will purchase approximately $5.1 million of property and equipment, exclusive of business acquisitions, if any, for the fiscal year ending June 30, 1997 ("1997").
At June 30, 1996, Jackpot had cash and cash equivalents of approximately $39.0 million, an increase of approximately $6.1 million, or 19%, from the beginning of 1996. Jackpot's working capital and current ratio were approximately $40.3 million and 11.2 to 1, respectively, at June 30, 1996, which increased from $31.6 million and 6.6 to 1, respectively, at June 30, 1995 primarily as a result of the activities described above.
On May 24, 1995, Jackpot notified Phar-Mor, Inc. ("Phar-Mor"), a large chain store, that it was in default under the terms of certain agreements. On July 25, 1995, Phar-Mor notified Jackpot that it disagreed with Jackpot's position and asserted that Jackpot was in default under the terms of an amended agreement. On or about March 7, 1996, Phar-Mor filed a lawsuit against Jackpot in the United States Bankruptcy Court for the Northern District of Ohio, claiming it is owed approximately $1 million under the amended agreement. Jackpot has filed an answer and counterclaim reflecting its position that under an original agreement Jackpot is owed in excess of $3 million. Jackpot, based upon discussions with counsel, does not believe it is probable that Phar-Mor will prevail in this matter. If Phar-Mor were to prevail, Jackpot could be liable for certain obligations up to $1 million. If Jackpot were to prevail, it would become an unsecured creditor of Phar-Mor in an amount in excess of $3 million. For further information concerning this matter, see Note 9 of Notes to Consolidated Financial Statements.
Management believes Jackpot's working capital and cash provided by operations will be sufficient to enable Jackpot to meet its planned capital expenditures and other cash requirements in 1997.
Jackpot continues to selectively explore expansion opportunities, both in and outside Nevada, and various potential acquisitions, both gaming and nongaming. Management believes working capital and cash provided by operations will be sufficient to enable Jackpot to pursue expansion opportunities; however, Jackpot may seek additional debt or equity financing to facilitate expansion opportunities and potential acquisitions.
Results of Operations _____________________
Since fiscal 1994, gaming machine route operations revenues have decreased approximately $6.7 million (from $90.2 million in 1994 to $83.5 million in 1996) due primarily to (i) the loss of a major retail chain store customer on June 30, 1994, (ii) the loss of a retail chain store customer due to the permanent closing of its three locations in Nevada in connection with such customer's bankruptcy reorganization plan, (iii) the loss, based on management's commitment to maintain pricing discipline, of certain non-chain locations, and (iv) a decrease in revenues at certain existing locations in 1996 due, in management's opinion, to growth in the number of casinos and other locations with gaming machines in residential areas of Nevada.
Jackpot has a significant amount of its gaming machine route operations at retail stores which are part of a group of affiliated store chains, subject to various leases. Gaming machine route operations from two groups of affiliated store chains in 1996, 1995 and 1994 each accounted for more than 10% of Jackpot's total revenues in such years. The largest six store chains accounted for approximately 54% of Jackpot's total revenues in 1996. Leases covering the six store chains have a wide range of terms and maturities, with expiration dates extending from 1997 to 1999. The loss or nonrenewal of any of these leases could have a material adverse effect on the Company's future results of operations.
License, lease and sublease agreements representing approximately 22% of 1996 gaming machine route operations revenues have terms expiring in fiscal 1997. Included in the 22% are three agreements, which expire on June 30, 1997, with three of Jackpot's largest six retail chain store customers representing 16% of 1996 gaming machine route operations revenues. Jackpot anticipates the renewal of these agreements will be offered on a competitive basis. While the Company intends to actively seek to renew these agreements, there is no assurance that the Company will be able to renew or extend such agreements or that these agreements will be renewed upon terms that Jackpot will find acceptable.
The renewal or extension of agreements at existing locations have generally resulted in increased monthly fees. These contracts often require fixed periodic increases in monthly fees during the term of the contract. With respect to the accounting treatment of fixed periodic increases in monthly fees associated with these contracts, the Company is required to average annual lease costs over the term of the contract. As a result of such accounting treatment, annual lease costs generally increase significantly in the first year of an extended contract for the respective locations covered by the contract and, thereafter, remain constant for existing locations during the term of the contract.
Through 1995, the Company has historically been able to renew or substantially replace revenues from expiring gaming machine route agreements with revenues generated by renewal or replacement agreements. However, increased competitive pressures in connection with the renewal or replacement of agreements has, and continues to result in higher lease payments as a percentage of gaming machine route operations revenues, thereby decreasing the Company's operating margin. In order to optimize its operating performance, the Company is engaged in a continual evaluation of leases. As a result of such evaluation, strict adherence to management's pricing guidelines and competitive pressure, certain agreements for non-chain locations were not renewed in 1996. In a potential effort to counter this trend and to possibly leverage off Jackpot's existing infrastructure, the Company's growth strategy may include the acquisition of other gaming machine route operators.
The table below presents the changes in comparative financial data from 1994 to 1996 (dollars in thousands).
Revenues generated from gaming machine route operations are attributable to fixed payment leases and revenue sharing contracts. The amount of revenues attributable to fixed payment leases and revenue sharing contracts in 1996, 1995 and 1994 are summarized below (dollars in thousands):
1996 compared to 1995 _____________________
General:
On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of its strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time.
Prior to the Board's approval to dispose of Jackpot's two remaining casinos, Jackpot sold its interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada, effective June 30, 1996. As a result of Jackpot's decision to dispose of its remaining casinos and the sale of the Nugget, a charge of approximately $2.2 million was recorded in the fourth quarter of 1996. The charge consisted primarily of the write-down of the carrying amount of certain long-lived assets of the Owl Club to fair value. Principally, as a result of this charge, net income in 1996 decreased 11.5%, from $6.6 million in 1995 to $5.9 million in 1996.
Revenues:
Total revenues in 1996 decreased approximately $5.8 million, from $96.9 million in 1995 to $91.1 million in 1996. The decrease in total revenues of $5.8 million was the net result of a decrease of $4.4 million (from $87.9 million in 1995 to $83.5 million in 1996) in gaming machine route operations revenues and a decrease of $1.4 million (from $9.0 million in 1995 to $7.6 million in 1996) in casino operations revenues.
The decrease in gaming machine route operations revenues of $4.4 million was due primarily to the closing or loss, based on management's commitment to maintain pricing discipline, of certain non-chain locations and to the loss of the Company's right to operate at all three Phar-Mor locations in Nevada due to the permanent closing by Phar-Mor of such locations in connection with Phar-Mor's bankruptcy reorganization plan. The decrease in gaming machine route operations revenues resulted from a combination of additional revenues generated from new locations, net of lost revenues from terminated locations and a decrease in revenues at existing locations. In 1996, new locations generated revenues of approximately $4.4 million. Terminated locations had generated revenues of $6.7 million in 1995, while revenues at existing locations decreased $2.1 million in 1996.
As described previously, a significant amount of Jackpot's gaming machine route operations revenues is derived from six retail chain store customers pursuant to license, lease or sublease agreements. As of June 30, 1996, such agreements involved the operation of 1,692 machines in 105 locations.
The decrease in casino operations revenues in 1996 of approximately $1.4 million was due principally to the decline in revenues generated at the Debbie Reynolds' Hotel and Casino. Such decline was due to the ceasing of Jackpot's casino operations at the location, effective March 31, 1996 and to a decrease in revenues in the nine months ended March 31, 1996. The Company, through its operating subsidiary Debbie's Casino, Inc. ("Debbie's"), had operated approximately 175 gaming machines at this location.
Costs and expenses:
Route operations expenses in 1996 decreased approximately $1.9 million (from $66.3 million in 1995 to $64.4 million in 1996) and, as a percentage of route operations revenues, route operations expenses increased to 77.2% in 1996 from 75.5% in 1995. The decrease of $1.9 million in 1996 over 1995 was attributable to decreases of $.8 million in location rent expense, $.2 million in payroll costs, $.4 million in workers' compensation costs and $.5 million in other route operations expenses. Route operations expenses in 1996 increased as a percentage of route operations revenues primarily because of the loss of the right to operate at the Phar-Mor locations, with which route operations expenses were lower as a percentage of route operations revenues than Jackpot's overall percentage, from the decrease in revenues at existing fixed payment lease locations and from the increase in location rent expense, as a percentage of route operations revenues, attributable to revenue sharing contracts. In general, the costs associated with revenues generated at new locations have been greater as a percentage of revenues than have the costs associated with the lost revenues.
Casino operations expenses in 1996 decreased approximately $1.2 million (from $7.9 million in 1995 to $6.7 million in 1996) and, as a percentage of casino operations revenues, casino operations expenses decreased to 87.9% in 1996 from 88.2% in 1995 due primarily to the closing in February 1995 of operations of Water Street Casino, Inc. dba the Post Office Casino (the "Post Office Casino"). With respect to casino operations expenses, 1995 included approximately $.9 million of costs and expenses incurred by the Post Office Casino.
Amortization expense decreased approximately $.7 million in 1996 (from $2.9 million in 1995 to $2.2 million in 1996). The decrease in amortization expense in 1996 was primarily attributable to the decrease in amortization expense related to the three Phar-Mor locations. As a result of the permanent closing of Phar-Mor's three locations in Nevada, Jackpot wrote off all remaining lease acquisition costs related to Phar-Mor in the three months ended June 30, 1995.
Depreciation expense in 1996 decreased approximately $1.1 million (from $5.4 million in 1995 to $4.3 million in 1996). The decrease in depreciation expense in 1996 was primarily attributable to gaming machines acquired in connection with the purchase of a gaming machine route business in 1992, which had become fully depreciated in the three months ended September 30, 1995.
General and administrative expenses in 1996 decreased approximately $1.2 million (from $5.4 million in 1995 to $4.2 million in 1996) primarily as a result of decreases in payroll and other compensation related costs in connection with a reduction in personnel.
Operating income decreased approximately $1.9 million in 1996 (from $9.0 million in 1995 to $7.1 million in 1996). The decrease in operating income of $1.9 million was due primarily to the loss from the write-down and sale of casino properties of approximately $2.2 million as previously described.
Other income (expense):
Other income in 1996 increased approximately $.6 million (from $.9 million in 1995 to $1.5 million in 1996) primarily from the increase in the net gain on sales of certain non-operating assets and from the increase in interest income as a result of the increase in available cash and cash equivalents.
Other:
The effective tax rate in 1996 was approximately 32%, which was slightly lower than the 33% rate in 1995 primarily because of the increase in tax benefits from tax-exempt interest income in 1996. Earnings per common share in 1996 was $.63 compared to earnings per share of $.72 in 1995.
1995 compared to 1994 _____________________
General:
The 1995 net income of $6.6 million, the highest in Jackpot's history, represented an increase of approximately $11.2 million from the net loss of $4.6 million in 1994. The net loss in 1994 included an after-tax loss of approximately $11.0 million for Jackpot's share of closing costs, write-down of certain assets and the operating loss of the Tunica Facility. The 1995 net income does not have any losses from the Tunica Facility because, as previously described, Jackpot permanently closed the Tunica Facility on July 8, 1994 and had accrued as of June 30, 1994 an estimate for all anticipated closing costs associated with the closure. A portion of the increase in net income in 1995 was also due to an improvement in operating results of gaming machine route operations despite the expiration of the Company's right to operate at certain locations of a major retail chain store customer (the "Customer") on June 30, 1994. Jackpot generated approximately 9% of its total revenues and a significantly greater percentage of its total operating income from operations at locations of the Customer in 1994.
Revenues:
Total revenues in 1995 decreased approximately $1.5 million, from $98.4 million in 1994 to $96.9 million in 1995. The decrease in total revenues of $1.5 million was the net result of a decrease of $2.3 million (from $90.2 million in 1994 to $87.9 million in 1995) in gaming machine route operations revenues and an increase of $.8 million (from $8.2 million in 1994 to $9.0 million in 1995) in casino operations revenues.
The decrease in gaming machine route operations revenues of $2.3 million resulted from a combination of additional revenues generated from existing and new locations, net of lost revenues from terminated locations. In 1995, new locations generated approximately $7.7 million of revenues, while existing locations generated approximately $4.2 million in additional revenues. Terminated locations had generated $14.2 million in revenues in 1994. The loss of the revenues generated at the terminated locations was primarily due to the expiration of the Company's right to operate at certain locations of the Customer on June 30, 1994.
As described previously, a significant amount of Jackpot's gaming machine route revenues is derived from six retail chain store customers pursuant to license, lease or sublease agreements. As of June 30, 1995, such agreements involved the operation of 1,615 machines in 100 locations.
The increase in casino operations revenues in 1995 of approximately $.8 million was primarily due to the commencement in January 1995 of operations of the Pony Express Casino.
Costs and expenses:
Route operations expenses in 1995 increased approximately $.7 million (from $65.6 million in 1994 to $66.3 million in 1995) and, as a percentage of route operations revenues, route operations expenses increased to 75.5% in 1995 from 72.8% in 1994. The increase of $.7 million in 1995 over 1994 was attributable to an increase of $.4 million in location rent expense, an increase of $.5 million in payroll costs, net of an overall decrease of $.2 million in other expenses. Route operations expenses increased as a percentage of route operations revenues primarily because of the loss of the Customer, with which route operations expenses were lower as a percentage of route operations revenues than Jackpot's overall percentage. Although Jackpot was able to replace a substantial portion of the revenues lost with revenues generated by new and existing locations, generally the costs associated with revenues generated at new locations have been greater as a percentage of revenues than have the costs associated with the lost revenues.
Casino operations expenses in 1995 increased approximately $1.1 million (from $6.8 million in 1994 to $7.9 million in 1995) and, as a percentage of casino operations revenues, casino operations expenses increased to 88.2% in 1995 from 83.8% in 1994 due to the lower than expected revenues of the Post Office Casino, which commenced operations in July 1994. As a result of the continuation of the poor operating performance of the Post Office Casino, which generated an operating loss of approximately $.4 million in 1995 including a one-time charge of approximately $.2 million in connection with the reduction in the size of gaming operations at the location from 175 gaming machines to 70 gaming machines and the change in operations from a casino location to a gaming machine route location, Jackpot terminated the operating agreement and sublease with the lessor and ceased operations at the Post Office Casino in February 1995.
Amortization expense in 1995 remained constant at approximately $2.9 million compared to 1994. Depreciation expense in 1995 decreased approximately $.5 million (from $5.8 million in 1994 to $5.3 million in 1995). The decrease in depreciation expense was primarily due to the reduction in depreciation expense of certain assets associated with the Tunica Facility.
General and administrative expenses in 1995 decreased approximately $2.3 million (from $7.7 million in 1994 to $5.4 million in 1995) primarily as a result of decreases of $1.1 million in severance costs, $.5 million in connection with the cancellation of a proposed public offering in 1994, $.4 million of unsuccessful development costs and $.3 million in other general and administrative expenses.
Operating income decreased approximately $.4 million in 1995 (from $9.4 million in 1994 to $9.0 million in 1995). The decrease in operating income of $.4 million was due primarily to the combination of the previously described effect on gaming machine route operations of the expiration of the Company's right to operate at certain locations of the Customer on June 30, 1994, net of the effect of the decrease of certain nonrecurring general and administrative expenses described above.
Other income (expense):
With respect to other non-operating income and expense, 1994 included a pretax loss of approximately $16.9 million for Jackpot's share of closing costs, write-down of certain assets and the operating loss of the Tunica Facility.
Other:
The effective tax rate was approximately 33% in 1995, which was lower than the 35% rate in 1994 primarily because of the tax benefits from tax-exempt interest income. Earnings per common share in 1995 was $.72 compared to the loss per common share in 1994 of $.50 per share.
Item 8.
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).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ________________________________________________
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant __________________________________________________
Item 11.
Item 11. Executive Compensation ______________________
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management ______________________________________________________________
Item 13.
Item 13. Certain Relationships and Related Transactions ______________________________________________
The information required by items 10, 11, 12 and 13 are incorporated by reference from the 1996 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report.
PART IV
Item 14.
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.
(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, 1996, Jackpot filed no reports on Form 8-K.
(c) Exhibits
3(i) Articles of Incorporation of the Registrant, as amended (C) 3(ii) By-laws of the Registrant, as amended (C) 3(iii) Form of Amendment to Articles of Incorporation of Registrant (L) 4.1 Form of Amended and Restated Warrant agreement between the Registrant and Continental Stock Transfer & Trust Company, including form of Warrant (I) 4.2 Stockholder Rights Agreement dated as of July 11, 1994 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (M) 10.1 Employment and consulting agreement with Neil Rosenstein (B), as amended (E), and as further amended (F)(R) 10.2 License agreements with Albertson's, Inc. (A)(J) 10.3 Agreement with K Mart Corporation, as revised on November 1, 1990 (E) 10.4 License agreement with Longs Drug Stores California, Inc. (A) 10.5 License agreements with Lucky Stores, Inc., as revised on October 31, 1991 (F) 10.6 License agreements with American Drug Stores, Inc., formerly Osco Drug, Inc., as revised on October 31, 1991 (F) 10.7 License agreement with Pay Less Drug Stores Northwest, Inc., as revised on April 14, 1992 (F) 10.8 License agreement with Safeway Stores, Inc. (A) 10.9 Agreement with Warehouse Markets (A) 10.10 1990 Incentive and Nonqualified Stock Option Plan (D)(R) 10.11 Employment Agreement with Frederick Sandvick (E)(R) 10.12 Indemnification Agreement (Sample) (E) 10.13 Salary Continuation Plan for Executives (E)(R) 10.14 Form of Retirement Plan for Directors (F) 10.15 Amendment No. 2 to Employment Agreement with Neil Rosenstein (E)(R) 10.16 1992 Incentive and Non-qualified Stock Option Plan (G)(R) 10.17 Employment Agreement with John F. O'Reilly (J)(R) 10.18 Employment Agreement with Jeffrey L. Gilbert (H)(R) 10.19 Form of First Amendment to Retirement Plan for Directors (K) 10.20 Settlement Agreement with John F. O'Reilly (N) 10.21 Employment Agreement dated as of September 8, 1994 with Don R. Kornstein (O)(R) 10.22 Settlement Agreement by and among Winners Entertainment, Inc. (formerly Excalibur Holding Corporation), Mountaineer Park, Inc. and Jackpot Enterprises, Inc. (P) 11.1 Computation of Earnings (Loss) per Common Share (Q) 22.1 List of Registrant's subsidiaries (Q) 23.1 Consent of Deloitte & Touche LLP (Q) 25.1 Statement of Eligibility and Qualification of Bankers Trust Company as Trustee on Form T.1 (A) 27.1 Financial Data Schedule (EDGAR version only)
(A) Incorporated by reference to Registrant's Registration Statement on Form S-2 dated May 4, 1989 (Registration No. 33-27614).
(B) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1988.
(C) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1989.
(D) Incorporated by reference to Registrant's Registration Statement on Form S-3 dated December 12, 1990 (Registration No. 33-38210).
(E) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1991.
(F) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1992.
(G) Incorporated by reference to Registrant's 1992 Proxy Statement.
(H) Incorporated by reference to Registrant's Form 10-Q for the quarter ended March 31, 1993.
(I) Incorporated by reference to Registrant's Registration Statement on Form S-3 dated July 8, 1993 (Registration No. 33-61624).
(J) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1993.
(K) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 1993.
(L) Incorporated by reference to Registrant's 1993 Proxy Statement.
(M) Incorporated by reference to Registrant's Form 8-A dated July 12, 1994.
(N) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1994.
(O) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 1994.
(P) Incorporated by reference to Registrant's Form 10-Q for the quarter ended March 31, 1995.
(Q) Included herein.
(R) 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.
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 25, 1996 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 Don R. Kornstein Officer and Director September 25, 1996 (Principal Executive Officer)
/s/ Bob Torkar __________________________ Senior Vice President-Finance, September 25, 1996 Bob Torkar Treasurer and Chief Accounting Officer (Principal Financial and Accounting Officer)
/s/ Allan R. Tessler __________________________ Chairman of the Board September 25, 1996 Allan R. Tessler
/s/ David R. Markin __________________________ Director September 25, 1996 David R. Markin
/s/ Robert L. McDonald, Sr. ___________________________ Director September 25, 1996 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, 1996 and 1995
Consolidated Statements of Operations Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information Years Ended June 30, 1996 and 1995
(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 given 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 as of June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jackpot Enterprises, Inc. and subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada August 9, 1996
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995 (Dollars in thousands)
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995 (Dollars in thousands, except share data) (Concluded)
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (Dollars in thousands, except per share data)
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (Dollars and shares in thousands, except per share data)
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (Dollars in thousands)
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business: Principles of consolidation: The accompanying consolidated financial statements include the accounts of Jackpot Enterprises, Inc. and its controlled subsidiaries ("Jackpot"). All material intercompany accounts and transactions are eliminated. In September 1993, Jackpot entered into an agreement with President Riverboat Casinos - Mississippi, Inc. ("President") which provided for the joint management of a dockside casino facility in Tunica County, Mississippi (the "Tunica Facility") under a wholly-owned subsidiary of Jackpot. Under this arrangement, Jackpot did not have ultimate control over the Tunica Facility and, therefore, for financial statement purposes, accounted for the Tunica Facility under the equity method (see Note 4).
Business: Jackpot, which was organized in 1980, conducts business in the gaming industry and generates revenues from gaming machine route operations and casino operations (see Note 3). Gaming machine route operations involve the installation, operation and service of gaming machines owned by Jackpot that are located in licensed, leased or subleased space in retail stores (supermarkets, drug stores, merchandise stores and convenience stores), bars and restaurants throughout Nevada.
Cash equivalents: Cash equivalents are liquid investments with a maturity of three months or less when acquired and are considered cash equivalents for purposes of the consolidated statements of cash flows. Cash equivalents are stated at cost which approximates fair value due to their short maturity.
Revenue recognition: In accordance with industry practice, Jackpot recognizes as gaming revenues the net wins from gaming activities, which is the difference between gaming wins and losses. Route operations' revenues include the net wins generated under revenue-sharing agreements. Revenue-sharing payments to route locations are recorded as costs of route operations. 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.
Preopening costs: Certain costs incurred prior to and in connection with the opening of a casino operation are capitalized and expensed upon the opening of the casino.
Depreciation of property and equipment: Depreciation is provided using the straight-line method for property and equipment, including property held for rental. Estimated useful lives, limited as to leasehold improvements by the term of the lease, range as follows:
Buildings 30 to 40 years Gaming equipment 4 to 7 years Other equipment 3 to 7 years Leasehold improvements 1 to 12 years
Lease acquisition costs and other intangible assets: Significant incremental costs associated with the acquisition of location leases are capitalized. Incremental costs capitalized and amounts allocated to lease acquisition costs are amortized on a straight-line basis over the term of the related leases, including expected renewals, which range from 1 to 12 years. Lease acquisition costs and other intangible assets include lease acquisition costs, net of accumulated amortization, of $3,934,000 and $5,968,000 as of June 30, 1996 and 1995.
Goodwill: Goodwill represents the excess of the costs of acquired businesses over the fair value of their net assets when acquired and is amortized on a straight-line basis over a period of 40 years.
Income tax: A deferred tax liability or asset is recognized at each balance sheet date that represents the amount of tax expected to be payable or refundable in future years as a result of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts, using current tax rates and laws. The deferred portion of the tax provision or benefit is the result of changes in the net deferred tax asset or liability for the period.
Earnings (loss) per common share: Earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Stock options and warrants have been excluded from the computations in 1996 and 1995 because they had no effect on earnings per common share. The weighted average number of common shares outstanding was 9,307,000, 9,235,000 and 9,211,000 in 1996, 1995 and 1994 .
Note 2 - Cash and cash equivalents: Cash equivalents are comprised primarily of marketable municipal bonds and money market accounts. Cash and cash equivalents include cash equivalents of $29,716,000 and $23,707,000 at June 30, 1996 and 1995.
Note 3 - Casino operations: On August 13, 1996, Jackpot's Board of Directors approved a plan to dispose of Jackpot Owl, Inc. (the "Owl Club") and Jackpot's Highway 93 Casino, Inc. (the "Pony Express Casino"), Jackpot's two remaining casinos, as part of Jackpot's strategy to exit its casino operations. This decision was reached after considering that these casino operations generated unacceptably low returns on capital, possessed limited growth prospects and commanded a disproportionately high amount of management time. Jackpot intends to dispose of these properties as soon as is practical, subject to market conditions.
The Owl Club, as of June 30, 1996, operated 89 gaming machines and two live table games in Battle Mountain, Nevada. The Owl Club also has a beverage operation incident to the conduct of gaming activities, a restaurant operation and an eighteen room motel. Jackpot owns the land and buildings used in the Owl Club's casino and motel operations. Jackpot manages the operations of the Pony Express Casino in Jackpot, Nevada under a five-year space lease agreement, which Jackpot may cancel upon ninety days written notice to the lessor. As of June 30, 1996, Jackpot operated 94 gaming machines at this location.
Prior to the Board's approval to dispose of Jackpot's remaining two casinos, Jackpot sold its 88.9% interest in Jackpot City, Inc. (the "Nugget"), a casino operation located in Reno, Nevada, effective June 30, 1996. As a result of Jackpot's decision to dispose of its two remaining casinos and the sale of the Nugget, a charge of $2,247,000 was recorded in the fourth quarter of fiscal 1996, which consisted primarily of the write-down to fair value of $1,978,000 for certain long-lived assets of the Owl Club, including the remaining carrying value of $858,000 for goodwill. As of June 30, 1996, the carrying value of assets to be disposed of associated with the Owl Club and the Pony Express Casino was approximately $1,700,000. The results of operations of the Owl Club and the Pony Express Casino were not material in 1996, 1995 and 1994.
Note 4 - Other transactions: South Dakota: As a result of continuous evaluation of market and gaming conditions in Deadwood, South Dakota, management determined in the third quarter of fiscal 1995 that the value of Jackpot's investments in its South Dakota properties had been further impaired. Accordingly, Jackpot wrote down its assets by $800,000 in the third quarter of fiscal 1995. On June 30, 1995 Jackpot permanently closed all operations in South Dakota. During fiscal 1996, Jackpot sold its remaining assets in South Dakota for approximately $785,000 which approximated the carrying value of such assets.
Tunica, Mississippi dockside gaming facility: In September 1993, Jackpot entered into an agreement with President whereby Jackpot agreed to provide the necessary improvements to a site leased by Jackpot in Tunica, Mississippi and President agreed to provide to Jackpot the use of a riverboat, fully converted to a gaming configuration, and a floating restaurant with meeting facilities for the Tunica Facility. The Tunica Facility, which commenced operations in December 1993, permanently closed on July 8, 1994. As a result of the permanent closure of the Tunica Facility, Jackpot recorded a charge of $13,243,000 in the fourth quarter of fiscal 1994, which included the write down to estimated recoverable value of $11,371,000 for the remaining carrying value of its assets associated with the Tunica Facility and the provision of $1,872,000 for closing costs.
The results of operations for 100% of the Tunica Facility before closing costs and write down of assets to net recoverable value for the period from December 6, 1993 (date of commencement) to June 30, 1994 is summarized below (dollars in thousands):
Note 6 - Long-term debt: Long-term debt was comprised of the following (dollars in thousands):
Note 7 - Stockholders' equity: Authorized common stock: On January 6, 1994, Jackpot's stockholders approved an increase in the number of authorized shares of common stock from 15,000,000 to 30,000,000.
Shares reserved for issuance: Shares of common stock were reserved for the exercise of the following (shares in thousands):
Stock option plans: On December 7, 1990, Jackpot's stockholders approved the 1990 Incentive and Nonqualified Stock Option Plan (the "1990 Plan"), which became retroactively effective on June 27, 1990. Under the 1990 Plan, Jackpot's Board of Directors (the "Board") may grant "incentive" or "nonqualified" stock options up to 929,846 shares of Jackpot's common stock (the "Common Stock"). On September 30, 1992, the Board adopted the 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan") which was approved by Jackpot's stockholders on January 12, 1993. The 1992 Plan is administered by a committee of the Board (the "Committee"). On August 17, 1994, the Board adopted certain amendments (the "Amendments") to the 1992 Plan which were approved by Jackpot's stockholders on January 10, 1995. The Amendments increased the number of shares of Common Stock authorized for issuance pursuant to the 1992 Plan from 1,045,000 shares to 2,545,000.
The 1990 Plan provides that the Board may grant options with an exercise period of up to ten years from date of grant to directors, officers and other employees who own less than 10% and five years from date of grant to directors, officers and other employees who own more than 10% of Common Stock. The 1992 Plan provides that the Committee may grant nonqualified stock options with an exercise period of up to ten years from date of grant. Incentive stock options may be granted with an exercise period of up to ten years from date of grant to officers and other employees who own less than 10% of the Common Stock and five years to officers and other employees who own more than 10% of the Common Stock. Under both the 1990 Plan and 1992 Plan, incentive stock options may not be granted at an exercise price less than 100% of the fair market value of the Common Stock at the time the option is granted to an individual who owns less than 10% of the Common Stock and 110% of the fair market value to an individual who owns more than 10% of the Common Stock. Nonqualified stock options may not be granted at an exercise price less than 50% of the fair market value of the Common Stock at the time the option is granted.
The 1992 Plan provides that each individual who is a member of the Board on June 30 of any year, including any future director on any such date, will automatically be granted nonqualified stock options to purchase 27,500 shares of Common Stock on each such June 30. The option price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year, and expire five years from the date of grant. The exercise price of the June 30, 1996 option grants will be determined September 30, 1996, at which time the options become exercisable. At June 30, 1996, options granted to Jackpot's directors to purchase an aggregate of 467,500 shares of Common Stock were outstanding, of which 357,500 were exercisable.
The 1990 Plan and 1992 Plan terminate on the earlier of (i) when all shares subject to the 1990 Plan and 1992 Plan have been issued pursuant to the exercise of options granted under the 1990 Plan and 1992 Plan and (ii) June 26, 2000 and September 30, 2002, respectively, or on such earlier date as the Board or the Committee may determine. Any option outstanding at the respective Plan termination date remains outstanding until it has either expired or has been exercised.
Changes in options outstanding under the stock option plans are summarized below (shares in thousands):
(A) To be determined on September 30, 1996.
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):
Preferred stock purchase rights: In June 1994, the Board approved a Stockholder Rights Plan and on July 11, 1994, declared a dividend distribution of one Preferred Stock purchase right (the "Rights") payable on each outstanding share of Common Stock, as of July 15, 1994. On July 15, 1994, there were approximately 9,220,000 Rights to purchase Series A Junior Preferred Stock outstanding.
The Rights become exercisable only in the event, with certain exceptions, an acquiring party accumulates 15% or more of Jackpot's voting stock, or if a party announces an offer to acquire 30% or more of Jackpot's voting stock. The Rights will expire on July 15, 2004. Each Right will entitle the holder to purchase one-hundredth of a share of a Series A Junior Preferred Stock at a price of $30. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either Jackpot's Preferred Stock or shares in an "acquiring entity" at half of market value.
The Rights may be redeemed by Jackpot at $.01 per Right prior to the close of business on the tenth day after a public announcement that beneficial ownership of 15% or more of Jackpot's shares of voting stock has been accumulated by a single acquiror or a group (with certain exceptions), under circumstances set forth in the Rights Agreement. At June 30, 1996 and 1995, 150,000 shares of Series A Junior Preferred Stock were authorized, but unissued, and were reserved for issuance upon exercise of the Rights. The issuance of the Rights did not have a dilutive effect on earnings (loss) per share in 1996, 1995 and 1994.
Common Stock warrants: On January 31, 1996, 1,588,076 warrants to purchase Common Stock, which had been distributed in connection with a special rights issuance declared by the Board of Directors on July 1, 1992, expired pursuant to their terms.
Note 8 - Related party transactions: One director of Jackpot is a partner in a law firm that has provided various legal services for which Jackpot accrued legal fees aggregating approximately $110,000, $163,000 and $275,000 in 1996, 1995 and 1994.
Note 9 - Commitments and contingencies: Leases: Jackpot has noncancelable location license, lease and sublease agreements (referred to as "leases") for space at various locations for its gaming machines with terms expiring at various dates through 2004. Leases are generally at fixed rentals, although certain leases require payments based on percentages of revenues generated by gaming machines at the leased locations. In addition, office and warehouse space is utilized under noncancelable leases with terms expiring at various dates through 2006.
Future minimum lease payments (dollars in thousands) under such non- cancelable operating leases or licenses aggregated approximately $59,058 at June 30, 1996, payable as follows: $25,180 in 1997; $22,545 in 1998; $8,732 in 1999; $479 in 2000; $411 in 2001; and $1,711 thereafter.
Rent expense was comprised as follows (dollars in thousands):
Employment agreements: Jackpot has an employment agreement with Don R. Kornstein, President, Chief Executive Officer and Director which currently expires on September 30, 1999. The agreement is automatically extended for additional one year periods on each October 1 unless, not later than March 31, immediately preceding each October 1, notice is given by Jackpot or Mr. Kornstein.
Mr. Kornstein's employment agreement provides for an annual bonus based on various percentages of certain amounts by which earnings before interest, taxes, depreciation, amortization and certain other items, as defined in the agreement, exceed certain levels for such fiscal year. Mr. Kornstein's bonus was $205,000 and $220,000 in 1996 and 1995. The aggregate commitment for future salaries at June 30, 1996, excluding bonuses, under Mr. Kornstein's agreement is approximately $2,347,000. 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. Such amount, depending upon the circumstance, would be determined pursuant to the terms of the employment agreement. The minimum contingent liability at June 30, 1996 under Jackpot's employment and severance agreements was approximately $2,610,000.
On April 20, 1995 Jeffrey L. Gilbert and Frederick Sandvick resigned as Executive Vice President and Chief Operating Officer and Executive Vice President and Chief Financial Officer, respectively. In connection with the termination of their respective employment agreements, which was effective April 28, 1995, Jackpot paid Messrs. Gilbert and Sandvick an aggregate of approximately $770,000 in consideration for the termination of employment and the cancellation of certain nonqualified stock options in full satisfaction of all rights under their respective employment agreements including, but not limited to, severance compensation and accrued vacation. Options to purchase an aggregate of 475,085 shares of Common Stock held by such persons were cancelled on April 28, 1995.
On May 3, 1994 (the "Resignation Date"), John F. O'Reilly resigned as Chairman of the Board of Directors and Chief Executive Officer of Jackpot. Pursuant to the terms of Mr. O'Reilly's employment agreement and settlement agreement with Jackpot, Jackpot paid Mr. O'Reilly approximately $1,256,000 in respect of (i) the present value of his salary through June 30, 1996, the expiration of the term of Mr. O'Reilly's employment agreement, and (ii) certain other compensation and life insurance premiums, and granted to Mr. O'Reilly options to purchase 50,000 shares of Common Stock at an exercise price of $15.00 per share exercisable for three years from the Resignation Date. The fair market value of the Common Stock based on the closing market price on the date of Mr. O'Reilly's resignation was $10.00 per share. Other options to purchase an aggregate of 550,000 shares of Common Stock held by Mr. O'Reilly expired on August 1, 1994.
Financial instruments with concentration of credit risk: The financial instruments that potentially subject Jackpot to concentrations of credit risk consist principally of cash, cash equivalents, certain receivables and lease and other security deposits. Jackpot maintains cash and certain cash equivalents with financial institutions in amounts, which at times may be in excess of the FDIC insurance limits. Jackpot's cash equivalents are invested in several high-grade securities which limits Jackpot's exposure to concentrations of credit risk.
A substantial portion of Jackpot's business activity is with customers who frequent retail stores (supermarkets, drugstores, merchandise stores and convenience stores) in Nevada. Generally, Jackpot leases space in stores which are part of a large chain of stores. At June 30, 1996, Jackpot had unsecured lease and other security deposits of $3,436,000 held primarily by two publicly-held chain stores.
Legal matters: On August 17, 1992, Phar-Mor, Inc. ("Phar-Mor"), a large chain store, announced that it had filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Jackpot operated 51 gaming machines at three Phar-Mor store locations in Nevada under a license agreement dated February 10, 1990 (the "Original Agreement"). Under the Original Agreement, Jackpot made certain advances to Phar-Mor. Thereafter, Jackpot and Phar-Mor, subject to bankruptcy court approval, entered into an amended license agreement, dated January 1, 1993 (the "Amended Agreement"). If the Amended Agreement were to become final, Jackpot would receive credits for certain prepaid sums but would be required to pay certain additional obligations.
On May 12, 1995, Phar-Mor announced the closing of 41 stores, including its three stores in Nevada. On May 24, 1995 Jackpot notified Phar-Mor that it was in default under (i) the Original Agreement, and (ii) the Amended Agreement to the extent applicable. Jackpot has taken the position that the Amended Agreement has not become operative and has not replaced the Original Agreement. Jackpot has claimed monetary damages in excess of several millions of dollars resulting from Phar-Mor's alleged default, consisting of, but not limited to certain refundable monies, prepaid license fees, lost profits and other consequential and incidental damages.
On July 25, 1995, Phar-Mor notified Jackpot that it disagreed with Jackpot's position that Phar-Mor has defaulted under the terms of either the Original Agreement or the Amended Agreement. Phar-Mor maintains that the Amended Agreement is the operative agreement and is seeking to enforce its rights thereunder. On or about March 7, 1996, Phar-Mor filed a lawsuit against Jackpot in the United States Bankruptcy Court for the Northern District of Ohio, claiming it is owed approximately $1 million under the Amended Agreement. Jackpot has filed an answer and counterclaim reflecting its position that under the Original Agreement Jackpot is owed in excess of $3 million. Jackpot, based upon discussions with counsel, does not believe it is probable that Phar-Mor will prevail in this matter. If Phar-Mor were to prevail and the Amended Agreement is determined to be the operative agreement, Jackpot could be liable for certain obligations under the Amended Agreement up to approximately $1 million. If Jackpot were to prevail, it would become an unsecured creditor with respect to its claims against Phar-Mor which exceed $3 million.
As result of Phar-Mor's announcement, Jackpot wrote-off all remaining costs related to lease deposits, prepaid rent and other lease connected expenditures for Phar-Mor and adjusted certain amounts due Phar-Mor pursuant to terms of the Original Agreement in the fourth quarter of fiscal 1995. The write-down of the above mentioned assets, net of certain liability adjustments did not have a material effect on Jackpot's financial position or its fiscal 1995 results of operations.
Jackpot is a party to various other claims, legal actions and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions filed by Jackpot. Management believes that its defenses are substantial in each of these matters and that Jackpot's legal position can be successfully defended without material adverse effect on its consolidated financial statements.
Note 10 - Revenues derived from major locations: Gaming machine operations at two groups of affiliated store chains in 1996, 1995 and 1994 accounted for more than 10% of Jackpot's total revenues. Revenues for Jackpot's top two affiliated store chains were approximately $23,000,000 and $12,000,000, respectively in 1996, $22,000,000 and $12,000,000, respectively in 1995 and $21,000,000 and $10,000,000, respectively in 1994. Each individual store chain included in an affiliated group of store chains has a separate lease with Jackpot.
Note 11 - Federal income tax: A reconciliation of the Federal statutory income tax rate to the effective income tax rate based on income (loss) before income tax follows:
The tax items comprising Jackpot's net deferred tax asset as of June 30, 1996, 1995 and 1994 are as follows (dollars in thousands):
Jackpot realized tax benefits of $54,000, $277,000 and $147,000 in 1996, 1995 and 1994 as a result of the exercise of certain incentive and nonqualified stock options. The tax benefits have been reflected as a decrease in current income tax payable and an increase in additional paid-in capital.
Note 12 - Benefit plans: Jackpot terminated a deferred profit sharing plan (the "Profit Sharing Plan"), effective March 31, 1996. Contributions to the Profit Sharing Plan, which covered substantially all employees, were at the discretion of the Board, subject to limitations based on profits as specified in the Profit Sharing Plan. The Profit Sharing Plan had no expense in 1996. The Profit Sharing Plan expense was $100,000 in both 1995 and 1994.
On May 14, 1996, Jackpot terminated the Jackpot Retirement Plan for Directors, as amended (the "Retirement Plan"). In consideration for the termination of the Retirement Plan, three directors received a lump sum distribution of accrued benefits in an aggregate amount of $1,485,000 ($495,000 each) in May 1996. Pursuant to the terms of the Retirement Plan, the amount of each director's distribution was equal to the aggregate of the annual base retainer paid to the respective director for years of service on the Board, including service prior to the implementation of the Retirement Plan on October 1, 1990, except for certain years that the directors waived such benefit. Interest was added to the accounts of each director quarterly, using the one-year Treasury bill rate.
The funding of the accrued benefits under the Retirement Plan was made from a restricted trust. The amount of the distributions approximated the fair value of the investments in the trust. As a result of the termination of the Retirement Plan and the lump sum distributions in May 1996, there is no remaining obligations or liability under the Retirement Plan at June 30, 1996.
On August 13, 1996, the Board approved the termination of the Salary Continuation Plan for Executives (the "Continuation Plan"). The Continuation Plan provides certain senior executives with a retirement benefit, which is based on compensation, to be paid over a period of up to 15 years beginning at normal retirement age. The Continuation Plan requires certain vesting periods and allows reduced benefits at certain early retirement ages and pre-retirement survivors' benefits. The Continuation Plan was unfunded at June 30, 1996 and 1995. The Company has entered into settlement agreements with substantially all of the individuals covered under the Continuation Plan. The accrued pension liability in connection with these agreements was $279,000 at June 30, 1996. The accumulated and projected benefit obligations for the remaining executives covered under the Continuation Plan was not material at June 30, 1996.
The Board waived current service benefits that would have accrued in 1996, 1995 and 1994 pursuant to the Retirement Plan and the Continuation Plan, other than the interest earned on accrued benefits. The Retirement Plan and the Continuation Plan, both defined benefit plans, had no plan assets. Interest cost on accrued benefits is included in general and administrative costs and expenses and the amortization of unrecognized prior service cost is included in amortization expense in the accompanying consolidated statements of operations. The unrecognized prior service cost has been fully amortized at June 30, 1996 and was $253,000 at June 30, 1995. The accrued pension liability under the Retirement Plan and Continuation Plan was $279,000 and $2,257,000 at June 30, 1996 and 1995, respectively. The pension expense for Jackpot's defined benefit plans for 1996, 1995 and 1994 includes the following components (dollars in thousands):
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL INFORMATION YEARS ENDED JUNE 30, 1996 AND 1995 (Dollars in thousands, except per share data) (Unaudited)
Summarized quarterly financial information for 1996 and 1995 follows:
(A) Gross operating income is revenues less route and casino expenses, deprecation associated with gaming machine operations and amortization associated with lease acquisition costs.
(B) Includes a charge of $2.2 million from the write-down and sale of certain casino properties. See Note 3 of Notes to Consolidated Financial Statements.