UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to________________
Commission file no. 1-9728
JACKPOT ENTERPRISES, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
NEVADA 88-0169922
______________________________ __________________________________
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1110 Palms Airport Drive, Las Vegas, Nevada 89119
___________________________________________ ________
(Address of principal executive offices) (Zip Code)
702-263-5555
__________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
_____ _____
There were 8,933,495 shares of the registrant's common stock outstanding as of
February 6, 1998.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997
Condensed Consolidated Statements of Income -
Three and Six Months Ended December 31, 1997 and 1996
Condensed Consolidated Statement of Stockholders'
Equity - Six Months Ended December 31, 1997
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Stockholders
Item 6. Exhibits and Reports on Form 8-K<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
December 31, June 30,
ASSETS 1997 1997
______ ___________ ________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,035 $ 47,945
Prepaid expenses 1,664 1,438
Other current assets 1,691 1,728
________ ________
Total current assets 52,390 51,111
________ ________
Property and equipment, at cost:
Land and buildings 1,535 1,535
Gaming equipment 29,661 28,202
Other equipment 4,648 4,595
Leasehold improvements 339 339
________ ________
36,183 34,671
Less accumulated depreciation (20,999) (21,582)
________ ________
15,184 13,089
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$4,228 and $6,198 2,557 3,596
Goodwill, net of accumulated
amortization of $2,631 and $2,547 3,991 4,074
Lease and other security deposits 3,126 2,959
Other non-current assets 482 438
________ ________
Total assets $ 77,730 $ 75,267
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Concluded)
<TABLE>
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
____________________________________ ___________ ________
<S> <C> <C>
Current liabilities:
Accounts payable $ 454 $ 375
Other current liabilities 4,298 4,407
_______ _______
Total current liabilities 4,752 4,782
Deferred rent 2,260 2,510
Deferred income tax 677 633
Other liabilities 61 61
_______ _______
Total liabilities 7,750 7,986
_______ _______
Commitments and contingencies
Stockholders' equity:
Preferred stock - authorized
1,000,000 shares of $1 par value;
none issued
Common stock - authorized
30,000,000 shares of $.01 par
value; 9,823,993 shares issued 98 98
Additional paid-in capital 66,033 66,033
Retained earnings 12,734 9,253
Less 810,558 and 741,958 shares
of common stock in treasury, at cost (8,885) (8,103)
_______ _______
Total stockholders' equity 69,980 67,281
_______ _______
Total liabilities and
stockholders' equity $77,730 $75,267
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in thousands, except per share data)
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
__________________ ________________
1997 1996 1997 1996
_______ _______ _______ _______
<S> <C> <C> <C> <C>
Revenues:
Route operations $22,949 $21,766 $44,867 $42,933
Casino operations 661 794 1,410 1,582
_______ _______ _______ _______
Totals 23,610 22,560 46,277 44,515
_______ _______ _______ _______
Costs and expenses:
Route operations 18,612 17,182 36,903 34,159
Casino operations 691 714 1,418 1,467
Amortization 286 431 562 862
Depreciation 897 858 1,765 1,746
General and administrative 961 1,012 1,886 1,995
_______ _______ _______ _______
Totals 21,447 20,197 42,534 40,229
_______ _______ _______ _______
Operating income 2,163 2,363 3,743 4,286
_______ _______ _______ _______
Other income:
Interest and other income 452 447 1,025 803
_______ _______ _______ _______
Totals 452 447 1,025 803
_______ _______ _______ _______
Income before income tax 2,615 2,810 4,768 5,089
_______ _______ _______ _______
Provision (credit) for Federal
income tax:
Current 826 872 1,243 1,578
Deferred (120) 44
_______ _______ _______ _______
Totals 706 872 1,287 1,578
_______ _______ _______ _______
Net income $ 1,909 $ 1,938 $ 3,481 $ 3,511
======= ======= ======= =======
Basic earnings per share $ .21 $ .21 $ .38 $ .38
======= ======= ======= =======
Diluted earnings per share $ .21 $ .21 $ .38 $ .37
======= ======= ======= =======
Cash dividends per share of
common stock $ - $ .08 $ - $ .16
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1997
(Dollars and shares in thousands)
<TABLE>
Additional Treasury Total
Common Stock Paid-in Retained Stock Stockholders'
_____________ Capital Earnings ______________ Equity
Shares Amount Shares Amount
______ ______ __________ ________ ______ _______ ____________
<C> <C> <C> <C> <C> <C> <C>
Balance
July 1,
1997 9,824 $98 $66,033 $ 9,253 (742) $(8,103) $67,281
Repurchases
of common
stock (69) (782) (782)
Net income 3,481 3,481
_____ ___ _______ _______ ____ _______ _______
Balance
December
31, 1997 9,824 $98 $66,033 $12,734 (811) $(8,885) $69,980
===== === ======= ======= ==== ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in thousands)
<TABLE>
1997 1996
_______ _______
<S> <C> <C>
Operating activities:
Net income $ 3,481 $ 3,511
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,327 2,608
Deferred income tax 44
Increase (decrease) from changes in:
Prepaid expenses and other current assets (350) 191
Other non-current assets (125) 58
Accounts payable 79 (12)
Other current liabilities (109) 275
Deferred rent 351 (277)
_______ _______
Net cash provided by operating activities 5,698 6,354
_______ _______
Investing activities:
Net proceeds from location operators 100 130
Proceeds from sales of subsidiary and property 201 1,465
Purchases of property and equipment (4,085) (1,390)
Increase in lease acquisition costs and other
intangible assets (42) (133)
_______ _______
Net cash (used in) provided by investing
activities (3,826) 72
_______ _______
Financing activities:
Proceeds from issuance of common stock 193
Repurchases of common stock (782) (837)
Dividends paid (1,496)
_______ _______
Net cash used in financing activities (782) (2,140)
_______ _______
Net increase in cash and cash equivalents 1,090 4,286
Cash and cash equivalents at beginning of period 47,945 39,024
_______ _______
Cash and cash equivalents at end of period $49,035 $43,310
======= =======
Supplemental disclosures of cash flow data:
Cash paid during the period for:
Federal income tax $ 1,400 $ 800
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General:
The accompanying unaudited condensed consolidated financial
statements included herein have been prepared by Jackpot pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to make
the information presented not misleading.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly Jackpot's financial position as of December 31, 1997, the
results of its operations for the three and six months ended
December 31, 1997 and 1996 and its cash flows for the six months
ended December 31, 1997 and 1996. The earnings for the three
and six months ended December 31, 1997 and 1996 are not
necessarily indicative of results for a full year. Information
included in the condensed consolidated balance sheet as of
June 30, 1997 has been derived from Jackpot's Annual Report
to the Securities and Exchange Commission on Form 10-K
for the year ended June 30, 1997 (the "1997 Form 10-K").
These unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements
and disclosures included in the 1997 Form 10-K.
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"),
which is effective for fiscal periods ending after December 15,
1997. SFAS 129 establishes standards for disclosing information
about an entity's capital structure. Management intends to comply
with the disclosure requirements of this statement.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which is effective for fiscal years beginning after December 15,
1997. SFAS 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position.
Management does not believe this statement will have a material
impact on the consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes
additional standards for segment reporting in the financial
statements. Management has not determined the extent of the
disclosure required by SFAS 131.
Note 2 - Earnings per share:
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which is
effective for periods, including interim periods, ending after
December 15, 1997. SFAS 128 establishes standards for computing
and presenting earnings per share ("EPS"), including the
replacement of the presentation of primary EPS with the
presentation of basic EPS, as defined. As required by SFAS 128,
Jackpot adopted this statement for the three month period ended
December 31, 1997. All prior-period EPS data presented has been
restated to conform with the provisions of the statement. The
implementation of SFAS 128 did not have a significant impact on
EPS for the three and six months ended December 31, 1996.
Basic EPS for the three and six months ended December 31, 1997 and
1996 is computed by dividing net income by the weighted average
number of common shares outstanding for the respective period.
Diluted EPS for the three and six months ended December 31, 1997
and 1996 is computed by dividing net income by the weighted number
of common and common equivalent shares outstanding for the
respective period. Options to purchase common stock, whose
exercise price was greater than the average market price for the
respective period, have been excluded from the computation of
diluted EPS. Such antidilutive options outstanding for the three
months ended December 31, 1997 and 1996 were 137,000 and 758,000,
respectively, and for the six months ended December 31, 1997 and
1996 were 445,000 and 755,000, respectively. The following is the
amount of income and number of shares used in the basic and
diluted EPS computations (dollars and shares in thousands, except
per share data):
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
__________________ ________________
1997 1996 1997 1996
______ ______ ______ ______
<S> <C> <C> <C> <C>
Basic earnings per share:
Earnings:
Income available to common
stockholders $1,909 $1,938 $3,481 $3,511
====== ====== ====== ======
Shares:
Weighted average number of common
shares outstanding 9,072 9,333 9,077 9,344
====== ======= ====== ======
Basic earnings per share $ .21 $ .21 $ .38 $ .38
====== ======= ====== ======
Diluted earnings per share:
Earnings:
Income available to common
stockholders $1,909 $1,938 $3,481 $3,511
Effect of dilutive securities - - - -
______ ______ ______ ______
Income, as adjusted $1,909 $1,938 $3,481 $3,511
====== ====== ====== ======
Shares:
Weighted average number of common
shares outstanding 9,072 9,333 9,077 9,344
Common shares issuable upon assumed
exercise of dilutive stock options 1,738 1,343 1,492 1,343
Less common shares assumed to be
repurchased by application of the
treasury stock method to the
proceeds using the average
market price for the period (1,554) (1,272) (1,336) (1,273)
______ ______ ______ ______
Weighted average number of common
shares and common share
equivalents outstanding 9,256 9,404 9,233 9,414
====== ====== ====== ======
Diluted earnings per share $ .21 $ .21 $ .38 $ .37
====== ====== ====== ======
</TABLE>
Note 3 - Stockholders' equity:
The 1992 Incentive and Non-qualified Stock Option Plan:
On September 30, 1997, the exercise price of the June 30, 1997
grant of nonqualified stock options to purchase an aggregate of
110,000 shares of common stock (27,500 each to four directors) was
vested at $11.50 per share, the fair market value of the stock on
that date, pursuant to the terms of the 1992 Incentive and
Non-qualified Stock Option Plan (the "1992 Plan"). See Note 5 of
Notes to Consolidated Financial Statements in the 1997 Form 10-K
for further information regarding the 1992 Plan and option grants.
Common stock in treasury:
Jackpot purchased 68,600 and 79,940 shares of its common stock at
the market price on the date of purchase for a total cost of
approximately $782,000 and $898,000, or an average of $11.40 and
$11.23 per share during the six months ended December 31, 1997 and
one month ended January 31, 1998, respectively.
Note 4 - Commitments and contingencies:
Litigation settlement:
In March 1996, Phar-Mor, Inc. ("Phar-Mor"), a large chain store,
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 an amended license agreement dated
January 1, 1993 (the "Amended Agreement"). Jackpot filed an
answer and counterclaim and certain proofs of claim reflecting its
position that under a license agreement dated February 10, 1990
(the "Original Agreement"), Jackpot is owed in excess of $3
million. See Note 7 of Notes to Consolidated Financial Statements
in the 1997 Form 10-K for a summary of these actions.
In December 1997, the Court granted partial summary judgment in
favor of Phar-Mor and against Jackpot, and set the matter for trial
for determination of final damages. In order to avoid further
litigation and to finally and fully resolve all claims between the
parties, Jackpot entered into a settlement agreement and mutual
release with Phar-Mor, effective February 6, 1998. Pursuant to the
terms of the agreement, both the Original Agreement and the Amended
Agreement are terminated and neither party has any remaining rights
or continuing obligations to the other under the Original
Agreement, the Amended Agreement or the proofs of claim. The cost
of the settlement to Jackpot has been fully accrued as of
December 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
_________________________________________________
Condition and Results of Operations
___________________________________
Capital Resources and Liquidity
_______________________________
Cash Flows:
Jackpot's principal sources of cash for the six months ended December 31,
1997 (the "1997 six months"), consisted of the cash flows from operating
activities and its available cash and cash equivalents which, at June 30,
1997, was $47.9 million and at December 31, 1997 was $49.0 million. Net
cash provided by operating activities for the 1997 six months was $5.7
million, compared to $6.4 million provided by operating activities for
the six months ended December 31, 1996 (the "1996 six months").
Net cash used in investing activities for the 1997 six months increased
$3.9 million, from $.1 million provided by investing activities for the
1996 six months to $3.8 million used in investing activities for the 1997
six months. The 1996 six months includes the receipt of $1.3 million from the
sale of Jackpot's interest in a casino subsidiary. Cash used in investing
activities for purchases of property and equipment increased $2.7 million, from
$1.4 million for the 1996 six months to $4.1 million for the 1997 six months.
Primarily, as a result of the transactions described above, net cash used in
investing activities increased by $3.9 million.
Net cash used in financing activities for the 1997 six months was $.8
million, which consisted of payments for repurchases of common stock, compared
to $2.1 million used in financing activities for the 1996 six months. The net
cash used in financing activities for the 1996 six months was approximately
$1.3 million greater than the net cash used in financing activities for
the 1997 six months principally due to dividends paid of $1.5 million for the
1996 six months.
Liquidity:
At December 31, 1997, Jackpot had cash and cash equivalents of $49.0
million, an increase of $1.1 million from June 30, 1997. Jackpot's working
capital increased to $47.6 million at December 31, 1997, from $46.3 million at
June 30, 1997 primarily as a result of the activities described above.
On October 29, 1996, Jackpot's Board of Directors authorized Jackpot's
management to repurchase up to 500,000 shares of its common stock, from time to
time, at prevailing market prices. From such authorization through January
1998, Jackpot has repurchased approximately 432,000 shares of common stock at a
cost of approximately $4.5 million. On January 22, 1998, Jackpot's Board of
Directors authorized management to repurchase an additional 500,000 shares of
Jackpot's common stock, which increased the repurchase authorization from
500,000 to 1,000,000 shares.
In March 1996, Phar-Mor, Inc. ("Phar-Mor"), a large chain store, 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 an amended
license agreement dated January 1, 1993 (the "Amended Agreement"). Jackpot
filed an answer and counterclaim and certain proofs of claim reflecting its
position that under a license agreement dated February 10, 1990 (the "Original
Agreement"), Jackpot is owed in excess of $3 million. See Note 7 of Notes to
Consolidated Financial Statements in the 1997 Form 10-K for a summary of these
actions.
In December 1997, the Court granted partial summary judgment in favor of
Phar-Mor and against Jackpot, and set the matter for trial for determination of
final damages. In order to avoid further litigation and to finally and fully
resolve all claims between the parties, Jackpot entered into a settlement
agreement and mutual release with Phar-Mor, effective February 6, 1998.
Pursuant to the terms of the agreement, both the Original Agreement and the
Amended Agreement are terminated and neither party has any remaining rights or
continuing obligations to the other under the Original Agreement, the Amended
Agreement or the proofs of claim. The cost of the settlement to Jackpot has
been fully accrued as of December 31, 1997.
Management believes Jackpot's working capital and cash provided by
operations will be sufficient to enable Jackpot to meet its planned capital
expenditures and other cash requirements for the remainder of the fiscal year
ending June 30, 1998. With respect to planned capital expenditures, management
anticipates Jackpot will purchase approximately $4.4 million of property and
equipment, exclusive of business acquisitions, if any, in the remainder of
fiscal 1998 to be used in existing and currently planned new locations.
Jackpot continues to selectively explore expansion opportunities, both in
and outside Nevada, and various potential acquisitions, both gaming and
nongaming. Management believes working capital and cash provided by operations
will be sufficient to enable Jackpot to pursue expansion opportunities; however,
Jackpot may seek additional debt or equity financing to facilitate expansion
opportunities and potential acquisitions.
Recently Issued Accounting Standards:
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), which is effective for periods, including interim periods, ending
after December 15, 1997. SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS"), including the replacement of the
presentation of primary EPS with the presentation of basic EPS, as defined. As
required by SFAS 128, Jackpot adopted this statement for the three month period
ended December 31, 1997. All prior-period EPS data presented has been restated
to conform with the provisions of the statement. The implementation of SFAS 128
did not have a significant impact on EPS for the three and six months ended
December 31, 1996.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
129"), which is effective for fiscal periods ending after December 15, 1997.
SFAS 129 establishes standards for disclosing information about an entity's
capital structure. Management intends to comply with the disclosure
requirements of this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for
fiscal years beginning after December 15, 1997. SFAS 130 requires companies to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. Management does not believe this
statement will have a material impact on the consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related Information"
("SFAS 131"), which is effective for fiscal years beginning after December 15,
1997. SFAS 131 establishes additional standards for segment reporting in the
financial statements. Management has not determined the extent of the
disclosure required by SFAS 131.
Results of Operations
_____________________
Revenues:
Total revenues for the three months ended December 31, 1997 (the "1997
three months") increased $1.1 million, from $22.5 million for the three months
ended December 31, 1996 (the "1996 three months") to $23.6 million for the 1997
three months, while total revenues for the 1997 six months increased $1.8
million, from $44.5 million for the 1996 six months to $46.3 million for the
1997 six months. The increase in total revenues of $1.1 million for the 1997
three months was the net result of an increase of $1.2 million (from $21.7
million for the 1996 three months to $22.9 million for the 1997 three months) in
gaming machine route operations ("route operations") revenues and a decrease of
$.1 million (from $.8 million for the 1996 three months to $.7 million for the
1997 three months) in casino operations revenues. The increase in total
revenues of $1.8 million for the 1997 six months was the net result of an
increase of $2.0 million (from $42.9 million for the 1996 six months to $44.9
million for the 1997 six months) in route operations revenues and a decrease of
$.2 million (from $1.6 million for the 1996 six months to $1.4 million for the
1997 six months) in casino operations revenues.
The increases in route operations revenues for the 1997 three months and
1997 six months of $1.2 million and $2.0 million, respectively, resulted from a
combination of additional revenues generated from new and existing locations,
net of lost revenues from terminated locations. New locations generated
revenues of $2.0 million and $3.9 million and existing locations generated
additional revenues of $1.7 million and $3.0 million for the 1997 three months
and the 1997 six months, respectively. Terminated locations had generated
revenues of $2.5 million and $4.9 million for the 1996 three months and the
1996 six months, respectively. The loss of revenues generated at terminated
locations was due primarily to the expiration of Jackpot's right to operate
at the locations of Warehouse Markets, Inc., a significant chain store customer,
on June 30, 1997. Despite a long-term relationship with such customer, Jackpot
was not willing to agree with the terms sought for a contract extension, which
management believed were uneconomic. The agreement involved the operation of
approximately 272 gaming machines in 16 locations. In fiscal 1997, Jackpot
generated approximately 6% of its total revenues and a significant amount of
operating income from operations at such customer's locations. For additional
information regarding Jackpot's operations, see Item 1 - Business - Gaming
Machine Route Operations in the 1997 Form 10-K.
Route operations revenues attributable to fixed payment leases and revenue
sharing contracts for the three and six months ended December 31, 1997 and 1996
are summarized below (dollars in thousands):
<PAGE>
<TABLE>
Three Months ended December 31,
_______________________________________
1997 1996
___________________ ___________________
Percent Percent
of route of route
operations operations
Amount revenues Amount revenues
_______ __________ _______ __________
<S> <C> <C> <C> <C>
Route operations:
Fixed payment leases $16,939 73.8% $14,514 66.7%
Revenue sharing contracts 6,010 26.2 7,252 33.3
_______ _____ _______ _____
Totals $22,949 100.0% $21,766 100.0%
======= ===== ======= =====
Six Months ended December 31,
_______________________________________
1997 1996
___________________ ___________________
Percent Percent
of route of route
operations operations
Amount revenues Amount revenues
_______ __________ _______ __________
Route operations:
Fixed payment leases $33,383 74.4% $28,318 66.0%
Revenue sharing contracts 11,484 25.6 14,615 34.0
_______ _____ _______ _____
Totals $44,867 100.0% $42,933 100.0%
======= ===== ======= =====
</TABLE>
The decreases in route operations revenues attributable to revenue sharing
contracts of $1.2 million (from $7.2 million for the 1996 three months to $6.0
million for the 1997 three months) and $3.1 million (from $14.6 million for the
1996 six months to $11.5 million for the 1997 six months) were principally due
to the loss of the significant customer previously discussed.
Costs and expenses:
Route operations expenses for the 1997 three months and 1997 six months
increased $1.4 million (from $17.2 million for the 1996 three months to $18.6
million for the 1997 three months) and $2.7 million (from $34.2 million for the
1996 six months to $36.9 million for the 1997 six months) and, as a percentage
of route operations revenues, increased to 81.1% and 82.2% for the 1997 three
months and 1997 six months, respectively, from 78.9% and 79.6% for the 1996
three months and 1996 six months, respectively. Such increases were principally
attributable to an increase in location rent. With respect to location rent,
which is the single largest route operations expense, Jackpot entered into
agreements for long-term extensions with four of its largest retail chain store
customers during 1997. Such agreements, two of which were not due to expire on
June 30, 1997, became effective July 1, 1997. A very competitive pricing
environment caused Jackpot to offer significant increases in location rent over
the existing agreements.
The increases in route operations expenses of $1.4 million and $2.7 million
resulted primarily from a combination of increases of $1.7 million and $3.5
million in location rent for locations of existing chain store customers, which
were related to the four chain store renewals, increases of $.9 million and $1.6
million in location rent for new locations of existing chain store customers,
net of decreases of $.9 million and $1.8 million in location rent for lost chain
store customers and decreases of $.3 million and $.6 million in other route
operations expenses, respectively. For a further description of the Company's
lease and license agreements, see Item 1 - Business - Gaming Machine Route
Operations and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview in the 1997 Form 10-K.
Amortization expense for the 1997 three months and 1997 six months
decreased $.1 million (from $.4 million for the 1996 three months to $.3 million
for the 1997 three months) and $.3 million (from $.9 million for the 1996 six
months to $.6 million for the 1997 six months). The decrease in amortization
expense for the respective 1997 periods was attributable to reductions in
amortization expense related to certain lease acquisition costs. Depreciation
expense for the 1997 three months and 1997 six months, compared to the 1996
three months and 1996 six months, remained constant at $.9 million and $1.8
million, respectively.
General and administrative expense for the 1997 three months, compared to
the 1996 three months, remained constant at $1.0 million, while general and
administrative expense for the 1997 six months decreased $.1 million, from $2.0
million for the 1996 six months to $1.9 million for the 1997 six months.
Other income:
Other income for the 1997 three months, compared to the 1996 three months,
remained constant at $.4 million, while other income for the 1997 six months
increased $.2 million (from $.8 million for the 1996 six months to $1.0 million
for the 1997 six months) primarily due to the increase in interest income earned
from cash equivalents and to the receipt of approximately $.1 million for
liquidated damages from the potential purchaser of Jackpot's remaining two
casinos. Jackpot received such amount as a result of the potential purchaser's
withdrawal of his gaming application with the Nevada Gaming Authorities. In
connection with its strategy to exit its casino operations, Jackpot is
evaluating its options and continues to market its two casinos for sale.
However, unless Jackpot is able to enter into agreements for the sale of these
properties, on terms acceptable to Jackpot, no assurance can be given that such
disposals will occur.
Other:
The effective tax rate for the 1997 three months and 1997 six months was
27%, which was lower than the 31% rate for the 1996 three months and 1996 six
months, primarily because of the increase in tax benefits from tax-exempt
interest income.
General:
Operating income for the 1997 three months and 1997 six months decreased
$.2 million (from $2.4 million for the 1996 three months to $2.2 million for the
1997 three months) and $.6 million (from $4.3 million for the 1996 six months to
$3.7 million for the 1997 six months). The decrease in operating income for the
1997 three months was due principally to a decrease in the route operations
operating margin of $.2 million, from $4.6 million to $4.4 million, while the
decrease in operating income for the 1997 six months resulted primarily from a
combination of a decrease in the route operations operating margin of $.8
million, net of a decrease in amortization of $.3 million. The decrease in the
route operations operating margin of $.8 million (from $8.8 million for the 1996
six months to $8.0 million for the 1997 six months) was due principally to the
increase in location rent expense for existing locations as previously
described.
While net income and basic earnings per share for the 1997 three months and
1997 six months remained constant, due to the factors described above, the
Company's results of operations for the remainder of fiscal 1998 will continue
to be adversely affected, compared to the prior year periods, due to the
intensely competitive market conditions prevailing for gaming machine route
operators, the loss of the significant chain store customer described above and
the above referenced increases in location rent.
However, management believes that the following may lessen the adverse
effects described above: (i) increased revenues at existing locations due to
capital improvements or replacements of gaming machines, (ii) increased revenues
at existing locations as a result of the maturing of several recently opened new
chain store locations, and (iii) additional revenues from new locations
scheduled to be opened by Jackpot's largest chain store customers. The Company
experienced positive results primarily from (i), and to a lesser degree, from
(ii) and (iii) during the 1997 three months and 1997 six months. While
management believes that these events will occur, they are, in part, based upon
factors that are outside the Company's control. Accordingly, no assurance can
be given that such benefits will occur, or occur at sufficient levels to lessen
the adverse effects described above.
Year 2000 issues:
Jackpot is presently reviewing its computer hardware and software for
potential "Year 2000" issues. The Year 2000 problem may occur as a result of
the inability of computer hardware and/or software to appropriately recognize
calendar dates beginning in the year 2000. Jackpot has appointed a senior
officer with the responsibility of overseeing Jackpot's Year 2000 review. While
management believes, based on its preliminary findings, that the Company will
not experience significant adverse effects or incur material costs regarding
"Year 2000" issues, no such assurance can be given until the review has been
completed.
Forward-looking statements:
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Company with the Securities and Exchange Commission contains
statements that may be considered forward-looking. In addition, from time to
time, the Company may release or publish forward-looking statements relating to
such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are not limited to, competitive
pressures, the loss or nonrenewal of any of Jackpot's significant contracts,
conditioning or suspension of any gaming license, adverse results of significant
litigation matters, possible future financial difficulties of a significant
customer and the continued growth of the gaming industry and population in
Nevada. Readers are cautioned not to place undue reliance on any forward-
looking statements, which speak only as of the date thereof. The Company
assumes no obligation to update or supplement forward-looking statements as a
result of new circumstances or subsequent events.
<PAGE>
PART II. OTHER INFORMATION
_________________
Item 1. Legal Proceedings
In March 1996, Phar-Mor, Inc. ("Phar-Mor"), a large chain
store, 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 an amended license
agreement dated January 1, 1993 (the "Amended Agreement").
Jackpot filed an answer and counterclaim and certain proofs
of claim reflecting its position that under a license agreement
dated February 10, 1990 (the "Original Agreement"), Jackpot is
owed in excess of $3 million. See Note 7 of Notes to
Consolidated Financial Statements in the 1997 Form 10-K for a
summary of these actions.
In December 1997, the Court granted partial summary judgment in
favor of Phar-Mor and against Jackpot, and set the matter for
trial for determination of final damages. In order to avoid
further litigation and to finally and fully resolve
all claims between the parties, Jackpot entered into a
settlement agreement and mutual release with Phar-Mor, effective
February 6, 1998. Pursuant to the terms of the agreement, both
the Original Agreement and the Amended Agreement are terminated
and neither party has any remaining rights or continuing
obligations to the other under the Original Agreement, the
Amended Agreement or the proofs of claim. The cost of the
settlement to Jackpot has been fully accrued as of December 31,
1997.
Item 4. Submission of Matters to a Vote of Stockholders
(a) Jackpot's 1997 Annual Meeting of Stockholders was held
on December 17, 1997.
(b) Proxies were solicited by Jackpot's management without
opposition and all nominees were elected to hold office until
the next annual meeting as described in the Proxy Statement
dated October 27, 1997.
(c) No other matters were voted upon except for the proposal
to ratify the appointment of Jackpot's independent auditors.
The stockholders voted 8,071,401 shares "FOR", 71,402 shares
"AGAINST" and 32,533 shares "ABSTAINING" to approve the
appointment of Deloitte & Touche LLP as Jackpot's independent
auditors for the fiscal year ending June 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule (EDGAR version only).
(b) Reports on Form 8-K - No Form 8-K was filed for the three months
ended December 31, 1997.
Signature
_________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACKPOT ENTERPRISES, INC.
_________________________
(Registrant)
By: /s/ BOB TORKAR
_________________________
BOB TORKAR
Senior Vice President - Finance,
Treasurer and Chief Accounting Officer
Date: February 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Jackpot's
Condensed Consolidated Balance Sheets - December 31, 1997 and June 30, 1997 and
its Condensed Consolidated Statements of Income - three and six months ended
December 31, 1997 and 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 49,035
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,390
<PP&E> 36,183
<DEPRECIATION> 20,999
<TOTAL-ASSETS> 77,730
<CURRENT-LIABILITIES> 4,752
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 69,980
<TOTAL-LIABILITY-AND-EQUITY> 77,730
<SALES> 0
<TOTAL-REVENUES> 46,277
<CGS> 0
<TOTAL-COSTS> 38,321
<OTHER-EXPENSES> 2,037
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,768
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,481
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
