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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to___________________
Commission file no. 1-9728
JACKPOT ENTERPRISES, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
NEVADA 88-0169922
_______________________________ _________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1110 Palms Airport Drive, Las Vegas, Nevada 89119
___________________________________________ ________
(Address of principal executive offices) (Zip Code)
702-263-5555
__________________________________________________
(Registrant's telephone number, including area code)
<PAGE>
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 8,856,039 shares of the registrant's common stock outstanding
as of May 4, 1998.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997
Condensed Consolidated Statements of Income -
Three and Nine Months Ended March 31, 1998 and 1997
Condensed Consolidated Statement of Stockholders' Equity -
Nine Months Ended March 31, 1998
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1998 and 1997
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 6. Exhibits and Reports on Form 8-K<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
March 31, June 30,
ASSETS 1998 1997
______ ________ ________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 50,196 $ 47,945
Prepaid expenses 1,144 1,438
Other current assets 1,912 1,728
________ ________
Total current assets 53,252 51,111
________ ________
Property and equipment, at cost:
Land and buildings 1,535 1,535
Gaming equipment 28,864 28,202
Other equipment 4,703 4,595
Leasehold improvements 343 339
________ ________
35,445 34,671
Less accumulated depreciation (19,802) (21,582)
________ ________
15,643 13,089
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$4,432 and $6,198 2,377 3,596
Goodwill, net of accumulated
amortization of $2,671 and $2,547 3,950 4,074
Lease and other security deposits 3,200 2,959
Other non-current assets - 438
________ ________
Total assets $ 78,422 $ 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>
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
____________________________________ ________ ________
<S> <C> <C>
Current liabilities:
Accounts payable $ 675 $ 375
Other current liabilities 3,384 4,407
_______ _______
Total current liabilities 4,059 4,782
Deferred rent 2,316 2,510
Deferred income tax 748 633
Other liabilities 61 61
_______ _______
Total liabilities 7,184 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;
9,845,477 and 9,823,993 shares issued 98 98
Additional paid-in capital 66,277 66,033
Retained earnings 14,646 9,253
Less 890,638 and 741,958 shares
of common stock in treasury, at cost (9,783) (8,103)
_______ _______
Total stockholders' equity 71,238 67,281
_______ _______
Total liabilities and
stockholders' equity $78,422 $75,267
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except per share data)
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
__________________ _________________
1998 1997 1998 1997
_______ _______ _______ _______
<S> <C> <C> <C> <C>
Revenues:
Route operations $22,667 $22,221 $67,534 $65,154
Casino operations 704 726 2,114 2,308
_______ _______ _______ _______
Totals 23,371 22,947 69,648 67,462
_______ _______ _______ _______
Costs and expenses:
Route operations 18,303 17,593 55,206 51,752
Casino operations 616 650 2,034 2,117
Amortization 289 430 851 1,292
Depreciation 986 869 2,751 2,615
General and administrative 992 975 2,878 2,970
_______ _______ _______ _______
Totals 21,186 20,517 63,720 60,746
_______ _______ _______ _______
Operating income 2,185 2,430 5,928 6,716
_______ _______ _______ _______
Other income:
Interest and other income 435 426 1,460 1,229
_______ _______ _______ _______
Totals 435 426 1,460 1,229
_______ _______ _______ _______
Income before income tax 2,620 2,856 7,388 7,945
_______ _______ _______ _______
Provision for Federal income tax:
Current 669 598 1,912 2,176
Deferred 39 287 83 287
_______ _______ _______ _______
Totals 708 885 1,995 2,463
_______ _______ _______ _______
Net income $ 1,912 $ 1,971 $ 5,393 $ 5,482
======= ======= ======= =======
Basic earnings per share $ .21 $ .21 $ .60 $ .59
======= ======= ======= =======
Diluted earnings per share $ .21 $ .21 $ .59 $ .59
======= ======= ======= =======
Cash dividends per share of
common stock $ - $ - $ - $ .16
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1998
(Dollars and shares in thousands)
<TABLE>
Additional Treasury Total
Common Stock Paid-in Retained Stock Stockholders'
_____________ Capital Earnings _______________ Equity
Shares Amount Shares Amount
______ ______ ___________ _________ ______ _______ ____________
<S> <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 (149) (1,680) (1,680)
Issuance of
shares on
exercise of
stock
options 21 244 244
Net
income 5,393 5,393
_____ ___ _______ _______ ____ _______ _______
Balance
March 31,
1998 9,845 $98 $66,277 $14,646 (891) $(9,783) $71,238
===== === ======= ======= ==== ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands)
<TABLE>
1998 1997
_______ _______
<S> <C> <C>
Operating activities:
Net income $ 5,393 $ 5,482
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,602 3,907
Deferred income tax 83 287
Increase (decrease) from changes in:
Prepaid expenses and other current assets 189 773
Other non-current assets (214) (113)
Accounts payable 300 (107)
Other current liabilities (749) 122
Deferred rent 407 (396)
Other liabilities 115
_______ _______
Net cash provided by operating activities 9,011 10,070
_______ _______
Investing activities:
Net proceeds from location operators 134 190
Proceeds from sales of subsidiary and property 325 1,612
Purchases of property and equipment (5,674) (3,088)
Increase in lease acquisition costs and other
intangible assets (109) (365)
_______ _______
Net cash used in investing activities (5,324) (1,651)
_______ _______
Financing activities:
Proceeds from issuance of common stock 244 193
Repurchases of common stock (1,680) (2,226)
Dividends paid (1,496)
_______ _______
Net cash used in financing activities (1,436) (3,529)
_______ _______
Net increase in cash and cash equivalents 2,251 4,890
Cash and cash equivalents at beginning of period 47,945 39,024
_______ _______
Cash and cash equivalents at end of period $50,196 $43,914
======= =======
Supplemental disclosures of cash flow data:
Cash paid during the period for:
Federal income tax $ 2,000 $ 1,600
</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 March 31, 1998, the
results of its operations for the three and nine months ended March
31, 1998 and 1997 and its cash flows for the nine months ended
March 31, 1998 and 1997. The earnings for the three and nine
months ended March 31, 1998 and 1997 are not necessarily indicative
of results for a full year. Information included in the condensed
consolidated balance sheet as of June 30, 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. As required by SFAS 128, Jackpot adopted this
statement for the three months ended December 31, 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. All
prior-period EPS data presented has been restated to conform with
the provisions of the statement. The implementation of SFAS 128
had no effect on EPS, as restated, for the three and nine months
ended March 31, 1997.
Basic EPS for the three and nine months ended March 31, 1998 and
1997 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 nine months ended March 31, 1998 and
1997 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 March
31, 1998 and 1997 were 130,000 and 751,000, respectively, and for
the nine months ended March 31, 1998 and 1997 were 169,000 and
754,000, 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 Nine Months Ended
March 31, March 31,
__________________ _________________
1998 1997 1998 1997
______ ______ ______ ______
<S> <C> <C> <C> <C>
Basic earnings per share:
Earnings:
Income available to common
stockholders $1,912 $1,971 $5,393 $5,482
====== ====== ====== ======
Shares:
Weighted average number
of common shares outstanding 8,949 9,172 9,035 9,287
====== ====== ====== ======
Basic earnings per share $ .21 $ .21 $ .60 $ .59
====== ====== ====== ======
Diluted earnings per share:
Earnings:
Income available to common
stockholders $1,912 $1,971 $5,393 $5,482
Effect of dilutive securities - - - -
______ ______ ______ ______
Income, as adjusted $1,912 $1,971 $5,393 $5,482
====== ====== ====== ======
Shares:
Weighted average number of
common shares outstanding 8,949 9,172 9,035 9,287
Common shares issuable upon
assumed exercise of dilutive
stock options 1,718 1,342 1,739 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 (1,482) (1,272) (1,556) (1,273)
______ ______ ______ ______
Weighted average number of
common shares and common
share equivalents outstanding 9,185 9,242 9,218 9,357
====== ====== ====== ======
Diluted earnings per share $ .21 $ .21 $ .59 $ .59
====== ====== ====== ======
</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 148,680 and 103,700 shares of its common stock at
the market price on the date of purchase for a total cost of
approximately $1,681,000 and $1,251,000, or an average of $11.31
and $12.06 per share during the nine months ended March 31, 1998
and one month ended April 30, 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 and was paid in February 1998.
<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 nine months ended March 31,
1998 (the "1998 nine 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 March 31, 1998 was $50.2 million. Net cash
provided by operating activities for the 1998 nine months was $9.0 million,
compared to $10.1 million provided by operating activities for the nine
months ended March 31, 1997 (the "1997 nine months").
Net cash used in investing activities for the 1998 nine months increased
$3.7 million, from $1.6 million used in investing activities for the 1997 nine
months to $5.3 million used in investing activities for the 1998 nine months.
The 1997 nine 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 $2.6 million, from $3.1
million for the 1997 nine months to $5.7 million for the 1998 nine months.
Primarily, as a result of the transactions described above, net cash used in
investing activities increased by $3.7 million.
Net cash used in financing activities for the 1998 nine months was $1.4
million, and resulted from payments for repurchases of common stock of $1.7
million, net of proceeds of approximately $.3 million from the issuance of
common stock upon the exercise of stock options. The net cash used in financing
activities for the 1997 nine months was approximately $2.1 million greater than
the net cash used in financing activities for the 1998 nine months principally
due to payments of dividends of $1.5 million for the 1997 nine months.
Liquidity:
At March 31, 1998, Jackpot had cash and cash equivalents of $50.2 million,
an increase of $2.3 million from June 30, 1997. Jackpot's working capital
increased to $49.2 million at March 31, 1998, from $46.3 million at June 30,
1997 primarily as a result of the activities described above.
On October 29, 1996, Jackpot's Board of Directors authorized management to
repurchase up to 500,000 shares of Jackpot's common stock at prevailing market
prices. Subsequently, on January 22, 1998, such authorization was increased
from 500,000 to 1,000,000 shares. From the authorization on October 29, 1996
through April 1998, Jackpot has repurchased approximately 536,000 shares of
common stock at a cost of $5.7 million.
Management believes Jackpot's working capital and cash provided by
operations will be sufficient to enable Jackpot to meet its planned capital
expenditures and other cash requirements for the remainder of the fiscal year
ending June 30, 1998. With respect to planned capital expenditures, management
anticipates Jackpot will purchase approximately $1.5 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. As required by SFAS 128, Jackpot adopted this
statement for the three months ended December 31, 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. All prior-period EPS data presented has been restated to
conform with the provisions of the statement. The implementation of SFAS 128
had no effect on EPS, as restated, for the three and nine months ended March
31, 1997.
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 March 31, 1998 (the "1998 three
months") increased $.4 million, from $23.0 million for the three months ended
March 31, 1997 (the "1997 three months") to $23.4 million for the 1998 three
months, while total revenues for the 1998 nine months increased $2.2 million,
from $67.4 million for the 1997 nine months to $69.6 million for the 1998 nine
months. The increase in total revenues of $.4 million for the 1998 three months
was due primarily to an increase of approximately $.5 million (from $22.2
million for the 1997 three months to $22.7 million for the 1998 three months) in
gaming machine route operations ("route operations") revenues. The increase in
total revenues of $2.2 million for the 1998 nine months was the net result of an
increase of $2.4 million (from $65.1 million for the 1997 nine months to $67.5
million for the 1998 nine months) in route operations revenues and a decrease of
$.2 million (from $2.3 million for the 1997 nine months to $2.1 million for the
1998 nine months) in casino operations revenues.
The increases in route operations revenues for the 1998 three months and
1998 nine months of $.5 million and $2.4 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 $.9 million and $4.8 million and existing locations generated
additional revenues of $2.1 million and $5.0 million for the 1998 three months
and the 1998 nine months, respectively. Terminated locations had generated
revenues of $2.5 million and $7.4 million for the 1997 three months and the
1997 nine 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 nine months ended March 31, 1998 and 1997
are summarized below (dollars in thousands):
<TABLE>
Three Months Ended March 31,
_________________________________________
1998 1997
___________________ ___________________
Percent Percent
of route of route
operations operations
Amount revenues Amount revenues
_______ __________ _______ __________
<S> <C> <C> <C> <C>
Route operations:
Fixed payment leases $16,736 73.8% $15,074 67.8%
Revenue sharing contracts 5,931 26.2 7,147 32.2
_______ _____ _______ _____
Totals $22,667 100.0% $22,221 100.0%
======= ===== ======= =====
Nine Months Ended March 31,
_________________________________________
1998 1997
____________________ ___________________
Percent Percent
of route of route
operations operations
Amount revenues Amount revenues
_______ __________ _______ __________
Route operations:
Fixed payment leases $50,119 74.2% $43,392 66.6%
Revenue sharing contracts 17,415 25.8 21,762 33.4
_______ _____ _______ _____
Totals $67,534 100.0% $65,154 100.0%
======= ===== ======= =====
The decreases in route operations revenues attributable to revenue sharing
contracts of $1.2 million (from $7.1 million for the 1997 three months to $5.9
million for the 1998 three months) and $4.3 million (from $21.7 million for the
1997 nine months to $17.4 million for the 1998 nine months) were principally due
to the loss of the significant customer previously discussed.
Costs and expenses:
Route operations expenses for the 1998 three months and 1998 nine months
increased $.7 million (from $17.6 million for the 1997 three months to $18.3
million for the 1998 three months) and $3.4 million (from $51.8 million for the
1997 nine months to $55.2 million for the 1998 nine months) and, as a percentage
of route operations revenues, increased to 80.7% and 81.7% for the 1998 three
months and 1998 nine months, respectively, from 79.2% and 79.4% for the 1997
three months and 1997 nine 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 $.7 million and $3.4
million resulted primarily from a combination of increases of $2.2
million and $5.7 million in location rent for locations of existing chain
store customers, which were related to the four chain store renewals,
increases of $.4 million and $2.0 million in location rent for new locations
of existing chain store customers, net of decreases of $.9 million and
$2.7 million in location rent for lost chain store customers and decreases of
$1.0 million and $1.6 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 1998 three months and 1998 nine months
decreased $.1 million (from $.4 million for the 1997 three months to $.3 million
for the 1998 three months) and $.4 million (from $1.3 million for the 1997 nine
months to $.9 million for the 1998 nine months). The decrease in amortization
expense for the respective 1998 periods was attributable to reductions in
amortization expense related to certain lease acquisition costs.
Depreciation expense for the 1998 three months and 1998 nine months
increased $.1 million (from $.9 million for the 1997 three months to $1.0
million for the 1998 three months) and $.2 million (from $2.6 million for the
1997 nine months to $2.8 million for the 1998 nine months). The increase in
depreciation expense for the respective 1998 periods was principally
attributable to new gaming machines purchased during the 1998 nine months.
General and administrative expense for the 1998 three months, compared to
the 1997 three months, remained constant at $1.0 million, while general and
administrative expense for the 1998 nine months decreased $.1 million, from $3.0
million for the 1997 nine months to $2.9 million for the 1998 nine months.
Other income:
Other income for the 1998 three months, compared to the 1997 three months,
remained constant at $.4 million, while other income for the 1998 nine months
increased approximately $.2 million (from $1.2 million for the 1997 nine months
to $1.4 million for the 1998 nine 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 1998 three months and 1998 nine months was
27%, which was lower than the 31% rate for the 1997 three months and 1997 nine
months, primarily because of the increase in tax benefits from tax-exempt
interest income.
General:
Operating income for the 1998 three months and 1998 nine months
decreased $.2 million (from $2.4 million for the 1997 three months to $2.2
million for the 1998 three months) and $.8 million (from $6.7 million for the
1997 nine months to $5.9 million for the 1998 nine months). The decrease in
operating income for the 1998 three months was due principally to a decrease in
the route operations operating margin of $.3 million, from $4.6 million for the
1997 three months to $4.3 million for the 1998 three months, while the
decrease in operating income for the 1998 nine months resulted primarily from a
combination of a decrease in the route operations operating margin of $1.1
million, net of a decrease in amortization of $.4 million. The decrease in the
route operations operating margin of $1.1 million (from $13.4 million for the
1997 nine months to $12.3 million for the 1998 nine months) was due principally
to the increase in location rent expense for existing locations as previously
described.
While net income for the 1998 three months and 1998 nine months decreased
slightly compared to the respective 1997 periods, and diluted earnings per share
for the 1998 three months and 1998 nine months remained constant, 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 1998 three months and 1998 nine 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, unfavorable changes in gaming
regulations, adverse results of significant litigation matters, possible future
financial difficulties of a significant customer and the continued growth of the
gaming industry and population in Nevada. Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as of the
date thereof. The Company assumes no obligation to update or supplement
forward-looking statements as a result of new circumstances or subsequent
events.
PART II. OTHER INFORMATION
_________________
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K - No Form 8-K was filed for the three months
ended March 31, 1998.
Signature
_________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACKPOT ENTERPRISES, INC.
_________________________
(Registrant)
By: /s/ BOB TORKAR
_________________________
BOB TORKAR
Senior Vice President - Finance,
Treasurer and Chief Accounting Officer
Date: May 11, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Jackpot's
Condensed Consolidated Balance Sheets - March 31, 1998 and June 30, 1997 and its
Condensed Consolidated Statements of Income - three and nine months ended March
31, 1998 and 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 50,196
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,252
<PP&E> 35,445
<DEPRECIATION> 19,802
<TOTAL-ASSETS> 78,422
<CURRENT-LIABILITIES> 4,059
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 71,140
<TOTAL-LIABILITY-AND-EQUITY> 78,422
<SALES> 0
<TOTAL-REVENUES> 69,648
<CGS> 0
<TOTAL-COSTS> 57,240
<OTHER-EXPENSES> 3,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,388
<INCOME-TAX> 1,995
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,393
<EPS-PRIMARY> .60
<EPS-DILUTED> .59
</TABLE>
