UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to___________________
Commission file no. 1-9728
JACKPOT ENTERPRISES, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
NEVADA 88-0169922
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1110 Palms Airport Drive, Las Vegas, Nevada 89119
___________________________________________ __________
(Address of principal executive offices) (Zip Code)
702-263-5555
____________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
___ ___
There were 8,616,680 shares of the registrant's common stock outstanding as of
February 5, 1999.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and June 30, 1998 (Unaudited)
Condensed Consolidated Statements of Income -
Three and Six Months Ended December 31, 1998 and 1997
(Unaudited)
Condensed Consolidated Statement of Stockholders'
Equity - Six Months Ended December 31, 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1998 and 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
December 31, June 30,
ASSETS 1998 1998
______ ____________ ________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 50,557 $ 50,275
Prepaid expenses 1,331 1,594
Other current assets 3,249 2,225
________ ________
Total current assets 55,137 54,094
________ ________
Property and equipment, at cost:
Land and buildings 1,535 1,535
Gaming equipment 28,203 28,988
Other equipment 4,488 4,758
Leasehold improvements 357 354
________ ________
34,583 35,635
Less accumulated depreciation (19,972) (19,850)
________ ________
14,611 15,785
Lease acquisition costs and other
intangible assets, net of
accumulated amortization of
$5,088 and $4,607 3,458 2,231
Goodwill, net of accumulated
amortization of $2,796 and
$2,713 3,825 3,908
Lease and other security deposits 1,532 3,082
Other non-current assets 309
________ ________
Total assets $ 78,872 $ 79,100
======== ========
</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)
(Unaudited)
<TABLE>
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
____________________________________ ____________ ________
<S> <C> <C>
Current liabilities:
Accounts payable $ 972 $ 1,434
Other current liabilities 2,778 3,508
________ ________
Total current liabilities 3,750 4,942
Deferred rent 2,443 2,377
Deferred income tax 949 849
Other liabilities 61
________ ________
Total liabilities 7,142 8,229
________ ________
Commitments and contingencies
Stockholders' equity:
Preferred stock - authorized
1,000,000 shares of $1 par value;
none issued
Common stock - authorized
30,000,000 shares of $.01 par
value; 9,860,252 and 9,854,327
shares issued 99 99
Additional paid-in capital 66,443 66,376
Retained earnings 18,964 16,466
Less 1,243,572 and 1,080,372 shares of
common stock in treasury, at cost (13,776) (12,070)
________ ________
Total stockholders' equity 71,730 70,871
________ ________
Total liabilities and
stockholders' equity $ 78,872 $ 79,100
======== ========
</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, 1998 AND 1997
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
__________________ ________________
1998 1997 1998 1997
_______ _______ _______ _______
<S> <C> <C> <C> <C>
Revenues:
Route operations $23,256 $22,949 $44,941 $44,867
Casino operations 491 661 1,013 1,410
_______ _______ _______ _______
Totals 23,747 23,610 45,954 46,277
_______ _______ _______ _______
Costs and expenses:
Route operations 19,389 18,612 37,779 36,903
Casino operations 505 691 978 1,418
Amortization 292 286 578 562
Depreciation 1,061 897 2,071 1,765
General and administrative 927 961 1,797 1,886
_______ _______ _______ _______
Totals 22,174 21,447 43,203 42,534
_______ _______ _______ _______
Operating income 1,573 2,163 2,751 3,743
_______ _______ _______ _______
Other income:
Interest and other income 357 452 718 1,025
_______ _______ _______ _______
Totals 357 452 718 1,025
_______ _______ _______ _______
Income before income tax 1,930 2,615 3,469 4,768
_______ _______ _______ _______
Provision (credit) for Federal
income tax:
Current 513 826 871 1,243
Deferred 27 (120) 100 44
_______ ________ _______ _______
Totals 540 706 971 1,287
_______ _______ _______ _______
Net income $ 1,390 $ 1,909 $ 2,498 $ 3,481
======= ======= ======= =======
Basic earnings per share $ .16 $ .21 $ .29 $ .38
======= ======= ======= =======
Diluted earnings per share $ .16 $ .21 $ .29 $ .38
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998
(Dollars and shares in thousands)
(Unaudited)
<TABLE>
Treasury
Common Stock Additional Stock Total
_____________ Paid-in Retained ________________ Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
______ ______ ___________ _________ ______ ________ _____________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
July 1,
1998 9,854 $99 $66,376 $16,466 (1,080) $(12,070) $70,871
Issuance
of shares
on
exercise
of stock
options 6 67 67
Repurchases
of common
stock (164) (1,706) (1,706)
Net income 2,498 2,498
_____ ___ _______ _______ ______ ________ _______
Balance
December
31, 1998 9,860 $99 $66,443 $18,964 (1,244) $(13,776) $71,730
===== === ======= ======= ====== ======== =======
</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, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
1998 1997
_______ _______
<S> <C> <C>
Operating activities:
Net income $ 2,498 $ 3,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,649 2,327
Deferred income tax 100 44
Increase (decrease) from changes in:
Prepaid expenses and other current assets 863 (350)
Other non-current assets 171 (125)
Accounts payable and other current liabilities (722) (30)
Deferred rent and other liabilities 5 351
_______ _______
Net cash provided by operating activities 5,564 5,698
_______ _______
Investing activities:
Net proceeds from location operators (10) 100
Proceeds from sales of property and equipment 58 201
Purchases of property and equipment (3,401) (4,085)
Increase in lease acquisition costs and other
intangible and non-current assets (290) (42)
_______ _______
Net cash used in investing activities (3,643) (3,826)
_______ _______
Financing activities:
Proceeds from issuance of common stock 67
Repurchases of common stock (1,706) (782)
_______ _______
Net cash used in financing activities (1,639) (782)
_______ _______
Net increase in cash and cash equivalents 282 1,090
Cash and cash equivalents at beginning of period 50,275 47,945
_______ _______
Cash and cash equivalents at end of period $50,557 $49,035
======= =======
Supplemental disclosures of cash flow data:
Cash paid during the period for:
Federal income tax $ 400 $ 1,400
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - General:
The accompanying unaudited condensed consolidated financial
statements included herein have been prepared by Jackpot pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information
presented not misleading.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly Jackpot's financial position as of December 31, 1998 and the
results of its operations for the three and six months ended
December 31, 1998 and 1997 and its cash flows for the six months
ended December 31, 1998 and 1997. The earnings for the three and
six months ended December 31, 1998 and 1997 are not necessarily
indicative of results for a full year. Information included in the
condensed consolidated balance sheet as of June 30, 1998 has been
derived from Jackpot's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended June 30, 1998
(the "1998 Form 10-K"). These unaudited condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and disclosures included in the
1998 Form 10-K.
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes additional
standards for segment reporting in the financial statements.
Management has begun its review of SFAS 131, however it has not
made a final determination of the extent of the disclosures
required by this statement.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which is effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes
additional accounting and reporting standards for derivative
instruments and hedging activities. Presently, Jackpot does not
have any derivative instruments, nor does the Company participate
in hedging activities. Accordingly, SFAS 133 is not expected to
have a significant effect on the results of operations or related
disclosures.
In April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities". This standard provides guidance on the financial
reporting for start-up costs and organization costs. This standard
requires costs of start-up activities and organization costs to be
expensed as incurred, and is effective for fiscal years beginning
after December 15, 1998, although earlier application is
encouraged. Upon adoption, this statement will not have a
significant effect on Jackpot's results of operations or its
financial position.
<PAGE>
Note 2 - Comprehensive income:
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which is effective for fiscal years beginning after December 15,
1997. SFAS 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. Jackpot
adopted this statement on July 1, 1998. For the three and six
months ended December 31, 1998 and 1997, Jackpot did not have any
items of other comprehensive income. Comprehensive income for the
three and six months ended December 31, 1998 and 1997 is the
following (dollars in thousands):
<TABLE>
Three Months Six Months
Ended Ended
December 31, December 31,
_____________ _____________
1998 1997 1998 1997
______ ______ ______ ______
<S> <C> <C> <C> <C>
Net income $1,390 $1,909 $2,498 $3,481
Other comprehensive income - - - -
______ ______ ______ ______
Comprehensive income $1,390 $1,909 $2,498 $3,481
====== ====== ====== ======
</TABLE>
Note 3 - Earnings per share:
Basic earnings per share ("Basic EPS") for the three and six months
ended December 31, 1998 and 1997 is computed by dividing net income
by the weighted average number of common shares outstanding for the
respective period. Diluted earnings per share ("Diluted EPS") for
the three and six months ended December 31, 1998 and 1997 is
computed by dividing net income by the weighted average number of
common and common equivalent shares outstanding for the respective
period. Options to purchase common stock, whose exercise price was
greater than the average market price for the respective period,
have been excluded from the Diluted EPS computations. Such
antidilutive options outstanding for the three months
ended December 31, 1998 and 1997 were 707,000 and 137,000,
respectively, and for the six months ended December 31, 1998 and
1997 were 495,000 and 445,000, respectively. The following is the
amount of income and number of shares used in the Basic and Diluted
EPS computations (dollars and shares in thousands, except per share
data):
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
__________________ ________________
1998 1997 1998 1997
______ ______ ______ ______
<S> <C> <C> <C> <C>
Basic earnings per share:
Earnings:
Income available to common
stockholders $1,390 $1,909 $2,498 $3,481
====== ====== ====== ======
Shares:
Weighted average number of common
shares outstanding 8,617 9,072 8,665 9,077
====== ====== ====== ======
Basic earnings per share $ .16 $ .21 $ .29 $ .38
====== ====== ====== ======
Diluted earnings per share:
Earnings:
Income available to common
stockholders $1,390 $1,909 $2,498 $3,481
Effect of dilutive securities - - - -
______ ______ ______ ______
Income, as adjusted $1,390 $1,909 $2,498 $3,481
====== ====== ====== ======
Shares:
Weighted average number of common
shares outstanding 8,617 9,072 8,665 9,077
Common shares issuable upon assumed
exercise of dilutive stock options 1,047 1,738 1,268 1,492
Less common shares assumed to be
repurchased by application of the
treasury stock method to the proceeds
using the average market price for
the period (999) (1,554) (1,179) (1,336)
______ ______ ______ ______
Weighted average number of common
shares and common share equivalents
outstanding 8,665 9,256 8,754 9,233
====== ====== ====== ======
Diluted earnings per share $ .16 $ .21 $ .29 $ .38
====== ====== ====== ======
</TABLE>
Note 4 - Stockholders' equity:
The 1992 Incentive and Non-qualified Stock Option Plan:
On September 30, 1998, the exercise price of the June 30, 1998
grant of nonqualified stock options to purchase an aggregate of
110,000 shares of common stock (27,500 each to four directors) was
vested at $9.94 per share, the fair market value of the stock on
that date, pursuant to the terms of the 1992 Incentive and Non-
qualified Stock Option Plan (the "1992 Plan"). See
Note 6 of Notes to Consolidated Financial Statements in the 1998
Form 10-K for further information regarding the 1992 Plan and
option grants.
Common stock in treasury:
Jackpot purchased 163,200 shares of its common stock at the market
price on the date of purchase for a total cost of approximately
$1,706,000 during the six months ended December 31, 1998.
Note 5 - Letter of intent:
On October 28, 1998, Jackpot and CRC Holdings, Inc., operating as
Carnival Resorts & Casinos ("CRC"), a privately owned
company, signed a non-binding letter of intent to merge the
companies. Such proposed transaction is subject to the completion
of a definitive agreement between the parties and regulatory and
other approvals. The proposed transaction, which is still in
negotiation, contemplates that Jackpot will acquire all the issued
and outstanding common stock of CRC in exchange for approximately
3.5 million shares of Jackpot's common stock, the assumption of
approximately $13 million of notes held by CRC stockholders and the
issuance of a promissory note in the principal amount of
approximately $13 million, subject to a reduction in such
consideration under certain conditions. No assurance can be given
that the proposed transaction will be consummated or that it will
be consummated on the terms described herein.
Note 6 - Subsequent event:
On February 8, 1999, Jackpot and Players International, Inc.
("Players") entered into a definitive agreement and plan of merger
(the "Players Agreement"). Pursuant to the terms of the Players
Agreement, Jackpot will acquire Players for $8.25 per share,
consisting of $6.75 per share in cash and $1.50 in Jackpot's common
stock for each share of Players outstanding common stock. The
completion of the merger is subject to a number of conditions,
including approval by the stockholders of both companies, receipt
of all the necessary regulatory and various approvals, and the
financing of the transaction.
<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,
1998 (the "1998 six months"), consisted of the cash flows from operating
activities and its available cash and cash equivalents which, at June 30, 1998,
was $50.3 million and at December 31, 1998 was $50.6 million. Net cash provided
by operating activities for the 1998 six months was $5.6 million compared to
$5.7 million for the six months ended December 31, 1997 (the "1997 six months").
Net cash used in investing activities for the 1998 six months was $3.6
million, and resulted primarily from payments of $3.4 million for purchases of
property and equipment and $.3 million for lease acquisition costs and other
intangible and non-current assets.
Net cash used in financing activities for the 1998 six months was $1.6
million, and resulted from payments for repurchases of common stock of $1.7
million, net of proceeds of $.1 million from the issuance of common stock upon
the exercise of stock options.
Liquidity:
During the 1998 six months, Jackpot's cash and cash equivalents increased
$.3 million primarily as a result of the activities described above, while
working capital increased $2.2 million, from $49.2 million at June 30, 1998 to
$51.4 million at December 31, 1998.
On October 29, 1996, Jackpot's Board of Directors authorized management to
repurchase up to 500,000 shares of Jackpot's common stock at prevailing market
prices. Subsequently, on January 22, 1998, such authorization was increased
from 500,000 to 1,000,000 shares. From October 29, 1996 through December 31,
1998, Jackpot repurchased 785,385 shares of common stock at a cost of
approximately $8.5 million.
Management believes Jackpot's working capital and cash provided by
operations will be sufficient to enable Jackpot to meet its planned capital
expenditures and other cash requirements for the remainder of the year ending
June 30, 1999 ("fiscal 1999"). With respect to planned capital expenditures,
management anticipates Jackpot will purchase approximately $4.7 million of
property and equipment, exclusive of business acquisitions, if any, in the
remainder of fiscal 1999 to be used in existing and currently planned new
locations.
On October 28, 1998, Jackpot and CRC Holdings, Inc., operating as Carnival
Resorts & Casinos ("CRC"), a privately owned company, signed a non-binding
letter of intent to merge the companies. Such proposed transaction is subject
to the completion of a definitive agreement between the parties and regulatory
and other approvals. The proposed transaction, which is still in negotiation,
contemplates that Jackpot will acquire all the issued and outstanding common
stock of CRC in exchange for approximately 3.5 million shares of Jackpot's
common stock, the assumption of approximately $13 million of notes held by CRC
stockholders and the issuance of a promissory note in the principal amount of
approximately $13 million, subject to a reduction in such consideration under
certain conditions. No assurance can be given that the proposed transaction
will be consummated or that it will be consummated on the terms described
herein.
On February 8, 1999, Jackpot and Players International, Inc. ("Players")
entered into a definitive agreement and plan of merger (the "Players
Agreement"). Pursuant to the terms of the Players Agreement, Jackpot will
acquire Players for $8.25 per share, consisting of $6.75 per share in cash and
$1.50 in Jackpot's common stock for each share of Players outstanding common
stock. The completion of the merger is subject to a number of conditions,
including approval by the stockholders of both companies, receipt of all the
necessary regulatory and various approvals, and the financing of the
transaction.
Jackpot continues to explore gaming acquisition opportunities. With
respect to the Players Agreement, management intends to obtain financing
through bank borrowings and long-term debt, and believes the proceeds
received from such financings, along with Jackpot's available working capital
and cash provided by operations will be sufficient to enable Jackpot
to finance this transaction. However, no assurance can be given that Jackpot
will obtain the necessary financing or that such transaction will be
successfully consummated.
Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes additional
standards for segment reporting in the financial statements. Management has
begun its review of SFAS 131, however it has not made a final determination of
the extent of the disclosure required by this statement.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is effective for fiscal years beginning after June 15, 1999. SFAS
133 establishes additional accounting and reporting standards for derivative
instruments and hedging activities. Presently, Jackpot does not have any
derivative instruments, nor does the Company participate in hedging activities.
Accordingly, SFAS 133 is not expected to have a significant effect on the
results of operations or related disclosures.
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No. 98-5,
"Reporting on the Costs of Start-Up Activities". This standard provides
guidance on the financial reporting for start-up costs and organization costs.
This standard requires costs of start-up activities and organization costs to be
expensed as incurred, and is effective for fiscal years beginning after December
15, 1998, although earlier application is encouraged. Upon adoption, this
statement will not have a significant effect on Jackpot's results of operations
or its financial position.
Results of Operations
_____________________
Revenues:
Total revenues for the three months ended December 31, 1998 (the "1998
three months") increased $.1 million, from $23.6 million for the three months
ended December 31, 1997 (the "1997 three months") to $23.7 million for the 1998
three months, while total revenues for the 1998 six months decreased $.3
million, from $46.3 million for the 1997 six months to $46.0 million for the
1998 six months. The increase in total revenues of $.1 million for the 1998
three months was the net result of an increase of $.3 million (from $22.9
million for the 1997 three months to $23.2 million for the 1998 three months) in
gaming machine route operations ("route operations") revenues and a decrease of
$.2 million (from $.7 million for the 1997 three months to $.5 million for the
1998 three months) in casino operations revenues. The decrease in total
revenues of $.3 million for the 1998 six months was the net result of an
increase of $.1 million (from $44.9 million for the 1997 six months to $45.0
million for the 1998 six months) in route operations revenues and a decrease of
$.4 million (from $1.4 million for the 1997 six months to $1.0 million for the
1998 six months) in casino operations revenues.
The increases in route operations revenues for the 1998 three months and
1998 six months of $.3 million and $.1 million, respectively, resulted from a
combination of additional revenues generated from new locations, net of lost
revenues from terminated locations and decreases in revenues at existing
locations. New locations generated revenues of $1.2 million and $2.3 million,
while revenues at existing locations decreased $.2 million and $.6 million for
the 1998 three months and 1998 six months, respectively. Terminated
locations had generated revenues of $.7 million and $1.6 million for the 1997
three months and 1997 six months, respectively.
Route operations revenues attributable to fixed payment leases and revenue
sharing contracts for the three and six months ended December 31, 1998 and 1997
are summarized below (dollars in thousands):
<PAGE>
<TABLE>
Three Months Ended December 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 $17,629 75.8% $16,939 73.8%
Revenue sharing contracts 5,627 24.2 6,010 26.2
_______ _____ _______ _____
Totals $23,256 100.0% $22,949 100.0%
======= ===== ======= =====
Six Months Ended December 31,
_____________________________________
1998 1997
__________________ __________________
Percent Percent
of route of route
operations operations
Amount revenues Amount revenues
_______ __________ _______ __________
<S> <C> <C> <C> <C>
Route operations:
Fixed payment leases $33,939 75.5% $33,383 74.4%
Revenue sharing contracts 11,002 24.5 11,484 25.6
_______ _____ _______ _____
Totals $44,941 100.0% $44,867 100.0%
======= ===== ======= =====
</TABLE>
Costs and expenses:
Route operations expenses for the 1998 three months and 1998 six months
increased $.8 million (from $18.6 million for the 1997 three months to $19.4
million for the 1998 three months) and $.9 million (from $36.9 million for the
1997 six months to $37.8 million for the 1998 six months) and, as a percentage
of route operations revenues, increased to 83.4% and 84.1% for the 1998 three
months and 1998 six months, respectively, from 81.1% and 82.2% for the 1997
three months and 1997 six months, respectively. The increase in route
operations expenses of $.8 million for the 1998 three months resulted primarily
from a combination of an increase of $.5 million in location rent, which
consisted principally of location rent for new locations of existing chain store
customers, and from increases in payroll costs and other route operations
expenses of $.1 million and $.2 million, respectively. The increase in route
operations expenses of $.9 million for the 1998 six months resulted primarily
from an increase in location rent for new locations of existing chain store
customers.
With respect to location rent, which is the single largest route operations
expense, Jackpot entered into an agreement for a long-term extension with one of
its largest retail chain store customers in September 1998. Pursuant to the
terms of the new agreement, which will become effective July 1, 1999, rent
expense will increase significantly over the previous agreement. Such increase
could adversely affect the Company's results of operations for the year ending
June 30, 2000. For a further description of the Company's lease and license
agreements, see Item 1 - Business - Gaming Machine Route Operations and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview in the 1998 Form 10-K.
Amortization expense for the 1998 three months and 1998 six months,
compared to the 1997 three months and 1997 six months, remained constant at $.3
million and $.6 million, respectively, while depreciation expense for the 1998
three months and 1998 six months increased $.2 million (from $.9 million for the
1997 three months to $1.1 million for the 1998 three months) and $.3 million
(from $1.8 million for the 1997 six months to $2.1 million for the 1998 six
months). The increase in depreciation expense for the 1998 three months and the
1998 six months was principally attributable to new gaming machines purchased
during the year ended June 30, 1998.
General and administrative expense in each of the 1998 three months and
1998 six months decreased $.1 million, from $1.0 million for the 1997 three
months to $.9 million for the 1998 three months, and from $1.9 million for the
1997 six months to $1.8 million for the 1998 six months.
Other income:
Other income for the 1998 three months and 1998 six months decreased $.1
million (from $.5 million for the 1997 three months to $.4 million for the 1998
three months) and $.3 million (from $1.0 million for the 1997 six months to $.7
million for the 1998 six months). Such decreases resulted primarily from
reductions in other income earned from nonrecurring transactions.
Federal income tax:
The effective tax rate for the 1998 three months and 1998 six months was
28%. Such rate, which approximated the effective tax rate for the 1997 three
months and 1997 six months, was lower than the Federal Statutory rate of 35%
primarily because of the tax benefits realized from tax-exempt interest
income.
General:
Operating income for the 1998 three months and 1998 six months decreased
$.6 million (from $2.2 million for the 1997 three months to $1.6 million for the
1998 three months) and $1.0 million (from $3.7 million for the 1997 six months
to $2.7 million for the 1998 six months). The decreases in operating income
resulted from the combination of decreases in the route operations operating
margin of $.5 million and $.8 million, respectively, increases in depreciation
expense of $.2 million and $.3 million, respectively, mentioned above, and a
decrease in all other operating expenses of $.1 million in each of the 1998
three months and 1998 six months.
The declines in the route operations operating margin of $.5 million (from
$4.3 million for the 1997 six months to $3.8 million for the 1998 six months)
and $.8 million (from $8.0 million for the 1997 six months to $7.2 million for
the 1998 six months) were due principally to the decreases in route operations
revenues at existing locations previously described, and to the operating
results of new locations.
Principally as a result of a highly competitive environment, which
management believes Jackpot will continue to face during the remainder of fiscal
1999, net income and earnings per share declined in the 1998 three months and
1998 six months compared to the 1997 three months and 1997 six months. Net
income decreased $.5 million (from $1.9 million for the 1997 three months to
$1.4 million for the 1998 three months) and $1.0 million (from $3.5 million for
the 1997 six months to $2.5 million for the 1998 six months). Basic and diluted
earnings per share for the 1998 three months and 1998 six months was $.16 and
$.29, respectively, versus $.21 and $.38 per share for the 1997 three months and
1997 six months.
Year 2000
_________
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This situation is generally referred to as the "Year 2000 Problem". If
this situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
Jackpot has conducted a comprehensive review of its computer systems and
other systems for the purpose of assessing its potential Year 2000 Problem, and
is in the process of modifying or replacing those systems which are not Year
2000 compliant. Based upon this review, management believes such systems will
be compliant by mid-calendar 1999. However, if modifications are not made or
not completed timely, the Year 2000 Problem could have a significant adverse
impact on the Company's operations.
In addition, Jackpot has communicated with its major vendors and suppliers
to determine their state of readiness relative to the Year 2000 Problem and
Jackpot's possible exposure to Year 2000 issues of such third parties. However,
there can be no guarantee that the systems of other companies, which the
Company's systems may rely upon, will be timely converted or representations
made to Jackpot by these parties are accurate. As a result, the failure of a
major vendor or supplier to adequately address their Year 2000 Problem could
have a significant adverse impact on the Company's operations.
Planning for the Year 2000 Problem, including contingency planning, is
significantly complete and will be revised, if necessary. All costs related to
the Year 2000 Problem are expensed as incurred, while the cost of new hardware
is capitalized and depreciated over its expected useful life. The costs
associated with Year 2000 compliance have not been and are not anticipated to be
material to the Company's financial position or results of operations. As of
December 31, 1998, the Company has incurred costs of approximately $70,000
(primarily for internal labor) related to the system applications and
anticipates spending an additional $110,000 to become Year 2000 compliant. The
estimated completion date and remaining costs are based upon management's best
estimates, as well as third party modification plans and other factors.
However, there can be no guarantee that such estimates will occur and actual
results could differ.
Forward-looking statements
__________________________
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Company with the Securities and Exchange Commission contains
statements that may be considered forward-looking. In addition, from time to
time, the Company may release or publish forward-looking statements relating to
such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are not limited to, competitive
pressures, the loss or nonrenewal of any of Jackpot's significant contracts,
conditioning or suspension of any gaming license, unfavorable changes in gaming
regulations, adverse results of significant litigation matters, possible future
financial difficulties of a significant customer and the continued growth of the
gaming industry and population in Nevada. Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as of the
date thereof. The Company assumes no obligation to update or supplement
forward-looking statements as a result of new circumstances or subsequent
events.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
_________________________________________________________
For the three and six months ended December 31, 1998, there were no changes
to the information incorporated by reference in Item 7A of the 1998 Form 10-K.
PART II. OTHER INFORMATION
_________________
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 - Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K - No Form 8-K was filed for the three months ended
December 31, 1998.
Signature
_________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JACKPOT ENTERPRISES, INC.
_________________________
(Registrant)
By: /s/ Bob Torkar
_________________________
BOB TORKAR
Senior Vice President - Finance,
Treasurer and Chief Accounting Officer
Date: February 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Jackpot's
Consolidated Balance Sheets - December 31, 1998 and June 30, 1998 and its
Consolidated Statements of Income - three and six months ended
December 31, 1998 and 1997 and is qualified in its entirety by reference
to such finanical statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 50,557
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,137
<PP&E> 34,583
<DEPRECIATION> 19,972
<TOTAL-ASSETS> 78,872
<CURRENT-LIABILITIES> 3,750
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 71,631
<TOTAL-LIABILITY-AND-EQUITY> 78,872
<SALES> 0
<TOTAL-REVENUES> 45,954
<CGS> 0
<TOTAL-COSTS> 38,757
<OTHER-EXPENSES> 2,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,469
<INCOME-TAX> 971
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,498
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
