UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Commission File Number 1-9728
JACKPOT ENTERPRISES, INC.
_____________________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 88-0169922
________________________________________________ ___________________
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1110 Palms Airport Drive, Las Vegas, Nevada 89119
________________________________________________ _____________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 263-5555
______________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
______________________________________________ ______________________
Common Stock - Par value $.01 per share, New York Stock Exchange
which includes certain preferred stock
purchase rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes x No
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: x
___
As of August 31, 2000, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $85,256,047.
As of September 15, 2000, there were 8,974,846 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.
PART I
Item 1. Business
________
Jackpot Enterprises, Inc. ("Jackpot" or the "Company") is in the process
of a major transition. On March 8, 2000, the Company announced a series of
actions designed to transform itself into a technology company and a manager
of technology related funds. The Company has been engaged, through its
subsidiaries, in the gaming industry for over 30 years and is presently one
of the largest gaming machine route operators in the State of Nevada and an
established leader in the operation of gaming machines in multiple retail
locations ("Route Operations"). In July 2000, the Company executed a
definitive agreement to sell the Route Operations. Such sale, subject to
regulatory approvals and customary closing conditions, is expected to be
completed during the quarter ending December 31, 2000. Because of such
pending sale this Annual Report on Form 10-K for the Company's fiscal year
ended June 30, 2000 (this "Form 10-K") reflects the Route Operations as
discontinued operations. See Discontinued Operations.
The Company has a multi-pronged approach to effect its transition to its
new business model. First, the Company has made significant investments in
two Internet infrastructure companies and is actively involved in
discussions with respect to potential acquisition of entities involved in
the Internet infrastructure business, including but not limited to, systems
development and software companies. The Company expects that such efforts
will result in it acquiring a significant operating business within a
reasonable period of time following the closing of the sale of the Route
Operations. Second, the Company acquired a 1% controlling interest in a
complex transaction involving a combination of put and call agreements, an
existing portfolio of interests in Internet related businesses. Third, the
Company established and is the lead investor in J Net Ventures I, LLC
("Venture I"), an entity that will make investments in Internet and technology
companies.
The Company has committed to invest approximately $55 million in Venture
I of which approximately $24 million has been raised from the issuance of
certain convertible subordinated notes by the Company to a small group of
investors. Certain of such investors include officers and directors
of the Company or entities controlled by such directors and the Co-
Presidents of J Net Venture Partners, LLC, the manager of Venture I.
Company Investments
___________________
The Company has taken several significant steps since announcing its new
business strategy. As described below, the investments in TechTrader, Inc.
("TechTrader") and Digital Boardwalk, LLC ("Digital Boardwalk") are the first
steps in the process of becoming an Internet infrastructure company. Buying
an existing portfolio of investments and establishing Venture I helped
jump-start the Company's position in the marketplace.
The Company intends to acquire, invest in and internally develop, manage
and operate companies in selected Internet infrastructure businesses.
Initially, the Company has focused on companies engaged in systems
development and software design. Many of such businesses have seen
significant reductions in their market valuations and continue to require
capital to support their growth. The Company believes it is in a favorable
position to effect such acquisitions on terms that will be fair to the
Company and its stockholders because of its cash position, its relatively
debt free balance sheet, the NYSE listing for its common stock, and the
experience of its management team. In addition, recent volatility in the
capital markets may make certain businesses available for acquisition that
would have previously gone public through an initial public offering.
Although the Company has been actively engaged in discussion with such
companies, there can be no assurance that any such company could be acquired
upon terms that the Company believes are fair.
All of the Company's investments are in non public companies. Substantially,
all such companies are development stage companies. The following is a
description of the Company's significant investments:
TechTrader provides enabling technology for next-generation Net
__________
markets through its proprietary software and tool kit. TechTrader's
software provides the following: support for a variety of market
transaction mechanisms including many types of auctions, request for
quotation and bid/ask exchanges; the ability to evaluate and compare
complex products in a simplified format; advanced search capabilities;
management of complex sourcing and transaction activities; ability to
roll-out content and community features; ability to manage permission
and workflow rules; and ability to warehouse and analyze large quantities
of data.
In June 2000, the Company led a $19 million Series B Preferred Stock
financing. Of the Company's $8.5 million investment, $6 million consisted of
cash and 178,571 shares of the Company's common stock. Vistaar, Inc. and
affiliates of Banc One provided the balance of the financing. On an as
converted basis, the Company had a 28.1% voting interest at the date of
acquisition. The Series B investors received 4 of 7 TechTrader board seats
- 2 of which are held by representatives of the Company.
Digital Boardwalk is an e-services company that focuses on e-business
_________________
strategy and the development of commercial web sites requiring a heavy
emphasis on high-end application development and technology. Digital
Boardwalk offers a complete, ongoing package of web business-building
services, consulting, and financing services, designed to help traditional
business and emerging Internet ventures achieve critical mass and realize
long-term success. Current and previous Digital Boardwalk clients include:
eToys, Hughes Global Services, Direct TV, OfficeMax and Chyron.
The Company acquired a 35% ownership interest and the right to purchase up
to 139,256 Common Units in Digital Boardwalk in March 2000 for an aggregate
purchase price of $4.7 million. The consideration consisted of $3 million
of cash and 146,342 shares of the Company's common stock. The Company and
Digital Boardwalk management each have the right to elect 3 directors to the
Digital Boardwalk board.
Meister Brothers Investments, LLC ("MBI") The Company acquired
_________________________________________
a 1% controlling interest in a transaction involving a combination of put and
call agreements on March 1, 2000. MBI holds a portfolio of interest investments
in the form of preferred stock and equivalents in nine technology companies.
Venture I has made further investments in two of the companies, Carta, Inc. and
Cyberbillls, Inc, which are discussed more fully below. Other MBI holdings
include (a) uReach, a unified messaging services business, (b) Gobi, a provider
of subsidized computers and Internet access to consumers, (c) 401kexchange.com,
a b-2-b exchange in the retirement funds market, (d) PropertyFirst.com, a b-
2-b exchange in the commercial real estate industry, (e) iChoose, a
provider of real-time dynamic pricing/marketing software for e-commerce,
(f) Netword, a provider of an infrastructure tool to facilitate internet
navigation and (g) Tutor.com, a provider of online tutoring services.
Venture I The Company has made a $55 million commitment to invest in
_________
Venture I. As of September 26, 2000, approximately $17 million has been
invested by the Company on behalf of Venture I. Following is a description
of the major investments made by Venture I:
CyberBills, Inc. ("Cyberbills") provides total bill management over the
________________
Internet. In addition to electronic bill presentment and payment, it enables
customers to view, manage and pay their bills online, whether the bills are in
paper or electronic format.
The Series A Preferred Stock financing of CyberBills, in which neither MBI
or Venture I participated, occurred in 1998 and was led by Dotcom Ventures and
Online Ventures. The Series B Preferred Stock occurred in 1999. Such financing
raised $12.5 million. Intuit and Vertex Management were the lead participants
in the Series B Preferred Stock financing. MBI participated in the Series B
financing. In March 2000, Venture I invested $3 million in the $28 million
Series C Preferred Stock financing led by GE Capital. Other participants in
the Series C round included Texaco, Inc. and JW Seligman.
Carta, Inc. ("Carta") provides systems integration, application development
___________
services and products and strategy consulting for state, county, municipal and
local governments in the United States. Carta enables government agencies to
offer e-commerce and services to constituents by providing an end-to-end
solution. Carta's end-to-end solution includes front-end interface, commerce
application and the capability to receive and integrate information into
back-end systems.
In May 2000, Venture I, along with Millenium Technology Ventures, an
affiliate of the Blackstone Group ("Millenium"), co-led an $8 million
convertible bridge note financing. A representative of the Company serves
on Carta's board of directors.
Alistia, Inc. ("Alistia") is a web based direct marketing integration
_____________
company that focuses on business-to-business information, analysis and
communication.
In May 2000, Venture I invested $2 million in the Series A Preferred Stock
financing of $5 million. The other participant in the Series A financing was
Arch Ventures. A representative of the Company serves on Alistia's board of
directors.
Strategic Data Corp. ("SDC") offers transparent and secure analysis and
____________________
real time learning to clients implementing targeted marketing programs which
allow SDC's customers to identify who their most valuable customers are and
immediately deliver to them targeted content, product recommendations, and
marketing messages.
Venture I invested $850,000 of the $5 million Series B Preferred Stock
financing completed in May 2000. Also participating in the financing were
Bear Stearns Constellation Ventures Fund and Smart Technology Ventures Fund.
Jasmine Networks, Inc. develops high-speed, multi-service optical switches
______________________
for next generation networks. Jasmine Network's vision is to effectively
utilize the existing fiber-optic infrastructure to deliver more bandwidth
and multiple services at light speed.
In August 2000, Venture I invested $5 million in Series C Preferred Stock
in a financing of over $75 million. The Series C financing also included
investments by Baker Capital Group, as lead investor, Gilbert Global Equity,
the Optical Capital Group and other investors. A representative of the Company
serves on Jasmine's board of directors.
Tellme Networks, Inc. ("Tellme") provides voice driven interactive services
_____________________
to consumers and businesses. Tellme Networks enables users through
voice-recognition and speech-synthesis to utilize any telephone to access the
Internet and hear online information.
Investors in Tellme include The Barksdale Group, Benchmark Capital,
Kleiner Perkins Caufield & Byers and AT&T. In September 2000, Venture I
invested $2 million in Tellme along with many of the existing investors and
several new investors.
Discontinued Operations
_______________________
Prior to the Company's change in business strategy, the Company had been
actively engaged, through its subsidiaries, in the gaming industry for over
30 years. The Company is one of the largest gaming machine route operators
in the state of Nevada, and is an established leader in the operation of
gaming machines in multiple retail locations. At various times during the
past several years, the Company has engaged in the active consideration of
potential acquisitions and expansion opportunities in both the gaming and
non-gaming markets, including most recently in 1999 in connection with the
potential acquisition of Players International, Inc. ("Players") and CRC
Holdings, Inc. d/b/a Carnival Resorts & Casinos ("CRC"), a privately owned
company. In connection with this change, the Company retained the
investment banking firm of Koffler & Company to advise the Company on the
disposition of its gaming business segment. During the quarter ended June
30, 2000, management formalized its plan to sell the Route Operations and
commenced activities to dispose of the subsidiaries identified with that
segment. On July 8, 2000, the Company entered into a definitive agreement to
sell its Route Operations for $45 million in cash. The sale, which is
subject to regulatory approvals and customary closing conditions, is
expected to close in the quarter ended December 31, 2000. As of June 30,
2000, the Company operated 3,540 gaming machines at 356 locations. For the
fiscal year ended June 30, 2000, 100% of the Company's revenues were
generated by Jackpot's Route Operations.
Industry Background
___________________
Advances in technology have led to the general acceptance of the
Internet as a new global medium that allows people to share information and
conduct commerce. The number of Internet users has grown dramatically.
International Data Corporation, an independent research firm, forecasts that
the number of worldwide Internet users will increase from 196 million in
1999 to 502 million in 2003, a compound annual growth rate of 27%.
Similarly, International Data Corporation estimates that the growth of
Internet content, as measured by number of web pages worldwide, will grow
from 1.7 billion pages in 1999 to 13.4 billion pages in 2003, a compound
annual growth rate of 67%.
Intellectual Property Rights
____________________________
We will rely upon a combination of trade secret, nondisclosure and other
contractual arrangements, and copyright and trademark laws, to protect our
proprietary rights. Where possible we will enter into confidentiality
agreements with our employees, and will generally require that our
consultants and clients enter into such agreements and limit access to and
distribution of our proprietary information. We cannot assure you that the
steps taken by us in this regard will be adequate to deter misappropriation
of our proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual
property rights.
Employees
_________
As of June 30, 2000, Jackpot employed approximately 700 persons, the
substantial number of whom are non-management personnel. Of the 700
employees, approximately 690 were employed by the gaming business segment.
None of Jackpot's employees are covered by a collective bargaining agreement
and Jackpot believes that it has satisfactory employee relations.
Regulation and Licensing Requirements of Discontinued Operations
________________________________________________________________
Nevada
The following requirements are applicable to the Company's discontinued
operations for as long as any of the Company's subsidiaries continue gaming
operations in the State of Nevada. The Company has requested release by the
Nevada Gaming Commission from the following requirements after the sale of
the Route Operations is completed.
The ownership and operation of casino gaming facilities and gaming
routes in Nevada are subject to: (i) the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, "Nevada Act"); and (ii)
various local regulations. The Company's gaming operations are subject to
the licensing and regulatory control of the Nevada Gaming Commission
("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada
Board") and local regulatory authorities. The Nevada Commission, the Nevada
Board and the local regulatory authorities are collectively referred to as
the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable
persons from having a direct or indirect involvement with gaming at any time
or in any capacity; (ii) the establishment and maintenance of responsible
accounting practices and procedures; (iii) the maintenance of effective
controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) to provide
a source of state and local revenues through taxation and licensing fees.
Change in such laws, regulations and procedures could have an adverse effect
on the Company's gaming operations.
Corporations that operate casinos and gaming machine routes in Nevada
are required to be licensed by the Nevada Gaming Authorities. A gaming
license requires the periodic payment of fees and taxes and is not
transferable. The Company is registered by the Nevada Commission as a
publicly traded corporation ("Registered Corporation") and as such, it is
required periodically to submit detailed financial and operating reports to
the Nevada Commission and furnish any other information which the Nevada
Commission may require. The Company has been found suitable by the Nevada
Commission to own the stock of Cardivan Company, Corral Coin, Inc., Corral
Country Coin, Inc. and Corral United, Inc. (the "Route Subsidiaries"). No
person may become a stockholder of, or receive any percentage of profits
from the Route Subsidiaries without first obtaining licenses and approvals
from the Nevada Gaming Authorities. The Company and the Route Subsidiaries
have obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming
activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or any
of its subsidiaries in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee.
Officers, directors and certain key employees of the Route Subsidiaries must
file applications with the Nevada Gaming Authorities and may be required to
be licensed or be found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company who are actively and
directly involved in gaming activities of the Company or its subsidiaries
may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of
suitability is comparable to licensing, and both require submission of
detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must
pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and, in addition to their
authority to deny an application for a finding of suitability or licensure,
the Nevada Gaming Authorities have jurisdiction to disapprove a change in a
corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or any of its subsidiaries, the companies
involved would have to sever all relationships with such person. In
addition, the Nevada Commission may require the Company and its subsidiaries
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Route Subsidiaries are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing
transactions by the Company and its subsidiaries must be reported to, or
approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company or
any of its subsidiaries, the gaming licenses and approvals they hold could
be limited, conditioned, suspended or revoked, subject to compliance with
certain statutory and regulatory procedures. In addition, the Company, the
subsidiary involved, and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the Company's gaming
properties and, under certain circumstances, earnings generated during the
supervisor's appointment (except for the reasonable rental value of the
Company's gaming properties) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the
Company's voting securities determined if the Nevada Commission has reason
to believe that such ownership would otherwise be inconsistent with the
declared policies of the State of Nevada. The applicant must pay all costs
of investigation incurred by the Nevada Gaming Authorities in conducting any
such investigation.
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10%
of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within thirty days after the Chairman of the Nevada
Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act,
which acquires more than 10%, but not more than 15%, of the Company's voting
securities may apply to the Nevada Commission for a waiver of such finding
of suitability if such institutional investor holds the voting securities
for investment purposes only. An institutional investor shall not be deemed
to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as
an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of
directors of the Company, any change in the Company's corporate charter,
bylaws, management, policies or operations of the Company, or any of its
gaming affiliates, or any other action which the Nevada Commission finds to
be inconsistent with holding the Company's voting securities for investment
purposes only. Activities which are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies
or operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial
information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or
a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable.
The same restrictions apply to a record owner if the record owner, after
requests, fails to identify the beneficial owner. Any stockholder found
unsuitable and who holds, directly or indirectly, any beneficial ownership
of the common stock of a Registered Corporation beyond such period of time
as may be prescribed by the Nevada Commission may be guilty of a criminal
offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have
any other relationship with the Company or any of its subsidiaries, the
Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly,
any voting right conferred through securities held by that person, (iii)
pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities for cash at fair
market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is
unsuitable to own such security, then pursuant to the Nevada Act, the
Registered Corporation can be sanctioned, including the loss of its
approvals, if without the prior approval of the Nevada Commission, it: (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person
by way of principal, redemption, conversion, exchange, liquidation, or
similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the
Nevada Gaming Authorities. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company is also required to
render maximum assistance in determining the identity of the beneficial
owner. The Nevada Commission has required that the Company's stock
certificates bear a legend indicating that the securities are subject to the
Nevada Act.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as
to the accuracy or adequacy of the prospectus or the investment merits of
the securities. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the
prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the
Nevada Commission in a variety of stringent standards prior to assuming
control of such Registered Corporation. The Nevada Commission may also
require controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate
defense tactics affecting Nevada gaming licensees, and Registered
Corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Nevada Commission has
established a regulatory scheme to ameliorate the potentially adverse
effects of these business practices upon Nevada's gaming industry and to
further Nevada's policy to: (i) assure the financial stability of corporate
gaming operators and their affiliates; (ii) preserve the beneficial aspects
of conducting business in the corporate form; and (iii) promote a neutral
environment for the orderly governance of corporate affairs. Approvals are,
in certain circumstances, required from the Nevada Commission before the
Company can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval
of a plan of recapitalization proposed by the Company's Board of Directors
in response to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending upon the type
of gaming or activity involved, are payable to the State of Nevada and to
the local jurisdictions. Depending upon the particular fee or tax involved,
these fees and taxes are payable either monthly, quarterly or annually and
are based upon any of: (i) a percentage of the gross revenues received;
(ii) the number of gaming devices operated; or (iii) the number of table
games operated. Nevada licensees that hold a license as an operator of a
slot route, or a manufacturer's or distributor's license, also pay certain
fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation of the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in
the discretion of the Nevada Commission. Thereafter, Licensees are required
to comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission
if they knowingly violate any laws of the foreign jurisdiction pertaining to
the foreign gaming operation, fail to conduct the foreign gaming operation
in accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employ a person
in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of personal unsuitability.
Federal Regulation
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver, or receive
gaming machines, gaming machine type devices, and components thereof across
interstate lines or to operate gaming machines unless that person has first
registered with the Attorney General of the United States. The Company's
subsidiaries have so registered and must renew their registration annually.
In addition, various record keeping and equipment identification
requirements are imposed by the Federal Act. Violation of the Federal Act
may result in seizure and forfeiture of equipment, as well as other
penalties.
Item 2. Properties
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Jackpot's corporate headquarters and Route Operations are currently
located in Las Vegas, Nevada with approximately 34,000 square feet of
office, warehouse and shop space under a lease which expires in 2006. In
connection with the sale of its Route Operations, the purchaser must enter
into an assumption of the leased property in Las Vegas, Nevada. Jackpot
also conducts certain corporate affairs in offices in New York, New York
with approximately 8,500 square feet under a lease which expires in 2010,
and in Dallas, Texas under a month-to-month lease. Upon the closing of the
sale of the Route Operations, all corporate functions which are presently
performed in Las Vegas will be transferred to offices in New York and
Dallas. Jackpot believes its properties are adequate and suitable for its
purposes.
Item 3. Legal Proceedings
_________________
For information concerning the settlement of a legal matter with
Albertson's, Inc. and the status of the dispute with Rite Aid Corporation,
see Note 11 of Notes to Consolidated Financial Statements in this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
Not applicable.
Item 4A. Executive Officers of the Registrant
____________________________________
Year Became an
Name Age Position Executive Officer
________________ ___ _____________________________________ _________________
Allan R. Tessler 63 Chief Executive Officer 2000
and Chairman of the Board
Mark W. Hobbs 44 President and Chief Operating Officer 2000
Steven L. Korby 54 Executive Vice President and Chief 2000
Financial Officer
George Congdon 51 Senior Vice President - Operations 1995
Bob Torkar 49 Senior Vice President - Finance, 1991
Treasurer and Chief Accounting Officer
Allan R. Tessler has served as Chief Executive Officer and Chairman of
the Board since March 2000 and May 1994, respectively, and has been a
director of Jackpot since 1980. Mr. Tessler also served as Secretary of
Jackpot from 1980 through August 1993. He has been Chairman and Chief
Executive Officer of International Financial Group, Inc., an international
merchant banking firm, since 1987. He was Co-Chairman and Co-Chief
Executive Officer of Data Broadcasting Corporation, a securities market data
supplier, from June 1992 through February 2000. Mr. Tessler has been
Chairman of the Board of Enhance Financial Services, Inc., an insurance
holding company, since 1986, and was Chairman of the Board of Great Dane
Holdings Inc., a diversified holding company, from 1987 through December
1996. He is also a director of The Limited, Inc., Allis-Chalmers
Corporation and Marketwatch.com, Inc.
Mark W. Hobbs joined Jackpot as President and Chief Operating Officer
in June 2000. From 1995 through his appointment to Jackpot, Mr. Hobbs
was a partner in Mariner Investment Group, a private money management and
hedge fund operation that had approximately $500 million under management.
Prior to Mariner, Mr. Hobbs was involved in private investing and financial
consulting from 1991 to 1995. From 1982 to 1991, Mr. Hobbs was President of
Rosewood Financial, Inc., a private investment management company.
Steven L. Korby was appointed Executive Vice President and Chief
Financial Officer in June 2000. From April 1999 through his appointment
with Jackpot, Mr. Korby was engaged in a private investment and consulting
business. From February 1998 through March 1999, Mr. Korby was Executive
Vice President and Chief Financial Officer of The Cerplex Group, Inc., a
provider of repair and logistics services, and spare parts sourcing and
service management for manufacturers of computer, communications and
electronic office equipment. From 1995 through 1997, Mr. Korby was Executive
Vice President and Chief Financial Officer of Greyhound Lines, Inc., a
nationwide intercity bus company. Prior to that and from 1983, Mr. Korby
was Executive Vice President and Chief Financial Officer of Neodata
Corporation and its predecessors, a direct marketing services company.
George Congdon was appointed Senior Vice President - Operations of
Jackpot on May 11, 1995. From October 1990 to May 1995, Mr. Congdon held
various management positions with certain of Jackpot's subsidiaries,
including Vice President of Route Operations and Senior Vice President of
Operations. Prior to October 1990, Mr. Congdon was employed for over
sixteen years in various operating positions by Bally Manufacturing, Inc.
and Bally Distributing, Inc., gaming machine manufacturers and distributors.
Bob Torkar was appointed Vice President - Finance, Treasurer and Chief
Accounting Officer of Jackpot on July 1, 1991 and Senior Vice President on
October 15, 1993. From February 1991 to June 1991, Mr. Torkar was a
financial consultant to Jackpot. Prior to the consulting assignment with
Jackpot, Mr. Torkar was Vice President and Chief Financial Officer with
Furnishings 2000, Inc., a publicly traded retail furnishings company in San
Diego, California, having spent seven years (1983-1990) with such
corporation.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
_____________________________________________________________________
Jackpot's common stock, par value $.01 per share (the "Common Stock"),
is listed on the New York Stock Exchange (NYSE) under the trading symbol
"J". The following table sets forth the range of high and low prices for
shares of the Common Stock for the fiscal quarters indicated, as furnished
by the NYSE. No cash dividends were paid during those fiscal quarters.
Future payment of quarterly cash dividends, if any, is subject to periodic
review and reconsideration by Jackpot's Board of Directors.
JACKPOT COMMON STOCK
__________________________________________________________________________
High Low
__________________________________________________________________________
Fiscal 1999
First Quarter $12.56 $ 9.38
Second Quarter 11.50 9.13
Third Quarter 9.63 7.63
Fourth Quarter 9.00 7.50
__________________________________________________________________________
Fiscal 2000
First Quarter $10.00 $ 7.63
Second Quarter 10.25 7.75
Third Quarter 21.50 7.88
Fourth Quarter 16.50 10.19
__________________________________________________________________________
As of September 15, 2000 there were 1,330 holders of record of Common
Stock. The number of holders of record of Jackpot's Common Stock on
September 15, 2000 was computed by a count of record holders.
Item 6. Selected Financial Data
_______________________
On July 8, 2000, the Company entered into a definitive agreement
to sell its Route Operations. As a result of the sale, which is
subject to closing conditions and regulatory and other approvals, the
financial position and results of operations of the Route Operations
have been reported as discontinued operations. The following
information has been derived from Jackpot's consolidated financial
statements. In accordance with accounting principles generally accepted
in the United States of America applicable to discontinued operations,
certain data in the table below has been reclassified to reflect the
Route Operations as discontinued.
Years Ended June 30,
___________________________________________
2000 1999 1998 1997 1996
____ ____ ____ ____ ____
(Dollars and shares in thousands, except per share data)
OPERATING DATA:
Income (loss) from
continuing operations (1) $ 6,295 (2) $ (978) $ (194) $ (764) $(1,178)
___________________________________________________________________________
Income from discontinued
operations $ 346 $ 5,581 $ 7,407 $ 8,608 $ 7,033
___________________________________________________________________________
Net income $ 6,641 $ 4,603 $ 7,213 $ 7,844 5,855
___________________________________________________________________________
Basic earnings (loss)
per share from continuing
operations(3) $ .73 (2) $ (.11) $ (.02) $ (.08) $ (.13)
___________________________________________________________________________
Diluted earnings (loss)
per share from continuing
operations (3) $ .71 (2) $ (.11) $ (.02) $ (.08) $ (.13)
___________________________________________________________________________
Dividends declared per
share $ - $ - $ - $ .16 $ .32
___________________________________________________________________________
Average common shares
outstanding 8,674 8,641 8,991 9,237 9,307
___________________________________________________________________________
Average common shares and
common share equivalents
outstanding 8,987 8,641 8,991 9,237 9,307
___________________________________________________________________________
BALANCE SHEET DATA
(at end of period):
Cash and cash equivalents $ 60,090 $44,137 $46,775 $44,445 $35,524
___________________________________________________________________________
Total assets $104,735 $77,721 $72,506 $70,116 $64,693
___________________________________________________________________________
Long-term debt $ 12,750 $ - $ - $ - $ -
___________________________________________________________________________
Stockholders' equity $ 87,910 $74,614 $70,871 $67,281 $63,495
___________________________________________________________________________
(1) For the periods presented above, Route Operations, which was
Jackpot's only business segment through February 2000, generated
100% of the Company's revenues. The Company's Internet-Related
Businesses segment, which the Company began operating in March
2000, did not generate any operating revenues in fiscal 2000.
(2) Includes a net fee from a terminated merger of $11,116.
(3) In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which became effective for periods ending after December
15, 1997. All prior-period earnings per share data presented has
been restated to conform to the provisions of such statement.
Item 7. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
Forward-looking statements; Risks and Uncertainties
___________________________________________________
Certain information included in this Form 10-K and other
materials filed or to be filed by the Company with the Securities and
Exchange Commission contains statements that may be considered forward-
looking. All statements other than statements of historical
information provided herein may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes",
"anticipates", "plans", "expects", "should" and similar expressions are
intended to identify forward-looking statements. 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 Internet-Related Businesses
include, but are not limited to, the ability of the Company to identify
and negotiate on terms acceptable to the Company an acquisition of a
systems development or other internet infrastructure company and the
ability to successfully integrate and grow such business if acquired,
the success of those entities in which the Company has invested, the
ability of those entities, in which the Company has existing minority
investments, to raise additional capital on terms that such entities
find attractive to themselves and to the Company or to otherwise
monetize their securities, and the ability of the Company to raise
additional outside capital for J Net Ventures I, LLC or for any future
funds to be established.
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's discontinued Route Operations
include, but are not limited to, competitive pressures, the loss or
nonrenewal of any of Jackpot's significant contracts, the consolidation or
disposition of selected locations as a result of the merger of
Albertson's, Inc. and American Stores Company (each of which was a
significant customer of the Company during the past three fiscal
years), conditioning or suspension of any gaming license, unfavorable
changes in gaming regulations, certain approvals from the Nevada Gaming
Commission of the amendments to the Rite Aid agreements, possible
future financial difficulties of any 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.
Overview
________
On March 8, 2000, Jackpot Enterprises, Inc. ("Jackpot" or the
"Company"), which has operated as one business segment since it was
organized in 1980, announced a series of actions designed to transform
the Company from a gaming entity into a high growth, technology,
Internet infrastructure provider and fund manager ("Internet-Related
Businesses"). On March 10, 2000, the Company formed J Net Ventures I,
LLC ("Venture I"), an entity that will invest primarily in Internet-
Related Businesses. As of June 30, 2000, the Company owned 100% of
Venture I. Venture I is managed by J Net Venture Partners, LLC (the
"Manager"). Allan R. Tessler, the Company's Chief Executive Officer is
the Chairman of the Manager and Keith Meister and Todd Meister are Co-
Presidents of the Manager. The Company will at all times own at least
51% of the Manager. In addition, the Board of Directors has
unanimously adopted a resolution to change the name of the Company to J
Net Enterprises, Inc. Such change is subject to the approval of the
Company's stockholders.
Management anticipates that Venture I will be an $80 million fund.
Of the $80 million, entities associated with Gilbert Global Entities
have committed $15 million. The remaining $10 million will be funded
by certain other investors, subject to the completion of the agreement
between such investors and Venture I. A portion of the $55 million was
derived from the sale of certain convertible subordinated notes (the "Notes").
The investors in such Notes include officers and directors of the
Company or entities controlled by such directors and the Co-Presidents
of the Manager. As of September 26, 2000, the Company has raised
approximately $24 million through the issuance of the Notes. The
receipt of the remaining $4 million is subject to the completion of
subscription agreements between the Company and certain other
investors. For financial statement purposes, the Notes were deemed to
have been beneficially converted as the conversion feature was in-the-
money at the commitment date. Approximately $3.8 million of the proceeds
from the issuance of the Notes, equal to the intrinsic value, will be recorded
as debt discount and allocated to additional paid-in capital. Of the $3.8
million, $2.5 million was recorded on June 28, 2000, and the remaining $1.3
million will be recorded in the quarter ending September 30, 2000. Because
the debt is not convertible until June 1, 2001, the debt discount is amortized
to interest expense from the date of issuance of the Notes through June 1,
2001 using the interest method. As a result of the issuance of the notes,
interest expense for the year ending June 30, 2001 will increase substantially.
For further information concerning the convertible subordinated notes, see
Note 2 of Notes to Consolidated Financial Statements.
Venture I will make investments primarily in early stage ventures
(first and second round financing) exhibiting reasonable risk adjusted
valuations. Additionally, Venture I may invest in public companies
when an opportunity exists for value creation. It is anticipated that
individual investments will range from $1 million to $10 million and
will consist of the following: (1) New companies primarily in the
business-to-business segment; (2) Established "brick and mortar"
companies who have established brand identities but have not yet
developed, deployed or migrated their businesses to the Internet; (3)
Technology and infrastructure opportunities which capitalize on the
growth of Internet traffic and the proliferation of Internet ready
devices; (4) Broadband technologies and related content driven
opportunities; and (5) Opportunistic turn-around situations. As of
September 26, 2000, the Company had invested approximately $33 million
in Internet-Related Businesses. Of the $33 million, the Company
invested approximately $17 million on behalf of Venture I .
Prior to the Company's change in business strategy, the Company
had been actively engaged, through its subsidiaries, in the gaming
industry for over 30 years. The Company is one of the largest gaming
machine route operators in the State of Nevada, and is an established
leader in the operation of gaming machines in multiple retail locations
("Route Operations"). In connection with its change in business
strategy, the Company has retained the investment banking firm of
Koffler & Company to advise the Company on the disposition of its
gaming business segment. During the quarter ended June 30, 2000,
management formalized its plan to sell the Route Operations and
commenced activities to dispose of such operations. On July 8, 2000,
the Company entered into a definitive agreement to sell its Route
Operations for $45 million in cash. As a result of the sale, which is
subject to closing conditions and regulatory and other approvals, the
financial position and results of operations of the Route Operations
have been reported as discontinued operations. In accordance with
accounting principles generally accepted in the United States of
America applicable to discontinued operations, previously reported
financial statements have been reclassified to reflect the Route
Operations as discontinued. The Company expects to complete the
closing of the sale during the quarter ending December 31, 2000.
At various times during the past several years, the Company
engaged in the active consideration of potential acquisitions and
expansion opportunities in both the gaming and nongaming markets,
including most recently in 1999 in connection with the potential
acquisition of Players International, Inc. ("Players") and CRC
Holdings, Inc. d/b/a Carnival Resorts & Casinos ("CRC"), a privately
owned company. The Company devoted significant management and other
resources to these efforts and incurred substantial expenses in
connection with such activities. The discussion that follows is based
on giving retroactive effect to the discontinued operations. Since the
Route Operations was the Company's only business segment from its
inception through February 2000, the following discussion focuses
primarily on Jackpot's continuing operations, which consisted primarily
of the activities of the parent company for the periods discussed in
this report.
Results of Operations
_____________________
Special Factors Affecting Discontinued Operations:
Albertson's-Raley's litigation. In August 1998, Albertson's,
_______________________________
Inc. ("Albertson's," a retail chain in which Jackpot conducts gaming
operations) and American Stores Company ("American Stores") entered
into a merger agreement that provided for the acquisition of American
Stores by Albertson's. Approximately 51%, 57% and 55% of revenues
generated by discontinued operations for the fiscal years ended June
30, 2000, 1999 and 1998 (referred to herein as "2000", "1999" and
"1998", respectively) were generated at the locations of those two
entities. The merger of Albertson's and American Stores was completed
on June 23, 1999. As a condition to avoiding and/or settling legal
proceedings against the merger by the Federal Trade Commission and the
Attorneys General of California, Nevada and New Mexico, Albertson's
agreed to divest certain of its stores, including 19 stores in southern
Nevada, fifteen of which were Jackpot locations. In late September
and early October 1999, Albertson's sold those locations to Raley's,
Inc. ("Raley's"), and Raley's has operated them since.
On August 30, 1999, Jackpot commenced litigation in United States
District Court for the District of Nevada against Albertson's and
Raley's to enforce its rights to remain in the fifteen locations under
its agreement with Albertson's. On September 14, 1999, Jackpot obtained
a preliminary injunction to prevent Albertson's and Raley's from
interfering with its right to occupy the subject premises and conduct
gaming operations. Albertson's and Raley's appealed the injunction and
made motions for summary judgment.
In connection with Raley's acquisition of the locations, United
Coin Machine Company ("United Coin"), the slot route operator for
Raley's northern Nevada stores, filed applications with the Nevada
Gaming Control Board to operate the gaming machines at the fifteen
stores. On September 23, 1999, United Coin commenced an action in
Nevada state court against Jackpot, Albertson's, Raley's and Anchor
Coin ("Anchor"), the slot route operator at the four other Albertson's
southern Nevada locations seeking declaratory and injunctive relief and
money damages.
On January 26, 2000, Jackpot entered into a Settlement Agreement
and Release (the "Settlement Agreement") with Albertson's, Raley's,
Anchor and United Coin. Pursuant to the terms of the Settlement
Agreement, the parties agreed to dismiss with prejudice all litigation
pending among them and to the takeover of gaming operations by United
Coin of the 19 stores in southern Nevada, effective February 1, 2000.
Of the 19 stores in southern Nevada operated by Raley's, Jackpot had
operated 246 gaming machines at 15 locations pursuant to its long-term
agreement with Albertson's. These 15 locations generated approximately
16% of revenues, and a significantly greater percentage of operating
income of discontinued operations in 1999. Jackpot believed it was in
its best interest to settle the case and thereby preserve and solidify
its long-term relationship with Albertson's, its largest customer,
pursuant to the terms of an amendment to its agreement with
Albertson's, which it had theretofore arranged and which is described
below. It was also important to Jackpot to avoid further litigation
and fully resolve all claims among and between the parties. All costs
incurred in connection with the litigation and settlement, including
legal and settlement costs aggregating approximately $950,000, were
recorded in 2000, and are included in the line captioned income from
discontinued operations in the accompanying consolidated statements of
income.
Settlement agreement with Albertson's. Prior to the settlement
______________________________________
described above, on November 18, 1999, Jackpot and Albertson's had
entered into a settlement agreement (the "Agreement"). The Agreement
amended the license agreement entered in September 1998 between Jackpot
and Albertson's (the "Albertson's Agreement"). The Agreement also
terminated Jackpot's separate license agreements with Lucky Stores,
Inc. and American Drug Stores, Inc. and incorporates Jackpot's
exclusive rights in Nevada to operate gaming devices at the locations
(including any future locations) of those entities into the Albertson's
Agreement, as amended by the Agreement. Under the Agreement, Jackpot
has the exclusive option to extend the agreements beyond their initial
terms and will continue to have exclusive gaming rights for new
Albertson's locations. In addition, Albertson's granted Jackpot
exclusive gaming rights in all drug stores opened by Albertson's or any
of its affiliates in Nevada, and in future fuel center locations, a new
retailing concept that Albertson's will open, in which gaming may be
offered to customers. Further, pursuant to the terms of the Agreement,
Jackpot received certain immediate credits toward license fees, and
will receive substantial reductions in certain license fees, which are
effective from February 1, 2000 through the initial term of the
Agreement. Based upon the amended terms and certain assumptions,
management believes that the estimated cost savings over the initial
term of the Agreement will approximate $18 million.
The Rite Aid dispute. On December 8, 1999, certain Route
_____________________
Operations subsidiaries of Jackpot commenced litigation in the United
States District Court for the District of Nevada against Rite Aid
Corporation ("Rite Aid"). The lawsuit is an action for rescission of
two license agreements between those subsidiaries and Rite Aid and for
damages based upon Rite Aid's alleged fraud. Operations of said
subsidiaries under said agreements resulted in an operating loss of
approximately $3.4 million in 2000.
On March 27, 2000, Jackpot entered into amendments to the two
license agreements with Rite Aid. Based on the number of existing
locations at which Jackpot currently operates gaming machines, license
fees payable to Rite Aid have been reduced by approximately $2.5
million annually over the remaining term of the amended agreements. The
amendments are subject to certain administrative approvals from the
Nevada State Gaming Control Board ("Nevada Board") for 31 Rite Aid
locations. The Company has recently received verbal approval from the
Nevada Board for 25 Rite Aid locations, and management expects to
receive verbal approval for the remaining 6 stores shortly. Based upon
verbal approval of the majority of the Company's Rite Aid locations,
management anticipates that the Company will receive the administrative
approvals from the Nevada Board for the 31 Rite Aid locations in
October 2000. Upon the receipt of the administrative approvals, the
amendments will become effective. Based upon management's belief that
such approval will be received shortly, the Company has recorded the
license fees at their reduced rates, effective March 1, 2000.
Further, upon such approval, all disputes between the parties,
including Jackpot's lawsuit against Rite Aid, will be resolved or
settled. On April 26, 2000, the Court ordered that all scheduling
deadlines previously set in the case were stayed pending the filing of
a Stipulation and Order of Dismissal by the parties. Further, because
the amended agreements are conditioned upon certain administrative
approvals by the Nevada Board, the parties were permitted to file the
Stipulation for Dismissal by September 15, 2000, which has been
extended to October 16, 2000.
Based upon the reduction in license fees described above, the
Company's operating losses at the Rite Aid locations should decrease
substantially. However, even with the license fee reductions,
management believes that the Company will continue to incur losses, and
such losses may be significant, unless revenues increase significantly
at these locations.
2000 compared to 1999
_____________________
Revenues:
The Company had no revenues from continuing operations in 2000
and 1999.
Costs and expenses:
Costs and expenses of Jackpot's continuing operations, which
consisted principally of parent company general and administrative
activities, increased $3.3 million, from $3.4 million in 1999 to $6.7
million in 2000. The increase of $3.3 million was due primarily to
$2.8 million of severance costs paid to the former Chief Executive
Officer.
Other income (expense):
Other income, net increased $14.1 million, from $1.3 million in
1999 to $15.4 million in 2000. The increase of $14.1 million was due
principally to the net fee from the terminated merger of $11.1 million
and the gain on the sale of the Players common stock of $2.4 million.
Federal income tax:
The effective tax rate for 2000 and 1999 was 28.1% and 28%,
respectively. These rates were lower than the Federal Statutory rate
of 35% principally because of the tax benefits realized from tax-exempt
interest income.
Net income (loss) from continuing operations:
Net income from continuing operations increased $7.3 million,
from a net loss of $1.0 million in 1999 to net income of $6.3 million
in 2000. Diluted earnings (loss) per share from continuing operations
for 2000 was $.71 per share versus ($.11) per share for 1999. Such
increases were due principally to the increase in other income relating
to the net fee from the terminated merger and the gain on the sale of
the Players common stock.
Income from discontinued operations, net of tax:
Income from discontinued operations, net of tax, decreased $5.3
million, from $5.6 million in 1999 to $.3 million in 2000. Such
decrease was due principally to three factors: (1) a significant
decline in income generated at 15 former Albertson's locations in
southern Nevada, which have been operated by Raley's since late
September and early October 1999. Such decline was due primarily to
(i) significantly lower revenues generated at these locations and (ii)
the loss of such locations on February 1, 2000, (2) an operating loss
of approximately $3.4 million in 2000 incurred at the locations of Rite
Aid, a large customer, resulting from the failure of 12 new locations
to achieve expected revenues, as well as from a decrease in revenues at
existing locations of such customer, and (3) legal and settlement costs
incurred in connection with Jackpot's litigation against Albertson's
and Raley's.
Net income:
Net income increased $2.0 million, from $4.6 million in 1999 to
$6.6 million in 2000. Diluted earnings per share for 2000 was $.75 per
share versus $.53 per share in 1999. Such increases were due primarily
to the combination of significant items described above.
1999 compared to 1998
_____________________
Revenues:
The Company had no revenues from continuing operations in 1999
and 1998.
Costs and expenses:
Costs and expenses of Jackpot's continuing operations, which
consisted principally of parent company general and administrative
activities, increased $.6 million, from $2.8 million in 1998 to $3.4
million in 1999. The increase was due principally to the termination
of the CRC merger agreement in 1999. As a result of the termination of
the CRC merger agreement, capitalized costs of $.9 million incurred in
connection with the proposed acquisition of CRC were expensed.
Other income (expense):
Other income, net decreased $.1 million, from $1.4 million in
1998 to $1.3 million in 1999. The decrease of $.1 million was due
primarily to a decrease in interest income.
Federal income tax:
The effective tax rate for 1999 and 1998 was 28% and 27%,
respectively. These rates were lower than the Federal Statutory rate
of 35% primarily because of the tax benefits realized from tax-exempt
interest income.
Net loss from continuing operations:
Net loss from continuing operations increased $.8 million, from
$.2 million in 1998 to $1.0 million in 1999. Basic and diluted loss
per share from continuing operations for 1999 was $.11 versus $.02 for
1998. Such increases were due principally to the charge associated
with the termination of the CRC merger agreement.
Income from discontinued operations, net of tax:
Income from discontinued operations, net of tax, decreased $1.8
million, from $7.4 million in 1998 to $5.6 million in 1999. Such
decrease was due principally to the following: (1) A charge of $1.2
million in 1999 in connection with the closing of the Owl Club Casino
in Battle Mountain, Nevada, (2) An increase of $.5 million in
amortization expense, (3) A decrease of $.4 million in the Route
Operations margin, from $16.4 million in 1998 to $16.0 million in 1999,
and (4) A decrease in other income of $.4 million in 1999.
Net income:
Principally as a result of the Owl Club Casino and the CRC
charges, net income and diluted earnings per share in 1999 decreased to
$4.6 million and $.53 per share, respectively, from $7.2 million and
$.80 per share in 1998.
Capital Resources and Liquidity
_______________________________
Liquidity:
On October 29, 1996, Jackpot's Board of Directors authorized
management to repurchase up to 500,000 shares of Jackpot's common stock
at prevailing market prices. Subsequently, on January 22, 1998, such
authorization was increased from 500,000 to 1,000,000 shares. From
October 29, 1996 through August 31, 2000, Jackpot has repurchased
800,437 shares at an aggregate cost of approximately $8.5 million.
On August 16, 1999, Jackpot received a notice from Players
terminating the Agreement and Plan of Merger dated February 8, 1999
(the "Players Agreement"). Such notice contained the terms of a merger
offer for Players from Harrah's Entertainment, Inc. On August 19,
1999, pursuant to the terms of the Players Agreement, Jackpot received
a break-up fee of $13.5 million. As a result of the termination of the
Players Agreement, capitalized costs of $2.4 million incurred in
connection with the proposed acquisition of Players were expensed
resulting in a net break-up fee of $11.1 million.
During 2000, Jackpot sold 1,014,400 shares of Players common
stock for $8.5 million. As a result of the sale of such shares, which
were purchased on March 10, 1999 at a cost of $6.1 million, Jackpot
realized a gain of $2.4 million.
As described previously, the Company has recently raised
approximately $23 million through the issuance of unregistered
convertible subordinated notes, and expects to raise an additional $5
million. Subject to the successful completion of such financing
discussed above, management believes the Company's working capital will
be sufficient to enable Jackpot to fund its $55 million commitment to
Venture I, and to meet its operating and other cash requirements for
the year ending June 30, 2001.
Cash Flows:
Jackpot's principal source of cash for 2000, 1999 and 1998 was
the net cash provided by discontinued operations. In addition, the
break-up fee of $13.5 million from a terminated merger with Players and
proceeds of $14.2 million received in June 2000 from the issuance of
convertible subordinated notes provided other significant sources of
cash.
Net cash provided by investing activities of continuing
operations in 2000 was $1.2 million. Such inflow resulted primarily
from the receipt of the break-up fee from the terminated merger with
Players and the proceeds from the sale of Players stock described below
less cash used of $19.1 million for investments in Internet-Related
Businesses. From March 2000 through June 30, 2000, the Company
directly and on behalf of Venture I invested $25.8 million in
Internet-Related Businesses. Such outflows consisted of $19.1 million
in cash and $6.7 million of non-cash consideration, primarily in the form
of the Company's common stock.
Net cash provided by financing activities in 2000 was $14.8
million, and consisted of net proceeds received from the issuance of
unregistered convertible subordinated notes and common stock upon the
exercise of stock options of approximately $14.2 million and $.6
million, respectively.
As a result of the combination of net cash provided by operating
activities, investing activities and financing activities of $.9
million, $.2 million and $14.8 million, respectively, cash and cash
equivalents increased $15.9 million in 2000.
Net cash provided by operating activities in 1999 and 1998
consisted principally of net cash provided by discontinued operations
of $11.0 million and $13.2 million, respectively. Such proceeds were
used to fund all investing and financing activities in 1999 and 1998.
With respect to 1999, net cash used in investing activities of
continuing operations was $7.7 million, and resulted primarily from the
purchase of marketable securities of $6.1 million.
Net cash used in financing activities in 1999 was $1.6 million,
and resulted from payments for repurchases of common stock of $1.7
million, net of proceeds received of approximately $.1 million from the
issuance of common stock upon the exercise of stock options.
As a result of the combination of net cash provided by operating
activities of $11.0 million less net cash used in investing and
financing activities of $12.0 million and $1.6 million, respectively,
cash and cash equivalents decreased $2.6 million in 1999.
Net cash used in financing activities in 1998 was $3.6 million,
and resulted from payments for repurchases of common stock of $4.0
million, net of proceeds received of approximately $.4 million from the
issuance of common stock upon the exercise of stock options.
As a result of the combination of net cash provided by operating
activities of $11.8 million less net cash used in investing activities
of discontinued operations and financing activities of $5.9 million and
$3.6 million, respectively, cash and cash equivalents increased $2.3
million in 1998.
Recently Issued Accounting Standards:
In April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities".
This standard provides guidance on the financial reporting for start-up
costs and organization costs. This standard requires costs of start-up
activities and organization costs to be expensed as incurred. The
Company adopted this standard on July 1, 1999. This statement did not
have any effect on Jackpot's results of operations or its financial
position.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended, which is effective for fiscal years beginning after June 15,
2000. SFAS 133 establishes additional accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position. This statement also
defines and allows companies to apply hedge accounting to its designated
derivatives under certain instances. It also requires that all derivatives be
marked to market on an ongoing basis. This applies whether the derivatives
are stand-alone instruments, such as warrants or interest rate swaps, or
embedded derivatives, such as call options contained in convertible debt
investments. Along with the derivatives, in the case of qualifying hedges,
the underlying hedged items are also to be marked to market. These market
value adjustments are to be included either in the income statement or other
comprehensive income, depending on the nature of the hedged transaction.
The fair value of financial instruments is generally determined by reference to
market values resulting from trading on a national securities exchange or
in an over the counter market. In cases where derivatives relate to financial
instruments of non public companies, or where quoted market prices are otherwise
not available, such as for derivative financial instruments, fair value is based
on estimates using present value or other valuation techniques. The Company
will adopt the standard in the quarter ending September 30, 2000 and will record
its derivatives on July 1, 2000 at fair market value. In addition, any
increase or decrease from historical cost basis of its derivatives on that date
will be recorded as a cumulative effect of a change in accounting principle in
the first quarter ending September 30, 2000.
Based on management's review, the Company expects the most significant
impact of this standard will be the cumulative effect adjustment as well as
ongoing marked to market adjustments related to the warrants that it received
to purchase TechTrader, Inc. common stock in connection with the Company's
purchase of Series B Preferred Stock. The value of these warrants can
fluctuate given that TechTrader is a non public company. At June 30, 2000, the
estimated value of the warrants was approximately $1.6 million. Under SFAS 133,
the warrants will be revalued each quarter and the change in value of the
warrants will be included in the consolidated statement of income. Under
current accounting principles, the change in value of these warrants is not
recorded. The cumulative effect of the adoption of SFAS 133 will be
approximately $15,000.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 clarifies existing accounting
principles related to revenue recognition in financial statements. The
Company is required to comply with the provisions of SAB 101 in its
quarter ending June 30, 2001. Based upon the current nature of the
Company's continuing operations, management does not believe that SAB
101 will have a significant impact on the Company's results of
operations.
In March 2000, the FASB issued FASB Interpretation 44 "Accounting
for Certain Transactions involving Stock Compensation" ("FIN 44"),
which provides clarification on the application of Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees. The Company is required to comply with the provisions of
FIN 44 beginning July 1, 2000. Based upon management's review, the
Company does not expect that the application will have a material
effect on the Company's results of operations.
Factors Which May Affect Future Results
_______________________________________
With its change in business strategy, the Company will be
operating in a significantly different environment that involves a
number of risks and uncertainties. Some factors including, but not
limited to the following, may affect the Company's future results of
operations: (1) the Company's ability to successfully execute its new
business model; (2) the development of the Internet and the infrastructure
that supports it; (3) the Company's success may depend greatly on increased
use of the Internet by businesses and individuals; (4) the ability of
the Company's investees to compete against direct and indirect
competitors; (5) the Company's ability to acquire interests in
additional Internet-Related Businesses, (6) the ability of the Company's
investees to raise additional capital, and (7) changes in the market
for securities of Internet-Related Businesses in general and for
initial public offerings of Internet companies in particular.
By their very nature, the entities in which the Company has and will
be investing capital will be in an earlier stage of development and maturity,
and therefore a different level of risk and reward. All of the Company's
investments in Internet-Related Businesses are in non public companies.
Substantially all such companies are development stage companies and are
presently incurring operating losses. There can be no assurance that such
companies will generate operating income in the future.
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 has been referred
to as the "Year 2000 Problem". The Company's essential systems were
Year 2000 compliant prior to December 31, 1999. All costs related to
the Year 2000 Problem have been expensed as incurred, while the cost of
new hardware is capitalized and amortized over its expected useful
life. As of December 31, 1999, the Company had incurred approximately
$280,000 of Year 2000 compliance costs, principally for internal costs
and system applications. Subsequent to December 31, 1999, the Company
has not experienced any significant difficulties, or incurred any
significant costs relating to the Year 2000 Problem, and continues to
monitor its essential computer systems and other systems for potential
problems which may occur.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
_________________________________________________________
The Company is generally exposed to market risk from adverse
changes in interest rates. The Company's interest income is affected
by changes in the general level of U.S. interest rates. Changes in
U.S. interest rates could affect interest earned on the Company's cash
equivalents, debt instruments and money market funds. A majority of
the interest earning instruments earn a fixed rate of interest over
short periods (7-35 days). Based upon the invested balances at June
30, 2000, a 10% drop in interest rates would reduce pretax interest
income by approximately $360,000 per year. Therefore, the Company does
not anticipate that exposure to interest rate market risk will have a
material impact on the Company due to the nature of the Company's
investments.
During the year ended June 30, 2000, the Company sold a total of
1,014,400 shares of common stock of Players in open market
transactions. Such shares, which were purchased on March 10, 1999,
were acquired because the purchase price for those shares was
significantly below the per share consideration which the Company had
agreed to pay for all outstanding shares of Players pursuant to the
Agreement and Plan of Merger dated as of February 8, 1999, which
provided for the merger of Players into a wholly-owned subsidiary of
the Company. As of June 30, 2000, Jackpot did not own any shares of
Players common stock. For further information concerning the
termination of the merger with Players and the sale of Players common
stock by the Company, see Note 9 of Notes to Consolidated Financial
Statements in this Form 10-K.
Except for the purchase described above, Jackpot invests its
available cash in marketable municipal bonds and money market funds.
No trading portfolios are available for the sale of these investments.
Therefore, Item 7A disclosure is not applicable for these investments.
In June 2000, the Company raised $15,250,000 through the issuance
of unregistered convertible subordinated notes ("the Notes"). The
principal amount of the Notes is payable on March 31, 2007 and bears
interest at 8% per annum, payable on a quarterly basis. For
financial statement purposes, the Notes were deemed to have been
beneficially converted as the conversion feature was in-the-money at
the commitment date. The Company has calculated the beneficial
conversion feature as the difference between the fair value of the
common stock at the commitment date and the initial conversion price,
multiplied by the number of shares into which the debt is convertible.
Approximately $2,500,000 of the proceeds from issuance of the Notes,
equal to the intrinsic value, has been recorded as debt discount and
allocated to additional paid-in capital. Management believes that the
carrying value of the Notes approximates fair value.
Beginning July 1, 2000, with the Company's adoption of SFAS 133,
the Company expects to have one derivative instrument in the form of
warrants to purchase common stock in a non public company. There is
currently no public market for these warrants. However, a 10% change
in the value of the warrants based upon the Company's valuation of the
warrants using Black Scholes valuation techniques would affect earnings
by $160,000.
Item 8. Financial Statements and Supplementary Data
___________________________________________
The Financial Statements and Supplementary Data required by this
Item 8 are set forth as indicated in Item 14(a)(1)(2).
Item 9. Changes in and Disagreements with Accountants on
________________________________________________
Accounting and Financial Disclosure
___________________________________
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
__________________________________________________
Item 11. Executive Compensation
______________________
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________
Item 13. Certain Relationships and Related Transactions
______________________________________________
The information required by items 10, 11, 12 and 13 are incorporated
by reference from the 2000 Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days of the end of the
fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
________________________________________________________________
(a) (1) and (2)
Consolidated Financial Statements and Schedules
For a list of the consolidated financial statements and
consolidated financial statement schedules filed as a part of
this annual report on Form 10-K, see "Index to Financial
Statements, Supplementary Data and Financial Statement
Schedules" on page F-1.
(a) (3) The exhibits filed and incorporated by reference are listed in
the index of Exhibits required by Item 601 of Regulation S-K at
Item (c) below.
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended June 30, 2000,
Jackpot filed no reports on Form 8-K.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant, as amended (J)
3.2 By-laws of the Registrant, as amended (A)
4.1 Stockholder Rights Agreement dated as of July 11, 1994
between the Registrant and Continental Stock Transfer &
Trust Company, as Rights Agent (D)
10.1 Indemnification Agreement (Sample) (B)
10.2 1992 Incentive and Non-qualified Stock Option Plan (C)(M)
10.3 Employment Agreement with Don R. Kornstein (E)(M)
10.4 License agreement with American Drug Stores, Inc. (F)
10.5 License agreement with American Drug Stores, Inc. (F)
10.6 License agreement with Lucky Stores, Inc. (F)
10.7 License agreement with Kmart Corporation (G)
10.8 License agreement with Albertson's, Inc. (G)
10.9 License agreement with Rite Aid Corporation (H)
10.10 License agreement with Rite Aid Corporation (H)
10.11 Settlement Agreement with Albertson's, Inc. (J)
10.12 First Amendment to Settlement Agreement with Albertson's,
Inc. (J)
10.13 First Amendment to License Agreement between Cardivan
Company and Rite Aid Corporation (K)
10.14 First Amendment to License Agreement between Corral Coin,
Inc. and Rite Aid Corporation (K)
10.15 Termination and Consulting Agreement between the Registrant
and Don R. Kornstein (K)(M)
10.16 Call Agreement, dated as of March 1, 2000, among Keith A.
Meister, Todd A. Meister and the Registrant (K)
10.17 Put Agreement, dated as of March 1, 2000, among Keith A.
Meister, Todd A. Meister and the Registrant (K)
10.18 Employment Agreement between the Registrant and George
Congdon (L)(M)
10.19 Employment Agreement between the Registrant and Robert
Torkar (L)(M)
10.20 Stock Purchase Agreement between E-T-T, Inc. and the
Registrant (L)
10.21 J Net Ventures I, LLC Operating Agreement (L)
10.22 Subscription Agreement and Investment Representation
(Sample) (L)
10.23 Convertible Subordinated Note (Sample) (L)
10.24 Registration Rights Agreement (Sample) (L)
21.1 List of Registrant's subsidiaries (L)
23.1 Consent of Deloitte & Touche LLP (L)
27.1 Financial Data Schedule (EDGAR version only)
(A) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30, 1989.
(B) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30, 1991.
(C) Incorporated by reference to Registrant's 1992 Proxy
Statement.
(D) Incorporated by reference to Registrant's Form 8-A
dated July 12, 1994.
(E) Incorporated by reference to Registrant's Form 10-Q
for the quarter ended September 30, 1994.
(F) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30, 1997.
(G) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30, 1998.
(H) Incorporated by reference to Registrant's Form 10-Q
for the quarter ended March 31, 1999.
(I) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30, 1999.
(J) Incorporated by reference to Registrant's Form 10-Q
for the quarter ended December 31, 1999.
(K) Incorporated by reference to Registrant's Form 10-Q
for the quarter ended March 31, 2000.
(L) Included herein.
(M) Management contract or compensatory plan or
arrangement which is separately identified in
accordance with Item 14(a)(3) of Form 10-K.
(d) Schedules
For a list of the financial statement schedules filed as a part
of this annual report on Form 10-K, see "Index to Financial
Statements, Supplementary Data and Financial Statement Schedules"
on page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 28, 2000 JACKPOT ENTERPRISES, INC.
(Registrant)
By: /s/ Allan R. Tessler
_______________________________
Allan R. Tessler
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
_________ _____ ____
/s/ Allan R. Tessler Chief Executive Officer and September 28, 2000
___________________________ Chairman of the Board
Allan R. Tessler
/s/ Steven L. Korby Executive Vice President and September 28, 2000
__________________________ Chief Financial Officer
Steven L. Korby (Principal Financial Officer)
/s/ Bob Torkar Senior Vice President-Finance, September 28, 2000
__________________________ Treasurer and Chief Accounting
Bob Torkar Officer (Principal Accounting
Officer)
/s/ Alan J. Hirschfield Director September 28, 2000
__________________________
Alan J. Hirschfield
/s/ David R. Markin Director September 28, 2000
__________________________
David R. Markin
/s/ Robert L. McDonald, Sr. Director September 28, 2000
__________________________
Robert L. McDonald, Sr.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 8 AND 14(a)]
(1) FINANCIAL STATEMENTS:
Independent Auditors' Report
Consolidated Balance Sheets
June 30, 2000 and 1999
Consolidated Statements of Income
Years Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information (Unaudited)
Years Ended June 30, 2000 and 1999
(3) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules are omitted because of the absence of
conditions under which they are required or because the required
information is provided in the consolidated financial statements or
notes thereto.
INDEPENDENT AUDITORS' REPORT
The Stockholders of
Jackpot Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Jackpot
Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 2000 and
1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30,
2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
September 25, 2000
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2000 AND 1999
(Dollars in thousands)
ASSETS 2000 1999
______ ________ _______
Current assets:
Cash and cash equivalents $ 60,090 $44,137
Short-term investments, at fair value - 7,292
Other current assets 697 599
Net assets of discontinued operations 16,645 23,688
________ _______
Total current assets 77,432 75,716
________ _______
Note receivable - related parties 1,000 -
Investments in internet-related businesses 24,136 -
Excess of costs over equity in underlying net
assets of investments in internet-related
businesses, net of amortization 1,657 -
Other non-current assets 510 2,005
________ _______
Total assets $104,735 $77,721
======== =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2000 AND 1999
(Dollars in thousands, except share data)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
____________________________________ _________ ________
Current liabilities:
Accounts payable $ - $ 1,283
Other current liabilities 799 991
________ _______
Total current liabilities 799 2,274
Convertible subordinated notes, net of
unamortized discount of $2,500 12,750 -
Deferred income tax 762 833
Minority interest in subsidiary 2,514 -
_________ _______
Total liabilities and minority
interest 16,825 3,107
_________ _______
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock - authorized
1,000,000 shares of $1 par value;
none issued
Common stock - authorized
60,000,000 shares of $.01 par
value; 10,233,470 and 9,860,252
shares issued 102 99
Additional paid-in capital 73,875 66,465
Retained earnings 27,710 21,069
Less 1,258,624 and 1,243,714 shares of
common stock in treasury, at cost (13,777) (13,776)
Unrealized gain on available-for-sale
securities, net of tax - 757
________ ________
Total stockholders' equity 87,910 74,614
________ ________
Total liabilities and
stockholders' equity $104,735 $ 77,721
======== ========
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands, except per share data)
2000 1999 1998
_______ _______ _______
Costs and expenses:
General and administrative $ 6,732 $ 2,503 $ 2,774
Costs of terminated merger - 900 -
_______ _______ _______
Totals 6,732 3,403 2,774
_______ _______ _______
Operating loss from continuing operations 6,732 3,403 2,774
_______ _______ _______
Other income (expense):
Net fee from terminated merger 11,116 - -
Gain on sale of short-term investments 2,361 - -
Interest and other income 2,068 1,340 1,432
Equity in income (loss) of internet-related
businesses (100) - -
_______ _______ _______
Totals 15,445 1,340 1,432
_______ _______ _______
Income (loss) from continuing operations
before income tax 8,713 (2,063) (1,342)
_______ _______ _______
Provision (benefit) for Federal income tax 2,418 (1,085) (1,148)
_______ _______ _______
Net income (loss) from continuing operations 6,295 (978) (194)
Income from discontinued operations,
net of tax 346 5,581 7,407
_______ _______ _______
Net income $ 6,641 $ 4,603 $ 7,213
======= ======= =======
Basic earnings (loss) per share:
Income (loss) from continuing operations $ .73 $ (.11) $ (.02)
Income from discontinued operations .04 .64 .82
_______ _______ _______
$ .77 $ .53 $ .80
======= ======= =======
Dilutive earnings (loss) per share:
Income (loss) from continuing operations $ .71 $ (.11) $ (.02)
Income from discontinued operations .04 .64 .82
_______ _______ _______
$ .75 $ .53 $ .80
======= ======= =======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars and shares in thousands, except per share data)
<TABLE>
Accumulated
Common Stock Additional Treasury Stock Other
________________ Paid-In Retained ________________ Comprehensive
Shares Amount Capital Earnings Shares Amount Income Totals
_______ ______ ________ ________ ______ _________ ____________ _______
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1997 9,824 $ 98 $66,033 $ 9,253 (742) $ (8,103) $67,281
Comprehensive income:
Net loss from continuing
operations (194) (194)
Income from discontinued
operations, net of tax 7,407 7,407
_______
Comprehensive income 7,213
Issuance of shares on
exercise of stock
options 30 1 343 344
Repurchases of
common stock (338) (3,967) (3,967)
_______ ____ _______ _______ _______ ________ ____ _______
Balance June 30, 1998 9,854 99 66,376 16,466 (1,080) (12,070) 70,871
Comprehensive income:
Net loss from continuing
operations (978) (978)
Income from discontinued
operations, net of tax 5,581 5,581
Other comprehensive
income:
Unrealized gain on
available-for-sale
securities, net of tax
of $408 $757 757
_______
Comprehensive income 5,360
Tax benefit from
stock options 22 22
Issuance of shares on
exercise of stock
options 6 67 67
Repurchases of
common stock (164) (1,706) (1,706)
______ ____ _______ _______ _______ ________ ____ _______
Balance June 30, 1999 9,860 99 66,465 21,069 (1,244) (13,776) 757 74,614
Comprehensive income:
Net income from
continuing operations 6,295 6,295
Income from discontinued
operations, net of tax 346 346
Other comprehensive
income:
Unrealized gain on
available-for-sale
securities, net of tax
and reclassification
adjustment
(See Note 9 and
disclosure below) (757) (757)
_______
Comprehensive income 5,884
Tax benefit from stock
options 83 83
Issuance of shares on
exercise of stock options 28 295 295
Repurchases of common stock (15) (1) (1)
Issuance of shares for
investments in internet-
related businesses 325 3 4,233 4,236
Issuance of shares for
cancellation of stock
options 20 299 299
Amount allocated to
additional paid-in capital
in connection with the
issuance of the 8%
convertible subordinated
notes (See Note 2) 2,500 2,500
______ ____ _______ _______ _______ ________ ____ _______
Balance June 30, 2000 10,233 $102 $73,875 $27,710 (1,259) $(13,777) $ - $87,910
====== ==== ======= ======= ======= ======== ==== =======
</TABLE>
Disclosure of reclassification
amount:
Unrealized gain for the year
ended ended June 30, 2000 $ 777
Less reclassification
adjustment for gain
included in net income (1,534)
_______
Unrealized gain on
available-for-sale securities,
net of tax $ (757)
=======
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands)
2000 1999 1998
________ _______ _______
Operating activities:
Net income $ 6,641 $ 4,603 $ 7,213
Adjustments to reconcile net income
to net cash provided by (used in)
continuing operations:
Income from discontinued operations,
net of tax (346) (5,581) (7,407)
Equity in loss of internet-related
businesses 100 - -
Net fee from terminated merger (11,116) - -
Deferred Federal income tax (71) 103 (297)
Gain on sale of short-term investments (2,361) - -
Increase (decrease) from changes in:
Prepaid expenses and other current
assets (15) 316 (111)
Other non-current assets (474) 900 109
Accounts payable and other current
liabilities 171 (260) (909)
Other liabilities - (61) -
________ ________ _______
Net cash provided by (used in)
continuing operations (7,471) 20 (1,402)
Net cash provided by discontinued
operations 8,389 10,987 13,238
________ ________ _______
Net cash provided by operating
activities 918 11,007 11,836
________ ________ _______
Investing activities:
Purchase of marketable securities - (6,127) -
Investments in internet-related businesses (19,099) - -
Break-up fee from terminated merger 13,500 - -
Proceeds from sale of short-term investments 8,488 - -
Purchases of property and equipment (11) - -
Increase in lease acquisition costs and
other intangible and non-current assets (1,669) (1,622) -
________ ________ _______
Net cash provided by (used in) continuing
operations 1,209 (7,749) -
Net cash used in discontinued operations (1,001) (4,257) (5,883)
________ ________ ________
Net cash provided by (used in) investing
activities 208 (12,006) (5,883)
________ ________ _______
Financing activities:
Proceeds from convertible subordinated notes 14,250 - -
Proceeds from issuance of common stock 594 67 344
Repurchases of common stock (1) (1,706) (3,967)
Other (16) - -
Net cash provided by (used in) financing ________ ________ _______
activities of continuing operations 14,827 (1,639) (3,623)
________ ________ _______
Net increase (decrease) in cash and cash
equivalents 15,953 (2,638) 2,330
Cash and cash equivalents of continuing
operations at beginning of year 44,137 46,775 44,445
________ ________ _______
Cash and cash equivalents of continuing
operations at end of year $ 60,090 $ 44,137 $46,775
======== ======== =======
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Federal income tax $ 2,650 $ 2,400 $ 2,750
Non-cash investing and financing activities:
Tax benefit from exercise of stock options $ 83 $ 22 $ -
Issuance of common stock for investments in
internet-related businesses $ 4,236 $ - $ -
Debt discount on convertible subordinated notes $ 2,500 $ - $ -
Minority interest in subsidiary $ 2,514 $ - $ -
Note receivable - related parties $ 1,000 $ - $ -
See Notes to Consolidated Financial Statements.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business:
Business:
On March 8, 2000, Jackpot Enterprises, Inc. ("Jackpot" or the
"Company"), which was organized in 1980, announced a series of
actions designed to transform the Company from a gaming entity
into an Internet infrastructure provider and a manager of
technology funds (the "Internet-Related Businesses"). On
March 10, 2000, the Company formed J Net Ventures I, LLC ("Venture
I"), an entity that will invest primarily in Internet-Related
Businesses. As of June 30, 2000, the Company owned 100% of
Venture I. Venture I is managed by J Net Venture Partners, LLC (the
"Manager"), an affiliate of the Company. Allan R. Tessler, the Company's
Chief Executive Officer is the chairman of the Manager and Keith Meister
and Todd Meister are Co-Presidents of the Manager. In addition, the Board
of Directors has unanimously adopted a resolution to change the
name of the Company to J Net Enterprises, Inc. Such change is
subject to the approval of the Company's stockholders.
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its controlled subsidiaries. All
material intercompany accounts and transactions are
eliminated. Unless the context indicates otherwise,
references to "2000", "1999" and "1998" are for the fiscal
years ended June 30, 2000, 1999 and 1998, respectively.
Business segments:
As of June 30, 2000, the Company operated in a single business
segment, its Internet-Related Business segment. During the
quarter ended June 30, 2000 management formalized its plan to
sell the gaming machine route operations segment ("Route
Operations") and commenced activities to dispose of the
subsidiaries identified with that segment. On July 8, 2000,
the Company entered into a definitive agreement to sell its
Route Operations (see Note 11). The Company's Route
Operations segment has been reported as discontinued
operations.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the amounts reported in the
accompanying consolidated financial statements and notes.
Actual results could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of
debt instruments and money market accounts with maturities of
three months or less when acquired and are considered cash
equivalents for purposes of the consolidated statements of
cash flows. Cash equivalents are stated at cost which
approximates fair value due to their short maturity. Cash and
cash equivalents include cash equivalents of $60,090,000 and
$44,137,000 at June 30, 2000 and 1999.
Fair value of financial instruments:
The carrying value of certain of the Company's financial
instruments, including accounts payable and accrued expenses
approximates fair value due to their short maturities. The
unregistered convertible subordinated notes are not traded in
the open market and a market price is not available. However,
based on the Company's financial position, management believes
that the carrying value of such debt approximates fair value.
Investments in Internet-Related Businesses:
The various interests that the Company acquires in Internet-
Related Businesses are accounted for under one of three
methods: consolidation, equity or cost. The applicable
accounting method is generally determined based on the
Company's voting interest and its ability to influence or
control the Internet-Related Business. For investments
accounted for under the equity method, the excess of the cost
of the investment over the Company's equity in the underlying
net assets of such investment is amortized on a straight-line
basis over 5 years. Such amortization is included in the line
captioned equity in income (loss) of internet-related
businesses in the accompanying consolidated statements of
income.
Investments in debt and equity securities:
The Company accounts for investments in debt and equity
securities in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). This
statement addresses the accounting and reporting for
investments in equity securities that have readily
determinable fair values and for all investments in debt
securities, and requires such securities be classified as
either held to maturity, trading, or available-for-sale.
Management determines the appropriate classification of its
investments in securities at the time of purchase and
reevaluates such classification at each balance sheet date.
SFAS 115 requires that available-for-sale securities be
carried at fair value with unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity.
Unrealized gains and losses for available-for-sale securities
are recorded as comprehensive income and are excluded from
earnings. Realized gains from sales of investment securities
in 2000 were $2,361,000. There were no realized gains from
sales of investment securities in 1999 and 1998. There were
no realized losses from sales of investment securities in
2000, 1999 and 1998.
Stock-based compensation:
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") for
stock options while disclosing pro forma net income and net
income per share as if the fair value method had been applied
in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
Recently issued accounting standards:
In April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued
Statement of Position No. 98-5, "Reporting on the Costs of
Start-Up Activities". This standard provides guidance on the
financial reporting for start-up costs and organization costs.
This standard requires costs of start-up activities and
organization costs to be expensed as incurred. The Company
adopted this standard on July 1, 1999. This statement did not
have any effect on Jackpot's results of operations or its
financial position.
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended, which is effective for
fiscal years beginning after June 15, 2000. SFAS 133
establishes additional accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position. This statement also defines and
allows companies to apply hedge accounting to its designated derivatives
under certain instances. It also requires that all derivatives be marked
to market on an ongoing basis. This applies whether the derivatives are
stand-alone instruments, such as warrants or interest rate swaps, or
embedded derivatives, such as call options contained in convertible
debt investments. Along with the derivatives, in the case of qualifying
hedges, the underlying hedged items are also to be marked to market. These
market value adjustments are to be included either in the income statement
or other comprehensive income, depending on the nature of the hedged
transaction. The fair value of financial instruments is generally
determined by reference to market values resulting from trading on a
national securities exchange or in an over the counter market. In cases
where derivatives relate to financial instruments of non public
companies, or where quoted market prices are otherwise not available,
such as for derivative financial instruments, fair value is based on
estimates using present value or other valuation techniques. The Company
will adopt the standard in the quarter ending September 30, 2000 and will
record its derivatives on July 1, 2000 at fair market value. In addition,
any increase or decrease from historical cost basis of its derivatives on
that date will be recorded as a cumulative effect of a change in accounting
principle in the first quarter ending September 30, 2000.
Based on management's review, the Company expects the most significant
impact of this standard will be the cumulative effect adjustment as well
as ongoing marked to market adjustments related to the warrant purchased by
the Company in connection with the Company's purchase of an interest in
Series B Preferred Stock of TechTrader, Inc. The value of this warrant can
fluctuate given that TechTrader is a non public company. At June 30, 2000,
the estimated value of the warrant was approximately $1.6 million. Under
SFAS 133, the warrants will be revalued each quarter and the change in value
of the warrants will be included in the consolidated statement of income.
Under current accounting principles, the change in value of these warrants
is not recorded. The cumulative effect of the adoption of SFAS 133 will be
approximately $15,000.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101"). SAB 101 clarifies
existing accounting principles related to revenue recognition
in financial statements. The Company is required to comply
with the provisions of SAB 101 in its quarter ending June 30,
2001. Based upon the current nature of the Company's
continuing operations, management does not believe that SAB
101 will have a significant impact on the Company's results of
operations.
In March 2000, the Financial Accounting Standards Board of the
AICPA issued FASB Interpretation 44 Accounting for Certain
Transactions involving Stock Compensation ("FIN 44"), which
provides clarification on the application of Accounting
Principals Board Opinion No. 25 Accounting for Stock Issued to
Employees. The Company is required to comply with the
provisions of FIN 44 beginning July 1, 2000. Based upon
management's review, the Company does not expect that the
application will have a material effect on the Company's
results of operations.
Note 2 - Convertible subordinated notes:
The Company is in the final stages of completing its offering
of up to $28 million of unregistered convertible subordinated
notes (the "Notes") to a small group of investors. Certain of
such investors include officers and directors of the
Company or entities controlled by such directors and the Co-
Presidents of the Manager (see Note 7). The issuance of the
Notes was approved by the Company's Board of Directors on
January 31, 2000. The initial conversion price of $10.75 was
set by the Company in connection with the limited circulation
of a Confidential Memorandum prior to the public announcement
of the Company's intention to effect its business
transformation and was equal to an 18% premium over the then
twenty day trailing average market price. Stockholder
approval is required with respect to the issuance of a portion
of the Notes.
In June 2000, the Company raised $15,250,000 through the
issuance of the Notes. The principal amount of the Notes is
payable on March 31, 2007 and bears interest at 8% per annum,
payable on a quarterly basis. The Notes may not be prepaid in
whole or in part by the Company. The Notes shall be
convertible automatically if at any time after April 1, 2004,
the common stock of the Company shall have a market price (as
determined by the principal trading market for the Company's
common stock or as otherwise specified in the Note) of over
250% of the then current conversion price for a period of ten
trading days within any twenty consecutive trading day period.
At the option of the holder of a Note, the Note shall be
convertible into the Company's common stock at any time after
June 1, 2001. The number of shares of common stock to be
received by a Note holder upon conversion will be determined
by dividing the principal amount of the Note by the conversion
price in effect at the time of the conversion, which was
initially $10.75. The conversion price is subject to
adjustment in the event of any subdivision, combination, or
reclassification of outstanding shares of the Company's common
stock.
For financial statement purposes, the Notes were deemed to
have been beneficially converted as the conversion feature was
in-the-money at the commitment date. The Company has
calculated the beneficial conversion feature as the difference
between the fair value of the common stock at the commitment
date and the initial conversion price, multiplied by the
number of shares into which the debt is convertible.
Approximately $2,500,000 of the proceeds from issuance of the
Notes, equal to the intrinsic value, has been recorded as debt
discount and allocated to additional paid-in capital. Because
the debt is not convertible until June 1, 2001, the debt
discount is amortized to interest expense from the date of
issuance of the Note through June 1, 2001 using the interest method.
Note 3 - Investments in Internet-Related Businesses:
Meister Brothers Investments, LLC:
On March 1, 2000, the Company acquired a 1% membership
interest in and became the managing member of Meister Brothers
Investments, LLC ("MBI") for $40,000 pursuant to an agreement
between MBI, the Company, Keith Meister ("KM") and Todd
Meister ("TM"). KM and TM each own 49.5% of the membership interests
in MBI. As managing member, the Company has complete authority and
responsibility for the operations and management of MBI and its
ownership interests. Through its ownership interests, MBI owns a
portfolio of investments (the "Portfolio") in development stage
Internet-related businesses. Such investments are accounted for
under the cost method.
Prior to the execution of the agreements described above, KM, TM and
the Company mutually agreed that the estimated Portfolio value was
$2,500,000. Based upon such value, the minimum number of shares to be
received by KM and TM was determined by using a $9.06 per share value of
Jackpot's common stock, which was the average closing price for the 30
days prior to the parties mutual agreement of the estimated Portfolio value.
On March 1, 2000 in connection with the agreement described above, KM, TM
and the Company entered into a combination of Put and Call Agreements.
Pursuant to the terms of the Call Agreement, KM and TM granted an option
to the Company to purchase from KM and TM, and KM and TM are each
obligated to sell to the Company, upon proper exercise, under such option
(the "Call Option") all of their membership interests in MBI. Upon
exercise of the Call Option by the Company, KM and TM will receive no less
than 312,500 and no more than 500,000 shares of the Company's common stock,
as calculated by a predetermined formula in the Call Agreement. The Call
Option may be exercised by the Company at any time after March 1, 2002 and
expires on March 1, 2004. Pursuant to the terms of the Put Agreement, the
Company granted an option to each of KM and TM to sell to the Company and
the Company shall be obligated to purchase from each of KM and TM,
upon proper exercise, under such option (the "Put Option") any
or all of the membership interests in MBI held by each of them
in exchange for a number of common shares of the Company, as
calculated by a predetermined formula in the Put Option.
Upon exercise of the Put Option by KM and TM, KM and TM will
receive no less than 275,938 and no more than 441,501 shares of
the Company's common stock, as calculated by a predetermined
formula in the Put Agreement. The Put Option may be exercised at
any time after the first to occur of (i) September 1, 2001 or (ii) the
date the Portfolio Value, as defined in the Put Option, is
fixed at $4,000,000, but in no event shall the Put Option
become exercisable any earlier than March 1, 2001. The Put
Option expires on March 1, 2004.
If neither the Put Option nor the Call Option is exercised, KM and
TM have a further option to purchase, or cause MBI to purchase,
the Company's interest in MBI at its fair market value as determined by
appraisal. This option is exercisable on or after April 1, 2004 and
expires April 30, 2004.
Based upon the Company's control over MBI as described above, the Company
has consolidated MBI in its June 30, 2000 balance sheet and reflected the
minority interest of MBI owned by KM and TM. Upon the exercise of the Put
or the Call, the Company will record the purchase of MBI as a step
acquisition based upon the fair value of the Jackpot common stock issued.
Digital Boardwalk, LLC:
On March 1, 2000, the Company purchased a 35% ownership
interest and the right to purchase up to 139,256 Common Units
at an exercise price of $3.59 per Common Unit (the "Warrant")
in Digital Boardwalk, LLC ("Digital"), a non public company,
for an aggregate purchase price of $4,746,000. The
consideration consisted of $3,000,000 in cash and $1,746,000
of the Company's common stock (146,342 shares). The Warrant
is exercisable commencing on the closing date of Digital's
next round of equity or convertible debt financing and shall
be exercisable until the earlier of the consummation of a
qualified initial public offering, as defined in the purchase
agreement between the parties, or March 1, 2003. The Company
allocated the excess of its cost over the equity acquired,
which was approximately $132,000, to the Warrant. The Company
accounts for its investment in Digital under the equity
method.
Alistia, Inc.:
On May 18, 2000, the Company, on behalf of Venture I, purchased
a 39.8% ownership interest in Series A Preferred Stock of
Alistia, Inc. ("Alistia"), a non public development stage
company for $2,000,000 in cash. In general, the Series A
Preferred Stockholders are entitled to vote along with the
common stockholders based on the number of shares of common
stock into which the Series A Preferred shares could be
converted. On an as converted basis, the Company had a 19.95%
voting interest in Alistia at the date of acquisition. A
member of Jackpot's board is a member of Alistia's five member
Board. Based on the Company's voting percentage and Board
representation, the Company accounts for this investment under
the equity method.
TechTrader, Inc.:
On June 12, 2000, the Company purchased a 42.1% interest in
Series B Preferred Stock and a warrant to acquire 827,796
shares of common stock at an exercise price of $2.25 per
common share in TechTrader, Inc. ("TechTrader"), a development
stage non public company for an aggregate purchase price of
$8,488,000. The consideration consisted of $6,000,000 in cash
and $2,488,000 of the Company's common stock (178,571 shares).
The value assigned to common stock was based on the closing price of the
Company's stock on June 12, 2000. The Company may exercise
the warrant in whole or in part at any time until June 1,
2007. The exercise price of the warrant is subject to adjustment
upon the occurrence of certain events that would be antidilutive,
as defined in the Securities Purchase Agreement. The Company has
determined that the warrant is a derivative as defined in SFAS 133 and
will begin accounting for the warrant in accordance with SFAS
133 in the quarter ending September 30, 2000. The excess of
the cost of the investment in TechTrader over the Company's
equity in the underlying net assets at the acquisition date
was approximately $3.2 million. Of the $3.2 million, the
Company has allocated approximately $1.6 million to the
warrant using the Black-Scholes pricing model. The remaining
excess cost of approximately $1.6 million is being amortized
over 5 years.
The Company shall be entitled to receive a dividend of 8% of
the Series B issue price, as defined, per year. Such
dividends shall be cumulative and shall accrue, whether or not
declared by TechTrader's Board of Directors. Generally, a
Series B Preferred stockholder is entitled to vote with the
common stockholders based upon the number of shares of common
stock into which the Series B Preferred stock could be
converted. On an as converted basis, the Company had a 28.1%
voting interest at the date of acquisition. Based upon such
voting percentage, the Company accounts for its investment in
TechTrader under the equity method.
Cyberbills, Inc.:
On March 10, 2000, the Company purchased 3,385,106 shares of Series C
Preferred Stock of Cyberbills, Inc. ("Cyberbills"), a non public development
stage company, at a cost of $3,183,000. Of such purchase, $3,000,000 was
made on behalf of Venture I. The Company accounts for this investment
under the cost method.
Other transactions:
In May 2000, the Company, on behalf of Venture I, invested $4,850,000
in other Internet-Related Businesses. Such investments consisted of a
purchase of 892,500 shares of Series B Preferred Stock of Strategic
Data Corp., at a cost of $850,000, and a 12% convertible demand loan of
$4,000,000 to Carta, Inc. ("Carta"). Such loan is convertible in whole or
in part, at the option of the Company, into common stock of
Carta. In addition, upon the occurrence of certain events,
the loan will convert into preferred stock of Carta. The
Company accounts for the investment in Strategic Data Corp.
under the cost method. Both Strategic Data Corp. and Carta
are non public development stage companies.
Summary of Investments in Internet-Related Businesses:
As described above, all Investments in Internet-Related
Businesses were in non public companies as of June 30, 2000.
Such investments under the applicable accounting methods are
summarized as follows (dollars in thousands):
June 30, 2000
_____________
Consolidation $ 2,540
Equity method 13,544
Cost method 8,052
_______
Total $24,136
=======
Note 4 - Other current liabilities:
Other current liabilities consist of the following (dollars in
thousands):
June 30,
_______________
2000 1999
____ ____
Accrued professional fees $203 $287
Accrued employee benefits - 187
Accrued interest payable 95 -
Other 501 517
____ ____
Totals $799 $991
==== ====
Note 5 - Earnings (loss) per share:
Basic earnings (loss) per share from continuing operations for
2000, 1999 and 1998 and diluted loss per share from continuing
operations for 1999 and 1998 are computed by dividing net
income (loss) from continuing operations by the weighted
average number of common shares outstanding for the respective
period. Diluted earnings per share from continuing operations
for 2000 is computed by dividing net income by the weighted
average number of common and common equivalent shares
outstanding. Options and warrants to purchase common stock,
whose exercise price was greater than the average market price
for the respective period, have been excluded from the
computation of diluted earnings per share from continuing
operations for 2000. Such antidilutive options and warrants
outstanding for 2000 were 364,000. Since both 1999 and 1998
had a loss from continuing operations, no potential common
shares from the assumed exercise of options and warrants have
been included in the diluted loss per share from continuing
operations computations pursuant to accounting principles
generally accepted in the United States of America. The
following is the amount of income (loss) and number of shares
used in the basic and diluted earnings (loss) per share
computations for continuing operations (dollars and shares in
thousands, except per share data):
2000 1999 1998
______ ______ ______
Basic earnings (loss) per share
from continuing operations:
Earnings (loss):
Income (loss) available to
common stockholders $6,295 $ (978) $ (194)
====== ====== ======
Shares:
Weighted average number of
common shares outstanding 8,674 8,641 8,991
====== ====== ======
Basic earnings (loss) per share from
continuing operations $ .73 $ (.11) $ (.02)
====== ====== ======
Diluted earnings (loss) per share:
Earnings (loss):
Income (loss) available to
common stockholders $6,295 $ (978) $ (194)
Effect of dilutive securities 63 - -
______ ______ _______
Income (loss), as adjusted $6,358 $ (978) $ (194)
====== ====== =======
Shares:
Weighted average number of common
shares outstanding 8,674 8,641 8,991
Common shares issuable upon assumed
exercise of dilutive stock options
1,516 - -
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 (1,404) - -
Common shares issuable upon assumed
conversion of 8% convertible
subordinated notes 109 - -
Common shares issuable upon assumed
exercise of put option 92 - -
______ ______ _______
Weighted average number of common
shares and common share
equivalents outstanding 8,987 8,641 8,991
======= ======= =======
Diluted earnings (loss) per share from
continuing operations $ .71 $ (.11) $ (.02)
======= ====== =======
Note 6 - Stockholders' equity:
Authorized common stock:
On September 14, 1999, Jackpot's stockholders approved an
increase in the number of authorized shares of common stock
from 30,000,000 to 60,000,000.
Rights plan:
In June 1994, the Board approved a Stockholder Rights Plan.
On July 11, 1994, Jackpot declared a dividend distribution of
one Preferred Stock purchase right (the "Rights") payable on
each outstanding share of common stock, as of July 15, 1994.
The Rights become exercisable only in the event, with certain
exceptions, an acquiring party accumulates 15% or more of
Jackpot's voting stock, or if a party announces an offer to
acquire 30% or more of Jackpot's voting stock. Each Right
will entitle the holder to purchase one-hundredth of a share
of a Series A Junior Preferred Stock at a price of $30. In
addition, upon the occurrence of certain events, holders of
the Rights will be entitled to purchase either Jackpot's
Preferred Stock or shares in an "acquiring entity" at half of
market value.
The Rights, which expire on July 15, 2004, may be redeemed by
Jackpot at $.01 per Right prior to the close of business on
the tenth day after a public announcement that beneficial
ownership of 15% or more of Jackpot's shares of voting stock
has been accumulated by a single acquiror or a group (with
certain exceptions), under circumstances set forth in the
Rights Agreement. As of June 30, 2000 and 1999, 150,000
shares of unissued Series A Junior Preferred Stock were
authorized and reserved for issuance upon exercise of the
Rights. The issuance of the Rights had no effect on dilutive
earnings per share in 2000, 1999 and 1998.
Stock option plans:
On December 7, 1990, Jackpot's stockholders approved the 1990
Incentive and Nonqualified Stock Option Plan (the "1990
Plan"). The 1990 Plan terminated on June 26, 2000. As of
such date, no options granted under the 1990 Plan were
outstanding. On January 12, 1993, Jackpot's stockholders
approved the 1992 Incentive and Non-qualified Stock Option
Plan (the "1992 Plan"). On August 17, 1994, the Board adopted
certain amendments (the "Amendments") to the 1992 Plan which
were approved by Jackpot's stockholders on January 10, 1995.
The Amendments increased the number of shares of Jackpot's
common stock (the "Common Stock") authorized for issuance
pursuant to the 1992 Plan from 1,045,000 to 2,545,000.
The 1992 Plan provides that each individual who is a member of
the Board on June 30 of any year, including any future
director on any such date, will automatically be granted
nonqualified stock options to purchase 27,500 shares of Common
Stock on each such June 30. The option price for each June 30
grant will be 100% of the fair market value of the Common
Stock on the following September 30. Each option granted to
a director will become exercisable after September 30 of each
year, and expire five years from the date of grant. Under the
1992 Plan, options granted to Jackpot's directors to purchase
an aggregate of 440,000 shares of Common Stock were
outstanding, of which 330,000 were exercisable at June 30,
2000.
The 1992 Plan terminates on the earlier of (i) the date all
shares subject to the 1992 Plan have been issued upon the
exercise of options granted under such plans, or (ii)
September 30, 2002, or on such earlier date as the Board may
determine. Any option outstanding at the termination date remains
outstanding until it has either expired or has been exercised.
On January 31, 2000, a new director was added to the Company's
Board of Directors. In connection with the appointment, such
director was granted a nonqualified stock option to purchase
27,500 shares of common stock. On May 1, 2000, pursuant to
the terms of the grant, the exercise price was vested at
$10.63 per share, the fair market value of the stock on that
date. The option expires five years from the date of grant.
Also, on January 31, 2000, nonqualified stock options to
purchase an aggregate of 450,000 shares of common stock were
granted to three directors (150,000 each) at an exercise price
of $10.13 per share, the fair market value on the date of
grant. The option granted to each director will vest in
thirds on each of the first, second and third anniversaries of
the date of grant. Such options expire ten years from date of
grant.
Changes in options outstanding under the 1992 stock option plan
are summarized below (shares in thousands):
2000 1999 1998
_________________ _________________ ________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ ________ ______ ________ ______ ________
Fixed options:
Outstanding at
beginning of
year 1,422 $ 9.79 1,486 $10.23 1,580 $10.89
Granted 757 10.25 55 12.25 60 11.00
Exercised (48) 12.31 (6) 8.56 (30) 11.34
Cancelled (109) 9.88 (223) 12.80 (234) 14.15
Automatic grant
to directors 110 (A) 110 8.75 110 9.94
_____ ______ _____ ______ _____ ______
Outstanding at
end of year 2,132 9.47 1,422 9.79 1,486 10.23
===== ====== ===== ====== ===== ======
Options exercisable
at year-end 1,292 9.76 1,290 9.83 1,336 10.23
Weighted average
fair value of
options granted
during the year $4.12 $ 2.47 $ 2.99
(A) To be determined on September 30, 2000.
The following table summarizes information about stock options
outstanding at June 30, 2000:
Options Outstanding Options Exercisable
______________________________________________ _____________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/00 Life Price at 6/30/00 Price
________ ___________ ___________ ________ ___________ _________
$ 8.63 to
$10.50 1,800 4.1 years $ 9.07 1,030 $ 9.35
$10.51 to
$12.63 332 4.6 years 11.64 262 $11.38
Other nonqualified stock options:
On September 14, 1999, nonqualified stock options to purchase
an aggregate of 120,000 shares of common stock were granted to
the Company's Board of Directors (30,000 each to four
directors) at an exercise price of $9.00 per share, the fair
market value on the date of grant. The option granted to each
director will vest 50% on each of the first and second
anniversaries of the date of grant and shall be subject to
accelerated vesting under certain circumstances. Such options
expire ten years from date of grant.
On January 31, 2000, nonqualified stock options to purchase an
aggregate of 150,000 shares of common stock were granted to
the Co-Presidents of the Manager (75,000 each) at an exercise
price of $10.13 per share, the fair market value on the date
of grant. Such options will vest in thirds on each of the
first, second and third anniversaries of the date of grant and
expire ten years from date of grant.
Changes in options outstanding under the nonqualified stock
option plan is summarized below (shares in thousands):
2000 1999 1998
_________________ _________________ ________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ ________ ______ ________ ______ ________
Fixed options:
Outstanding at
beginning of
year 221 $ 9.19 352 $ 9.72 379 $ 9.67
Granted 640 12.22 - -
Exercised - - -
Cancelled (221) 9.19 (131) 10.63 (27) 9.02
____ ____ ____
Outstanding at
end of year 640 12.22 221 9.19 352 9.72
==== ==== ====
Options exercisable
at year-end - 221 9.19 352 9.72
Weighted average
fair value of
options granted
during the year $ 4.89 $ - $ -
The following table summarizes information about nonqualified
stock options outstanding at June 30, 2000:
Options Outstanding Options Exercisable
______________________________________________ _____________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/00 Life Price at 6/30/00 Price
________ ___________ ___________ ________ ___________ _________
$9.00 to
13.125 640 1.9 years $12.22 - $ -
Shares reserved for issuance:
Shares of Common Stock were reserved for the exercise of the
following (in thousands):
June 30,
_______________
2000 1999
_____ _____
Stock option plans:
Outstanding 2,132 1,422
Available for grant 340 1,078
Other nonqualified stock options 640 221
_____ _____
Totals 3,112 2,721
===== =====
Accounting for stock-based compensation:
The following table discloses pro forma amounts for net income
and basic and dilutive earnings per share for 2000, 1999 and
1998 assuming compensation cost for employee stock options had
been determined using the fair value-based method prescribed
by SFAS 123. The table also discloses the weighted average
assumptions used in estimating the fair value of each option
grant on the date of grant using the Black-Scholes option
pricing model, and the estimated weighted average fair value
of the options granted. The model assumes no expected future
dividend payments on Jackpot's Common Stock for the options
granted in 2000, 1999 and 1998 (dollars in thousands, except
per share data):
2000 1999 1998
______ ______ ______
Net income:
As reported $6,641 $4,603 $7,213
Pro forma $5,507 $4,167 $6,837
Basic earnings per share:
As reported $ .77 $ .53 $ .80
Pro forma $ .63 $ .48 $ .76
Diluted earnings per share:
As reported $ .75 $ .53 $ .79
Pro forma $ .62 $ .48 $ .74
Weighted average assumptions:
Expected stock price volatility 50.0% 30.0% 30.0%
Risk-free interest rate 6.4% 5.6% 5.8%
Expected option lives (in years) 3.0 3.0 2.5
Estimated fair value of options granted $ 4.35 $ 3.02 $ 2.99
Note 7 - Related party transactions:
One director of Jackpot is a partner in a law firm that has
provided various legal services for which Jackpot incurred
legal fees aggregating approximately $190,000, $170,000 and
$121,000 in 2000, 1999 and 1998. As of June 30, 2000, three
directors of Jackpot, or entities controlled by such
directors, and Meister Brothers Holdings, LLC, have invested
$7 million and $3 million, respectively, in the Notes
described in Note 2. In connection with the issuance of a $3
million Note to Meister Brothers Holdings, LLC, the Company
loaned $1 million to such entity on June 28, 2000. Interest
on the loan accrues at 8% per annum. The principal amount and
accrued interest is payable on June 30, 2002. The obligations
of Meister Brothers Holdings, LLC are secured by the right,
title and interest in and to the $3 million Note dated June
28, 2000.
Note 8 - Federal income tax:
The components of Federal income tax expense (benefit) are as
follows (dollars in thousands):
2000 1999 1998
______ ______ ______
Federal:
Current expense (benefit) $1,641 $ (744) $(1,196)
Deferred expense (benefit) 777 (341) 48
______ _______ _______
Federal income tax expense (benefit)
on income (loss) from continuing
operations 2,418 (1,085) (1,148)
Federal income tax expense of
discontinued operations 177 2,875 3,816
______ _______ _______
Total Federal income tax expense $2,595 $ 1,790 $ 2,668
====== ======= =======
A reconciliation of the Federal statutory income tax rate to
the effective income tax rate based on income (loss) from
continuing operations before income tax follows:
2000 1999 1998
____ ______ ______
Statutory rate 35.0% (35.0)% (35.0)%
Increase (decrease) in
tax resulting from:
Surtax exemption (1.0) 1.0 1.0
Tax-exempt interest (7.6) (22.5) (37.1)
Other 1.4 3.9 (14.4)
____ _____ _____
Effective rate 27.8% (52.6)% (85.5)%
==== ===== =====
The tax items comprising Jackpot's net deferred tax liability
as of June 30, 2000 and 1999 are as follows (dollars in
thousands):
2000 1999
____ ______
Deferred tax liabilities:
Unrealized gain on
available-for-sale securities - 408
Other 762 425
____ ____
Net deferred tax liability $762 $833
==== ====
Note 9 - Other events:
Terminated mergers:
On February 17, 1999, Jackpot and CRC Holdings, Inc. d/b/a
Carnival Resorts & Casinos ("CRC"), a privately owned company,
entered into a definitive agreement providing for the
acquisition of CRC by Jackpot. On April 15, 1999, Jackpot and
CRC mutually agreed to terminate the agreement. As a result
of the termination of the agreement, capitalized costs incurred
in connection with the proposed acquisition of CRC of $900,000 were
expensed in 1999.
On August 16, 1999, Jackpot received a notice from Players
International, Inc. ("Players") terminating the Agreement and
Plan of Merger dated February 8, 1999 (the "Players
Agreement"). Such notice contained the terms of a merger
offer for Players from Harrah's Entertainment, Inc. On August
19, 1999, pursuant to the terms of the Players Agreement,
Jackpot received a break-up fee of $13,500,000. As a result
of the termination of the Players Agreement, capitalized costs
of $2,384,000 incurred in connection with the proposed
acquisition of Players were expensed resulting in a net break-
up fee of $11,116,000. During 2000, Jackpot sold 1,014,400
shares of Players common stock for $8,488,000 ($8.37 per
share). As a result of the sale of such shares, which were
purchased on March 10, 1999 at a cost of $6,127,000 ($6.04 per
share), Jackpot realized a gain of $2,361,000.
Termination and Consulting Agreement:
On February 29, 2000, the Company and Don R. Kornstein,
President, Chief Executive Officer and Director, entered into
a Termination and Consulting Agreement (the "Termination
Agreement"). Pursuant to the terms of the Termination
Agreement, Mr. Kornstein and the Company mutually agreed that
his employment and position on the Board of Directors
terminated on February 29, 2000. On March 10, 2000, pursuant
to the terms of Mr. Kornstein's employment agreement and the
Termination Agreement, the Company paid $2,906,000 to Mr.
Kornstein for severance and accrued vacation costs. Of such
amount, $2,835,000 was expensed in 2000, and is included in
the line captioned general and administrative in the
accompanying consolidated statements of income.
Note 10 - Commitments and contingencies:
Employment agreements:
Jackpot has employment agreements with George Congdon, Senior
Vice President - Operations and Bob Torkar, Senior Vice
President - Finance, which expire on June 30, 2001. In the
event of termination of Mr. Congdon and Mr. Torkar's
employment, as defined in their employment agreements, Mr.
Congdon and Mr. Torkar would receive severance payments. The
aggregate contingent liability at June 30, 2000 under such
agreements is $1,140,000.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject Jackpot to
concentrations of credit risk consist principally of cash and
cash equivalents. Jackpot maintains cash and certain cash
equivalents with financial institutions in amounts which, at
times, may be in excess of the FDIC insurance limits.
Jackpot's cash equivalents are invested in several high-grade
securities which limits Jackpot's exposure to concentrations
of credit risk.
Legal matters:
Jackpot is a party to various other claims, legal actions and
complaints arising in the ordinary course of business or
asserted by way of defense or counterclaim in actions filed by
Jackpot. Management believes that its defenses are
substantial in each of these matters and that Jackpot's legal
position can be successfully defended without material adverse
effect on its consolidated financial statements. See Note 11
for information regarding a litigation settlement and a legal
dispute that is part of the discontinued operations.
Leases:
Jackpot has a noncancelable office lease in New York, New
York. Future minimum payments (dollars in thousands) under
such lease is $4,699 at June 30, 2000, payable as follows:
$354 in 2001; $438 in 2002; $438 in 2003; $438 in 2004; $438
in 2005; and $2,593 thereafter. See Note 11 for information
concerning commitments and contingencies of the discontinued
operations.
Note 11 - Discontinued operations:
Definitive agreement:
On July 8, 2000, the Company entered into a definitive
agreement to sell its Route Operations for $45 million in
cash. As a result of management's plan to dispose of the
Route Operations and of the sale, which is subject to closing
conditions and regulatory and other approvals, the financial
position and the results of operations for the Route
Operations have been reported as discontinued operations. In
accordance with accounting principles applicable to
discontinued operations, previously reported financial
statements have been reclassified to reflect the Route
Operations as discontinued. The Company expects to complete
the closing of the sale during the quarter ending December 31,
2000.
Litigation settlement:
In August 1998, Albertson's, Inc. ("Albertson's," a retail
chain in which Jackpot conducts gaming operations) and
American Stores Company ("American Stores") entered into a
merger agreement that provided for the acquisition of American
Stores by Albertson's. Approximately 51%, 57% and 55% of
revenues generated by discontinued operations for 2000, 1999
and 1998, respectively, were generated at the locations of
those two entities. The merger of Albertson's and American
Stores was completed on June 23, 1999. As a condition to
avoiding and/or settling legal proceedings against the merger
by the Federal Trade Commission and the Attorneys General of
California, Nevada and New Mexico, Albertson's agreed to
divest certain of its stores, including 19 stores in southern
Nevada, fifteen of which were Jackpot locations. In late
September and early October 1999, Albertson's sold those
locations to Raley's, Inc. ("Raley's"), and Raley's has
operated them since.
On August 30, 1999, Jackpot commenced litigation in United
States District Court for the District of Nevada against
Albertson's and Raley's to enforce its rights to remain in the
fifteen locations under its agreement with Albertson's. On
September 14, 1999, Jackpot obtained a preliminary injunction
to prevent Albertson's and Raley's from interfering with its
right to occupy the subject premises and conduct gaming operations.
Albertson's and Raley's appealed the injunction and made motions
for summary judgment.
In connection with Raley's acquisition of the locations,
United Coin Machine Company ("United Coin"), the slot route
operator for Raley's northern Nevada stores, filed
applications with the Nevada Gaming Control Board to operate
the gaming machines at the fifteen stores. On September 23,
1999, United Coin commenced an action in Nevada state court
against Jackpot, Albertson's, Raley's and Anchor Coin
("Anchor"), the slot route operator at the four other
Albertson's southern Nevada locations seeking declaratory and
injunctive relief and money damages.
On January 26, 2000, Jackpot entered into a Settlement
Agreement and Release (the "Settlement Agreement") with
Albertson's, Raley's, Anchor and United Coin. Pursuant to the
terms of the Settlement Agreement, the parties agreed to
dismiss with prejudice all litigation pending among them and
to the takeover of gaming operations by United Coin of the 19
stores in southern Nevada, effective February 1, 2000. Of the
19 stores in southern Nevada operated by Raley's, Jackpot had
operated 246 gaming machines at 15 locations pursuant to its
long-term agreement with Albertson's. Jackpot believed it was
in its best interest to settle the case and thereby preserve
and solidify its long-term relationship with Albertson's, its
largest customer, pursuant to the terms of an amendment to its
agreement with Albertson's, which it had theretofore arranged
and which is described below in this note. It was also
important to Jackpot to avoid further litigation and fully
resolve all claims among and between the parties. All costs
incurred in connection with the litigation and settlement,
including legal and settlement costs aggregating approximately
$950,000, were recorded in fiscal 2000, and are included in
the line captioned income from discontinued operations in the
accompanying consolidated statements of income.
Settlement agreement with Albertson's:
Prior to the settlement described above, on November 18, 1999,
Jackpot and Albertson's had entered into a settlement
agreement (the "Agreement"). The Agreement amended the
license agreement entered in September 1998 between Jackpot
and Albertson's (the "Albertson's Agreement"). The Agreement
also terminated Jackpot's separate license agreements with
Lucky Stores, Inc. and American Drug Stores, Inc. and
incorporates Jackpot's exclusive rights in Nevada to operate
gaming devices at the locations (including any future
locations) of those entities into the Albertson's Agreement,
as amended by the Agreement. Under the Agreement, Jackpot has
the exclusive option to extend the agreements beyond their
initial terms and will continue to have exclusive gaming
rights for new Albertson's locations. In addition,
Albertson's granted Jackpot exclusive gaming rights in all
drug stores opened by Albertson's or any of its affiliates in
Nevada, and in future fuel center locations, a new retailing
concept that Albertson's will open, in which gaming may be
offered to customers. Further, pursuant to the terms of the
Agreement, Jackpot will received certain immediate credits
toward license fees and will receive substantial reductions in
certain license fees, which are effective from February 1, 2000
through the initial term of the Agreement.
The Rite Aid dispute:
On December 8, 1999, certain Gaming Machine Route Operations
subsidiaries of Jackpot commenced litigation in the United
States District Court for the District of Nevada against Rite
Aid Corporation ("Rite Aid"). The lawsuit is an action for
rescission of two license agreements between those
subsidiaries and Rite Aid and for damages based upon Rite
Aid's alleged fraud. Operations of said subsidiaries under
said agreements resulted in an operating loss of approximately
$3.4 million in 2000.
On March 27, 2000, Jackpot entered into amendments to the two
license agreements with Rite Aid. Based on the number of
existing locations at which Jackpot currently operates gaming
machines, license fees payable to Rite Aid have been reduced
by approximately $2.5 million annually over the remaining term
of the amended agreements. The amendments are subject to
certain administrative approvals from the Nevada State Gaming
Control Board ("Nevada Board") for 31 Rite Aid locations. The
Company has recently received verbal approval from the Nevada
Board for 25 Rite Aid locations, and management expects to
receive verbal approval for the remaining 6 stores shortly.
Based upon verbal approval of the majority of the Company's
Rite Aid locations, management anticipates that the Company
will receive the administrative approvals from the Nevada
Board for the 31 Rite Aid locations in October 2000. Upon the
receipt of the administrative approvals, the amendments will
become effective. Based upon management's belief that such
approval will be received shortly, the Company has recorded
the license fees at their reduced rates, effective March 1,
2000.
Further, upon such approval, all disputes between the parties,
including Jackpot's lawsuit against Rite Aid, will be resolved
or settled. On April 26, 2000, the Court ordered that all
scheduling deadlines previously set in the case were stayed
pending the filing of a Stipulation and Order of Dismissal by
the parties. Further, because the amended agreements are
conditioned upon certain administrative approvals by the
Nevada Board, the parties were permitted to file the
Stipulation for Dismissal by September 15, 2000, which has
been extended to October 16, 2000.
Based upon the reduction in license fees described above, the
Company's operating losses at the Rite Aid locations should
decrease substantially. However, even with the license fee
reductions, management believes that the Company will continue
to incur losses, and such losses may be significant, unless
revenues increase significantly at these locations.
Leases:
Jackpot's discontinued operations has noncancelable location
license, lease and sublease agreements (referred to as
"leases") for space at various locations for its gaming machines
with terms expiring at various dates through 2010. Leases are
generally at fixed rentals, although certain leases require payments
based on percentages of revenues generated by gaming machines at the
leased locations. In addition, office and warehouse space is utilized
under noncancelable leases with terms expiring at various dates
through 2006.
Future minimum payments (dollars in thousands) under
noncancelable operating leases or licenses for Jackpot's
discontinued operations aggregated approximately $112,654 at
June 30, 2000, payable as follows: $31,468 in 2001; $31,584
in 2002; $31,783 in 2003; $8,963 in 2004; $7,690 in 2005; and
$1,166 thereafter.
Rent expense for Jackpot's discontinued operations was
comprised as follows (dollars in thousands):
2000 1999 1998
_______ _______ _______
Location leases:
Fixed rentals $38,569 $39,689 $36,866
Percentage rentals 18,537 17,181 16,883
Office and equipment leases 447 442 453
_______ _______ _______
Totals $57,553 $57,312 $54,202
======= ======= =======
The following are the summary operating results of the
discontinued operations (dollars in thousands):
2000 1999 1998
_______ _______ _______
Revenues $86,949 $95,669 $93,013
Costs and expenses 86,563 87,264 82,276
_______ _______ _______
Operating income 386 8,405 10,737
Other income 137 51 486
_______ _______ _______
Income before income tax 523 8,456 11,223
Provision for income tax 177 2,875 3,816
_______ _______ _______
Income from discontinued
operations, net of tax $ 346 $ 5,581 $ 7,407
======= ======= =======
The following are the net assets of the discontinued
operations (dollars in thousands):
June 30,
_________________
2000 1999
_______ ______
Assets:
Cash $ 3,500 $ 3,500
Prepaid expenses 1,209 1,438
Other current assets 1,020 1,463
Deferred income tax 384 500
Property and equipment at
cost, net 11,907 13,757
Lease acquisition costs and
other intangible assets, net 5,190 8,104
_______ _______
Total assets $23,210 $28,762
======= =======
Liabilities:
Accounts payable and other current
liabilities 2,516 2,520
Deferred rent 4,049 2,554
_______ _______
Total liabilities $ 6,565 $ 5,074
_______ _______
Net assets of discontinued operations $16,645 $23,688
======= =======
Note 12 - Subsequent events:
In August 2000, the Company, on behalf of Venture I, acquired an interest
in Series C Preferred Stock of Jasmine Networks, Inc., a non public
development stage company for approximately $5 million in cash. In
addiiton, the Company, on behalf of Venture I, invested $2 million in
cash in Tellme Networks, Inc., a non public development stage
company in September 2000.
With respect to the convertible subordinated notes described
in Note 2, the Company raised an additional $8.5 million in
August and September 2000. Including the $8.5 million, gross
proceeds raised to date from the issuance of the Notes
aggregated $23.75 million.
JACKPOT ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 2000 AND 1999
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 2000 and 1999
follows:
Quarter
______________________________________
First Second Third Fourth
______ ________ ________ ________
2000
____
Revenues $ - $ - $ - $ -
Operating loss from continuing
operations (679) (908) (3,322) (1,823)
Income (loss) from continuing
operations 7,437 1,383 (1,670) (855)
Income (loss) from discontinued
operations (144) (506) 281 715
Net income (loss) 7,293 877 (1,389) (140)
Basic earnings (loss) per share:
Income (loss) from continuing
operations .86 .16 (.19) (.10)
Income (loss) from discontinued
operations (.01) (.06) .03 .08
Net income (loss) .85 .10 (.16) (.02)
Dilutive earnings (loss) per share:
Income (loss) from continuing
operations .86 .16 (.19) (.12)
Income (loss) from discontinued
operations (.01) (.06) .03 .08
Net income (loss) .85 .10 (.16) (.04)
1999
____
Revenues $ - $ - $ - $ -
Operating loss from continuing
operations (588) (653) (618) (1,544)
Income loss from continuing
operations (59) (82) (31) (806)
Income from discontinued
operations 1,167 1,472 1,842 1,100
Net income 1,108 1,390 1,811 294
Basic earnings (loss) per share:
Income (loss) from continuing
operations (.01) (.01) - (.09)
Income from discontinued
operations .14 .17 .21 .12
Net income .13 .16 .21 .03
Dilutive earnings (loss) per share:
Income (loss) from continuing
operations (.01) (.01) - (.09)
Income from discontinued
operations .14 .17 .21 .12
Net income .13 .16 .21 .03
