<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 4 TO
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
JILLIAN'S ENTERTAINMENT CORPORATION
(Name of the Issuer)
JILLIAN'S ENTERTAINMENT CORPORATION
(Name of Person(s) Filing Statement)
<TABLE>
<S> <C>
COMMON STOCK, PAR VALUE $.001 PER SHARE 477420103
(Title of Class of Securities) (CUSIP Number of Class of Securities)
</TABLE>
Steven L. Foster
Chief Executive Officer
Jillian's Entertainment Corporation
727 Atlantic Avenue, Suite 600
Boston, Massachusetts 02111
(617) 350-3111
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
----------------------------
Copies to:
Sylvia M. Mahaffey, Esq.
Denise R. Cade, Esq.
SHAW, PITTMAN, POTTS & TROWBRIDGE
2300 N Street, N.W.
Washington, D.C. 20037
----------------------------
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c)
under the Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities
Act of 1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies. /X/
<TABLE>
<CAPTION>
CALCULATION OF FILING FEE
- -------------------------------------------------------------------------------
<S> <C>
TRANSACTION VALUATION(1) AMOUNT OF FILING FEE
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$2,131,632 $426.33
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</TABLE>
/X/ CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(a)(2)
AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID.
IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM
OR SCHEDULE AND THE DATE OF ITS FILING.
<TABLE>
<S> <C>
Amount previously paid: $426.33 Filing parties: Jillian's Entertainment Corporation
Form or registration no: Schedule 14A Date filed: November 13, 1995
</TABLE>
(1) Pursuant to Rule 0-11(b), the filing fee was determined at 1/50 of 1%
of $2,131,632, the amount to be received by the Non-Continuing
Shareholders for their shares of Common Stock in the Merger.
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CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item in
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Schedule 13E-3 Caption in Preliminary Proxy Statement
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<S> <C>
Item 1(a) ......... INTRODUCTION
Item 1(b) ......... VOTING AND PROXY INFORMATION -- RECORD DATE; OUTSTANDING
SHARES; VOTING
Item 1(c)-(d) ..... MARKET INFORMATION
Item 1(e)-(f) ..... Not Applicable
Item 2 ............ AVAILABLE INFORMATION and EXECUTIVE OFFICERS AND
DIRECTORS OF THE COMPANY
Item 3 ............ PRIOR CONTACTS BETWEEN THE COMPANY AND CERTAIN AFFILIATES
Item 4(a) ......... PROPOSAL TO APPROVE THE MERGER
Item 4(b) ......... SPECIAL FACTORS -- Alternatives Considered and PROPOSAL
TO APPROVE THE MERGER
Item 5(a)-(e) ..... Not Applicable
Item 5(f)-(g) ..... SPECIAL FACTORS -- CERTAIN EFFECTS of the MERGER
Item 6(a) ......... FINANCING OF THE MERGER
Item 6(b) ......... FEES AND EXPENSES
Item 6(c)-(d) ..... Not Applicable
</TABLE>
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<TABLE>
<CAPTION>
Item in
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Schedule 13E-3 Caption in Preliminary Proxy Statement
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<S> <C>
Item 7(a)-(c)...... SPECIAL FACTORS -- Background of the Merger and --
Purposes and Reasons for the Merger
Item 7(d).......... SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger, -- Certain Effects of the Merger,
-- Material Federal Income Tax Consequences, -- Purposes
and Reasons for the Merger and -- Interests of Certain
Persons in the Merger
Item 8(a)-(b)...... SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger and -- Opinion of Stonebridge
Item 8(c).......... VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting and PROPOSAL TO APPROVE THE MERGER -- Vote
Required and Recommendation of the Board of Directors
Item 8(d)-(e)...... SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger
Item 8(f).......... Not Applicable
Item 9(a)-(b)...... SPECIAL FACTORS -- Background of the Merger --
Current Effects of Borrowings and Equity Financing and
-- Opinion of Stonebridge
Item 9(c).......... AVAILABLE INFORMATION
</TABLE>
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<TABLE>
<CAPTION>
Item in
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Schedule 13E-3 Caption in Preliminary Proxy Statement
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<S> <C>
Item 10(a) ........ VOTING AND PROXY INFORMATION -- RECORD DATE; OUTSTANDING
SHARES; VOTING; SPECIAL FACTORS -- Interests of Certain
Persons in the Merger and SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Item 10(b) ........ Not Applicable
Item 11 ........... SPECIAL FACTORS -- Background of the Merger--
Alternatives Considered; PROPOSAL TO APPROVE THE MERGER
-- Certain Effects of the Merger, -- Payment for Common
Stock in the Merger,-- Conditions to the Merger,
FINANCING OF THE MERGER and MATERIAL TERMS OF THE
PURCHASE AGREEMENT
Item 12(a) ........ INTRODUCTION, VOTING AND PROXY INFORMATION -- Record
Date; Outstanding Shares; Voting and PROPOSAL TO APPROVE
THE MERGER -- Vote Required and Recommendation of the
Board of Directors
Item 12(b) ........ INTRODUCTION, VOTING AND PROXY INFORMATION -- Record
Date; Outstanding Shares; Voting; SPECIAL FACTORS --
Purposes and Reasons for the Merger and PROPOSAL TO
APPROVE THE MERGER -- Vote Required and Recommendation of
the Board of Directors
Item 13(a) ........ PROPOSAL TO APPROVE THE MERGER -- Rights of Dissenting
Shareholders
Item 13(b)-(c) .... Not Applicable
</TABLE>
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<TABLE>
<CAPTION>
Item in
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Schedule 13E-3 Caption in Preliminary Proxy Statement
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<S> <C>
Item 14(a) ........ SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS and INDEX TO FINANCIAL STATEMENTS
Item 14(b) ........ Not Applicable
Item 15(a) ........ VOTING AND PROXY INFORMATION -- Solicitation of Proxies
Item 15(b) ........ SPECIAL FACTORS -- Background of Merger,-- Alternatives
Considered,-- Opinion of Stonebridge and FINANCING OF THE
MERGER
Item 16 ........... Additional information concerning the Rule 13e-3
transaction is set forth in the Preliminary Proxy
Statement and the Appendices thereto, a copy of which is
attached hereto as Exhibit (d)(1)
Item 17 ........... Separately included herewith
</TABLE>
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ITEM 1. Issuer and Class of Security Subject to the Transaction.
(a) The information set forth in the Preliminary Proxy Statement
under "INTRODUCTION " is incorporated herein by reference.
(b) The information set forth in the Preliminary Proxy Statement
under "VOTING AND PROXY INFORMATION -- Record Date; Outstanding Shares; Voting"
is incorporated herein by reference.
(c)-(d) The information set forth in the Preliminary Proxy
Statement under "MARKET INFORMATION"
is incorporated herein by reference.
(e)-(f) Not applicable.
ITEM 2. Identity and Background.
The information set forth in the Preliminary Proxy Statement
under "AVAILABLE INFORMATION" and "EXECUTIVE OFFICERS AND DIRECTORS OF THE
COMPANY" is incorporated herein by reference. Neither Jillian's Entertainment
Corporation, nor any of the other persons or entities with respect to whom
information is given in response to this Item 2 (x) has been convicted during
the last five years in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or (y) was a party during the last five years to a civil
proceeding of a judicial or administrative body of competent jurisdiction and
as a result of such proceeding was or is subject to a judgment, decree or final
order enjoining further violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
ITEM 3. Past Contacts, Transactions or Negotiations.
The information set forth in the Preliminary Proxy Statement
under "PRIOR CONTACTS BETWEEN THE COMPANY AND CERTAIN AFFILIATES" is
incorporated herein by reference.
ITEM 4. Terms of the Transaction.
(a) The information set forth in the Preliminary Proxy
Statement under "PROPOSAL TO APPROVE THE MERGER" is incorporated herein by
reference.
(b) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS -- Alternatives Considered" and "PROPOSAL TO
APPROVE THE MERGER" is incorporated herein by reference.
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ITEM 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(e) Not applicable.
(f)-(g) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS -- Certain Effects of the Merger" is
incorporated herein by reference.
ITEM 6. Source and Amount of Funds or Other Consideration.
(a) The information set forth in the Preliminary Proxy
Statement under "FINANCING OF THE MERGER" is incorporated herein by reference.
(b) The information set forth in the Preliminary Proxy
Statement under "FEES AND EXPENSES" is incorporated herein by reference.
(c)-(d) Not applicable.
ITEM 7. Purpose(s), Alternatives, Reasons and Effects.
(a)-(c) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS -- BACKGROUND of the Merger " and "--
Purposes and Reasons for the Merger" is incorporated herein by reference.
(d) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger," "-- Certain Effects of the Merger," "-- Material
Federal Income Tax Consequences," "-- Purposes and Reasons for the Merger" and
"-- Interests of Certain Persons in the Merger" is incorporated herein by
reference.
ITEM 8. Fairness of the Transaction.
(a)-(b) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger" and "-- Opinion of Stonebridge" is incorporated herein
by reference.
(c) The information set forth in the Preliminary Proxy
Statement under "VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting" and "PROPOSAL TO APPROVE THE MERGER -- Vote Required and
Recommendation of the Board of Directors" is incorporated herein by reference.
(d)-(e) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger" is incorporated herein by reference.
(f) Not applicable.
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<PAGE> 8
ITEM 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(b) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS "-- Background of the Merger," "-- Current
Effects of Borrowings and Equity Financing" and " -- Opinion of Stonebridge"
is incorporated herein by reference.
(c) The information set forth in the Preliminary Proxy
Statement under "AVAILABLE INFORMATION" is incorporated herein by reference
ITEM 10. Interest in Securities of the Issuer.
(a) The information set forth in the Preliminary Proxy
Statement under "VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting," "SPECIAL FACTORS -- Interests of Certain Persons in the
Merger" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
(b) Not applicable.
ITEM 11. Contracts, Arrangements or Understandings with Respect
to the Issuer's Securities.
The information set forth in the Preliminary Proxy Statement
under "SPECIAL FACTORS -- Background of the Merger," "-- Alternatives
Considered," "PROPOSAL TO APPROVE THE MERGER -- Certain Effects of the Merger,"
"-- Payment for Common Stock in the Merger," "-- Conditions to the Merger,"
"FINANCING OF THE MERGER" and "MATERIAL TERMS OF THE PURCHASE AGREEMENT" is
incorporated herein by reference.
ITEM 12. Present Intention and Recommendation of Certain
Persons with Regard to the Transaction.
(a) The information set forth in the Preliminary Proxy Statement
under "INTRODUCTION," "VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting" and "PROPOSAL TO APPROVE THE MERGER -- Vote Required and
Recommendation of the Board of Directors" is incorporated herein by reference.
(b) The information set forth in the Preliminary Proxy Statement
under "INTRODUCTION," "VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting," "SPECIAL FACTORS -- Purposes and Reasons for the Merger" and
"PROPOSAL TO APPROVE THE MERGER -- Vote Required and Recommendation of the
Board of Directors" is incorporated herein by reference.
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<PAGE> 9
ITEM 13. Other Provisions of the Transaction.
(a) The information set forth in the Preliminary Proxy
Statement under "PROPOSAL TO APPROVE THE MERGER -- Rights of Dissenting
Shareholders" is incorporated herein by reference.
(b)-(c) Not applicable.
ITEM 14. Financial Information.
(a) The information set forth in the Preliminary Proxy Statement
under "SELECTED FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "INDEX TO FINANCIAL
STATEMENTS" is incorporated herein by reference.
(b) Not applicable.
ITEM 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth in the Preliminary Proxy Statement
under "VOTING AND PROXY INFORMATION -- Solicitation of Proxies" is incorporated
herein by reference.
(b) The information set forth in the Preliminary Proxy Statement
under "SPECIAL FACTORS -- Background of the Merger," "-- Alternatives
Considered," "-- Opinion of Stonebridge" and "FINANCING OF THE MERGER" is
incorporated herein by reference.
ITEM 16. Additional Information.
Additional information concerning the Rule 13e-3 transaction is
set forth in the Preliminary Proxy Statement and the Appendices thereto, a copy
of which is attached hereto as Exhibit (d)(1).
ITEM 17. Material to be Filed as Exhibits.
(b) (1)* Draft Fairness Opinion, dated October 2, 1995, of
Bannon & Co., Inc.
(b) (2)* Presentation of Bannon & Co., Inc. to the Board of
Directors of Jillian's Entertainment Corporation, dated October 2, 1995.
(b) (3) Fairness Opinion, dated April 22, 1997, of
Stonebridge Associates, LLC.
(c) (1)* Letter, dated May 23, 1996, relating to the engagement
of Hampshire Securities Corporation by Jillian's Entertainment Corporation.
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(c) (2)* Letter, dated May 23, 1996, relating to the purchase
of common stock of Jillian's Entertainment Corporation by Island Partners, Ltd.
(c)(3)* Letter, dated April 4, 1997, relating to the
engagement of Stonebridge Associates, LLC by Jillian's Entertainment
Corporation.
(c)(4)+ Form of Exchange Agreement between Jillian's
Entertainment Holdings, Inc. and the Exchange Agent.
(c)(5)+ Form of Employment/Noncompetition Agreement of
Steven L. Foster.
(c)(6)+ Form of Employment/Noncompetition Agreement of
Daniel M. Smith.
(c)(7)+ Form of Employment/Noncompetition Agreement of
Stephen Weis.
(c)(8)* Form of Management Agreement among Jillian's
Entertainment Corporation, Jillian's Entertainment Holdings, Inc. and J.W.
Childs Associates, L.P.
(c)(9)+ Form of Stockholders Agreement among certain
stockholders, option holders and warrant holders of Jillian's Entertainment
Holdings, Inc., Jillian's Entertainment Holdings, Inc. and J.W. Childs Equity
Partners, L.P.
(c)(10)+ Form of License Agreement between Jillian's
Entertainment Corporation and Jillian's Billiard Club, Inc.
(c)(11)+ Form of Option Agreement between Jillian's
Entertainment Corporation and the owners of Jillian's Billiard Club, Inc.
(c)(12)* Form of Purchase Agreement among Jillian's
Entertainment Holdings, Inc., J.W. Childs Equity Partners, L.P., Jillian's
Entertainment Corporation, the Representative and certain stockholders, option
holders and warrant holders of Jillian's Entertainment Corporation.
(d) (1) Notice of Special Meeting of Shareholders,
Preliminary Proxy Statement, with Appendices and Form of Proxy for Special
Meeting.
(d) (2)+ Consent of Stonebridge Associates, LLC.
(d) (3)* Consent of BDO Seidman, LLP.
(d)(4)* Consent of Deloitte & Touche LLP.
- --------------
* Previously filed.
+ To be filed by amendment.
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<PAGE> 11
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete
and correct.
April 30, 1997
JILLIAN'S ENTERTAINMENT
CORPORATION
By: /s/ Steven L. Foster
----------------------
Steven L. Foster
Chief Executive Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C> <C>
(b)(1) Draft Fairness Opinion, dated October 2, 1995, of Bannon & Co., Inc. *
(b)(2) Presentation of Bannon & Co., Inc. to the Board of Directors of *
Jillian's Entertainment Corporation, dated October 2, 1995.
(b)(3) Fairness Opinion, dated April 22, 1997, of Stonebridge Associates,
LLC.
(c)(1) Letter, dated May 23, 1996, relating to the engagement of Hampshire *
Securities Corporation by Jillian's Entertainment Corporation.
(c)(2) Letter, dated May 23, 1996, relating to the purchase of common stock *
of Jillian's Entertainment Corporation by Island Partners, Ltd.
(c)(3) Letter, dated April 4, 1997, relating to the engagement of *
Stonebridge Associates, LLC by Jillian's Entertainment Corporation.
(c)(4) Form of Exchange Agreement between Jillian's Entertainment Holdings, +
Inc. and the Exchange Agent.
(c)(5) Form of Employment/Noncompetition Agreement of Steven L. Foster. +
(c)(6) Form of Employment/Noncompetition Agreement of Daniel M. Smith. +
(c)(7) Form of Employment/Noncompetition Agreement of Stephen Weis. +
(c)(8) Form of Management Agreement among Jillian's Entertainment *
Corporation, Jillian's Entertainment Holdings, Inc. and J.W. Childs
Associates, L.P.
(c)(9) Form of Stockholders Agreement among certain stockholders, option +
holders and warrant holders of Jillian's Entertainment Holdings,
Inc., Jillian's Entertainment Holdings, Inc. and J.W. Childs Equity
Partners, L.P.
(c)(10) Form of License Agreement between Jillian's Entertainment +
Corporation and Jillian's Billiard Club, Inc.
(c)(11) Form of Option Agreement between Jillian's Entertainment Corporation +
and the owners of Jillian's Billiard Club, Inc.
</TABLE>
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<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C> <C>
(c)(12) Form of Purchase Agreement among Jillian's Entertainment Holdings, *
Inc., J.W. Childs Equity Partners, L.P., Jillian's Entertainment
Corporation, the Representative and certain stockholders, option
holders and warrant holders of Jillian's Entertainment Corporation.
(d)(1) Notice of Special Meeting of Shareholders, Preliminary Proxy
Statement, with Appendices and Form of Proxy for Special Meeting.
(d)(2) Consent of Stonebridge Associates, LLC. +
(d)(3) Consent of BDO Seidman, LLP. *
(d)(4) Consent of Deloitte & Touche LLP. *
</TABLE>
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* Previously filed.
+ To be filed by amendment.
416083
<PAGE> 1
EXHIBIT (b)(3)
[Letterhead of Stonebridge Associates, LLC]
April 22, 1997
The Board of Directors and John L. Kidde
Jillian's Entertainment Corporation
727 Atlantic Avenue
Suite 600
Boston, MA 02111
Attention: John L. Kidde
Ladies and Gentlemen:
We understand that Jillian's Entertainment Corporation, (the "Company")
proposes to enter into an Agreement and Plan of Merger by and among the
Company, Jillian's Entertainment Holdings, Inc. ("Holdings") and Jillian's
Entertainment Acquisition Corporation, a wholly owned subsidiary of Holdings
("Sub"), (the "Merger Agreement"). Pursuant to the terms of a purchase
agreement dated as of the date of the Merger Agreement, J.W. Childs Equity
Partners, LP will contribute $12,000,000 to Holdings in exchange for shares of
Series A 12% Convertible Preferred Stock of Holdings and certain shareholders
of the Company will contribute their common stock of the Company to Holdings in
exchange for shares of common stock of Holdings. Under the terms of the Merger
Agreement, Sub will merge with and into the Company, and the Company shall be
the surviving corporation (the "Merger"). Each shareholder of Company common
stock other than Holdings ("Non-continuing Shareholder") will have the right to
receive $.50 in cash for each share of Company common stock owned by such
shareholder (the "Merger Consideration").
In connection with the Merger, you have asked us to render our opinion, as
investment bankers, as to the fairness to the Non-continuing Shareholders, from
a financial point of view, of the Merger Consideration to be received in the
Merger. We have not been requested to opine as to, and our opinion has not in
any manner addressed any other terms or provisions of, the Merger or the Merger
Agreement or the Company's underlying decision to proceed with the Merger.
As you are aware, we have acted as financial advisor to the Company's
Board of Directors (the "Board") and to John L. Kidde in his capacity as the
outside director of the Company who has been designated to perform the
functions of a special committee of the Board
<PAGE> 2
The Board of Directors
Jillian's Entertainment Corporation
April 22, 1997
Page 2 of 3
(the "Designated Director") in connection with the Merger and will receive a
fee for our services. In addition, the Company has agreed to indemnify us
against certain liabilities arising out of providing these services.
In connection with rendering the opinion, we have reviewed and examined,
among other items, the following: (i) a draft dated April 14, 1997 of the
Merger Agreement, (ii) a draft dated April 18, 1997 of the Company's Proxy
Statement to be furnished in connection with the solicitation of proxies to
approve the Merger, (iii) certain publicly available information concerning the
Company, including the Annual Reports on Form 10-K and proxy statements of the
Company for each of the fiscal years in the three year period ended March 31,
1996, Quarterly Reports on Form 1O-Q of the Company for the quarters ended
December 31, 1996, September 30, 1996 and June 30, 1996 and Form 8-K dated
March 13, 1997 and filed on March 17, 1997, (iv) monthly unaudited
financial statements for the Company for the eleven months ended February 28,
1997, (v) financial and operating information with respect to the business,
operations and prospects of the Company, (vi) certain internal business plans
and financial forecasts prepared by the management of the Company, and (vii)
certain publicly available information concerning other concept entertainment
companies, the trading markets for such companies' securities and the nature
and terms of certain other merger and acquisition transactions we believe to be
relevant to our inquiry. During the course of our review, we met and had
discussions with the management of the Company concerning the Company's
business and operations, assets, liabilities, present financial condition, the
general condition and future prospects for the businesses in which it is
engaged and other matters which we believe to be relevant.
As part of our investment banking business, we are continually engaged in
the valuation of businesses and their securities in connection with mergers,
acquisitions, divestitures, leveraged buyouts and private placements of debt
and equity securities. In our review and examination and in arriving at our
opinion, we have examined and assumed the accuracy and completeness of all
financial and other information that was available to us from public sources,
that was provided to us by the Company, or its representatives, or that was
otherwise reviewed by us, and we have not attempted independently to verify any
such information. We have not made, nor have we obtained, any independent
evaluation or appraisal of the assets or liabilities of the Company. With
respect to the financial and business forecasts, we have assumed that they have
been reasonably prepared on the basis of the best currently available estimates
and judgments of the Company's management as to the future operating and
financial performance of the Company, and that such forecasts will be realized
in the amounts and in the time periods currently estimated by the management.
We have relied upon the representations of the Company to be contained in the
Merger Agreement with respect to legal and other matters.
In conducting our review and analysis and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed to be
relevant, including, among others, (i) a review of
<PAGE> 3
The Board of Directors
Jillian's Entertainment Corporation
April 22, 1997
Page 3 of 3
the trading history of the Company's common stock, (ii) a review of the
historical and current financial condition and operating characteristics of the
Company as compared with those of other companies we deemed comparable, (iii) a
review of equity market valuation parameters for securities of companies we
deemed comparable, (iv) a review of the nature and financial terms of certain
transactions that we considered relevant for comparison with the financial
terms of the Merger, and (v) a discounted cash flow analysis of the Company.
In addition, we performed such other analyses and examinations and considered
such information and financial economic and market data as we deemed relevant.
In rendering our opinion, we have taken into account our assessment of
general economic, market, financial and other conditions, as well as our
experience in connection with similar transactions and securities evaluation,
generally. Our opinion necessarily is based upon conditions as they exist and
can be evaluated on the date hereof. We were not engaged to solicit, and have
not solicited, potential purchasers for the Company, and we did not consider
specific alternative transactions involving the Company. For the purposes of
rendering this opinion, we have assumed that all conditions precedent to the
consummation of the Merger will be satisfied and accordingly express no opinion
as to the likelihood that the Merger will be consummated. This opinion is not
intended to be and does not constitute a recommendation to any holder of the
Company's common stock as to whether or not to vote in favor of the Merger.
It is understood that this opinion is for the information of the Board and
the Designated Director only in connection with their evaluation of the Merger.
This opinion may not be so disclosed, referred to, or communicated (in whole
or part) to any third party for any purpose whatsoever except with our prior
written consent in each instance or as otherwise provided in our engagement
letter with the Company. This opinion may be reproduced in full in any proxy
statement mailed to shareholders of the Company but may not otherwise be
disclosed publicly in any matter without our prior written approval and must be
treated as confidential.
Based upon and subject to the foregoing, we are of the opinion, as
investment bankers, that as of the date hereof, the Merger Consideration to be
received by the Non-continuing Shareholders in the Merger, is fair to the
Non-continuing Shareholders from a financial point of view.
Very truly yours,
STONEBRIDGE ASSOCIATES, LLC
<PAGE> 1
PRELIMINARY COPY
JILLIAN'S ENTERTAINMENT CORPORATION
727 Atlantic Avenue, Suite 600
Boston, Massachusetts 02111
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _____________, 1997
To the Shareholders:
Notice is hereby given that a special meeting (together with any
adjournment(s) thereof, the "Special Meeting") of the shareholders (the
"Shareholders") of Jillian's Entertainment Corporation, a Florida corporation
(the "Company"), will be held at ____________________, ____________________,
____________________, at __:__ A.M., Eastern Time, on ___________, 1997. Only
Shareholders who were shown on the Company's records as holders of issued and
outstanding shares of common stock, par value $.001 per share (the "Common
Stock") in the Company as of the close of business on _________________, 1997
(the "Record Date") are entitled to notice of and to vote at the Special
Meeting. Each Shareholder is entitled to one vote in person or by proxy for
each share of Common Stock held by such Shareholder on the Record Date.
The Special Meeting is being held for the following purposes:
1. To consider and vote upon a proposal (the "Proposal") to
approve a merger (the "Merger") by and between the Company and Jillian's
Entertainment Acquisition Corporation, a Florida corporation ("Sub") and wholly
owned subsidiary of Jillian's Entertainment Holdings, Inc. ("Holdings"), with
the Company surviving as a wholly owned subsidiary of Holdings. The Merger will
be effected subject to the terms and conditions of an Agreement and Plan of
Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, among other
matters, each share of Common Stock, other than those shares held by seven
Shareholders who each have ongoing relationships with the Company, owned
immediately prior to consummation of the Merger will be converted into the
right to receive cash of $0.50 per share, without interest.
2. To transact such other business as may properly come before
the Special Meeting.
<PAGE> 2
The accompanying Proxy Statement sets forth in more detail information
concerning the Merger. A copy of the Merger Agreement is set forth as Appendix
A to the accompanying Proxy Statement.
Whether or not you expect to attend the meeting in person, you are
urged to sign and date the enclosed proxy and return the same promptly so that
your shares of Common Stock may be represented and voted at the Special
Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
------------------------------------
Secretary
Boston Massachusetts
, 1997
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IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE SIGN,
DATE AND COMPLETE THE ACCOMPANYING PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE GIVING
OF THE PROXY WILL NOT AFFECT YOUR RIGHTS TO VOTE AT THE MEETING IF THE PROXY IS
REVOKED AS SET FORTH IN THE ACCOMPANYING PROXY STATEMENT.
2
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PRELIMINARY COPY
JILLIAN'S ENTERTAINMENT CORPORATION
727 ATLANTIC AVENUE, SUITE 600
BOSTON, MASSACHUSETTS 02111
PROXY STATEMENT FOR A SPECIAL MEETING
OF SHAREHOLDERS
TO BE HELD ON _____________, 1997
INTRODUCTION
This Proxy Statement is being furnished on behalf of Jillian's
Entertainment Corporation, a Florida corporation (the "Company"), in connection
with the solicitation of proxies to be voted at a special meeting (together
with any adjournment(s) thereof, the "Special Meeting") of shareholders of the
Company (the "Shareholders"). The Special Meeting is to be held at __:__ _.m.,
Eastern Time, on _____________, 1997, at ____________________________,
_____________________________, _____________________________. This Proxy
Statement and the Proxy are first being mailed to Shareholders on or about
____________, 1997.
The Board of Directors of the Company (the "Board") is soliciting the
proxies of the Shareholders who were shown on the Company's records as holders
of issued and outstanding shares of common stock, par value $.001 per share
(the "Common Stock"), in the Company as of the close of business on
______________, 1997 (the "Record Date") to consider and vote upon a proposal
(the "Proposal") to approve a merger (the "Merger") by and between the Company
and Jillian's Entertainment Acquisition Corporation, a Florida corporation
("Sub") and a wholly owned subsidiary of Jillian's Entertainment Holdings,
Inc., a Delaware corporation ("Holdings").
The Merger will be effected subject to the terms and conditions of an
Agreement and Plan of Merger (the "Merger Agreement"), which are summarized in
this Proxy Statement. The Merger Agreement provides, among other matters, that
(i) Sub will be merged with and into the Company, and the Company shall be the
surviving company in the Merger (the "Surviving Company"), (ii) each share of
common stock of Sub owned immediately prior to consummation of the Merger will
be converted into the right to receive one share of Series A Common Stock, par
value $.001 per share, of the Surviving Company and one share of Series B
Common Stock, par value $.001 per share, of the Surviving Company, (iii) each
share of Common Stock owned immediately prior to consummation of the Merger by
any Shareholder, other than a Continuing Shareholder (as defined below) (any of
such persons being hereinafter referred to as a "Non-Continuing Shareholder"),
will be converted into the right to receive cash of $0.50 per share, without
interest (a "Merger Payment"), (iv) each warrant to purchase a share or shares
of Common Stock held immediately prior to consummation of the Merger by certain
persons with whom the Company has ongoing relationships (the "Continuing
Warrant Holders") will be exchanged for a warrant to purchase the same number
of shares
<PAGE> 4
of common stock of Holdings on substantially the same terms and
conditions, (v) each warrant to purchase a share or shares of Common Stock held
immediately prior to consummation of the Merger by any person other than a
Continuing Warrant Holder (a "Non-Continuing Warrant Holder") will be converted
into the right to receive, upon the exercise of such warrant, a Merger Payment
for each share of Common Stock as to which the warrant is exercised, upon
payment of the exercise price for each such share, (vi) each stock option to
purchase a share or shares of Common Stock outstanding immediately prior to
consummation of the Merger that is held by a former director, officer or
employee of the Company (a "Former Management Company Option") will be
converted into the right to receive a Merger Payment for each share of Common
Stock as to which the option is exercisable less the exercise price for each
such share, and (vii) each stock option to purchase a share or shares of Common
Stock outstanding immediately prior to consummation of the Merger that is held
by a current director, officer or employee of the Company or certain persons
with whom the Company has ongoing relationships (a "Current Management Company
Option") will be exchanged for an option to purchase the same number of shares
of common stock of Holdings on substantially the same terms and conditions (a
"Holdings Management Option"), all as indicated in the following table:
<TABLE>
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Summary of Certain Provisions of the Merger Agreement
- --------------------------------------------------------------------------------------------
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(i) Sub will be merged with and into the Company, and the Company will be
the Surviving Company in the Merger.
- --------------------------------------------------------------------------------------------
(ii) Each share of common stock of Sub will be converted into the right to receive one
share of Series A Common Stock, par value $.001 per share, of the Surviving
Company and one share of Series B Common Stock, par value $.001 per
share, of the Surviving Company.
- --------------------------------------------------------------------------------------------
(iii) Each share of Common Stock held by a Non-Continuing Shareholder will be
converted into the right to receive a Merger Payment.
- --------------------------------------------------------------------------------------------
(iv) Each warrant to purchase a share or shares of Common Stock held by a Continuing
Warrant Holder will be exchanged for a warrant to purchase the same
number of shares of common stock of Holdings.
- --------------------------------------------------------------------------------------------
(v) Each warrant to purchase shares of Common Stock held by a
Non-Continuing Warrant Holder will be converted into the right to
receive, upon the exercise of such warrant, a Merger Payment for each
share of Common Stock as to which the warrant is exercised, upon
payment of the exercise price for each such share.
- --------------------------------------------------------------------------------------------
(vi) Each Former Management Company Stock Option to purchase shares of Common Stock
will be converted into the right to receive a Merger Payment for each share of
Common Stock as to which such option is exercisable, less the exercise
price for each such share.
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(vii) Each Current Management Company Option to purchase shares of Common
Stock will be exchanged for a Holdings Management Option.
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</TABLE>
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All of the outstanding options to purchase shares of Common Stock are held
by current or former directors, officers, employees and affiliates of the
Company.
If the Merger is approved by the Shareholders, immediately prior to
consummation of the Merger, certain Shareholders with whom the Company has
ongoing relationships (the "Continuing Shareholders") will participate in a
transaction (the "Corporate Formation") whereby each such Shareholder (i) shall
exchange each share of Common Stock owned by the Shareholder for one share of
common stock of Holdings and (ii) shall receive options to purchase a
predetermined number of shares of common stock of Holdings, the vesting of
which is subject to the achievement of certain performance objectives (the
"Holdings Performance Options"), pursuant to the terms and conditions of a
purchase agreement, dated _________, 1997, by and among the Company, Holdings,
J.W. Childs Equity Partners, L.P. ("Childs"), the representative of, and
attorney-in-fact for (the "Representative"), certain related persons or
entities of Childs (together with Childs, the "Childs Group"), the Continuing
Shareholders, the holders of Former Management Company Options, the holders of
Current Management Company Options, the Other Option Holders (as defined
below), the Continuing Warrant Holders and the Debtors (as defined below) (the
"Purchase Agreement"). See "Material Terms of the Purchase Agreement." In
addition, Holdings shall issue Holdings Performance Options to purchase a
predetermined number of shares of common stock of Holdings to certain other
persons with ongoing relationships with the Company (the "Other Option
Holders"), and Holdings shall lend funds to certain persons for the purchase of
shares of common stock of Holdings (the "Debtors").
The Company has determined that approximately $2,577,154 in cash will be
required in order to make the Merger Payments to the Non-Continuing
Shareholders and that approximately $23,500 in cash will be required in order
to make payments to the Non-Continuing Warrant Holders and holders of Former
Management Company Options. The Company intends to use funds obtained from the
private placement (the "Private Placement") of $12,000,000 of convertible
preferred stock of Holdings (the "Preferred Stock") with the Childs Group,
pursuant to the terms and conditions of the Purchase Agreement, to make the
Merger Payments. If the Merger is approved by the Shareholders, subject to the
terms and conditions of the Purchase Agreement, the Private Placement will be
consummated immediately prior to consummation of the Merger. See "Financing of
the Merger."
If the Merger is approved by the Shareholders, immediately after
consummation of the Corporate Formation, the Private Placement and the Merger,
the Non-Continuing Shareholders will possess no interest in, or rights as
Shareholders of, the Company or Holdings, Holdings will be owned by the
Continuing Shareholders and the Childs Group, and the Surviving Company will be
a wholly owned subsidiary of Holdings.
If the Merger is not approved by the Shareholders, the Company, at that
time, will assess whether it will seek to structure another transaction or
continue to retain the Placement Agent (as hereinafter defined) to raise funds
for the Company. Approval of the Merger will require the favorable vote of the
majority of all shares of Common Stock. As of the Record Date, there were
9,137,798 issued and outstanding shares of Common Stock held of record by
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approximately 3,400 Shareholders. As of the Record Date, the members of the
Board and the executive officers of the Company owned an aggregate of 1,327,250
shares of Common Stock (approximately 14.5 percent of the total shares of
Common Stock outstanding). Only one member of the Board and/or executive
officer of the Company is a Continuing Shareholder. Such Continuing Shareholder
held a total of 1,310,000 shares of Common Stock (approximately 14.3 percent of
the total shares of Common Stock outstanding) as of the Record Date. Such
Shareholder, along with the other Continuing Shareholders, has entered into a
voting agreement with Holdings and Childs under which he agreed, among other
matters, to vote all of the shares of Common Stock held by him FOR the
Proposal. For additional information concerning the beneficial ownership of
shares of Common Stock, see "Security Ownership of Certain Beneficial Owners
and Management."
The Board believes that the Merger is fair to the Non-Continuing
Shareholders, and in the best interest of the Company and the Shareholders, and
unanimously recommends that Shareholders vote FOR approval of the Merger. In
making this recommendation, the Board is relying upon, among other things, the
opinion of Stonebridge Associates, LLC ("Stonebridge") (which the
Board retained to determine the fairness of the Merger Payment) that the
Merger Payment of $0.50 per share of Common Stock is fair to the Non-Continuing
Shareholders from a financial point of view, as of April 22, 1997. See "Special
Factors -- Board of Directors Determination of Fairness of the Proposal" and
"Special Factors -- Opinion of Stonebridge."
If the Merger is consummated, the Company will become an entity the
securities of which are privately held. The registration of the Common Stock
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") will
terminate, resulting in the suspension of the Company's obligations to file
periodic reports such as Forms 10-KSB, 10-QSB and 8-K. Since the Common Stock
will no longer be publicly held, the Company will be relieved of the obligation
to comply with the proxy rules of Regulation 14A under Section 14 of the
Exchange Act, and the executive officers and directors of the Company and
Shareholders owning more than 10 percent of the Common Stock will be relieved
of the reporting requirements and "short swing" trading restrictions under
Section 16 of the Exchange Act. In addition, the Common Stock will be delisted
from The NASDAQ SmallCap Market, which will terminate the Company's public
trading market and relieve the Company of any further obligations to comply
with the rules and regulations relating to The NASDAQ SmallCap Market listing.
AVAILABLE INFORMATION
The Company is currently subject to the informational requirements of the
Exchange Act, and, in accordance therewith, files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copies obtained from the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the
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<PAGE> 7
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov.
The Company has filed with the Commission a Rule 13e-3 Transaction
Statement on Schedule 13E-3 (the "Schedule 13E-3") under the Exchange Act. This
Proxy Statement does not contain all of the information set forth in the
Schedule 13E-3, certain parts of which are omitted in accordance with the rules
and regulations of the Commission. The Schedule 13E-3 and any amendments
thereto, including exhibits filed as a part thereof, may be examined and copied
at the principal executive offices of the Company during regular business hours
by any Shareholder or such Shareholder's representative who has been so
designated in writing.
THESE TRANSACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTIONS OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The date of this Proxy Statement is ___________, 1997.
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TABLE OF CONTENTS
<TABLE>
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INTRODUCTION ............................................................................................. 1
AVAILABLE INFORMATION..................................................................................... 4
SUMMARY OF PROXY STATEMENT................................................................................ 9
Business of the Company.......................................................................... 9
Background of the Merger......................................................................... 9
Meeting and Proxy Information....................................................................16
The Corporate Formation and the Merger...........................................................16
Financing of the Merger..........................................................................18
Recommendation of the Board of Directors.........................................................18
Holdings and Sub Determination of Fairness
of the Merger...........................................................................19
Conflicts of Interest............................................................................19
Certain Effects of the Merger....................................................................21
Opinion of Stonebridge...........................................................................22
Material Federal Income Tax Consequences.........................................................23
Regulatory Requirements and Conditions...........................................................23
Market Information...............................................................................23
Rights of Dissenting Shareholders................................................................24
VOTING AND PROXY INFORMATION..............................................................................24
Record Date; Outstanding Shares; Voting..........................................................24
Proxy............................................................................................26
Revocability of Proxy............................................................................26
Solicitation of Proxies..........................................................................26
SPECIAL FACTORS...........................................................................................27
Background of the Merger.........................................................................27
General.................................................................................27
Bank and Equipment Lease Financing......................................................29
Shareholder Loans.......................................................................32
Seller, Landlord and Municipal Financing................................................32
Equity and Debt Financing...............................................................35
Current Effects of Borrowings and Equity Financing......................................39
Alternatives Considered.................................................................42
Payments to the Non-Continuing Shareholders......................................................49
Preliminary Opinion of Bannon....................................................................50
Opinion of Stonebridge...........................................................................53
Transaction Overview....................................................................55
Stock Trading History...................................................................55
Comparable Public Company Analysis......................................................56
Comparable Transaction Analysis.........................................................57
Premiums Paid Analysis..................................................................58
Discounted Cash Flow Analysis...........................................................58
Base Case Scenario...............................................................59
Base Case Scenario (assuming that the Long Beach Club is sold)...................59
Additional Scenarios.............................................................59
Board of Directors Determination of Fairness of the Merger.......................................60
</TABLE>
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Certain Effects of the Merger....................................................................64
Material Federal Income Tax Consequences.........................................................65
Federal Income Tax Consequences for Continuing
Shareholders Resulting from the Corporate Formation.................................65
Federal Income Tax Consequences for Non-Continuing
Shareholders Resulting from the Merger..............................................66
Federal Income Tax Consequences for Holders of Warrants to
Purchase Common Stock..............................................................67
Federal Income Tax Consequences for Holders of Options to
Purchase Common Stock..............................................................68
Purposes and Reasons for the Merger..............................................................68
Conflicts of Interest............................................................................69
Effect if the Merger is Not Approved.............................................................71
PROPOSAL TO APPROVE THE MERGER............................................................................71
General..........................................................................................71
Certain Effects of the Merger....................................................................71
Effective Time of the Merger.....................................................................73
Amounts Paid in the Merger.......................................................................73
Payment for Common Stock in the Merger...........................................................73
Conditions to the Merger.........................................................................74
Waiver and Amendment.............................................................................75
Fees and Expenses............................................................................... 75
Rights of Dissenting Shareholders................................................................75
Vote Required and Recommendation of the Board of Directors.......................................75
REGULATORY MATTERS........................................................................................76
FINANCING OF THE MERGER...................................................................................76
MATERIAL TERMS OF THE PURCHASE AGREEMENT..................................................................77
BUSINESS AND PROPERTIES OF THE COMPANY....................................................................79
Description of Business..........................................................................79
General.................................................................................79
Jillian's Clubs.........................................................................80
Description of Properties........................................................................82
Administrative Operations...............................................................82
Jillian's Clubs.........................................................................83
Legal Proceedings............................................................................... 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................88
Results of Operations............................................................................88
</TABLE>
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Third Quarter Ended December 31, 1996 Compared
to Third Quarter Ended December 31, 1995...........................................88
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year
Ended March 31, 1995...............................................................89
Liquidity and Capital Resources..................................................................91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................................................................92
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY...........................................................95
PRIOR CONTACTS BETWEEN THE COMPANY AND
CERTAIN AFFILIATES.....................................................................................97
SELECTED FINANCIAL DATA...................................................................................98
MARKET INFORMATION........................................................................................99
FEES AND EXPENSES.........................................................................................101
INDEPENDENT ACCOUNTANTS...................................................................................101
MISCELLANEOUS.............................................................................................102
DOCUMENTS INCORPORATED BY REFERENCE.......................................................................102
GLOSSARY..................................................................................................103
INDEX TO FINANCIAL STATEMENTS ............................................................................F-1
APPENDIX A Form of Agreement and Plan of Merger by and among
Jillian's Entertainment Corporation, Jillian's Entertainment
Acquisition Corporation, and Jillian's Entertainment Holdings, Inc.
APPENDIX B Fairness Opinion of Stonebridge Associates, LLC
</TABLE>
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SUMMARY OF PROXY STATEMENT
The following is a brief summary of certain information contained in this
Proxy Statement. This summary is not intended to be complete and is qualified
in its entirety by reference to the more detailed information appearing
elsewhere in this Proxy Statement, including any Appendices hereto.
Shareholders are urged to review the entire Proxy Statement carefully.
Business of the Company
Jillian's Entertainment Corporation is a Florida corporation whose primary
business is the operation of upscale billiard clubs (the "Company"). The
Company, through wholly owned subsidiaries, currently wholly or partially owns,
operates and manages ten billiard clubs, which are located in Miami, Florida;
Seattle, Washington; Cleveland, Ohio; Cleveland Heights, Ohio; Pasadena,
California; Worcester, Massachusetts; Champaign, Illinois; Annapolis, Maryland;
Long Beach, California; and Tacoma, Washington. The principal executive offices
of the Company are located at 727 Atlantic Avenue, Suite 600, Boston,
Massachusetts 02111. See "Business and Properties of the Company."
Background of the Merger
The decision of the Board of Directors of the Company (the "Board") to
present a proposal (the "Proposal") to approve a merger (the "Merger") by and
between the Company and Jillian's Entertainment Acquisition Corporation, a
Florida corporation ("Sub") and a wholly owned subsidiary of Jillian's
Entertainment Holdings, Inc., a Delaware corporation ("Holdings"), to the
Shareholders, marked the culmination of a process that began in late 1994. The
Merger is subject to satisfaction of various conditions, including, but not
limited to, consummation of the Corporate Formation (as defined below) and the
Private Placement (as defined below). See "The Corporate Formation and the
Merger," and "Financing of the Merger" and "Proposal to Approve the Merger --
Conditions to the Merger," below. At that time, the Board determined that it
might be necessary to restructure the Company in order to create the potential
for improving the Company's ability to raise funds both for working capital and
for further expansion and development of its billiard club business in
accordance with its business plans. In the Board's view, the Company has an
obligation to use its best efforts to continue to increase the value of each
Shareholder's investment in the Company. Although the Board believed that the
Company had satisfied this objective in part, the Board determined that it
could not continue to fully satisfy this objective without further expansion of
the Company's operations and an increase in the number of clubs operating under
the Company's name. The Board recognized that since the Company began its
upscale billiard club business in 1990, the Company had experienced a net
operating loss in each year other than 1993, the Company had difficulty
obtaining financing for development of additional clubs and the Company had not
been able to take full advantage of its position as a public company through
equity or debt offerings of its securities or the securities of its
subsidiaries. In addition, the Board recognized that since mid 1993 the common
stock, par value $.001 per share, of the Company (the "Common Stock") had not
traded above approximately $1.06 per share. Management believes that no
analysts have followed the Common Stock since 1993 and the Common Stock has not
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traded above $0.50 per share since March 16, 1995. See "Market Information." As
of the date of this Proxy Statement, each of these factors continues to be
true. In addition, on February 7, 1997, the Company was notified by The NASDAQ
SmallCap Market that the Company had failed to satisfy the continued listing
requirement that its Common Stock maintain a closing inside bid price of at
least $1.00 per share for ten consecutive trading days. The NASDAQ SmallCap
Market indicated that it will commence delisting action with respect to the
Common Stock unless the Company is able to satisfy the bid price requirement by
May 7, 1997. As of the date of this Proxy Statement, the Company does not
believe that such requirement will be satisfied.
The Company was one of the pioneers in the concept of upscale billiard
clubs. However, the billiard club business requires significant amounts of
cash, and the Company has not had sufficient cash to operate optimally or
expand its business in accordance with its business plans. As a result, the
Company was not able to develop billiard clubs quickly enough to attain a
dominant position in the upscale billiard club market prior to the entry into
this market of a number of competitors operating single outlets or multiple
units . In all but one year since it began its billiard club business in 1990,
the Company has experienced a net operating loss. During this same period, the
number of competitors in the upscale entertainment business that own multi-unit
entertainment facilities has increased, and a number of these competitors have
opened billiard clubs in areas where the Company otherwise might have
established clubs if it had been able to obtain sufficient capital to do so.
For example, Clicks Billiards, which dominates the Southwest and Southeast
upscale billiard club markets, has opened 26 billiard clubs in those regions;
Pinkies has opened 14 billiard clubs at sites in Arizona, Colorado, Nevada and
other Southwestern states; Boston Billiard Clubs has opened six billiard clubs
in the Northeast region; Fats Billiard Clubs has established five billiard
clubs in Southern California; and Champions Billiards has opened five billiard
clubs in the Washington, D.C. metropolitan area. Other competitors have opened
larger clubs, or entertainment centers, which offer diverse forms of
entertainment, such as billiards, electronic games, restaurant and bar services
and nightclub-style entertainment. For example, Dave & Busters, Inc., a public
company based in Dallas, Texas, operates ten entertainment centers throughout
the United States, and America Live operates a chain of three entertainment
centers throughout the United States. See "Business and Properties of the
Company -- Description of Business -- General."
Since it began its billiard club business, the Company has had difficulty
raising capital at the rate it believes would have been necessary either to
maximize or to benefit from its position as a pioneer in the industry. During
this period, the Company has had difficulty obtaining bank and equipment lease
financing, and when the Company has been able to obtain such financing, the
Company's poor financial condition generally has adversely affected its ability
to obtain financing on more favorable terms. See "Special Factors -- Background
of the Merger -- Bank and Equipment Lease Financing."
The Company has been more successful in its efforts to obtain seller,
landlord or municipal financing and has used such financing to partially fund
the acquisition or construction of all of its billiard clubs. However, the
Company collateralized the financing with the assets
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or stock of all of the subsidiaries through which the Company owns the clubs,
leaving the Company with reduced sources of collateral to obtain additional
financing for working capital and further expansion and development and risking
the possibility that the Company could lose its interests in these clubs. See
"Special Factors -- Background of the Merger -- Seller, Landlord and Municipal
Financing."
In addition, the Company has attempted to raise capital for expansion
through private placements of equity and debt instruments. Because of the
dilutive effect that such issuances would have on the value of the Common Stock
in the hands of the existing Shareholders, the Company has attempted to raise
capital in this manner only as a last resort. Despite its efforts, the Company
has had only modest success in raising capital through private placements of
its Common Stock, of debt instruments or of the equity interests in its
subsidiaries. While the Company believed that its guarantee of favorable
returns and offering of early buy-outs would help attract investors, it was
advised during its discussions with potential investors that such investors had
no confidence that the Company could fulfill its guarantees or buy-out
responsibilities, based on the Company's history of poor performance, and if
the Company had insufficient assets or cash flow, it would be doubtful that an
investor with standing to sue would be provided with the rights guaranteed the
investor in the offering. See "Special Factors -- Background of the Merger --
Equity and Debt Financing."
While the Company has had modest success in raising capital through
private placements of its Common Stock and the equity interests in its
subsidiaries, it has not considered it practicable to attempt to raise capital
through public offerings of its equity or debt securities. Currently, there is
only a limited trading market for the Common Stock (see "Market Information")
and the Board believes that the Common Stock is not being followed by market
analysts because the Company has not received any communications from market
analysts in the past several years. The Company has made no attempt to get
analysts to follow the Common Stock or to retain an investment banking firm to
underwrite a public offering of the Common Stock because in light of the
Company's history of poor performance to date the Company believes that such
attempts would be unsuccessful. Further, the Board recognizes that the Company
has had an unusual history, in that its present involvement in the billiard
club industry is different from the purposes for which it was initially
incorporated. See "Business and Properties of the Company." Further, the
Company has not shown any strong earnings in the course of its operations in
the billiard club industry and is not in the best position to support
optimistic or dramatic market statements. In addition, since mid 1993, the
Common Stock has not traded above approximately $1.06 per share, and has not
traded above $0.50 per share since March 16, 1995. The Company has not given
any consideration to raising capital through a rights or other offering to the
Shareholders or through the issuance of preferred stock or other similar
security carrying preferential rights, other than the Private Placement (as
defined below). See "Special Factors -- Background of the Merger -- Equity and
Debt Financing."
While the Company has raised approximately $3,255,465 in funds (excluding
landlord contributions) for working capital for the acquisition and/or
construction of its ten existing clubs, it has not raised sufficient capital to
enable it to expand in accordance with its business
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<PAGE> 14
plans. In addition, the site locations for most of the Company's clubs
have in large part been dictated by the availability of seller, landlord and
municipal financing. The Company has not been able to develop sites in other
more attractive areas where such financing has not been available. The
Company's reliance on this type of financing has resulted in the encumbrance of
the assets and/or stock of all of the subsidiaries through which it owns its
billiard clubs. All of the Company's assets are pledged as collateral. None of
the Company's assets are available for future or subordinate level pledges
without the consent of the primary lenders. The unavailability of such
collateral has, in turn, contributed to the Company's difficulty in obtaining
bank and equipment lease financing. Further, the Company's history of poor
performance has inhibited its ability to raise capital through the private
placement of its securities or the securities of its subsidiaries.
The Board believes that the Company's inability to raise capital has
significantly contributed to the fact that the Company has experienced net
losses for all but one of the past six years, and such lack of profit, in turn,
has prevented the Company from significantly improving its position in the
upscale billiard club market through expansion and development. Management
believes that there are a number of markets in which the Company could have
achieved market dominance or acquired a more substantial share of the market if
the Company had had sufficient capital either to enter the market earlier or to
commence and expand its operations in that market at an earlier date. Because
the Company has instead had limited amounts of capital available, it has had to
slowly expand the number of clubs that it operates, and the construction of
those clubs has, in some cases, been delayed due to lack of funds at a
particular time. Such delays, in some instances, have required the Company to
pay rent prior to commencement of operations at those clubs, which resulted in
increased expense for the Company without any offsetting increase in operating
income. As a result, delays resulting in the payment of pre-opening rent have
had a direct impact on the costs associated with developing the clubs. The
Board believes that the value of the Common Stock also has been depressed due
to the Company's failure to achieve profitable operations on a continuing
basis. As a result, the Company's ability to raise capital through the public
or private sale of its Common Stock or other equity securities has been
limited.
By late 1994, for the reasons discussed above, the Board believed that it
was no longer prudent for the Company to continue to seek short-term financing
on terms that could not be considered favorable to the Company due to the
anticipated difficulty of repaying such loans as a result of the Company's slow
or nonexistent growth in assets and income and the increasing level of
competition from better-capitalized entities. The terms of any financing
available to the Company at that time and at the present time was and continues
to be such that the Company's acceptance of financing on such terms would place
the Company at a competitive disadvantage in terms of its debt obligations and
available capital. At a Board meeting held on December 20, 1994, the Board
determined that it might be appropriate for the Company to consider eliminating
its status as a "public company," in part because, as a "private company," the
Company could reduce certain costs associated with complying with the federal
securities laws. The Company estimates that this cost savings would be
approximately $109,500 per year. In addition, the Company's status as a private
company could cause the Company to be more attractive to the types of
well-capitalized and sophisticated investors that are willing to
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<PAGE> 15
invest substantial amounts of capital in an enterprise. In the experience
of certain members of the Board, investors generally are not willing
to commit significant amounts of capital to an enterprise that, like the
Company, does not have a history of profitable operations, unless the number of
shareholders is relatively small and composed primarily of individuals who
either are actively involved in the operations of the Company or are family
members of such persons. Further, management of the Company believes that the
additional disclosure obligations of a public company under the federal
securities laws regarding company operations, stock ownership and compensation
of, or payments to, persons with a significant investment in the company are
often unacceptable to investors that are considering a substantial investment
in such a company.
The Board believes that the Company could be an attractive investment,
even at this time, because the infusion of additional capital would enable the
Company to expand its business and thereby increase the likelihood that the
Company will become profitable, due in part to the Company's ability, as a
larger company, to achieve economies of scale. However, a substantial
investment in a company, such as the Company, that does not have a history of
profitable operations, but whose prior operating history and relative position
in its markets indicate that a significant infusion of capital could produce
profitable operating results on a consistent basis in the future, may be more
likely to prove profitable (and, therefore, may be more attractive to a
potential investor) if the company is a private company.
At a meeting on January 23, 1995, the Board specifically considered
eliminating the Company's status as a public company. The Board believes that
the elimination of the Company's status as a publicly held company would
provide the Company with greater flexibility in structuring financing
arrangements and attracting additional sources of capital. For example, the
Board believes that, as a private company, the Company might be better able to
attract investors that are willing to invest significant amounts in the Company
for the reasons discussed above. In addition, this change in the Company's
status would allow the Company to reduce or eliminate certain costs associated
with its status as a public company. Such costs include those incurred to pay
the Transfer Agent; those required to communicate with the approximately 3,400
Shareholders; and those required to make the necessary filings with, and
otherwise comply with the regulations of, the Securities and Exchange
Commission (the "Commission") and The NASDAQ SmallCap Market, including legal
fees and expenses. The Board estimates that the annual savings for the Company
due to the reduction or elimination of these costs would be approximately
$109,500. See "Special Factors -- Purposes and Reasons for the Merger."
In addition, at the January 23, 1995 Board meeting, the Board authorized
Steven L. Foster, Chairman of the Board, to retain a valuation expert to
evaluate the Company in connection with the Company's consideration of becoming
a private company. In March 1995, Mr. Foster engaged Bannon & Co., Inc.
("Bannon") to undertake a study to enable it to render, as an independent third
party, a preliminary opinion with respect to the proposed consideration to be
offered in a going private transaction and to present a preliminary fairness
opinion to the Board. See "Special Factors -- Preliminary Opinion of Bannon."
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<PAGE> 16
After Mr. Foster selected Bannon, the Board began an analysis of methods
of structuring a transaction that would have the effect of eliminating the
Company's status as a publicly held company while maximizing Shareholder value.
The Board considered transactions that could have the effect of taking the
Company private, but would retain the interest in the Company or any successor
to the Company of certain Shareholders. After considering a number of possible
transactions, as described under "Special Factors -- Background of the Merger
- -- Alternatives Considered," at its meeting on October 2, 1995, the Board
unanimously determined that a merger would be the most efficient method for
taking the Company private and paying some Shareholders a fair price for their
interests in the Company, as well as retaining the interests of other
Shareholders in the Company or a successor to the Company.
On April 29, 1996, the Board authorized the Company to retain Hampshire
Securities Corporation, a New York corporation that specializes in underwriting
private placements of debt and equity and public offerings of small and
medium-sized companies and providing such companies with business valuations
and strategic advice on non-recurring transactions such as mergers and
acquisitions and restructurings (the "Placement Agent"), to structure a merger
transaction designed to raise $6,000,000 to $12,000,000 in gross proceeds to be
used for the consideration to be paid in a merger and to fund new club
development, among other things.
The Placement Agent commenced an offering of preferred stock of Holdings
on June 13, 1996 by mailing a private placement memorandum dated June 10, 1996
(the "Private Placement Memo") to a total of 20 institutional investors. Eight
of these institutional investors declined an interest in the private placement
without a meeting. Meetings were held with twelve of the prospective investors.
The Company's management made presentations at six of these meetings, and the
Placement Agent met alone with six prospective investors. Of the twelve that
met with the Company and/or the Placement Agent, six declined an interest in
the private placement, and the remaining six engaged in further discussions
with the Placement Agent from June 1996 to March 1997, among which was J.W.
Childs Equity Partners, L.P. ("Childs"). The Childs Group (as defined below)
expressed an interest to invest $12,000,000 in Holdings. No other single
prospective investor or group of prospective investors was willing to invest
$12,000,000 in Holdings.
In February 1996, the Placement Agent introduced Childs to the Company.
Childs has made a commitment to purchase $12,000,000 of convertible preferred
stock of Holdings (the "Private Placement"), pursuant to the terms and
conditions of a purchase agreement, dated _________, 1997, by and among the
Company, Holdings, Childs, the representative of, and attorney-in-fact for (the
"Representative"), certain related persons or entities of Childs (together with
Childs, the "Childs Group"), certain Shareholders with whom the Company has
ongoing relationships (the "Continuing Shareholders"), the holders of Former
Management Company Options (as defined below), the holders of Current
Management Company Options (as defined below), the Other Option Holders (as
defined below), the Continuing Warrant Holders (as defined below) and the
Debtors (as defined below). See "Financing of the Merger," below.
The Board of Directors held a meeting on March 11, 1997 to authorize the
Company to enter into a non-binding letter of intent with Childs whereby the
parties proposed the
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<PAGE> 17
Merger, the Corporate Formation (as defined below) and the Private Placement.
In addition, the Board of Directors authorized John L. Kidde, who is an
independent director of the Company, to perform the functions of a special
committee of the Board, including the negotiation of the Merger Agreement, the
Purchase Agreement and other related agreements with the Childs Group, and the
coordination of the relationship between the Company and Bannon and any other
financial advisor or analyst that the Company might engage. Mr. Kidde was
designated to serve this function to protect the interests of those persons
unaffiliated with the Company.
On March 31, 1997, the Board of Directors authorized Mr. Kidde to engage
Stonebridge Associates, LLC ("Stonebridge") to render an opinion to
the Board as to the fairness from a financial point of view of the
consideration to be received by the Non-Continuing Shareholders in the
Merger. See "Special Factors -- Opinion of Stonebridge." Bannon had
been engaged in March 1995 to render a preliminary opinion to the Board as to
the fairness of the consideration to be received by the Non-Continuing
Shareholders in the Merger, as mentioned above. The Company and Bannon
anticipated that the Company would engage Bannon to render a final opinion
immediately prior to the mailing of this Proxy Statement to the Shareholders.
When the Company contacted Bannon in March 1997 to discuss the terms under
which Bannon would render the final opinion, the Company learned that Bannon
had become affiliated with another entity. As a result of that affiliation and
the lapse of time, Bannon indicated that it would be unable to render the final
opinion within the price range that the Company and Bannon had discussed when
Bannon was originally engaged in March 1995. Consequently, the Company
authorized Mr. Kidde to engage Stonebridge.
The Board, after consultation with the Placement Agent and after
consultation and negotiation with Childs, has structured the proposed Merger so
that (i) Sub will be merged into the Company, and the Company shall be the
surviving company in the Merger (the "Surviving Company"), (ii) each share of
common stock of Sub will be converted into the right to receive one share of
Series A Common Stock, par value $.001 per share, of the Surviving Company and
one share of Series B Common Stock, par value $.001 per share, of the Surviving
Company, (iii) each Shareholder that is not a Continuing Shareholder (a "Non-
Continuing Shareholder") will have the right to receive cash of $0.50 per
share, without interest (a "Merger Payment") for each share of Common Stock
beneficially owned by such Shareholder, (iv) each warrant to purchase a share
or shares of Common Stock held immediately prior to consummation of the Merger
by certain persons with whom the Company has ongoing relationships (the
"Continuing Warrant Holders") will be exchanged for a warrant to purchase the
same number of shares of common stock of Holdings on substantially the same
terms and conditions, (v) each warrant to purchase a share or shares of Common
Stock held immediately prior to consummation of the Merger by any person other
than a Continuing Warrant Holder (a "Non-Continuing Warrant Holder") will be
converted into the right to receive, upon the exercise of such warrant, a
Merger Payment for each share of Common Stock to which the warrant is
exercisable, upon payment of the exercise price for each such share, (vi) each
stock option to purchase a share or shares of Common Stock outstanding
immediately prior to consummation of the Merger that is held by a former
director, officer or employee of the Company (a "Former Management Company
Option")
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<PAGE> 18
will be converted into the right to receive a Merger Payment for each share of
Common Stock as to which the option is exercisable, less the exercise price for
each such share, and (vii) each stock option to purchase a share or shares of
Common Stock outstanding immediately prior to consummation of the Merger that
is held by a current director, officer or employee of the Company or certain
persons with whom the Company has ongoing relationships (a "Current Management
Company Option") will be exchanged for an option to purchase the same number of
shares of common stock of Holdings on substantially the same terms and
conditions (a "Holdings Management Option").
The Board selected the Continuing Shareholders because of each of their
ongoing relationships with the Company. For a detailed discussion of the
process by which the Continuing Shareholders, Continuing Warrant Holders and
the holders of Current Management Company Options were selected, as well as the
identity of each of these persons or entities, see "Special Factors --
Background of the Merger -- Alternatives Considered."
Meeting and Proxy Information
A special meeting (together with any adjournment(s) thereof, the "Special
Meeting") of Shareholders will be held at __:__ _.m., Eastern Time, on
_____________, 1997, at _____________________________,
_____________________________, for the purposes of: (i) considering and voting
upon the Proposal to approve the Merger and (ii) transacting such other
business as may properly come before the Special Meeting.
Only Shareholders of record at the close of business on _________________,
1997 (the "Record Date") will be entitled to vote at the Special Meeting. As of
the Record Date, there were 9,137,798 issued and outstanding shares of Common
Stock held by approximately 3,400 Shareholders of record. Each Shareholder is
entitled to one vote in person or by proxy for each share of Common Stock held
by such Shareholder on the Proposal submitted to a vote of the Shareholders at
the Special Meeting. The Proposal will be approved if and only if it receives
the favorable vote of the majority of all shares of Common Stock outstanding on
the Record Date.
The Corporate Formation and the Merger
If the Merger is approved by the Shareholders, pursuant to the terms and
conditions of the Purchase Agreement, immediately prior to consummation of the
Merger, the Continuing Shareholders will participate in a transaction (the
"Corporate Formation") whereby each such Shareholder (i) shall exchange each
share of Common Stock owned by the Shareholder for one share of common stock of
Holdings and (ii) shall receive options to purchase a predetermined number of
shares of common stock of Holdings, the vesting of which is subject to the
achievement of certain performance objectives (the "Holdings Performance
Options"). In addition, Holdings shall issue Holdings Performance Options to
purchase a predetermined number of shares of common stock of Holdings to
certain persons (the "Other Option Holders"), and Holdings shall lend funds to
certain persons for the purchase of shares of common stock of Holdings (the
"Debtors"). See "Material Terms of the Purchase Agreement."
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<PAGE> 19
If the Merger is approved, then, subject to the terms and conditions of
the Agreement and Plan of Merger (the "Merger Agreement"), (i) Sub will be
merged with and into the Company when Articles of Merger are filed and recorded
with the Secretary of State of the State of Florida (the "Effective Time"), and
each share of Common Stock held by a Non-Continuing Shareholder (the "Other
Common Stock") will be converted into the right to receive the Merger Payment
of $0.50 in cash, without interest; (ii) the Other Common Stock will be
canceled; (iii) each share of common stock of Sub owned by Holdings will be
converted into the right to receive one share of Series A Common Stock, par
value $.001 per share, of the Surviving Company and one share of Series B
Common Stock, par value $.001 per share, of the Surviving Company; (iv) each
warrant to purchase a share or shares of Common Stock held immediately prior to
consummation of the Merger by a Continuing Warrant Holder will be exchanged for
a warrant to purchase the same number of shares of common stock of Holdings on
substantially the same terms and conditions; (v) each warrant to purchase a
share or shares of Common Stock held immediately prior to consummation of the
Merger by a Non-Continuing Warrant Holder will be converted into the right to
receive, upon the exercise of such warrant, a Merger Payment for each share of
Common Stock as to which the warrant is exercisable, upon payment of the
exercise price for each such share; (vi) each Former Management Company Option
outstanding immediately prior to consummation of the Merger will be converted
into the right to receive, upon the exercise of such option, a Merger Payment
for each share of Common Stock as to which the option is exercised, less the
exercise price for each such share; (vii) each Current Management Company
Option outstanding immediately prior to consummation of the Merger will be
exchanged for an option to receive a Holdings Management Option; (viii) the
Company will be the Surviving Company in the Merger, and Sub will cease to
exist as a result of the Merger; (ix) the articles of incorporation and by-laws
of Sub will be the articles of incorporation and by-laws of the Surviving
Company; and (x) the name of the Company shall be the name of the Surviving
Company.
Immediately after consummation of the Corporate Formation and the Private
Placement and the Effective Time, the Non-Continuing Shareholders will possess
no interest in, or rights as Shareholders of, the Company or Holdings, Holdings
will be owned by the Continuing Shareholders and the Childs Group, and the
Surviving Company will be a wholly owned subsidiary of Holdings.
The Board's purpose in proposing to the Shareholders the transactions
contemplated by the Proposal is to provide the Company greater flexibility in
structuring financing arrangements and additional sources of capital that will
enable it to operate efficiently, expand its business and improve its market
position, while providing fair treatment to the Non-Continuing Shareholders. In
addition, the Board believes that operating the Company as a private company
that does not include the Non-Continuing Shareholders will significantly reduce
or eliminate certain costs that currently are necessary to operate the Company.
The Board estimates that the annual savings for the Company due to the
reduction or elimination of these costs would be approximately $109,500. See
"Special Factors -- Purposes and Reasons for the Merger."
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<PAGE> 20
The Board expects that if the Proposal is not approved by the
Shareholders, or if the Merger is not consummated for any other reason, the
Board will continue to manage the Company as an ongoing business. In addition,
if the Proposal is not approved by the Shareholders, neither the Corporate
Formation nor the Private Placement will be consummated. See "Financing of the
Merger" and "Material Terms of the Purchase Agreement." No other transaction is
currently under consideration by the Company as an alternative to the Merger,
although the Company from time to time may explore other alternatives if the
Proposal is not approved.
Financing of the Merger
The Company has determined that approximately $2,577,154 in cash will be
required in order to make the Merger Payments to the Non-Continuing
Shareholders and that approximately $23,500 in cash will be required in order
to make payments to the Non-Continuing Warrant Holders and holders of Former
Management Company Options. The Company intends to use funds obtained from the
Private Placement to make the Merger Payments, as well as to provide the
Surviving Company with funds for working capital and the development of
additional billiard clubs. The Childs Group has no obligation to consummate the
Private Placement if the Proposal is not approved by the Shareholders. If the
Proposal is not approved by the Shareholders, the Company, at that time, will
assess whether it will seek to structure another transaction or continue to
retain the Placement Agent to raise funds for the Company. See "Financing of
the Merger" and "Material Terms of the Purchase Agreement." The respective
obligations of the Company, Holdings and Sub to consummate the Merger are
contingent upon, among other things, consummation of the Corporate Formation
and the Private Placement. See "Proposal to Approve the Merger -- Conditions to
the Merger." In the event that the Company does not consummate the Merger, it
will continue to conduct its operations as a public company.
Recommendation of the Board of Directors
The Board unanimously approved the Merger and recommends a vote FOR
approval of the Merger. The Board believes that the Merger, including the
process by which the Merger was decided upon and the Merger Payment, is fair
to, and in the best interest of, each Shareholder, including each
Non-Continuing Shareholder who is not a controlling person of the Company and
each Continuing Shareholder who is not a controlling person of the Company. In
reaching this conclusion, the Board considered a number of factors, including,
but not limited to, the following: (i) the preliminary opinion of Bannon
rendered to the Board that the Merger Payment of $0.50 per share of Common
Stocks is fair to the Non-Continuing Shareholders, as of October 2, 1995, (ii)
the opinion of Stonebridge rendered to the Board that the Merger
Payment of $0.50 per share of Common Stock is fair, from a financial point of
view, to the Non-Continuing Shareholders, as of April 22, 1997, (iii) the
Company's financial condition and operating losses, the market price of
the Common Stock and the trading market for the Common Stock, and the manner in
which these matters compared to those of certain other publicly traded
companies that Stonebridge used as a peer group to compare to the Company,
(iv) the performance by John L. Kidde, an independent director of the Company,
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<PAGE> 21
of the functions of a special committee of the Board, (v) the February 7, 1997
letter that the Company received from The NASDAQ SmallCap Market notifying the
Company that the Company had failed to satisfy the continued listing
requirement that its Common Stock maintain a closing inside bid price of at
least $1.00 per share for ten consecutive trading days, (vi) the Board's own
knowledge regarding the financial condition, results of operations and
projections of the Company for fiscal 1998, as well as current industry,
economic and market conditions, (vii) the Merger Payment in relation to current
market prices, historical market prices and purchase prices paid by members of
the Board and executive officers and other Shareholders owning more than five
percent of the issued and outstanding shares of Common Stock as of the Record
Date during the past two years, (viii) the effect that the Merger may have on
the liquidity of Holdings and the Surviving Company, and (ix) the desirability
of soliciting indications of interest in purchasing the Company or otherwise
purchasing the shares of Common Stock held by the Non-Continuing Shareholders.
See "Special Factors -- Board of Directors Determination of Fairness of the
Merger."
Holdings and Sub Determination of Fairness of the Merger
Holdings and Sub have each informed the Company that they each believe
that the Merger is fair to, and in the best interest of, each Shareholder,
including each Non-Continuing Shareholder who is not a controlling person of
the Company and each Continuing Shareholder who is not a controlling person of
the Company. In reaching this conclusion, Holdings and Sub each relied upon the
factors considered by the Board of Directors of the Company and the analysis of
Stonebridge. Holdings and Sub have each informed the Company that
they have each adopted the analyses of the Board of Directors of the Company
and Stonebridge as their own. See "Special Factors -- Board of
Directors Determination of Fairness of the Merger" and "-- Opinion of
Stonebridge."
Holdings has informed the Company that the Merger has been approved by its
board of directors, and Sub has informed the Company that the Merger has been
approved by its board of directors and stockholders.
Conflicts of Interest
Steven L. Foster, as Chief Executive Officer and Chairman of the Board of
the Company, is the only member of the Board and/or executive officer of the
Company that is a Continuing Shareholder. Mr. Foster, as an executive officer
and director of the Company and as a Continuing Shareholder, is a participant
on both sides of the proposed Merger because, upon consummation of the
Corporate Formation, he will be a shareholder in Holdings, which will wholly
own the Surviving Company, and he will own Holdings Management Options and
Holdings Performance Options. In addition, on ___________, 1997, Mr. Foster and
each of the other Continuing Shareholders, entered into a voting agreement with
Holdings and Childs whereby they agreed to vote the shares of Common Stock
owned by them in favor of the Proposal and to refrain from selling, assigning
or otherwise disposing of such shares (the "Voting Agreement").
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<PAGE> 22
Daniel M. Smith, President, Chief Operating Officer and a Director of the
Company, is also a participant on both sides of the proposed Merger because,
upon consummation of the Merger and related transactions, he will own Holdings
Management Options and Holdings Performance Options.
Further, it is a condition to consummation of the Merger that the
Continuing Shareholders, Holdings, the Childs Group, the Other Option Holders,
the holders of Current Management Company Options and the Debtors enter into a
stockholders agreement which would, among other things, place restrictions on
the transferability of shares of common stock of Holdings (the "Stockholders
Agreement"). In addition, it is a condition to consummation of the Merger that
(i) Mr. Foster, Mr. Smith and Stephen Weis, Vice President of Operations of the
Company, each enter into an employment/noncompetition agreement with the
Surviving Company (collectively, the "Employment/Noncompetition Agreements"),
(ii) Holdings lend Mr. Foster and designees $375,000 for the purchase of shares
of common stock of Holdings (the "Foster Loan"), and (iii) Holdings lend Kevin
Troy, a Shareholder and advisor to the Company, $50,000 (exclusive of any
amounts lent to Mr. Troy under the Foster Loan) for the purchase of shares of
common stock of Holdings. Except as described in this Proxy Statement, there
will be no other relationships that will continue between the Company or
Holdings and any persons who are officers, directors or Shareholders of the
Company.
Mr. Foster's and Mr. Smith's continuing interest in the Company presents
each of them with a conflict of interest in voting for the Proposal or
recommending that the Non-Continuing Shareholders vote for the Proposal. In
addition, each Continuing Shareholder, even if not a member of management or
employee of the Company, may have an interest in voting their shares of Common
Stock in favor of the Proposal because their interests in the Merger are not
the same as those of the Non-Continuing Shareholders. See "Special Factors --
Certain Effects of the Merger." There are seven Continuing Shareholders.
As of the Record Date, Mr. Foster held a total of 1,310,000 shares of
Common Stock (approximately 14.3 percent of the total shares of Common Stock
outstanding), the members of the Board and the executive officers of the
Company owned an aggregate of 1,327,250 shares of Common Stock (approximately
14.5 percent of the total shares of Common Stock outstanding), and Mr. Rubin, a
personal friend and business associate of Mr. Foster, held a total of 1,240,765
shares of Common Stock (approximately 13.6 percent of the total shares of
Common Stock outstanding). See "Security Ownership of Certain Beneficial Owners
and Management." If the Corporate Formation and the Merger are consummated,
immediately thereafter, Mr. Foster, as a Continuing Shareholder, will own a
total of __________ shares of common stock of Holdings (approximately ____
percent of the total shares of common stock of Holdings outstanding at the
Effective Time, assuming full conversion of the preferred stock of Holdings
issued in the Private Placement), and Mr. Rubin, as a Continuing Shareholder,
will own a total of __________ shares of common stock of Holdings
(approximately ____ percent of the total shares of common stock of Holdings
outstanding). In addition, Mr. Foster will own Holdings Management Options and
Holdings Performance Options to purchase an aggregate of _______ shares of
common stock of Holdings, and Mr. Rubin will own Holdings Management Options
and Holdings Performance Options, which he will receive in his
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<PAGE> 23
capacity as a Continuing Shareholder and as an Other Option Holder, to
purchase an aggregate of _______ shares of common stock of Holdings.
As of the Record Date, Mr. Smith did not own any shares of Common Stock.
See "Security Ownership of Certain Beneficial Owners and Management." If the
Corporate Formation and the Merger are consummated, immediately thereafter, Mr.
Smith will own Holdings Management Options and Holdings Performance Options to
purchase an aggregate of _______ shares of common stock of Holdings.
As of the Record Date, the seven Continuing Shareholders held an aggregate
of 3,983,490 shares of Common Stock (approximately 43.6 percent of the total
shares of Common Stock outstanding). If the Corporate Formation and the Merger
are consummated, immediately thereafter, the Continuing Shareholders will own
an aggregate of __________ shares of common stock of Holdings (approximately
____ percent of the total shares of common stock of Holdings outstanding at the
Effective Time, assuming full conversion of the preferred stock of Holdings
issued in the Private Placement).
Consummation of the Merger could have a positive effect on the liquidity
of Holdings and the Surviving Company. The Merger will not be consummated
unless the Private Placement is consummated. After deducting the Merger
Payments of approximately $2,577,154, an additional approximately $23,500 for
payments to Non-Continuing Warrant Holders and holders of Former Management
Company Options, expenses associated with consummation of the Merger of
approximately $__________ and expenses associated with consummation of the
Private Placement of approximately $_______, Holdings will have approximately
$__________ for the development of additional billiard clubs and working
capital. See "Financing of the Merger" and "Fees and Expenses." Such an
infusion of capital may enable Holdings to expand its business and improve its
profitability, which in turn would be likely to make Holdings more attractive
to potential investors. Consequently, consummation of the Merger may have an
indirect positive effect on the liquidity of Holdings and the Surviving
Company.
Certain Effects of the Merger
If the Merger is consummated, the Non-Continuing Shareholders will no
longer have an equity interest in the Company. Instead, each Non-Continuing
Shareholder will have the right to receive the Merger Payment of $0.50 per
share of Common Stock in cash. The Non-Continuing Shareholders will no longer
be subject to the inherent risks of investing in a company with a history of
poor performance, but will also be denied the opportunity to participate in any
future growth of the Surviving Company after the Effective Time. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Financial Condition."
The Continuing Shareholders, who include Steven L. Foster, Chief Executive
Officer and Chairman of the Board of the Company, and the holders of Holdings
Management Options and Holdings Performance Options, which include Mr. Foster
and Daniel M. Smith,
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<PAGE> 24
President, Chief Operating Officer and a Director of the Company, will have an
opportunity to share in the future results of operations of Holdings, which
will wholly own the Surviving Company, and to take advantage of any increase in
the value of Holdings assets if the Merger is consummated, but will also be
subject to the inherent risks of investing in a company with a history of poor
performance. There can be no assurance, that the value of these assets will
increase or as to whether there will be any future distributions by Holdings.
The Company has never declared a cash dividend. See "Market Information."
The Company, as a result of the Merger, will become an entity the
securities of which are privately held. The registration of the Common Stock
under the Exchange Act will terminate, resulting in the suspension of the
Company's obligations to file periodic reports such as Forms 10-KSB, 10-QSB and
8-K. Since the Common Stock will no longer be publicly held, the Company will
be relieved of the obligation to comply with the proxy rules of Regulation 14A
under Section 14 of the Exchange Act, and the executive officers and directors
of the Company and Shareholders owning more than 10 percent of the Common Stock
will be relieved of the reporting requirements and "short swing" trading
restrictions under Section 16 of the Exchange Act. In addition, the Common
Stock will be delisted from The NASDAQ SmallCap Market, which will terminate
the Company's public trading market and the Company no longer will be required
to comply with the rules and regulations relating to The NASDAQ SmallCap Market
listing.
Opinion of Stonebridge
The Board and Mr. Kidde retained Stonebridge primarily based on
Stonebridge's qualifications and experience for the limited purpose of
rendering an opinion, as investment bankers to the Board and Mr. Kidde, as to
the fairness, from a financial point of view, of the Merger Payment to the
Non-Continuing Shareholders. Stonebridge was not retained to market the
Company or solicit indications of interest from or negotiate with any party
with respect to the acquisition of any shares of Common Stock, and Stonebridge
did not market the Company or solicit indications of interest or negotiate with
any party with respect to the acquisition of any such shares in connection with
the rendering of its opinion.
Stonebridge rendered to the Board and Mr. Kidde on April 22, 1997 an oral
and written opinion to the effect that, as of the date of such opinion and
based upon and subject to certain assumptions, the Merger Payment was fair,
from a financial point of view, to the Non-Continuing Shareholders. The full
text of the written opinion of Stonebridge, dated April 22, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is included as Appendix B to this Proxy Statement and incorporated
herein by reference. The Non-Continuing Shareholders are urged to read that
opinion carefully in its entirety. The opinion is directed only to the
fairness of the Merger Payment to the Non-Continuing Shareholders from a
financial point of view and has been provided for the use of the Board in its
evaluation of the Merger and does not constitute a recommendation to any
Shareholder as to how such Shareholder should vote at the Special Meeting. The
summary of the opinion of Stonebridge set forth in this Proxy Statement is a
description of the material aspects of the opinion and is qualified in its
entirety by reference to the full text of such opinion.
Stonebridge is a private investment bank that specializes in providing
a broad range of corporate finance services to middle market and emerging
growth companies. Its primary areas of focus include mergers and acquisitions,
divestitures and private placements of debt and equity securities, as well as
related corporate advisory services such as fairness opinions, valuations and
restructurings and recapitalizations. Stonebridge, as part of these investment
banking services, is regularly engaged in the valuation of businesses and their
securities. Stonebridge is based in Boston, Massachusetts.
In rendering its opinion, Stonebridge took into account its assessment
of general economic, market, financial and other conditions, as well as its
experience in connection with similar transactions and securities evaluation,
generally. All material analysis undertaken by Stonebridge is described under
"Special Factors -- Opinion of Stonebridge." The opinion was necessarily based
upon conditions as they existed and could be evaluated as of the date of the
opinion. Stonebridge was not engaged to solicit, and did not solicit,
potential purchasers for the Company, and did not consider specific alternative
transactions involving the Company. For the purposes of rendering its opinion,
Stonebridge assumed that all conditions precedent to the consummation of the
Merger would be satisfied and accordingly expressed no opinion as to the
likelihood that the Merger would be consummated.
In connection with rendering its opinion, Stonebridge reviewed and
examined, among other items, the following: (i) a draft of the Merger Agreement
dated April 14, 1997, (ii) a draft of the Company's Proxy Statement, dated
April 18, 1997, to be furnished in connection with the solicitation of proxies
to approve the Merger, (iii) certain publicly available information concerning
the Company, including the Annual Reports on Form 10-K and proxy statements of
the Company for each of the fiscal years in the three-year period ended March
31, 1996, Quarterly Reports on Form 10-Q of the Company for the quarters ended
December 31, 1996, September 30, 1996 and June 30, 1996 and Form 8-K dated
March 13, 1997 and filed on March 17, 1997, (iv) monthly unaudited financial
statements of the Company for each of the eleven months ended February 28,
1997, (v) financial and operating information with respect to the business,
operations and prospects of the Company, (vi) certain internal business plans
and financial forecasts prepared by the management of the Company, and (vii)
certain publicly available information concerning other entertainment and theme
restaurant companies, the trading markets for such companies' securities and
the nature and terms of certain other merger and acquisition transactions that
Stonebridge believed to be relevant to its inquiry. See "Special Factors --
Opinion of Stonebridge." During the course of its review, Stonebridge met and
had discussions with the management of the Company concerning the Company's
business, operations, assets, liabilities, present financial condition, the
general condition and future prospects for the businesses in which it is
engaged and other matters which Stonebridge believed to be relevant.
In its review and examination and in arriving at its opinion,
Stonebridge assumed and relied upon, without independent verification, the
accuracy and completeness of the financial and other information that was
available to it from public sources, or that was provided to it by the Company
or its representatives. Stonebridge did not make, nor has it obtained, any
independent evaluation or appraisal of the assets or liabilities of the
Company. With respect to the financial forecasts, Stonebridge assumed that
they have been reasonably prepared on the bases reflecting the best currently
available estimates and judgments of the Company's management as to the future
operating and financial performance of the Company and that such forecasts will
be realized in the amounts and in the time periods currently estimated by the
Company's management. The opinion is necessarily based upon general economic,
market, financial and other conditions as they existed and could be evaluated
as of the date of the opinion.
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Material Federal Income Tax Consequences
The following is a summary of the income tax consequences associated with
the Corporate Formation and the Merger. The Corporate Formation will, in part,
consist of an exchange by the Continuing Shareholders of their Common Stock for
Holdings common stock and Holdings Performance Options. The Continuing
Shareholders' receipt of the Holdings common stock in the Corporate Formation
generally will not be subject to federal income tax, but their receipt of
Holdings Performance Options in the Corporate Formation may cause Continuing
Shareholders to recognize gain. A Continuing Shareholder generally will be
taxed on the lesser of (i) the fair market value of the Holdings Performance
Options received and (ii) the gain realized on the exchange in the Corporate
Formation. The gain realized on the exchange will be measured by the difference
between (i) the Continuing Shareholder's adjusted tax basis in the Common Stock
and (ii) the fair market value of the Holdings common stock and Holdings
Performance Options received by the Continuing Shareholder. Under no
circumstances will a Continuing Shareholder be able to recognize a loss
resulting from the Corporate Formation. See "Special Factors -- Material
Federal Income Tax Consequences -- Federal Income Tax Consequences for
Continuing Shareholders Resulting from the Corporate Formation."
As a result of the Merger, the Non-Continuing Shareholders will receive a
cash payment in exchange for all of their Common Stock (i.e., the Merger
Payment), resulting in taxable gain or loss to such Shareholders. This gain or
loss will be equal to the difference, if any, between (i) the Merger Payment
received by the Non-Continuing Shareholder and (ii) such Non-Continuing
Shareholder's adjusted tax basis in such Shareholder's shares of Common Stock
immediately prior to consummation of the Merger. See "Special Factors --
Material Federal Income Tax Consequences -- Federal Income Tax Consequences for
Non-Continuing Shareholders Resulting from the Merger."
Regulatory Requirements and Conditions
No federal or state regulatory approvals must be obtained in connection
with the Proposal. However, certain filings will be required to be made with
the Secretary of State of the State of Florida in order to effect the Merger.
Market Information
The Common Stock is traded in the over-the-counter market and is included
for quotation on The NASDAQ SmallCap Market under the symbol "QBAL." On
____________, 1997, the average of high and low bid prices of the Common Stock
was $____ per share. On _______, 1997, the last full day of trading for which
quotations were available at the time of printing of this Proxy Statement, the
average of the high and low bid prices of the Common Stock was $_____ per
share. Despite the fact that the Common Stock is quoted on The NASDAQ SmallCap
Market, there is currently only a limited trading market for the Common Stock.
See "Market Information."
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<PAGE> 26
Rights of Dissenting Shareholders
Any Shareholder objecting to the Proposal is not entitled to any statutory
rights of dissent or appraisal under Florida law or the Articles of
Incorporation or Bylaws of the Company.
VOTING AND PROXY INFORMATION
Record Date; Outstanding Shares; Voting
The Board of Directors (the "Board") of Jillian's Entertainment
Corporation, a Florida corporation (the "Company"), has fixed the close of
business on ___________, 1997 as the record date (the "Record Date") for
determination of shareholders of the Company (the "Shareholders") entitled to
receive notice of and to vote on a proposal (the "Proposal") to approve a
merger (the "Merger") by and between the Company and Jillian's Entertainment
Acquisition Corporation, a Florida corporation ("Sub") and a wholly owned
subsidiary of Jillian's Entertainment Holdings, Inc., a Delaware corporation
("Holdings"). Accordingly, only Shareholders of record at the close of business
on the Record Date will be entitled to vote at a special meeting (together with
any adjournment(s) thereof, the "Special Meeting") of Shareholders. Management
of the Company will not use any proxies voting against the Proposal to vote for
any adjournment of the Special Meeting pursuant to its discretionary authority.
The Merger will be effected subject to the terms and conditions of an
Agreement and Plan of Merger (the "Merger Agreement"), which are summarized in
this Proxy Statement. The Merger Agreement provides, among other matters, that
(i) Sub will be merged with and into the Company, and the Company shall be the
surviving company in the Merger (the "Surviving Company"), (ii) each share of
common stock of Sub owned immediately prior to consummation of the Merger will
be converted into the right to receive one share of Series A Common Stock, par
value $.001 per share, of the Surviving Company and one share of Series B
Common Stock, par value $.001 per share, of the Surviving Company, (iii) each
share of common stock, par value $.001 per share of the Company (the "Common
Stock") owned immediately prior to consummation of the Merger by any
Shareholder, other than a Continuing Shareholder, as defined below (any such
person being hereinafter referred to as a "Non-Continuing Shareholder"), will
be converted into the right to receive cash of $0.50 per share, without
interest (a "Merger Payment"), (iv) each warrant to purchase a share or shares
of Common Stock held immediately prior to consummation of the Merger by certain
persons with whom the Company has ongoing relationships (the "Continuing
Warrant Holders") will be exchanged for a warrant to purchase the same number
of shares of common stock of Holdings on substantially the same terms and
conditions, (v) each warrant to purchase a share or shares of Common Stock held
immediately prior to consummation of the Merger by any person other than a
Continuing Warrant Holder (a "Non-Continuing Warrant Holder") will be converted
into the right to receive, upon the exercise of such warrant, a Merger Payment
for each share of Common Stock as to which the warrant is exercised, upon
payment of the exercise price for each such share, (vi) each stock option
issued under the Company's Consolidated Stock Option Plan, 1994 Director,
Adviser and Key Employee Stock Option Plan and 1995
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<PAGE> 27
Director, Adviser and Key Employee Stock Option Plan (collectively, the "Stock
Option Plans") to purchase a share or shares of Common Stock outstanding
immediately prior to consummation of the Merger that is held by a former
director, officer or employee of the Company (a "Former Management Company
Option") will be converted into the right to receive, a Merger Payment for each
share of Common Stock as to which the option is exercisable, less the exercise
price for each such share, and (vii) each stock option under the Stock Option
Plans to purchase a share or shares of Common Stock outstanding immediately
prior to consummation of the Merger that is held by a current director, officer
or employee of the Company or certain persons with whom the Company has ongoing
relationships (a "Current Management Company Option") will be exchanged for an
option to purchase the same number of shares of common stock of Holdings on
substantially the same terms and conditions (a "Holdings Management Option").
If the Merger is approved by the Shareholders, immediately prior to
consummation of the Merger, certain Shareholders with whom the Company has
ongoing relationships (the "Continuing Shareholders") will participate in a
transaction (the "Corporate Formation") whereby each such Shareholder (i) shall
exchange each share of Common Stock owned by the Shareholder for one share of
common stock of Holdings and (ii) shall receive options to purchase a
predetermined number of shares of common stock of Holdings, the vesting of
which is subject to the achievement of certain performance objectives (the
"Holdings Performance Options"), pursuant to the terms and conditions of a
purchase agreement, dated _________, 1997, by and among the Company, Holdings,
J.W. Childs Equity Partners, L.P. ("Childs"), the representative of, and
attorney-in-fact for (the "Representative"), certain related persons or
entities of Childs (together with Childs, the "Childs Group"), the Continuing
Shareholders, the holders of Former Management Company Options, the holders of
Current Management Company Options, the Other Option Holders (as defined
below), the Continuing Warrant Holders and the Debtors (as defined below) (the
"Purchase Agreement"). See "Material Terms of the Purchase Agreement." In
addition, Holdings shall issue options to purchase a predetermined number of
shares of common stock of Holdings to certain persons (the "Other Option
Holders"), and Holdings shall lend funds to certain persons for the purchase of
shares of common stock of Holdings, including Steve L. Foster and Kevin Troy
(the "Debtors").
As of the Record Date, there were 9,137,798 issued and outstanding shares
of Common Stock held by approximately 3,400 Shareholders of record. As of the
Record Date, the members of the Board and the executive officers of the Company
owned an aggregate of 1,327,250 shares of Common Stock (approximately 14.5
percent of the total shares of Common Stock outstanding). Only one Continuing
Shareholder is a member of the Board and/or an executive officer of the
Company. Such Continuing Shareholder held a total of 1,310,000 shares of Common
Stock (approximately 14.3 percent of the total shares of Common Stock
outstanding) as of the Record Date and has, along with the other Continuing
Shareholders, entered into a voting agreement (the "Voting Agreement") with
Holdings and Childs under which he agreed, among other matters, to vote all
shares of Common Stock held by him FOR the Proposal. For additional information
concerning the beneficial ownership of shares of Common Stock, see "Security
Ownership of Certain Beneficial Owners and Management."
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<PAGE> 28
Each Shareholder is entitled to one vote in person or by proxy for each
share of Common Stock held by such Shareholder on the Proposal submitted to a
vote of the Shareholders at the Special Meeting. Votes cast in person or by
proxy at the Special Meeting will be tabulated by American Stock Transfer (the
"Transfer Agent"), who will determine whether a quorum is present. The Proposal
will be approved if and only if it receives the favorable vote of the majority
of all shares of Common Stock outstanding on the Record Date. The Transfer
Agent will treat abstentions as shares of Common Stock that are present and
entitled to vote for purposes of determining the approval of such matter. In
addition, if a broker submits a proxy indicating that it does not have
discretionary authority as to certain shares of Common Stock to vote on a
particular matter, those shares will not be treated as present and entitled to
vote for purposes of determining the approval of such matter, but will be
treated as present for purposes of determining whether a quorum is present at
the Special Meeting.
Proxy
The proxy set forth on the proxy card which is enclosed with this Proxy
Statement (the "Proxy") contains a space where each Shareholder may indicate
whether such Shareholder chooses to vote such Shareholder's shares of Common
Stock in favor of or against the Proposal or to abstain from voting. If the
Proxy is duly completed and returned to the Transfer Agent, the Proxy will be
voted in accordance with the instructions thereon. If a Shareholder returns the
Proxy duly executed, but does not indicate the manner in which the Proxy is to
be voted, the Proxy will be voted FOR the Proposal.
Revocability of Proxy
A Shareholder may revoke or amend the Shareholder's Proxy at any time
prior to the Proxy's exercise at the Special Meeting by executing a
subsequently dated Proxy or by filing a written request with _______________,
Secretary of the Company, at 727 Atlantic Avenue, Suite 600, Boston,
Massachusetts 02111, to revoke or amend the Proxy. The giving of a Proxy does
not preclude the right of a Shareholder to vote in person should the
Shareholder giving the Proxy attend the Special Meeting and choose to do so.
Solicitation of Proxies
This Proxy Statement is submitted, and Proxies are being solicited by, the
Board in support of the Proposal. The expense of solicitation of Proxies will
be borne by the Company. The Board and certain officers or other employees of
the Company may solicit proxies by telephone, telegram or personal interview or
may engage a third party to do so. The Board will request that custodians,
nominees and fiduciaries forward proxy materials to the beneficial owners of
shares of Common Stock, and the Company will reimburse such persons for
reasonable expenses incurred in connection therewith.
If you have any questions concerning this proxy solicitation or the
procedure to be followed to execute and deliver a Proxy, please contact
_______________ at 727 Atlantic Avenue, Suite 600, Boston, Massachusetts 02111
or by telephone at (617) 350-3111.
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<PAGE> 29
-------------------------
The principal executive offices of the Company are located at 727 Atlantic
Avenue, Suite 600, Boston, Massachusetts 02111, and the telephone number of the
Company at such address is (617) 350-3111. The principal executive offices of
Holdings are located at One Federal Street, 21st Floor, Boston, Massachusetts
02110, and the telephone number of Holdings at such address is (617) 753-1100.
SPECIAL FACTORS
Background of the Merger
General. The Board's decision to present the Proposal to the Shareholders
marked the culmination of a process that began in late 1994. The Merger is
subject to satisfaction of various conditions, including, but not limited to,
consummation of the Corporate Formation and the private placement (the "Private
Placement") of $12,000,000 of convertible preferred stock of Holdings (the
"Preferred Stock") with the Childs Group pursuant to the terms and conditions
of the Purchase Agreement. See "Financing of the Merger" and "Material Terms of
the Purchase Agreement." At that time, the Board determined that it might be
necessary to restructure the Company in order to create the potential for
improving the Company's ability to raise funds both for working capital and for
further expansion and development of its billiard club business in accordance
with its business plans. In the Board's view, the Company has an obligation to
use its best efforts to continue to increase the value of each Shareholder's
investment in the Company. Although the Board believed that the Company had
satisfied this objective in part, the Board determined that it could not
continue to fully satisfy this objective without further expansion of the
Company's operations and an increase in the number of clubs operating under the
Company's name. The Board recognized that since the Company began its upscale
billiard club business in 1990, the Company had experienced a net operating
loss in each year other than 1993, the Company had difficulty obtaining
financing for development of additional clubs and the Company had not been able
to take full advantage of its position as a public company through equity or
debt offerings of its securities or the securities of its subsidiaries. In
addition, the Board recognized that since mid-1993, the Common Stock had not
traded above approximately $1.06 per share. Management believes that no
analysts have followed the Common Stock since 1993, and the Common Stock has
not traded above $0.50 per share since March 16, 1995. See "Market
Information." As of the date of this Proxy Statement, each of these factors
continues to be true. In addition, on February 7, 1997, the Company was
notified by The NASDAQ SmallCap Market that the Company had failed to satisfy
the continued listing requirement that its Common Stock maintain a closing
inside bid price of at least $1.00 per share for ten consecutive trading days.
The NASDAQ SmallCap Market has indicated that it will commence delisting action
with respect to the Common Stock unless the Company is able to satisfy the bid
price requirement by May 7, 1997. As of the date of this Proxy Statement, the
Company does not believe that such requirement will be satisfied.
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<PAGE> 30
Since 1990, the Company's primary business has been the operation of
upscale billiard clubs. The Company, through wholly owned subsidiaries,
currently wholly or partially owns, operates and manages ten billiard clubs,
which are located in Miami, Florida; Seattle, Washington; Cleveland, Ohio;
Cleveland Heights, Ohio; Pasadena, California; Worcester, Massachusetts;
Champaign, Illinois; Annapolis, Maryland; Long Beach, California; and Tacoma,
Washington. The Cleveland Heights, Worcester, Champaign and Annapolis clubs are
owned by limited partnerships in which wholly owned subsidiaries of the Company
are the general partners, with 87 percent, 25 percent, 43 percent and 79
percent ownership interests, respectively. See "Business and Properties of the
Company."
The Company was one of the pioneers in the concept of upscale billiard
clubs. However, the billiard club business requires significant amounts of
cash, and the Company has not had sufficient cash to operate optimally or
expand its business in accordance with its business plans. As a result, the
Company was not able to develop billiard clubs quickly enough to attain a
dominant position in the upscale billiard club market prior to the entry of a
number of competitors operating single outlets or multiple units into this
market. In all but one year since it began its billiard club business in 1990,
the Company has experienced a net operating loss. During this same period, the
number of competitors in the upscale entertainment business that own multi-unit
entertainment facilities has increased, and a number of these competitors have
opened billiard clubs in areas where the Company otherwise might have
established clubs if it had been able to obtain sufficient capital to do so.
For example, Clicks Billiards, which dominates the Southwest and Southeast
upscale billiard club markets, has opened 26 billiard clubs in those regions;
Pinkies has opened 14 billiard clubs at sites in Arizona, Colorado, Nevada and
other Southwestern states; Boston Billiard Clubs has opened six billiard clubs
in the Northeast region; Fats Billiard Clubs has established five billiard
clubs in Southern California; and Champions Billiards has opened five billiard
clubs in the Washington, D.C. metropolitan area. Total Entertainment
Corporation has established twelve upscale billiard clubs primarily in the
South, including nine Bailey's billiard clubs in the Southeast and three Fox
and Hounds billiard clubs in Texas. Other competitors have opened larger clubs,
or entertainment centers, which offer diverse forms of entertainment, such as
billiards, electronic games, restaurant and bar services and nightclub-style
entertainment. For example, Dave & Busters, Inc., a public company based in
Dallas, Texas, operates ten entertainment centers throughout the United States,
and America Live operates a chain of three entertainment centers throughout the
United States. See "Business and Properties of the Company -- Description of
Business -- General."
Since it began its billiard club business, the Company has had difficulty
raising capital at the rate it believes would have been necessary either to
maximize or to benefit from its position as a pioneer in the industry. As
described in more detail below, during this period, the Company has had
difficulty obtaining bank financing, as well as equipment lease financing, and
when the Company has been able to obtain such financing, the Company's poor
financial condition generally has adversely affected its ability to obtain
financing on more favorable terms.
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<PAGE> 31
Bank and Equipment Lease Financing. The Company has attempted to obtain
loans in principal amounts of between $100,000 and $600,000 to be used as
working capital and for business expansion and development from at least 15
financial institutions during the past six years, including U.S. Trust Bank,
where Steven L. Foster, the Chief Executive Officer and Chairman of the Board
of the Company, maintains certain of his personal and other business accounts.
The Company sought a variety of structures for these loans (including secured
and unsecured lines of credit and term loans) in an effort to increase the
likelihood that the Company would obtain approval of one or more of these loan
requests. All but three of the Company's loan requests were denied because,
according to communications from such lending institutions to the Company, the
Company did not meet the lending criteria of the institutions. These lending
institutions also advised the Company that its poor financial condition and
lack of available collateral were the principal reasons for the credit denials.
Two of the loans that the Company was able to obtain came from Evergreen
National Bank, a Seattle bank in which the subsidiary of the Company that owns
the Seattle billiard club, Jillian's Billiard Club of Seattle, Inc. ("Jillian's
- - Seattle"), maintains an account. In 1994, Evergreen National Bank loaned
Jillian's - Seattle $200,000 for working capital. The loan, which matures in
May 1999 and bears interest at the rate of 9.5 percent, is collateralized by
all of the common stock of Jillian's - Seattle. In addition, the loan is
guaranteed by the Company. At the time of the loan, Jillian's - Seattle had
assets of approximately $860,000 and had generated annual cash flow in excess
of $320,000. At December 31, 1996, Jillian's - Seattle had assets and cash flow
of approximately $788,167 and $557,178, respectively. At December 31, 1996, the
Company was in compliance with its obligations under the loan, and the loan had
a principal balance of $112,772. The Company believes, based on the historical
operations of the Seattle club, that it will have sufficient working capital in
the future to make the scheduled loan payments. If the Company fails to make
the required loan payments, it could lose all ownership interest in the Seattle
club.
In December 1995, the subsidiary through which the Company owns the Tacoma
billiard club, Jillian's Billiard Club of Tacoma, Inc. ("Jillian's -Tacoma")
obtained a $300,000 loan from Evergreen National Bank to develop the Tacoma,
Washington billiard club. The loan, which matures in December 2000 and bears
interest at the rate of 9.5 percent, is collateralized by all of the assets of
Jillian's - Tacoma, and all of the common stock of Jillian's - Seattle. In
addition, the loan is guaranteed by the Company and Jillian's - Seattle. At
December 31, 1996, Jillian's - Tacoma had assets and cash flow of approximately
$2,029,844 and $471,114, respectively, and Jillian's - Seattle had assets and
cash flow of approximately $788,167 and $557,178, respectively, as mentioned
above. At December 31, 1996, the Company was in compliance with its obligations
under the loan, and the loan had a principal balance of $251,050. The Company
believes, based on the current operations of the Tacoma club, that it will have
sufficient working capital in the future to make the scheduled loan payments.
If the Company fails to make the required loan payments, it could effectively
lose all rights to continue the operations of the Tacoma club if Evergreen
National Bank becomes the owner of that club's assets and could lose all
ownership interest in the Seattle club.
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<PAGE> 32
The Company obtained the third loan from U.S. Trust Bank in August 1996.
The $250,000 loan, which matures in 1999 and bears interest at the rate of 1.5
percent above the prime rate, is collateralized by all of the assets of the
subsidiary through which the Company owns the Cleveland Billiard Club,
Jillian's Billiard Club of Cleveland, Inc. ("Jillian's - Cleveland"). In
addition, the loan is guaranteed by Kerry Breitbart, a Shareholder. In exchange
for this guarantee, the Company granted Mr. Breitbart an option to purchase
50,000 shares of Common Stock at the exercise price of $1.50 per share. At
December 31, 1996, Jillian's - Cleveland had assets and cash flow of
approximately $551,085 and $157,899, respectively. At December 31, 1996, the
Company was in compliance with its obligations under the loan, and the loan had
a principal balance of $222,222. The Company believes, based on the historical
performance of the Cleveland club, that it will have sufficient working capital
in the future to make the scheduled loan payments. If the Company fails to make
the required loan payments, it could effectively lose all rights to the assets
of the Cleveland club.
In addition, the Company had difficulty demonstrating that it was
creditworthy in connection with a First Union loan. The loan, originally in the
amount of $440,000 with United National Bank, was obtained in 1989 by an
unaffiliated trust to purchase 206,825 shares of Common Stock from a
Shareholder. At the time the loan was made, the Company had not begun its
billiard club business. In addition, at the time the loan was made, neither the
Company nor any of its affiliates had any prior relationship with the
unaffiliated trust. While no affiliate of the Company had any prior
relationship with the Shareholder at that time, the Company had engaged in
discussions, initiated by the Shareholder, with the Shareholder earlier in 1989
regarding the Shareholder's acquisition of additional shares of Common Stock,
the merger of the Company into one or more shell entities owned by the
Shareholder and the Shareholder's potential nomination to the Board. The
Company did not believe that any of the Shareholder's proposals were in the
best interest of the Company. Because the Company believed that the
Shareholder's continued equity interest in the Company would be disruptive to
the Company's business, in connection with the acquisition of the loan by the
unaffiliated trust, the Company entered into an agreement with the trust in
November 1989 whereby the Company agreed to repurchase the 206,825 shares of
Common Stock from the trust at $1.64 per share immediately upon the demand of
the trust (the "Put"). See "Financial Statements of the Company." When United
National Bank refused to renew the loan and First Union refinanced it in 1992,
the Company became a guarantor and a co-obligor of the loan in exchange for the
trust's agreement not to exercise the Put. In addition to First Union's
requirement that the trust use the 206,825 shares of Common Stock (which was
trading at over $1 per share at that time) as collateral for the loan, the Bank
required that the Company, in its capacity as co-obligor of the loan, provide
as cash collateral a $240,000 certificate of deposit. First Union required the
Company to maintain the certificate of deposit as collateral even after the
outstanding principal balance of the loan had been reduced to $262,500 at
December 31, 1994. In April 1995, $103,413 in net proceeds from the sale, at
$0.50 per share, of the 206,825 shares of Common Stock was used to pay down the
loan, and in June 1995, approximately $159,000 of the $240,000 certificate of
deposit was used to pay the remaining balance of the loan. See "Financial
Statements of the Company."
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<PAGE> 33
In addition to bank financing, the Company also has attempted to obtain
$10,000 to $300,000 in equipment financing from leasing companies during the
past six years. During this time, the Company submitted at least 30
applications for equipment financing to leasing companies, 11 of which were
accepted. The approximately 19 applications that were rejected were denied
because the Company had a history of poor performance and lacked available
collateral other than the equipment to be purchased.
The Company was successful in obtaining two equipment leases from Leasing
Technology, Inc. However, both of these leases resulted in the encumbrance of
the assets of one of its clubs and the stock of another one of its clubs.
Specifically, in March 1994, the Company financed with Leasing Technology, Inc.
certain equipment for, and leasehold improvements in, the Annapolis, Maryland
billiard club for $300,000 at an annual lease rate of 12 percent. The lease was
collateralized by all of the equity securities of the subsidiary through which
the Company owns the Kendall club, which is located in Miami, Florida,
Jillian's Billiard Club of Kendall, Inc. ("Jillian's - Kendall"), and all of
the assets of the subsidiary through which the Company owns the Annapolis
billiard club, Jillian's Billiard Club of Annapolis, Inc. ("Jillian's -
Annapolis"). At the time of the lease, Jillian's - Kendall had assets of
approximately $646,000 and was generating approximately $173,000 in cash flow,
and the Company projected that Jillian's - Annapolis would have $600,000 in
assets within three months after commencement of the loan. At December 31,
1996, Jillian's - Kendall had assets and cash flow of approximately $429,607
and $27,142, respectively, and Jillian's - Annapolis had assets and cash flow
of approximately $796,115 and $216,022, respectively. At December 31, 1996, the
Company was in compliance with its obligations under the lease, and $172,221
remained payable under the lease. The Company believes, based on the historical
operations of the Annapolis club, that it will have sufficient working capital
in the future to make the scheduled lease payments. If the Company fails to
make the required payments under the lease, it could lose all ownership
interest in the Kendall club and effectively lose all rights to continue the
operations of the Annapolis club if Leasing Technology, Inc. becomes the owner
of that club's assets.
The Company obtained the second equipment lease from Leasing Technology,
Inc. in December 1995 to finance certain equipment for, and leasehold
improvements in, the Tacoma, Washington billiard club for $300,000 at an annual
lease rate of 12.6 percent. The lease was collateralized by the equipment
purchased, as well as the equipment lease obtained from Leasing Technology,
Inc. to equip and develop the Annapolis club, which is described above. The
Company believes, based on the current operations of the Tacoma club, that it
will have sufficient working capital in the future to make the scheduled lease
payments. If the Company fails to make the required payments under the lease,
it could lose all ownership interest in the Kendall club and effectively lose
all rights to continue the operations of the Annapolis club if Leasing
Technology, Inc. becomes the owner of that club's assets.
The Company has obtained seven additional equipment leases totaling
approximately $350,000. The terms of the leases range from one to five years.
In addition, the leases bear interest at annual rates ranging from
approximately 11.25 to 18.2 percent.
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Shareholder Loans. The Company's inability to obtain funding from
financial institutions has necessitated that it obtain loans from Shareholders
and other persons affiliated with the Company. For example, in late 1995, the
Company obtained a one-year bridge loan in the aggregate amount of $280,000
from Kerry Breitbart, Steve and Karen Rubin, Island Partners, Ltd., Steven L.
Foster, Warren S. Berman and Justin N.N. Wilson to complete renovation of the
Tacoma billiard club. The loan bears interest at the rate of 25 percent. The
loan has since been extended and the balance of $315,000, consisting of the
$280,000 principal and $35,000 of interest accrued during the extension period,
will be due in June 1997. At December 31, 1996, the Company was in compliance
with its obligations under the loan. However, based on the Company's current
cash shortage, there can be no assurance that the Company will have sufficient
working capital in the future to pay the balance of the loan when it matures in
June 1997.
Also, in July 1996, the Company obtained a $300,000 loan from The Blind
Trust UDT 3/26/93, a Shareholder. The loan, which matures in August 1997 and
bears interest at the rate equal to the prime interest rate plus three
percentage points, is collateralized by the leasehold improvements, furniture,
fixtures and equipment of the Company, the subsidiary through which the Company
owns the Long Beach club, Jillian's Billiard Club of Long Beach, Inc.
("Jillian's - Long Beach"), and the subsidiary through which the Company owns
the Pasadena club, Jillian's Billiard Club of Pasadena, Inc. ("Jillian's -
Pasadena"). At December 31, 1996, the Company was in compliance with its
obligations under the loan. However, based on the Company's current cash
shortage, there can be no assurance that the Company will have sufficient
working capital in the future to pay the entire principal amount of the loan
when it matures in August 1997. If the Company fails to make the required loan
payment on the maturity date, it could effectively lose all interest in the
leasehold improvements, furniture, fixtures and equipment of the Company and
all interest in the Long Beach and Pasadena clubs.
Seller, Landlord and Municipal Financing. The Company has been able to
obtain seller, landlord or municipal financing to partially fund the
acquisition or construction of all of its billiard clubs. However, the Company
collateralized the financing with the assets or stock of all of the
subsidiaries through which the Company owns the clubs, leaving the Company with
reduced sources of collateral to obtain additional financing for working
capital and further expansion and development and risking the possibility that
the Company could lose its interests in these clubs. The seller, landlord
and/or municipal financing obtained by the Company to partially fund the
acquisition or construction of four of its billiard clubs is described below.
The City of Cleveland Heights, Ohio, loaned the Company $100,000 of the
approximately $650,000 necessary to construct and equip the Cleveland Heights
billiard club in 1991 as an incentive to enter into the lease in what such City
considered a "redevelopment urban area." The loan, which bears interest at a
rate of seven percent and matures in April 1998, is collateralized by the
assets of the subsidiary through which the Company owns the club, Jillian's
Billiard Club of Cleveland Heights, Inc. ("Jillian's - Cleveland Heights"). At
December 31, 1996, the Company was in compliance with its obligations under the
loan, and the loan had a principal balance of $69,618. The Company believes,
based on the historical operations of the Cleveland Heights club, that it will
have sufficient working capital in the future to
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make the scheduled loan payments. If the Company fails to make such payments,
it could effectively lose all rights to continue the operations of the
Cleveland Heights club if the City of Cleveland Heights becomes the owner of
the club's assets. The Company also attempted to raise $150,000 in June 1992
through the private placement of interests in the limited partnership,
Jillian's Billiard Club of Cleveland Heights Limited Partnership (the
"Cleveland Heights Limited Partnership"), in which Jillian's - Cleveland
Heights is the general partner and currently has an 87 percent ownership
interest. The Company raised only $22,500, out of the $150,000 that it
attempted to raise, from a single unaffiliated third party even though the
Company offered each investor, and the single investor accepted, an option to
sell the investor's partnership interest to the Company at a cash price equal
to the greater of the price paid for the investment or 500 percent of the
adjusted net income of the Cleveland Heights Limited Partnership for the 12
months ending December 31, 1995, multiplied by a fraction representing a
percentage interest in such Partnership's profits and losses of the investment
to be sold to the Company. The option was exercised in accordance with its
terms, within 60 days of the transmittal to the investor of the financial
statements of the Cleveland Heights Limited Partnership for the 12 months
ending December 31, 1995. The Company and the investor currently are
negotiating the terms by which the Company will purchase the interest of the
$22,500 investor. As of the date of this Proxy Statement, the Company believes
that it has sufficient cash flow to meet its obligation to purchase the
interest. The Company's failure to honor this commitment could result in a suit
by the investor to obtain the price, as well as the investor's cost and
expenses, including reasonable attorneys' fees. The Company financed the
remaining $527,500 needed to develop the Cleveland Heights club using $427,500
in cash generated from the Company's operations and the proceeds from a
$100,000 four-year convertible note, bearing interest at a rate of 12.5
percent, issued by the Company in February 1992 in favor of an unaffiliated
third party. On January 1, 1993, the third party exchanged the note for a 10
percent equity interest in the Cleveland Heights Limited Partnership.
In 1993, the Company paid $150,000 in cash and obtained the remaining
$175,000 of the $325,000 necessary to acquire an existing billiard club in
Pasadena, California, through a loan from the club's seller. The Company issued
the seller a three-year note collateralized by the assets of Jillian's -
Pasadena. The Company repaid the note in August 1996.
In 1994, the landlord of the Champaign, Illinois club loaned the Company
$150,000 of the $700,000 required to develop the Champaign club. The loan is
collateralized by the assets of the subsidiary through which the Company owns
the club, Jillian's Billiard Club of Champaign - Urbana, Inc. ("Jillian's -
Champaign"), bears interest at a rate of 10 percent, and matures in September
1999. At December 31, 1996, the Company was in compliance with its obligations
under the loan, and the loan had a principal balance of $89,196. The Company
believes, based on the historical operations of the Champaign club, that it
will have sufficient working capital in the future to make the scheduled loan
payments. If the Company fails to make such required payments, it could lose
all rights to continue the operations of the Champaign club if the landlord
becomes the owner of the club's assets. The landlord provided the financing
after the Company was able to raise an additional $425,000 through a 1994
private placement of interests in the limited partnership, Jillian's Billiard
Club of Champaign - Urbana, L.P. (the "Champaign Limited Partnership"), in
which Jillian's - Champaign is the
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general partner and currently has a 43 percent ownership interest. Of the
$425,000 raised, $365,000 in limited partnership interests in the Champaign
Limited Partnership were sold to unaffiliated third parties and $60,000 in such
interests were sold to existing Shareholders. The Company had attempted to
raise $525,000 through this offering and believed that the investment was
attractive because the Company, among other things, (i) guaranteed each
investor a 140 percent return on its investment within six years, (ii) offered
a buy-out in 1997 of each investor to be paid 15 percent in cash and 85 percent
in Common Stock, to be valued at the average of the bid and asked price of the
Common Stock during the 30 days prior to the transmittal to investors of the
financial statements of the Champaign Limited Partnership for the 12 months
ending December 31, 1996; provided, however, that if all investors sell their
partnership interests to the Company, the purchase price would be five times 50
percent of the net profits of such Partnership for the 12 months ending
December 31, 1996, and (iii) for a limited period of time, offered a demand
registration right requiring the Company to register such Common Stock after
the end of its 1997 fiscal year. The Company's obligation to buy out a
Champaign investor is contingent upon such investor's giving notice to the
Company, within 60 days of the transmittal to investors of the aforementioned
financial statements, of the investor's desire to sell its partnership interest
to the Company. There can be no assurance that the Company will have sufficient
cash flow to meet these guaranteed payment or buy-out obligations when they do
become due or when they become exercisable. The Company's failure to meet these
obligations could result in a suit by investors to obtain the guaranteed return
or buy-out rights. The Company financed the remaining $125,000 needed to
develop the Champaign club using cash generated from the Company's operations.
In 1995, the City of Long Beach, California, agreed to honor its
commitment to lend the Company $450,000 of the $1,500,000 necessary to
construct and equip the Long Beach billiard club in a "redevelopment urban
area" only after the Company agreed to use the assets of the subsidiary through
which the Company owns the club, Jillian's Billiard Club of Long Beach, Inc.
("Jillian's - Long Beach"), as well as the assets of Jillian's - Pasadena
(through a second lien), as collateral. The loan bears interest at a rate of
seven percent and matures in January 2006. As additional consideration for the
loan, the Company granted the City of Long Beach a warrant to receive 225,000
shares of Common Stock at an exercise price of $0.00 per share, with the
warrant exercisable solely by the City of Long Beach under the loan agreement
if the Company defaults on the loan. If the City of Long Beach exercises the
warrant and the market value of the Common Stock issued under the warrant is
less than the outstanding loan balance, the Company is required to continue to
issue additional shares of Common Stock until the total market value of the
Common Stock issued to the City of Long Beach is equal to the outstanding loan
balance. At December 31, 1996, the Company was in compliance with its
obligations under the loan, and the loan had a principal balance of $449,136.
The Company believes, based on the current operations of the Long Beach club,
that it will have sufficient working capital in the future to make the
scheduled loan payments. If the Company fails to make such payments, it could
effectively lose all rights to continue the operations of the Long Beach and
Pasadena clubs if the City of Long Beach becomes the owner of the assets of
both clubs. In addition, if the Company defaults on the loan, the warrant will
be exercisable, as described above. The Company financed the remaining
$1,050,000 needed to develop the Long Beach club using approximately $680,000
in cash generated from the Company's
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operations, a $250,000 landlord contribution and approximately $120,000 from
three equipment leases. The landlord took into consideration the $250,000
contribution when computing the annual lease payments. The landlord disbursed
the funds between January and May 1995 as the Company presented construction
bills to the landlord. The three equipment leases, which were obtained between
May and June 1995, bear interest at annual rates ranging from approximately 13
to 15 percent and have three- to five-year terms.
Equity and Debt Financing. Since it began its billiard club business, the
Company has made at least six attempts, as described below, in addition to the
Cleveland Heights and Champaign private placements described above, to raise
capital for expansion through private placements of equity and debt
instruments. Because of the dilutive effect that such issuances would have on
the value of the Common Stock in the hands of the existing Shareholders, the
Company has attempted to raise capital in this manner only as a last resort.
Despite its efforts, the Company has had only modest success in raising capital
through private placements of its Common Stock, of debt instruments or of the
equity interests in its subsidiaries. While the Company believed that its
guarantee of favorable returns and offering of early buy-outs would help
attract investors, it was advised during its discussions with potential
investors that such investors had no confidence that the Company could fulfill
its guarantees or buy-out responsibilities, based on the Company's history of
poor performance, and if the Company had insufficient assets or cash flow, it
would be doubtful that an investor with standing to sue would be provided with
the rights guaranteed the investor in the offering. First, during fiscal 1993,
in an effort to raise working capital and funds for expansion and development,
the Company offered Common Stock for sale through a private placement. The
Company sold 2,043,022 shares of Common Stock for approximately $874,000, net
of offering expenses and sales commissions. The Common Stock was placed for
between approximately $0.50 and $0.60 per share, the highest prices that the
Company was able to obtain in the private placement. While the Common Stock was
trading at approximately $1 per share at that time, the volume of trading of
the Common Stock was low, and there was only a limited trading market for the
Common Stock.
Second, the Company was also successful in raising the $850,000 it needed
to construct the Worcester, Massachusetts billiard club. In 1993, it sold 75
percent of the limited partnership interests in Jillian's Billiard Club of
Worcester Limited Partnership (the "Worcester Limited Partnership"). The
Company's wholly owned subsidiary, Jillian's Billiard Club of Worcester, Inc.
("Jillian's - Worcester"), is the general partner and currently has a 25
percent ownership interest in the Worcester Limited Partnership. The Company,
among other things, (i) guaranteed a 15 percent annual return on the Worcester
investment, (ii) offered a buy-out in 1999 of each investor to be paid 50
percent in cash and 50 percent in Common Stock, to be valued at 80 percent of
the average of the bid and asked price of the Common Stock during the 30 days
prior to the transmittal to investors of the financial statements of the
Worcester Limited Partnership for the 12 months ending December 31, 1998;
provided, however, that if all investors sell their partnership interests to
the Company, the purchase price would be five times 75 percent of the net
profits of such Partnership for the 12 months ending December 31, 1998, with a
maximum purchase price equal to 200 percent of capital invested, and (iii)
offered, for a limited period of time, a demand registration right requiring
the
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Company to register such Common Stock after the end of its 1999 fiscal
year. The Company's obligation to buy out a Worcester investor is contingent
upon such investor giving notice to the Company, within 60 days of the
transmittal to investors of the aforementioned financial statements, of the
investor's desire to sell its partnership interest to the Company. In addition,
the Company may elect to buy out Worcester investors for the same purchase
price described above if the Company gives such investors notice during the
same 60-day period. There can be no assurance that the Company will have
sufficient cash flow to meet these guaranteed payment or buy-out obligations
when they do become due or when they become exercisable. The Company's failure
to meet these obligations could result in a suit by investors to obtain the
guaranteed return, buy-out and/or the registration rights. In connection with
the consummation of the Merger and the Private Placement, Jillian's - Worcester
has entered into a purchase and sale agreement dated March 1, 1997 with each
investor in the Worcester Limited Partnership, pursuant to which Jillian's -
Worcester has agreed to purchase from each such investor their interest in the
partnership, along with limited partnership interests in Jillian's Vending
Limited Partnership (the "Vending Partnership") for a negotiated aggregate base
purchase price, to be paid in cash. The aggregate base purchase price assumes
(i) that the closing date for such buy-out occurs on March 25, 1997 and (ii)
that the investors of the Worcester Limited Partnership have received a payment
on account of such partnership's income (an "Income Payment") for the month of
February on or before March 25, 1997. In the event that the Income Payment for
February is not paid to the investors prior to March 25, 1997, the payment to
be made at the closing date will be proportionately increased. The 1997 buy-out
is contingent upon the Company completing a private placement financing to
raise net proceeds of at least $7,000,000 on or before December 31, 1997, with
the closing date for such buy-out to occur after the successful completion of
the Company's proposed private placement. In the event that the closing date
for such buy-out occurs after March 25, 1997 (the date on which the aggregate
base purchase price is based), and in the event that the Income Payment for
March 1997, and for any subsequent months, has been paid to the limited
partners of the Worcester Limited Partnership prior to the closing date, the
aggregate base purchase price, otherwise payable at the closing, will be
decreased in proportion to the amount of any such Income Payments. The
aggregate base purchase price also will be proportionately reduced by any
quarterly payments made to the limited partners of the Vending Partnership
beginning in March 1997. In addition, in the event that the closing date for
the buy-out occurs after March 25, 1997, the aggregate base purchase price will
be increased by an interest factor of seven percent per annum.
Third, the Company raised only $133,000 out of the approximately $700,000
that was necessary to develop and equip the Annapolis club in a private
placement between July and September 1994, even after offering, among other
things, (i) a 140 percent return of investment in Jillian's Billiard Club of
Annapolis Limited Partnership (the "Annapolis Limited Partnership") within six
years, (ii) a buy-out of each investor in 1998 to be paid 15 percent in cash
and 85 percent in Common Stock, to be valued at the average of the bid and
asked price of the Common Stock during the 30 days prior to the transmittal to
investors of the financial statements of the Annapolis Limited Partnership for
the 12 months ending December 31, 1997; provided, however, that if all
investors sell their partnership interests to the Company, the purchase price
would be four times 50 percent of the net income of such Partnership for the 12
months ending December 31, 1997, with a maximum purchase price equal to 100
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percent of capital invested, and (iii) for a limited period of time, a demand
registration right requiring the Company to register such Common Stock after
the end of its 1998 fiscal year. The Company's obligation to buy out an
Annapolis investor is contingent upon such investor giving notice to the
Company, within 60 days of the transmittal to investors of the aforementioned
financial statements, of the investor's desire to sell its partnership interest
to the Company. Existing Shareholders, including affiliates of the Company,
accounted for $83,000 of the funds raised through the Annapolis Limited
Partnership in which Jillian's - Annapolis is a general partner and currently
has a 79 percent ownership interest. Persons unaffiliated with the Company
accounted for the remaining $50,000 raised. There can be no assurance that the
Company will have sufficient cash flow to meet these guaranteed payment or
buy-out obligations when they do become due or when they become exercisable.
The Company's failure to meet any of its obligations with respect to the
investors in the Annapolis Limited Partnership could result in a suit by them
to obtain the guaranteed return, buy-out and/or registration rights. The
Company financed the remaining $567,000 needed to develop the Annapolis club
through equipment lease financing (see "Bank and Equipment Lease Financing"
above) and cash generated from the Company's operations.
The Company had virtually no success in its efforts to raise capital
through three additional private placements. Between 1993 and 1994, the Company
made two separate attempts to sell $2,000,000 in interests in JBC - USA Limited
Partnership by guaranteeing a 15 percent return on the investments and
favorable buy-out terms. The Company did not sell any interests in the limited
partnership during either attempt. Lastly, in 1994, the Company attempted to
privately place a $750,000 debt instrument guaranteed by the Company. The
Company raised only $185,000, $60,000 of which came from existing Shareholders.
The Company believes that it was unable to succeed in placing the debt
instrument because it had difficulty in convincing potential lenders that it
would be able to repay the loan.
While the Company has had modest success in raising capital through
private placements of its Common Stock and the equity interests in its
subsidiaries, it has not considered it practicable to attempt to raise capital
through public offerings of its equity or debt securities. Currently, there is
only a limited trading market for the Common Stock (see "Market Information")
and the Board believes that the Common Stock is not being followed by market
analysts because the Company has not received any communications from market
analysts in the past several years. The Company has made no attempt to get
analysts to follow the Common Stock or to retain an investment banking firm to
underwrite a public offering of the Common Stock because in light of the
Company's history of poor performance to date the Company believes that such
attempts would be unsuccessful. Further, the Board recognizes that the Company
has had an unusual history, in that its present involvement in the billiard
club industry is different from the purposes for which it was initially
incorporated. See "Business and Properties of the Company." Further, the
Company has not shown any strong earnings in the course of its operations in
the billiard club industry and is not in the best position to support
optimistic or dramatic market statements. In addition, since mid-1993, the
Common Stock has not traded above approximately $1.06 per share, and has not
traded above $0.50 per share since March 16, 1995.
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Although the Company has not attempted to retain an underwriter for a
public offering of its securities during the past several years, it received
advice from an investment banking firm as to a manner in which the Company
might raise capital. The investment banking firm did not, however, express an
interest in undertaking to underwrite any of the Company's securities when it
provided the advice. The advice was offered during a routine Board meeting in
1994 by Elliot Smith who at that time was a member of the Board and a principal
of Whale Securities, the investment banking firm that placed the Common Stock
in a public offering in 1987. The Company was advised by Mr. Smith, on behalf
of Whale Securities, that the Company could raise capital by reducing the
exercise prices of the then outstanding warrants to purchase approximately
627,000 shares of Common Stock to prices significantly below the then current
market value of the Common Stock and reducing the exercise period of the
warrants. The warrants were issued in public offerings in 1985 and 1987 and
their exercise prices range from $4.00 to $5.00 per share of Common Stock. At
the time Whale Securities made the suggestion, the Common Stock was trading for
approximately $1 per share. After considering such advice, the Board determined
that it was inadvisable to reduce the exercise price of the warrants because if
the warrants were exercised at the reduced exercise price, the value of the
Common Stock in the hands of the existing Shareholders would be diluted.
The Company has not given any consideration to raising capital through a
rights or other offering to the Shareholders or through the issuance of
preferred stock or other similar security carrying preferential rights, other
than the Private Placement.
As indicated above, because of their dilutive effect on the value of the
Common Stock in the hands of the existing Shareholders, the Company has been
reluctant to raise capital through private placements of equity securities or
through programs that reduce the exercise price and/or exercise period of
outstanding stock options or warrants to purchase shares of Common Stock.
However, on December 20, 1994, in an effort to raise capital in a short period
of time to complete the Long Beach billiard club, the Company reduced the
exercise price and exercise period of an aggregate of 1,105,000 outstanding
stock options issued under the Stock Option Plans. The Company reduced from
approximately $0.66 per share to $0.25 per share the exercise price of options
to purchase an aggregate of 520,000 shares of Common Stock, 400,000 of which
were held by Steven L. Foster, Chief Executive Officer and Chairman of the
Board of the Company, and the remaining 120,000 of which were held by Kevin
Troy, a Shareholder and advisor to the Company, and the Company reduced the
remaining exercise period of such options from nine years to 90 days. In
addition, the Company reduced from approximately $0.33 per share to $0.25 per
share the exercise price of options to purchase an aggregate of 585,000 shares
of Common Stock, 450,000 of which were held by Mr. Foster and the remaining
135,000 of which were held by Mr. Troy, and the Company reduced the remaining
exercise period of such options from nine years to 90 days. The market value of
the Common Stock was $0.50 per share on December 20, 1994. The options were
granted to Mr. Foster as part of his compensation for serving as an executive
officer of the Company and to Mr. Troy as compensation for serving as an
advisor to the Company. All of these options were exercised during the last
quarter of the Company's 1995 fiscal year. The Company reduced the exercise
price and the exercise period of the options at a time when continued
construction of the Long Beach club was in jeopardy because of insufficient
capital and the
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Company had exhausted all available resources for raising cash immediately. The
Company reduced the exercise price and the exercise period of the stock options
as a last resort to raise capital and has not reduced the exercise price or
exercise period of stock options or warrants held by an executive officer or
member of the Board in order to raise capital at any other time during the last
three years. By offering the reduced exercise price and exercise period only
for stock options held by controlling persons of the Company, the Company
eliminated the time and expense associated with putting the matter to a vote of
Shareholders and increased the likelihood that the reduced price and period in
fact would result in an exercise of the options and, therefore, in the desired
capital infusion.
Under the Stock Option Plans, the Company issues to its management from
time to time options to purchase shares of Common Stock as part of management's
compensation. Other than the exercise by Mr. Foster described above, no current
executive officer or member of the Board has exercised stock options since
February 1994. See "Market Information."
Current Effects of Borrowings and Equity Financing. Of the $3,680,465
borrowed by the Company since it began its billiard club business, an aggregate
of approximately $2,861,494 was outstanding as of December 31, 1996. This
amount, which is represented by twelve loans and nine leases, bears interest at
annual rates ranging from seven to 25 percent. The Company believes, based on
the historical and current operations of its clubs, that it will have
sufficient working capital in the future to make the scheduled payments with
respect to the foregoing indebtedness, except for the $280,000 and $300,000
Shareholder loans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." If the
Company fails to make the required payments on obligations secured by the
assets or stock of the subsidiaries through which the Company owns the relevant
clubs, the Company could lose its interests in these clubs as discussed above
under "Bank and Equipment Lease Financing" and "Seller, Landlord and Municipal
Financing." These obligations and contingent liabilities, as well as the
lenders' recourse in the event of the Company's default under the loans, will
continue in the Surviving Company if the Proposal is approved by the
Shareholders and the Merger is consummated unless such obligations are
refinanced. It is a condition to Holdings' and Sub's obligation to effect the
Merger that the Company refinance its existing debt. See "Proposal to Approve
the Merger -- Conditions to the Merger."
None of the Company's obligations to provide the guaranteed returns and
buy-outs associated with the Champaign, Worcester and Annapolis Limited
Partnerships has matured as of the date of this Proxy Statement. There can be
no assurance that the Company will have sufficient working capital in the
future to meet these obligations when they do mature or when they become
exercisable. The Company's failure to honor these commitments could result in
investor suits to obtain the guaranteed returns or buy-outs. All of these
obligations, as well as the investors' rights to sue in the event that the
Company fails to satisfy such obligations, will continue in the Surviving
Company if the Proposal is approved by the Shareholders and the Merger is
consummated. In addition, the Board believes that the existence of the
guaranteed returns, buy-outs and registration rights is itself depressing the
price of the Common Stock and inhibiting the Company's ability to raise capital
and will continue to have this effect, whether or not the Company is a "public
company" or a "private company," as long as
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these rights remain pending and unsatisfied. The Board's belief is based on the
fact that, at the present time, there is no reasonable prospect that the
Company will be able to satisfy its obligations relating to the guaranteed
returns or buy-outs. In addition, the Board has based its conclusion on the
fact that the Common Stock is an illiquid security that is experiencing a
decline in market value.
While the Company has raised approximately $3,255,465 in funds (excluding
landlord contributions) for working capital for the acquisition and/or
construction of its ten existing clubs, as described above, it has not raised
sufficient capital to enable it to expand in accordance with its business
plans. In addition, the site locations for most of the Company's clubs have in
large part been dictated by the availability of seller, landlord and municipal
financing. The Company has not been able to develop sites in other more
attractive areas where such financing has not been available. The Company's
reliance on this type of financing has resulted in the encumbrance of the
assets and/or stock of all of the subsidiaries through which it owns its
billiard clubs. All of the Company's assets are pledged as collateral. None of
the Company's assets are available for future or subordinate level pledges
without the consent of the primary lenders. The unavailability of such
collateral has, in turn, contributed to the Company's difficulty in obtaining
bank and equipment lease financing. Further, the Company's history of poor
performance has inhibited its ability to raise capital through the private
placement of its securities or the securities of its subsidiaries.
The Board believes that the Company's inability to raise capital has
significantly contributed to the fact that the Company has experienced net
losses for all but one of the past five years, and such lack of profit, in
turn, has prevented the Company from significantly improving its position in
the upscale billiard club market through expansion and development. Management
believes that there are a number of markets in which the Company could have
achieved market dominance or acquired a more substantial share of the market if
the Company had sufficient capital either to enter the market earlier or to
commence and expand its operations in that market at an earlier date. Because
the Company has instead had limited amounts of capital available, it has had to
expand the number of clubs that it operates slowly, and the construction of
those clubs has, in some cases, been delayed due to lack of funds at a
particular time. Such delays, in some instances, have required the Company to
pay rent prior to commencement of operations at those clubs, which resulted in
increased expense for the Company without any offsetting increase in operating
income. As a result, delays resulting in the payment of pre-opening rent have
had a direct impact on the costs associated with developing the clubs. The
Board believes that the value of the Common Stock also has been depressed due
to the Company's failure to achieve profitable operations on a continuing
basis. As a result, the Company's ability to raise capital through the public
or private sale of its Common Stock or other equity securities has been
limited.
By late 1994, for the reasons discussed above, the Board believed that it
was no longer prudent for the Company to continue to seek short-term financing
on terms that could not be considered favorable to the Company due to the
anticipated difficulty of repaying such loans as a result of the Company's slow
or nonexistent growth in assets and income and the increasing level of
competition from better capitalized entities. The terms of any financing
available
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to the Company at that time and at the present time was and continues to be
such that the Company's acceptance of financing on such terms would place the
Company at a competitive disadvantage in terms of its debt obligations and
available capital. At a Board meeting held on December 20, 1994, the Board
determined that it might be appropriate for the Company to consider eliminating
its status as a "public company," in part because, as a "private company," the
Company could reduce certain costs associated with complying with the federal
securities laws. The Company estimates that this cost savings would be
approximately $109,500 per year. In addition, the Company's status as a private
company could cause the Company to be more attractive to the types of
well-capitalized and sophisticated investors that are willing to invest
substantial amounts of capital in an enterprise. In the experience of certain
members of the Board, investors generally are not willing to commit significant
amounts of capital to an enterprise that, like the Company, does not have a
history of profitable operations unless the number of shareholders is
relatively small and composed primarily of individuals who either are actively
involved in the operations of the Company or are family members of such
persons. Further, management of the Company believes that the additional
disclosure obligations of a public company under the federal securities laws
regarding company operations, stock ownership and compensation of, or payments
to, persons with a significant investment in the company are often unacceptable
to investors that are considering a substantial investment in such a company.
The Board believes that the Company could be an attractive investment, even at
this time, because the infusion of additional capital would enable the Company
to expand its business and thereby increase the likelihood that the Company
will become profitable, due in part to the Company's ability, as a larger
company, to achieve economies of scale. However, a substantial investment in a
company, such as the Company, that does not have a history of profitable
operations, but whose prior operating history and relative position in its
markets indicate that a significant infusion of capital could produce
profitable operating results on a consistent basis in the future, may be more
likely to prove profitable (and, therefore, may be more attractive to a
potential investor) if the company is a private company.
At the request of the Board, Mr. Foster agreed to explore the feasibility
and potential benefits of causing the Company to become a private company.
At a meeting on January 23, 1995, the Board specifically considered
eliminating the Company's status as a public company. The Board believes that
the elimination of the Company's status as a publicly held company would
provide the Company with greater flexibility in structuring financing
arrangements and attracting additional potential sources of capital. For
example, the Board believes that, as a private company, the Company might be
better able to attract investors that are willing to invest significant amounts
in the Company for the reasons discussed above. In addition, this change in the
Company's status would allow the Company to reduce or eliminate certain costs
associated with its status as a public company. Such costs include those
incurred to pay the Transfer Agent (approximately $6,000 per year); those
required to communicate with the approximately 3,400 Shareholders
(approximately $28,500 per year); and those required to make the necessary
filings with, and otherwise comply with the regulations of, the Securities and
Exchange Commission (the "Commission") and The NASDAQ SmallCap Market,
including legal fees and expenses (approximately $75,000 per year). The Board
estimates that the annual savings for the Company due to the reduction or
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elimination of these costs would be approximately $109,500. See "Purposes and
Reasons for the Merger," below.
At the January 23, 1995 Board meeting, Mr. Foster recommended that the
Company retain Bannon & Co., Inc. ("Bannon") to evaluate the Company in
connection with the Company's consideration of becoming a private company
because of Bannon's experience with entertainment entities and its reasonable
quoted fees. Mr. Foster became aware of the financial services provided by
Bannon through Douglas M. Suliman, Jr., an agent of Hampshire Securities
Corporation (the "Placement Agent"). For a discussion of how Mr. Foster became
acquainted with Mr. Suliman, see "Alternatives Considered," below. Mr. Foster
then presented to the Board information regarding the qualifications and fees
of Bannon, which Mr. Foster had obtained by contacting Bannon directly, at the
suggestion of Mr. Suliman. Mr. Foster had no prior contact or relationship with
Bannon before he contacted Bannon to obtain such information. Upon Mr. Foster's
request for additional valuation experts, John L. Kidde suggested that the
Board consider Brown, Brothers, Harriman & Co. and Layne Weggeland. The Board
authorized Mr. Foster to obtain information regarding the qualifications and
fees of these two valuation experts and to select, in consultation with the
other directors as appropriate, the most suitable of the three experts to
present an opinion to the Board. The Board also authorized the Company to pay
all reasonable fees and expenses incurred by the expert selected in connection
with the engagement. The Board did not establish any parameters with respect to
the fees to be incurred by the expert.
Each of the two experts referred to the Board by Mr. Kidde advised Mr.
Foster that the firm would be unable to undertake the engagement, without
offering any specific reason for that decision. Although Mr. Foster contacted
certain other experts in the industry who were recommended by the two experts
originally referred by Mr. Kidde, these individuals or organizations were, in
the opinion of Mr. Foster, understaffed or had relatively insufficient
experience to complete the evaluation properly. Consequently, in March 1995,
Mr. Foster engaged Bannon to undertake a study to enable it to render a
preliminary opinion with respect to the Merger Payment as an independent third
party and present a preliminary fairness opinion to the Board. Except as
described above, there were no contacts between Bannon and the Company and its
affiliates regarding the hiring of Bannon to present a preliminary fairness
opinion to the Board. See "Special Factors -- Preliminary Opinion of Bannon."
Alternatives Considered. After Mr. Foster selected Bannon, the Board began
an analysis of methods of structuring a transaction that would have the effect
of eliminating the Company's status as a publicly held company while maximizing
Shareholder value. At meetings held on April 4, and October 2, 1995, the Board
considered continuing to operate the Company with the current capital structure
as a public company. The Board rejected this alternative primarily because of
the Company's history of poor performance and the Board's belief that the
Company's status as a private company would reduce certain expenses associated
with its current public status and provide the Company with greater flexibility
in structuring financing arrangements and additional potential sources of
capital. Because the Board believes that reducing such expenses and obtaining
financing will increase the likelihood that the
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Company's performance will improve and the value of the Common Stock will
increase, the Board determined that it would be imprudent to sell the Company
at this time.
In addition, the Company has received only one bid in the last three
years. On August 11, 1994, the Company received an unsolicited letter via
facsimile from On Cue Limited ("On Cue") in which On Cue merely indicated (i)
that it operated four billiard club restaurants in Canada, (ii) that its shares
were listed on NASDAQ and (iii) that it proposed to exchange shares of Common
Stock for shares of On Cue in a transaction that, prior to expenses and based
on the then-trading value of the common stock of On Cue, would have had a value
of approximately $1.25 per share. Immediately thereafter, in an effort to
evaluate the relative merits of the proposal, Mr. Foster, on behalf of the
Company, contacted On Cue and requested copies of recent financial statements
of On Cue, as well as any other documents that On Cue had available that would
provide the Company information about On Cue's business, with which the Company
had no familiarity. On September 13, 1994, Mr. Foster sent On Cue a brochure
describing the Company's business. In addition, Mr. Foster asked an employee of
the Company to contact the Commission and NASDAQ to ascertain whether any
securities of On Cue were registered or listed thereon. The employee learned
that no securities of On Cue had ever been registered with the Commission or
listed on NASDAQ. Despite additional calls placed by Mr. Foster during the next
few weeks to follow up with On Cue with respect to the proposal, On Cue has
never responded to the Company's inquiries. The Company has no knowledge of any
reason or reasons for On Cue's failure to provide the information that Mr.
Foster requested and failure to contact the Company to discuss the proposal
further.
Although the Board has not solicited bids for the sale of the Company's
assets during the past two years nor received any other bids during this time,
the Board believes that the Company has little resale value because of the
nature of the Company's assets, which are primarily comprised of leasehold
interests in the billiard clubs that the Company operates, as well as equipment
and furniture. These clubs are not readily convertible to other uses, and
without an agreement by the Company or the managers of the clubs to continue
operating these clubs, the clubs, the leasehold interests and the equipment and
furniture held by the Company have relatively low resale value even if sold to
a competitor of the Company that would take over operations of the clubs. In
particular, the Board believes that a sale of the Company's assets, with the
accompanying expenses, would be unlikely to result in a net distribution to
Shareholders of an amount as great as the Merger Payment. For these reasons,
the Board believes that it can structure a transaction likely to yield greater
distributions to the Shareholders than any distributions they would receive if
the Company were sold. The Board's view on this matter took into account the
Company's receipt of the unsolicited share exchange proposal from On Cue. The
Company never received any information from On Cue to enable the Company to
evaluate the relative merits of the proposal, including the basis for On Cue's
determination of the exchange value of $1.25 per share, and the Company was
unable to locate any information about On Cue through its own investigations.
In addition, On Cue failed to respond to Mr. Foster's efforts to discuss the
proposal. Consequently, because On Cue took no affirmative steps after it sent
the initial letter to the Company to indicate that it was serious about
engaging in a transaction with the Company, the Board believes
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that it is inadvisable to consider the proposal an indication of the Company's
resale value or that the Company's consummation of a transaction with On Cue
would have resulted in greater distributions to the Shareholders than the
Merger Payment. In fact, the Company's experience with On Cue (in which the
entity initiating a bid on an unsolicited basis lacked the interest necessary
to pursue the matter) led the Board to conclude that it was likely to be
unproductive to invest Company resources in seeking additional bids for the
Company in order to assist the Board in determining the Company's value. Even
if the Company had obtained one or more additional bids for the Company, it
would be necessary for the Board to assess the likelihood that any particular
bid could result in a sale of the Company on terms acceptable to all parties in
order to utilize the bids as a measure of the value of the Company.
At the meeting held on April 4, 1995, the Board made an informal, initial
determination that Shareholders should be paid approximately $0.50 per share in
any transaction that the Board structured that would have the effect of
eliminating the Company's status as a publicly held company. For a discussion
of the Board's determination of this distribution amount, see "Payments to the
Non-Continuing Shareholders," below.
In light of the Board's belief that it is not in the best interests of the
Company and the Shareholders to sell the Company at this time, the Board
considered transactions at the meeting held on October 2, 1995 that could have
the effect of taking the Company private, but would retain the interest in the
Company or any successor to the Company of certain Shareholders. The Board
considered (i) a tender offer by the Company, (ii) a tender offer by the
Company and a subsequent merger of the Company into a newly formed company to
eliminate any non-tendering Shareholders that the Company did not want to have
a continuing interest in the Company, and (iii) a merger of the Company into a
newly formed corporation organized for that purpose.
The Board rejected the first alternative as impractical because there
could be no assurance that any Shareholders would elect to tender their Common
Stock to the Company. Further, in light of its recent difficulty in obtaining
financing from financial institutions and other sources, it was unlikely that
the Company could obtain financing sufficient to acquire all of the tendered
Common Stock. Because the Board had determined that it was in the best interest
of the Company and the Shareholders for the Company to become a private company
not subject to the provisions of the federal securities laws and regulations
relating to the operation of public entities, the Board did not believe that it
was advisable or in the interest of the Shareholders to undertake a transaction
in which the Company would incur significant expense but would have no
assurance that, even if a majority of the Shareholders supported the
transaction by tendering their Common Stock to the Company, the transaction
would accomplish its purpose. If the transaction were not sufficient to enable
the Company to become a private company, the Company would have incurred the
expense associated with a transaction of this type but would be required to
continue to incur additional expenses to satisfy the additional recordkeeping
requirements associated with operating the Company as a public company that is
subject to the provisions of the federal securities laws and regulations
relating to the operation of public entities. The second alternative was
rejected because, while it could terminate the interests of all Shareholders in
the Company, it would be a protracted and costly process. After
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reviewing these alternatives, the Board unanimously determined that a merger
would be the most efficient method for taking the Company private and paying
some Shareholders a fair price for their interests in the Company, as well as
retaining the interests of certain other Shareholders in the Company or a
successor to the Company.
At the October 2, 1995 meeting, the Board initially determined that
Shareholders that beneficially own at least 101,000 shares of Common Stock
should receive shares of common stock of the surviving corporation in the
merger so that the merger would satisfy one of the requirements necessary for
the merger to have no federal income tax consequences to the Company. One of
the conditions for such tax-free treatment is that after the merger, the
Shareholders, as a group, maintain a significant continuing equity interest in
the surviving company. The Board was advised by its tax advisor, Shaw, Pittman,
Potts & Trowbridge, that this continuity requirement would be satisfied if
Shareholders, as a group, receive shares of common stock in the surviving
company in the merger with a value equal to at least 48 percent of the value of
the Common Stock surrendered in the merger. After reviewing the Company's
Shareholder records, the Board determined that it could satisfy this
requirement if it set a 101,000-share threshold for those receiving shares of
common stock of the surviving corporation in the merger. However, despite this
continuity requirement, the Board decided to also give Shareholders that
beneficially own at least 101,000 shares of Common Stock the option to
liquidate their investment in the Company in the merger. The Board decided that
certain employees should receive shares of common stock in the surviving
company because it would satisfy one of the requirements necessary for the
merger to have no federal income tax consequences to the Company and,
therefore, would make it more attractive to a potential investor that could
supply the funds required to pay the Shareholders whose investment in the
Company would be liquidated in the merger. The Board also determined that
unexercised warrants and options should be aggregated with shares of Common
Stock held by an employee in determining whether or not the employee would
continue as a shareholder in the surviving company because the options and
warrants held by Company employees had primarily been granted to the employees
as additional compensation or bonuses for their services. For this reason, and
because certain of the options and warrants were not exercisable at the time of
the Board's deliberations on this matter, the Board determined that it was
appropriate, and consistent with the compensation associated with the granting
of such options and warrants, to include such options and warrants in
determining the number of shares held by the employee for purposes of
determining whether the employee would continue as a shareholder in the
surviving company. A total of twelve Shareholders either beneficially owned at
least 101,000 shares of Common Stock or could have owned 101,000 shares of
Common Stock when their unexecuted warrants and options were aggregated with
the shares of Common Stock owned by them as set forth above when the Board
considered this matter.
At the meeting held on October 2, 1995, the Board also discussed potential
sources of financing for the merger. At the suggestion of Mr. Foster, the Board
authorized the Company to retain Island Partners, Ltd. ("Island") to structure
a transaction designed to raise funds to be used for the consideration to be
paid in the merger. Mr. Foster was introduced to Douglas M. Suliman, Jr. of
Island over two years ago by a mutual friend who works in the entertainment
industry in Boston, Massachusetts. After this introduction, Mr. Foster had
meetings with Mr.
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Suliman to discuss his experience in raising capital, particularly his success
in raising funds for an entity in the restaurant industry. Mr. Foster then
contacted two of Mr. Suliman's references, each of whom confirmed that Mr.
Suliman had been successful in his capital raising efforts. Based on Mr.
Suliman's qualifications, Mr. Foster recommended to the Board that the Company
hire Island to assist the Company with the Company's efforts to raise funds.
Mr. Foster had no prior contact or relationship with Mr. Suliman or Island
prior to the initial introduction over two years ago.
In March 1996, Mr. Suliman became an agent of Hampshire Securities
Corporation (i.e., the Placement Agent). On April 29, 1996, the Board
authorized the Company to retain Hampshire Securities Corporation, a New York
corporation that specializes in underwriting private placements of debt and
equity and public offerings of small and medium-sized companies and providing
such companies with business valuations and strategic advice on non-recurring
transactions such as mergers and acquisitions and restructurings, to structure
a merger transaction designed to raise $6,000,000 to $12,000,000 in gross
proceeds to be used for the Merger Payments, working capital and the
development of additional billiard clubs. The Board had initially authorized
the Company to retain Island because of the experience and success of Mr.
Suliman, one of its principals, particularly his success in raising capital for
an entity in the restaurant industry. Once Mr. Suliman became affiliated with
the Placement Agent, which has had success in raising capital for small and
medium-sized companies in the entertainment/leisure industry, the Board
believed that it was advisable to retain the Placement Agent. The Company had
no prior contact or relationship with the Placement Agent before the Company
retained the Placement Agent on May 23, 1996. The Company's prior contacts with
Mr. Suliman are discussed above. See "Financing of the Merger."
At the meeting on October 2, 1995, Bannon presented its preliminary
fairness opinion to the Board. See "Preliminary Opinion of Bannon," below.
In its consideration of the timing and structure of the merger at the
October 2, 1995 meeting, the Board reviewed the Company's guaranteed return,
buy-out and registration rights obligations undertaken in connection with the
private placement of the securities of certain of its subsidiaries to determine
what impact, if any, the merger would have on such obligations. See "Current
Effects of Borrowings and Equity Financing," above and "Financial Statements of
the Company." The Board determined that all of the obligations that the Company
undertook in connection with these private placements would continue in the
surviving company if the merger were consummated regardless of the fact that
the surviving company would not be a public company. However, the investors in
the private placements would be unable to effectively exercise their
registration rights without the Company's re-registration of its securities
under the federal securities laws (which the Company has no present intention
of doing) because the Common Stock would be deregistered under the Exchange Act
and delisted from The NASDAQ SmallCap Market under the terms of the merger. The
inability of investors to effectively exercise their registration rights and/or
the loss of their expectation to have rights or interests in a public company
could result in a suit by any of them against the surviving company.
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The Placement Agent commenced an offering of preferred stock of Holdings
on June 13, 1996 by mailing a private placement memorandum dated June 10, 1996
(the "Private Placement Memo") to a total of 20 institutional investors. Eight
of these institutional investors declined an interest in the private placement
without a meeting. Meetings were held with twelve of the prospective investors.
The Company's management made presentations at six of these meetings, and the
Placement Agent met alone with six prospective investors. Of the twelve that
met with the Company and/or the Placement Agent, six declined an interest in
the private placement, and the remaining six engaged in further discussions
with the Placement Agent from June 1996 to March 1997, among which was Childs.
The Childs Group expressed an interest to invest $12,000,000 in Holdings. No
other single prospective investor or group of prospective investors was willing
to invest $12,000,000 in Holdings.
The Board of Directors held a meeting on March 11, 1997 to authorize the
Company to enter into a non-binding letter of intent with Childs whereby the
parties proposed the Merger, the Corporate Formation and the Private Placement.
In addition, the Board of Directors authorized John L. Kidde, who is an
independent director of the Company, to perform the functions of a special
committee of the Board, including the negotiation of the Merger Agreement, the
Purchase Agreement and other related agreements with the Childs Group, and the
coordination of the relationship between the Company and Bannon and any other
financial advisor or analyst that the Company might engage. Mr. Kidde was
designated to serve this function to protect the interests of those persons
unaffiliated with the Company. The Board also discussed its belief that the
Merger Payment continued to be a fair price in view of the February 7, 1997
letter that the Company received from The NASDAQ SmallCap Market notifying the
Company that the Company had failed to satisfy the continued listing
requirement that its Common Stock maintain a closing inside bid price of at
least $1.00 per share for ten consecutive trading days, and the Company's
continued poor financial performance. See "Special Factors -- Background of the
Merger -- General" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
On March 31, 1997, the Board of Directors authorized Mr. Kidde to engage
Stonebridge Associates, LLC ("Stonebridge") to render an opinion to the Board
as to the fairness, from a financial point of view, of the consideration to be
received by the Non-Continuing Shareholders in the Merger. See "Special Factors
- -- Opinion of Stonebridge." The Company and Bannon anticipated that the Company
would engage Bannon to render a final opinion immediately prior to the mailing
of this Proxy Statement to the Shareholders. When the Company contacted Bannon
in March 1997 to discuss the terms under which Bannon would render the final
opinion, the Company learned that Bannon had become affiliated with another
entity. As a result of that affiliation and the lapse of time, Bannon indicated
that it would be unable to render the final opinion within the price range that
the Company and Bannon had discussed when Bannon was originally engaged in
March 1995. Consequently, the Company decided to engage Stonebridge.
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In February 1996, the Placement Agent introduced Childs to the Company.
Childs has made a commitment to purchase $12,000,000 of Preferred Stock in the
Private Placement, pursuant to the terms and conditions of the Purchase
Agreement. If the Merger is approved by the Shareholders, subject to the terms
and conditions of the Purchase Agreement, the Private Placement will be
consummated immediately prior to consummation of the Merger. See "Financing of
the Merger."
The Board, after consultation with the Placement Agent and after
consultation and negotiation with Childs, has structured the Merger as proposed
herein so that (i) Sub will be merged with and into the Company, and the
Company will be the Surviving Company in the Merger; (ii) each share of Common
Stock held by Non-Continuing Shareholders will be converted into the right to
receive the Merger Payment of $0.50 in cash, without interest; (iii) each share
of common stock of Sub owned by Holdings will be converted into the right to
receive one share of Series A Common Stock, par value $.001 per share, of the
Surviving Company and one share of Series B Common Stock, par value $.001 per
share, of the Surviving Company; (iv) each warrant to purchase a share or
shares of Common Stock held immediately prior to consummation of the Merger by
a Continuing Warrant Holder will be exchanged for a warrant to purchase the
same number of shares of common stock of Holdings on substantially the same
terms and conditions; (v) each warrant to purchase a share or shares of Common
Stock held immediately prior to consummation of the Merger by a Non-Continuing
Warrant Holder will be converted into the right to receive, upon the exercise
of such warrant, a Merger Payment for each share of Common Stock as to which
the warrant is exercisable, upon payment of the exercise price for each
such share; (vi) each Former Management Company Option outstanding immediately
prior to consummation of the Merger will be converted into the right to receive
a Merger Payment for each share of Common Stock as to which the option is
exercisable, less the exercise price for each such share; and (vii) each
Current Management Company Option outstanding immediately prior to consummation
of the Merger will be exchanged for an option to receive a Holdings Management
Option. In addition, if the Merger is approved by the Shareholders, subject to
the terms and conditions of the Purchase Agreement, immediately prior to
consummation of the Merger, the Continuing Shareholders will participate in the
Corporate Formation and the Private Placement will be consummated.
While the Board had determined at its meeting on October 2, 1995, as
discussed above, that Shareholders owning more than 101,000 shares of Common
Stock and certain employees of the Company should continue as shareholders in
the surviving company in a merger, the Board decided, after consultation with
Childs and the Placement Agent, that the Merger, as proposed herein, should be
structured so that certain persons with whom the Company has ongoing
relationships would be shareholders in Holdings and holders of Holdings stock
options and warrants. In addition, after the initial draft of this Proxy
Statement was filed with the Commission in 1995, the Company was contacted by
certain Shareholders who owned more than 101,000 shares of Common Stock who
expressed an interest to have their investment in the Company liquidated in any
merger in which the Company engaged. The Company also considered these
Shareholders when it decided, in consultation with the Childs Group and the
Placement Agent, to liquidate the investment of most of its Shareholders
through the combination of the Merger and the Corporate Formation to facilitate
the
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contribution of new capital to the Company and to offer those Shareholders,
warrant holders and option holders that do not have ongoing relationships with
the Company a fair price for their interests. A condition of the Childs Group's
letter of intent was to liquidate the investment of most of the Shareholders
and to retain only a small number of Shareholders that have ongoing
relationships with the Company.
The following persons who have ongoing relationships with the Company were
selected as Continuing Shareholders: Steven L. Foster, Steven Rubin, Kevin
Troy, Kerry Breitbart, Warren Berman, William Hurlin and The Blind Trust UDT
3/26/93.
The following persons who have ongoing relationships with the Company were
selected by the Company as Continuing Warrant Holders: Kerry Brietbart and the
landlord of the Seattle billiard club.
The following persons who have ongoing relationships with the Company were
selected to receive Holdings Management Options: King Cole, Cary S. Tuland,
Patricia Ambur, Steven L. Meltzer, Donald Leopold, John L. Kidde, Steven L.
Foster, Kevin Troy, Daniel M. Smith, Stephen M. Weis, Ron Widman and The Blind
Trust UDT 3/26/93.
Steven Meltzer is a partner at Shaw, Pittman, Potts & Trowbridge, which is
general counsel to the Company. The Company awarded Mr. Meltzer an aggregate of
20,000 Current Management Company Options from 1988 through 1991 as
compensation for his service as a member of the Board of Directors of the
Company and as an advisor to the Board. Mr. Meltzer resigned from the Board as
a director in 1990.
In addition to the exchange of each share of Common Stock by the
Continuing Shareholders for one share of common stock of Holdings, and Holdings
Performance Options to purchase a predetermined number of shares of common
stock of Holdings and the receipt by holders of Current Management Company
Options of Holdings Management Options to purchase a predetermined number of
shares of common stock of Holdings and the receipt by the Continuing Warrant
Holders of warrants to purchase shares of common stock of Holdings, pursuant to
the Corporate Formation, Holdings will issue Holdings Performance Options to
purchase a predetermined number of shares of common stock of Holdings to the
Other Option Holders, and Holdings will lend funds to the Debtors. The Other
Option Holders are: Steven L. Foster, Daniel M. Smith, Steven M. Weis, Kevin
Troy, Steven Rubin and Kerry Breitbart. In addition, the Debtors are Steven L.
Foster and designees, Kevin Troy and Island.
Payments to the Non-Continuing Shareholders
At its meeting on April 4, 1995, the Board made a preliminary
determination that Shareholders should receive a distribution of approximately
$0.50 per share of Common Stock in any transaction that would have the effect
of eliminating the Company's status as a publicly held company. The Board based
this determination on the market value of the Common Stock at that time, which
the Board believes is a reasonable and reliable measure of the value of the
Common Stock. During the first three months of 1995, the average of high and
low bid prices of the Common Stock, as reported by The NASDAQ SmallCap Market,
was $0.53
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per share. In light of such market value, the Board determined that a
distribution of $0.50 per share would be fair, subject to the Board's review of
the preliminary fairness opinion to be provided by Bannon.
The Board then evaluated the preliminary fairness opinion, presented to it
by Bannon on October 2, 1995, that the proposed Merger Payment of $0.50 per
share was fair to the Non-Continuing Shareholders, as of October 2, 1995. The
Board also considered the fact that the Common Stock had not traded above $0.50
per share since March 16, 1995. In light of the foregoing, the Board determined
at its October 2, 1995 meeting that the Merger Payment was fair to the
Non-Continuing Shareholders. See "Special Factors -- Preliminary Opinion of
Bannon."
At its March 11, 1997 meeting, the Board determined that the Merger
Payment continues to be fair to the Non-Continuing Shareholders because of the
February 7, 1997 letter that the Company received from The NASDAQ SmallCap
Market notifying the Company that the Company had failed to satisfy the
continued listing requirement that its Common Stock maintain a closing inside
bid price of at least $1.00 per share for ten consecutive trading days, and the
Company's continued poor financial performance. See "Special Factors --
Background of the Merger -- General" and "Financial Statements of the Company."
For the reasons discussed above under "Alternatives Considered," the Board
did not solicit bids for the sale of the Company's assets in connection with
its determination of the Merger Payment, despite the Company's receipt of the
unsolicited share exchange proposal from On Cue.
Preliminary Opinion of Bannon
On October 2, 1995, Bannon presented its preliminary opinion, subject to
Hreview and revision, to the Board that the proposed Merger Payment of $0.50 per
share was fair to the Non-Continuing Shareholders, as of October 2, 1995.
Bannon was not retained to provide, and did not provide, any advice as to the
fairness of the Merger to any of the Continuing Shareholders, including those
Continuing Shareholders who are not controlling persons of the Company.
Bannon provides investment banking, strategic planning and financial
advisory services to companies primarily in the media and entertainment
industries. Bannon, as part of its investment banking activities, is
continually engaged in the valuations of businesses and their securities,
principally in the media and entertainment industries. Bannon is based in
Beverly Hills, California. As of the date of this Proxy Statement, Bannon and
its controlling persons do not beneficially own any equity securities of the
Company. Neither Bannon nor its controlling persons has ever had any
relationship with the Company or any of its controlling persons.
The Board selected Bannon based on its qualifications and experience,
particularly its familiarity with entertainment entities and its lack of
potential conflicts of interest, as well as
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its reasonable quoted fees. Bannon was retained for the limited purpose of
rendering a preliminary opinion, subject to review and revision, to the Board
as to the fairness of the Merger Payment to the Non-Continuing Shareholders.
The Board did not give any instructions to or impose any limitations on Bannon
in connection with rendering its preliminary fairness opinion. The Board did
not retain Bannon to market the Company or solicit indications of interest from
or negotiate with any party with respect to the acquisition of any shares of
Common Stock, and Bannon did not market the Company or solicit indications of
interest from or negotiate with any party with respect to the acquisition of
any such shares, in connection with rendering the preliminary fairness opinion.
In connection with the engagement, Bannon did not make an independent
evaluation or appraisal of the assets or liabilities of the Company (or its
affiliates), and the Company did not furnish Bannon any such evaluation or
appraisal.
In March 1995, Mr. Foster engaged Bannon to undertake a study to enable it
to render a preliminary opinion to the Board with respect to the proposed
Merger Payment and to pay all reasonable fees and expenses incurred by Bannon
in connection with providing such opinion. Except as described above, there
were no business contacts between Bannon and the Company and its affiliates
regarding the engagement of Bannon.
In conducting its analysis and arriving at its preliminary opinion, Bannon
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of operations of the Company; (ii) the
financial projections provided to it by the Company for the Company's 1996
fiscal year; and (iii) the historical and current market for the Common Stock
and for the equity securities of certain other publicly traded companies that
Bannon determined were comparable in certain limited respects to the Company.
Bannon also took into account its assessment of general economic, market and
financial conditions and its knowledge of the entertainment industry as well as
its experience in connection with similar transactions and securities valuation
generally. Bannon's preliminary opinion was based on conditions as they existed
and could be evaluated on October 2, 1995, the date of its preliminary opinion.
In rendering its preliminary opinion, Bannon reviewed, among other things,
certain publicly available information relating to the Company and performed
such studies and analyses as it considered appropriate, including, among other
things, a comparison of the financial and operational results and certain other
financial and stock market information of the Company with similar information
of certain comparable companies.
Bannon relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by Bannon
for the purposes of its preliminary opinion. With respect to any financial
forecasts, Bannon assumed that they had been reasonably prepared and reflect
the best currently available estimates and judgment of the management of the
Company as to the expected future financial performance of the Company.
In connection with a presentation to the Board on October 2, 1995, Bannon
advised the Board that, in evaluating the consideration to be received in a
merger by the Non-
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Continuing Shareholders, Bannon had performed a variety of financial analyses
with respect to the Company.
Bannon reviewed with the Board for background purposes certain aspects of
the financial performance of the Company, including revenue, earnings before
interest, taxes, depreciation and amortization ("EBITDA") and earnings before
interest and taxes ("EBIT") for fiscal years 1992, 1993, 1994 and 1995 and
during the latest twelve months ended June 30, 1995 ("LTM"), as well as
management projections for fiscal year 1996 (calculated as of September 11,
1995). Bannon also reviewed with the Board certain information concerning the
trading prices and volumes of trading of the Common Stock through September 29,
1995. Bannon observed that the Merger Payment represented approximately a 60
percent premium over the trading price of the Common Stock on September 29,
1995. Bannon also reviewed with the Board certain publicly available financial,
operating and stock market information for the Company and for certain
comparable companies.
The foregoing summary does not purport to be a complete description of the
analyses performed by Bannon. The preparation of financial analyses and
fairness opinions is a complex process and is not necessarily susceptible to
partial analysis or summary description. Bannon believes that its analyses (and
the summary set forth above) must be considered as a whole, and that selecting
portions of such analyses and of the factors considered by Bannon, without
considering all of such analyses and factors, could create an incomplete view
of the processes underlying the analyses conducted by Bannon and of its
preliminary opinion. Bannon made no attempt to assign specific weights to
particular analyses. Any estimates contained in Bannon's analyses are not
necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth therein. Estimates of values of companies do
not purport to be appraisals or necessarily to reflect the prices at which
companies may actually be sold.
Based on the foregoing, on October 2, 1995, Bannon delivered to the Board
its preliminary opinion, subject to review and revision, that the proposed
Merger Payment of $0.50 per share was fair to the Non-Continuing Shareholders,
as of October 2, 1995. For its services in rendering its preliminary opinion,
the Company paid Bannon a $75,000 fee and reimbursed Bannon for out-of-pocket
expenses totaling $5,090, which consisted of $3,599 in travel expenses, $715 in
legal expenses and $776 in miscellaneous expenses.
The Company and Bannon anticipated that the Company would engage Bannon to
render a final opinion immediately prior to the mailing of this Proxy Statement
to the Shareholders. When the Company contacted Bannon in March 1997 to discuss
the terms under which Bannon would render the final opinion, the Company
learned that Bannon had become affiliated with another entity. As a result of
that affiliation and the lapse of time, Bannon indicated that it would be
unable to render the final opinion within the price range that the Company and
Bannon had discussed when Bannon was originally engaged in March 1995.
Consequently, the Company decided to engage Stonebridge.
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Opinion of Stonebridge
Stonebridge is a private investment bank that specializes in providing
a broad range of corporate finance services to middle market and emerging
growth companies. Its primary areas of focus include mergers and acquisitions,
divestitures and private placements of debt and equity securities, as well as
related corporate advisory services such as fairness opinions, valuations and
restructurings and recapitalizations. Stonebridge, as part of these investment
banking services, is regularly engaged in the valuation of businesses and their
securities. Stonebridge is based in Boston, Massachusetts.
The Board and Mr. Kidde retained Stonebridge primarily based on
Stonebridge's qualifications and experience for the limited purpose of
rendering an opinion, as investment bankers to the Board and Mr. Kidde, as to
the fairness, from a financial point of view, of the Merger Payment to the
Non-Continuing Shareholders. Stonebridge was not retained to market the
Company or solicit indications of interest from or negotiate with any party
with respect to the acquisition of any shares of Common Stock, and Stonebridge
did not market the Company or solicit indications of interest or negotiate with
any party with respect to the acquisition of any such shares in connection with
the rendering of its opinion.
Stonebridge rendered to the Board and Mr. Kidde on April 22, 1997 an
oral and written opinion to the effect that, as of the date of such opinion and
based upon and subject to certain assumptions, the Merger Payment was fair,
from a financial point of view, to the Non-Continuing Shareholders. The full
text of the written opinion of Stonebridge, dated April 22, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is included as Appendix B to this Proxy Statement and incorporated
herein by reference. The Non-Continuing Shareholders are urged to read that
opinion carefully in its entirety. The opinion is directed only to the
fairness of the Merger Payment to the Non-Continuing Shareholders from a
financial point of view and has been provided for the use of the Board in its
evaluation of the Merger and does not constitute a recommendation to any
Shareholder as to how such Shareholder should vote at the Special Meeting. The
summary of the opinion of Stonebridge set forth in this Proxy Statement is a
description of the material aspects of the opinion and is qualified in its
entirety by reference to the full text of such opinion.
In rendering its opinion, Stonebridge took into account its assessment
of general economic, market, financial and other conditions, as well as its
experience in connection with similar transactions and securities evaluation,
generally. The opinion was necessarily based upon conditions as they existed
and could be evaluated as of the date of the opinion. Stonebridge was not
engaged to solicit, and did not solicit, potential purchasers for the Company,
and did not consider specific alternative transactions involving the Company.
For the purposes of rendering its opinion, Stonebridge assumed that all
conditions precedent to the
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consummation of the Merger would be satisfied and accordingly expressed no
opinion as to the likelihood that the Merger would be consummated.
In connection with rendering its opinion, Stonebridge reviewed and
examined, among other items, the following: (i) a draft of the Merger Agreement
dated April 14, 1997, (ii) a draft of the Company's Proxy Statement, dated
April 18, 1997, to be furnished in connection with the solicitation of proxies
to approve the Merger, (iii) certain publicly available information concerning
the Company, including the Annual Reports on Form 10-K and proxy statements of
the Company for each of the fiscal years in the three-year period ended March
31, 1996, Quarterly Reports on Form 10-Q of the Company for the quarters ended
December 31, 1996, September 30, 1996 and June 30, 1996 and Form 8-K dated
March 13, 1997 and filed on March 17, 1997, (iv) monthly unaudited financial
statements of the Company for each of the eleven months ended February 28,
1997, (v) financial and operating information with respect to the business,
operations and prospects of the Company, (vi) certain internal business plans
and financial forecasts prepared by the management of the Company, and (vii)
certain publicly available information concerning other entertainment and theme
restaurant companies, the trading markets for such companies' securities and
the nature and terms of certain other merger and acquisition transactions that
Stonebridge believed to be relevant to its inquiry. During the course of its
review, Stonebridge met and had discussions with the management of the Company
concerning the Company's business, operations, assets, liabilities, present
financial condition, the general condition and future prospects for the
businesses in which it is engaged and other matters which Stonebridge believed
to be relevant.
In its review and examination and in arriving at its opinion,
Stonebridge assumed and relied upon, without independent verification, the
accuracy and completeness of the financial and other information that was
available to it from public sources, or that was provided to it by the Company
or its representatives. Stonebridge did not make, nor has it obtained, any
independent evaluation or appraisal of the assets or liabilities of the
Company. With respect to the financial forecasts, Stonebridge assumed that
they have been reasonably prepared on the bases reflecting the best currently
available estimates and judgments of the Company's management as to the future
operating and financial performance of the Company and that such forecasts will
be realized in the amounts and in the time periods currently estimated by the
Company's management. The opinion is necessarily based upon general economic,
market, financial and other conditions as they existed and could be evaluated
as of the date of the opinion.
In connection with its opinion, Stonebridge performed a variety of
financial and comparative analyses, including those described below. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances, and therefore such an opinion
is not necessarily susceptible to summary description. Furthermore, in
arriving at its opinion, Stonebridge did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis and factor. Accordingly,
Stonebridge believes that its analyses must be considered as a whole and that
considering any portion of such analyses and the factors considered,
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without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying the opinion. In performing its
analyses, Stonebridge made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of the Company. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than such estimates. Any theoretical or implied values derived from these
analyses are not necessarily indicative of actual fair market values, which may
be significantly more or less favorable than as set forth therein. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or purport to reflect the prices at which businesses may actually be
sold.
The following is a summary of the presentation Stonebridge made to the
Board, including Mr. Kidde, on April 22, 1997. This summary does not purport
to be a complete description of the analysis underlying Stonebridge's opinion
or its presentation to the Board.
Transaction Overview
Stonebridge noted that the Merger Agreement contemplates that: (i) each
share of Common Stock owned immediately prior to consummation of the Merger by
the Non-Continuing Shareholders (5,154,308 shares in the aggregate) will be
converted into the right to receive $0.50 per share in cash without interest
(i.e., a Merger Payment), (ii) each stock option to purchase a share or shares
of Common Stock outstanding immediately prior to consummation of the Merger
that is held by a former director, officer or employee of the Company will be
converted into the right to receive a Merger Payment for each share of Common
Stock as to which the option is exercisable, less the exercise price for each
such share, and (iii) each warrant to purchase a share or shares of Common
Stock held immediately prior to consummation of the Merger by a Non-Continuing
Warrant Holder will be converted into the right to receive, upon exercise of
such warrant, a Merger Payment for each share of Common Stock as to which the
warrant is exercised, upon payment of the exercise price for each such share.
Stonebridge observed that the Merger Payment, when applied to all outstanding
shares of Common Stock and all outstanding options and warrants with exercise
prices below the price of the Merger Payment, implied a total equity value of
the Company of $4,745,245.
Stock Trading History
Stonebridge reviewed the Company's historical and current stock price
and trading volume as well as the historical and current stock price of certain
publicly traded companies that Stonebridge considered comparable based on
business activities and operating formats. The Company was compared with a peer
group of publicly traded entertainment and theme restaurant companies consisting
of Bowl America, Inc.; Dave & Buster's Inc.; Grand Havana; Laser Storm, Inc.;
Michigan Brewery, Inc.; Planet Hollywood International, Inc.; Rock Bottom
Restaurants, Inc.; and Western Country Clubs, Inc. While all of the companies
used in this and other analyses may not be directly comparable to the Company
due to their greater
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size and general market focus, Stonebridge noted that their similar operating
formats and customer bases make them relevant for these analyses.
Stonebridge examined the Company's historical weekly stock price and
trading volume over the three years ended April 18, 1997 as well as over the 52
weeks ended April 18, 1997. The Company's highest stock price in that
three-year time period was $0.81, which occurred in May 1994. The Merger
Payment represents a 38.3% discount to the Company's stock price as of that
date. Over the three-year time period, average weekly trading volume was
27,387 shares. During the 52 week period, the Company's highest stock price
was $0.38, to which the Merger Payment represents a 31.6% premium. Over this
time period, the average weekly trading volume was 24,840 shares.
Stonebridge examined the trading volume history of the Company's stock
over the 360, 180, 90, 60, and 30 day periods ended April 18, 1997.
Stonebridge then compared each period's average stock price, weighted by the
volume traded within that period, to the Merger Payment. This analysis showed
that the Merger Payment represented 127%, 178%, 194%, 150%, and 138% premiums
to the Company's 360, 180, 90, 60, and 30 day weighted average stock prices,
respectively.
Stonebridge also compared the Company's stock price history over the
three years ended April 18, 1997 to the trading history of an index comprised
of the comparable public companies discussed above, the trading history of the
S&P 500 Index and the trading history of the S&P 600 SmallCap Index. Over the
three-year period, the Company's stock price significantly underperformed all
three indexes, reflecting the Company's operating and financial performance, as
well as its small public float, limited trading activity and lack of investor
following. Stonebridge further noted that the Company (i) was one of only two
companies with a stock price below $1.00 among the peer comparable companies,
(ii) had the lowest public float market value of any company analyzed, (iii)
had been notified of the NASDAQ SmallCap Market's intent to delist the Common
Stock, (iv) had the second lowest average monthly trading volume of any company
analyzed, (v) had less than 1.0% institutional ownership, and (vii) was not
followed by any equity research analysts. Stonebridge offered its assessment
that these factors had also influenced the Company's historical stock trading
history and would most likely continue to affect the stock's price and trading
performance.
Comparable Public Company Analysis
Stonebridge reviewed and compared selected historical and current
operating and financial data of the Company to comparable data of the peer
group of comparable companies listed above. The compared historical and
current financial data included total capitalization, market equity
capitalization, EBITDA, EBIT, net income, book value, revenue growth, gross
margin, EBITDA margin, EBIT margin and net margins.
Over the last three full fiscal years for each company, the Company's
calculated annual revenue growth rate of 53% was lower than six of the eight
peer companies, but higher
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than the peer group's mean of 47.5%. The Company's gross margin, while higher
than all but one peer company, declined from 79.19% in 1994 to 77.2% in 1996.
The Company's EBITDA margin was negative in 1994 and 1995, and lower than the
peer group's mean EBITDA margin of 4.4% and 5.3%, respectively. In 1996, the
Company's EBITDA margin of 3.8% was lower than all but one of the peer
companies, and lower than the peer group's mean of 12.1%. The Company's EBIT
margin was also negative in 1994 and 1995. In 1996, the Company had an EBIT
margin of (1.7%), which was lower than six companies in the peer group, and
lower than the group's mean of 3.4%. Over the last three years the Company has
reported annual net losses. In 1996, the Company's net margin of (3.3%) was
lower than five of the peer companies and lower than the mean of 3.4%.
Stonebridge observed that, in general, the Company's operating and financial
performance compared unfavorably to the mean operating and financial
performances of the peer group.
Stonebridge calculated that the mean and median total capitalization
values as multiples of the EBITDA for the twelve months ended December 31, 1996
for the peer group of companies were between 7.6 and 8.8 times. Applying those
multiples to the Company's latest twelve months EBITDA, after removing
extraordinary expenses related to a write-down of assets of the Long Beach Club
and legal fees specifically related to the Merger, yielded an implied equity
valuation of between $8.2 million and $9.8 million for the Company. Similarly,
the mean and median multiples of EBIT for the peer group ranged from 15.1 to
17.4 times. Applying those multiples to the Company's adjusted latest twelve
months EBIT yielded an implied equity valuation of between $5.4 million and
$6.5 million for the Company. The mean and median multiples of book value for
the peer group ranged from 0.9 to 1.0 times, implying an equity valuation range
of the Company of $2.1 million to $2.4 million. Stonebridge observed that the
range of these mean and median values of Company equity was $2.1 million to
$9.8 million as derived from this "Comparable Public Company Analysis"
resulting in an implied per share equity valuation range of $0.23 to $1.07.
Because of the Company's current operating performance, which compared
unfavorably to the mean operating performances of the peer companies, its
historical lack of profitability and its leveraged capital structure,
Stonebridge concluded that the appropriate benchmark of the Company's equity
value would fall in the lower end of this range.
Comparable Transaction Analysis
Stonebridge examined and analyzed certain financial parameters of
merger and acquisition transactions for the three-year period from May 1994 to
April 1997 in the entertainment and restaurant industries. Of the 39
transactions examined, only ten companies reported revenue information, two
companies provided EBITDA information, one company provided EBIT information
and three companies provided book value information from which market multiples
could be determined. Stonebridge then calculated the market capitalization
value of these companies as multiples of EBITDA, EBIT and book value. The mean
and median EBITDA multiple of the comparable transactions was 4.3 times, the
EBIT multiple was 12.5 times and the mean to median book value multiple range
was 2.0 to 2.5 times. Applying each of these multiples to the Company's
appropriate financial measure for the latest twelve months, yielded an implied
equity valuation range of $3.6 million to $5.8 million translating
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into a per share implied equity valuation range for the Company of $0.39 to
$0.64. Stonebridge noted that this analysis incorporated only a limited
number of transactions, some of which occurred over two years ago.
Premiums Paid Analysis
Stonebridge reviewed and analyzed information on the 39 selected
completed acquisitions discussed in the immediately preceding paragraph to
determine the relative premiums paid in these transactions over the target
companies' stock price one day and 30 days prior to the announcement of the
transaction. Stonebridge noted that, of these acquisitions, only three
provided information relevant to its "Premiums Paid Analysis." Of those three
transactions, the mean and median premiums paid relative to the stock price one
day prior to the announcement was 51%. Stonebridge also noted that the mean
and median premiums paid relative to the stock price 30 days prior to
announcement in these acquisitions was 50%. Stonebridge also examined merger
and acquisition transactions involving a larger sample of companies with market
capitalizations under $10 million. Of the 32 transactions that occurred
between January 1995 and March 1997, 26 provided information relevant to this
analysis. Stonebridge calculated that the mean to median premiums paid over
the target's stock price one day prior to the announcement date ranged from 14%
to 0%. The mean to median premiums paid over the target's stock price 30 days
prior to the announcement ranged from 38% to 14%.
Stonebridge also examined the Company's stock price both one day and 30
days prior to the announcement of the proposed transaction. On March 14, 1997,
one trading day prior to the announcement, the Company's stock price was $0.13.
On February 13, 1997, 30 days prior to the announcement, the Company's stock
price was also $0.13. The $0.50 per share Merger Payment represents a 284.6%
premium over the Company's stock price on both March 14th and February 13th.
Discounted Cash Flow Analysis
Stonebridge performed several discounted cash flow analyses for the
Company. These analyses were based upon the following: (i) an estimate of
projected financial performance for the Company on a stand-alone basis, as
developed using the Company's business plan and discussions with the Company's
management, (ii) an estimate of projected financial performance of the Company
assuming the Long Beach Club is sold at the end of fiscal 1998, (iii) an
estimate of projected financial performance assuming a more aggressive revenue
growth scenario, and (iv) an estimate of projected financial performance
assuming a more aggressive revenue growth scenario and the sale of the Long
Beach Club at the end of fiscal 1998. All four of these analyses were
performed on a "stand-alone" basis assuming that the Merger would not occur.
Because of the high cost and uncertainty associated with external financing,
Company management assumed in its projections that no additional clubs would be
opened during the five-year period incorporated in the projections.
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Base Case Scenario. Stonebridge analyzed the valuation of the Company
based upon an unlevered discounted cash flow analysis of the projected
five-year financial performance of the Company as presented in its business
plan prepared by management (the "Base Case"). This performance assumed a
3.5% increase in revenues for fiscal 1998, and a 2.5% increase in revenues
thereafter. Stonebridge discounted to present value the projected stream of
after-tax cash flows as reflected in the Base Case and the terminal value
(defined as the estimated future sale value) of the Company using discount
rates ranging from 31% to 35%, which were chosen to reflect different
assumptions, including the risk assumptions applied by Stonebridge to the
financial forecasts as incorporated in the Company's estimated weighted average
cost of capital. The terminal value was based on multiples of 5.0 to 7.0 times
projected 2003 EBITDA. These multiples were based on Stonebridge's
observations included in its "Comparable Public Company Analysis" above. This
analysis indicated an implied equity valuation range for the Company of $1.3
million to $2.1 million, or $0.14 to $0.23 per share.
Base Case Scenario (assuming that the Long Beach Club is sold).
Stonebridge analyzed the valuation of the Company based upon the assumption
that the Long Beach Club is sold as of the end of fiscal 1998. Incorporating
the same discount rates and terminal value multiples as in the "Base Case
Scenario," this analysis indicated an implied equity valuation range for the
Company of $1.5 million to $2.4 million, or $0.17 to $0.26 per share.
Additional Scenarios. Incorporating the revenue growth of better
performing companies in the entertainment and restaurant industries,
Stonebridge analyzed each scenario described above using a 5.0% revenue growth
assumption beginning in 1998. This analysis indicated an implied equity
valuation range for the Company of $2.4 million to $3.7 million ($0.27 to $0.40
per share) assuming the Long Beach Club is not sold, and $2.7 million to $4.1
million ($0.30 to $0.44 per share) assuming the Long Beach Club is sold as of
the end of fiscal 1998.
In each discounted cash flow analysis, Stonebridge noted that the
Company may not be capable of generating sufficient cash flow to meet scheduled
debt repayment obligations as well as meet the working capital requirements of
operating its existing clubs.
For Stonebridge's services in rendering its opinion, the Company agreed
to pay Stonebridge $80,000, of which $25,000 was paid upon commencement of the
preparation of the opinion and $55,000 was payable upon the conclusion of the
transaction. The Company agreed to reimburse Stonebridge for its out-of-pocket
expenses and to indemnify Stonebridge against certain liabilities arising out
of Stonebridge's engagement.
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Board of Directors Determination of Fairness of the Merger
The Board unanimously approved the Merger. Two of the four directors are
not employed by the Company. The Board believes that the Merger, including the
process by which the Merger was decided upon and the Merger Payment, is fair
to, and in the best interest of, each Shareholder, including each
Non-Continuing Shareholder who is not a controlling person of the Company and
each Continuing Shareholder who is not a controlling person of the Company. In
reaching this conclusion, the Board considered a number of factors, including,
but not limited to, the following. Each of these factors supported this
conclusion.
(1) The preliminary fairness opinion of Bannon. In considering such
opinion, the Board also took note of Bannon's reputation, qualifications and
experience in the entertainment industry. The Board, in reaching its conclusion,
considered the fact that Bannon (which is an independent entity whose
principals have substantial experience in making fairness determinations of the
type delivered to the Board) concluded that the Merger Payment was fair to the
Non-Continuing Shareholders as of October 2, 1995, which supported the Board's
view that the Merger is fair to the Shareholders.
(2) The fairness opinion of Stonebridge. In considering such opinion,
the Board also took note of Stonebridge's reputation, qualifications and
experience. The Board, in reaching its conclusion, considered the fact that
Stonebridge (which is an independent entity whose principals have substantial
experience in making fairness determinations of the type delivered to the
Board) concluded that the Merger Payment was fair, from a financial point of
view, to the Non-Continuing Shareholders as of April 22, 1997, which supported
the Board's view that the Merger is fair to the Shareholders.
(3) Certain of the factors considered by Stonebridge, as set forth in
this paragraph. Like Stonebridge the Board considered the Company's financial
condition and operating losses (which, for the reasons discussed above under
"Certain Effects of Borrowings and Equity Financing," indicated that the
Company would not realize a profit if it continued to operate under its
current structure), the market price of the Common Stock, and the trading
market for the Common Stock and the manner in which these matters compared to
those of certain comparable companies.
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(4) The performance by John L. Kidde, an independent director of the
Company, of the functions of a special committee of the Board, including the
negotiation of the terms of the Merger and related transactions and the
engagement of Stonebridge.
(5) The February 7, 1997 letter that the Company received from The NASDAQ
SmallCap Market notifying the Company that the Company had failed to satisfy
the continued listing requirement that its Common Stock maintain a closing
inside bid price of at least $1.00 per share for ten consecutive trading days.
(6) The Board's own knowledge regarding the financial condition, results
of operations and projections of the Company for fiscal 1998 (which, for the
reasons discussed above under "Certain Effects of Borrowings and Equity
Financing," indicated that the Company would not realize a profit if it
continued to operate under its current structure), as well as current industry,
economic and market conditions. The financial projections provided to
Stonebridge by the Company projected, for the Company's 1998 fiscal year,
total revenues of approximately $12,486,300, excluding the Long Beach Club,
which is an asset for sale, and an adjusted net gain before taxes of
approximately $192,000. In preparing these projections, management projected a
3.4 percent increase in total revenues over the prior fiscal year based
primarily on historical performance The Board believes that the current
industry, economic and market conditions favor companies that are involved in
businesses similar to that of the Company. Entertainment industry experts
project that American consumers will spend over $250 billion in domestic
restaurant and leisure time entertainment in 1997; American consumers spent
$185 billion in such entertainment in 1992. In particular, billiards
represented a $4 billion industry in 1995, with more than forty million
Americans playing at least once a year and five million playing at least once a
week, an increase of nearly 20 percent over the past five years. However, due
to the Company's poor financial condition, particularly its current cash
shortage, the Board determined that the Company would be unable to benefit from
these conditions by developing additional billiard clubs without a substantial
infusion of capital. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." Absent
a restructuring of the Company, the Board concluded that the Company would be
unable to obtain the infusion of capital required.
(7) The Merger Payment in relation to current market prices, historical
market prices and purchase prices paid by members of the Board and executive
officers and other Shareholders owning more than five percent of the issued and
outstanding shares of Common Stock as of the Record Date during the past two
years. As of the date of this Proxy Statement, the Common Stock has not traded
above $0.50 per share since March 16, 1995. During the past two years, no
member of the Board, executive officer or other Shareholder owning more than
five percent of the issued and outstanding shares of Common Stock as of the
Record Date has purchased shares of Common Stock for a price in excess of $0.25
per share. The Board believes that the current market price of the Common Stock
and purchase prices paid for shares of Common Stock by controlling persons of
the Company support the fairness of the Merger and the Merger Payment.
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(8) The effect that the Merger may have on the liquidity of Holdings and
the Surviving Company. After deducting the Merger Payments of approximately
$2,577,154, an additional approximately $23,500 for payments to the
Non-Continuing Warrant Holders and holders of Former Management Company
Options, expenses associated with consummation of the Merger of approximately
$__________ and expenses associated with consummation of the Private Placement
of approximately $_________, Holdings will have approximately $__________ for
the development of additional billiard clubs and working capital if the Private
Placement is consummated. See "Financing of the Merger" and "Fees and
Expenses." The Board believes that such an infusion of capital will enable
Holdings to expand its business and improve its profitability, which in turn
would be likely to make Holdings more attractive to potential investors.
Consequently, the Board concluded that consummation of the Merger may have an
indirect positive effect on the liquidity of Holdings and the Surviving
Company, which supports the fairness of the Merger. Based on the foregoing, the
Board determined that consummation of the Merger would not have an adverse
effect on Continuing Shareholders, including those Continuing Shareholders who
are not controlling persons of the Company.
(9) The desirability of soliciting indications of interest in purchasing
the Company or otherwise purchasing the shares of Common Stock held by the
Non-Continuing Shareholders. In particular, the Board considered the fact that
since the Company began its upscale billiard club business in 1990, the Company
has experienced a net operating loss in each year other than 1993 and the fact
that the Company has never received a "firm offer" of this type. As discussed
above under "Alternatives Considered," the Company did receive an unsolicited
share exchange proposal from On Cue but was unable to initiate negotiations
with On Cue. Further, the Board considered its belief that the Company has
little resale value because of the nature of the Company's assets, which are
primarily comprised of leasehold interests in the billiard clubs that the
Company operates, as well as equipment and furniture. See "Alternatives
Considered," above. In light of these facts, the Board determined that it was
not advisable for the Company to incur any additional expense in order to
retain Stonebridge or another advisor to solicit indications of
interest from potential bidders, and the Board believes that this decision does
not detract from the overall fairness of the Merger, including the Merger
Payment and the process by which it was determined. For a discussion of the
process by which the Merger Payment was determined, see "Payments to the
Non-Continuing Shareholders," above.
In reaching its conclusion that the Merger, including the process by which
the Merger was decided upon and the Merger Payment, is fair to each
Shareholder, including each Non-Continuing Shareholder who is not a controlling
person of the Company and each Continuing Shareholder who is not a controlling
person of the Company, the Board considered the aforementioned factors most of
which involve evaluations and judgments made by an unaffiliated third party. In
view of the variety of factors considered, the Board did not find it
practicable to, and therefore did not, quantify or otherwise assign relative
weights to the individual factors considered in reaching its conclusion that
the Merger is fair to the Shareholders. For the reasons discussed in the
preceding listing of these factors, each of the individual factors supported
the Board's conclusion.
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The Board believes that the Merger is fair even though the Merger has not
been structured to require the approval of a majority of the Shareholders who
are not controlling persons of the Company. The Board believes that a
transaction structured to require the approval of a majority of the
shareholders who are not controlling persons of a company is just one indicator
of the fairness of the transaction and that the transaction must be considered
as a whole to ascertain its fairness. The Board is of the view that the absence
of such a procedural safeguard in the case of the Merger does not detract from
the overall fairness of the Merger, which is supported by the nine factors
discussed above. The absence of such a safeguard does not, however,
individually support the fairness of the Merger.
The Board did not seek an explanation of the analysis performed, other
than as described under "Opinion of Stonebridge," above, or conclusion reached
by Stonebridge because it had hired Stonebridge, which has substantial
experience in these types of evaluations, to function as an independent advisor
and did not wish to influence either the process followed by Stonebridge or its
ultimate opinion. The Board accepted the opinion of Stonebridge without
detailed evaluation of the conclusion contained therein not only because of the
expertise and experience of Stonebridge in these types of evaluations but also
because the conclusion of Stonebridge, which is an independent advisor not
affiliated with any member of the Board, any officer or any affiliate of
either, accorded with the analysis, evaluation and conclusion of the Board. The
Board believes that it has satisfied its fiduciary obligation to the
Non-Continuing Shareholders, including each Non-Continuing Shareholder who is
not a controlling person of the Company, to obtain a fair price for their
Common Stock. In order to fulfill this obligation, the Board not only reviewed
the history of the Company's performance and lack of ability to obtain
financing and attract investors as a public company, but also obtained an
opinion from an independent third party as to the fairness of the Merger
Payment.
No firm offers, other than in conjunction with the Merger, of which the
Board is aware have been made by an unaffiliated person during the preceding
two years for (i) the merger or consolidation of the Company into or with such
person, (ii) the sale or other transfer of all or any substantial part of the
assets of the Company, or (iii) the purchase of a number of shares of Common
Stock that would enable the holder thereof to exercise control of the Company.
In addition, the Board did not solicit any such offers. The Board did not
consider the unsolicited share exchange proposal from On Cue a "firm offer"
because the Company did not have an opportunity to evaluate the relative merits
of the proposal or engage in negotiations with On Cue with respect to the
proposal. Although the Company made several attempts to pursue the matter, On
Cue took no affirmative steps after it made its initial contact with the
Company to indicate that it was serious about engaging in a transaction with
the Company. For a detailed discussion of the On Cue proposal, see "Background
of the Merger -- Alternatives Considered," above.
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Certain Effects of the Merger
If the Merger is consummated, the Non-Continuing Shareholders will no
longer have an equity interest in the Company. Instead, each Non-Continuing
Shareholder will have the right to receive the Merger Payment of $0.50 per
share of Common Stock in cash. The Non-Continuing Shareholders will no longer
be subject to the inherent risks of investing in a company with a history of
poor performance, but will also be denied the opportunity to participate in any
future growth of the Surviving Company after the Effective Time. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Financial Condition."
The Continuing Shareholders, who include Steven L. Foster, Chief Executive
Officer and Chairman of the Board of the Company, and the holders of Holdings
Management Options and Holdings Performance Options, which include Mr. Foster
and Daniel M. Smith, President, Chief Operating Officer and a Director of the
Company, will have an opportunity to share in the future results of operations
of Holdings, which will wholly own the Surviving Company, and to take advantage
of any increase in the value of Holdings' assets if the Merger is consummated,
but will be subject to the inherent risks of investing in a company with a
history of poor performance. There can be no assurance that the value of these
assets will increase or as to whether there will be any future distributions by
Holdings. The Company has never declared a cash dividend. See "Market
Information." Mr. Foster is the only Continuing Shareholder who is a member of
the Board and/or an executive officer of the Company.
The Company, as a result of the Merger, will become an entity the
securities of which are privately held. The registration of the Common Stock
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")
will terminate, resulting in the suspension of the Company's obligations to
file periodic reports such as Forms 10-KSB, 10-QSB and 8-K. Since the Common
Stock will no longer be publicly held, the Company will be relieved of the
obligation to comply with the proxy rules of Regulation 14A under Section 14 of
the Exchange Act, and the executive officers and directors of the Company and
Shareholders owning more than 10 percent of the Common Stock will be relieved
of the reporting requirements and "short swing" trading restrictions under
Section 16 of the Exchange Act. In addition, the Common Stock will be delisted
from The NASDAQ SmallCap Market, which will terminate the Company's public
trading market and the Company no longer will be required to comply with the
rules and regulations relating to The NASDAQ SmallCap Market listing.
If the Merger is consummated, all of the Company's loan obligations and
guaranteed return, buy-out and registration rights obligations undertaken in
connection with the private placement of the securities of certain of its
subsidiaries will continue in the Surviving Company. See "Current Effects of
Borrowings and Equity Financing," above. However, it is a condition to
Holdings' and Sub's obligation to effect the Merger that the Company refinance
its existing debt. See "Proposal to Approve the Merger -- Conditions to the
Merger."
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Material Federal Income Tax Consequences
The following is a summary of the material federal income tax consequences
associated with the Corporate Formation and the Merger, based upon the advice
of Shaw, Pittman, Potts & Trowbridge, as federal income tax counsel to the
Company. This discussion is based upon the laws, regulations and reported
rulings and decisions in effect as of the date of this Proxy Statement (or, in
the case of certain regulations, proposed as of such date), all of which are
subject to change, retroactively or prospectively, and to possibly differing
interpretations. This discussion does not purport to deal with the federal
income or other tax consequences applicable to all Shareholders in light of
their particular investment circumstances (such as their source and level of
income, the nature of their investment portfolio and the nature and amount of
tax deductions, credits and other expenses unrelated to the Company). Nor does
this discussion purport to deal with all categories of Shareholders, some of
whom may be subject to special rules (including, for example, insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States). Furthermore, this discussion of the federal income tax
consequences of the Corporate Formation and the Merger is intended to provide
only a general summary and does not address tax consequences which may vary
with, or are contingent on, individual circumstances. For example, the proposed
Corporate Formation and/or the Merger may affect the tax liability of each
Shareholder differently, depending on such factors as whether the Shareholder
is an individual, corporation, or other entity.
No ruling on the federal income tax consequences of the Corporate
Formation or the Merger has been or will be requested from the Internal Revenue
Service or from any other tax authority. In addition, this discussion is not
binding upon any tax authority or any court and no assurance can be given that
a position contrary to those expressed in this discussion will not be asserted
and sustained. Moreover, this discussion does not address any foreign, state or
local income or other tax consequences of the Corporate Formation or the
Merger.
ACCORDINGLY, EACH SHAREHOLDER IS STRONGLY URGED TO CONSULT SUCH
SHAREHOLDER'S OWN TAX ADVISOR REGARDING ANY SPECIFIC TAX CONSEQUENCES TO THE
SHAREHOLDER OF THE CORPORATE FORMATION AND THE MERGER, INCLUDING THE FEDERAL,
FOREIGN, STATE, AND LOCAL INCOME AND OTHER TAX CONSEQUENCES OF THE CORPORATE
FORMATION AND THE MERGER AND POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Federal Income Tax Consequences for Continuing Shareholders Resulting from
the Corporate Formation. The Corporate Formation will, in part, consist of an
exchange by the Continuing Shareholders of their Common Stock for Holdings
common stock and Holdings Performance Options. Generally, in corporate
formations the contribution of property to a newly formed company in exchange
for solely stock in the new company is a tax-free transaction for the
contributor of property. However, when the contribution of property in a
corporate formation is in exchange for not only stock but also for "other
property," gain, but not loss, may be recognized on the exchange. In the
Corporate Formation, the Continuing
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Shareholders' receipt of the Holdings common stock generally will not be
subject to federal income tax. However, any Holdings Performance Options
received by the Continuing Shareholders in exchange for their Common Stock
generally will be considered "other property" that will potentially result in
tax liability for Continuing Shareholders who realize gain in the Corporate
Formation. The gain realized in the Corporate Formation will be measured by the
difference between (i) the Continuing Shareholder's adjusted tax basis in the
Common Stock and (ii) the fair market value of the Holdings common stock and
Holdings Performance Options received by the Continuing Shareholder. The gain
recognized, i.e. subject to tax, will be limited, however, to the fair market
value of the Holdings Performance Options received by the Continuing
Shareholder. Therefore, a Continuing Shareholder will be taxed on the lesser of
(i) the gain realized in the exchange of Common Stock for Holdings common stock
and Holdings Performance Options and (ii) the fair market value of the Holdings
Performance Options received.
If the Common Stock exchanged by a Continuing Shareholder pursuant to the
Corporate Formation is a capital asset, the gain recognized by such Continuing
Shareholder will be treated as a capital gain. Otherwise, the gain recognized
by such Continuing Shareholder will be treated as ordinary income. Capital gain
recognized by a Continuing Shareholder who has held shares of Common Stock for
more than one year at the time of the Corporate Formation will generally be
treated as long-term capital gain. Capital gain recognized by a Continuing
Shareholder who has held shares of Common Stock for one year or less at the
time of the Corporate Formation will generally be treated as short-term capital
gain. The Continuing Shareholder's basis in the Holdings common stock will be
the Continuing Shareholder's basis in the Common Stock decreased by the fair
market value of the Holdings Performance Options received and increased by the
amount of gain recognized (if any). The Continuing Shareholder's basis in the
Holdings Performance Options received in the exchange will be their fair market
value.
Certain Continuing Shareholders may also receive Holdings Performance
Options in the Corporate Formation in addition to those issued in exchange for
Common Stock. To the extent the Holdings Performance Options are received
pursuant to a plan similar to the Stock Option Plans, the holders of these
options should not recognize taxable income as a result of their issuance.
Income will instead be recognized as ordinary income at the time such options
are exercised in an amount equal to any excess in the value of the Holdings
common stock received at the time of exercise over the exercise price paid.
However, to the extent the options are not received pursuant to a plan similar
to the Stock Option Plans, holders of these options will recognize gain on the
issuance of the options to the extent of the option's value, if any.
Federal Income Tax Consequences for Non-Continuing Shareholders Resulting
from the Merger. As a result of the Merger, Non-Continuing Shareholders will
receive a cash payment in exchange for all of their Common Stock (i.e., the
Merger Payment), resulting in taxable gain or loss to such Shareholders. This
gain or loss will be equal to the difference, if any, between (i) the Merger
Payment received by the Non-Continuing Shareholder and (ii) such
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Non-Continuing Shareholder's adjusted tax basis in such Shareholder's shares of
Common Stock immediately prior to consummation of the Merger. If the Common
Stock surrendered in the Merger by an Non-Continuing Shareholder is a capital
asset, the gain or loss recognized by such Non-Continuing Shareholder will be
treated as a capital gain or loss. Otherwise, the gain or loss recognized by
such Non-Continuing Shareholder will be treated as ordinary income or loss.
Capital gain (or loss) recognized by an Non-Continuing Shareholder who has held
shares of Common Stock for more than one year at the time of the Merger will
generally be treated as long-term capital gain (or loss). Capital gain (or
loss) recognized by an Non-Continuing Shareholder who has held shares of Common
Stock for one year or less at the time of the Merger will generally be treated
as short-term capital gain (or loss).
Individual Non-Continuing Shareholders will be subject to federal income
tax on any capital gains recognized as a result of the Merger at a maximum rate
of 28 percent and generally will only be able to offset capital gains with
capital losses. In addition, an individual's capital losses in excess of
capital gains for a taxable year may be used to offset up to $3,000 of ordinary
income, on an annual basis ($1,500 in the case of a married individual filing a
separate return). However, unused capital losses of individual Shareholders may
be carried forward indefinitely to subsequent tax years to offset future
capital gains and up to $3,000 of ordinary income, on an annual basis, to the
extent that the carried forward capital loss exceeds the future capital gain.
Individual Shareholders will be subject to federal income tax on any ordinary
income recognized as a result of the Merger at a maximum rate of 39.6 percent.
Corporate Non-Continuing Shareholders will be subject to federal income
tax on any ordinary income or capital gains recognized as a result of the
Merger at a maximum rate of 35 percent (39 percent for certain corporations in
order to effect the phase-out of the benefits of the graduated rates applied to
income below $75,000) and generally will be able to use any capital losses only
to offset capital gains. However, unused capital losses of corporate
Shareholders may be (i) carried back to each of the three taxable years
preceding the taxable year in which the loss is recognized and (ii) carried
forward to each of the five taxable years following the taxable year in which
the loss is recognized.
Federal Income Tax Consequences for Holders of Warrants to Purchase Common
Stock. If the Merger is approved, each warrant to purchase a share or shares of
Common Stock outstanding immediately prior to consummation of the Merger will
be exchanged, if held by a Continuing Warrant Holder, for a warrant to purchase
the same number of shares of common stock of Holdings on the same terms and
conditions or, if held by a Non-Continuing Warrant Holder, will be converted
into the right to receive, upon the exercise of such warrant, cash equal to the
Merger Payment for each of the shares of Common Stock for which such warrant
may be exercised less the exercise price for each such share.
The exchange of the Continuing Warrant Holders' warrants to purchase
Common Stock for warrants to purchase Holdings' common stock will be a taxable
exchange. Each Continuing Warrant Holder will recognize gain or loss equal to
the difference, if any, between (i) the value of the Holdings' common stock
warrant received by the Continuing Warrant Holder in the exchange and (ii) the
Continuing Warrant Holder's adjusted tax basis
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immediately prior to the exchange in the Common Stock warrant surrendered in
the exchange.
The conversion of the Non-Continuing Warrant Holders' warrants to purchase
Common Stock into the right to receive cash will also be treated as a taxable
exchange. Each Non-Continuing Warrant Holder will recognize gain or loss equal
to the difference, if any, between (i) the cash payment that the Non-Continuing
Warrant Holder has the right to receive because of the conversion and (ii) the
Non-Continuing Warrant Holder's adjusted tax basis in the Common Stock warrant
surrendered in the conversion immediately prior to the conversion.
Any gain (or loss) recognized by a Continuing Warrant Holder or a
Non-Continuing Warrant Holder on the exchange or conversion of a Common Stock
warrant will be treated as ordinary income (or loss) if the Common Stock
warrant is not a capital asset in the hands of the warrant holder at the time
of the exchange or conversion. Otherwise, if the exchanged or converted Common
Stock warrant had been held by the warrant holder for more than one year prior
to the exchange or conversion, then the gain (or loss) recognized by the
warrant holder in the exchange or conversion will be treated as long-term
capital gain (or loss). If the Common Stock warrant had been held for one year
or less by the warrant holder prior to the exchange or conversion, then the
gain (or loss) recognized by the warrant holder will be treated as short-term
capital gain (or loss).
Federal Income Tax Consequences for Holders of Options to Purchase Common
Stock. If the Merger is approved and completed, each Current Management Company
Option will be converted into the right to receive a Holdings Management
Option. This conversion will not affect the exercise price, expiration date,
vesting provisions or any other provisions of a Current Management Company
Option. The holders of Current Management Company Options should not recognize
any taxable income as a result of this conversion.
If the Merger is approved and completed, each Former Management Company
Option to purchase shares of Company Stock will be converted into the right to
receive a Merger Payment for each share of Common Stock as to which such option
is exercisable, less the exercise price for each such share. This conversion
will be treated as a taxable exchange, and the Former Management Company Option
holder will recognize gain equal to the cash payment that the Former Management
Company Option holder has the right to receive. That is, the Former Management
Company Option holder will recognize gain for each share of Common Stock as to
which the Former Management Company Option was exercisable equal to the Merger
Payment less the exercise price of the option.
Purposes and Reasons for the Merger
The Board's purpose in proposing to the Shareholders the transactions
contemplated by the Proposal is to provide the Company greater flexibility in
structuring financing arrangements and additional potential sources of capital
that will enable it to operate efficiently, expand its business and improve its
market position, while providing fair treatment to the Non-Continuing
Shareholders. The Board believes that, as a private company, the Company
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might be better able to attract venture capitalists for the reasons set forth
under "Special Factors -- Background of the Merger -- Current Effects of
Borrowings and Equity Financing." In addition, the Board believes that
operating the Company as a private company that does not include the
Non-Continuing Shareholders will significantly reduce or eliminate certain
costs that currently are necessary to operation of the Company. Such costs
include those incurred to pay the Transfer Agent (approximately $6,000 per
year); those required to communicate with the approximately 3,400 Shareholders
(approximately $28,500 per year); those required to make the necessary filings
with, and otherwise comply with the regulations of, the Commission and The
NASDAQ SmallCap Market, including legal fees and expenses (approximately
$75,000 per year). The Board estimates that the annual savings for the Company
due to the reduction or elimination of these costs would be approximately
$109,500. The majority of this savings would result from reductions in audit
and legal fees associated with the Company's compliance with federal securities
laws and regulations. The Company would also incur significantly lower expenses
relating to printing, mailing and postage charges. In addition, the Company
would not in the future incur certain other charges due to its status as a
public corporation.
Conflicts of Interest
Steven L. Foster, as Chief Executive Officer and Chairman of the Board of
the Company, is the only member of the Board and/or executive officer of the
Company who is a Continuing Shareholder. Mr. Foster, as an executive officer
and director of the Company and as a Continuing Shareholder, is a participant
on both sides of the proposed Merger because, upon consummation of the
Corporate Formation, he will be a shareholder in Holdings, which will wholly
own the Surviving Company, and he will own Holdings Management Options and
Holdings Performance Options. In addition, Mr. Foster and each of the other
Continuing Shareholders entered into the Voting Agreement whereby they each
agreed to vote the shares of Common Stock owned by them in favor of the
Proposal.
Daniel M. Smith, President, Chief Operating Officer and a Director of the
Company, is also a participant on both sides of the proposed Merger because,
upon consummation of the Merger and related transactions, he will own Holdings
Management Options and Holdings Performance Options.
Further, it is a condition to consummation of the Merger that the
Continuing Shareholders enter into the Stockholders Agreement. In addition, it
is a condition to consummation of the Merger that (i) Mr. Foster, Mr. Smith and
Stephen Weis, Vice President of Operations of the Company, each enter into an
"Employment/Noncompetition agreement with the Surviving Company (collectively,
the "Employment/Noncompetition Agreements"), (ii) Holdings lend Mr. Foster and
designees $375,000 for the purchase of shares of common stock of Holdings (the
"Foster Loan"), and (iii) Holdings lend Kevin Troy, a Shareholder and advisor
to the Company, $50,000 (exclusive of any amounts lent to Mr. Troy under the
Foster Loan) for the purchase of shares of common stock of Holdings. Except as
described in this Proxy Statement, there will be no other relationships that
will continue between the
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Company and Holdings and any persons who are officers, directors or
Shareholders of the Company.
Mr. Foster's and Mr. Smith's continuing interest in the Company presents
each of them with a conflict of interest in voting for the Proposal or
recommending that the Non-Continuing Shareholders vote for the Proposal. In
addition, each Continuing Shareholder, even if not a member of management or
employee of the Company, may have an interest in voting their shares of Common
Stock in favor of the Proposal because their interests in the Merger are not
the same as those of the Non-Continuing Shareholders. See "Special -- Certain
Effects of the Merger." There are seven Continuing Shareholders.
As of the Record Date, Mr. Foster held a total of 1,310,000 shares of
Common Stock (approximately 14.3 percent of the total shares of Common Stock
outstanding), the members of the Board and the executive officers of the
Company owned an aggregate of 1,327,250 shares of Common Stock (approximately
14.5 percent of the total shares of Common Stock outstanding), and Mr. Rubin, a
personal friend and business associate of Mr. Foster, held a total of 1,240,765
shares of Common Stock (approximately 13.6 percent of the total shares of
Common Stock outstanding). See "Security Ownership of Certain Beneficial Owners
and Management." If the Corporate Formation and the Merger are consummated,
immediately thereafter, Mr. Foster, as a Continuing Shareholder, will own a
total of __________ shares of common stock of Holdings (approximately ____
percent of the total shares of common stock of Holdings outstanding at the
Effective Time, assuming full conversion of the preferred stock of Holdings
issued in the Private Placement), and Mr. Rubin, as a Continuing Shareholder,
will own a total of __________ shares of common stock of Holdings
(approximately ____ percent of the total shares of common stock of Holdings
outstanding at the Effective Time, assuming full conversion of the preferred
stock of Holdings issued in the Private Placement). See "Proposal to Approve
the Merger -- Certain Effects of the Merger." In addition, Mr. Foster will own
Holdings Management Options and Holdings Performance Options to purchase an
aggregate of _______ shares of common stock of Holdings, and Mr. Rubin will own
Holdings Management Options and Holdings Performance Options, which he will
receive in his capacity as a Continuing Shareholder and as an Other Option
Holder, to purchase an aggregate of _______ shares of common stock of Holdings.
As of the Record Date, Mr. Smith did not own any shares of Common Stock.
See "Security Ownership of Certain Beneficial Owners and Management." If the
Corporate Formation and the Merger are consummated, immediately thereafter, Mr.
Smith will own Holdings Management Options and Holdings Performance Options to
purchase an aggregate of _______ shares of common stock of Holdings.
As of the Record Date, the seven Continuing Shareholders held an aggregate
of 3,983,490 shares of Common Stock (approximately 43.6 percent of the total
shares of Common Stock outstanding). If the Corporate Formation and the Merger
are consummated, immediately thereafter, the Continuing Shareholders will own
an aggregate of __________ shares of common stock of Holdings (approximately
____ percent of the total shares of
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common stock of Holdings outstanding at the Effective Time, assuming full
conversion of the preferred stock of Holdings issued in the Private Placement).
Consummation of the Merger may have a positive effect on the liquidity of
Holdings and the Surviving Company. The Merger will not be consummated unless
the Corporate Formation and the Private Placement are consummated. After
deducting the Merger Payments of approximately $2,577,154, expenses associated
with consummation of the Merger of approximately $__________ and expenses
associated with consummation of the Private Placement of approximately
$550,000, Holdings will have approximately $__________ for the development of
additional billiard clubs and working capital if the Private Placement is
consummated. See "Financing of the Merger" and "Fees and Expenses." Such an
infusion of capital may enable Holdings to expand its business and improve its
profitability, which in turn would likely make Holdings more attractive to
potential investors.
Effect if the Merger is Not Approved
The Board expects that if the Proposal is not approved by the
Shareholders, or if the Merger is not consummated for any other reason, the
Board will continue to manage the Company as an ongoing business. In addition,
if the Proposal is not approved by the Shareholders, neither the Corporate
Formation nor the Private Placement will be consummated. See "Financing of the
Merger." No other transaction is currently under consideration by the Company
as an alternative to the Merger, although the Company from time to time may
explore other alternatives if the Proposal is not approved.
PROPOSAL TO APPROVE THE MERGER
General
Because the Proposal will terminate the interests of the Non-Continuing
Shareholders in the Company while enabling the Continuing Shareholders and the
Childs Group to obtain ownership of all of the equity interest in Holdings,
which will wholly own the Surviving Company, Shareholders will have one vote
per share of Common Stock with respect to the Proposal. The description of the
Agreement and Plan of Merger (the "Merger Agreement") included in this Proxy
Statement is qualified in its entirety by reference to the Merger Agreement, a
copy of which is attached hereto as Appendix A.
Certain Effects of the Merger
The Merger Agreement provides that, subject to its terms and conditions:
(i) Sub will be merged with and into the Company when Articles of Merger
are filed and recorded with the Secretary of State of the State of Florida (the
"Effective Time"),
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and each share of Common Stock held by Non-Continuing
Shareholders (the "Other Common Stock") will be converted into the right to
receive the Merger Payment of $0.50 in cash, without interest;
(ii) the Other Common Stock will be canceled;
(iii) each share of common stock of Sub owned by Holdings will be
converted into the right to receive one share of Series A Common Stock, par
value $.001 per share, of the Surviving Company and one share of Series B
Common Stock, par value $.001 per share, of the Surviving Company;
(iv) each warrant to purchase a share or shares of Common Stock held
immediately prior to consummation of the Merger by a Continuing Warrant Holder
will be exchanged for a warrant to purchase the same number of shares of common
stock of Holdings on substantially the same terms and conditions;
(v) each warrant to purchase a share or shares of Common Stock held
immediately prior to consummation of the Merger by a Non-Continuing Warrant
Holder will be converted into the right to receive, upon the exercise of such
warrant, a Merger Payment for each share of Common Stock as to which the
warrant is exercised, less the exercise price for each such share;
(vi) each Former Management Company Option outstanding immediately prior
to consummation of the Merger will be converted into the right to receive a
Merger Payment for each share of Common Stock as to which the option is
exercisable, less the exercise price for each such share;
(vii) each Current Management Company Option outstanding immediately prior
to consummation of the Merger will be exchanged for an option to receive a
Holdings Management Option;
(viii) the Company will be the Surviving Company in the Merger, and Sub
will cease to exist as a result of the Merger;
(ix) the articles of incorporation and by-laws of Sub will be the articles
of incorporation and by-laws of the Surviving Company; (x) the name of the
Company shall be the name of the Surviving Company; and
(xi) Immediately after consummation of the Corporate Formation and the
Private Placement and the Effective Time, the Non-Continuing Shareholders will
possess no interest in, or rights as Shareholders of, the Company or Holdings,
Holdings will be owned by the Continuing Shareholders and the Childs Group, and
the Surviving Company will be a wholly owned subsidiary of Holdings. The board
of directors and officers of the Surviving Company will be determined by
Holdings as the sole shareholder of the Surviving Company.
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Effective Time of the Merger
The Merger Agreement provides that the Merger will become effective upon
the filing and recordation of Articles of Merger with the Secretary of State of
the State of Florida (i.e., the Effective Time). The Company intends to make
such filing promptly after the satisfaction or written waiver, where
permissible, of the conditions contained in the Merger Agreement.
Amounts Paid in the Merger
The Merger Payments will be funded by the Company from funds obtained
through the Private Placement. See "Financing of the Merger."
Payment for Common Stock in the Merger
In order to receive the Merger Payment, each Non-Continuing Shareholder
will be required to (i) submit a duly executed letter of transmittal (a "Letter
of Transmittal") in the form to be sent to each such Shareholder as promptly as
practicable after the Effective Time to a bank or trust company mutually
acceptable to the Company and Holdings (the "Exchange Agent") and (ii)
surrender their Common Stock certificates to the Exchange Agent.
Upon receipt of a duly executed Letter of Transmittal and Common Stock
certificates, the Exchange Agent will promptly issue a check to the person or
persons entitled thereto in an amount equal to $0.50 for each share of Other
Common Stock owned by such person or persons. No interest will be paid or
accrued on amounts payable.
Instructions with respect to the submission of a Letter of Transmittal to
be used for this purpose will be mailed to Non-Continuing Shareholders as
promptly as practicable after the Effective Time. It is also expected that
Letters of Transmittal will be available at the office of the Exchange Agent.
NON-CONTINUING SHAREHOLDERS SHOULD NOT SEND ANY COMMON STOCK CERTIFICATES WITH
THE ENCLOSED PROXY OR AT ANY TIME PRIOR TO RECEIPT OF A LETTER OF TRANSMITTAL.
The Merger Agreement provides that Holdings shall deposit in trust for the
benefit of Non-Continuing Shareholders with the Exchange Agent the funds to
which the holders of shares of Other Common Stock will be entitled in the
Merger. Pursuant to the terms of the Merger Agreement, upon consummation of the
Merger, Holdings will enter into an exchange agreement with the Exchange Agent,
which shall govern the Exchange Agent's duties and responsibilities with
respect to distribution of the Merger Payments and related matters (the
"Exchange Agreement").
Any amount remaining on deposit with the Exchange Agent upon expiration of
the term of the Exchange Agreement will be released and paid by the Exchange
Agent to Holdings, which will be liable for any payment to be made thereafter
under the terms of the Merger Agreement, after which time persons entitled
thereto may look, subject to applicable
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abandonment, escheat or similar laws, only to Holdings for any cash payments
remaining to be paid to them pursuant to the Merger, without any interest
thereon.
Conditions to the Merger
The respective obligations of the Company, Holdings and Sub to consummate
the Merger are subject to the fulfillment or written waiver of the following
conditions at or prior to the Effective Time: (i) the approval of the Proposal
by Shareholders owning a majority of the outstanding Common Stock; (ii) the
filing, occurrence or acquisition of all material consents, approvals, orders
or authorizations of, or registrations, declarations or filings with, or
expirations of waiting periods imposed by, any governmental entity; (iii) the
absence of any order, ruling or injunction of any court of competent
jurisdiction or other governmental entity preventing the consummation of the
Merger or limiting or restricting the Company's or Holdings' conduct or the
operation of the business of the Company or Holdings after the Merger; (iv) the
absence of any statute, rule or regulation that makes consummation of the
Merger illegal; (v) the execution and delivery of the Exchange Agreement; (vi)
the execution and delivery of the Employment/Noncompetition Agreements; (vii)
the execution and delivery of a management agreement among the Company,
Holdings and Childs whereby Childs would provide consulting and management
advisory services to the Surviving Company and Holdings and their subsidiaries
(the "Management Agreement"); (viii) the execution and delivery of the
Stockholders Agreement; (ix) the execution and delivery of a license agreement
by the Company and Jillian's Billiard Club Inc. ("Jillian's Boston") whereby
the Company would grant Jillian's Boston a license to use the Jillian's name
and all other trade names, trademarks and service marks of the Company (the
"License Agreement"); (x) the execution and delivery of an option agreement by
the Company and the owners of Jillian's Boston whereby the owners of Jillian's
Boston would grant the Surviving Company an option to acquire Jillian's Boston
(the "Option Agreement"); (xi) the execution and delivery of debt instruments
by each of Steven L. Foster and designees, Kevin Troy and Island under which
Holdings will lend funds to Messrs. Foster and designees and Troy and Island
for the purchase of shares of common stock of Holdings; (xii) consummation of
the Private Placement; and (xiii) consummation of the Corporate Formation. In
addition, Holdings' and Sub's obligation to effect the Merger is subject to the
fulfillment or written waiver of the following conditions: (i) the Company's
having performed all its obligations contained in the Merger Agreement at or
prior to the Effective Time; (ii) the representations and warranties of the
Company being true and correct in all material respects at the Effective Time;
(iii) the Company's delivery to Holdings of a legal opinion covering certain
matters with respect to the Merger; (iv) the Company's refinancing of its
existing debt; (v) the cancellation of all registration rights with respect to
securities of the Company; and (vi) the Company's certification to Holdings and
Sub that the shares of Common Stock being transferred in the Merger are not
U.S. real property interests within the meaning of the Internal Revenue Code of
1986, as amended (the "Code") and applicable treasury regulations. Furthermore,
the Company's obligation to effect the Merger is subject to the fulfillment or
written waiver of the following conditions: (i) Holdings' and Sub's having
performed all obligations contained in the Merger Agreement at or prior to the
Effective Time; (ii) the representations and warranties of Holdings and Sub
being true and correct in all material respects at the
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Effective Time; and (iii) Childs' delivery to the Company of a legal opinion
covering certain matters with respect to the Merger.
Waiver and Amendment
Any provision of the Merger Agreement may be waived in writing at any time
by the party that is entitled to the benefits thereof and the Merger Agreement
may be amended in writing at any time before or after approval of the Merger by
the Shareholders, but after any such approval no amendment may be made which by
law requires further approval by the Shareholders without the approval of the
Shareholders.
Fees and Expenses
The Merger Agreement provides that all fees and expenses incurred in
connection with the Merger Agreement and the Purchase Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses, except that if the Merger is consummated, (i) the Company will pay
all of Childs fees and expenses and (ii) the Company will pay Childs a one-time
transaction fee of $200,000. In addition, pursuant to the Merger Agreement, the
Company is obligated to pay Childs a termination fee of $500,000 if the Merger
Agreement is terminated under certain circumstances, including, but not limited
to, the failure of the Shareholders to approve the Merger and the withdrawal of
the Board of Directors of its recommendation that Shareholders vote in favor of
the Merger.
Rights of Dissenting Shareholders
Any Shareholder objecting to the Proposal is not entitled to any statutory
rights of dissent or appraisal under Florida law or the Articles of
Incorporation or Bylaws of the Company.
Vote Required and Recommendation of the Board of Directors
The Merger will be approved if and only if it receives the favorable vote
of the majority of all Common Stock outstanding on the Record Date. As of the
Record Date, members of the Board and executive officers of the Company owned
1,327,250 shares of Common Stock (approximately 14.5 percent of the total
shares of Common Stock outstanding). Steven L. Foster, as Chief Executive
Officer and Chairman of the Board of the Company, is the only member of the
Board and/or executive officer of the Company that is a Continuing Shareholder.
Such Shareholder held a total of 1,310,000 shares of Common Stock
(approximately 14.3 percent of the total shares of Common Stock outstanding) as
of the Record Date. In addition, such Shareholder, along with the other
Continuing Shareholders, entered into the Voting Agreement under which he
agreed, among other matters, to vote all of the shares of Common Stock held by
him in favor of the Proposal.
The board of directors of Holdings has approved the Merger, the execution
and delivery of the Merger Agreement by Holdings and consummation of the
Merger. The board of
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directors and shareholder of Sub have approved the Merger, the execution and
delivery of the Merger Agreement by Sub and consummation of the Merger.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
MERGER.
REGULATORY MATTERS
No federal or state regulatory approvals must be obtained in connection
with the Proposal. However, certain filings will be required to be made with
the Secretary of State of the State of Florida in order to effect the Merger.
FINANCING OF THE MERGER
The Company has determined that approximately $2,577,154 in cash will be
required in order to make the Merger Payments to the Non-Continuing
Shareholders and that approximately $23,500 in cash will be required in order
to make payments to Non-Continuing Warrant Holders and holders of Former
Management Company Options. For a discussion of the Company's estimate of the
total cost of the Merger, see "Fees and Expenses." The Company intends to use
funds obtained through the Private Placement with the Childs Group to make the
Merger Payments, and to provide the Surviving Company with funds for working
capital and for the development of additional billiard clubs. The Childs Group
has no obligation to consummate the Private Placement if the Proposal is not
approved by the Shareholders. See "Material Terms of the Purchase Agreement."
If the Proposal is not approved by the Shareholders, the Company, at that time,
will assess whether it will seek to structure another transaction or continue
to retain the Placement Agent to raise funds for the Company. The respective
obligations of the Company, Holdings and Sub to consummate the Merger are
contingent upon, among other things, consummation of the Corporate Formation
and the Private Placement. See "Proposal to Approve the Merger -- Conditions to
the Merger." In the event that the Company does not consummate the Merger, it
will continue to conduct its operations as a public company.
By written agreement dated May 23, 1996, the Company granted the Placement
Agent an exclusive right to present a merger proposal by ____________, 199_
acceptable to the Company designed to raise $6,000,000 to $12,000,000 in gross
proceeds through the private placement of equity and/or subordinated debt
securities to a limited number of accredited investors. As of the date of this
Proxy Statement, the Placement Agent and its controlling persons do not
beneficially own any equity securities of the Company. Neither the Placement
Agent nor its controlling persons is affiliated with, or has ever had any
relationship with, the Company or any of its controlling persons.
In February, 1996, Childs was introduced to the Company. On March 13,
1997, the Company and Childs entered into a non-binding letter of intent
whereby the parties proposed, among other things, the Corporate Formation, the
Merger and the Private Placement. The Purchase Agreement was executed on
____________, 1997, in
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<PAGE> 79
which the parties agreed to consummate, among other things, the Corporate
Formation, and the Private Placement if, among other things, the Proposal is
approved by the Shareholders. For a detailed description of the material terms
of the Purchase Agreement, see "Material Terms of the Purchase Agreement,"
below.
MATERIAL TERMS OF THE PURCHASE AGREEMENT
Pursuant to the terms of the Purchase Agreement, if the Merger is approved
by the Shareholders, immediately prior to the consummation of the Merger, the
Corporate Formation will be consummated and the Childs Group will purchase the
Preferred Stock (as defined below) in the Private Placement.
In the Private Placement, the Childs Group would purchase 12,872,774
shares of convertible preferred stock of Holdings, par value $.001 per share
(the "Preferred Stock"), for $12,000,000. Each share of Preferred Stock would
be convertible at any time, at the option of the holder, into one share of
common stock of Holdings, at a price of $0.9322 per share, subject to certain
customary anti-dilution adjustments under certain circumstances. Holders of the
Preferred Stock would be entitled to cause Holdings to redeem their shares at a
price of $0.9322 per share if Holdings sold shares of its common stock or the
common stock of any of its subsidiaries in a public offering or upon a change
in the control of Holdings (the "Put Right"). Dividends on the Preferred Stock
would be payable in shares of Preferred Stock at a rate of twelve percent per
annum on a cumulative basis at the time of redemption, whether by exercise of
the Put Right or otherwise. Dividends not payable on an anniversary date would
be payable pro rata for the period elapsed subsequent to the immediately prior
anniversary date. Holders of the Preferred Stock would be entitled to voting
rights identical to the voting rights of holders of shares of common stock of
Holdings, on an "as if converted" basis, and would have special voting rights
as a class requiring approval of the holders of a majority of the shares of
Preferred Stock outstanding for (i) the creation of any security senior to or
pari passu with the Preferred Stock, (ii) any amendment to Holdings' charter
adversely affecting the rights of the holders of the Preferred Stock or (iii)
certain material transactions, including any transaction involving a change in
control of Holdings. The Preferred Stock would be entitled to a liquidation
preference over the common stock of Holdings, or any other class or series of
stock of Holdings ranking junior to the Preferred Stock, in an amount equal to
the original purchase price of the Preferred Stock plus accrued but unpaid
dividends. In addition, holders of shares of Preferred Stock would be granted
certain demand and piggyback registration rights.
If the Preferred Stock is placed on the terms described above, the
Continuing Shareholders would realize an immediate increase in the net tangible
book value of the shares of common stock of Holdings owned by them, while
purchasers of the Preferred Stock would experience an immediate dilution
(reduction) in the net tangible book value of their shares of Preferred Stock
because the price per share of the Preferred Stock would exceed the net
tangible book value per share of the common stock of Holdings immediately
subsequent to placement of the Preferred Stock. Net tangible book value per
share is (i) the difference between the total tangible assets and total
liabilities of Holdings divided by (ii) the number of shares of
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<PAGE> 80
common stock of Holdings and the number of shares of Preferred Stock that are
expected to be outstanding immediately subsequent to placement of the Preferred
Stock. The following table illustrates the increase in the net tangible book
value of the shares of common stock of Holdings that the Continuing
Shareholders would realize if the Preferred Stock were placed.
<TABLE>
<CAPTION>
<S> <C> <C>
Private Placement price per share of Preferred Stock $0.93
Net tangible book value per share of Common Stock at
December 31, 1996 $0.17
Increase in net tangible book value per share of
Common Stock after Holdings' Private Placement, Purchase
and Merger transactions, assuming the conversion of
Preferred Stock into Holdings common stock at
December 31, 1996 $0.31
-----
Pro forma net tangible book value of
Holdings' common stock at December 31,
1996 $0.48
=====
Dilution of net tangible book value per
share of Holdings' common stock, assuming the
conversion of Perferred Stock into Holdings
common stock at December 31, 1996 $0.45
</TABLE>
In consideration of the Placement Agent's undertaking, the Company expects
to pay, upon the successful raising of at least $6,000,000 in gross proceeds
from the Private Placement, an amount equal to five percent of such gross
proceeds. In addition, Holdings will lend to Island and its officers,
concurrently with the consummation of the Private Placement, up to $200,000 in
the aggregate, which will be used to purchase up to 400,000 shares of common
stock of Holdings for a price of $0.50 per share. The Company has also agreed
to accept Island's promissory note as payment for any shares acquired pursuant
to such agreement.
If the Private Placement is not consummated, each of the parties will bear
its own expenses, including legal, accounting and other professional fees,
incurred in connection therewith. If the Private Placement is consummated, the
Company will pay all of Childs" expenses, including its legal, accounting,
professional and out of pocket expenses, related to
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this investment. The Company estimates that its fees and expenses in connection
with the placement of the Preferred Stock, most of which would be paid by the
Company out of the proceeds of the sale of such Preferred Stock and some of
which may be deferred, would total approximately $1,380,000, which consists of
$600,000 in fees and expenses payable to the Placement Agent, a $200,000
one-time transaction fee payable to Childs, $400,000 in legal expenses and
$180,000 in accounting, travel and miscellaneous expenses. In addition, the
Company has incurred legal expenses of approximately $250,000 through December
31, 1996.
BUSINESS AND PROPERTIES OF THE COMPANY
Description of Business
General. From its organization in 1983 through March 16, 1989, the Company
conducted business as a wholesale dealer engaged in the purchase and sale of
fine gold and pure silver in the form of bullion and granules. The Company
registered the Common Stock under the Exchange Act on July 15, 1985. The
Company terminated its precious metals division with the sale of the assets
used in the precious metals operation on March 16, 1989. The operations and all
related gains and losses of the metals division have been treated as
discontinued operations. From the date of the sale of its metals operation and
until April 11, 1990 when the Company acquired an interest in a billiard club
business (discussed below), the Company's primary business operation was
conducted through its wholly owned subsidiary, Dixie Run Corporation ("Dixie
Run"). Dixie Run and its wholly owned subsidiaries had been engaged in the
business of identifying, purchasing and developing raw land suitable for
subdivision and resale to builders and developers and construction of primarily
luxury residential homes. On June 7, 1990, the Board approved the
discontinuation of the operations of Dixie Run and, accordingly, Dixie Run has
been treated as discontinued operations. For a discussion of the discontinued
precious metals division and real estate subsidiary, see "Financial Statements
of the Company."
On March 11, 1990, the Board approved the acquisition by the Company of a
majority interest in Jillian's, Inc., formerly Jillian's Entertainment
Corporation, a Delaware corporation formed to acquire and operate billiard
clubs located in various cities throughout the United States. The Company
entered into a Stock Exchange Agreement, dated April 11, 1990 (the "Acquisition
Date"), with Jillian's Inc. and Steven L. Foster, The Frank and Celia Foster
Family Trust, Steven Rubin and Kevin Troy (collectively, the "Foster Group")
pursuant to which it acquired a 51 percent ownership interest in Jillian's,
Inc., and the Foster Group acquired the remaining 49 percent ownership
interest. The Company acquired the remaining 49 percent of Jillian's, Inc. from
the Foster Group on March 14, 1991. See "Financial Statements of the Company"
for a discussion of the terms and conditions of the agreements governing the
acquisition of Jillian's, Inc.
Pursuant to a series of related transactions, on the Acquisition Date,
Jillian's, Inc. acquired all of the outstanding stock of corporations that own
and operate billiard clubs in Seattle, Washington and Miami, Florida. Since the
Acquisition Date, Jillian's, Inc., through wholly owned subsidiaries, has
constructed new billiard clubs in Cleveland, Ohio, Cleveland
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Heights, Ohio, Worcester, Massachusetts, Champaign, Illinois, Annapolis,
Maryland, Long Beach, California and Tacoma, Washington and additionally, has
acquired an existing billiard club in Pasadena, California.
The Jillian's clubs are part of the new generation of upscale billiard
clubs in America. These new billiard clubs offer a wider variety of
entertainment and food and beverage service and are designed to attract a
broader segment of the adult population than traditional pool halls. The clubs
are decorated in an appealing and comfortable style. The Jillian's billiard
clubs face competition in their respective cities from other billiard clubs, as
well as from other leisure time activities, such as theaters, bowling centers,
theme restaurants and night clubs. The Jillian's billiard clubs also compete
with entertainment centers, large facilities which offer diverse forms of
entertainment, such as billiards, virtual reality and other electronic games,
restaurant and bar services and nightclub-style entertainment. Some of these
competitors operate single outlet facilities, while others operate multi-unit
entertainment facilities. For a description of some of the competitors that
operate a chain of entertainment facilities, see "Special Factors -- Background
of the Merger -- General." The Jillian's clubs compete with other billiard
clubs, leisure time activities and entertainment centers by providing adult
customers a single stop destination for an entire evening's entertainment. The
Jillian's clubs offer customers an upscale, comfortable setting, billiards
activities, a variety of entertainment activities (e.g., electronic games,
darts and pingpong) and food and beverage services.
The Company currently is concentrating its efforts on its investment in
the billiard club business. Although no assurance can be given, the Company
intends to develop, through wholly owned subsidiaries of Jillian's, Inc.,
additional Jillian's clubs that offer the same forms of entertainment that are
offered by the existing clubs. These clubs may be owned by Jillian's, Inc.
subsidiaries directly or indirectly through their participation in limited
partnerships or joint ventures that own the clubs. In the case of clubs owned
by limited partnerships, the Company expects that in each case a wholly owned
subsidiary would be the general partner, own a substantial interest in the
limited partnership and receive a management fee. The Company currently is
investigating potential sites for clubs in Massachusetts and certain other
areas in the Midwest and Mid-Atlantic states.
The Company hired four new executive officers during the first half of
1995. See "Executive Officers and Directors of the Company." These officers
will assist the Company with its efforts to expand its billiard club business,
as discussed above. As of the date of this Proxy Statement, the Company is not
considering any new lines of business, concepts or changes in priorities. Prior
to the hiring of the officers, the Company was thinly staffed at the management
level. The Company believes that the addition of these new personnel will
enable it to provide more efficient and effective management, including the
centralization of its administrative operations.
Jillian's Clubs. Set forth in the table below are descriptions of the
existing Jillian's clubs.
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<PAGE> 83
<TABLE>
<CAPTION>
DATE OF
COMMENCEMENT DESCRIPTION OF SPACE NUMBER OF BRUNSWICK
NAME OF OF (APPROXIMATE BILLIARD TABLES;
SUBSIDIARY OWNER LOCATION OF CLUB OPERATIONS FOOTAGE) OTHER AMENITIES
---------------- ---------------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Jillian's - Kendall Miami, Florida November 1989 9,600 square feet; 27 tables; other
located in a shopping table top games; high
center next to a tech video games; bar
nine-screen movie and food service
theater
Jillian's - Seattle Seattle, April 1990 18,500 square feet; 34 tables; other
Washington two-story free table top games;
standing building high tech video
games; separate room
available for private
rental; bar and food
service on both floors
Jillian's Billiard Club Cleveland, Ohio July 1990 13,000 square feet; 25 tables; other
of Cleveland, Inc. (on the banks of two floors of a table top games;
("Jillian's - Cleveland") the Cuyohoga building high tech video
River) games; separate room
available for private
rental; bar and food
service on both floors
Jillian's - Cleveland Cleveland November 1992 9,600 square feet 21 tables; other
Heights(1) Heights, Ohio table top games;
high tech video
games; bar and food
service
Jillian's - Pasadena "Old Town" August 1993(2) 7,200 square feet; two 16 tables; bar and
Pasadena, floors of a building food service on both
California with additional floors
outside seating on the
first floor
Jillian's - Worcester(1) Worcester, December 1993 16,000 square feet, 24 tables; other
Massachusetts including a 5,000 table top games; high
(near Worcester square foot game room; tech video games; bar
Polytechnic one-story free and food service
Institute) standing building
Jillian's - Champaign(1) Champaign, August 1994 12,000 square feet; 20 tables; other
Illinois two-story free table top games;
(adjacent to the standing building high tech video
University of games; bar and food
Illinois campus) service
Jillian's - Annapolis(1) Annapolis, October 1994 10,000 square feet; 16 tables; other
Maryland (near one-story free table top games;
the U.S. Naval standing building high tech video
Academy and the games; bar and food
Annapolis service
historical
district)
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
DATE OF
COMMENCEMENT DESCRIPTION OF SPACE NUMBER OF BRUNSWICK
NAME OF OF (APPROXIMATE BILLIARD TABLES;
SUBSIDIARY OWNER LOCATION OF CLUB OPERATIONS FOOTAGE) OTHER AMENITIES
---------------- ---------------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Jillian's - Long Beach Long Beach, May 1995 16,000 square feet; 16 tables; bar and
California two floors of a food service;
13-story free standing nightclub located in
building the basement
Jillian's - Tacoma Tacoma, December 1995 25,000 square feet 25 tables; other
Washington including a game room; table top games; high
(near the two-story free tech video games; bar
University of standing building and food service
Puget Sound
campus)
</TABLE>
(1) The Cleveland Heights, Worcester, Champaign and Annapolis clubs are
owned by limited partnerships in which the Jillian's subsidiary owner is
the general partner and owns a substantial (87%, 25%, 43% and 79%,
respectively) interest. The Jillian's subsidiary receives a management fee
for operating the related club equal to 6.5% of the gross revenues in the
case of the Cleveland Heights club, 6% in the case of the Champaign and
Annapolis clubs and 5% in the case of the Worcester club.
(2) The club located in Pasadena was an existing billiard club/diner that
the Company, through Jillian's - Pasadena, acquired in August 1993. As
part of the acquisition, the Company acquired all of the assets located at
the existing club (including all leasehold improvements, furniture,
fixtures, bar and kitchen equipment and billiard tables), all of the
seller's interest in the lease for the premises and all alcoholic beverage
licenses and other licenses necessary to operate the club.
Description of Properties
Administrative Operations. On June 13, 1995, the Company entered into a
written lease agreement for 3,020 square feet of space for its administrative
operations to be located at 727 Atlantic Avenue in Boston, Massachusetts. The
lease began on July 28, 1995 and expires on July 28, 1998. In addition, the
lease has a two-year renewal period. Under the lease agreement, the Company is
obligated to pay the lessor minimum annual rent equal to $31,710 (payable in
monthly installments of $2,642) for the first year, $34,730 (payable in monthly
installments of $2,894) for the second year and $37,750 (payable in monthly
installments of $3,146) for the third year.
On June 1, 1994, the Company entered into a written lease agreement for
its administrative operations in an executive center located at One Alhambra
Plaza, Coral Gables, Florida. The lease is for 1,243 square feet of office
space and began on July 1, 1994 and expires June 30, 1999. The total required
monthly payments are $1,916, all of which is paid by third parties who sublease
the space.
Jillian's, Inc. leases additional administrative space in an executive
center located at 508 North Second Street, Fairfield, Iowa. The lease began on
April 1, 1994 and expires on March 31, 1997. The required monthly payments are
$910.
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<PAGE> 85
Jillian's Clubs. Set forth in the table below are descriptions of the
leases for the Jillian's clubs.
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT ENDED 3/31/96
- --------- ---- ---------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Jillian's 5/26/89; triple net; $192,000 ($16,000 per 6% of gross sales in under 3/7/94
- - Kendall amended 10 years; month); adjusted each excess of $1,000,000 amendment,
3/7/94 two year based on increases lessor was
five-year in the Consumer Price granted warrants
renewal Index ("CPI"), but to purchase
options limited to 6% of the 65,000 shares of
prior year's annual rent; lessee's common
all CPI adjustments stock at $0.50
deferred until 1/1/95 by per share for a
3/7/94 amendment five-year period
rental payments
for FY-96 of
$262,702, which
includes taxes
and common area
maintenance
charges
Jillian's 8/29/89 triple net; $258,000 ($21,500 per 3% of gross sales in FY-96 rental
- - Seattle 10 years; month); beginning 3/91 excess of $750,000; payments totaled
one and every 12th month adjusted annually $304,610, which
five-year thereafter, monthly rent based on increases included taxes,
renewal will increase based on in CPI, but no more common area
option increase in CPI, but no than 6%; two thirds maintenance
more than 6% annually; if of the percentage charges and
option to renew lease is rental payments can percentage rent
exercised, rent shall be be made by issuing of $14,054 in
agreed to by both parties the lessor warrants cash; FY-96
and based on fair market to purchase shares rental payments
value ("FMV") of of the Company's also made by the
comparable rentals Common Stock on a Company's
one share per dollar issuance of
basis warrants to
purchase 28,108
shares of the
Company's Common
Stock at an
exercise price
of $0.27 per
share
</TABLE>
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<PAGE> 86
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT ENDED 3/31/96
- --------- ---- ---------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Jillian's - 4/20/90; triple net; $69,615 ($5,801 per 5% of gross sales in 11/24/93
Cleveland amended 10 years; month) for years 1-4; excess of $1,392,300 amendment
11/24/93 two $80,325 ($6,694 per for years 1-4, temporarily
five-year month) thereafter; $1,606,500 limited rent and
renewal beginning year 7, rent thereafter common area
options will be increased to an maintenance
amount equal to the charges and
lesser of (i) 105% of the lessor and
annual rent payable for lessee
the prior lease year, or subsequently
(ii) the annual rent verbally agreed
payable for the prior to limit the
lease year adjusted for rents
increases in CPI; if indefinitely to
option to renew lease is $6,000 per month
exercised, rent shall be from October
negotiated, but will not through March
be less than the greater and $9,000 per
of comparable rentals or month from April
the rent payable for the through
last month of the September; in
preceding term; rent for exchange for
each year of first such reduction,
renewal period may not be lessee agreed to
greater than 115% of pay 8.5% of
annual rent of last year gross sales in
of initial term excess of
$650,000 until
lessor received
100% of the
reduced rents
and common area
maintenance
FY-96 rental
payments totaled
$118,478, which
included taxes
and common area
maintenance
charges
Jillian's - 10/17/91 triple net; $57,240 ($4,770 per month none FY-96 rental
Cleveland 10 years; starting 5/92) for years payments for
Heights two 1 and 2; $68,688 ($5,724 primary and
five-year per month) for years 3-6; option space
renewal $76,320 ($6,360 per totaled
options month) for years 7-10; if $110,656, which
renewal option is included taxes
exercised, minimum annual and common area
rent for each of the maintenance
options will be $91,584 charges
and $106,848,
respectively
</TABLE>
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<PAGE> 87
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT ENDED 3/31/96
- --------- ---- ---------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Jillian's - 8/19/93 1st $33,048 ($2,754 per none FY-96 rental
Pasadena sublease: month) for each year payments (for
10 years; through 9/96; thereafter, both subleases)
two rent will be equal to FMV totaled
five-year of comparable rentals $147,985, which
renewal with CPI adjustments included taxes
options starting 4/1/98 and common area
(1,377 sq. maintenance
ft. on charges
ground
floor)
2nd $68,928 ($5,744 per
sublease: month) for each year
5 years; through 9/30/94;
expires thereafter, rent will be
9/30/96; increased by CPI
three
five-year
renewal both subleases provide
options that if a renewal option
(5,744 sq. is exercised, rent for
ft. in such period shall be
basement) agreed upon by the
parties and based on FMV
of comparable rentals
with certain CPI
adjustments
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT ENDED 3/31/96
- --------- ---- ---------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Jillian's 4/21/93 triple net; $123,780 ($10,315 per none separate lease
- - Worcester 10 years; month starting 8/93) for for parking
two years 1-3; $140,284 spaces for the
five-year ($11,690 per month) for same term as
renewal years 4-5; $165,040 building lease;
options ($13,753 per month) for annual rent is
years 6-10; if renewal $13,200 for
option exercised, rent years 1-5 and
for each year of the $15,840 for
first 5-year period will years 6-10; for
be $198,048, and of the the first and
second 5-year period will second renewal
be greater of $198,048 or periods, rent
80% of the then FMV for will be $19,000
similar space and $22,800,
respectively
FY-96 rental
payments totaled
$183,176, which
included taxes,
parking rental
and common area
maintenance
charges
Jillian's 4/14/93 triple net; $64,800 ($5,400 per month none in 10/94, lessee
- - Champaign 10 years; starting 8/93) for years entered into
two 1 and 2; from April 1, separate leasing
five-year 1995, and on April 1 of agreement for
renewal each year thereafter, parking; annual
options during the initial term rent is $5,220
and any extension term, ($435 per month)
the monthly rental amount and the lease
shall be adjusted by expires on
increases in CPI 9/1/97
FY-96 rental
payments totaled
$95,371, which
included taxes,
parking rental
and common area
maintenance
charges
</TABLE>
-86-
<PAGE> 89
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT ENDED 3/31/96
- --------- ---- ---------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Jillian's 4/20/93 triple net; $79,992 ($6,666 per month none FY-96 rental
- - Annapolis 10 years; starting 4/26/93) for payments totaled
two year 1; $90,000 ($7,500 $127,969, which
five-year per month) for year 2; included taxes
renewal $99,996 ($8,333 per and common area
options month) for year 3; maintenance
beginning year 4, the charges
minimum annual rent will
be adjusted upward to an
amount equal to 66 2/3%
of the annual increase in
CPI, with the adjustment
in any year limited to 5%
of prior year's annual
rent; if a renewal is
exercised, the minimum
annual rent for each of
the first and second
five-year renewal periods
will be the same as the
tenth year's rent with
the same CPI adjustment
Jillian's 7/12/93 triple net; $178,935 ($14,911 per none FY-96 rental
- - Long 10 years, month starting 1/94) for payments totaled
Beach two year 1; $220,790 $297,196, which
five-year ($18,399 per month) for included taxes
renewal years 2-3; yearly and common area
options increases of 5% for years maintenance
4-10; if renewal option charges
is exercised, minimum
annual rent will be equal
to annual base rent
payable for immediately
preceding year, increased
by 5% per annum
Jillian's 12/21/94; triple net; $223,119 ($18,593 per none FY-96 rental
- - Tacoma amended 10 years month starting payments totaled
6/15/95 commencement of $70,338, which
operations or 1/1/96) for included taxes
years 1-3; $224,119 and common area
($20,343 per month) for maintenance
years 4-6; $265,116 charges
($22,093 per month) for
years 7-10
</TABLE>
-87-
<PAGE> 90
Legal Proceedings
Neither the Company nor any of its properties currently is subject to any
litigation nor, to the knowledge of the Board, is any material litigation
currently threatened against the Company or any of its properties, other than
ordinary litigation routine to the Company's business, except as follows. In
October 1995, an action to enforce a mechanic's lien was filed against the
Company in the California Superior Court for Los Angeles County by Building
Trade Services Construction, Inc. ("BTS") for approximately $123,000, plus
interest. BTS alleged that the Company had failed to pay for improvements to
the restaurant at Jillian's - Long Beach, with respect to which BTS had served
as the original contractor. The Company filed an answer and cross complaint to
the suit in January 1996. On April 14, 1997, the Company and BTS executed a
settlement agreement and release, whereby the Company agreed to pay $42,500 to
BTS in exchange for the release of the Company from the mechanic's lien and the
dismissal of the action with prejudice.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter Ended December 31, 1996 Compared to Third Quarter Ended
December 31, 1995. The Company had net losses of approximately $215,300 and
$502,100, respectively, for the three and nine month periods ended December 31,
1996 as compared to net losses of approximately $225,100 and $584,400,
respectively, during the three and nine month periods ended December 31, 1995.
The decrease in the net loss for the three months ended December 31, 1996 of
approximately $9,800 as compared to the same period in 1995 was primarily due
to a decrease in general and administrative expenses of approximately $189,000
offset in part by an increase in depreciation and amortization of approximately
$67,000, an increase in interest expense of approximately $25,800 and a
decrease in net club operating income of approximately $106,300. The decrease
in the net loss for the nine months ended December 31, 1996 of approximately
$82,300 compared to the same period in 1995 was primarily attributed to a
cumulative increase in net club operating income of approximately $296,100 and
a decrease in general and administrative expenses of approximately $69,700 and
decreased start-up costs of approximately $82,600. These decreases were offset
in part by increased depreciation and amortization expense relating to new
units of approximately $211,300 and an increase in interest expense of
approximately $117,700 as a result of additional borrowings related to club
development.
The Company had revenues from the clubs of approximately $3,497,600 and
$9,799,900, respectively, for the three and nine month periods ended December
nn31, 1996 as compared to $3,011,700 and $8,182,300, respectively, for the three
and nine month periods ended December 31, 1995. The increase of $1,617,600 for
the nine month period ended December 31, 1996 as compared to the same period in
1995 was due to increases in comparable club sales of $232,300 and increased
revenues of $1,618,000 from the Tacoma club, which
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<PAGE> 91
opened in December 1995. These increases were partially offset by decreased
revenues of approximately $139,800 from the Long Beach club, which opened in
May, 1995.
During the third quarter of Fiscal 1997, the Company analyzed numerous
options regarding the Long Beach club, which continues to incur operating
losses, including selling the unit. In connection with this direction, the
Company wrote down certain long-lived assets of its Long Beach club based upon
its determination that the projected cash flow from a sale will not be
sufficient for the Company to recover the historic carrying amount of the
club's long-lived assets. A charge of $300,000 for the impairment of long-lived
assets is included as an expense of club operations in the accompanying
consolidated condensed statements of operations for the three month and nine
month periods ended December 31, 1996.
The increase in comparable club revenue of $232,300, or approximately
3.3%, was primarily attributed to an increase in the majority of club revenues,
with Seattle being the most noteworthy at 16.7%. These increases were offset by
a combined decrease in club revenues at Miami and Annapolis of approximately
7.6%.
Total costs and expenses increased $450,700 and $1,408,000, respectively,
for the three and nine month periods ended December 31, 1996, as compared to
the same periods ended December 31, 1995. The increase in total expenses was
due primarily to increased cost of club operations of $592,200 and $1,321,500,
respectively, for the three and nine month periods ended December 31, 1996 as
compared to the same periods ended December 31, 1995. Such increase in cost of
club operations is primarily attributed to the Tacoma club, with cost of
operations of approximately $1,146,800 for the nine months ended December 31,
1996 compared to approximately two weeks of operation during the same period of
1995 as well as the aforementioned $300,000 Long Beach impairment of long-lived
asset charge offset partially by reduction of $82,600 in start-up costs and
$69,700 in general and administrative expenses. The $69,700 decrease is
primarily due to reorganization efforts, which decreased overhead by
approximately $39,400 during the quarter ended December 31, 1996.
During the nine months ended December 31, 1996 and 1995, the Company
pursued various financing alternatives to meet working capital and club
development cash needs, including investigating the issuance of additional
equity or debt securities. In connection with such activities, the Company had
incurred professional fees of approximately $113,000 and $217,000,
respectively, for the nine months ended December 31, 1996 and 1995, which is
included in general and administrative expenses.
Interest expense was approximately $84,000 and $251,000, respectively, for
the three and nine month periods ended December 31, 1996 as compared to $58,200
and $133,300, respectively, during the three and nine month periods ended
December 31, 1995. The increase was primarily due to additional borrowing
associated with the development and openings of the Long Beach and Tacoma clubs
in 1995.
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31,
1995. The Company had a net loss of $393,731 for the year ended March 31, 1996
as compared to a net
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<PAGE> 92
loss of $863,056 for the year ended March 31, 1995. This improvement from 1995
to 1996 was primarily due to higher net club operating income of $779,628 and
decreased start-up costs relating to development stage clubs of $452,233,
offset in part by increased general and administrative expenses of $520,699,
increased depreciation and amortization of $133,268 and increased income
applicable to minority interest of $79,382.
The Company had revenues from club operations of $11,875,716 and
$7,969,247 for the years ended March 31, 1996 and 1995, respectively. The
increase of $3,906,469 for the year ended March 31, 1996, as compared to the
same period ended March 31, 1995, was due to increases in comparable sales of
$603,492, increased revenues of $973,457 from full operating years for second
year clubs (i.e., the Champaign and Annapolis clubs, which opened for business
on August 19, 1994 and October 27, 1994, respectively) and increased revenues
of $2,329,520 from new clubs opened in fiscal 1996 (i.e., the Long Beach and
Tacoma clubs, which opened for business on May 5, 1995 and December 8, 1995,
respectively). The increase of $603,492 or 12.2 percent in comparable sales for
the year ended March 31, 1996, as compared to the same period ended March 31,
1995, was primarily due to increases of $374,631 or 21.1 percent in Seattle,
$79,940 or 9.5 percent in Cleveland, $77,417 or 9.1 percent in Cleveland
Heights and $71,504 or 8.9 percent in Pasadena.
The Company had total costs and expenses of $12,196,941 and $8,788,984 for
the years ended March 31, 1996 and March 31, 1995, respectively. The increase
of $3,407,957 for the year ended March 31, 1996, as compared to the same period
ended March 31, 1995, was due to increased cost of club operations of
$3,126,841, increased general and administrative expenses of $520,699,
increased depreciation and amortization expenses of $133,268 and increased
income applicable to minority interest of $79,382, offset by a decrease of
$452,233 relating to start-up costs for development stage clubs.
The increase of $3,126,841 in cost of club operations was primarily due to
increased costs associated with the Champaign, Annapolis, Long Beach and Tacoma
clubs. The increase in general and administrative expenses for the year ended
March 31, 1996, as compared to the same period ended March 31, 1996, was
primarily due to increased wages, professional services and travel expenses of
approximately $394,000, $64,000 and $90,000, respectively. The increase in
wages and travel expenses from 1995 to 1996 was primarily attributed to the
hiring of a new President and Chief Operating Officer, Controller, Vice
President of Operations, Vice President of Development and support personnel.
In addition, Steven L. Foster, Chief Executive Officer of the Company, began
accruing a salary on October 1, 1995. The increase in professional fees was
primarily due to consulting and legal fees associated with the preparation and
filing with the Commission of this Proxy Statement.
The decrease in start-up costs relating to development stage clubs of
$452,233 was primarily due to the fact that during fiscal 1996, the Company
developed one new club (Tacoma) as compared to three new clubs in fiscal 1995
(Champaign, Annapolis and Long Beach). In addition, the Long Beach club was
required to pay rent totaling approximately $284,000 during fiscal 1995, but
did not open for business until May 5, 1995.
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<PAGE> 93
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased by approximately $51,000
during the nine month period ended December 31, 1996. Cash provided by
operating activities was approximately $318,900 for the nine months ended
December 31, 1996 as a result of the net loss incurred of $502,100 offset by a
charge for impairment of long-lived assets, depreciation and amortization and
changes in operating assets and liabilities totaling $821,000. The Company also
purchased approximately $92,000 in property and equipment primarily related to
club leasehold improvement and made distributions of $240,200 to minority
interest limited partners during the nine months ended December 31, 1996. The
Company obtained bank and investor financing totaling $500,000 during the nine
months ended December 31, 1996. The proceeds from such loans were primarily
used to fund required debt maturities totaling $537,700 for the nine months
ended December 31, 1996.
The Company had ten clubs fully operational as of December 31, 1996 and
1995. The Company continues to experience a cash shortage. The Company had a
working capital deficit of approximately $1,525,100 as of December 31, 1996,
and current maturities of notes and equipment leases payable totaled $1,105,400
as of December 31, 1996. The Company plans to retire certain debt through its
proposed issuance of additional equity or debt securities if such offerings are
successful. The Company believes that the cash provided from its club
operations and the issuance of additional equity or debt securities should be
sufficient to fund its working capital needs, debt maturity requirements and
its new club development plans. However, there can be no assurance that the
Company will be successful with its proposed equity or debt security offering.
The Company intends to develop, through wholly-owned subsidiaries of
Jillian's, Inc., additional Jillian's clubs. These clubs may be owned by
Jillian's Inc. subsidiaries directly or indirectly through their participation
in limited partnerships or joint ventures. In the case of clubs owned by
limited partnerships, the Company expects that in each case a wholly-owned
subsidiary would be the general partner, own a substantial interest in the
limited partnership and receive a management fee. The Company currently is
investigating potential sites for clubs in Massachusetts and certain other
areas in the Midwest and Mid-Atlantic states. In October, 1996, the Company
executed a new lease for a club to be developed in Raleigh, North Carolina. The
new lease provides for minimum monthly lease payments of approximately $4,400
from April, 1997 through April, 2007. There can be no assurance that the
Company will be successful in developing additional billiard clubs or that it
can meet its new lease obligation without a successful equity or debt security
offering.
In order to partially finance the costs of renovating and equipping the
Jillian's billiard clubs located in Cleveland Heights, Worcester, Champaign and
Annapolis, the Company sold limited partnership interests in limited
partnerships that own those clubs. The Company sold 13%, 75%, 57% and 21% of
the partnership interests in the partnerships that own the billiard clubs in
Cleveland Heights, Worcester, Champaign and Annapolis, respectively.
Wholly-owned subsidiaries of the Company own the remaining interests. Each of
the limited partnership agreements for the partnerships allows the limited
partnerships to require the Company
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<PAGE> 94
to repurchase their limited partnership interests at a price calculated as
described in the following paragraph.
The purchase price for the interest of a limited partner in any of the
clubs located in Cleveland Heights, Worcester, Champaign or Annapolis is a
multiple (ranging from four to five) times the limited partner's allocable
share of the limited partnership's net income for the twelve month period
preceding the required repurchase date. The limited partners are entitled to
receive part of their purchase price in the form of the Company's common stock
and the balance in cash. The limited partners also will have the right for a
certain period of time after receipt of the common stock to require that the
Company register its shares of common stock for sale to the public. The
Company's ability to fulfill its obligations and the future value of the
Company's common stock is dependent on the success of the Company's business.
In addition, the Company is required to make cash distributions to the limited
partners based on club operating income before depreciation and amortization
with certain minimum annual return on investment guarantees. Since the
inception of the limited partnerships, the Company has paid all required cash
distributions through December 31, 1996.
There can be no assurance that the Company can meet its future cash
distribution and other obligations to the partnership or to the limited
partners, including its obligation under its guarantee to the limited partners.
There is also no assurance that the Company's common stock will have value in
the event the limited partners exercise their option to sell their units to the
Company in exchange for the Company's common stock.
The Company, as of December 31, 1996, had goodwill of approximately
$765,400, net of amortization. The Company evaluates the potential impairment
of its long-lived assets, including goodwill related thereto, in accordance
with the Statement of Financial Accounting Standards No. 121 "Accounting for
Improvement of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
During the third quarter ended December 31, 1996, the Company recorded a charge
of $300,000 for the impairment of its Long Beach club's long-lived assets, as
described above. The Company does not believe that its other clubs' long-lived
assets or goodwill have been impaired.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, at ______________, 1997, the Record Date,
the ownership of the Common Stock and the common stock of the Company's
subsidiaries, by each executive officer and director of the Company, executive
officers and directors of the Company as a group and each person known by the
Board to own more that five percent of the Common Stock. The ownership
percentages are calculated in accordance with Rule 13d-3 under the Exchange
Act. The calculations were based on a total of 10,717,070 shares, which
reflects the shares issued and outstanding at ______________, 1997 of 9,137,798
and 1,579,272 shares issuable pursuant to stock options issued under the Stock
Option Plans and warrants of the Company, respectively.
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<PAGE> 95
<TABLE>
<Caption)
Name, Position & Number of Shares Percent of Outstanding Shares
---------------- ---------------- -----------------------------
Business Address
----------------
<S> <C> <C>
Steven L. Foster, Chief 1,511,100(1) 14.5%
Executive Officer, Chairman of
the Board and a Director of
the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Daniel M. Smith, President, 230,000(2) 1.1%
Chief Operating Officer and a
Director of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Stephen M. Weis, Vice President of 15,000(3) 0.0%
Operations of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Ronald Widman, Vice President of 15,000(4) 0.0%
Development of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
John L. Kidde, Director of 67,250(5) (6)
the Company
KDM Development Corporation
The Livery
209 Cooper Avenue
Upper Montclair, NJ 07043
Donald R. Leopold, Director of the 50,000(7) (6)
Company
Sherbrooke Associates, Inc.
52 Waltham Street
Lexington, MA 02173
Kevin Troy 634,167(8) 5.9%
145 Ipswich Street
Boston, MA 02215
Steven Rubin 1,280,765(9) 12.0%
508 North Second Street
Fairfield, IA 52556
</TABLE>
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<PAGE> 96
<TABLE>
<Caption)
Name, Position & Number of Shares Percent of Outstanding Shares
---------------- ---------------- -----------------------------
Business Address
----------------
<S> <C> <C>
All executive officers and 1,798,350(10) 16.8%
directors as a group (six persons)
</TABLE>
- -------------
(1) Consists of (i) 300,000 shares owned by a trust, (ii) 1,020,000
shares held by Mr. Foster, of which Mr. Steven Rubin, a personal friend and
business associate of Mr. Foster, beneficially owns 10,000 shares, (iii)
187,500 shares issuable pursuant to options held by Mr. Foster, (iv) 5,000
shares held by Mr. Foster's spouse, and (v) 8,600 shares, of which 4,300 shares
are held by each of Mr. Foster's sons. Mr. Foster disclaims any beneficial
ownership of the 10,000 shares owned by Mr. Rubin, the 5,000 shares owned by
his spouse, and the 8,600 shares owned by his children. Excludes 522,500 shares
issuable pursuant to options held by Mr. Foster.
(2) All shares issuable pursuant to options held by Mr. Smith.
Excludes 230,000 shares issuable pursuant to options held by Mr. Smith.
(3) All shares issuable pursuant to options held by Mr. Weis.
Excludes 45,000 shares issuable pursuant to options held by Mr. Weis.
(4) All shares issuable pursuant to options held by Mr. Widman.
Excludes 45,000 shares issuable pursuant to options held by Mr. Widman.
(5) Consists of (i) 1,000 shares owned by Mr. Kidde's son, (ii)
17,250 shares held by Mr. Kidde, and (iii) 50,000 shares issuable pursuant to
options held by Mr. Kidde. Mr. Kidde disclaims any beneficial ownership of
the 1,000 shares owned by his son.
(6) Less than one percent.
(7) All shares issuable pursuant to options held by Mr. Leopold.
(8) Consists of (i) 551,667 shares, (ii) 62,500 shares issuable
pursuant to options held by Mr. Troy, and 20,000 shares issuable pursuant to a
warrant held by Mr. Troy. Excludes 250,000 shares issuable pursuant to
options held by Mr. Troy.
(9) Consists of (i) 10,000 shares purchased by Mr. Foster in Mr.
Foster's name and beneficially owned by Mr. Rubin, (ii) 1,230,765 shares held
by Mr. Rubin, and (iii) 40,000 shares issuable pursuant to warrants held by
Mr. Rubin.
(10) Includes 20,000 and 40,000 shares issuable pursuant to
warrants held by Mr. Troy and Mr. Rubin, respectively, but excludes 562,500,
345,000, 60,000, 60,000, and 187,500 shares issuable pursuant to options held
by Mr. Foster, Mr. Smith, Mr. Weis, Mr. Widman, and Mr. Troy, respectively.
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<PAGE> 97
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Set forth below is the name, age and principal occupation or employment
during the past five years of each executive officer and director of the
Company, each of whom is a citizen of the United States.
<TABLE>
<CAPTION>
Positions with the Company;
Name and Business Address Principal Occupation and Business Experience
- -------------------------- --------------------------------------------
<S> <C>
Steven L. Foster, age 48 Mr. Foster has been Chief Executive Officer of the
727 Atlantic Avenue, Suite 600 Company since March 1991, Chairman of the Board of the
Boston, MA 02111 Company since March 1994 and a Director of the Company
since April 1991. He is the principal founder and
co-creator of the Jillian's billiard club concept. He
has been actively involved in creating and operating
entertainment clubs since 1979 and is co-owner of a
Jillian's billiard club in Boston, Massachusetts. In
addition, Mr. Foster is co-founder of United Fuels
International, Inc., an international energy brokerage
firm, and its affiliates. Mr. Foster graduated magna
cum laude from Boston University School of Law in 1978
with a Juris Doctor (J.D.) degree.
Daniel M. Smith, age 35 Mr. Smith has been President, Chief Operating Officer
727 Atlantic Avenue, Suite 600 and a Director of the Company since January 1995. Mr.
Boston, MA 02111 Smith was most recently a Vice President of KFC
(Kentucky Fried Chicken), where he was employed from
1990 to 1995 and prior to that was employed as Vice
President-European Operations of Domino's Pizza during
his tenure from 1986 to 1990. He received a Masters of
Management (M.M.A.) degree from Northwestern
University.
Ronald Widman, age 32 Mr. Widman has been Vice President of Development of
727 Atlantic Avenue, Suite 600 the Company since June 1995. Prior to joining the
Boston, MA 02111 Company, Mr. Widman was employed by KFC/Pepsico for
over 11 years where he was most recently responsible
for the creation, implementation and turn-key
development of new concepts, including the cross
functional development of Taco Bell and KFC facilities.
He received a Masters of Business Administration
(M.B.A.) degree from the University of Louisville.
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
Positions with the Company;
Name and Business Address Principal Occupation and Business Experience
- -------------------------- --------------------------------------------
<S> <C>
Stephen M. Weis, age 31 Mr. Weis has been Vice President of Operations of the
727 Atlantic Avenue, Suite 600 Company since June 1995. Mr. Weis was Delivery
Boston, MA 02111 Operations Manager of KFC from 1991 to 1995 where he
oversaw the field operations of over 100 delivery
restaurants. Prior to that, Mr. Weis was Senior
Operations Supervisor of Domino's Pizza in the
Mid-Atlantic region from 1987 to 1991. He received a
Bachelor of Arts (B.A.) degree in marketing from The
American University.
John L. Kidde, age 62 Mr. Kidde has been a Director of the Company since its
727 Atlantic Avenue, Suite 600 inception. Mr. Kidde is currently the President of
Boston, MA 02111 KDM Development Corporation, an investment management
firm. Mr. Kidde currently serves as a member of the
board of directors of The Futures Group of Washington,
D.C.; Asset Management Advisors, Inc., Palm Beach,
Florida; International Resources Group, Washington,
D.C.; Australasia Inc., Cayman Islands; Continental
Europe '90, Cayman Islands; International Agritech
Resources, New York; Juniper Partners, Inc., New York;
and HFG Expansion Management Inc., Massachusetts. He
currently serves as a trustee of Stevens Institute of
Technology, Hoboken, New Jersey; Open Space Institute,
New York; and the Frost Valley YMCA, Montclair, New
Jersey. He is a general partner of Claflin Capital
Management I-VII and The Opportunity Fund, both of
Boston, Massachusetts, and North American Venture
Capital II, L.P. of Madison, New Jersey. From June
1968 through January 1988, Mr. Kidde was Vice President
and Director of International Operations of Kidde,
Inc., a multi-industrial conglomerate.
Donald R. Leopold, age 46 Mr. Leopold has been a Director of the Company since
727 Atlantic Avenue, Suite 600 April 1991. For the past six years, he has been
Boston, MA 02111 President of Game Plan, Inc., a Boston-area based
marketing and strategic planning consulting firm.
Game Plan provides marketing research, marketing
planning and strategic planning consulting services to
clients in the sports, recreation, leisure and consumer
goods industries. Mr. Leopold is also on the faculty of
the Harvard University Extension School, where he
teaches graduate level courses in Marketing of Services
and Management of Service Operations. He earned a
Bachelor of Arts (B.A.) degree, cum laude, from Harvard
College in general studies, and a Masters in Business
Administration (M.B.A.) degree from the Harvard
University Graduate School of Business Administration.
</TABLE>
-96-
<PAGE> 99
PRIOR CONTACTS BETWEEN THE COMPANY
AND CERTAIN AFFILIATES
Since April 1, 1993, there have been no contacts, negotiations or
transactions between the Company and a current director or executive officer of
the Company, or between the Company or a director or executive officer of the
Company and an unaffiliated party concerning (i) a merger, consolidation or
acquisition, (ii) tender offer for or other acquisition of any class of
securities of the Company, (iii) an election of directors of the Company, or
(iv) a sale or other transfer of a material amount of assets of the Company or
any of its subsidiaries. In addition, there have been no transactions between
the Company and any one or more of its directors or executive officers since
April 1, 1993 that involve an aggregate amount of one percent or more of the
Company's consolidated revenues.
-97-
<PAGE> 100
SELECTED FINANCIAL DATA
The following table sets forth certain financial information with respect
to the Company. The financial information was excerpted or derived from the
audited and unaudited financial statements contained elsewhere in this Proxy
Statement and should be read in conjunction with such financial statements. See
"Financial Statements of the Company."
<TABLE>
<CAPTION>
Nine
Months Ended Year Ended Year Ended Year Ended Year Ended
12/31/96 3/31/96 3/31/95 3/31/94 3/31/93
------------ ---------- ---------- ---------- -----------
Income Statement Data:
- ---------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 9,799,894 $11,875,716 $7,969,247 $5,196,423 $3,620,756
Income/(loss) from continuing
operations $ (502,092) $ (393,731) $ (863,056) $ (932,529) $ 64,824
Net income (loss) $ (502,092) $ (393,731) $ (863,056) $ (904,282) $ 161,834
Per Share Data:
- --------------
Income (loss) from continuing
operations $ (0.05) $ (0.04) $ (0.11) $ (0.12) $ 0.0
Net income (loss) $ (0.05) $ (0.04) $ (0.11) $ (0.12) $ 0.0
Weighted average common
and common stock equivalent
shares outstanding 9,137,798 9,137,798 8,116,291 7,803,209 6,713,323
Balance Sheet Data:
- ------------------
Working capital (deficiency) $(1,525,061) $ 1,209,476 $(24,485) $ 454,879 $ 555,641
Total assets $ 9,067,923 $ 9,904,271 $7,847,472 $6,339,345 $5,352,088
Long-term obligations $ 2,823,755 $ 3,374,095 $1,568,171 $ 589,291 $ 406,266
Stockholders' equity $ 2,342,336 $ 2,844,428 $3,111,746 $3,600,298 $4,049,771
</TABLE>
-98-
<PAGE> 101
MARKET INFORMATION
The Common Stock is traded in the over-the-counter market and is included
for quotation on The NASDAQ SmallCap Market under the symbol "QBAL." On
___________, 1997, the Record Date, the average of high and low bid prices of
the Common Stock was $_____ per share. On ___________, 1997, the last full day
of trading for which quotations were available at the time of printing of this
Proxy Statement, the average of the high and low bid prices of the Common Stock
was $_____ per share.
The following table sets forth the range of high and low bid
quotations for the Common Stock as reported by The NASDAQ SmallCap Market for
each quarter since December 31, 1994. Such quotations reflect inter-dealer
prices without retail markup, markdown or commissions and may not necessarily
represent actual transactions
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
12/31/94 3/4 7/16
3/31/95 5/8 7/16
6/30/95 15/32 5/16
9/30/95 7/16 11/32
12/31/95 15/32 7/32
3/31/96 5/16 1/4
6/30/96 5/16 3/16
9/30/96 3/8 3/16
12/31/96 3/8 3/16
</TABLE>
Despite the fact that the Common Stock is quoted on The NASDAQ SmallCap
Market, there is currently only a limited trading market for the Common Stock.
In addition, the Company has never declared a cash dividend and does not intend
to do so in the foreseeable future.
-99-
<PAGE> 102
The following table shows the shares of Common Stock purchased by the
Company and each director and executive officer (including former directors and
officers) of the Company and the average purchase price for shares for each
quarter since December 31, 1994.
<TABLE>
<CAPTION>
Number of Average Purchase
Company/Director/Officer Shares Purchased Price Paid
------------------------ ---------------- -----------------
<S> <C> <C> <C>
Third Quarter Ended 12/31/94 N/A N/A N/A
Fourth Quarter Ended 3/31/95 Steven L. Foster, Chief 850,000 $0.25
Executive Officer,
Chairman of the Board and
a Director of the Company
First Quarter Ended 6/30/95 N/A N/A N/A
Second Quarter Ended 9/30/95 N/A N/A N/A
Third Quarter Ended 12/31/95 N/A N/A N/A
Fourth Quarter Ended 3/31/96 N/A N/A N/A
First Quarter Ended 6/30/96 N/A N/A N/A
Second Quarter Ended 9/30/96 N/A N/A N/A
Third Quarter Ended 12/31/96 N/A N/A N/A
</TABLE>
- -----------
(1) The shares were purchased without consideration in satisfaction of
certain anti-dilution obligations of the Company arising from a merger
agreement between the Company and a company owned by Mr. Foster and Kevin Troy,
a Shareholder of the Company.
-100-
<PAGE> 103
FEES AND EXPENSES
All fees and expenses in connection with the preparation, printing and
mailing of this Proxy Statement and the Proxy and in connection with the
Proposal (including the fees and expenses of Stonebridge) will be
borne by the Company, whether or not Shareholders approve the Proposal and
whether or not the Merger is consummated.
The estimated fees and expenses referred to above are as follows:
<TABLE>
<S> <C> <C>
Merger Payments........................................................$2,577,154
Commission Filing Fee.................................................. 426
Stonebridge Fees and Expenses ......................................... *
Legal Fees............................................................. *
Accounting Fees ....................................................... *
Solicitation Expenses.................................................. *
Mailing Expense........................................................ *
Printing Costs......................................................... *
Miscellaneous.......................................................... *
TOTAL.............................................................. *
</TABLE>
- -----------------------
*To be determined.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of March 31, 1996 have been
included herein in reliance upon the report of BDO Seidman, LLP, independent
certified public accountants to the Company, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
Representatives of the firm are expected to be present at the Special Meeting,
will have an opportunity to make a statement should they desire to do so and
are expected to be available to respond to appropriate questions.
BDO Seidman, LLP was engaged by the Company as its principal accountant on
June 11, 1996 after the resignation of Deloitte & Touche LLP ("Deloitte") on
March 21, 1996 (the "Resignation Date"). Deloitte had served as principal
accountant to the Company since 1989.
-101-
<PAGE> 104
Deloitte's report on the financial statements of the Company for the
fiscal years ended March 31, 1995 and 1994 did not contain an adverse opinion
or a disclaimer of opinion, and such reports were not qualified or modified as
to uncertainty, audit scope, or accounting principles.
During the two fiscal years in the period ended March 31, 1995 and in the
subsequent period through the Resignation Date, there were no disagreements
between the Company and Deloitte on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure. In
addition, during the two fiscal years in the period ended March 31, 1995 and in
the subsequent period through the Resignation Date, there were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K under the Exchange
Act.
MISCELLANEOUS
No person has been authorized to give any information or make any
representation on behalf of the Company other than as contained in this Proxy
Statement and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company.
The Board is not aware of any matter which may properly be presented for
action at the Special Meeting other than the matters set forth herein, but
should any matter requiring the vote of the Shareholders arise, it is intended
that Proxies in the accompanying form will be voted in respect thereof in
accordance with the best judgment of the person or persons voting the Proxies,
discretionary authority to do so being included in the Proxy.
DOCUMENTS INCORPORATED BY REFERENCE
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Proxy Statement and prior
to the date of the Special Meeting shall be deemed to be incorporated by
reference into this Proxy Statement and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
-102-
<PAGE> 105
GLOSSARY
"Acquisition Date" means the date on which the Company acquired a majority
interest in Jillian's, Inc.
"Annapolis Limited Partnership" means Jillian's Billiard Club of Annapolis
Limited Partnership.
"Bannon" means Bannon & Co., Inc.
"Base Case" means Stonebridge's analyzed valuation of the Common Stock
based upon an unlevered discounted cash flow analysis of the projected
five-year financial performance of the Company.
"Board" means the Board of Directors of the Company.
"Champaign Limited Partnership" means Jillian's Billiard Club of Champaign
- - Urbana, L.P.
"Childs " means J.W. Childs Equity Partners, L.P.
"The Childs Group" means Childs and certain related persons or entities of
Childs.
"Cleveland Heights Limited Partnership" means Jillian's Billiard Club of
Cleveland Heights Limited Partnership.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the issued and outstanding shares of common stock,
par value $.001 per share, of the Company.
"Company" means Jillian's Entertainment Corporation, a Florida
corporation.
"Continuing Shareholder/s" means any Shareholder who is not a
Non-Continuing Shareholder, and any of them.
"Continuing Warrant Holder/s" means a person with an ongoing relationship
with the Company whose warrants to purchase shares of Common Stock will be
exchanged for warrants to purchase the same number of shares of common stock of
Holdings in the Corporate Formation.
"Corporate Formation" means the transaction in which each Continuing
Shareholder shall exchange each share of Common Stock owned by such Shareholder
for one share of common stock of Holdings and Holdings Performance Options to
purchase a predetermined number of shares of common stock of Holdings.
-103-
<PAGE> 106
"CPI" means the Consumer Price Index.
"Current Management Company Option/s" means those stock options held by
current directors, officers or employees of the Company or certain persons with
whom the Company has ongoing relationships.
"Debtor/s" means Steven L. Foster, Kevin Troy or Island, and any of them.
"Deloitte" means Deloitte & Touche LLP.
"Dixie Run" means Dixie Run Corporation.
"EBIT" means earnings before interest and taxes.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"Effective Time" means the time at which Articles of Merger are filed and
recorded with the Secretary of State of the State of Florida, at which point
the Merger will become effective.
"Employment/Noncompetition Agreement/s" means the employment agreements
which each of Steven L. Foster, Daniel M. Smith and Stephen M. Weis will enter
into with the Surviving Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means ___________.
"Exchange Agreement" means the exchange agreement between Holdings and the
Exchange Agent which governs the Exchange Agent's duties and responsibilities
with respect to distribution of the Merger Payments and related matters.
"First Union" means First Union Bank.
"FMV" means fair market value.
"Former Management Company Option/s" means those options that are not
Current Management Company Options.
"Foster Group" means Steven L. Foster, The Frank and Celia Foster Family
Trust, Steven Rubin and Kevin Troy.
-104-
<PAGE> 107
"Foster Loan" means the loan from Holdings to Steven Foster and designees
for the purchase of shares of Holdings common stock as a condition to
consummation of the Merger.
"Holdings" means Jillian's Entertainment Holdings, Inc., a Delaware
corporation.
"Holdings Management Option/s" means those options to purchase stock in
Holdings to be issued in exchange for Current Management Company Options upon
consummation of the Merger.
"Holdings Performance Option/s" means those options to purchase shares of
common stock of Holdings, the vesting of which is subject to the achievement of
certain performance objectives, to be issued to the Continuing Shareholders and
the Other Option Holders in the Corporate Formation.
"Income Payment" means the payment to the limited partners of the
Worcester Limited Partnership to account for such partnership's income.
"Island" means Island Partners, Ltd.
"Jillian's - Annapolis" means Jillian's Billiard Club of Annapolis, Inc.
"Jillian's Boston" means Jillian's Billiard Club, Inc.
"Jillian's - Champaign" means Jillian's Billiard Club of Champaign -
Urbana, Inc.
"Jillian's - Cleveland" means Jillian's Billiard Club of Cleveland, Inc.
"Jillian's - Cleveland Heights" means Jillian's Billiard Club of Cleveland
Heights, Inc.
"Jillian's - Kendall" means Jillian's Billiard Club of Kendall, Inc.
"Jillian's - Long Beach" means Jillian's Billiard Club of Long Beach, Inc.
"Jillian's - Pasadena" means Jillian's Billiard Club of Pasadena, Inc.
"Jillian's - Seattle" means Jillian's Billiard Club of Seattle, Inc.
"Jillian's - Tacoma" means Jillian's Billiard Club of Tacoma, Inc.
-105-
<PAGE> 108
"Jillian's - Worcester" means Jillian's Billiard Club of Worcester, Inc.
"Letter of Transmittal" means a duly executed letter of transmittal that
each Non-Continuing Shareholder will be required to submit to the Exchange
Agent in order to receive the Merger Payment for each share of Other Common
Stock owned by each of them.
"License Agreement" means the agreement under which the Company will grant
Jillian's Boston a license to use the trade names, trademarks and service marks
of the Company.
"LTM" means the twelve month period ended June 30, 1995.
"Management Agreement" means the agreement under which Childs will provide
consulting and management advisory services to the Surviving Company and
Holdings and their subsidiaries.
"Merger" means the merger between the Company and Sub to be effected
subject to the terms and conditions of the Merger Agreement.
"Merger Agreement" means the proposed Agreement and Plan of Merger by and
among the Company, Holdings and Sub.
"Merger Payment" means the cash payment of $0.50 per share of Common
Stock, without interest.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Non-Continuing Shareholder" means any Shareholder that is not a
Continuing Shareholder.
"Non-Continuing Warrant Holder" means any warrant holder that is not a
Continuing Warrant Holder.
"On Cue" means On Cue Limited, a company operating four billiard club
restaurants in Canada.
"Option Agreement" means the agreement under which the owners of Jillian's
Boston will grant the Surviving Company an option to acquire Jillian's Boston.
"Other Common Stock" means each share of Common Stock held by
Non-Continuing Shareholders which at the Effective Time will be converted into
the right to receive the Merger Payment.
-106-
<PAGE> 109
"Other Option Holders" means certain persons who will receive Holdings
Performance Options to purchase shares of common stock of Holdings pursuant to
the Purchase Agreement.
"Placement Agent" means Hampshire Securities Corporation, a New York
corporation.
"Preferred Stock" means the preferred stock of Holdings to be sold,
pursuant to the Private Placement.
"Private Placement" means the private placement of 12,872,774 shares of
Preferred Stock with the Childs Group pursuant to the terms and conditions of
the Purchase Agreement.
"Private Placement Memo" means the private placement memorandum relating
to an offering of preferred stock of the entity which was to be the surviving
corporation in a merger with the Company.
"Proposal" means the proposal to approve the Merger.
"Proxy" means the proxy set forth on the proxy card enclosed with this
Proxy Statement.
"Proxy Statement" means this Proxy Statement, as the same may be amended.
"Purchase Agreement" means the purchase agreement, dated _________, 1997,
by and among the Company, Holdings, Childs, the Representative, the Continuing
Shareholders, the holders of Former Management Company Options, the holders of
Current Management Company Options, the Other Option Holders, the Continuing
Warrant Holders and the Debtors.
"Put" means the right acquired by an unaffiliated trust in November 1989
to require the Company to repurchase 206,825 shares of Common Stock from the
trust at $1.64 per share immediately upon the demand of the trust.
"Put Right" means, with respect to the Private Placement, the right
acquired by holders of Preferred Stock to redeem their shares at a price of
$0.9322 per share under certain circumstances.
"QBAL" means the symbol under which the Common Stock is included for
quotation on The NASDAQ SmallCap Market.
"Record Date" means _____________, 1997, the date as of which Shareholders
are shown on the Company's records as holders of issued and outstanding shares
of Common Stock.
-107-
<PAGE> 110
"Representative" means the representative of, and attorney-in-fact for,
certain members of the Childs Group.
"Resignation Date" means March 21, 1996, the date Deloitte resigned as
principal accountant to the Company.
"Schedule 13E-3" means the Rule 13e-3 Transaction Statement on Schedule
13E-3 under the Exchange Act, and any amendments thereto, including exhibits
filed as a part thereof, that the Company has filed with the Commission.
"Shareholder/s" means the shareholders of the Company, and any of them.
"Special Meeting" means the special meeting, together with adjournments
thereof, at which the Shareholders will vote on the Proposal.
"Stockholders Agreement" means the stockholders agreement among the
Continuing Shareholders, Holdings, the Childs Group, the Other Option Holders,
the holders of Current Management Company Options, the Continuing Warrant
Holders and the Debtors which would, among other things, place restrictions on
the transferability of shares of common stock of Holdings.
"Stock Option Plans" means collectively, the Company's Consolidated Stock
Option Plan, 1994 Director, Adviser and Key Employee Stock Option Plan and 1995
Director, Adviser and Key Employee Stock Option Plan.
"Stonebridge" means Stonebridge Associates, LLC.
"Sub" means Jillian's Entertainment Acquisition Corporation, a Florida
corporation, and a wholly owned subsidiary of Holdings.
"Surviving Company" means the Company, which will be the surviving company
in the Merger.
"Transfer Agent" means American Stock Transfer.
"Vending Partnership" means Jillian's Vending Limited Partnership.
"Voting Agreement" means an agreement under which the Continuing
Shareholders agreed to vote their shares of Common Stock in favor of the Merger
and to refrain from selling, assigning or otherwise disposing of such shares.
"Worcester Limited Partnership" means Jillian's Billiard Club of Worcester
Limited Partnership.
-108-
<PAGE> 111
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pro Forma Financial Statements:
Pro Forma Combined Condensed Balance Sheet as of December 31, 1996 (unaudited)........................ F-3
Pro Forma Combined Condensed Statement of Operations for the Nine Months Ended December 31, 1996
(unaudited)......................................................................................... F-4
Pro Forma Combined Condensed Statement of Operations for the Year Ended March 31, 1996................ F-5
Unaudited Financial Statements:
Consolidated Condensed Balance Sheets as of December 31, 1996 and March 31, 1996 (unaudited).......... F-6
Consolidated Condensed Statements of Operations for the Three Month Periods and Nine Month Periods
Ended December 31, 1996 and 1995 (unaudited)........................................................ F-7
Consolidated Condensed Statements of Cash Flows for the Nine Month Periods Ended December 31, 1996
and 1995 (unaudited).............................................................................. F-8
Notes to Consolidated Condensed Financial Statements (unaudited)...................................... F-9
Audited Financial Statements:
Report of BDO Seidman, LLP, Independent Auditors...................................................... F-10
Consolidated Balance Sheet as of March 31, 1996 ...................................................... F-11
Consolidated Statements of Operations for the Years Ended March 31, 1996 and 1995 .................... F-12
Consolidated Statements of Changes in Stockholder Equity for the Years Ended March 31, 1996
and 1995 ......................................................................................... F-13
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996 and 1995..................... F-14
Notes to Consolidated Financial Statements ........................................................... F-15
</TABLE>
F-1
<PAGE> 112
JILLIAN'S ENTERTAINMENT AND HOLDINGS
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma combined condensed financial information is
based on the historical consolidated financial statements of Jillian's
Entertainment Corporation and Subsidiaries ("Jillian's Entertainment") and
reflects the issuance of $12 million of convertible preferred stock of a newly
formed Delaware corporation ("Holdings"). Holdings was formed for the purpose
of acquiring Jillian's Entertainment through the merger of a wholly owned
subsidiary of Holdings. The Holdings subsidiary will be merged with and into
Jillian's Entertainment subject to definitive terms and conditions of the
Purchase and Merger Agreements.
The unaudited combined condensed balance sheet of Jillian's
Entertainment and Holdings as of December 31, 1996 is presented as if the $12
million convertible preferred stock issuance and the acquisition and merger of
Jillian's Entertainment by and with Holdings occurred on December 31, 1996. The
unaudited pro forma combined condensed statement of operations for the nine
months ended December 31, 1996 and the year ended March 31, 1996 is presented as
if the issuance of the $12 million of convertible preferred stock of Holdings
and the acquisition and merger of Jillian's Entertainment by and with Holdings
occurred on April 1, 1996 and 1995, respectively. In management's opinion, all
adjustments necessary to reflect the $12 million convertible preferred stock
issuance and the related acquisition and merger transaction have been included
in the accompanying pro forma condensed financial statements. The unaudited pro
forma condensed statement of operations is not necessarily indicative of the
results which actually would have occurred if the transactions had been
consummated at the beginning of the period presented, nor does it purport to
represent the financial results of operations for future periods. The unaudited
pro forma information should be read in conjunction with Jillian's
Entertainment's historical financial statements and notes thereto included in
the Company's March 31, 1996 Form 10-KSB and December 31, 1996 Form 10-QSB.
F-2
<PAGE> 113
JILLIAN'S ENTERTAINMENT AND HOLDINGS
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------
Jillian's Pro Forma
Entertainment -----------------------
(Historical) Holdings Adjustments Combined
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 595 $12,000 (a) $(2,577) (b) $ 8,614
(24) (b)
(1,380) (b)
Other current assets....................... 511 - - 511
------ ------- ------- -------
Total current assets 1,106 12,000 (3,981) 9,125
Property, leasehold improvements
and equipment, net............................ 6,879 - - 6,879
Goodwill, net................................... 765 - 3,631 (b) 4,396
Other assets.................................... 318 - - 318
------ ------- ------- -------
$9,068 $12,000 $ (350) $20,718
====== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...... $1,526 $ - $ - $ 1,526
Current portion of notes and equipment
leases payable.......................... 1,105 - - 1,105
------ ------- ------- -------
Total current liabilities.............. 2,631 - - 2,631
Notes and equipment leases payable, less
current maturities............................ 1,756 - - 1,756
Deferred rent................................... 1,068 - - 1,068
------ ------- ------- -------
Total liabilities...................... 5,455 - - 5,455
Minority interest............................... 1,271 - - 1,271
Redeemable preferred stock...................... - 12,000 (a) - 12,000
Total stockholders' equity...................... 2,342 - (350) (b) 1,992
625 (c)
(625) (c)
------ ------- ------- -------
$9,068 $12,000 $ (350) $20,718
====== ======= ======= =======
</TABLE>
- --------------------------
(a) To reflect the issuance of $12 million of redeemable preferred stock
at the formation of Holdings.
(b) To reflect the acquisition and merger of Jillian's Entertainment by and
with Holdings, as if occurred on December 31, 1996. The acquisition and
merger Pro Forma adjustments are summarized as follows:
- Cash of $2,577,000 to be paid by Holdings for the purchase of
5,154,308 shares of Jillian's Entertainment common stock at a
purchase price of $.50 per share;
- Cash of $24,000 to be paid by Holdings for certain Jillian's
Entertainment outstanding warrants and options;
- The Pro Forma reflects management's estimate of $1,380,000 of
transaction costs;
- Goodwill represents the excess purchase price over the fair
value of net assets acquired calculated as follows:
<TABLE>
<S> <C>
Total purchase price of 9,137,798 shares of Jillian's Entertainment at $5,973
$.50 per share, including purchase price of certain warrants and
options and estimated transaction costs
Fair value of net assets acquired 2,342
------
Excess of purchase price over fair value $3,631
======
</TABLE>
(c) To reflect the issuance of 1,250,000 shares of Holdings common stock
at $.50 per share in exchange for stockholder notes receivable.
F-3
<PAGE> 114
JILLIAN'S ENTERTAINMENT AND HOLDINGS
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
---------------------------------------------------
Jillian's Pro Forma
Entertainment ----------------------------
(Historical) Holdings Adjustments Combined
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues from clubs............................. $ 9,800 $ - $ - $ 9,800
------- ------- -------- -------
Cost of club operations......................... 8,136 - - 8,136
General and administrative expenses............. 1,142 - - 1,142
Depreciation and amortization expense........... 661 - 109 (a) 770
Income applicable to minority interests......... 115 - - 115
------- ------- -------- -------
Total costs and expenses............... 10,054 - 109 10,163
------- ------- -------- -------
Other income (expense):
Interest expense........................... (251) - - (251)
Other income............................... 3 - 37 (b) 40
------- ------- -------- -------
(248) - 37 (211)
------- ------- -------- -------
Net loss ....................................... (502) - (72) (574)
Preferred stock dividends....................... - - (1,080) (c) (1,080)
------- ------- -------- -------
Net loss applicable to common and common
equivalent shares............................. $ (502) $ - $ (1,152) $(1,654)
======= ======= ======== =======
Net loss per common and common
equivalent shares............................. $ (0.05) $ (0.08)
======= =======
Weighted average number of common and
common equivalent shares outstanding.......... 9,137,798 20,047,014
========= ==========
</TABLE>
- --------------------------
(a) To reflect amortization of goodwill ($3,631,000 assuming an
estimated useful life of twenty-five years).
(b) To reflect interest income earned on notes receivable of $625,000 to
be issued in exchange for common stock in Holdings at 7% per annum on
$375,000 and 9% per annum on $250,000, assuming transaction occurred
on April 1, 1996.
(c) To reflect dividends on the $12 million issuance of Holdings'
redeemable preferred stock at dividend accrual rate of 12% per annum,
assuming the issuance occurred on April 1, 1996.
F-4
<PAGE> 115
JILLIAN'S ENTERTAINMENT AND HOLDINGS
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
---------------------------------------------------
Jillian's Pro Forma
Entertainment --------------------------
(Historical) Holdings Adjustments Combined
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues from clubs............................. $11,876 $ - $ - $11,876
------- --------- -------- -------
Cost of club operations......................... 9,643 - - 9,643
General and administrative expenses............. 1,707 - - 1,707
Depreciation and amortization expense........... 657 - 145 (a) 802
Income applicable to minority interests......... 190 - - 190
------- --------- -------- -------
Total costs and expenses............... 12,197 - 145 12,342
------- --------- -------- -------
Other income (expense):
Interest expense........................... (212) - - (212)
Other income............................... 139 - 49 (b) 188
------- --------- -------- -------
(73) - 49 (24)
------- --------- -------- -------
Net loss ....................................... (394) - (96) (490)
Preferred stock dividends....................... - - (1,440) (c) (1,440)
------- --------- -------- -------
Net loss applicable to common and common
equivalent shares............................. $ (394) $ - $ (1,536) $(1,930)
======= ========= ======== =======
Net loss per common and common
equivalent shares............................. $ (0.04) $ (0.10)
======= =======
Weighted average number of common and
common equivalent shares outstanding.......... 9,137,798 20,047,014
========= ==========
</TABLE>
- --------------------------
(a) To reflect amortization of goodwill ($3,631,000 assuming an estimated
useful life of twenty-five years).
(b) To reflect interest income earned on notes receivable of $625,000 to be
issued in exchange for common stock in Holdings at 7% per annum on
$375,000 and $9% per annum on $250,000, assuming transaction occurred
on April 1, 1995.
(c) To reflect dividends on the $12 million issuance of Holdings' redeemable
preferred stock at dividend accrual rate of 12% per annum, assuming the
issuance occurred on April 1, 1995.
F-5
<PAGE> 116
<TABLE>
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
December 31, March 31,
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 595,313 $ 646,306
Inventory 187,817 204,581
Accounts receivable 110,221 63,386
Other current assets 212,274 166,035
----------- -----------
Total current assets 1,105,625 1,080,308
Investments 39,725 39,725
Property, leasehold improvements and
equipment, net 6,878,989 7,687,606
Goodwill, net 765,446 805,384
Other assets 278,138 291,248
----------- -----------
Total assets $ 9,067,923 $ 9,904,271
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 943,388 $ 941,707
Accrued expenses and other liabilities 581,904 635,167
Current portion of notes and equipment
leases payable 825,394 712,910
Notes payable to related parties 280,000 --
----------- -----------
Total current liabilities 2,630,686 2,289,784
Deferred rent 1,067,655 1,187,860
Notes payable and equipment
leases payable 1,756,100 1,906,235
Notes payable to related parties -- 280,000
----------- -----------
Total liabilities 5,454,441 5,663,879
----------- -----------
Minority interests 1,271,146 1,395,964
----------- -----------
Commitments and contingencies
Stockholders' equity:
Cumulative preferred stock, $.001 par
value, 1,000,000 shares authorized, none
issued or outstanding -- --
Common stock, $.001 par value, 25,000,000
shares authorized, 9,137,798 shares issued
and outstanding 9,138 9,138
Paid-in capital 9,536,277 9,536,277
Accumulated deficit (7,203,079) (6,700,987)
----------- -----------
Total stockholders' equity 2,342,336 2,844,428
----------- -----------
Total liabilities and stockholders' equity $ 9,067,923 $ 9,904,271
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements
F-6
<PAGE> 117
<TABLE>
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Month Period Nine Month Period
Ended December 31, Ended December 31,
------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from clubs $3,497,637 $3,011,717 $9,799,894 $8,182,344
---------- ---------- ---------- ----------
Cost and expenses:
Cost of club operations:
Cost of food and beverage 781,239 722,221 2,228,647 1,943,988
Wages 756,380 702,471 2,272,936 1,944,404
Rent 495,019 406,129 1,352,252 1,215,532
Direct operating expenses 660,761 570,366 1,982,169 1,710,598
Other operating expenses 300,000 - 300,000 -
General and administrative expenses 342,391 531,368 1,141,954 1,211,652
Depreciation and amortization 221,192 154,226 661,101 449,826
Minority interest 73,221 72,466 115,389 87,864
Start-up costs related to development
stage clubs - 20,216 - 82,575
---------- ---------- ---------- ----------
Total cost and expenses 3,630,203 3,179,463 10,054,448 8,646,439
---------- ---------- ---------- ----------
Other income/(expenses):
Interest income 1,217 907 3,496 12,985
Interest Expense (83,973) (58,220) (251,034) (133,325)
---------- ---------- ---------- ----------
Total other expenses (82,756) (57,313) (247,538) (120,340)
---------- ---------- ---------- ----------
Net loss $ (215,322) $ (225,059) $ (502,092) $ (584,435)
========== ========== ========== ==========
Net loss per share of common and
common equivalents $ (0.02) $ (0.02) $ (0.05) $ (0.06)
========== ========== ========== ==========
Weighted average common and
common equivalent shares outstanding 9,137,798 9,137,798 9,137,798 9,137,798
========== ========== ========== ==========
See accompanying notes to consolidated condensed financial statements
</TABLE>
F-7
<PAGE> 118
<TABLE>
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Month Period
Ended December 31,
1996 1995
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(502,092) $ (584,435)
--------- -----------
Adjustments to reconcile net loss to net cash provided by operations:
Charge for impairment of long-lived assets 300,000 -
Depreciation and amortization 661,101 449,826
Changes in operating assets in liabilities:
Accounts receivables (46,835) (38,553)
Inventory 16,764 (46,895)
Other assets (53,659) (367)
Accounts payable 1,681 324,883
Accrued expenses and other liabilities (173,468) 106,826
Minority interest 115,389 87,864
--------- -----------
Total adjustments 820,973 883,584
--------- -----------
Cash provided by operating activities 318,881 299,149
--------- -----------
Cash flows from investing activities:
Purchases of property and equipment (92,016) (1,137,932)
Collections of notes receivable - 103,413
--------- -----------
Cash used by investing activities (92,016) (1,034,519)
--------- -----------
Cash flows from financing activities:
Repayment of notes and leases payables (537,651) (432,571)
Proceeds from borrowings 500,000 630,253
Distributions to minority interest shareholders (240,207) (126,483)
--------- -----------
Cash used by financing activities (277,858) 71,199
--------- -----------
Net decrease in cash and cash equivalents (50,993) (664,171)
Cash and cash equivalents at beginning of year 646,306 1,254,120
--------- -----------
Cash and cash equivalents at end of period $ 595,313 $ 589,949
========= ===========
</TABLE>
Supplemental cash flow information:
During the nine months ended December 31, 1995, the Registrant acquired
equipment by entering into capital leases in the amount of $167,566.
See accompanying notes to consolidated condensed financial statements
F-8
<PAGE> 119
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
Note A - General
- ------------------
The unaudited consolidated condensed financial statements include the accounts
of Jillian's Entertainment Corporation (the "Registrant"), Jillian's, Inc. and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Net loss per share amounts are computed based upon the average number of common
and common equivalent shares outstanding, assuming proceeds from the assumed
exercise of options and warrants were used to purchase common shares outstanding
at the average complete market value during each period, unless such exercise is
anti-dilutive.
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions for Form 10-QSB and therefore do
not include all information and footnotes necessary for a complete presentation
of financial position, results of operations and changes in cash flow in
conformity with generally accepted accounting principles. The unaudited
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the
Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1996. In
the opinion of management, the unaudited consolidated condensed financial
statements contain all adjustments necessary for a fair presentation of the
results of operations for the interim periods presented and all such adjustments
are of a normal and recurring nature. The results of operations for the three
and nine months ended December 31, 1996 are not necessarily indicative of the
results which may be expected for the entire fiscal year.
Certain amounts in the unaudited accompanying condensed consolidated financial
statements for the three and nine months ended December 31, 1995 have been
reclassified to conform to the December 31, 1996 presentation.
F-9
<PAGE> 120
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Jillian's Entertainment
Corporation:
We have audited the accompanying consolidated balance sheet of Jillian's
Entertainment Corporation and subsidiaries as of March 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Jillian's
Entertainment Corporation and subsidiaries at March 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Boston, Massachusetts
July 2, 1996
F-10
<PAGE> 121
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 646,306
Inventory 204,581
Accounts receivable 63,386
Other current assets 166,035
----------
Total current assets 1,080,308
Investments (Note 2) 39,725
Property, leasehold improvements and equipment,
net (Notes 3 and 4) 7,687,606
Goodwill, net 805,384
Other assets 291,248
----------
Total assets $ 9,904,271
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 941,707
Accrued expenses and other liabilities 635,167
Current portion of notes and equipment
leases payable (Note 4) 712,910
----------
Total current liabilities 2,289,784
Deferred rent 1,187,860
Notes payable and equipment
leases payable (Note 4) 1,906,235
Notes payable to related parties (Note 4) 280,000
----------
Total liabilities 5,663,879
----------
Minority interests (Note 11) 1,395,964
----------
Commitments and contingencies (Notes 6, 8 and 11)
Stockholders' equity (Notes 4, 7, 8, 9 and 11):
Cumulative preferred stock, $.001 par
value, 1,000,000 shares authorized, none
issued or outstanding -
Common stock, $.001 par value, 25,000,000
shares authorized, 9,137,798 shares issued
and outstanding 9,138
Paid-in capital 9,536,277
Accumulated deficit (6,700,987)
----------
Total stockholders' equity 2,844,428
----------
Total liabilities and stockholders' equity $9,904,271
==========
</TABLE>
See accompanying notes to consolidated financial statements
F-11
<PAGE> 122
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues from club operations $ 11,875,716 $ 7,969,247
------------ ------------
Costs and expenses:
Cost of club operations:
Cost of goods sold 2,736,704 1,749,269
Wages 2,745,768 1,870,360
Rent 1,685,014 1,223,785
Direct operating costs 2,393,039 1,590,270
Start-up costs related to development
stage clubs 82,575 534,808
General and administrative expenses 1,707,460 1,186,761
Depreciation and amortization expense 656,768 523,500
Income applicable to minority
interest (Note 11) 189,613 110,231
------------ ------------
Total costs and expenses 12,196,941 8,788,984
------------ ------------
Other income/(expenses):
Gain on sale of investment -- 4,785
Interest expense (211,520) (98,021)
Other income 139,014 49,917
------------ ------------
Total other expenses, net (72,506) (43,319)
------------ ------------
Net loss $ (393,731) $ (863,056)
============ ============
Net loss per common and
common equivalents share $ (0.04) $ (0.11)
============ ============
Weighted average common and common
equivalent shares outstanding 9,137,798 8,116,291
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-12
<PAGE> 123
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
For the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Total
-------------------- Paid-in Accumulated Notes Stockholders'
Shares Amount Capital Deficit Receivable Equity
------ ------ ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 8,032,798 $8,033 $9,188,132 $(5,444,200) $(151,667) $3,600,298
Shares issued, stock options
exercised (Note 7) 1,105,000 1,105 275,145 276,250
Collection of notes receivable 48,254 48,254
Services contributed by
shareholder (Note 6) 50,000 50,000
Net loss (863,056) (863,056)
--------- ------ ---------- ----------- --------- ----------
Balance at March 31, 1995 9,137,798 9,138 9,513,277 (6,307,256) (103,413) 3,111,746
Collection of notes receivable 103,413 103,413
Services contributed by
shareholder (Note 6) 23,000 23,000
Net loss (393,731) (393,731)
--------- ------ ---------- ----------- --------- ----------
Balance at March 31, 1996 9,137,798 $9,138 $9,536,277 $(6,700,987) $ -- $2,844,428
========= ====== ========== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-13
<PAGE> 124
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (393,731) $ (863,056)
----------- -----------
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 656,768 523,500
Gain on sale of investments -- (4,785)
Provision for losses on receivables -- 41,587
Increase in paid-in capital for contribution
of services 23,000 50,000
(Increase)/decrease in accounts receivable (29,698) 5,706
Increase in inventory (49,014) (38,484)
Decrease/(increase) in other assets 29,706 (103,015)
Increase in accounts payable 362,922 284,592
Increase in accrued expenses and other liabilities 282,518 294,102
Increase in minority interest 189,613 110,231
----------- -----------
Total adjustments 1,465,815 1,163,434
----------- -----------
Cash provided by operating activities 1,072,084 300,378
----------- -----------
Cash flow from investing activities:
Purchase of property and equipment (1,677,301) (1,775,960)
Collection of note receivable 103,413 6,667
Proceeds from sale of investments -- 9,470
----------- -----------
Net cash used in investing activities (1,573,888) (1,759,823)
----------- -----------
Cash flows from financing activities:
Issuance of notes payable 630,253 1,419,320
Repayment of notes and leases payable (506,829) (261,505)
Proceeds from issuance of common stock -- 276,250
Proceeds from sale of partnership interests -- 258,084
Distributions to minority interest partners (229,434) (108,145)
----------- -----------
Net cash (used)/provided by financing activities (106,010) 1,584,004
----------- -----------
Net (decrease)/increase in cash and cash equivalents (607,814) 124,559
Cash and cash equivalents at beginning of year 1,254,120 1,129,561
----------- -----------
Cash and cash equivalents at end of year $ 646,306 $ 1,254,120
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 211,520 $ 98,021
=========== ===========
Non-cash investing and financing activity:
Acquisition of equipment through capital leases $ 723,392 $ --
=========== ===========
Acquisition of leasehold improvements through
landlord contributions $ 872,682 $ --
=========== ===========
Conversion of notes payable into limited partner-
ship interest $ -- $ 100,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-14
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Jillian's Entertainment Corporation (the "Company"), owns, operates and manages,
through wholly-owned subsidiaries, billiard clubs in Miami, Florida; Seattle,
Washington; Cleveland, Ohio; Cleveland Heights, Ohio; Pasadena California;
Worcester, Massachusetts; Champaign, Illinois; Annapolis, Maryland; Long Beach,
California and Tacoma, Washington. The Cleveland Heights, Worcester, Champaign
and Annapolis clubs are owned by limited partnerships in which wholly-owned
subsidiaries of Jillian's, Inc. are the general partners and own 87%, 25%, 43%
and 79% interests, respectively.
Certain amounts in the accompanying consolidated financial statements as of and
for the year ended March 31, 1995, have been reclassified to conform to the
presentation as of and for the year ended March 31, 1996.
The following is a summary of significant accounting policies followed in the
preparation of these consolidated financial statements:
Principles of Consolidation
The consolidated financial statements include the accounts of Jillian's
Entertainment Corporation, Jillian's, Inc. and subsidiaries and Carom Financial
Corporation. The Cleveland Heights, Worcester, Champaign and Annapolis clubs are
owned by limited partnerships in which wholly-owned subsidiaries of the Company
have an 87%, 25%, 43% and 79% ownership interest, respectively. All of the
limited partnerships are consolidated herein, since the Company controls the
operations of the limited partnerships. All significant intercompany accounts
and transactions have been eliminated.
Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and
interest-bearing deposits with banks, with original maturities of less than
three months.
F-15
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS,
CONTINUED
Inventory
Inventory, primarily food and beverage, is stated at cost. Cost is determined by
the first-in, first-out method.
Investments
Investments in equity securities and non-billiard club limited partnerships,
which do not have readily determinable fair values, are carried at the lower of
cost or estimated fair market value. Gains and losses on the sale of investments
are calculated on the "specific identification" method.
Property, Leasehold Improvements and Equipment
Property, leasehold improvements and equipment are stated at cost. Property and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets which range from five to ten years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term (including all renewal periods) or the useful lives of the
improvement which range from ten to twenty years. When items are retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gains or losses are recognized.
Goodwill
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No.
121 requires, among other things, that impairment losses on assets held, and
gains or losses from assets that are expected to be disposed of, be included as
a component of income from continuing operations.
The excess of the cost of the investment in Jillian's, Inc. over the fair value
of net assets acquired is being amortized on a straight-line basis over twenty
years from the acquisition dates. The Company evaluates the potential impairment
of its long-lived assets, including goodwill related thereto, in accordance with
SFAS No. 121 and evaluates other goodwill in accordance with Accounting
Principle Board Opinion No. 17 "Intangible Assets". The Company does not believe
that its long-lived assets or goodwill has been impaired.
F-16
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS,
CONTINUED
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes". Under SFAS 109, current income taxes are
provided based upon taxes currently payable and deferred taxes are provided to
reflect the temporary difference in the tax basis of assets and liabilities and
their reported amounts in the financial statements. A valuation allowance is
recorded to reduce deferred tax assets to an amount which is considered more
likely than not to be realized.
Earnings/Loss Per Share
Earnings (loss) per share amounts are computed based upon the average number of
common and common equivalent shares outstanding, assuming proceeds from the
assumed exercise of options were used to purchase common shares outstanding at
the average fair market value during each period, unless such exercise is
anti-dilutive.
Start-up Costs
Start-up costs related to development stage clubs are expensed as incurred.
These costs include all wages, rents and direct general and administrative
expenses incurred prior to a club opening for business.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising expense was
approximately $317,000 and $168,000 for the years ended March 31, 1996 and 1995,
respectively.
Leases
The Company has entered into operating lease agreements which contain scheduled
rent increases during the term of the lease. Such scheduled rent increases are
recorded on a straight-line basis over the term of the lease. Landlord
incentives are recorded as deferred rent and amortized over the terms of the
lease.
Fair Value of Financial Instruments
The Company believes that the carrying amount of notes and equipment leases
payable, as reported in the accompanying consolidated balance sheet,
approximates fair value.
F-17
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. INVESTMENTS
Investments at March 31, 1996 consisted of the following:
<TABLE>
<S> <C>
North American Venture Capital
Fund II, L.P. $25,000
Tellurado Assoc., Ltd. 14,725
-------
Total $39,725
=======
</TABLE>
North American Venture Capital Fund II, L.P. and Tellurado Assoc., Ltd represent
limited partnership interests purchased in fiscal 1990 and fiscal 1992,
respectively. These partnerships were formed primarily to invest in marketable
securities and real estate, respectively.
3. PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET
Property, leasehold improvements and equipment consists of the following at
March 31, 1996:
<TABLE>
<S> <C>
Leasehold improvements $ 5,487,014
Game equipment 1,391,937
Club and office equipment 1,772,683
Furniture and fixtures 720,323
-----------
9,371,957
Less accumulated depreciation (1,684,351)
-----------
Total $ 7,687,606
===========
</TABLE>
4. NOTES AND EQUIPMENT LEASES PAYABLE
Notes Payable
Notes payable at March 31, 1996 consist of the following:
<TABLE>
<S> <C>
Note payable to U.S. Government. (See Note 8). $199,792
Note payable to City of Cleveland Heights collateralized by personal
property and fixtures in the Cleveland Heights club. Interest
payable at 7%. Principal and interest payable in monthly
installments of $1,161. Balance due in April 1998. 76,219
Note payable to seller of Pasadena club. Interest payable monthly
at 8%. Principal due in August, 1996. (See Note 10). 175,000
</TABLE>
F-18
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. NOTES AND EQUIPMENT LEASES PAYABLE, CONTINUED
Notes Payable, Continued
<TABLE>
<S> <C>
Note payable to unaffiliated third parties. Interest at 15%.
(Currently payable at 12%). Principal and accrued interest due
October 20, 1999. 185,000
Note payable to bank collateralized by stock in Seattle club
Interest payable at 9.5%. Principal and interest payable in
monthly installments of $4,205. Balance due May 18, 1999. 144,538
Note payable to Champaign club landlord. Interest payable at 10%. Principal and
interest payable in monthly installments of $3,187.
Balance due September 1, 1999. 110,301
Note payable to City of Long Beach. Interest accrues at 7% for first year,
thereafter, principal and interest is payable in monthly installments of $5,507
beginning April 1, 1996.
Balance due April 2006. 450,000
Note payable to unaffiliated third party. Interest payable
quarterly at 8.5%. Balance due August 1, 1996. 50,000
Note payable to bank collateralized by equipment in
Tacoma club and by stock in Seattle club. Interest payable
in monthly installments of $6,306. Balance due December
2000. 284,357
---------
Total 1,675,207
Notes Payable to Related Parties
Notes payable to affiliated third parties. Interest payable
at 25%. Interest payable semi-annually. Principal and accrued
interest due May and June 1997. 280,000
---------
Total notes payable 1,955,207
---------
Capitalized Equipment Leases Payable
Equipment leases payable to unaffiliated third party. Payable in monthly
installments of $6,673. $30,000 buy-out due June 1, 1999. 214,633
Other equipment leases payable to unaffiliated third party. 178,923
</TABLE>
F-19
<PAGE> 130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. NOTES AND EQUIPMENT LEASES PAYABLE, CONTINUED
Capitalized Equipment Leases Payable, Continued
<TABLE>
<S> <C>
Equipment leases payable to unaffiliated third party. Payable
in monthly installments of $6,762. $30,000 buyout due January
2001. 294,556
Equipment leases payable to unaffiliated third party. Payable in
monthly installments of $11,953. Balance due in March 1998. 255,826
----------
Total capital leases payable 943,938
----------
Total notes and equipment leases payable 2,899,145
Less current portion of notes and equipment leases payable 712,910
----------
Long term portion of notes and equipment leases payable $2,186,235
==========
</TABLE>
The aggregate amount of required payments under the notes payable at March 31,
1996 are as follows:
Years Ending March 31,
<TABLE>
<S> <C>
1997 $ 420,626
1998 549,154
1999 309,254
2000 322,767
2001 99,433
Thereafter 253,973
----------
Total $1,955,207
==========
</TABLE>
As collateral on the City of Long Beach loan, the Company has issued the City of
Long Beach a warrant to receive 225,000 shares of its common stock at no charge.
This warrant is only exercisable if the Company defaults on the loan and fails
to cure such default. Any net proceeds the City of Long Beach receives on the
sale of such warrant would be used to offset the outstanding loan balance. If
such net proceeds were not sufficient to repay the outstanding loan balance, the
Company has agreed to continue to issue additional shares of its common stock
until the outstanding loan balance is paid in full.
F-20
<PAGE> 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. NOTES AND EQUIPMENT LEASES PAYABLE, CONTINUED
Future minimum lease payments under capital lease obligation together with the
present value of the net minimum lease payments are as follows:
Years Ending March 31,
<TABLE>
<S> <C>
1997 $ 395,662
1998 355,550
1999 202,095
2000 140,035
2001 77,947
----------
Total minimum
lease payments 1,171,289
Less amounts repre-
senting interest 227,351
----------
Present value of net
minimum lease pay-
ments $ 943,938
==========
Current $ 292,284
Long-term 651,654
----------
$ 943,938
==========
</TABLE>
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes and operating loss carryforwards.
The tax effects of significant items comprising the Company's net deferred tax
assets as of March 31, 1996 are as follows:
F-21
<PAGE> 132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. INCOME TAXES, CONTINUED
<TABLE>
<CAPTION>
1996
----
<S> <C>
Gross deferred tax liabilities $ --
-----------
Deferred tax assets:
Contribution carryforward 8,000
Net operating loss carryforward 2,202,300
Capital loss carryforward 31,600
-----------
Gross deferred tax assets 2,241,900
-----------
Deferred tax asset 2,241,900
Valuation allowance (2,241,900)
-----------
Net deferred asset $ --
===========
</TABLE>
No provision or benefit for income taxes was recorded in the accompanying
consolidated financial statements for the years ended March 31, 1996 and 1995.
As of March 31, 1996, the Company has unused operating loss carryforwards of
approximately $5,850,000 for federal income tax purposes. Approximately
$4,000,000 of these carryforwards are limited under Section 382 of the Internal
Revenue Code to approximately $350,000 per year. These carryforwards begin to
expire in the year 2006.
The Company's provision for income taxes differs from the amounts determined by
applying the statutory federal income tax rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Amount % Amount %
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Tax (benefit) at federal rate $(137,800) (35.0) $(302,070) (35.0)
Benefit of graduated rate 4,200 1.0 8,631 1.0
Goodwill amortization 18,600 4.7 18,637 2.2
Change in valuation allowance 94,402 24.0 260,545 30.1
Accrued officers compensation 35,000 8.9 -- --
Other, net (14,402) (3.6) 14,257 1.7
--------- ----- --------- -----
Total $ 0 0% $ 0 0%
========= ===== ========= =====
</TABLE>
The valuation allowance increased by $94,402 in the year ended March 31, 1996.
6. COMMITMENTS AND CONTINGENCIES
Leases
On June 13, 1995, the Company entered into a lease agreement for 3,020 square
feet of space for its administrative operation located at 727 Atlantic Avenue in
Boston, Massachusetts. The lease commenced in July, 1995 and expires July, 1998.
In addition, the lease has a two-year renewal period. Under the lease agreement,
the Company will be obligated to pay the lessor minimum annual rent equal to
$31,710 (payable in monthly installments of $2,642) for the first year, $34,730
(payable in monthly installments of $2,894) for the second year and $37,750
(payable in monthly installments of $3,146) for the third year.
F-22
<PAGE> 133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company also leases the premises in which its billiard clubs are operated.
The future minimum lease payments under the administrative and clubs operating
leases are as follows:
<TABLE>
<CAPTION>
Years ending Leases as of
March 31, March 31, 1996
------------ --------------
<S> <C> <C>
1997 $ 1,607,000
1998 1,553,000
1999 1,561,000
2000 1,213,000
2001 1,011,000
Thereafter 2,878,000
-----------
Total $ 9,823,000
===========
</TABLE>
Some of the billiard clubs lease agreements contain clauses that provide for
additional rental expense based on gross sales exceeding specified dollar
amounts. Such rental clauses differ by club. During the year ended March 31,
1996, none of the clubs were required to pay any material amounts of additional
rent. Additionally, the Company is using the straight line method for certain
lease payments under the lease agreements and, therefore, current expenses are
greater than the actual cash payments.
Litigation
On October 13, 1995, an action foreclosing a mechanics lien was filed against
the Company in a California Superior Court for Los Angeles County for
approximately $123,000, plus interest. The Company filed an answer and cross
complaint on January 3, 1996. While the Company is vigorously defending the
action and believes that it has meritorious defenses, no assurance can be given
of a favorable outcome.
Employment Agreement
On March 14, 1991, Steven L. Foster entered into an employment agreement with
the Company. The term of the employment agreement was for four years at an
annual salary of $50,000 plus annual incentive compensation and was extended to
September 14, 1995. There was no annual incentive compensation earned during the
term of the agreement. Mr. Foster has waived his annual salary from May 1, 1992
through September 14, 1995 in order to reduce the Company's general and
administrative expenses. For fiscal 1995 and 1996, the Company recognized an
expense of $50,000 and $23,000, respectively for the fair value of the service
rendered by Mr. Foster and a corresponding credit to paid-in capital.
F-23
<PAGE> 134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCKHOLDERS' EQUITY
During fiscal 1993, the Company offered for sale its common stock through a
private placement. The Company sold 2,043,022 shares of its common stock for
approximately $874,000 net of offering expenses and sales commissions. In
accordance with the terms of the subscription agreement for the private
placement, the Company filed with the Securities and Exchange Commission a
registration statement with respect to the shares sold in the private placement.
The registration statement became effective February 5, 1993 and continues to be
effective.
On March 14, 1991 the Company issued 1,000,000 shares of common stock in
connection with the Jillian's, Inc. acquisition. Additionally, on such date, the
Company and Steven Foster, Steven Rubin, Kevin Troy and The Frank and Celia
Foster Family Trust (collectively, the "Foster Group") entered into a
Registration Rights Agreement. Pursuant to the Registration Rights Agreement,
the Foster Group has a one time demand registration right to require the Company
to register its stock for sale to the public and certain rights to participate
in registrations of securities by the Company, subject to certain restrictions.
The Registration Rights Agreement also contains an anti-dilution provision
providing that for a period of 18 months from March 14, 1991, the Company would
not engage in any offering and sale of any of its equity securities or
securities convertible into or exchangeable into equity securities without the
prior written consent of Steven Rubin acting as the representative of the Foster
Group. Steven Rubin was required to negotiate on behalf of the Foster Group in
good faith with the Company in an effort to achieve the Company's capital
requirements while minimizing the dilutive effect on the Foster Group of the
sale of any securities in any such offering. On April 28, 1993, the Company and
Steven Rubin negotiated a settlement with respect to the anti-dilution provision
for the River Club Limited Partnership transaction (see Note 9) and the 1993
private placement of common stock discussed above. The Company issued the Foster
Group an additional 650,000 shares of common stock pursuant to its anti-dilution
rights. The Company also granted the Foster Group a warrant, for the purchase of
100,000 shares of the Company's common stock at an exercise price of $1.50. The
warrant is exercisable for a three-year period commencing April 28, 1993.
F-24
<PAGE> 135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCKHOLDERS' EQUITY, CONTINUED
At March 31, 1996, outstanding warrants and options to purchase shares of the
Company's common stock were as follows:
<TABLE>
<S> <C>
Warrants issued to investment banker (a) 125,000
Warrants issued in connection with the River Club
Limited Partnership transaction (See Note 9) 75,995
Warrants issued in connection with the Seattle club lease (b) 86,885
Warrants issued to public relations firm (c) 50,000
Warrants issued to former directors and officers (d) 262,500
Warrants issued in connection with the California clubs' acquisition (e) 10,000
Warrants issued to the Foster Group in connection with the anti-dilution
provision, discussed above 100,000
Warrants issued in connection with the Miami club lease (f) 65,000
Consolidated Stock Option Plan (g) 150,500
1994 Stock Option Plan (h) 124,000
1995 Stock Option Plan (i) 1,645,000
Warrants issued to the City of Long Beach (See Note 4) 225,000
---------
Total number of common shares issuable upon exercise of warrants
and stock options 2,919,880
=========
</TABLE>
(a) On December 31, 1988, the Company entered into a letter agreement with
an investment banking firm (the "Firm"), pursuant to which the Company
retained the Firm to assist the Company in its efforts to locate
suitable acquisition opportunities. The Firm failed to locate an
acquisition opportunity for the Company and the Company and the Firm
informally agreed on March 7, 1990 to terminate the agreement. The
Company and the Firm negotiated a settlement with respect to the
investment banking services rendered. Under the terms of the
settlement, the Firm was granted warrants to purchase 100,000 shares
and 25,000 shares of the Company's common stock exercisable for a five
year period commencing May 15, 1991 at an exercise price of $1.00 and
$2.00 per share, respectively.
(b) Under the terms of an amendment to the Seattle club lease, the lessor
and Jillian's - Seattle have agreed that the percentage rental payments
may be made one-third in cash and two-thirds by issuing the lessor
warrants to purchase shares of the Company's common stock in an amount
equal to one share for each dollar of percentage rent owing. The
warrants will be issued on the fifteenth day following the end of each
fiscal year and will be exercisable for a five-year period at an
exercise price equal to the average bid and asked prices of the common
stock for the ten-day period prior to issuance. The warrants issued
under this amendment are as follows:
F-25
<PAGE> 136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
For Fiscal Warrants Exercise
Year Issued Price/Share
---------- -------- -----------
<S> <C> <C> <C>
1992 9,901 $0.97
1993 12,608 0.745
1994 15,637 0.70
1995 20,631 0.45
1996 28,108 0.27
------
86,885
======
</TABLE>
(c) On September 10, 1992, the Company issued to its public relations firm,
for services rendered, a warrant to purchase 50,000 shares of the
Company's common stock for a five-year period commencing at the time of
issuance at an exercise price of $0.50 per share.
(d) The Board of Directors has issued former directors and a former officer
of the company common stock purchase warrants exercisable for a
five-year period from the date of grant. The warrants have various
restrictions and registration rights. The warrants issued are as
follows:
<TABLE>
<CAPTION>
Date Warrants Exercise
Granted Issued Price/Share
------- -------- -----------
<S> <C> <C> <C>
3/23/93 40,000 $0.78
3/31/94 40,000 0.70
1/23/95 40,000 0.656
2/17/95 67,500 0.656
2/17/95 75,000 0.33
-------
262,500
=======
</TABLE>
(e) On August 19, 1993, the Company issued to an unaffiliated broker, for
services rendered in connection with the acquisition of the Pasadena
club and negotiating the City of Long Beach loan, a warrant to purchase
10,000 shares of the Company's common stock for a three-year period,
commencing on the date of issuance, at an exercise price of $1.00 per
share.
(f) On March 7, 1994, under the terms of an amendment to the Miami club
lease, the lessor and the Company have agreed to eliminate all basic
percentage rents due from inception of the lease through the
termination of the lease (including all renewal periods) and delay all
CPI increases until January 1, 1995. The basic percentage rent was 3%
of gross revenues up to $1,000,000 for years 1990 and 1991 of the lease
and 4% thereafter. In exchange for the amendment, the Company issued
the lessor
F-26
<PAGE> 137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCKHOLDERS' EQUITY, CONTINUED
40,000 shares of its common stock and granted the lessor warrants to
purchase 65,000 shares of its common stock at $0.50 per share. The
warrants are exercisable for a five-year period.
(g) On June 28, 1994, the Board of Directors cancelled all options (786,000
shares of the Company's common stock in the aggregate) previously
granted to directors, advisors and key employees under all stock option
plans adopted prior to March 31, 1994. Such plans were replaced with
the Consolidated Stock Option Plan which provided that options to
purchase 786,000 shares of the Company's common stock could be awarded.
On the same date, the Stock Option Committee granted options to
purchase 786,000 shares of the Company's common stock. On December 20,
1994, the Company reduced the exercise price of 520,000 options held by
Mr. Foster and Mr. Troy to $0.25 per share and all such options were
exercised during the fourth quarter of fiscal 1995. As of March 31,
1996, 520,000 of these options were exercised, 150,500 of these options
remained outstanding and 115,500 of these options were surrendered by
the option holder and/or terminated by the Company. The outstanding
options are exercisable at $.656 per share to the extent vested which
is as follows: 1) 132,100 options were exercisable as of March 31,
1996, 2) 9,200 options vest during fiscal 1997 and 3) 9,200 options
vest during fiscal 1998. The outstanding options expire as follows: 1)
5,000 options in fiscal 1998, 2) 5,000 options in fiscal 1999, 3) 5,500
options in fiscal 2000, 4) 32,000 options in fiscal 2001, 5) 30,000
options in fiscal 2002 and 6) 73,000 options in fiscal 2004.
(h) On March 31, 1994, the Board of Directors adopted, subject to
shareholder approval, the 1994 Director, Adviser and Key Employee Stock
Option Plan (the "1994 Plan"). Under the 1994 Plan, options to purchase
804,000 shares of the Company's common stock could be awarded. On the
same date, the Stock Option Committee granted options to the Board of
Directors and to key employees which, in the aggregate, allowed for the
purchase of 774,000 shares of the Company's common stock. The options
were exercisable to the extent vested under the vesting schedule, which
is 100% vested on the date of grant for 660,000 of the options and 50%
on the date of grant and 50% one year thereafter for the remaining
114,000 options. The exercise price was $0.656 per share for 114,000
options and $0.33 for the remaining 660,000 options. On December 20,
1994, the Company reduced the exercise price of 585,000 options held by
Mr. Foster and Mr. Troy to $0.25 per share and all such options were
exercised during the fourth quarter of fiscal 1995. On March 31, 1995,
the Board of Directors granted 20,000 additional options with an
exercise price of $0.45 per share to the outside directors, exclusive
of Mr. Foster; these options were 50% vested upon grant and were fully
vested on March 31, 1996. As of March 31, 1996, 585,000 of
F-27
<PAGE> 138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCKHOLDERS' EQUITY, CONTINUED
these options were exercised, 124,000 options remained outstanding and
85,000 options were surrendered by the option holder and terminated by
the Company. The outstanding options are currently fully vested, of
which 104,000 and 20,000 options are exercisable at $.656 and $.45,
respectively. The outstanding options expire as follows: 1) 104,000
options on March 31, 2004 and 2) 20,000 options on March 31, 2005.
(i) On October 2, 1995, the Board of Directors, adopted a new 1995
Director, Adviser and Key Employee Stock Option Plan (the "1995 Plan").
Under the 1995 Plan, options to purchase 1,650,000 shares of the
Company's common stock can be awarded. In October 1995, the Stock
Option Committee granted options to key employees which, in the
aggregate, allow for the purchase of 1,645,000 shares of the Company's
stock. As of March 31, 1996, 1,645,000 options remained outstanding.
The outstanding options are exercisable at $.40 per share to the extent
vested, which is as follows: 1) 380,000 options were exercisable as of
March 31, 1996, 2) 411,250 options will vest during fiscal 1997, 1998
and 1999 and 3) 31,250 options will vest during fiscal 2000. The
outstanding options expire in October 2005.
8. SETTLEMENT AGREEMENT
Precious Metals Operation
On April 30, 1992, the United States Attorney executed a Settlement Agreement
with the Company concerning certain litigation. The litigation related to the
Company's discontinued precious metals operations that were sold in March 1989
to Advent Technology, Inc. ("Advent") prior to the Company's involvement in the
Jillian's billiard club business.
Under the Settlement Agreement, the Company specifically denied any wrongdoing
but agreed, because the Company may have unknowingly received property subject
to forfeiture, and therefore, desired to prevent the expenditure of monies in
defense of any such claim, that a newly-incorporated subsidiary would deliver to
the government 100,000 shares of the common stock of the Company owned by the
subsidiary and a secured promissory note in the amount of $250,000 payable over
eight years commencing April 30, 1993. The promissory note is secured by the
Company's obligation to issue 200,000 shares of the Company's common stock in
the event of default.
On March 31, 1994, the Company amended the promissory note to provide that the
Company would, starting April 30, 1994, make six monthly payments of $1,000,
followed by six monthly payments of $1,500, followed by twelve monthly payments
of $2,500, followed by twenty-four monthly payments of $3,000, and one final
payment of $127,792 on April 30, 1998.
F-28
<PAGE> 139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. THE RIVER CLUB LIMITED PARTNERSHIP PRIVATE PLACEMENT
On February 4, 1992 (the "closing date"), the Company entered into an agreement
(the "Agreement") and two $100,000 promissory notes with the River Club Limited
Partnership ("River Club"). Pursuant to the Agreement, River Club delivered to
the Company $325,000 in exchange for 311,377 shares of the Company's common
stock. The offering of the common stock issued to River Club was registered
pursuant to a registration statement which became effective April 14, 1993.
Additionally, under the Agreement the Company has granted River Club 75,995
common stock purchase warrants (which includes warrants issued pursuant to an
anti-dilution provision) exercisable for five years from the closing date at
$1.50 per share. The promissory notes were four-year convertible notes accruing
interest at a rate of 12.5% per annum.
On January 1, 1993 and October 1, 1994 the River Club converted each of the
promissory notes for a 10% interest in each of the limited partnerships which
own the Cleveland Heights club and the Champaign club, respectively. After River
Club holds the limited partnerships' equity for a four year period, it can
exchange its equity interest in the limited partnership for the Company's common
stock. The number of shares issuable by the Company in the exchange will equal
River Club's percentage of the limited partnerships' cash flow times five
divided by the average bid and asked prices of the Company stock for the last
ten trading days before the exchange.
10. ACQUISITION OF PASADENA CLUB
On August 19, 1993, the Company, through Jillian's Billiard Club of Pasadena,
Inc., a wholly-owned California corporation ("Jillian's-Pasadena"), entered into
a series of related agreements with an unrelated third-party to acquire all the
assets of an existing billiard club/diner located in the downtown business
district of Pasadena, California. The Pasadena club contains approximately 7,200
square feet of space on two floors. The ground floor is approximately 1,400
square feet, which is operated as a diner with additional outside seating. The
downstairs space is approximately 5,800 square feet and is operated as a
billiard club with 16 Brunswick billiard tables. The Pasadena club also has a
bar and food service. The assets acquired were (a) all assets located at the
billiard club/diner, which includes all leasehold improvements, furniture,
fixtures, bar and kitchen equipment, billiard tables and related items, (b) all
of the seller's rights, title and interest as lessee under the leases of the
premises, and (c) all alcoholic beverage licenses and other licenses and permits
necessary or useful for the operation of the billiard club/diner.
Jillian's-Pasadena paid $150,000 in cash and delivered a $275,000 note payable
for the assets. The note bears interest at the rate of 8% per annum.
Jillian's-Pasadena will pay interest monthly with all principal and any unpaid
interest due three years from the closing date. (See Note 4). The obligations of
Jillian's-Pasadena under the note are guaranteed by the Company.
F-29
<PAGE> 140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. MINORITY INTERESTS
In order to partially finance the costs of renovating and equipping the
Jillian's billiard clubs located in Cleveland Heights, Worcester, Champaign and
Annapolis, the Company sold limited partnership interests in limited
partnerships that own those clubs. The Company sold 13%, 75%, 57% and 21% of the
partnership interests in the partnerships that own the billiard clubs in
Cleveland Heights, Worcester, Champaign and Annapolis, respectively.
Wholly-owned subsidiaries of the Company own the remaining interests. Each of
the limited partnership agreements for the partnerships allows the limited
partners, after a certain date (the "Put Date"), to require the Company to
repurchase their limited partnership interests.
The purchase price is a multiple (ranging from four to five) times the limited
partner's allocable share of the limited partnership's net income for the twelve
month period preceding the Put Date. The limited partners will receive part of
their purchase price in the form of the Company's common stock and the balance
in cash. The limited partners also will have the right for a certain period of
time after receipt of the common stock to require that the Company register its
shares of common stock for sale to the public. The Company receives a fee from
each limited partnership for managing the related club and the partnership,
ranging from 5% to 6.5% of the gross revenues of the club.
JILLIAN'S BILLIARD CLUB OF CLEVELAND HEIGHTS, LTD.
The Cleveland Heights, Ohio club is owned by Jillian's Billiard Club of
Cleveland Heights Limited Partnership, an Ohio limited partnership, in which a
wholly-owned subsidiary of Jillian's, Inc. (Jillian's Billiard Club of Cleveland
Heights, Inc., a Delaware corporation) is the general partner and owns an 87%
interest. The remaining 13% of the limited partnership interest was sold for
$122,500.
A 3% limited partner will have the option to sell its three units to the
Company, the parent corporation of the general partner, during the sixty day
period after the transmittal to limited partners of the financial statements for
the partnership for the twelve months ending December 31, 1995. The Company has
agreed to purchase such units at a price equal to the greater of (a) the price
paid by a limited partner for units, ($22,500) or (b) 500% of the "Adjusted Net
Income" of the partnership for the twelve months ending December 31, 1995,
multiplied by a fraction representing the percentage interest in partnership
profits and losses of the units to be sold by the partner to the Company.
Adjusted Net Income is the net income of the Partnership determined in
accordance with general accounting principles, plus any depreciation taken by
the partnership in determining net income.
A 10% limited partner will have the option to sell its interest to the Company
any time after January 1, 1997. The Company has agreed to purchase the 10%
interest at a price equal to
F-30
<PAGE> 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. MINORITY INTERESTS, CONTINUED
500% of the annualized cash flow of Jillian's Billiard Club of Cleveland
Heights, Ltd, times 10%. The full purchase price is to be paid in common stock
of the Company and such common stock will be valued based on the average of the
bid and asked prices, for the ten trading days immediately prior to the limited
partner exercising its option to sell its interest.
The Company's ability to fulfill its obligations and the future value of the
Company's common stock is dependent on the success of the Company's business.
There is no assurance that the Company will be able to fulfill its obligations
to the partnership or to the limited partners, including its obligations under
its guarantee to the limited partners, and there can be no assurance that the
Company's common stock will have value in the event the limited partners
exercise their options to sell their units to the Company in exchange for the
Company's common stock.
JILLIAN'S BILLIARD CLUB OF WORCESTER, LTD.
The Worcester, Massachusetts club is owned by Jillian's Billiard Club of
Worcester Limited Partnership, a Massachusetts limited partnership, in which a
wholly-owned subsidiary of Jillian's, Inc. (Jillian's Billiard Club of
Worcester, Inc., a Massachusetts corporation) is the general partner and owns a
25% interest. The remaining 75% of the limited partnership interest was sold for
$850,000.
The limited partners will have the option to sell their units to the Company
during the sixty day period after the transmittal to limited partners of the
financial statements of the partnership for the twelve months ending December
31, 1998. If a limited partner exercises its option, the purchase price for the
units will be paid partly in cash (50% of the purchase price) and partly in
common stock of the Company (50% of the purchase price), with the stock to be
valued at 80% of its market price. Assuming all limited partners elect to sell
their units, the purchase price is five times 75% of the net profits of the
partnership for the twelve months ending December 31, 1998, determined in
accordance with generally accepted accounting principles, with a maximum
purchase price equal to 200% of the price paid by the limited partners for their
units. The Company has agreed to provide a right to the limited partners, for a
limited time, to register the Company's common stock for sale to the public. The
Company has guaranteed that owners of the units will receive distributions from
the partnership equal to 8% per annum of their investment in the partnership
from the close of escrow in connection with the sale of units until the sooner
of the opening of the partnership's club or November 30, 1993, and 15% per annum
of their investment in the partnership thereafter.
F-31
<PAGE> 142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. MINORITY INTERESTS, CONTINUED
The Company's ability to fulfill its obligations and the future value of the
Company's common stock is dependent on the success of the Company's business.
There is no assurance that the Company will be able to fulfill its obligations
to the partnership or to the limited partners, including its obligations under
its guarantee to the limited partners, and there can be no assurance that the
Company's common stock will have value in the event the limited partners
exercise their option to sell their units to the Company in exchange for the
Company's common stock.
JILLIAN'S BILLIARD CLUB OF CHAMPAIGN-URBANA, LTD.
The Champaign-Urbana, Illinois club is owned by Jillian's Billiard Club of
Champaign-Urbana Limited Partnership, an Illinois limited partnership, in which
a wholly-owned subsidiary of Jillian's, Inc. (Jillian's Billiard Club of
Champaign-Urbana, Inc., an Illinois corporation) is the general partner and owns
a 43% interest. The remaining 57% of the limited partnership interest was sold
for $325,000.
Limited partners, owning a 47% interest in the partnership, will have the
option to sell their units to the Company, the parent corporation of the
general partner, during the sixty day period after the transmittal to limited
partners of the financial statements for the partnership for the twelve months
ending December 31, 1996. If a limited partner exercises its option, the
purchase price for the units will be partly in cash (15% of the purchase
price) and partly in common stock of the Company (85% of the purchase price).
Assuming all limited partners elect to sell their units, the purchase price
would be five times 50% of the net income of the partnership multiplied by
their respective limited partnership interest, for the twelve months ending
December 31, 1996, determined in accordance with general accounting principles.
The Company has agreed to provide a right to the limited partners for a limited
time to register the Company's stock for sale to the public.
A 10% limited partner will have the option to sell its interest to the Company,
the parent of the general partner, anytime after October 1, 1998. The Company
has agreed to purchase the 10% interest at a price equal to 500% of the
annualized cash flow of Jillian's Billiard Club of Champaign-Urbana, Ltd. times
10%. The full purchase price is to be paid in common stock of the Company and
such common stock will be valued based on the average bid and asked prices for
the ten trading days immediately prior to the limited partner exercising its
option to sell its interest. The limited partner does not have a demand
registration right.
If the limited partners do not exercise their right to sell, the Company has
guaranteed that owners of the units will receive distributions from the
partnership
F-32
<PAGE> 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. MINORITY INTERESTS, CONTINUED
equal to 140% of their investment over a six year period. The guarantee period
will commence at the beginning of the first calendar quarter after the closing
of the sale of units.
The Company's ability to fulfill its obligations and the future value of the
Company's common stock is dependent on the success of the Company's business.
There is no assurance that the Company will be able to fulfill its obligations
to the partnership or to the limited partners, including its obligations under
its guarantee to the limited partners, and there can be no assurance that the
Company's common stock will have value in the event the limited partners
exercise their option to sell their units to the Company in exchange for the
Company's common stock.
JILLIAN'S BILLIARD CLUB OF ANNAPOLIS, LTD.
The Annapolis, Maryland club is owned by Jillian's Billiard Club of Annapolis
Limited Partnership, a Maryland limited partnership, in which a wholly-owned
subsidiary of Jillian's, Inc. (Jillian's Billiard Club of Annapolis, Inc., a
Maryland corporation) is the general partner and owns a 79% interest. The
remaining 21% of the limited partnership interest was sold for $133,084. The
limited partners will have the option to sell their units to the Company, the
parent corporation of the general partner, during the sixty day period after the
transmittal to limited partners of the financial statements for the partnership
for the twelve months ending December 31, 1997. If a limited partner exercises
its option, the purchase price for the units will be partly in cash (15% of the
purchase price) and partly in common stock of the Company (85% of the purchase
price). Assuming all limited partners elect to sell their units, the purchase
price would be four times 50% of the net income of the partnership multiplied
by their respective limited partnership interest, for the twelve months ending
December 31, 1997, determined in accordance with generally accepted accounting
principles, with the maximum price being an amount equal to 100% of the
investment of the limited partners in this offering. The Company has agreed to
provide a right to the limited partners, for a limited time, to register the
Company's common stock for sale to the public.
If the limited partners do not exercise their right to sell, the Company has
guaranteed that owners of the units will receive distributions from the
partnership equal to 140% of their investment over a six year period. The
guarantee period will commence at the beginning of the first calendar quarter
after the closing of the sale of units.
The Company's ability to fulfill its obligations and the future value of the
Company's common stock is dependent on the success of the Company's business.
There is no assurance that the Company will be able to fulfill its obligations
to the partnership or to the
F-33
<PAGE> 144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. MINORITY INTERESTS, CONTINUED
limited partners, including its obligations under its guarantee to the limited
partners, and there can be no assurance that the Company's common stock will
have value in the event the limited partners exercise their options to sell
their units to the Company in exchange for the Company's common stock.
The following is a summary of the limited partnerships terms:
<TABLE>
<CAPTION>
Minimum Percent of
Original Annual Purchase Purchase Price
Investment by Return Put Price Payable in Cash/
Limited Partners Guaranteed Date Multiple Common Stock
---------------- ---------- ---- -------- ------------
<S> <C> <C> <C> <C> <C>
Cleveland Heights $ 22,500 0 12/31/95 5(a) 100%/0%
Cleveland Heights 100,000 0 1/01/97 5 0%/100%
Worcester 850,000 15%(b) 12/31/98 5 50%/50%
Champaign 325,000 23.33%(c) 12/31/96 5 15%/85%
Champaign 100,000 0 10/01/98 5 0%/100%
Annapolis 133,084 23.33%(c) 12/31/97 4 15%/85%
</TABLE>
- ----------------
(a) Minimum return of original investment.
(b) Minimum annual return guaranteed until put date.
(c) Minimum annual return guaranteed over a six-year period, assuming
partners do not exercise their right to sell.
The minority interest at March 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Cleveland Heights Limited Partnership $ 113,532
Worcester Limited Partnership 632,930
Champaign Limited Partnership 446,974
Annapolis Limited Partnership 202,528
----------
Total $1,395,964
==========
</TABLE>
F-34
<PAGE> 145
PRELIMINARY COPY
JILLIAN'S ENTERTAINMENT CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
_____________, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
The undersigned hereby appoints Steven L. Foster and Daniel M. Smith,
and each of them as proxies, with full power of substitution in each, to
represent and to vote all shares of common stock, par value $.001 per share
(the "Common Stock") of Jillian's Entertainment Corporation (the "Company"),
which the undersigned would be entitled to vote, as fully as the undersigned
could vote and act if personally present, at the Special Meeting of
Shareholders to be held on ___________, 1997, at __:__ a.m., Eastern Time, and
all adjournments thereof, upon all matters set forth in the Notice of Special
Meeting of Shareholders and Proxy Statement, dated __________, 1997, copies of
which have been received by the undersigned, as follows:
1. To approve a merger (the "Merger") by and between the Company
and Jillian's Entertainment Acquisition Corporation, a
Florida corporation ("Sub") and wholly owned subsidiary of
Jillian's Entertainment Holdings, Inc. ("Holdings"), pursuant
to which, among other matters (a) Sub will be merged with and
into the Company, and the Company will survive as a wholly
owned subsidiary of Holdings, and (b) each share of Common
Stock owned immediately prior to consummation of the Merger
by any Shareholder, other than seven Shareholders who each
have ongoing relationships with the Company, will be
converted into the right to receive cash of $0.50, without
interest.
[ ] [ ] [ ]
For Against Abstain
2. Grant Authority to vote upon such other matters as may
properly come before the Special Meeting as Steven L. Foster
and Daniel M. Smith determine are in the best interest of the
Company.
[ ] [ ] [ ]
For Against Abstain
<PAGE> 146
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and the Proxy Statement. Any proxy heretofore given to
vote said Common Stock is hereby revoked. The undersigned hereby ratifies and
confirms all that said proxies or any of their substitutes may lawfully do by
virtue hereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR EACH OF THE MATTERS STATED.
Please complete, date and sign your name(s) as it appear(s) to the
left and return in the enclosed envelope. If acting as an executor,
administrator, trustee, guardian, etc., you should so indicate when signing. If
the signer is a corporation, please sign the full corporate name, by a duly
authorized officer. If Common Stock is held jointly, each Shareholder named
should sign.
Date: , 1997
----------------
Name Signature
-------------------------- --------------------------
Name Signature
-------------------------- --------------------------
2
