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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 5 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)
COMMON STOCK, PAR VALUE $.001 PER SHARE 477420103
(Title of Class of Securities) (CUSIP Number of Class of Securities)
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]
CALCULATION OF FILING FEE
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TRANSACTION VALUATION(1) AMOUNT OF FILING FEE
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$2,131,632 $426.33
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[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.
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Amount previously paid: $426.33 Filing parties: Jillian's Entertainment Corporation
Form or registration no: Schedule 14A Date filed: November 13, 1995
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(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
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Item in
Schedule 13E-3 Caption in Preliminary Proxy Statement
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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
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Item in
Schedule 13E-3 Caption in Preliminary Proxy Statement
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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
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
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Item in
Schedule 13E-3 Caption in Preliminary Proxy Statement
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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
Item 14(a) .................... SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS and FINANCIAL STATEMENTS OF THE COMPANY
Item 14(b) .................... Not Applicable
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Item in
Schedule 13E-3 Caption in Preliminary Proxy Statement
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Item 15(a) .................... VOTING AND PROXY INFORMATION-- Solicitation of Proxies
Item 15(b) .................... SPECIAL FACTORS-- Background of Merger,-- Alternatives
Considered,-- Preliminary Opinion of Bannon,-- 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
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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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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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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 "FINANCIAL STATEMENTS OF THE COMPANY"
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," "--
Preliminary Opinion of Bannon," "-- 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)(1) Draft Fairness Opinion, dated October 2, 1995, of Bannon &
Co., Inc.
(b)(2)(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, attached as Appendix B to Exhibit (d)(1).
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(1) Previously filed.
(2) Previously filed.
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(c)(1)(3) Letter, dated May 23, 1996, relating to the engagement of
Hampshire Securities Corporation by Jillian's Entertainment Corporation.
(c)(2)(4) Letter, dated May 23, 1996, relating to the purchase of
common stock of Jillian's Entertainment Corporation by Island Partners, Ltd.
(c)(3)(5) Letter, dated April 4, 1997, relating to the engagement of
Stonebridge Associates, LLC by Jillian's Entertainment Corporation.
(c)(4)+ Form of Employment/Noncompetition Agreement of Steven L.
Foster.
(c)(5)+ Form of Employment/Noncompetition Agreement of Daniel M.
Smith.
(c)(6)(6) Form of Management Agreement among Jillian's Entertainment
Corporation, Jillian's Entertainment Holdings, Inc. and J.W. Childs Associates,
L.P.
(c)(7) 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)(8) Form of License Agreement between Jillian's Entertainment
Corporation and Jillian's Billiard Club, Inc.
(c)(9) Form of Option Agreement between Jillian's Entertainment
Corporation and the owners of Jillian's Billiard Club, Inc.
(c)(10) 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 BDO Seidman, LLP.
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(3) Previously filed as Exhibit (b)(3) of Amendment No. 2 to Schedule
13E-3.
(4) Previously filed as Exhibit (b)(4) of Amendment No. 2 to Schedule
13E-3.
(5) Previously filed.
(6) Previously filed as Exhibit (c)(8) of Amendment No.3 to Schedule
13E-3.
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+ To be filed by amendment.
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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.
May 30, 1997
JILLIAN'S ENTERTAINMENT
CORPORATION
By: /s/ Steven L. Foster
--------------------
Steven L. Foster
Chief Executive Officer
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EXHIBIT INDEX
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Exhibit
Number Description
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(b)(1) Draft Fairness Opinion, dated October 2, 1995, of Bannon & Co., Inc. 1
(b)(2) Presentation of Bannon & Co., Inc. to the Board of Directors of 2
Jillian's Entertainment Corporation, dated October 2, 1995.
(b)(3) Fairness Opinion, dated April 22, 1997, of Stonebridge Associates,
LLC, attached as Appendix B to Exhibit (d)(1).
(c)(1) Letter, dated May 23, 1996, relating to the engagement of Hampshire 3
Securities Corporation by Jillian's Entertainment Corporation.
(c)(2) Letter, dated May 23, 1996, relating to the purchase of
common stock 4 of Jillian's Entertainment Corporation by
Island Partners, Ltd. 4
(c)(3) Letter, dated April 4, 1997, relating to the engagement of
Stonebridge Associates, LLC by Jillian's Entertainment Corporation. 5
(c)(4) Form of Employment/Noncompetition Agreement of Steven L. Foster. +
(c)(5) Form of Employment/Noncompetition Agreement of Daniel M. Smith. +
(c)(6) Form of Management Agreement among Jillian's Entertainment 6
Corporation, Jillian's Entertainment Holdings, Inc. and J.W. Childs
Associates, L.P.
(c)(7) 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)(8) Form of License Agreement between Jillian's Entertainment
Corporation and Jillian's Billiard Club, Inc.
(c)(9) Form of Option Agreement between Jillian's Entertainment Corporation
and the owners of Jillian's Billiard Club, Inc.
(c)(10) Form of Purchase Agreement among Jillian's Entertainment
</TABLE>
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Exhibit
Number Description
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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 BDO Seidman, LLP.
</TABLE>
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+ To be filed by amendment.
(1) Previously filed.
(2) Previously filed.
(3) Previously filed as Exhibit (b)(3) of Amendment No. 2 to Schedule
13E-3.
(4) Previously filed as Exhibit (b)(4) of Amendment No. 2 to Schedule
13E-3.
(5) Previously filed.
(6) Previously filed as Exhibit (c)(8) of Amendment No. 3 to Schedule
13E-3.
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EXHIBIT (c)(7)
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.
STOCKHOLDERS AGREEMENT
Dated as of May [ ], 1997
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JILLIAN'S ENTERTAINMENT HOLDINGS, INC.
STOCKHOLDERS AGREEMENT
TABLE OF CONTENTS
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Page
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PREAMBLE..........................................................................................................1
ARTICLE I Definitions.....................................................................................2
ARTICLE II Covenants and Conditions........................................................................7
Section 2.1 Restrictions on Transfers.......................................................................7
Section 2.2 Call by the Company.............................................................................9
Section 2.3 Come Along.....................................................................................12
Section 2.4 Take Along.....................................................................................14
Section 2.5 Purchase Rights................................................................................15
Section 2.6 Restrictions on Other Agreements...............................................................17
Section 2.7 Synthetic Sales................................................................................17
Section 2.8 Corporate Governance...........................................................................17
ARTICLE III Registration Rights............................................................................18
Section 3.1 General........................................................................................18
Section 3.2 Demand Registrations...........................................................................18
Section 3.3 Piggyback Registration.........................................................................19
Section 3.4 Obligations of the Company.....................................................................20
Section 3.5 Furnish Information............................................................................24
Section 3.6 Expenses of Registration.......................................................................24
Section 3.7 Underwriting Requirements......................................................................25
Section 3.8 Indemnification................................................................................25
Section 3.9 Lock-Up Agreement..............................................................................28
Section 3.10 No Inconsistent Agreements.....................................................................29
Section 3.11 Stock Split and Reverse Stock Split............................................................29
ARTICLE IV Miscellaneous..................................................................................30
Section 4.1 Remedies.......................................................................................30
Section 4.2 Entire Agreement; Amendment; Waiver............................................................30
Section 4.3 Severability...................................................................................31
Section 4.4 Notices........................................................................................31
Section 4.5 Binding Effect; Assignment.....................................................................32
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Section 4.6 Governing Law..................................................................................32
Section 4.7 Termination....................................................................................33
Section 4.8 Recapitalization, Exchanges, Etc...............................................................33
Section 4.9 JWC Group Stockholder Representative...........................................................33
Section 4.10 Action Necessary to Effectuate the
Agreement......................................................................................34
Section 4.11 Purchase for Investment; Legend on
Certificate....................................................................................34
Section 4.12 Effectiveness of Transfers.....................................................................35
Section 4.13 Additional Stockholders........................................................................35
Section 4.14 No Waiver......................................................................................36
Section 4.15 Counterparts...................................................................................36
Section 4.16 Headings.......................................................................................36
Section 4.17 Number; Gender.................................................................................36
Section 4.18 Effective Time.................................................................................36
EXHIBIT A Schedule of Stockholders
EXHIBIT B Form of Note
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STOCKHOLDERS AGREEMENT
This Stockholders Agreement (this "Agreement") is entered
into as of the [ ] day of May, 1997, by and among Jillian's Entertainment
Holdings, Inc., a Delaware corporation (the "Company"), those persons listed as
JWC Group Stockholders on the signature pages hereof, including J.W. Childs
Equity Partners, L.P., a Delaware limited partnership ("Equity Partners")
(collectively, the "JWC Group Stockholders"), those persons listed as
Management Stockholders on the signatures pages hereof (the "Management
Stockholders") and those persons listed as Non-Management Stockholders on the
signatures pages hereof (the "Non-Management Stockholders"). The JWC Group
Stockholders, the Management Stockholders and the Non-Management Stockholders
are collectively referred to herein as the "Stockholders".
WHEREAS, upon consummation of the transactions contemplated
by that certain Purchase Agreement dated as of May [ ], 1997 (the "Purchase
Agreement"), by and among the Company, the Stockholders, those persons listed
as Other Option Holders on the signature pages thereto, those persons listed as
Continuing Option Holders on the signature pages thereto and those persons
listed as Continuing Warrant Holders on the signature pages thereto, the
Stockholders will own the number of shares of Common Stock and Preferred Stock
set forth opposite their respective names on Exhibit A hereto; and
WHEREAS, each of the Stockholders desires to enter into this
Agreement for the purpose of regulating certain aspects of the Stockholders'
relationships with regard to the Company and certain restrictions on, and
rights and obligations with respect to, the Common Stock and Preferred Stock
owned by the Stockholders.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
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ARTICLE I
Definitions
For the purposes of this Agreement, the following terms
shall be defined as follows:
1933 Act. The "1933 Act" shall mean the Securities Act of
1933, as amended.
1934 Act. The "1934 Act" shall mean the Securities
Exchange Act of 1934, as amended.
Affiliate. An "Affiliate" of a specified Person shall mean a
Person which, directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the corporation
or other entity specified and, when used with respect to the Company or any
Subsidiary of the Company, shall include any holder of at least five percent
(5%) of the capital stock, or any officer or director, of the Company.
Anniversary Date. "Anniversary Date" shall mean the date
which is one year after the closing under the Purchase Agreement.
Associate. "Associate," (a) when used to indicate a
relationship with any Person shall mean, (i) any corporation or organization of
which such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent (10%) or more of any class of equity
securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as a trustee
or in a similar fiduciary capacity and (iii) any relative of such Person who
has the same home as such Person or is a parent, aunt or uncle, sibling,
spouse, in-law, child, niece or nephew or grandchild of such Person, or the
spouse of any of them, or (b) when used to indicate a relationship with the
Company, shall also mean a director or officer of the Company or any
Subsidiary. Neither the Company nor any of its Subsidiaries shall be deemed an
Associate of any Stockholder.
2
<PAGE> 6
Board. The "Board" shall mean the Board of Directors of the
Company as the same shall be constituted from time to time.
Business Day. "Business Day" shall mean any day which is not
a Saturday, Sunday or legal holiday in the State of Delaware.
Cause. "Cause" shall mean (a) disregard of lawful
instructions of the Board or of a superior officer of the Company or of the
Board of Directors or a superior officer of any Subsidiary of the Company, as
the case may be, relating to the business or affairs of the Company or any
Subsidiary of the Company (the Company or Subsidiary of the Company having
given written notice thereof and the employee having failed to comply, as
promptly as is reasonably practicable, with such instructions upon receipt of
such notice), (b) dishonesty or willful misconduct injurious to the Company
or any Subsidiary of the Company whether monetarily or otherwise of a material
nature, (c) conviction of a felony or any crime involving moral turpitude, (d)
habitual drunkenness or drug abuse or (e) excessive absenteeism not related to
a medically determinable illness or injury.
Common Stock. "Common Stock" shall mean the Company's common
stock, par value $.001 per share, that the Company may be authorized to issue
from time to time, any other securities of the Company into which such Common
Stock may hereafter be changed or for which such Common Stock may be exchanged
after giving effect to the terms of such change or exchange (by way of
reorganization, recapitalization, merger, consolidation or otherwise) and
shall also include any common stock of the Company hereafter authorized and any
capital stock of the Company of any other class hereafter authorized which is
not preferred as to dividends or distribution of assets in liquidation over any
other class of capital stock of the Company and which has ordinary voting power
for the election of directors of the Company.
Company Stock. "Company Stock" shall mean the Common Stock,
the Preferred Stock or any other common or preferred stock of the Company.
Good Reason. "Good Reason" shall mean with respect to any
Management Stockholder, such Management
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<PAGE> 7
Stockholder's resignation from his employment with the Company or any of its
Subsidiaries following and because of (a) the Company's reducing or reassigning
a material portion of the Management Stockholder's duties under his employment
agreement, if any, without Cause or (b) a reduction of the Management
Stockholder's base salary other than in connection with an across-the-board
reduction of executive compensation imposed by the Board in response to
negative financial results or other adverse circumstances affecting the
Company.
Permitted Transfer. A "Permitted Transfer" shall mean:
(a) a Transfer of Shares by any JWC Group
Stockholder or Management Stockholder who is a natural person to such
Stockholder's spouse, children, grandchildren, parents or siblings or a trust
for the benefit of any of them;
(b) a bona fide pledge of Shares by a JWC Group
Stockholder to a bank, financial institution or other lender;
(c) a Transfer of Shares between any Stockholder
who is a natural person and such Stockholder's guardian or conservator;
(d) a Transfer of Shares from any Stockholder
which is a partnership to its partners, provided such Transfer is reasonably
acceptable to the Company;
(e) a Transfer of Shares from any Stockholder
which is a corporation or partnership to any Affiliate of such Stockholder,
provided such Transfer is reasonably acceptable to the Company;
(f) a Transfer of Shares by a JWC Group Stockholder
to another JWC Group Stockholder or to an officer, employee or consultant of
J.W. Childs Associates, Inc. ("JWC Associates") or to a corporation or
partnership (or other entity for collective investment, such as a fund) which
is controlled by, controlling or under common control with JWC Associates; or
(g) a Transfer of Shares by a Management
Stockholder to another Management Stockholder.
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No Permitted Transfer shall be effective unless and until the transferee of the
Shares so Transferred, if such transferee is not already a party to this
Agreement, executes and delivers to the Company an executed counterpart of
this Agreement in accordance with the terms of Section 4.13 hereof. No
Permitted Transfer shall conflict with or result in any violation of a
judgment, order, decree, statute, law, ordinance, rule or regulation.
Permitted Transferee. A "Permitted Transferee" shall mean
any Person who shall have acquired and who shall hold Shares pursuant to a
Permitted Transfer.
Person. "Person" shall mean an individual, corporation,
partnership, limited liability company, trust, or unincorporated association,
or a government or any agency or political subdivision thereof.
Preferred Stock. "Preferred Stock" shall mean the Company's
preferred stock, par value $.001 per share, that the Company may be authorized
to issue from time to time, any other securities of the Company (other than
Common Stock) into which such Preferred Stock may hereafter be changed or for
which such Preferred Stock may be exchanged after giving effect to the terms of
such change or exchange (by way or reorganization, recapitalization, merger,
consolidation or otherwise) and shall also include any preferred stock of the
Company hereafter authorized.
Public Offering. A "Public Offering" shall mean the
completion of a sale of Common Stock, resulting in gross cash proceeds of not
less than $25 million, pursuant to a registration statement which has become
effective under the 1933 Act, excluding registration statements on Form S-4,
S-8 or similar limited purpose forms and also excluding the registration of any
equity security issued to non-Affiliates of the Company as part of a bona fide
debt offering of units comprised of such equity security and a debt security of
the Company.
Registrable Securities. "Registrable Securities" shall
mean all shares of Common Stock held from time to time by any party hereto and
any other securities of the Company or any of its Subsidiaries issued in
exchange for, upon a reclassification of, or in a distri-
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bution with respect to, such Common Stock. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when (a) a
registration statement with respect to the sale of such securities shall
have become effective under the 1933 Act and such securities shall have been
disposed of in accordance with such registration statement, (b) such securities
shall have been sold under a Rule 144 Transaction, (c) such securities shall
have ceased to be outstanding or (d) with respect to such securities held by a
Non-Management Stockholder, (i) such Non-Management Stockholder owns less
than 1% of the shares of Common Stock then outstanding (on a fully diluted
basis after giving effect to the exercise of all options, warrants and the like
and the conversion of all securities convertible into or exchangeable for
Common Stock) and (ii) such securities may be disposed of by such
Non-Management Stockholder in compliance with Rule 144 under the 1933 Act.
Rule 144 Transaction. "Rule 144 Transaction" shall mean a
Transfer of Shares (a) complying with Rule 144 under the 1933 Act as such Rule
or a successor thereto is in effect on the date of such Transfer (but only a
sale pursuant to a "brokers' transaction" as defined in clauses (i) and (ii) of
paragraph (g) of Rule 144 as in effect on the date hereof) and (b) occurring at
a time when Shares are registered pursuant to Section 12 of the 1934 Act.
Schedule. "Schedule" shall refer to the Schedule of
Stockholders attached hereto as Exhibit A, as amended from time to time in
accordance with Section 4.13.
SEC. "SEC" shall mean the Securities and Exchange
Commission.
Shares. "Shares" shall mean (a) all shares of Company Stock
and (b) securities of the Company issued in exchange for, upon reclassification
of, or as a distribution in respect of, any Company Stock; provided that
"Shares", when referring to a number of shares of Preferred Stock, shall mean
the number of shares of Common Stock into which such Preferred Stock is
convertible at the prevailing conversion price.
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Subsidiary. "Subsidiary," with respect to any entity (the
"parent"), shall mean any corporation, firm, association or trust of which such
parent, at the time in respect of which such term is used, (a) owns directly or
indirectly more than fifty percent (50%) of the equity or beneficial interest,
on a consolidated basis, and (b) owns directly or controls with power to vote,
indirectly through one or more Subsidiaries, shares of capital stock or
beneficial interest having the power to cast a majority of the votes entitled
to be cast for the election of directors, trustees, managers or other officials
having powers analogous to that of directors of a corporation. Unless
otherwise specifically indicated, when used herein the term Subsidiary shall
refer to a direct or indirect Subsidiary of the Company.
Synthetic Sale. "Synthetic Sale" shall mean any hedge, sale
or purchase of any derivative security or other action (other than Transfers
expressly permitted by the terms hereof) having the effect of reducing a
Stockholder's economic interest in Shares or reducing a Stockholder's exposure
to a decrease in fair market value of Shares.
Third Party. "Third Party" shall mean any Person other than
the Company.
Transaction Price. "Transaction Price" shall mean $.50 per
Share of Common Stock (as equitably adjusted for stock dividends, stock
splits, reverse stock splits and other similar reclassifications).
Transfer. "Transfer" shall mean to transfer, sell, assign,
pledge, hypothecate, give, create a security interest in or lien on, place in
trust (voting or otherwise), assign or in any other way encumber or dispose
of, directly or indirectly and whether or not by operation of law or for value,
any Shares.
ARTICLE II
Covenants and Conditions
Section 2.1 Restrictions on Transfers. Without the prior
written consent of JWC Group Stockholders holding a majority of the aggregate
number of Shares held by all of the JWC Group Stockholders, no Stockholder may
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Transfer all or any part of the Shares owned by such Stockholder other than a
Transfer of Shares which is (i) a Permitted Transfer, (ii) pursuant to a Public
Offering, (iii) for any JWC Group Stockholder, Management Stockholder or
Non-Management Stockholder, made after a Public Offering, pursuant to a Rule
144 Transaction; provided that no Management Stockholder or Non-Management
Stockholder shall Transfer, pursuant to any Rule 144 Transaction, an
aggregate number of Shares that, together with all prior Transfers by such
Management Stockholder or Non-Management Stockholder pursuant to one or more
Rule 144 Transactions and Public Offerings, represents more than (A) the
aggregate number of Shares Transferred by the JWC Group Stockholders other than
pursuant to a Permitted Transfer multiplied by (B) such Management
Stockholders' or Non-Management Stockholders' Proportionate Equity Interest
or (iv) pursuant to another section of this Article II. For purposes of this
Section 2.1, "Proportionate Equity Interest" shall mean the number of Shares
set forth on the Schedule opposite the Management Stockholder's or
Non-Management Stockholder's name plus the number of Shares underlying options
granted to such Management Stockholder or Non-Management Stockholder pursuant
to the Purchase Agreement (to the extent exercisable) divided by the aggregate
number of Shares set forth on the Schedule opposite the names of the JWC Group
Stockholders, in each case as equitably adjusted to account for stock
dividends, stock splits, reverse stock splits or other similar
reclassifications. For purposes of calculating the Proportionate Equity
Interest only, the number of Shares set forth opposite any Stockholder's name
on the Schedule shall not include any adjustments to such number arising out of
Transfers pursuant to Rule 144 Transactions or Public Offerings. Any Transfer
of Shares pursuant to this Section 2.1 (other than pursuant to Sections 2.1
(ii) and (iii)) shall remain subject to the Transfer restrictions of this
Agreement, and each intended transferee pursuant to this Section shall
execute and deliver to the Company a counterpart of this Agreement, which shall
evidence such transferee's agreement that the Shares intended to be Transferred
shall continue to be subject to this Agreement and that as to such Shares the
transferee shall be bound by the restrictions of this Agreement as a
Stockholder hereunder.
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Section 2.2 Call by the Company.
(a) If the employment of a Management Stockholder
by the Company or any of its Subsidiaries shall terminate (a "Call Event")
prior to the completion of the Company's initial Public Offering, the Company
shall have the right to purchase (the "Call Option"), by delivery of a written
notice (the "Call Notice") to such terminated Management Stockholder or such
Management Stockholder's Permitted Transferees (the "Call Group") no later than
ninety (90) days after the date of such Call Event, and such Management
Stockholder and the Call Group shall be required to sell all (but not less than
all) of the Shares which are owned by the members of the Call Group on the date
of such Call Event (collectively, the "Call Securities") at a price per Share
equal to the Call Price (as defined in Section 2.2(c) below) applicable to such
Shares.
(b) Notwithstanding anything set forth in this
Section 2.2 to the contrary, prior to the exercise of the Call Option by the
Company, the Board may, in its sole discretion, elect to assign the Company's
right to exercise the Call Option to purchase all, but not less than all, of
the Call Securities to the JWC Group Stockholders. If the Board so elects,
the Company shall give notice of such assignment to each JWC Group Stockholder
(the "Call Assignment Notice"), indicating the number of Call Securities each
JWC Group Stockholder is entitled to purchase (including the right to
over-allotment of Call Securities, if any), the Call Price applicable to such
Shares and the date of the closing of such purchase under this Section 2.2.
Within five (5) Business Days of the Call Assignment Notice, those JWC Group
Stockholders who intend to purchase Call Securities pursuant to this Section
2.2(b) (the "Call Securities Electing Stockholders") shall notify the Company
in writing of such intention, indicating the number of Call Securities
(including over-allotments, if any) they intend to purchase. The right to
purchase such Call Securities shall be allocated to the JWC Group Stockholders
pro rata (based on the number of Shares each JWC Group Stockholder (together
with each such JWC Group Stockholder's Permitted Transferees) owns in relation
to the total number of Shares owned by all of the JWC Group Stockholders); pro-
vided, however, that if any JWC Group Stockholder does not elect to purchase
the number of Call Securities which such JWC
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<PAGE> 13
Group Stockholder (and its Permitted Transferees) may purchase pursuant to this
Section 2.2(b), then the Call Securities Electing Stockholders (and their
Permitted Transferees) may elect to purchase the remaining Call Securities.
The right to purchase the remaining Call Securities shall be allocated to the
Call Securities Electing Stockholders pro rata (based on the number of Shares
each Call Securities Electing Stockholder (together with their Permitted Trans-
ferees) owns in relation to the total number of Shares owned by all of the Call
Securities Electing Stockholders).
(c) For purposes of this Section 2.2, the term
"Call Price" shall mean (i) if the employment of the Management Stockholder
with the Company or one of its Subsidiaries is terminated for Cause or is
terminated by the Management Stockholder without Good Reason, the lower of the
Transaction Price and the fair market value (as determined by the Board) of
each Share; and (ii) if the employment of the Management Stockholder is
terminated other than for Cause or the Management Stockholder voluntarily
terminates his or her employment with the Company or one of its Subsidiaries
for Good Reason, the greater of the Transaction Price and the fair market value
(as determined by the Board) of each Share.
(d) The closing of any purchase of Call Securities
pursuant to Section 2.2(a) or 2.2(b) shall take place at the principal office
of the Company (i) with respect to purchases by the Company or a Designated
Employee (as defined below), on the tenth (10th) Business Day after the date of
the Call Notice and (ii) with respect to any JWC Group Stockholder, on the
tenth (10th) Business Day after notifying the Company in writing of its
intention to exercise its right to purchase pursuant to Section 2.2(b). At
such closing, the Company, the JWC Group Stockholders or the Designated
Employee, as the case may be, shall deliver to the Call Group, against delivery
of certificates (duly endorsed or accompanied by duly executed stock powers)
representing the Call Securities, a certified check or checks payable to the
Management Stockholder and/or the Permitted Transferees, as the case may be,
in an amount equal to the aggregate Call Price payable in respect of such Call
Securities. All of the foregoing deliveries will be deemed to be made simul-
taneously, and none shall be deemed completed until all have been completed.
Notwithstanding anything in this
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Section 2.3(d) to the contrary, to the extent that the Company has insufficient
funds legally available for the repurchase of equity securities of the Company
or the Company is not permitted to repurchase for cash equity securities of
terminated employees pursuant to the agreements or indentures governing
indebtedness for borrowed money of the Company or any Subsidiary, the Company
may pay the purchase price for any Call Securities by delivery of a
subordinated promissory note (a "Promissory Note") in substantially the form
attached hereto as Exhibit B in an original principal amount equal to that
portion of the Call Price not paid in cash. If an agreement or indenture
referred to in the preceding sentence contains a restriction on the amount of
Call Securities that can be repurchased from any terminated Management
Stockholder or his Permitted Transferees in any given fiscal year of the
Company, the maximum amount which the Company shall be permitted to pay for the
repurchase of Call Securities from a terminated Management Stockholder or his
Permitted Transferees shall be, in the aggregate, (x) the maximum amount
permitted by such agreement or indenture for the fiscal year of the Company in
which such Management Stockholder's employment with the Company terminates,
less (y) the aggregate amount previously paid by the Company to repurchase Call
Securities from any other Management Stockholder whose employment with the
Company terminated in such fiscal year. Any amounts which would otherwise be
available with respect to any fiscal year of the Company for the repurchase of
Call Securities shall first be applied to repurchase outstanding Promissory
Notes issued under this Section 2.3(d), in the order in which such Promissory
Notes were issued, until all such Promissory Notes have been repurchased in
accordance herewith. Repurchases shall be applied first to accrued and unpaid
interest and second to principal.
(e) Notwithstanding anything set forth in this
Section 2.2 to the contrary, prior to the exercise by the Company of its Call
Option to purchase Call Securities pursuant to this Section 2.2, one or more
new or existing employees of the Company or any of its Subsidiaries may, in
the sole discretion of the Board, be designated by the Board (individually a
"Designated Employee" and collectively, "Designated Employees") who shall have
the right, but not the obligation, to exercise the Call Option and to acquire,
in lieu of the Company, some or all (as determined by the Company) of the Call
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Securities that the Company is entitled to purchase from the Call Group
hereunder, for cash and on the same terms and conditions as set forth in
Section 2.2(d) which apply to the repurchase of Call Securities by the Company.
Concurrently with any such purchase of Call Securities by any such Designated
Employee, such Designated Employee who is not already a Management Stockholder
shall execute a counterpart of this Agreement whereupon such Designated
Employee shall be deemed a "Management Stockholder" and shall have the same
rights and be bound by the same obligations as a Management Stockholder
hereunder.
(f) Subject to Section 2.2(b), if neither the
Company nor any Designated Employee elect to exercise the Call Option and
deliver a Call Notice within ninety (90) days of a Call Event, then the Call
Option provided in this Section 2.2 shall terminate, but the Management
Stockholder or his Permitted Transferees shall continue to hold such Call
Securities pursuant to all of the other provisions of this Agreement.
(g) Notwithstanding anything in this Agreement to
the contrary, the provisions of this Section 2.2 shall not apply to any Shares
owned by Steven L. Foster or Daniel M. Smith.
Section 2.3 Come Along. Except as provided in Section
2.3(c) hereof, no JWC Group Stockholder shall Transfer (in one or a series of
transactions within any 24-month period) Shares representing more than ten per-
cent (10%) of the outstanding Shares (calculated on a fully diluted basis) to a
Third Party who is not a Permitted Transferee without complying with the
terms and conditions set forth in Sections 2.3(a) and 2.3(b) below.
(a) Any JWC Group Stockholder, when desiring to
Transfer such Shares (the "Transferor"), shall give not less than ten (10) days
prior written notice of such intended Transfer to each other Stockholder and
to the Company. Such notice (the "Participation Notice") shall set forth the
terms and conditions of such proposed Transfer, including the name of the
prospective transferee, the number of Shares proposed to be transferred (the
"Participation Securities") by the Transferor, the purchase price per Share
proposed to be paid therefor and the payment terms and type of transfer to be
effectuated. Within ten (10) days following the delivery
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of the Participation Notice by the Transferor to each other Stockholder and to
the Company, each Stockholder desiring to participate in such proposed Transfer
(each, a "Participating Offeree") shall, by notice in writing to the Transferor
and to the Company, have the opportunity and right to sell to the purchasers in
such proposed Transfer (upon substantially the same terms and conditions as
the Transferor provided that if the Transferor is Transferring Preferred Stock
and if the financial condition and prospects of the Company are such that, in
the good faith determination of the proposed transferee, the liquidation
preference of the Preferred Stock has value to the proposed transferee, the
purchase price per Share of Common Stock may be adjusted to take into account
the value of the liquidation preference) up to that number of Shares owned by
such Participating Offeree as shall equal the product of (i) a fraction, the
numerator of which is the number of Shares owned by such Participating
Offeree as of the date of such proposed Transfer and the denominator of which
is the aggregate number of Shares actually owned as of the date of such
Participation Notice by the Transferor and by all Participating Offerees,
multiplied by (ii) the number of Participation Securities. The amount of
Participation Securities to be sold by the Transferor shall be reduced to the
extent necessary to provide for such sales of Shares by Participating
Offerees.
(b) At the closing of any proposed Transfer in
respect of which a Participation Notice has been delivered, the Transferor,
together with all Participating Offerees, shall deliver to the proposed
transferee certificates evidencing the Shares to be sold thereto (duly endorsed
or with duly executed stock powers) and shall receive in exchange therefor the
consideration to be paid or delivered by the proposed transferee in respect
of such Shares as described in the Participation Notice.
(c) The provisions of this Section 2.3 shall not
apply to (i) any Permitted Transfer, (ii) any Transfer pursuant to or following
a Public Offering or (iii) any Transfer pursuant to Section 2.4.
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Section 2.4 Take Along.
(a) If a JWC Group Stockholder or group of JWC
Group Stockholders holding more than one-third (1/3) of the then outstanding
Shares (the "Take Along Group") determine to sell or exchange (in a business
combination or otherwise), in one or a series of bona fide arms-length
transactions to a Third Party who is not an Affiliate of the Take Along Group,
50% or more of the aggregate number of Shares owned by the JWC Group Stock-
holders on the date of the closing under the Purchase Agreement (as equitably
adjusted to account for stock dividends, stock splits, reverse stock splits or
other similar reclassifications), then, upon fifteen (15) days written notice
by the Take Along Group to each other Stockholder, which notice shall include
reasonable details of the proposed sale or exchange including the proposed
time and place of closing and the consideration to be received by the Take
Along Group (such notice being referred to as the "Sale Request"), each other
Stockholder (each, a "Seller") shall be obligated to, and shall sell,
transfer and deliver, or cause to be sold, transferred and delivered, to such
Third Party on substantially the same terms as the Take Along Group, that
number of Shares owned by such Seller as shall equal the product of (i) a
fraction, the numerator of which is the number of Shares proposed to be
transferred by the Take Along Group as of the date of such Sale Request and the
denominator of which is the aggregate number of Shares actually owned as of the
date of such Sale Request by the Take Along Group, multiplied by (ii) the
number of Shares actually owned as of the date of such Sale Request by such
Seller; provided that if the Take Along Group is selling or exchanging
Preferred Stock and if the financial condition and prospects of the Company are
such that, in the good faith determination of such Third Party, the liquidation
preference of the Preferred Stock has value to such Third Party, the
consideration to the Sellers for their Common Stock may be adjusted to take
into account the value of the liquidation preference. Each Seller shall (i)
deliver certificates for all of its Shares at the closing of the proposed
Transfer, free and clear of all claims, liens and encumbrances and (ii) if
stockholder approval of the transaction is required, vote its Shares in favor
thereof.
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(b) The provisions of this Section 2.4 shall not
apply to (i) any Transfer pursuant to or following a Public Offering or (ii)
a Permitted Transfer.
Section 2.5 Purchase Rights.
(a) Purchase Rights. In the event that, prior to
March 31, 2000, the Board determines that Jillian's Entertainment Corporation,
a Florida corporation ("Jillian's"), requires additional capital funding in
order to achieve the Base Plan (as defined in the Stock Option Agreement
attached as Exhibit A to the Purchase Agreement and subject to adjustment from
time to time as set forth in such Stock Option Agreement) and neither the
Company nor Jillian's is able to secure such funding, on acceptable terms, at
an all-in cost of capital of no more than twenty percent (20%) annually
within ninety (90) days of such determination (JWC Associates or its Affiliates
having used reasonable best efforts to secure such funding on behalf of the
Company or Jillian's), then each of the Stockholders will have the right to
purchase a pro rata number of newly issued Shares (calculated on a fully
diluted basis, excluding the effect of any options issued under the Company's
1997 Non-Qualified Stock Option Plan) of Common Stock or junior Preferred Stock
for $0.9322 per Share (as equitably adjusted for stock dividends, stock
splits, reverse stock splits and other similar reclassifications) (a "Company
Purchase Right"). The total number of Shares of Common Stock and junior
Preferred Stock that may be purchased pursuant to the Company Purchase Rights
shall not exceed 7,000,000 (as equitably adjusted for stock dividends, stock
splits, reverse stock splits and other similar reclassifications). To the
extent that a Stockholder does not exercise its Company Purchase Right (a
"Non-Exercising Stockholder"), the remaining Stockholders will each have the
right to purchase a number of additional newly issued Shares of Common Stock
or junior Preferred Stock for $0.9322 per Share (as equitably adjusted for
stock dividends, stock splits, reverse stock splits and other similar
reclassifications), equal to a pro rata portion (calculated on a fully diluted
basis, excluding the Non-Exercising Stockholder and the effect of any options
issued under the Company's 1997 Non-Qualified Stock Option Plan) of the
number of such Shares that could have been purchased by such Non-Exercising
Stockholder pursuant to the exercise of its Company Purchase
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Right. The Company Purchase Rights may not be sold, transferred, assigned,
pledged or otherwise disposed of or encumbered, in whole or in part, without
the prior written consent of each of the Stockholders.
(b) Notice from the Company. In the event the
Company proposes to issue Shares pursuant to Section 2.5(a), the Company shall
give each Stockholder written notice of such proposal, describing the type of
Shares to be issued and the price and the terms upon which the Company proposes
to issue the same. For a period of ten (10) days following the delivery of
such notice by the Company, the Company shall be deemed to have irrevocably
offered to sell to each Stockholder its pro rata portion of such Shares,
calculated in accordance with Section 2.5(a), for the price and upon the terms
specified in the notice. Each Stockholder may exercise its Company Purchase
Right by giving written notice to the Company within such ten (10) day period
and stating therein the quantity of such Shares to be purchased.
(c) Failure to Exercise. In the event that any
Stockholder fails to exercise in full its Company Purchase Right within said
ten (10) day period, the Company shall give written notice to each Stockholder
who fully exercised its Company Purchase Right of the aggregate number of
additional Shares which may be purchased by such Stockholders pursuant to
Section 2.5(a). For a period of ten (10) days following the delivery of such
notice by the Company, the Company shall be deemed to have irrevocably offered
to sell to each such Stockholder its pro rata portion of such Shares,
calculated in accordance with Section 2.5(a), for the price and upon the
terms specified in the notice. Each such Stockholder may exercise its right to
purchase such Shares by giving written notice to the Company within such ten
(10) day period.
(d) Closing. The closing for any issuance
pursuant to this Section 2.5 shall take place as proposed by the Company with
respect to the Shares to be issued, at which closing the Company shall deliver
certificates for the Shares in the respective names of the purchasing
Stockholders against receipt of payment therefor.
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Section 2.6 Restrictions on Other Agreements. Until the
completion of a Public Offering by the Company, no Stockholder (other than the
JWC Group Stockholders as among themselves) shall grant any proxy or enter into
or agree to be bound by any voting trust with respect to the Shares, nor shall
any Stockholder enter into any stockholders agreements or arrangements of any
kind with any person with respect to the Shares on terms which conflict with
the provisions of this Agreement (whether or not such agreements and
arrangements are with other Stockholders), including, but not limited to,
agreements or arrangements with respect to the acquisition, disposition or
voting of Shares inconsistent herewith.
Section 2.7 Synthetic Sales. Any Synthetic Sales by a
Management Stockholder then employed by the Company or any of its Subsidiaries
shall require the prior written approval of the Board.
Section 2.8 Corporate Governance. Until the tenth (10th)
anniversary of the date of the closing under the Purchase Agreement, the
Company and each of the Stockholders shall take all action (including but not
limited to such Stockholder's voting, or executing proxies or written
consents with respect to, the Shares held at the time by such Stockholder) as
may be requested from time to time by the JWC Group Stockholder Representative
(as defined below) or a majority in interest of the JWC Group Stockholders, so
that the Board shall include such number of members designated by the JWC Group
Stockholder Representative or a majority in interest of the JWC Group
Stockholders. The JWC Group Stockholder Representative or a majority in
interest of the JWC Group Stockholders shall also be entitled to require that
any member of the Board so designated pursuant to this Section 2.8 be removed
or replaced by another designee of the JWC Group Stockholder Representative or
a majority in interest of the JWC Group Stockholders, in which event the
Company and each of the Stockholders shall take all action (including but not
limited to such Stockholder's voting, or executing written consents with
respect to, the Shares held at the time by such Stockholder) as may be
necessary to effect such removal or replacement.
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ARTICLE III
Registration Rights
Section 3.1 General. For purposes of Article III: (a) the
terms "register", "registered" and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with
the 1933 Act and the declaration or ordering of effectiveness of such
registration statement; and (b) the term "Holder" means any Stockholder or
Permitted Transferee thereof.
Section 3.2 Demand Registrations.
(a) If the Company shall receive a written
request (specifying that it is being made pursuant to this Section 3.2) from
the JWC Group Stockholders who together with their Permitted Transferees own in
the aggregate at least ten percent (10%) of the Shares (as equitably adjusted
to account for stock dividends, stock splits, reverse stock splits or other
similar reclassifications) acquired by the JWC Group Stockholders at the time
of the closing under the Purchase Agreement (the "Requesting JWC Group
Stockholders") that the Company file a registration statement under the 1933
Act, or a similar document pursuant to any other statute then in effect
corresponding to the 1933 Act, covering the registration of Common Stock,
then the Company shall, not later than ninety (90) days after receipt by the
Company of a written request for a demand registration pursuant to this Section
3.2, file a registration statement with the SEC relating to such Registrable
Securities as to which such request for a demand registration relates (the
"Requested Shares"), and the Company shall use its best efforts to cause the
offering of such Requested Shares to be registered under the 1933 Act. The
Company shall be obligated to effect only three (3) registrations of
Registrable Securities pursuant to this Section 3.2 and such registrations may
be effected no earlier than six (6) months, twelve (12) months or eighteen (18)
months, respectively, following completion of an initial Public Offering of
Common Stock by the Company.
(b) If, pursuant to Section 3.3, the total amount
of securities that all Holders and all other holders of securities which have
applicable registration
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rights request to be included in an offering made pursuant to this Section
3.2 exceeds the amount of securities that the underwriters reasonably believe
compatible with the success of the offering, then the Company will include in
such registration only the number of securities which, in the good faith
opinion of such underwriters, can be sold, selected from the securities
requested to be included by all Holders and such other holders pro rata based
on the number of securities which each of them owns.
Section 3.3 Piggyback Registration.
(a) If, at any time, the Company determines to register any
of its equity securities (including securities convertible into equity
securities, but excluding equity securities being registered pursuant to a
registration statement on Form S-8 and equity securities issued in connection
with mezzanine debt or senior financing of the Company, or equity securities
issued upon conversion or exchange thereof or in connection therewith), for
its own account in connection with the public offering of such securities
(other than the initial Public Offering), the Company shall, at each such time,
promptly give each JWC Group Stockholder or Permitted Transferee thereof
written notice of such determination no later than twenty (20) days before the
effective date of any such registration. Upon the written request of any JWC
Group Stockholder or Permitted Transferee thereof received by the Company
within ten (10) days after the giving of any such notice by the Company, the
Company shall use its best efforts to cause to be registered under the 1933 Act
all of the Registrable Shares of each JWC Group Stockholder or Permitted
Transferee thereof that such JWC Group Stockholder or Permitted Transferee
thereof has requested be registered. If the total amount of securities that
are to be included by the Company in such registration exceeds the amount of
securities that the underwriters reasonably believe compatible with the success
of the offering, then the Company will include in such registration only the
number of securities which in the opinion of such underwriters can be sold,
selected from the securities requested to be included by all JWC Group
Stockholders and Permitted Transferees thereof pro rata based on the number of
securities which each of them owns.
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<PAGE> 23
(b) If, at any time, the Company determines to
register for the account of any JWC Group Stockholder (whether pursuant to
the provisions of Sections 3.2 or 3.3(a) or otherwise), any of its equity
securities (including securities convertible into equity securities, but
excluding equity securities being registered pursuant to a registration
statement on Form S-8 and equity securities issued in connection with
mezzanine debt or senior financing of the Company, or equity securities issued
upon conversion or exchange thereof or in connection therewith), under the 1933
Act in connection with the public offering of such securities (other than the
initial Public Offering), the Company shall, at each such time, promptly give
each Holder written notice of such determination no later than twenty (20) days
before the effective date of any such registration. Upon the written request
of any Holder received by the Company within ten (10) days after the giving of
any such notice by the Company, the Company shall use its best efforts to cause
to be registered under the 1933 Act all of the Registrable Shares of each
Holder that such Holder has requested be registered. If the total amount of
securities that are to be included by the Company in such registration exceeds
the amount of securities that the underwriters reasonably believe compatible
with the success of the offering, then the Company will include in such
registration only the number of securities which in the opinion of such
underwriters can be sold, selected from the securities requested to be
included by all Holders pro rata based on the number of securities which each
of them owns.
Section 3.4 Obligations of the Company.
(a) Whenever required under Section 3.2 or 3.3
hereof to use its best efforts to effect the registration of any Registrable
Securities, the Company shall:
(1) prepare and file with the SEC a
registration statement with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become
and remain effective, including, without limitation, filing of
post-effective amendments and supplements to any registration
statement or prospectus necessary to keep the registra-
20
<PAGE> 24
tion statement current; provided, however, that if such registration
statement does not become effective, then any demand registration
pursuant to Section 3.2 prompting such undertaking by the Company
shall be deemed to be rescinded and retracted and shall not be counted
as, or deemed or considered to be or to have been, a demand
registration pursuant to Section 3.2 for any purpose;
(2) as expeditiously as reasonably
possible, prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to
comply with the provisions of the 1933 Act with respect to the dis-
position of all securities covered by such registration statement and
to keep each registration and qualification under this Agreement
effective (and in compliance with the 1933 Act) by such actions as may
be necessary or appropriate for a period of up to 180 days (if, in
the reasonable discretion of the Holders owning securities covered by
such registration statement, such period of time is necessary for
the successful completion of the offering of such securities) after
the effective date of such registration statement, all as requested by
such Holders;
(3) as expeditiously as reasonably
possible, furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with
the requirements of the 1933 Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Reg-
istrable Securities owned by them;
(4) as expeditiously as reasonably
possible, use its best efforts to register and qualify the securities
covered by such registration statement under such securities or
"blue sky" laws of such jurisdictions as shall be reasonably
appropriate for the distribution of the securities covered by the
21
<PAGE> 25
registration statement, provided that the Company shall not be
required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of
process in any such jurisdiction, and further provided that (anything
in this Agreement to the contrary notwithstanding with respect to
the bearing of expenses) if any jurisdiction in which the securities
shall be qualified shall require that expenses incurred in
connection with the qualification of the securities in that
jurisdiction be borne by selling stockholders, then such expenses
shall be payable by selling stockholders pro rata to the extent
required by such jurisdiction;
(5) use its best efforts to cause all
Registrable Securities covered by such registration statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers
thereof to consummate the disposition of such Registrable Secu-
rities in the United States;
(6) notify each seller of Registrable
Securities covered by such registration statement, at any time when
a prospectus relating thereto is required to be delivered under
the 1933 Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were
made, and at the request of any such seller or Holders promptly
prepare to furnish to such seller or Holders a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
22
<PAGE> 26
therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made;
(7) otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC, and make
generally available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at least
twelve (12) months, but not more than eighteen (18) months, beginning
with the first full calendar month after the effective date of such
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the 1933 Act, and will furnish to each
such seller a copy of any post-effective amendment or supplement to
such registration statement or prospectus;
(8) provide and cause to be maintained
a transfer agent and registrar for all Registrable Securities covered
by such registration statement from and after a date not later than
the effective date of such registration statement; and
(9) use its best efforts to list all
Registrable Securities covered by such registration statement on any
securities exchange on which any class of Registrable Securities is
then listed.
(b) In the case of any underwritten offering, the
Company will furnish to each Holder on whose behalf Registrable Securities have
been registered pursuant to this Agreement a signed counterpart, addressed to
such Holder, of an opinion of counsel for the Company dated the effective date
of such registration statement, and such opinion of counsel shall cover those
matters which are customarily covered in opinions of issuer's counsel delivered
to underwriters in connection with underwritten public offerings of securities.
(c) Except as otherwise set forth in Section 3.3,
if the Company at any time proposes to register any of its securities under the
1933 Act, wheth-
23
<PAGE> 27
er or not for sale for its own account, and such securities are to be
distributed by or through one or more underwriters, then the Company will make
reasonable efforts, if requested by any Holder of Registrable Securities who
requests registration of Registrable Securities in connection therewith
pursuant to Section 3.2 or 3.3 hereof, to arrange for such underwriters to
include such Registrable Securities among the securities to be distributed by
or through such underwriters.
(d) In connection with the preparation and filing
of each registration statement registering Registrable Securities under this
Agreement, the Company will give the Holders of Registrable Securities on whose
behalf such Registrable Securities are to be so registered and their
underwriters, if any, and their respective counsel and accountants, the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the SEC, and each amendment
thereof or supplement thereto, and will give each of them such access to its
books and records and such opportunities to discuss the business of the Company
with its officers, its counsel and the independent public accountants who
have certified its financial statements, as shall be necessary, in the
opinion of such Holders or such underwriters or their respective counsel, in
order to conduct a reasonable and diligent investigation within the meaning of
the 1933 Act.
Section 3.5 Furnish Information. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to
Article III that the Holders shall furnish to the Company such information
regarding them, the Registrable Securities held by them, and the intended
method of disposition of such securities as the Company shall reasonably
request and as shall be required in connection with the action to be taken by
the Company.
Section 3.6 Expenses of Registration. All expenses incurred
in connection with a registration pursuant to Section 3.2 or 3.3 hereof
(excluding underwriters' discounts and commissions, which shall be borne by the
sellers), including without limitation all registration and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company and the reasonable fees and disbursements of one counsel
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<PAGE> 28
for the selling Holders (which counsel shall be selected by a majority
in interest of such Holders based on the number of Registrable Securities
included in such registration) shall be borne by the Company.
Section 3.7 Underwriting Requirements. In connection with
any underwritten registration of Registrable Securities under this Agreement,
the Company will, if requested by the underwriters for any Registrable
Securities included in such registration, enter into an underwriting agreement
with such underwriters for such offering, such agreement to contain such
representations and warranties by the Company, and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, provisions relating
to indemnification and contribution. The Holders on whose behalf Registrable
Securities are to be distributed by such underwriters shall be parties to any
such underwriting agreement, and the representations and warranties by the
Company and the other agreements on the part of the Company to and for the
benefit of such underwriters shall be also made to and for the benefit of such
Holders of Registrable Securities. Such underwriters shall be selected (i) by
the Company, in the case of a registration pursuant to Section 3.3, or (ii)
by the Holders requesting a demand registration, in the case of a regis-
tration pursuant to Section 3.2.
Section 3.8 Indemnification. In the event any Registrable
Securities are included in a registration statement under Article III:
(a) To the fullest extent permitted by law, the
Company will indemnify and hold harmless each Holder requesting or joining in a
registration, any underwriter (as defined in the 1933 Act) for it, and each
person, if any, who controls such Holder or such underwriter within the
meaning of the 1933 Act, from and against any losses, claims, damages, expenses
(including reasonable attorneys' fees and expenses and reasonable costs of
investigation) or liabilities, joint or several, to which they or any of them
may become subject under the 1933 Act or otherwise, insofar as such losses,
claims, damages, expenses or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based on any
untrue or alleged
25
<PAGE> 29
untrue statement of any material fact contained in such registration statement
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
arise out of any alleged violation by the Company of any rule or regulation
promulgated under the 1933 Act applicable to the Company and relating to action
or inaction required of the Company in connection with any such registration;
provided, however, that the indemnity agreement contained in this Section
3.8(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, expense, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable to anyone for any such loss claim, damage,
expense, liability or action to the extent that it arises out of or is based
upon an untrue statement or omission made in connection with such registra-
tion statement, preliminary prospectus, final prospectus or amendments or
supplements thereto in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by such
Holder, underwriter or control person. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Holder, underwriter or control person and shall survive the transfer of such
securities by such Holder.
(b) To the fullest extent permitted by law, each
Holder requesting or joining in a registration will indemnify and hold harmless
the Company, as the case may be, each of its directors, each of its officers
who has signed the registration statement, each person, if any, who controls
the Company within the meaning of the 1933 Act, and each agent and any
underwriter for the Company and any person who controls any such agent or
underwriter and each other Holder and any person who controls such Holder
(within the meaning of the 1933 Act) against any losses, claims, damages or
liabilities to which the Company or any such director, officer, control person,
agent, underwriter, or other Holder may become subject, under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon an untrue
26
<PAGE> 30
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or omission was
made in such registration statement, preliminary or final prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
written information furnished by such Holder with respect to such Holder
expressly for use in connection with such registration; and such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, control person, agent, underwriter, or other Holder
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity obligation of each
such Holder hereunder shall be limited to and shall not exceed the proceeds
actually received by such Holder upon a sale of Registrable Securities pursuant
to a registration statement hereunder; and provided, further, that the
indemnity agreement contained in this Section 3.8(b) shall not apply to amounts
paid in settlements effected without the consent of such Holder (which
consent shall not be unreasonably withheld). Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Company or any such director, officer, Holder, underwriter or control
person and shall survive the transfer of such securities by such Holder.
(c) Any person seeking indemnification under this
Section 3.8 will (i) give prompt notice to the indemnifying party of any claim
with respect to which it seeks indemnification (but the failure to give such
notice will not affect the right to indemnification hereunder, unless the
indemnifying party is materially prejudiced by such failure) and (ii) unless in
such indemnified party's reasonable judgment a conflict of interest may exist
between such indemnified and indemnifying parties with respect to such claim,
permit such indemnifying party, and other indemnifying parties similarly
situated, jointly to assume the defense of such claim with counsel reasonably
satisfactory to the parties. In the event that the indemnifying parties
cannot
27
<PAGE> 31
mutually agree as to the selection of counsel, each indemnifying party may
retain separate counsel to act on its behalf and at its expense. The
indemnified party shall in all events be entitled to participate in such
defense at its expense through its own counsel. If such defense is not assumed
by the indemnifying party, the indemnifying party will not be subject to any
liability for any settlement made without its consent (but such consent will
not be unreasonably withheld). No indemnifying party will consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to
such claim, in which event the indemnifying party shall be obligated to pay the
reasonable fees and expenses of such additional counsel.
(d) If for any reason the foregoing indemnification
is unavailable to any party or insufficient to hold it harmless as and to the
extent contemplated by the preceding paragraphs of this Section 3.8, then
each indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage, expense or liability
in such proportion as is appropriate to reflect the relative benefits received
by the applicable indemnifying party, on the one hand, and the applicable
indemnified party, as the case may be, on the other hand, and also the relative
fault of the applicable indemnifying party and the applicable indemnified
party, as the case may be, as well as any other relevant equitable
considerations.
Section 3.9 Lock-Up Agreement. If required by the
underwriter, each Stockholder agrees not to sell or otherwise transfer or
dispose of any Common Stock (or other securities) of the Company held by such
Stockholder (other than securities included in the applicable registration
statement or shares purchased in the public
28
<PAGE> 32
market after the effective date of registration) or any interest or future
interest therein during such period (not to exceed 180 days) as is acceptable
to the underwriter following the effective date of each registration
statement of the Company filed under the 1933 Act which includes securities to
be sold to the public in an underwritten offering. The Company may impose
stop transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said
period.
Section 3.10 No Inconsistent Agreements. The Company
represents and warrants that it has not entered into, and agrees that it will
not hereafter enter into, any agreement with respect to the registration of its
securities that is inconsistent with (or superior to) the rights granted to the
Holders of Registrable Securities in this Agreement.
Section 3.11 Stock Split and Reverse Stock Split. If, on or
after the receipt by the Company of a request for registration of a public
offering pursuant to Section 3.2 hereof, the proposed managing underwriter or
underwriters of such offering reasonably believes that the number of shares to
be registered is not the number necessary for the success of such offering, the
Company shall use its best efforts to cause each share of its outstanding
Common Stock to be converted into such number of shares of such Common Stock so
that the number of shares of Registrable Securities to be registered is equal
to the number which such managing underwriter or underwriters reasonably
believes is necessary for the success of such offering. If necessary in
connection therewith, the Company shall use its best efforts to cause to be
recommended, approved and adopted by its Board and approved and adopted by its
stockholders, and, if so approved and adopted, file and cause to become
effective, an amendment to its certificate of incorporation increasing the
number of shares of Common Stock which the Company is authorized to issue.
Each Stockholder, together with its Permitted Transferees, hereby agrees to
vote the Shares held by it in favor of adopting such amendment.
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<PAGE> 33
ARTICLE IV
Miscellaneous
Section 4.1 Remedies. The parties to this Agreement
acknowledge and agree that the covenants of the Company and the Stockholders
set forth in this Agreement may be enforced in equity by a decree requiring
specific performance. In the event of a breach of any material provision of
this Agreement, the aggrieved party will be entitled to institute and prosecute
proceedings in any court of competent jurisdiction to enforce specific
performance of such provision, as well as to obtain damages for breach of this
Agreement. Without limiting the foregoing, if any dispute arises concerning
the sale or other disposition of any of the Shares subject to this Agreement or
concerning any other provisions hereof or the obligations of the parties
hereunder, the parties to this Agreement agree that an injunction may be issued
in connection therewith (including, without limitation, restraining the sale or
other disposition of such Shares or rescinding any such sale or other
disposition). Such remedies shall be cumulative and non-exclusive and shall be
in addition to any other rights and remedies the parties may have under this
Agreement or otherwise.
Section 4.2 Entire Agreement; Amendment; Waiver. This
Agreement, together with the Schedule hereto and the Purchase Agreement, sets
forth the entire understanding of the parties, and as of the closing
contemplated by the Purchase Agreement supersedes all prior agreements and all
other arrangements and communications, whether oral or written, with respect
to the subject matter hereof. The Schedule may be amended to reflect changes
in the composition of the Stockholders and changes in stock ownership that may
occur from time to time as a result of Permitted Transfers or Transfers
permitted under Article II hereof. Amendments to the Schedule reflecting
Permitted Transfers or Transfers permitted under Article II hereof shall become
effective when a copy of this Agreement, as executed by any new transferee, is
filed with the Company, except as otherwise provided in Section 4.13 hereof.
Any other amendment to, or the termination of, this Agreement shall be in
writing and shall require the written consent of (i) the Company and (ii)
either the JWC Group Stockholder Representative or a majority in interest of
the JWC Group
30
<PAGE> 34
Stockholders. Notwithstanding the preceding sentence, no amendment may
adversely affect the JWC Group Stockholders, the Non-Management Stockholders
or the Management Stockholders at any time, unless consented to in writing by a
majority in interest of such adversely affected group. Notwithstanding any
provisions to the contrary contained herein, any party may waive any rights
with respect to which such party is entitled to the benefits under this
Agreement. No waiver of or consent to any departure from any provision of this
Agreement shall be effective unless signed in writing by the party entitled to
the benefit thereof.
Section 4.3 Severability. The invalidity or
unenforceability of any particular provision of this Agreement shall not affect
the other provisions hereof, and this Agreement shall be construed in all
respects as if the invalid or unenforceable provision were omitted.
Section 4.4 Notices. All notices and other communications
necessary or contemplated under this Agreement shall be in writing and shall be
delivered in the manner specified herein or, in the absence of such
specification, shall be deemed to have been duly given three (3) Business Days
after mailing by certified mail, when delivered by hand, upon confirmation of
receipt by telecopy, or one (1) day after sending by overnight delivery
service, to the respective addresses of the parties set forth below:
(a) For notices and communications to the
Management Stockholders or the Non-Management Stockholders, to the respective
addresses set forth in the Schedule;
(b) for notices and communications to the Company:
Jillian's Entertainment
Holdings, Inc.
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Attention: Daniel M. Smith
Facsimile No.: (617) 350-5606
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<PAGE> 35
with a copy to:
J.W. Childs Associates, L.P.
One Federal Street, 21st Floor
Boston, MA 02110
Attention: Glenn A. Hopkins
Facsimile No.: (617) 753-1101
(c) for notices and communications to the JWC Group
Stockholders, to the respective addresses set forth in the Schedule, with a
copy to:
Skadden, Arps, Slate,
Meagher & Flom LLP
One Beacon Street
Boston, MA 02108
Attention: Louis A. Goodman, Esq.
Facsimile No.: (617) 573-4822
By notice complying with the foregoing provisions of this Section 4.4, each
party shall have the right to change the mailing address for future notices and
communications to such party.
Section 4.5 Binding Effect; Assignment. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and to
their respective transferees, successors and assigns; provided, however, that
the rights under this Agreement may not be assigned except as expressly
provided herein, it being understood that the Company's rights hereunder may be
assigned by the Company to any corporation which is the surviving entity in a
merger, consolidation or like event involving the Company [if such merger,
consolidation or like event does not result in a change in control of the
Company]. No such assignment shall relieve an assignor of its obligations
hereunder.
Section 4.6 Governing Law. This Agreement shall be governed
by and construed in accordance with the General Corporation Law of the State of
Delaware as to matters within the scope thereof and as to all other matters
shall be governed by and construed in accordance with the internal laws of the
Commonwealth of Massachusetts (without giving effect to the principles of
conflicts of law thereof).
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<PAGE> 36
Section 4.7 Termination. Without affecting any other
provision of this Agreement requiring termination of any rights in favor of
any Stockholder, Permitted Transferee or any other transferee of Shares, the
provisions of Articles II and III of this Agreement shall terminate as to
such Stockholder, Permitted Transferee or other transferee, when, pursuant to
and in accordance with this Agreement such Stockholder, Permitted Transferee
or other transferee as the case may be, no longer own any Shares; provided that
termination pursuant to this Section 4.7 shall only occur in respect of a
Stockholder after all Permitted Transferees in respect thereof also no longer
own any Shares. As provided above, the provisions of Sections 2.3, 2.4, 2.5
and 2.6 shall not apply to the Shares owned by Stockholders following a Public
Offering.
Section 4.8 Recapitalization, Exchanges, Etc. The
provisions of this Agreement shall apply, to the full extent set forth herein
with respect to Shares, to any and all shares of capital stock of the Company
or any successor or assign of the Company (whether by merger, consolidation,
sale of assets or otherwise) which may be issued in respect of, in exchange
for, or in substitution of the Shares, by reason of a stock dividend, stock
split, stock issuance, reverse stock split, combination, recapitalization,
reclassification, merger, consolidation or otherwise.
Section 4.9 JWC Group Stockholder Representative. Each
JWC Group Stockholder hereby designates and appoints (and each Permitted
Transferee of each such JWC Group Stockholder is hereby deemed to have so
designated and appointed) each of Steven G. Segal and Glenn A. Hopkins, as his
attorney-in-fact with full power of substitution for each of them (the "JWC
Group Stockholder Representative"), to serve as the representative of each such
JWC Group Stockholder to perform all such acts as are required, authorized or
contemplated by this Agreement to be performed by such JWC Group Stockholder
and hereby acknowledges that the JWC Group Stockholder Representative shall
be the only person authorized to take any action so required, authorized or
contemplated by this Agreement by each such person. Each such JWC Group
Stockholder further acknowledges that the foregoing appointment and
designation shall be deemed to be coupled with an interest and shall survive
the death or incapaci-
33
<PAGE> 37
ty of such JWC Group Stockholder. Each such person hereby authorizes (and each
such Permitted Transferee shall be deemed to have authorized) the other parties
hereby to disregard any notice or other action taken by such person pursuant to
this Agreement except for the JWC Group Stockholder Representative. The other
parties hereto are and will be entitled to rely on any action so taken or any
notice given by the JWC Group Stockholder Representative and are and will be
entitled and authorized to give notices only to the JWC Group Stockholder
Representative for any notice contemplated by this Agreement to be given to
any such person. A successor to the JWC Group Stockholder Representative may
be chosen by a majority in interest of the JWC Group Stockholders, provided
that notice thereof is given by the new JWC Group Stockholder Representative to
the Company and to each other Stockholder.
Section 4.10 Action Necessary to Effectuate the Agreement.
The parties hereto agree to take or cause to be taken all such corporate and
other action as may be necessary to effect the intent and purposes of this
Agreement.
Section 4.11 Purchase for Investment; Legend on Certificate.
Each of the parties acknowledges that all of the Shares held by such party are
being (or have been) acquired for investment and not with a view to the
distribution thereof and that no Transfer of Shares may be made except in
compliance with applicable federal and state securities laws. Each of the
certificates of Shares of the Company which are now or hereafter owned by the
Stockholders and which are subject to the terms of this Agreement shall have
endorsed in writing, stamped or printed, thereon the following legend:
"The shares represented by this stock certificate are
subject to the terms and conditions, including restrictions on transfer, of a
Stockholders Agreement dated as of May [ ], 1997, as amended from time to
time. A copy of the Stockholders Agreement is on file with the Secretary of
the Company and will be mailed to any properly interested person without
charge upon the Company's receipt of a written request therefor. Any sale or
transfer in violation of said Agreement shall be null and void."
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<PAGE> 38
All certificates of Shares shall also bear all legends
required by federal and state securities laws.
Section 4.12 Effectiveness of Transfers. All Shares
Transferred by a Stockholder (other than pursuant to an effective registration
statement under the 1933 Act or pursuant to a Rule 144 Transaction) shall,
except as otherwise expressly stated herein, be held by the transferee
thereof pursuant to this Agreement. Such transferee shall, except as
otherwise expressly stated herein, have all the rights and be subject to all of
the obligations of a Stockholder under this Agreement (as through such party
had so agreed pursuant to Section 4.13 hereof) automatically and without
requiring any further act by such transferee or by any parties to this
Agreement. Without affecting the preceding sentence, if such transferee is
not a Stockholder on the date of such Transfer, then such transferee, as a
condition to such Transfer, shall confirm such transferee's obligations
hereunder in accordance with Section 4.13 hereof. No Shares shall be
Transferred on the Company's books and records, and no Transfer of Shares shall
be otherwise effective, unless any such Transfer is made in accordance with the
terms and conditions of this Agreement, and the Company is hereby authorized by
all of the Stockholders to enter appropriate stop transfer notations on its
transfer records to give effect to this Agreement.
Section 4.13 Additional Stockholders. Subject to the
restrictions on Transfers of Shares contained herein, any Person who is not
already a Stockholder acquiring Shares (except for transferees acquiring Shares
in an offering registered under the 1933 Act or in a Rule 144 Transaction and
except as otherwise permitted by the Board) shall, on or before the Transfer or
issuance to it of Shares, sign a counterpart signature page hereto in form
reasonably satisfactory to the Company and shall thereby become a party to this
Agreement to be bound hereunder as (a) a Management Stockholder if a Permitted
Transferee of a Management Stockholder or an employee of the Company or any of
its Subsidiaries, (b) a JWC Group Stockholder if a Permitted Transferee or an
employee or affiliate of J.W. Childs Associates, Inc. or Equity Partners or (c)
a Non-Management Stockholder if such person or entity does not fall within
either (i) or (ii) above; provided that a transferee which is a Permitted
Transferee under clause (b) of the definition of Permit-
35
<PAGE> 39
ted Transferee shall not be obligated to so agree until foreclosure on its
pledge.
Section 4.14 No Waiver. No course of dealing and no delay
on the part of any party hereto in exercising any right, power or remedy
conferred by this Agreement shall operate as waiver thereof or otherwise
prejudice such party's rights, powers and remedies. No single or partial
exercise of any rights, powers or remedies conferred by this Agreement shall
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
Section 4.15 Counterparts. This Agreement may be executed
in two or more counterparts each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
Section 4.16 Headings. All headings and captions in this
Agreement are for purposes of reference only and shall not be construed to
limit or affect the substance of this Agreement.
Section 4.17 Number; Gender. When the context so requires,
the singular shall include the plural and the plural shall include the singular
and the gender of any pronoun shall include the other gender.
Section 4.18 Effective Time. Notwithstanding anything in
this Agreement to the contrary, this Agreement shall become binding and
effective as of the date of the closing under the Purchase Agreement.
36
<PAGE> 40
IN WITNESS WHEREOF, the undersigned have caused this
Agreement to be duly executed under seal as of the date and year first above
written.
JILLIAN'S ENTERTAINMENT
HOLDINGS, INC.
By:
------------------------
Name: Glenn A. Hopkins
Title: President
JWC Group Stockholders:
J.W. CHILDS EQUITY PARTNERS,
L.P.
By: J.W. Childs Advisors,
L.P., its general partner
By: J.W. Childs Associates,
L.P., its general partner
By: J.W. Childs Associates,
Inc., its general partner
By:
-------------------------
Name: Glenn A. Hopkins
Title: Vice President
<PAGE> 41
JWC Group Stockholders
(continued):
------------------------------
Glenn A. Hopkins, as agent and
attorney-in-fact for certain
coinvestors under Purchaser
Appointment of Agent and Power
of Attorney and not in his
individual capacity
<PAGE> 42
Management Stockholders:
-----------------------------
Steven L. Foster
-----------------------------
Daniel M. Smith
<PAGE> 43
Non-Management Stockholders:
-----------------------------
Steven Rubin
-----------------------------
Kevin Troy
-----------------------------
Kerry Breitbart
THE BLIND TRUST
UDT 3/26/93
By:
--------------------------
Name:
Title:
-----------------------------
Warren Berman
-----------------------------
William Hurlin
<PAGE> 44
Non-Managment Stockholders
(continued):
ISLAND PARTNERS, LTD.
By:
--------------------------
Name:
Title:
<PAGE> 1
EXHIBIT (c)(8)
LICENSE AGREEMENT
This LICENSE AGREEMENT (this "Agreement") is entered into
as of the ____ day of May, 1997 by and between Jillian's Entertainment
Corporation, a Florida corporation ("Licensor"), and Jillian's Billiard Club,
Inc., a Massachusetts corporation ("Licensee").
WHEREAS, Licensor is the owner of the trademarks, service
marks and trade names set forth on Schedule A hereto; and
WHEREAS, Licensee has been utilizing certain of these
trademarks, service marks and trade names in connection with the operation,
management and marketing of its billiard club currently located at 145 Ipswich
Street in Boston, Massachusetts (such club at its current location, or at such
other location within a two mile radius of its current location to which such
club may be required to move, is hereinafter referred to as the "Boston Club")
pursuant to an oral license agreement between Licensor and Licensee, and the
parties now desire to enter into a new license agreement governing such use;
and
WHEREAS, Licensee desires to continue to utilize such
trademarks, service marks and trade names in connection with the operation,
management and marketing of the Boston Club; and
WHEREAS, Licensee desires to obtain, and Licensor is
willing to grant, a written license pursuant to which Licensee shall have the
non-exclusive right and license to use the Marks in connection with the
operation, management, and marketing of the Boston Club.
NOW, THEREFORE, in consideration of the premises and
mutual agreements set forth herein and other good and valuable consideration,
the sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Definitions. As used herein, the term:
"Advertising and Promotion" shall include, but shall not
be limited to, any and all fliers, coupons,
<PAGE> 2
special events, contests, give-aways, incentives, signage, on-site displays,
and any and all other advertisements, marketing and promotional materials
relating to the Boston Club.
"Marks" shall mean the marks set forth on Schedule A
hereto plus any variations thereon approved by Licensor pursuant to Section
5.4.
"Products" shall mean such tangible items as Licensee may,
from time to time in its discretion, utilize or sell on the premises of the
Boston Club, including but not limited to stationery, menus, napkins, match
books, shirts, hats and other supplies and souvenirs.
"Services" shall mean those services as are provided to or
consumed by patrons of the Boston Club on the premises of the Boston Club.
"Term" shall mean that period beginning at the Effective
Time (as defined in the Agreement and Plan of Merger dated as of May [ ], 1997
by and among Jillian's Entertainment Holdings, Inc., a Delaware corporation
("Holdings"), Jillian's Entertainment Acquisition Corporation, a Florida
corporation and wholly owned subsidiary of Holdings, and Licensor) and
continuing thereafter in perpetuity, unless earlier terminated pursuant to
Article 6 hereof or as a matter of law, or otherwise provided by written
amendment hereto.
2. Grant of License.
2.1. Subject to the terms and conditions hereof and during
the Term, Licensor hereby grants to Licensee and Licensee hereby accepts a
royalty-free, non-exclusive right and license to use the Marks solely in
connection with the management, operation and marketing of the Boston Club, the
Services, the Products and the Advertising and Promotion.
2.2. The license granted hereunder expressly includes the
right to use the Marks as all or part of a corporate name during the Term, so
long as the entity operating under such name conducts no business other than
the management, operation and marketing of the Boston Club.
2
<PAGE> 3
2.3. Licensee shall not sublicense the rights granted
hereunder to use the Marks. Licensee may, however, authorize sub-contract
manufacturers to apply the Marks to Products in connection with their provision
of such Products to Licensee.
3. Representations and Warranties; Certain Covenants.
3.1. Licensor represents and warrants that it has the full
right, power, and authority to enter into this Agreement, to perform all of its
obligations hereunder, and to consummate all of the transactions contemplated
herein, and that this Agreement is its valid and binding obligation,
enforceable against it in accordance with its terms.
3.2. Licensee represents and warrants that it has the full
right, power, and authority to enter into this Agreement, to perform all of its
obligations hereunder, and to consummate the transactions contemplated herein,
and that this Agreement is its valid and binding obligation, enforceable
against it in accordance with its terms.
3.3. Licensee, at its expense, shall obtain all permits
and licenses which may be required under any applicable federal, state or local
law, ordinance, rule or regulation by virtue of any acts performed by Licensee
in the performance of this Agreement.
3.4. The parties disclaim any representation, covenant, or
warranty, express or implied, with respect to the validity, enforceability,
registrability, or rights to use the Marks.
3.5. Licensee hereby agrees that, at all times while this
Agreement is in effect, Licensee shall, unless otherwise consented to by
Licensor in writing, operate its business under the name "Jillian's."
4. Quality Standards.
4.1. Licensee acknowledges that the Marks have established
valuable goodwill and reputation among consumers and that it is of great
importance to each party
3
<PAGE> 4
that the high quality standards and reputation that Licensor and Licensee with
Licensor's approval (it being acknowledged that Licensee owned and licensed the
Marks to Licensor until Licensee assigned the Marks to Licensor by an
Assignment dated November 26, 1996) have established be maintained for the
Marks as indicators of an upscale entertainment facility that features
billiards. Accordingly, the use of the Marks in connection with, and the
operation, management, marketing, promotion and appearance of, the Boston Club
shall be in such manner as is consistent with the reputation and goodwill
associated with the Marks which have been established in the operation,
management, marketing, promotion and appearance of the billiard clubs operated
under the Marks (the "Quality Standards"). It is acknowledged and agreed that
the operation, management, marketing, promotion and appearance of the Boston
Club prior to the date hereof satisfies the Quality Standards.
4.2. Licensee shall submit to Licensor for review from
time to time, upon Licensor's reasonable request, representative samples of
Advertising and Promotion, Products, and other materials bearing the Marks and
shall permit Licensor and its representatives, upon reasonable notice, to enter
in and upon the Boston Club to inspect the premises, experience the Services,
examine the Products and review files, documents and reports reasonably related
thereto; provided, however, that such entry shall not unreasonably interfere
with the use, operation or management of the Boston Club and shall be
consistent with applicable laws and regulations and the rights of patrons of
the Boston Club. Licensee acknowledges that all inspections of Licensor are
solely for the purpose of ascertaining compliance with the Quality Standards
and not to ascertain Licensee's compliance with any federal, state or local
law, regulation, rule, order, or code requirements with respect to the Boston
Club. Licensor assumes no responsibility or liability to Licensee, its lenders,
contractors, employees, patrons or others by reason of any inspection.
4.3. Licensee may sell or distribute Products or offer
Services at the Boston Club, which were not being sold, distributed or offered
in connection with the Boston Club as of the date hereof, or make changes in
the Advertising and Promotion, business or appearance of the Boston Club from
that in existence as of the date hereof
4
<PAGE> 5
("New Uses and Developments") so long as such New Uses and Developments are
consistent with the Quality Standards. Licensor shall have the right and
license, but not the obligation, to adopt such New Uses and Developments, on a
royalty-free basis, in connection with any and all clubs it now or hereafter
operates under the Marks. Licensor hereby acknowledges that Licensee shall have
the right and license, but not the obligation, to adopt any similar
developments by any of Licensor's clubs operated under the Marks
("Innovations"), at the Boston Club on a royalty-free basis. The rights and
licenses set forth in this Section 4.3 shall be subject to such quality
standards and rights of inspection as shall be necessary, in the reasonable
business judgment of the licensor of such rights and licenses, to maintain the
validity and enforceability of such rights and licenses.
5. Ownership and Protection of Marks.
5.1. Licensee acknowledges that Licensor owns the Marks
and the goodwill associated therewith and that use of any Mark by Licensee
shall not create in Licensee's favor any ownership interest therein. Use of the
Marks pursuant to this Agreement shall not vest in Licensee any title or right
to continue such use.
5.2. Except for the license specifically provided herein
to use the Marks, all rights in the Marks are reserved by Licensor. Licensee
shall not, during the Term or thereafter: (a) challenge Licensor's title or
rights in and to the Marks or the validity of the Marks in any jurisdiction or
challenge the validity of the license granted hereunder, (b) contest the fact
that Licensee's rights under this Agreement are solely those of a licensee and
shall cease upon proper termination of this Agreement in accordance with its
terms, or (c) use the Marks or any marks confusingly similar thereto in
connection with any product, service, or business, or in any territory, other
than to the extent permitted under this Agreement during the Term. Licensor
hereby acknowledges that nothing in this Section 5.2 shall prohibit Licensee
from contesting the validity of Licensor's termination of this Agreement under
its terms.
5.3. Licensee shall not file or prosecute any trademark or
service mark application or applications to
5
<PAGE> 6
register the Marks, whether alone or in combination with other words, except
with the prior written approval of Licensor in the capacity of agent of
Licensor, and in the name of Licensor.
5.4. Unless otherwise approved by Licensor, Licensee may
only use the Marks as provided in Article 2 hereof and in accordance with the
terms and conditions of this Agreement. Licensee shall not use or register any
confusingly similar marks.
5.5. Licensee shall promptly notify Licensor in writing of
any third-party uses which may be unauthorized, infringements, dilutions, or
imitations of the Marks which come to Licensee's attention. Licensor shall have
the sole initial right to take, and to determine whether or not to take, any
action(s) it deems appropriate in its sole discretion with respect to any
unauthorized use, infringement, dilution or imitation of the Marks, and
Licensee shall fully cooperate with Licensor in connection with any such
actions. Licensor may bring claims or suits in its own name, Licensee's name,
or both, and Licensee agrees to join Licensor as a party thereto, upon request.
If Licensor declines to take any action authorized under this Section 5.5, then
Licensee may undertake such action, at Licensee's own expense; provided,
however, that Licensee may not enter into any settlement or compromise or
consent to the entry of any judgment which affects the Marks without Licensor's
prior written approval. Notwithstanding Licensor's sole initial right to take
any action with respect to any unauthorized use, infringement, dilution or
imitation of the Marks, Licensee shall have the right to bear the expense of,
and to receive the recovery from (but not to direct the taking of), any action
taken in response to the unauthorized use, infringement, dilution or imitation
of the Marks related to an establishment located within a five mile radius of
the Boston Club. All recovery in the form of monetary damages or settlement
shall belong to the party bearing the expense of bringing such claim or legal
action.
5.6. Licensor hereby reserves the unilateral right, and
Licensee hereby acknowledges Licensor's right, in the event of a change in
ownership or control of Licensee, to modify the Quality Standards and other
provisions of this Agreement as Licensor in good faith
6
<PAGE> 7
determines is necessary and advisable in light of the circumstances, to provide
for (i) greater supervision by Licensor over the operation, management,
marketing, promotion and appearance of the Boston Club and (ii) the adoption of
New Uses and Developments and Innovations and the granting of cross-licenses
with respect thereto. Licensor hereby acknowledges that it will not, in the
event of a change in ownership or control of Licensee, require the payment by
Licensee of any additional fees or royalties hereunder.
6. Default and Termination.
6.1. Licensor shall have the right, but not the
obligation, to terminate this Agreement upon 30 days' written notice:
(a) if the Licensee discontinues the use
of the Marks for a continuous period of one year, unless such discontinuance
results from an eminent domain proceeding or casualty beyond the control of
Licensee which prevents Licensee from operating the Boston Club, in which case
Licensor may terminate this Agreement upon 30 days' written notice if Licensee
discontinues the use of the Marks for a continuous period of two years; or
(b) if (i) the Licensee makes a general
assignment for the benefit of creditors or acknowledges that it cannot pay its
debts as they become due; (ii) the Licensee's interest under this Agreement
shall be taken on execution of a judgment; or (iii) the Licensee files a
petition for adjudication as a bankrupt, for reorganization or for an
arrangement under any bankruptcy or insolvency law, or if any involuntary
petition under such law is filed against Licensee and not dismissed within 90
days thereafter; or
(c) if there is a change in ownership or
control of Licensee in violation of the provisions of the Option Agreement
dated as of May [ ], 1997, by and among Licensor, Licensee, Steven Foster, The
Foster Family Trust and Kevin Troy (the "Option Agreement"); or
(d) if Licensee renounces this Agreement.
7
<PAGE> 8
6.2. Licensor may terminate this Agreement if Licensee
commits a material violation of any of Sections 2.3, 4.1, 4.2, 4.3, 5.2, 5.3,
5.4, 5.5, 9 or 10 of this Agreement and fails to cure such default within 30
days of receipt of written notice from Licensor. Notwithstanding the foregoing,
in the event that any such non-compliance shall not be remediable within such
30 day period then, provided that Licensee promptly commences and diligently
pursues such remedial steps as are necessary, Licensee shall have such
additional time as is necessary to effect such remedy. Licensor hereby
acknowledges that the termination of any employee responsible for any such
material violation shall be an adequate cure for such violation under this
Section 6.2, so long as such violation immediately ceases upon such employee's
termination.
6.3. Licensee shall be obligated to immediately inform
Licensor of any change of ownership or control of Licensee.
6.4. The rights of termination granted to the Licensor in
this Article 6 shall be in addition to any other right or remedy that may
otherwise be available to the Licensor.
7. Effect of Termination.
7.1. Upon the termination of this Agreement, Licensee
shall immediately: (i) change its corporate name to delete therefrom all
references to or use of the Marks; (ii) cease all use of, and destroy or
effectively remove, the Marks and all references thereto from the Boston Club,
the Products, and any Advertising and Promotion (including, but not limited to,
the cancellation of all Advertising and Promotion and the removal of the Marks
from all signage and stationery, promotional, display, and other materials, and
unsold, undistributed, or returned Products), and (iii) refrain from further
use of or reference to the Marks, direct or indirect, or any other trademark,
service mark, trade name, or logo that is confusingly similar to any of the
Marks.
7.2. Upon the termination of this Agreement, all rights
granted to Licensee hereunder, together with any interest in and to the Marks
which Licensee may have
8
<PAGE> 9
acquired, shall forthwith, without further act or instrument, be assigned to
and revert to Licensor. In addition, Licensee will execute any instruments
requested by Licensor which are necessary to accomplish or confirm the
foregoing. Any such assignment, transfer or conveyance shall be without
consideration other than the mutual agreements contained herein. Licensor's
rights to New Uses and Developments, adopted pursuant to Section 4.3 hereof,
shall survive the termination of this Agreement in perpetuity, as shall
Licensee's rights to Innovations adopted at the Boston Club pursuant to Section
4.3 hereof (not including those Innovations which require use of the name
"Jillian's"), and the parties agree to enter into written royalty-free,
world-wide, perpetual licenses relating to such continued use, effective upon
termination.
7.3. Licensee acknowledges and admits that there would be
no adequate remedy at law for its failure to cease use of the Marks upon proper
termination of this Agreement in accordance with its terms. Licensee agrees
that, in the event of such failure, Licensor shall be entitled to equitable
relief by way of temporary, preliminary, and permanent injunction and such
other and further relief as any court with jurisdiction may deem just and
proper including, but not limited to, actual, consequential, and exemplary
damages.
7.4. Termination of this Agreement for any reason shall
not affect those obligations, including obligations to indemnify set forth in
Article 8 hereof, which have accrued as of the date of termination.
8. Indemnity.
8.1. Licensor does not assume any liability to Licensee or
any third party with respect to the operation, management or marketing of the
Boston Club, or with respect to the Services, Products or Advertising and
Promotion. Licensee shall defend, hold harmless and indemnify Licensor, and its
owners, employees and representatives, from and against any and all claims,
demands, actions, liabilities, damages, losses, fines, penalties, costs and
expenses (including, without limitation, all reasonable attorneys' fees) of any
kind whatsoever (including, without limitation, those relating to actual or
9
<PAGE> 10
alleged death of or injury to person and damage to property) (collectively,
"Losses") actually or allegedly, directly or indirectly, arising or resulting
in any way from or in connection with the operation, management or marketing of
the Boston Club, the Services, Products, or Advertising and Promotion.
8.2. Licensee does not assume any liability to Licensor or
any third party with respect to the operation, management or marketing of the
billiard clubs operated by Licensor. Licensor shall defend, hold harmless and
indemnify Licensee, and its owners, employees and representatives, from and
against any and all Losses actually or allegedly, directly or indirectly,
arising or resulting in any way from or in connection with the operation,
management or marketing of the billiard clubs operated by Licensor.
9. Insurance.
9.1. Licensee shall carry liability insurance providing
protection in an amount deemed reasonably adequate by Licensor, covering all
insurable risks relating to the Boston Club, the Services, the Products, the
Advertising and Promotion and the operation of Licensee's business that are
now, or hereafter become, customary to insure in the operation of similar
businesses. Licensor shall be named in every such insurance policy as an
additional insured. Licensee shall deliver to Licensor a copy of the
certificate of such insurance from the insurance carrier, setting forth the
scope of coverage and the limits of liability. Licensee's obligations under
this Section 9.1 shall survive for a period of three years after the
termination of this Agreement. Licensor hereby acknowledges that Licensee's
current insurance policies, as set forth in the schedule of such policies
delivered by Licensee to Licensor and dated May [ ], 1997, satisfy the
provisions of this Section 9.1, provided that Licensor is added as an
additional named insured to such policies in accordance with this Section 9.1.
10. Assignment.
10.1. This Agreement shall be binding upon and inure to
the benefit of the successors and permitted
10
<PAGE> 11
assigns of the parties hereto. Licensor may freely assign the Marks, and may
freely assign all of its rights, duties, and obligations hereunder to any
entity to which the Marks, or the right to use the Marks, have been
transferred, or to an affiliate of any such entity; provided that such assignee
agrees in writing to be bound by all of the terms of this Agreement. However,
the rights granted to Licensee hereunder are unique and personal in nature, and
neither this Agreement nor any rights to use the Marks may be assigned, in
whole or in part, by Licensee (including without limitation by operation of
law) except (i) pursuant to a change in ownership or control of Licensee that
is permitted under the Option Agreement or (ii) with Licensor's prior written
consent. Any attempt by Licensee to transfer any of its rights or obligations
under this Agreement, in violation of this Section 10.1, whether by merger,
assignment, sublicense, or otherwise, shall constitute an event of default, but
shall otherwise be null and void.
11. Miscellaneous.
11.1. Notices. All notices required to be given under this
Agreement shall be in writing and shall be sent by hand, by facsimile, by
certified or registered mail, return receipt requested, postage prepaid, or by
overnight courier, as follows:
If to Licensee: Jillian's Billiard Club, Inc.
145 Ipswich Street
Boston, Massachusetts 02215
Attn: Kevin Troy
If to Licensor: Jillian's Entertainment Corporation
727 Atlantic Avenue, Suite 600
Boston, Massachusetts 02111
Attn: Steven Foster
with copies to: J.W. Childs Associates, L.P.
One Federal Street
Boston, Massachusetts 02110
Attn: Glenn Hopkins
or to such other person or place as may be designated by notice of one party to
the other, and all notices shall be deemed effective when received. The
attorney for any
11
<PAGE> 12
party may give notices under this Agreement on behalf of such party.
11.2. Governing Law. This Agreement is being executed and
delivered in the Commonwealth of Massachusetts and shall be governed by and
construed and interpreted in accordance with the laws of the Commonwealth of
Massachusetts without regard to principles of conflicts of law.
11.3. Captions. The captions and headings throughout this
Agreement are for convenience and reference only, and they shall in no way be
held or deemed to define, modify or add to the meaning, scope or intent of any
provision of this Agreement.
11.4. No Waiver. No assent, expressed or implied, by the
Licensor or the Licensee, to any breach of or default in any term, covenant or
condition which this Agreement requires to be performed or observed by the
other party shall constitute a waiver of or assent to any succeeding breach of
or default in the same or any other term, covenant or condition hereof.
11.5. Severability. In the event that any one or more of
the phrases, sentences, clauses or paragraphs contained in this Agreement shall
be declared invalid by a final or unappealable order, decree or judgment of any
court, this Agreement shall be construed as if it did not contain such phrases,
sentences, clauses or paragraphs.
11.6. Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto relating to the subject matter
hereof, superseding all prior agreements or undertakings, oral or written.
11.7. No Third Party Beneficiaries. Nothing in this
Agreement, express or implied, shall confer upon any person or entity, other
than the parties hereto and their authorized successors and assigns, any rights
or remedies under or by reason of this Agreement.
11.8. Supplemental Agreements. Licensor and Licensee shall
execute and deliver all other appropriate supplemental agreements and other
instruments, and take any other actions necessary to make this Agreement fully
and legally effective, binding and enforceable as between
12
<PAGE> 13
them and as against third parties. Failure to execute such supplemental
agreements shall not affect the validity of this Agreement and this Agreement
shall continue to be a valid and binding obligation of the parties hereto
irrespective thereof.
11.9. No Oral Modification. This Agreement may not be
modified, amended, surrendered or changed, except by a written instrument
signed by the parties hereto.
11.10. Relationship Between Parties. Nothing herein
contained shall be construed to place the parties in the relationship of
partners, joint venturers, principal and agent, or employer and employee, and
neither party shall have the power to obligate or bind the other party in any
manner whatsoever.
11.11. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all of which taken together shall constitute but one and the same instrument.
11.12. Not an Interest in Real Estate. Licensor and
Licensee agree that it is not the intention of the parties to this Agreement to
convey or create an interest in real property. Neither party shall have the
right to record this Agreement without obtaining the prior written consent of
the other party hereto.
13
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement or caused the same to be executed under seal by a duly authorized
officer as of the date first above written.
JILLIAN'S BILLIARD CLUB, INC.
By:
--------------------------------
Name: Steven L. Foster
Title:
JILLIAN'S ENTERTAINMENT
CORPORATION
By:
--------------------------------
Name: Daniel M. Smith
Title: President and Chief
Operating Officer
<PAGE> 15
SCHEDULE A
Schedule of Trademarks,
Service Marks and Trade Names
1. U.S. Registrations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Mark Reg. No. Int. Class Reg. Date
---- -------- ---------- ---------
"Jillian's" 1,625,291 41, 42 11/27/90
</TABLE>
2. U.S. Pending Applications:
None.
3. State Registrations:
None.
4. State Pending Applications:
None.
5. Unregistered Marks:
None.
15
<PAGE> 1
EXHIBIT (c)(9)
OPTION AGREEMENT
OPTION AGREEMENT, dated as of May [ ], 1997 (this
"Agreement"), by and between Steven L. Foster ("Foster"), The Foster Family
Trust (the "Trust"), Kevin Troy ("Troy", and together with Foster and the
Trust, the "Grantors"), Jillian's Billiard Club, Inc., a Massachusetts
corporation ("Jillian's Boston"), and Jillian's Entertainment Corporation, a
Florida corporation ("Grantee").
WHEREAS, concurrently with the execution of this
Agreement, Jillian's Entertainment Holdings, Inc. ("Holdings"), a Delaware
corporation, Jillian's Entertainment Acquisition Corporation, a Florida
corporation and wholly owned subsidiary of Holdings ("Sub"), and Grantee have
entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby,
upon the filing of Articles of Merger with the Department of State of Florida
(the "Effective Time"), Sub will merge with and into Grantee with Grantee
becoming a wholly owned subsidiary of Holdings (the "Merger");
WHEREAS, as a condition and inducement to Holdings'
execution of the Merger Agreement, Holdings and Grantee have requested that the
Grantors agree, and the Grantors have agreed, to grant Grantee the Option (as
defined below); and
WHEREAS, as a condition and inducement to Holdings'
execution of the Merger Agreement, Holdings and Grantee have requested that
Jillian's Boston agree, and Jillian's Boston has agreed, to execute this
Agreement and to perform its obligations hereunder;
NOW, THEREFORE, in consideration of the foregoing and
the respective representations, warranties, covenants and agreements set forth
herein, in the Merger Agreement and in the License Agreement dated as of May
[ ], 1997 by and between Grantee and Jillian's Boston (the "License Agreement"),
and for other good and valuable consideration the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option; Purchase Price. (a) Subject to the
terms and conditions set forth herein, each of the Grantors hereby grants to
Grantee an irrevocable option (the "Option") to purchase all, but not less
<PAGE> 2
than all, of the shares of common stock, no par value, of Jillian's Boston set
forth opposite such Grantor's name on Schedule 1 hereto (collectively, the
"Option Shares") for an aggregate cash purchase price (the "Purchase Price") as
set forth below; such Option Shares being all of the issued and outstanding
equity securities of Jillian's Boston.
(b) The aggregate Purchase Price for the
Option Shares shall be, 6.0 times Jillian's Boston's trailing 12-month EBITDA
(as defined below), valued on a debt-free basis, subject to adjustment as set
forth below. In the event that the exercise of the Option occurs in connection
with an initial public offering of the common stock of Holdings, Grantee or any
subsidiary of Grantee (the "IPO Common Stock"), then the aggregate Purchase
Price shall be: (i) adjusted to 6.5 times Jillian's Boston's trailing 12-month
EBITDA, valued on a debt-free basis, if the initial public offering price of
the IPO Common Stock is at least 10.0 times the issuer's prospective 12-month
EBITDA as reflected in the latest issuer projections furnished to the
underwriters prior to the offering (the "Issuer's Prospective 12-month EBITDA")
and less than 11.0 times the Issuer's Prospective 12-month EBITDA or (ii)
adjusted to 7.0 times Jillian's Boston's trailing 12-month EBITDA, valued on a
debt-free basis, if the initial public offering price of the IPO Common Stock
is at least 11.0 times the Issuer's Prospective 12-month EBITDA. In the event
that there is an initial public offering of the IPO Common Stock prior to, and
not in connection with, the exercise of the Option, then the aggregate Purchase
Price shall be: (i) adjusted to 6.5 times Jillian's Boston's trailing 12-month
EBITDA, valued on a debt-free basis, if the Fair Market Value (as defined
below) of such stock, as of the date of exercise of the Option, is at least
10.0 times the issuer's prospective 12-month EBITDA as reflected in the latest
issuer budget approved by the issuer's board of directors and less than 11.0
times the issuer's prospective 12-month EBITDA as reflected in the latest
issuer budget approved by the issuer's board of directors or (ii) adjusted to
7.0 times Jillian's Boston's trailing 12-month EBITDA, valued on a debt-free
basis, if the Fair Market Value of such stock, as of the date of exercise of
the Option, is at least 11.0 times the issuer's prospective 12-month EBITDA as
reflected in the latest issuer budget approved by the issuer's board of
directors.
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(c) In the event that Grantee exercises
the Option prior to the occurrence of an initial public offering of the IPO
Common Stock, Grantee shall promptly pay, upon completion of any such initial
public offering prior to July 1, 2001, such additional consideration as would
have been owed had such initial public offering occurred in connection with the
exercise by Grantee of the Option and the aggregate Purchase Price had been
adjusted pursuant to the terms of Section 1(b).
"EBITDA" shall mean, with respect to any fiscal year of
Jillian's Boston, Jillian's Boston's operating earnings for such fiscal year,
before interest, taxes, depreciation and amortization, calculated in accordance
with generally accepted accounting principles consistently applied and
excluding all non-recurring income items.
The "Fair Market Value" of shares of IPO Common Stock as
of a given date shall mean the average of the closing prices of such shares on
the Nasdaq National Market (or such other market or exchange on which such
shares are listed) over the twenty trading days ending on and including the
trading day prior to such date or, if such shares are not so listed, shall be
as determined in good faith by the Board of Directors of Holdings.
2. Exercise of Option. Grantee may exercise the Option,
in whole but not in part, at any time and from time to time, upon written notice
(an "Exercise Notice") given between July 1, 1999 and June 30, 2001, inclusive;
provided, that the Option will be exercisable upon the giving of an Exercise
Notice between January 1, 1999 and December 31, 2000, inclusive, if (i) prior
to such exercise there has been an initial public offering of the IPO Common
Stock or (ii) such exercise is in connection with an initial public offering of
the IPO Common Stock (any such period during which the Option is exercisable is
hereinafter referred to as the "Exercise Period"). Notwithstanding anything in
this Agreement to the contrary, Grantee may give an Exercise Notice up to 60
days prior to July 1, 1999 or January 1, 1999, as the case may be, provided
that the Closing Date (as defined below) shall not occur prior to July 1, 1999
or January 1, 1999, as the case may be. The Option shall terminate and be of no
further force and effect upon the expiration of the Exercise Period.
Notwithstanding anything in this Agreement to the contrary, in the event that
the Option
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<PAGE> 4
cannot be exercised on any day during the Exercise Period because of any
injunction, order or similar restraint issued by a court of competent
jurisdiction, the Exercise Period shall be extended so that the Option shall
expire no earlier than on the 60th day after such injunction, order or
restraint shall have been dissolved or shall have become permanent and no
longer subject to appeal.
3. Payment and Delivery of Option Shares. (a) Immediately
following the giving of an Exercise Notice pursuant to Section 2, the parties
hereto will negotiate a definitive purchase and sale agreement (the "Purchase
and Sale Agreement") and such other documentation reasonably necessary in
connection with the Transfer (as defined below) of the Option Shares ("Other
Documentation"). Each of the parties hereto agrees to negotiate the terms of
the Purchase and Sale Agreement and the Other Documentation in good faith and
to take all other actions reasonably necessary to consummate the Transfer of
the Option Shares as promptly as practicable following the giving of the
Exercise Notice, which Transfer will in no event occur more than 60 days
following the giving of such notice (unless delayed by Grantee) (the date on
which such Transfer occurs is hereinafter referred to as the "Closing Date").
The Purchase and Sale Agreement will contain provisions customary in such
transactions including, without limitation, representations and warranties by
each of the Grantors and Jillian's Boston substantially similar to the
representations and warranties given by Grantee in Article II of the Merger
Agreement.
(b) Pursuant to the Purchase and Sale
Agreement, on the Closing Date, simultaneously with the delivery of the
aggregate Purchase Price by Grantee, each Grantor shall deliver to Grantee a
certificate or certificates representing the Option Shares to be purchased from
such Grantor duly endorsed in blank, or accompanied by appropriate stock powers
duly executed in blank, in proper form for transfer and with all requisite
stock transfer stamps, if any, attached or provided for, which Option Shares
shall be free and clear of all liens, claims, charges and encumbrances of any
kind whatsoever.
(c) Each of the Grantors hereby agrees that,
prior to the Closing Date, such Grantor will take all actions reasonably
necessary to eliminate from the
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<PAGE> 5
Articles of Organization and the By-Laws of Jillian's Boston any and all
restrictions or limitations on the Transfer of the Option Shares. Jillian's
Boston hereby agrees to cooperate fully with each of the Grantors in the
elimination of any such restrictions or limitations.
(d) Notwithstanding anything in this Section 3 to
the contrary or the giving an Exercise Notice pursuant to Section 2, Grantee
will have no obligation to execute the Purchase and Sale Agreement or to
purchase the Option Shares; provided, however, that Grantee's right to purchase
the Option Shares pursuant to an Exercise Notice given prior to the expiration
of the Exercise Period shall terminate 60 days following the expiration of the
Exercise Period.
4. Representations and Warranties of the Grantors and
Jillian's Boston. Each of the Grantors and Jillian's Boston hereby jointly and
severally represents and warrants to Grantee as follows, except that only the
Grantors represent and warrant with respect to Section 4(e):
(a) Organization of Jillian's Boston.
Jillian's Boston is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry
on its business as now being conducted and as proposed to be conducted. Except
as set forth in Section 4(a) of Schedule 2 hereto, Jillian's Boston does not,
directly or indirectly, own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity.
(b) Capital Structure. The authorized
capital stock of Jillian's Boston consists of [15,000] shares of common stock,
no par value ("Common Stock"). As of the date of this Agreement, (i) [ ] shares
of Common Stock are issued and outstanding, all of which are duly authorized,
validly issued, fully paid and nonassessable; (ii) [ ] shares of Common Stock
are reserved for future issuance pursuant to outstanding stock options and (iii)
[ ] shares of Common Stock are reserved for future issuance pursuant to
outstanding war-
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rants. Except as set forth in this Section 4(b), there are no equity securities
of any class of Jillian's Boston or any securities exchangeable into or
exercisable for such equity securities, issued, reserved for issuance or
outstanding. Except as set forth in this Section 4(b), there are no options,
warrants, calls, rights, commitments or agreements of any character to which
Jillian's Boston or such Grantor is a party, or by which Jillian's Boston or
such Grantor is bound, obligating Jillian's Boston or such Grantor to issue,
deliver or sell, or cause to be issued, delivered or sold, shares of capital
stock of Jillian's Boston or obligating Jillian's Boston or such Grantor to
grant, extend or accelerate the vesting of or enter into any such option,
warrant, call, right, commitment or agreement. The information set forth on
Schedule 1 hereto is true and correct and the Option Shares, as set forth on
Schedule 1 hereto, represent all of the issued and outstanding equity
securities of Jillian's Boston.
(c) Authority; No Conflict; Required Filings and
Consents.
(i) Such Grantor or Jillian's Boston has all
requisite power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of such Grantor or
Jillian's Boston. This Agreement has been duly and validly executed and
delivered by such Grantor or Jillian's Boston and constitutes a valid and
binding obligation of such Grantor or Jillian's Boston, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights and
by general equitable principles (regardless of whether enforceability is
considered in a proceeding in equity or at law).
(ii) Except as set forth in Section 4(c)(ii) of
Schedule 2 hereto, the execution and delivery by such Grantor or Jillian's
Boston of this Agreement does not, and the consummation of the transactions
contemplated hereby will not, (A) conflict with, or result in any violation or
breach of any provision of the Arti-
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<PAGE> 7
cles of Organization, as amended, or the By-laws, of Jillian's Boston, or the
organizational documents of such Grantor if such Grantor is not a natural
person, (B) result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Jillian's Boston or such Grantor is a party or by which
Jillian's Boston or such Grantor or any of Jillian's Boston's or such Grantor's
properties or assets may be bound, or (C) conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Jillian's Boston or such Grantor or
any of Jillian's Boston's or such Grantor's properties or assets, except in the
case of clause (B) for any such violations, breaches, defaults, terminations,
cancellations, accelerations or conflicts which would not, in the aggregate,
have a material adverse effect on Jillian's Boston or impair the ability of
Jillian's Boston or such Grantor to consummate the transactions contemplated by
this Agreement.
(iii) No consent, approval, order or
authorization of, or registration, declaration or filing with (collectively,
"Consents") any person, including, without limitation, any court,
administrative agency or commission or other governmental authority or
instrumentality (a "Governmental Entity"), is required by or with respect to
Jillian's Boston or such Grantor in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby,
except for filings pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations thereunder (if applicable),
Consents relating to any liquor licenses held by Jillian's Boston or such
Grantor and such other Consents (other than those of a Governmental Entity)
which, if not obtained or made, would not, individually or in the aggregate,
have a material adverse effect on Jillian's Boston or impair the ability of
Jillian's Boston or such Grantor to consummate the transactions contemplated by
this Agreement.
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(d) Litigation. Except as set forth in
Section 4(d) of Schedule 2 hereto, there is no action, suit or proceeding,
claim, arbitration or investigation pending or, to the best knowledge of
Jillian's Boston or such Grantor, threatened against Jillian's Boston or such
Grantor which would have or result in a material adverse effect on Jillian's
Boston or impair the ability of Jillian's Boston or such Grantor to consummate
the transactions contemplated by this Agreement, nor has Jillian's Boston or
such Grantor received notice of any judgment, decree, injunction, rule or order
of any Governmental Entity outstanding against Jillian's Boston or such Grantor
having, or which is reasonably likely to have, a material adverse effect on
Jillian's Boston. Jillian's Boston is not in violation of any term of any
judgment, decree, injunction or order outstanding against it of which it has
received notice.
(e) Title to Option Shares. Except as set
forth in Section 4(e) of Schedule 2 hereto, such Grantor has good, valid and
marketable title to the Option Shares set forth opposite such Grantor's name on
Schedule 1 hereto, free and clear of all security interests, liens, claims,
pledges, charges or other encumbrances of any nature, and upon exercise of the
Option in accordance with the terms of this Agreement, Grantee will acquire
good, valid and marketable title to such Option Shares, free and clear of all
security interests, liens, claims, pledges, charges or other encumbrances of
any nature.
5. Conduct of Business; Restrictions on the
Issuance of Securities. (a) From and after the date hereof and until the
expiration of the Exercise Period (except to the extent that Grantee shall
otherwise consent in writing), Jillian's Boston will, and each of the Grantors
will use its best efforts to ensure that Jillian's Boston does, carry on its
business in the usual, regular and ordinary course as a billiard club or
entertainment facility that primarily features billiards or other indoor games.
(b) From and after the date hereof and until the
expiration of the Exercise Period, Jillian's Boston will not, and each of the
Grantors will use its best efforts to ensure that Jillian's Boston does not,
offer, sell, contract to sell, issue or otherwise dispose of (i)
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<PAGE> 9
any shares of Common Stock or other equity securities of Jillian's Boston, (ii)
any securities convertible into or exchangeable for equity securities of
Jillian's Boston or (iii) warrants or other rights to purchase any equity
securities of Jillian's Boston, without the prior written consent of Grantee.
From and after the date hereof and until the expiration of the Exercise Period,
Jillian's Boston will not, and each of the Grantors will use its best efforts
to ensure that Jillian's Boston does not, enter into any transaction involving
(i) a merger or consolidation of Jillian's Boston or any affiliate thereof,
(ii) a sale of all or substantially all of the assets of Jillian's Boston,
(iii) a change in ownership or control of Jillian's Boston, or engage in any
other transaction having substantially similar effects, without the prior
written consent of Grantee.
6. Restrictions on Transfer. Each of the Grantors
hereby agrees that, from and after the date hereof and until the expiration of
the Exercise Period, it will not, other than pursuant to the exercise of the
Option or pursuant to a Permitted Transfer (as defined below), transfer, sell,
assign, pledge, hypothecate, give, create a security interest in or lien on,
place in trust (voting or otherwise), assign or in any other way encumber or
dispose of, directly or indirectly and whether or not by operation of law or
for value ("Transfer"), any Option Shares owned, directly or indirectly, by
such Grantor. A "Permitted Transfer" shall mean a Transfer of Option Shares by
any Grantor who is a natural person to such Grantor's spouse, children,
grandchildren, parents or siblings or a trust for the benefit of any of them,
provided that such Option Shares remain subject to all of the terms and
provisions of this Agreement as if the transferee of such Option Shares were a
Grantor hereunder.
7. Right of First Refusal on Sale of Equity Securities.
(a) In the event that any Grantor, following the expiration of the Exercise
Period, desires to Transfer any Equity Securities (as defined below), owned,
directly or indirectly, by such Grantor to any person other than pursuant to a
Permitted Transfer, such Grantor (the "Offering Grantor") will (unless it is a
condition precedent to such Transfer that Jillian's Boston cease to operate
under the name "Jillian's" and that the License Agreement be terminated) notify
Grantee in writing (the
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"Notification") of such Grantor's intention to do so, specifying the number of
shares of Equity Securities proposed to be transferred (the "Offered Shares"),
the name of the person or persons to whom such Grantor proposes to Transfer the
Offered Shares (or if no particular purchaser is identified, then the general
class of persons to whom such Grantor proposes to Transfer the Offered Shares),
and a price per share which shall be the minimum price at which such Grantor
proposes to effect the Transfer (the "Minimum Price"). The Notification shall
contain an affirmation by the Offering Grantor that such Grantor has a
reasonable expectation of being able to effect the proposed Transfer at the
Minimum Price and to such person or persons (or class of persons) and shall
recite the basis for such expectation. The Notification shall offer to sell to
Grantee all, but not less than all, of the Offered Shares, free and clear of
any liens or encumbrances, at the Minimum Price and on such other terms and
conditions, if any, not less favorable to Grantee than those proposed to be
offered to such other person or persons (or class of persons). In the event
that all or any part of the consideration for the proposed Transfer shall be
other than cash, the Minimum Price shall include the fair value of such
consideration, including the fair value of any promissory notes of the
prospective purchaser (taking into account, among other matters, the terms of
the notes and the creditworthiness of the prospective purchaser). "Equity
Securities" shall mean the Common Stock and any other common or preferred stock
of Jillian's Boston or option, warrant or other security convertible into, or
exercisable or exchangeable for, common or preferred stock of Jillian's Boston.
(b) Grantee shall act upon the offer of the
Offering Grantor by giving written notice (the "Grantee's Notice") to the
Offering Grantor setting forth Grantee's intention as to the Offered Shares.
The Grantee's Notice shall be given as soon as practicable after receipt of the
Notification, and in all events within 30 days after such receipt (the
"Acceptance Period"). If a Grantee's Notice is not given within the Acceptance
Period, Grantee shall be deemed to have elected not to purchase the Offered
Shares.
(c) In the event that Grantee shall elect
to purchase or acquire all of the Offered Shares, written notice to the
Offering Grantor of such election to pur-
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chase or so acquire all of the Offered Shares shall, when taken in conjunction
with the Notification, be deemed to constitute a valid and legally binding
purchase and sale agreement. The closing of the purchase and sale of Offered
Shares shall take place at the principal executive offices of Grantee at such
time and on such date within 60 days following the expiration of the Acceptance
Period as shall be agreed upon by Grantee and the Offering Grantor, at which
time the Offering Grantor shall deliver the certificate or certificates
representing the Offered Shares so sold against the Offering Grantor's receipt
of payment of the Minimum Price in cash (by certified check, bank cashier's
check or wire transfer); provided, however, that if the Minimum Price consists
in whole or in part of promissory notes or property other than cash, Grantor
shall have the option of giving promissory notes or property other than cash of
like tenor or cash in an amount equal to the fair value of such promissory
notes and such property other than cash.
8. Right of First Refusal on the Sale of Jillian's
Boston. In the event that Jillian's Boston, following the expiration of the
Exercise Period, desires to enter into any transaction with a third party
involving (i) a merger or consolidation of Jillian's Boston or any affiliate
thereof, (ii) a sale of all or substantially all of the assets of Jillian's
Boston, (iii) a change in ownership or control of Jillian's Boston, or to
engage in any other transaction having substantially similar effects, Jillian's
Boston will (unless it is a condition precedent to the consummation of such
transaction that Jillian's Boston cease to operate under the name "Jillian's"
and that the License Agreement be terminated) notify Grantee in writing of
Jillian's Boston's intention and shall offer Grantee the opportunity to enter
into a similar transaction with Jillian's Boston on terms and conditions no
less favorable to Grantee than those offered to the proposed third party. The
notice shall contain an affirmation by Jillian's Boston that Jillian's Boston
has a reasonable expectation of being able to effect the proposed transaction
on the terms and conditions set forth in the notice and shall recite the basis
for such expectation. The procedures set forth in Section 7 with respect to the
right of first refusal on sales by the Grantors of Equity Securities shall
apply to the right of first refusal granted in this Section 8, with such
modifications as the parties mutually agree are
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necessary given the nature of any transaction proposed pursuant to this Section
8.
9. Access to Information. Beginning 60 days prior to
the Exercise Period and during the Exercise Period, notwithstanding any
injunction, order or similar restraint issued by a court of competent
jurisdiction restraining the exercise of the Option, upon the reasonable
request of Grantee, Jillian's Boston will, and each of the Grantors will use
its best efforts to ensure that Jillian's Boston does, provide Grantee with
reasonable access to Jillian's Boston and to officers, directors, employees,
files, reports, statements and other documents (financial or otherwise) of
Jillian's Boston that Grantee, in the exercise of its reasonable judgement,
deems necessary in conjunction with the exercise of the Option. Grantee agrees
to use information revealed as a result of such investigations solely in
conjunction with the possible exercise of the Option and will hold such
information confidential, in keeping with the practices and procedures Grantee
applies in connection with its own internal confidential information. The
parties hereby agree that the foregoing provisions of this Section 9 will also
apply following the expiration of the Exercise Period to Grantee's reasonable
requests for information in conjunction with Grantee's exercise of the rights
of first refusal set forth in Sections 7 and 8.
10. Non-Competition; Non-Solicitation. Jillian's Boston
and each of the Grantors hereby agrees that:
(a) From and after the date hereof and so
long as Steven L. Foster is prohibited from competing with Grantee pursuant to
the terms of his employment agreement with Grantee dated the date hereof (the
"Prohibition Period"), Jillian's Boston or such Grantor will not, directly or
indirectly, own, operate or invest in any billiard club or entertainment
facility that primarily features billiards or other games, including an
entertainment facility that includes a restaurant but not a facility that is
primarily a restaurant, bar or nightclub; provided, however, that activities
relating to (i) the business of Jillian's Billiard Club (the "Boston Club"),
currently located at 145 Ipswich Street, Boston, Massachusetts or (ii)
the business of the Boston Club at such other location, within a two mile
radius of its current location, to which the Boston Club may be re-
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quired to move, in either case, shall not constitute a violation of this
Section 10(a).
(b) During the Prohibition Period, Jillian's
Boston or such Grantor will not, directly or indirectly, hire, recruit,
solicit, entice or in any other manner persuade or attempt to persuade any
employee, independent contractor, dealer, supplier, client or customer of
Grantee or any of its subsidiaries to discontinue his or her position or
relationship or violate any agreement with Grantee or any of its subsidiaries
as employee, independent contractor, dealer, supplier, client or customer,
respectively, except with the prior written consent of the Board of Directors
of Holdings, which consent shall be given at the sole discretion of such Board
of Directors.
(c) Jillian's Boston and such Grantor will,
in the event that Grantee acquires all or substantially all of the equity
of Jillian's Boston pursuant to the exercise of the Option or the rights of
first refusal set forth in Sections 7 and 8, enter into non-competition and
non-solicitation agreements which contain provisions substantially similar to
those set forth in Sections 10(a) and 10(b) above (except that such
non-competition provisions will only prohibit competition in the City of
Boston, Massachusetts) and which expire on the fourth anniversary of such
acquisition by Grantee.
11. Termination; Effect of Termination. (a) This
Agreement will terminate and be of no further force and effect:
(i) upon the mutual written consent of the parties
hereto;
(ii) upon exercise in full by Grantee of the Option;
(iii) upon termination of the License Agreement in
accordance with its terms, provided that the Exercise Period has expired; or
(iv) upon termination of the Merger
Agreement in accordance with its terms.
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(b) Upon termination of this Agreement pursuant
to Section 11(a) this Agreement shall immediately become void and there shall
be no liability on the part of Grantee, Jillian's Boston or the Grantors in
respect hereof, except for breaches of the representations, warranties and
covenants contained in this Agreement that occur prior to such termination.
12. Miscellaneous. (a) Expenses. Except as otherwise
provided herein, each of the parties hereto shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including fees and expenses of its own financial
consultants, investment bankers, accountants and counsel.
(b) Definitions. For purposes of this Agreement:
(i) "business day" shall mean any day which is
not a Saturday, Sunday or legal holiday in The Commonwealth of Massachusetts;
and
(ii) "affiliate" shall have the meaning
set forth in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
(c) Waiver and Amendment. Any provision
of this Agreement may be waived at any time by the party that is entitled to
the benefits of such provision. This Agreement may not be modified, amended,
altered or supplemented except upon the execution and delivery of a written
agreement executed by the parties hereto.
(d) Entire Agreement; No Third-Party Beneficiary;
Severability. This Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or a federal or state
regulatory agency to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
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<PAGE> 15
in full force and effect and shall in no way be affected, impaired or
invalidated.
(e) Governing Law. This Agreement shall be
governed and construed in accordance with the laws of The Commonwealth of
Massachusetts without regard to any applicable conflicts of law rules.
(f) Descriptive Headings. The descriptive
headings contained herein are for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
(g) Notices. All notices and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally, telecopied (with confirmation) or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to Grantee to:
Jillian's Entertainment Corporation
727 Atlantic Avenue, Suite 600
Boston, Massachusetts 02111
Attention: Daniel M. Smith
with a copy to:
J.W. Childs Associates, L.P.
One Federal Street, 21st Floor
Boston, Massachusetts 02110
Attention: Glenn A. Hopkins
If to Grantors or Jillian's Boston to:
Jillian's Billiard Club, Inc.
145 Ipswich Street
Boston, Massachusetts 02215
Attention: Steven L. Foster and
Kevin Troy
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(h) Counterparts. This Agreement and any
amendments hereto may be executed in two or more counterparts, each of which
shall be considered one and the same agreement and shall become effective when
each counterpart has been signed, it being understood that the parties need not
sign the same counterpart.
(i) Assignment. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (by operation of law or otherwise) without the prior
written consent of the other parties; provided, however, that this Agreement
may be assigned by Grantee, without the consent of the other parties, to any
person or entity that acquires all or substantially all of the equity of
Grantee (through a merger, sale of assets, stock purchase or otherwise).
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns. As used in this Agreement, Grantee shall include any
person to whom this Agreement or the Option shall be assigned by a previous
Grantee in accordance with the provisions hereof.
(j) Further Assurances. In the event of any
exercise of the Option or the rights of first refusal set forth in Sections 7
and 8, each of the Grantors, Jillian's Boston and Grantee shall execute and
deliver all other documents and instruments and take all other actions that may
be reasonably necessary in order to consummate the transactions provided for by
such exercise.
(k) Specific Performance. The parties hereto
agree that this Agreement may be enforced by either party through specific
performance, injunctive relief and other equitable relief. Both parties further
agree to waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such equitable relief and that this
provision is without prejudice to any other rights that the parties hereto may
have for any failure to perform this Agreement.
(l) Effective Time. Notwithstanding
anything in this Agreement to the contrary, this Agreement shall not be binding
and effective until the Effective Time, except that the provisions of Section
5,
16
<PAGE> 17
Section 6 and Section 10 shall be binding and effective as of the date hereof.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have signed this
Option Agreement under seal, all as of the day and year first written above.
JILLIAN'S BILLIARD CLUB, INC.
By:
------------------------------
Name: Steven L. Foster
Title:
JILLIAN'S ENTERTAINMENT
CORPORATION
By:
------------------------------
Name: Daniel M. Smith
Title: President and Chief
Operating Officer
---------------------------------
Steven L. Foster
---------------------------------
Kevin Troy
THE FOSTER FAMILY TRUST
By:
------------------------------
Name:
Title:
<PAGE> 19
Schedule 1
Schedule of Option Shares
Shareholder Option Shares
Steven L. Foster
The Foster Family Trust
Kevin Troy
19
<PAGE> 20
Schedule 2
Disclosure Schedule
Section 4(a)
[ ]
Section 4(c)(ii)
[ ]
Section 4(d)
[ ]
Section 4(e)
[ ]
20
<PAGE> 1
EXHIBIT (C)(10)
TABLE OF CONTENTS
PURCHASE AGREEMENT
<TABLE>
<S> <C>
ARTICLE I
PURCHASE OF PREFERRED STOCK; EXCHANGE
OF COMMON STOCK; CONVERSION OF OPTIONS
1.1 Preferred Stock to be Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Exchange of Common Stock; Receipt of Options. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Rollover of Certain Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Closing Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HOLDINGS
2.1 Organization of Holdings and Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Capital Structure of Holdings and Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Authority; No Conflict; Required Filings and Consents . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF JWC
3.1 Organization of JWC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 Authority; No Conflict; Required Filings and Consents . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Authorization of Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 Acquisition of Shares for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE CONTINUING SHAREHOLDERS,
THE OTHER OPTION HOLDERS AND THE BORROWERS
4.1 Authority; No Conflict; Required Filings and Consents . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Acquisition of Shares of Holdings Common and
Holdings Options for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Title to Shares of Jillian's Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE CONTINUING
OPTION HOLDERS AND THE CONTINUING WARRANT HOLDERS
5.1 Authority; No Conflict; Required Filings and
Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 Acquisition of Holdings Management Options and Holdings Warrants for Investment . . . . . . . . . 14
5.3 Title to Jillian's Management Options and Jillian's Warrants . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF JILLIAN'S
6.1 Organization of Jillian's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.2 Authority; No Conflict; Required Filings and Consents . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII
COVENANTS
7.1 Legal Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.2 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.3 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.4 JWC Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.5 Continuing Shareholder Agreements; Other Option Holder Agreements . . . . . . . . . . . . . . . . 18
7.6 Continuing Option Holder Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.7 Holdings Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.8 Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.9 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.10 Continuing Warrant Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE PARTIES
8.1 Conditions to Each Party's Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.2 Additional Conditions to Obligations of Holdings and JWC . . . . . . . . . . . . . . . . . . . . . 21
8.3 Additional Conditions to Obligations of Jillian's, the Continuing Shareholders, the
Other Option Holders, the Continuing Option Holders, the Borrowers and the Continuing
Warrant Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IX
TERMINATION
9.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE X
SURVIVAL
10.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XI
MISCELLANEOUS
11.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.2 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
11.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
11.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Schedule 1 Continuing Shareholders; Other Option Holders
Schedule 2 Continuing Option Holders
Schedule 3 Continuing Warrant Holders
Exhibit A Form of Holdings Option
Exhibit B Form of Holdings Warrant
Exhibit C Form of IP Promissory Note
Exhibit D Form of Foster Promissory Note
Exhibit E Form of Troy Promissory Note
Exhibit F Matters to be Covered by Opinion of Counsel to Continuing Shareholders
</TABLE>
iii
<PAGE> 4
PURCHASE AGREEMENT
by and among
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.,
J.W. CHILDS EQUITY PARTNERS, L.P.
and
THE OTHER SIGNATORIES HERETO
dated as of May [ ], 1997
<PAGE> 5
PURCHASE AGREEMENT
This Purchase Agreement (this "Agreement") is made and entered into
as of this [ ] day of May, 1997 by and among Jillian's Entertainment Holdings,
Inc., a Delaware corporation ("Holdings"), J.W. Childs Equity Partners, L.P., a
Delaware limited partnership ("JWC"), Glenn A. Hopkins (the "Representative"),
as representative of, and attorney-in-fact for, certain related persons or
entities of JWC (the "Group", and together with JWC, the "JWC Group"),
Jillian's Entertainment Corporation, a Florida corporation ("Jillian's"), those
persons listed as Continuing Shareholders on the signature pages hereto (the
"Continuing Shareholders"), those persons listed as Other Option Holders on the
signature pages hereto ("Other Option Holders"), those persons listed as
Continuing Option Holders on the signature pages hereto (the "Continuing Option
Holders"), those persons listed as Borrowers on the signature pages hereto (the
"Borrowers") and those persons listed as Continuing Warrant Holders on the
signature pages hereto (the "Continuing Warrant Holders").
WHEREAS, Holdings, Jillian's Entertainment Acquisition Corporation, a
Florida corporation and a wholly owned subsidiary of Holdings ("Sub"), and
Jillian's are executing, simultaneously with the execution of this Agreement,
an Agreement and Plan of Merger (the "Merger Agreement") whereby, at the
Effective Time (as defined therein), Sub will merge with and into Jillian's
with Jillian's becoming a wholly owned subsidiary of Holdings;
WHEREAS, in order to induce Jillian's to enter into the Merger
Agreement the parties hereto have agreed to enter into this Agreement; and
WHEREAS, pursuant to the terms of the Merger Agreement, it is a
condition of the obligations of the parties thereto that the transactions
contemplated by this Agreement shall have been consummated prior to the
Effective Time;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth,
<PAGE> 6
and for other good and valuable consideration, and intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I
PURCHASE OF PREFERRED STOCK; EXCHANGE
OF COMMON STOCK; TREATMENT OF OPTIONS
1.1 Preferred Stock to be Sold. Upon the terms and subject to the
conditions contained herein, at the Closing (as hereinafter defined), Holdings
shall sell and transfer to the JWC Group, and the JWC Group shall purchase and
accept from Holdings, 12,872,774 shares of Series A 12% Cumulative Convertible
Accruing Pay-In-Kind Preferred Stock, par value $.001 per share, of Holdings
(the "Preferred Stock"). The purchase price for the Preferred Stock, payable
by the JWC Group to Holdings, in immediately available funds, at the Closing,
is $12,000,000.
1.2 Exchange of Common Stock; Receipt of Options. Upon the terms
and subject to the conditions contained herein, at the Closing, (i) each of the
Continuing Shareholders shall transfer to Holdings all of the shares of common
stock, $.001 par value per share, of Jillian's ("Jillian's Common") owned by
such Continuing Shareholder (as set forth on Schedule 1 hereto) and Holdings
shall accept such shares of Jillian's Common and issue to each of the
Continuing Shareholders shares of common stock, par value $.001 per share, of
Holdings ("Holdings Common") and options to purchase shares of Holdings Common,
substantially in the form of Exhibit A hereto ("Holdings Options"), as set
forth on Schedule 1 hereto and (ii) Holdings shall issue to each of the Other
Option Holders Holdings Options, as set forth on Schedule 1 hereto. After the
Effective Time, each Holdings Option shall be exercisable upon the terms and
conditions set forth in the Holdings 1997 Non-Qualified Stock Option Plan,
substantially in the form of Exhibit C to the Merger Agreement (the "Holdings
Stock Option Plan").
1.3 Rollover of Certain Options. Upon the terms and subject to the
conditions contained herein, at the Closing, each of the Continuing Option
Holders shall
2
<PAGE> 7
deliver to Holdings each option owned by such Continuing Option Holder (whether
or not then vested or exercisable) to purchase shares of Jillian's Common (a
"Jillian's Management Option") granted under the Consolidated Stock Option
Plan, the 1994 Director, Adviser and Key Employee Stock Option Plan or the 1995
Director, Adviser and Key Employee Stock Option Plan, (collectively, the
"Jillian's Stock Option Plans"), and Holdings shall accept such Jillian's
Management Options and issue to each of the Continuing Option Holders options
to purchase shares of Holdings Common, substantially in the form of Exhibit D
to the Merger Agreement ("Holdings Management Options"), as set forth on
Schedule 2 hereto. Each Holdings Management Option will be exercisable for a
number of shares of Holdings Common equal to the number of shares of Jillian's
Common subject to the Jillian's Management Option for which it was exchanged,
at an exercise price equal to the exercise price per share of such Jillian's
Management Option. After the Effective Time, each Jillian's Management Option
shall be cancelled, and each Holdings Management Option shall be exercisable
upon the terms and conditions set forth in the Holdings Stock Option Plan.
1.4 Closing Deliveries. At the Closing, (a) the JWC Group shall
deliver to Holdings, by wire transfer of immediately available funds pursuant
to the instructions of Holdings, $12,000,000, (b) Holdings shall deliver to the
JWC Group certificates evidencing 12,872,774 shares of Preferred Stock, (c) the
Continuing Shareholders shall each deliver to Holdings certificates
representing the shares of Jillian's Common owned by such Continuing
Shareholder, duly endorsed in blank or accompanied by appropriate stock powers
duly executed in blank, in proper form for transfer and with all requisite
stock transfer stamps, if any, attached or provided for, (d) Holdings shall
deliver to each of the Continuing Shareholders a certificate or certificates
evidencing shares of Holdings Common and Holdings Options as set forth on
Schedule 1 hereto, (e) Holdings shall deliver to each of the Other Option
Holders Holdings Options as set forth on Schedule 1 hereto, (f) the Continuing
Option Holders shall each deliver to Holdings the Jillian's Management Options
owned by such Continuing Option Holder, (g) Holdings shall deliver to each of
the Continuing Option Holders Holdings Management Options as set forth on
Schedule 2 hereto and (h) the parties shall deliver such other instruments or
documents as may be reasonably
3
<PAGE> 8
necessary to carry out the transactions contemplated by this Agreement and to
comply with the terms hereof.
1.5 Closing. Subject to Article VII, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
immediately prior to the Effective Time, on the later of (a) June 13, 1997 or
(b) the first business day after satisfaction or waiver of the latest to occur
of the conditions set forth in Article VII, at the offices of Skadden, Arps,
Slate, Meagher & Flom LLP, One Beacon Street, Boston, Massachusetts or on such
other date, or at such other time or place, as is agreed to in writing by JWC
and Jillian's. The date on which the Closing shall occur is referred to herein
as the "Closing Date."
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HOLDINGS
Holdings hereby represents and warrants to Jillian's, the Continuing
Shareholders and the Borrowers with respect to Sections 2.1 through 2.3 and to
the Other Option Holders, the Continuing Option Holders and the Continuing
Warrant Holders with respect to Sections 2.1 through 2.3, except Section
2.2(d), as follows:
2.1 Organization of Holdings and Sub. Each of Holdings and Sub is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power to own, lease and operate its property and to carry on its business as
now being conducted and is duly qualified or licensed to do business and is in
good standing as a foreign corporation in each jurisdiction in which the
failure to be so qualified or licensed would have or result in a material
adverse effect on the prospects, business, assets (including intangible
assets), properties, liabilities, results of operations or condition (financial
or otherwise) (a "Material Adverse Effect") of Holdings (taken separately) or
Holdings and Sub (taken as a whole). Except for Sub, Holdings does not,
directly or indirectly, own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
4
<PAGE> 9
interest in, any corporation, partnership, joint venture or other business
association or entity.
2.2 Capital Structure of Holdings and Sub.
(a) The authorized capital stock of Holdings consists of
55,000,000 shares of Holdings Common and 42,000,000 shares of Preferred Stock.
As of the date hereof, one share of Holdings Common is issued and outstanding
and is registered in the name of JWC, such share being duly authorized,
validity issued, fully paid and nonassessable and no shares of Preferred Stock
are issued and outstanding. It is the intent of the parties that such share of
Holdings Common be surrendered by JWC at the Effective Time in exchange for one
dollar.
(b) The authorized capital stock of Sub consists of 1,000
shares of common stock, par value $.001 per share, of which 10 shares are
issued and outstanding, all of which are duly authorized, validly issued, fully
paid and nonassessable.
(c) Except as set forth in Section 2.2 (a) and (b) and as
otherwise explicitly set forth in this Agreement, there are no equity
securities of any class of Holdings or Sub or any security exchangeable into or
exercisable for such equity securities, issued, reserved for issuance or
outstanding. There are no options, warrants, calls, rights, commitments or
agreements of any character to which Holdings or Sub is a party, or by which
Holdings or Sub is bound, obligating Holdings or Sub to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
Holdings or Sub or obligating Holdings or Sub to grant, extend or accelerate
the vesting or enter into any such option, warrant, call, right, commitment or
agreement. There are no voting trusts, proxies or other agreements or
understandings with respect to the shares of capital stock of Holdings. There
are no obligations, contingent or otherwise, of Holdings or Sub to repurchase,
redeem or otherwise acquire any shares of capital stock of Holdings or Sub or
to provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any such subsidiary or any other entity.
(d) All of the shares of Preferred Stock and Holdings
Common to be issued pursuant to the terms
5
<PAGE> 10
hereof have been duly authorized by all necessary corporate action and will,
when issued in accordance with this Agreement, be validly issued, fully paid
and non-assessable and free of preemptive rights, other than restrictions
imposed by the Certificate of Incorporation of Holdings, as amended (the
"Holdings Certificate of Incorporation"), the By-Laws of Holdings, as amended
(the "Holdings By-Laws"), or the Stockholders Agreement (as defined in the
Merger Agreement).
2.3 Authority; No Conflict; Required Filings and Consents.
(a) Holdings has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Holdings. This Agreement has
been duly and validly executed and delivered by Holdings and constitutes a
valid and binding obligation of Holdings, enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights and by general equitable
principles (regardless of whether enforceability is considered in a proceeding
in equity or at law).
(b) The execution and delivery of this Agreement by
Holdings does not, and the consummation of the transactions contemplated by
this Agreement will not, (i) conflict with, or result in any violation or
breach of any provision of the Holdings Certificate of Incorporation or the
Holdings By-laws or (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
any benefit) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Holdings or Sub is a party or by which Holdings or Sub or
any of their properties or assets may be bound, except in the case of clause
(ii) for any such violations, breaches, defaults, terminations, cancellations,
accelerations or conflicts which
6
<PAGE> 11
would not, in the aggregate, have or result in a Material Adverse Effect on
Holdings (taken separately) or Holdings and Sub (taken as a whole) or impair
the ability of Holdings to consummate the transactions contemplated by this
Agreement.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing (collectively, "Consents") with any person,
including, without limitation, any court, administrative agency or commission
or other governmental authority or instrumentality ("Governmental Authority")
is required by or with respect to Holdings or Sub in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) such Consents as may be
required under applicable state securities laws and (ii) such other Consents
(other than those of a Governmental Entity) which, if not obtained or made,
would not, individually or in the aggregate, have a Material Adverse Effect on
Holdings (taken individually) or Holdings and Sub (taken as a whole) or impair
the ability of Holdings to consummate the transactions contemplated by this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF JWC
JWC hereby represents and warrants to Jillian's, the Continuing
Shareholders, the Other Option Holders, the Continuing Option Holders, the
Borrowers and the Continuing Warrant Holders, on behalf of itself and the JWC
Group, as follows:
3.1 Organization of JWC. JWC is a limited partnership duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite power to own, lease and
operate its property and to carry on its business as now being conducted and is
duly qualified or licensed to do business and is in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified or
licensed would have or result in a Material Adverse Effect on JWC.
7
<PAGE> 12
3.2 Authority; No Conflict; Required Filings and Consents.
(a) JWC has all requisite power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of JWC. This Agreement has been duly and validly executed
and delivered by JWC and constitutes a valid and binding obligation of JWC,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and by general equitable principles (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(b) The execution and delivery of this Agreement by JWC
does not, and the consummation of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach of
any provision of the organizational documents of JWC, or (ii) result in any
violation or breach of, or constitute (with or without notice or lapse of time,
or both) a default (or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which JWC is a party
or by which JWC or any of its properties or assets may be bound, except in the
case of clause (ii) for any such violations, breaches, defaults, terminations,
cancellations, accelerations or conflicts which would not, in the aggregate,
have or result in a Material Adverse Effect on JWC or impair the ability of JWC
to consummate the transactions contemplated by this Agreement.
(c) No Consent of any person, including without limitation,
any Governmental Entity, is required by or with respect to JWC in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) such Consents as may be
required under applicable state securities laws and (ii) such other Consents
(other than
8
<PAGE> 13
those of a Governmental Entity) which, if not obtained or made, would not,
individually or in the aggregate, have a Material Adverse Effect on JWC or
impair the ability of JWC to consummate the transactions contemplated by this
Agreement.
3.3 Authorization of Representative. The Representative is duly
authorized to act as representative of, and attorney-in-fact for, the Group
pursuant to a Purchaser Appointment of Agent and Power of Attorney executed by
each member of the Group and dated as of the date hereof. This Agreement has
been duly and validly executed and delivered by the Representative and
constitutes a valid and binding obligation of the Group, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights and
by general equitable principles (regardless of whether enforceability is
considered in a proceeding in equity or at law).
3.4 Acquisition of Shares for Investment. The JWC Group is
acquiring the shares of Preferred Stock for its own account for investment
purposes and not (a) as nominee or agent for any other person, firm,
corporation or entity, or (b) with a view toward, or for sale in connection
with, any distribution thereof or (c) with any present intention of
distributing or selling any of the shares of Preferred Stock. The JWC Group
agrees that the shares of Preferred Stock may only be sold, transferred,
offered for sale, pledged, hypothecated or otherwise disposed of if registered
under applicable law (including without limitation the Securities Act of 1933,
as amended (the "Securities Act")) or if so sold, transferred, offered for
sale, pledged, hypothecated or otherwise disposed of pursuant to an available
exemption from all applicable registration requirements. The JWC Group has
such sufficient knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of its investment, and the JWC
Group understands and is able to bear any economic risks associated with such
investment for an indefinite period of time, inasmuch as the shares of
Preferred Stock have not been, and may not in the foreseeable future be,
registered under the Securities Act, and including the risk of the loss of the
JWC Group's entire investment in such
9
<PAGE> 14
shares. The JWC Group and the JWC Group's attorneys, accountants and other
representatives and advisors, if any, (i) have been given an opportunity to
ask, and have to the extent that the JWC Group has considered necessary, asked
questions of, and have received answers from, representatives of Holdings and
Jillian's concerning the terms of this investment and the affairs of Holdings
and Jillian's; and (ii) have been given or afforded access to all documents,
records, books and additional information which the JWC Group has requested
regarding such matters.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE CONTINUING SHAREHOLDERS,
THE OTHER OPTION HOLDERS AND THE BORROWERS
Each of the Continuing Shareholders, the Other Option Holders and the
Borrowers represents and warrants to Holdings and the JWC Group as follows,
except that only the Continuing Shareholders represent and warrant with respect
to Section 4.3:
4.1 Authority; No Conflict; Required Filings and Consents.
(a) Such Continuing Shareholder, Other Option Holder or
Borrower has all requisite power and authority and is legally competent to
enter into this Agreement and to consummate the transaction contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action on the part of such Continuing Shareholder, Other Option Holder or
Borrower. This Agreement has been duly and validly executed and delivered by
such Continuing Shareholder, Other Option Holder or Borrower and constitutes a
valid and binding obligation of such Continuing Shareholder, Other Option
Holder or Borrower, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and by general equitable principles (regardless
of whether enforceability is considered in a proceeding in equity or at law).
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<PAGE> 15
(b) The execution and delivery of this Agreement by such
Continuing Shareholder, Other Option Holder or Borrower does not, and the
consummation of the transactions contemplated by this Agreement will not,
result in any violation or breach of, or constitute (with or without notice or
lapse of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, contract or other agreement, instrument or obligation to
which such Continuing Shareholder, Other Option Holder or Borrower is a party
or by which such Continuing Shareholder, Other Option Holder or Borrower or any
of its properties or assets may be bound, except for any such violations,
breaches, defaults, terminations, cancellations, accelerations or conflicts
which would not, in the aggregate, have or result in a Material Adverse Effect
on such Continuing Shareholder, Other Option Holder or Borrower or impair the
ability of such Continuing Shareholder, Other Option Holder or Borrower to
consummate the transactions contemplated by this Agreement.
(c) No Consent of any person, including without limitation,
any Governmental Entity, is required by or with respect to such Continuing
Shareholder, Other Option Holder or Borrower in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such Consents as may be required under
applicable state securities laws and (ii) such other Consents (other than those
of a Governmental Entity) which, if not obtained or made, would not,
individually or in the aggregate, have a Material Adverse Effect on such
Continuing Shareholder, Other Option Holder or Borrower or impair the ability
of such Continuing Shareholder, Other Option Holder or Borrower to consummate
the transactions contemplated by this Agreement.
4.2 Acquisition of Shares of Holdings Common and Holdings Options
for Investment. Such Continuing Shareholder, Other Option Holder or Borrower
is acquiring shares of Holdings Common or Holdings Options for its own account
for investment purposes and not (a) as nominee or agent for any other person,
firm, corporation or entity, or (b) with a view toward, or for sale in
connection with, any distribution thereof or (c) with any present
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<PAGE> 16
intention of distributing or selling any shares of Holdings Common or Holdings
Options. Such Continuing Shareholder, Other Option Holder or Borrower agrees
that shares of Holdings Common and Holdings Options may only be sold,
transferred, offered for sale, pledged, hypothecated or otherwise disposed of
if registered under applicable law (including without limitation the Securities
Act) or if so sold, transferred, offered for sale, pledged, hypothecated or
otherwise disposed of pursuant to an available exemption from all applicable
registration requirements. Such Continuing Shareholder, Other Option Holder or
Borrower has such sufficient knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its
investment, and such Continuing Shareholder, Other Option Holder or Borrower
understands and is able to bear any economic risks associated with such
investment for an indefinite period of time, inasmuch as the shares of Holdings
Common and the Holdings Options have not been, and may not in the foreseeable
future be, registered under the Securities Act, and including the risk of the
loss of such Continuing Shareholder's, Other Option Holder's or Borrower's
entire investment in shares of Holdings Common or Holdings Options. Such
Continuing Shareholder, Other Option Holder or Borrower and such Continuing
Shareholder's, Other Option Holder's or Borrower's attorneys, accountants and
other representatives and advisors, if any, (i) have been given an opportunity
to ask, and have to the extent that such Continuing Shareholder, Other Option
Holder or Borrower has considered necessary, asked questions of, and have
received answers from, representatives of Holdings and Jillian's concerning the
terms of this investment and the affairs of Holdings and Jillian's; and (ii)
have been given or afforded access to all documents, records, books and
additional information which such Continuing Shareholder, Other Option Holder
or Borrower has requested regarding such matters.
4.3 Title to Shares of Jillian's Common. Such Continuing
Shareholder has, and upon consummation of the transactions contemplated by this
Agreement Holdings will acquire, good, valid and marketable title to the shares
of Jillian's Common to be received by Holdings from such Continuing Shareholder
pursuant to this Agreement.
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<PAGE> 17
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE CONTINUING
OPTION HOLDERS AND THE CONTINUING WARRANT HOLDERS
Each of the Continuing Option Holders and the Continuing Warrant
Holders severally represents and warrants to Holdings and the JWC Group as
follows:
5.1 Authority; No Conflict; Required Filings and Consents.
(a) Such Continuing Option Holder or Continuing Warrant
Holder has all requisite power and authority and is legally competent to enter
into this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of such Continuing Option Holder or Continuing Warrant
Holder. This Agreement has been duly and validly executed and delivered by
such Continuing Option Holder or Continuing Warrant Holder and constitutes a
valid and binding obligation of such Continuing Option Holder or Continuing
Warrant Holder, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and by general equitable principles (regardless
of whether enforceability is considered in a proceeding in equity or at law).
(b) The execution and delivery of this Agreement by such
Continuing Option Holder or Continuing Warrant Holder does not, and the
consummation of the transactions contemplated by this Agreement will not result
in any violation or breach of, or constitute (with or without notice or lapse
of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, contract or other agreement, instrument or obligation to
which such Continuing Option Holder or Continuing Warrant Holder is a party or
by which such Continuing Option Holder or Continuing Warrant Holder or any of
its properties or assets
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<PAGE> 18
may be bound, except for any such violations, breaches, defaults, terminations,
cancellations, accelerations or conflicts which would not, in the aggregate,
have or result in a Material Adverse Effect on such Continuing Option Holder or
Continuing Warrant Holder or impair the ability of such Continuing Option
Holder or Continuing Warrant Holder to consummate the transactions contemplated
by this Agreement.
(c) No Consent of any person, including without limitation,
any Governmental Entity, is required by or with respect to such Continuing
Option Holder or Continuing Warrant Holder in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) such Consents as may be required under applicable state
securities laws and (ii) such other Consents (other than those of a
Governmental Entity) which, if not obtained or made, would not, individually or
in the aggregate, have a Material Adverse Effect on such Continuing Option
Holder or Continuing Warrant Holder or impair the ability of such Continuing
Option Holder or Continuing Warrant Holder to consummate the transactions
contemplated by this Agreement.
5.2 Acquisition of Holdings Management Options and Holdings
Warrants for Investment. Such Continuing Option Holder or Continuing Warrant
Holder is acquiring Holdings Management Options or Holdings Warrants (as
defined below) for its own account for investment purposes and not (a) as
nominee or agent for any other person, firm, corporation or entity, or (b) with
a view toward, or for sale in connection with, any distribution thereof or (c)
with any present intention of distributing or selling any Holdings Management
Options or Holdings Warrants. Such Continuing Option Holder or Continuing
Warrant Holder agrees that the Holdings Management Options and Holdings
Warrants, and the shares of Holdings Common for which they are exercisable, may
only be sold, transferred, offered for sale, pledged, hypothecated or otherwise
disposed of if registered under applicable law (including without limitation
the Securities Act) or if so sold, transferred, offered for sale, pledged,
hypothecated or otherwise disposed of pursuant to an available exemption from
all applicable registration requirements. Such Continuing Option Holder or
Continuing Warrant Holder has such sufficient knowledge and experience in
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<PAGE> 19
financial and business matters that it is capable of evaluating the merits and
risks of its investment, and such Continuing Option Holder or Continuing
Warrant Holder understands and is able to bear any economic risks associated
with such investment for an indefinite period of time, inasmuch as the Holdings
Management Options and Holdings Warrants, and the shares of Holdings Common for
which they are exercisable, have not been, and may not in the foreseeable
future be, registered under the Securities Act, and including the risk of the
loss of such Continuing Option Holder's or Continuing Warrant Holder's entire
investment in Holdings Management Options or Holdings Warrants. Such
Continuing Option Holder or Continuing Warrant Holder and such Continuing
Option Holder's or Continuing Warrant Holder's attorneys, accountants and other
representatives and advisors, if any, (i) have been given an opportunity to
ask, and have to the extent that such Continuing Option Holder or Continuing
Warrant Holder has considered necessary, asked questions of, and have received
answers from, representatives of Holdings and Jillian's concerning the terms of
this investment and the affairs of Holdings and Jillian's; and (ii) have been
given or afforded access to all documents, records, books and additional
information which such Continuing Option Holder or Continuing Warrant Holder
has requested regarding such matters.
5.3 Title to Jillian's Management Options and Jillian's Warrants.
Such Continuing Option Holder has good, valid and marketable title to the
Jillian's Management Options to be received by Holdings from such Continuing
Option Holder pursuant to this Agreement. Such Continuing Warrant Holder has
good, valid and marketable title to the Jillian's Warrants (as defined below)
to be received by Holdings from such Continuing Warrant Holder pursuant to this
Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF JILLIAN'S
Jillian's represents and warrants to Holdings and the JWC Group, as
follows:
6.1 Organization of Jillian's. Each of Jillian's and its
subsidiaries is a corporation duly orga-
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<PAGE> 20
nized, validly existing and in good standing under the laws of the jurisdiction
of its incorporation, has all requisite corporate power to own, lease and
operate its property and to carry on its business as now being conducted and as
proposed to be conducted and is duly qualified or licensed to do business and
is in good standing as a foreign corporation in each jurisdiction in which the
failure to be so qualified or licensed would, in the aggregate, have or result
in a Material Adverse Effect on Jillian's (taken separately) or Jillian's and
its subsidiaries (taken as a whole). Except as set forth in Section 2.1 of the
Disclosure Schedule (as defined in the Merger Agreement), Jillian's does not,
directly or indirectly, own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity.
6.2 Authority; No Conflict; Required Filings and Consents.
(a) Jillian's has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Jillian's. This Agreement has
been duly and validly executed and delivered by Jillian's and constitutes a
valid and binding obligation of Jillian's, enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights and by general equitable
principles (regardless of whether enforceability is considered in a proceeding
in equity or at law).
(b) The execution and delivery by Jillian's of this
Agreement does not, and the consummation of the transactions contemplated
hereby will not, (i) conflict with, or result in any violation or breach of any
provision of the Articles of Incorporation, as amended, or the By-laws, of
Jillian's or (ii) result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a
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<PAGE> 21
right of termination, cancellation or acceleration of any obligation or loss of
any benefit) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Jillian's or any of its subsidiaries is a party or by which
any of them or any of their properties or assets may be bound, except in the
case of clause (ii) for any such violations, breaches, defaults, terminations,
cancellations, accelerations or conflicts which would not, in the aggregate,
have a Material Adverse Effect on Jillian's (taken separately) or Jillian's and
its subsidiaries (taken as a whole) or impair the ability of Jillian's to
consummate the transactions contemplated by this Agreement.
(c) Except as set forth in Section 2.3(c) of the Disclosure
Schedule, no Consent of any person, including, without limitation, any
Governmental Entity is required by or with respect to Jillian's or any of its
subsidiaries in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby, except for (i) such
Consents as may be required under applicable state securities laws and (ii)
such other Consents (other than those of a Governmental Entity) which, if not
obtained or made, would not, individually or in the aggregate, have a Material
Adverse Effect on Jillian's (taken separately) or Jillian's and its
subsidiaries (taken as a whole) or impair the ability of Jillian's to
consummate the transactions contemplated by this Agreement.
ARTICLE VII
COVENANTS
7.1 Legal Conditions. Each of the parties hereto will take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on it with respect to the transactions contemplated hereby
and will promptly cooperate with and furnish information to each other in
connection with any such requirements imposed upon any of them in connection
with the transactions contemplated hereby. Each of the parties hereto will
take all reasonable actions necessary to obtain (and will cooperate with each
other in obtaining) any consent, authorization, order or approval of, or
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<PAGE> 22
any exemption by, any Governmental Entity required to be obtained or made by
any such party in connection with the transactions contemplated hereby.
7.2 Consents and Approvals. Each of the parties hereto shall use
all reasonable efforts to obtain all necessary consents, waivers and approvals
under any of such party's material agreements, contracts, licenses, leases or
commitments in connection with the transactions contemplated hereby.
7.3 Reasonable Efforts. The parties hereto agree to use reasonable
efforts to effect the Closing and otherwise consummate the transactions
contemplated hereby.
7.4 JWC Agreements. JWC will execute and deliver the Stockholders
Agreement and the Management Agreement (as defined in the Merger Agreement) at
or prior to the Closing.
7.5 Continuing Shareholder Agreements; Other Option Holder
Agreements. The Continuing Shareholders will each execute and deliver the
Stockholders Agreement at or prior to the Closing and a Holdings Option, at the
Closing, exercisable for such number of shares of Holdings Common as set forth
on Schedule 1 hereto. The Other Option Holders will each execute and deliver a
Holdings Option, at the Closing, exercisable for such number of shares of
Holdings Common as set forth on Schedule 1 hereto.
7.6 Continuing Option Holder Agreements. The Continuing Option
Holders will each execute and deliver a Holdings Management Option, at the
Closing, exercisable for such number of shares of Holdings Common as set forth
on Schedule 2 hereto.
7.7 Holdings Agreements. Holdings will (i) adopt the Holdings
Stock Option Plan at or prior to the Closing, (ii) execute and deliver the
Stockholders Agreement at or prior to the Closing, (iii) execute and deliver a
Holdings Option for each Continuing Shareholder and Other Option Holder, at
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<PAGE> 23
the Closing, exercisable for such number of shares of Holdings Common as set
forth on Schedule 1 hereto, (iv) execute and deliver a Holdings Management
Option for each Continuing Option Holder, at the Closing, exercisable for such
number of shares of Holdings Common as set forth on Schedule 2 hereto and (v)
execute and deliver a warrant to purchase shares of Holdings Common,
substantially in the form of Exhibit B hereto (a "Holdings Warrant"), for each
Continuing Warrant Holder, at the Closing, exercisable for such number of
shares of Holdings Common as set forth on Schedule 3 hereto.
7.8 Debt Instruments. Island Partners, Ltd. will execute and
deliver a promissory note (the "IP Promissory Note") in the principal amount of
$200,000 at an annual rate of interest equal to that paid by Jillian's on
borrowings from its primary bank to be designated by the Board of Directors of
Holdings as of the Effective Time, substantially in the form of Exhibit C
hereto, at or prior to the Closing. Steven Foster and [ ] will execute and
deliver a promissory note (the "Foster Promissory Note") in the principal
amount of $375,000 at a 7% annual interest rate, substantially in the form of
Exhibit D hereto, at or prior to the Closing. Kevin Troy will execute and
deliver a promissory note (the "Troy Promissory Note") in the principal amount
of $50,000 at an annual rate of interest equal to that paid by Jillian's on
borrowing from its primary bank to be designated by the Board of Directors of
Holdings as of the Effective Time, substantially in the form of Exhibit E
hereto, at or prior to the Closing. The IP Promissory Note, the Foster
Promissory Note and the Troy Promissory Note are collectively referred to
herein as the "Debt Instruments." Each of Island Partners, Ltd., Steven Foster
and Kevin Troy hereby represents and warrants to Holdings and the JWC Group
that (i) such Borrower has all requisite power and authority to enter into the
applicable Debt Instrument, (ii) the execution and delivery of the applicable
Debt Instrument have been duly authorized by all necessary action on the part
of such Borrower, and (iii) the applicable Debt Instrument has been duly and
validly executed and delivered by such Borrower and constitutes a valid and
binding obligation of such Borrower, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights and by general equitable
principles (regardless of whether enforceability is considered in a proceeding
in equity or at law). At the Closing, Hold-
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ings will deliver to each Borrower the number of shares of Holdings Common for
which the applicable note serves as consideration, as set forth in such note.
Further, the Borrowers will each execute and deliver the Stockholders Agreement
at or prior to the Closing.
7.9 No Solicitation. None of Jillian's the Continuing
Shareholders, the Other Option Holders, the Continuing Option Holders, the
Borrowers or the Continuing Warrant Holders will (i) solicit, initiate,
facilitate or encourage any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, sale of shares
of capital stock or similar transactions involving Jillian's or any of its
subsidiaries, other than the transactions contemplated by this Agreement or the
Merger Agreement (any of the foregoing inquiries or proposals being referred to
in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal, or (iii) agree to, approve or
recommend any Acquisition Proposal; provided, however, that nothing contained
in this Agreement shall prevent Jillian's or its Board of Directors from
furnishing non-public information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity or recommending an
unsolicited bona fide written Acquisition Proposal to the shareholders of
Jillian's, if and only to the extent that the Board of Directors of Jillian's
determines in good faith by a majority vote, (x) after consultation with its
financial advisor, that such Acquisition Proposal would, if consummated, result
in a transaction more favorable to the shareholders of Jillian's from a
financial point of view than the transaction contemplated by this Agreement
(any such more favorable Acquisition Proposal being referred to in this
Agreement as a "Superior Proposal") and (y) based on the written opinion of
outside legal counsel, that failing to take such action would result in a
breach of its fiduciary duties to shareholders under applicable law.
7.10 Continuing Warrant Holders. The Continuing Warrant Holders
will each, at the Closing, deliver to Holdings any warrants to purchase shares
of Jillian's
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Common (each a "Jillian's Warrant") held by them (whether or not exercisable).
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE PARTIES
8.1 Conditions to Each Party's Obligation. The respective
obligations of each party to consummate the transactions contemplated hereby
are subject to the satisfaction (or waiver by the relevant party under the
Merger Agreement) at or prior to the Closing of each of the conditions set
forth in Sections 6.1 (a) through (h), 6.2 and 6.3 of the Merger Agreement.
8.2 Additional Conditions to Obligations of Holdings and JWC. The
obligations of Holdings and JWC to effect the transactions contemplated by this
Agreement are subject to the satisfaction of each of the following conditions,
any of which may be waived in writing exclusively by Holdings and JWC:
(a) Representations and Warranties. The representations
and warranties of Jillian's, the Continuing Shareholders, the Other Option
Holders, the Continuing Option Holders, the Borrowers and the Continuing
Warrant Holders set forth in this Agreement shall be true and correct as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date, except for changes contemplated by this Agreement, and
Holdings and JWC shall have received a certificate signed by each such party to
such effect.
(b) Performance of Obligations. Jillian's, the Continuing
Shareholders, the Other Option Holders, the Continuing Option Holders, the
Borrowers and the Continuing Warrant Holders shall have performed all
obligations required to be performed by them under this Agreement at or prior
to the Closing Date, and Holdings and JWC shall have received a certificate
signed by each such party to such effect.
(c) Opinion. Holdings shall have received the opinion of
Shaw Pittman Potts & Trowbridge, in form and substance reasonably acceptable to
Holdings,
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<PAGE> 26
dated the Closing Date, covering the matters set forth on Exhibit F hereto.
8.3 Additional Conditions to Obligations of Jillian's, the
Continuing Shareholders, the Other Option Holders, the Continuing Option
Holders, the Borrowers and the Continuing Warrant Holders. The obligations of
Jillian's, the Continuing Shareholders, the Other Option Holders, the
Continuing Option Holders, the Borrowers and the Continuing Warrant Holders to
effect the transactions contemplated by this Agreement are subject to the
satisfaction of each of the following conditions, any of which may be waived,
in writing, exclusively by Jillian's, the Continuing Shareholders, the Other
Option Holders, the Continuing Option Holders, the Borrowers and the Continuing
Warrant Holders:
(a) Representations and Warranties. The representations
and warranties of Holdings and JWC set forth in this Agreement shall be true
and correct as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date, except for changes contemplated by
this Agreement, and Jillian's, the Continuing Shareholders, the Other Option
Holders, the Continuing Option Holders, the Borrowers and the Continuing
Warrant Holders shall have received a certificate signed by each such party to
such effect.
(b) Performance of Obligations. Holdings and the JWC Group
shall have performed all obligations required to be performed by them under
this Agreement at or prior to the Closing Date, and Jillian's, the Continuing
Shareholders, the Other Option Holders, the Continuing Option Holders, the
Borrowers and the Continuing Warrant Holders shall have received a certificate
signed by each such party to such effect.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated, by any of the
parties hereto, prior to the Closing, in the event that the Merger Agreement is
terminated in accordance with its terms, and the transactions contemplated
hereby thereupon may be abandoned.
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9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall immediately become
void, and there shall be no liability or obligation on the part of Holdings,
the JWC Group, Jillian's, the Continuing Shareholders, the Other Option
Holders, the Continuing Option Holders, the Borrowers or the Continuing Warrant
Holders or their respective officers, directors, stockholders or affiliates,
except that a party may have liability to the other parties if the basis of
termination is a willful or reckless material breach by such party of one or
more of the provisions of this Agreement.
ARTICLE X
SURVIVAL
10.1 Survival. All representations and warranties contained in
this Agreement shall survive the Closing.
ARTICLE XI
MISCELLANEOUS
11.1 Amendment. This Agreement may be amended by the parties
hereto at any time. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
11.2 Extension; Waiver. At any time prior to the Closing, the
parties hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
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<PAGE> 28
11.3 Notices. All notices and other communications hereunder shall
be in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice). Any such notice or other communication shall be effective upon
receipt, if personally delivered or telecopied, or one day after delivery to a
courier for next-day delivery.
(a) if to JWC, the JWC Group or Holdings, to
J.W. Childs Associates, L.P.
One Federal Street, 21st Floor
Boston, MA 02110
Attention: Glenn A. Hopkins
Telecopy: (617) 753-1101
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
LLP
One Beacon Street
Boston, MA 02108
Attention: Louis A. Goodman
Telecopy: (617) 573-4822
(b) if to the Continuing Shareholders, the Other Option
Holders, the Continuing Option Holders, the Borrowers or the Continuing Warrant
Holders, to
Jillian's Entertainment Corporation
727 Atlantic Avenue
Boston, MA 02111
Attention: Steven L. Foster
Telecopy: (617) 350-5606
with a copy to
Jillian's counsel:
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<PAGE> 29
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attention: Steven L. Meltzer
Telecopy: (202) 663-8007
(c) if to Jillian's to:
Jillian's Entertainment Corporation
727 Atlantic Avenue
Boston, MA 02110
Attention: Steven L. Foster
Telecopy: (617) 350-5606
with a copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attention: Steven L. Meltzer
Telecopy: (202) 663-8007
11.4 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. As used in this Agreement, the
term "affiliate(s)" shall have the meaning set forth in Rule 12b-2 of the
Exchange Act.
11.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
11.6 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof.
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<PAGE> 30
11.7 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the Commonwealth of Massachusetts without regard
to any applicable conflicts of law.
11.8 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall
be made.
11.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of each of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
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<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have signed this Agreement
under seal as of the date first written above.
J.W. CHILDS EQUITY PARTNERS, L.P.
By: J.W. Childs Advisors, L.P.,
its general partner
By: J.W. Childs Associates, L.P.,
its general partner
By: J.W. Childs Associates, Inc.,
its general partner
By:
----------------------------------------------
Name: Glenn A. Hopkins
Title: Vice President
-------------------------------------------------
Glenn A. Hopkins, as agent and attorney-in-fact
for certain coinvestors under Purchaser Appointment
of Agent and Power of Attorney and not in his
individual capacity
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.
By:
---------------------------------------------
Name: Glenn A. Hopkins
Title: President
<PAGE> 32
JILLIAN'S ENTERTAINMENT CORPORATION
By:
------------------------------------------
Name: Steven L. Foster
Title: Chairman of the Board and
Chief Executive Officer
CONTINUING SHAREHOLDERS:
-------------------------------------------
Steven L. Foster
-------------------------------------------
Steven Rubin
-------------------------------------------
Kevin Troy
-------------------------------------------
Kerry Breitbart
THE BLIND TRUST UDT 3/26/93
By:
----------------------------------------
Name:
Title:
<PAGE> 33
CONTINUING SHAREHOLDERS (continued):
---------------------------------------------
Warren Berman
---------------------------------------------
William Hurlin
OTHER OPTION HOLDERS:
--------------------------------------------
Steven L. Foster
--------------------------------------------
Daniel M. Smith
--------------------------------------------
Stephen M. Weis
--------------------------------------------
Kevin Troy
--------------------------------------------
Steven Rubin
--------------------------------------------
Kerry Breitbart
<PAGE> 34
CONTINUING OPTION HOLDERS:
--------------------------------------------
King Cole
--------------------------------------------
Cary S. Toland
--------------------------------------------
Patricia Ambur
--------------------------------------------
Steven L. Meltzer
--------------------------------------------
Donald Leopold
--------------------------------------------
John L. Kidde
--------------------------------------------
Steven L. Foster
--------------------------------------------
Kevin Troy
--------------------------------------------
Daniel M. Smith
<PAGE> 35
CONTINUING OPTION HOLDERS (continued):
-------------------------------------------
Stephen M. Weis
-------------------------------------------
Ron Widman
THE BLIND TRUST UDT 3/26/93
By:
----------------------------------------
Name:
Title:
BORROWERS:
-------------------------------------------
Steven L. Foster
-------------------------------------------
Kevin Troy
<PAGE> 36
BORROWERS (continued):
ISLAND PARTNERS, LTD.
By:
----------------------------------------
Name:
Title:
<PAGE> 37
CONTINUING WARRANT HOLDERS:
--------------------------------------------
Kerry Breitbart
<PAGE> 38
CONTINUING WARRANT HOLDERS (continued):
KENNEY PROPERTIES
By:
------------------------------------------
Name:
Title:
<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 May 27, 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
- ------------
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
<PAGE> 3
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 May 27,
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 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") 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>
<CAPTION>
- --------------------------------------------------------------------------------
Summary of Certain Provisions of the Merger Agreement
- --------------------------------------------------------------------------------
<S> <C>
(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 Option 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.
- --------------------------------------------------------------------------------
(vii) Each Current Management Company Option will be exchanged for a
Holdings Management Option.
- --------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 5
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 Current Management Company Options, the Other
Option Holders (as defined below), the Continuing Warrant Holders and the
Borrowers (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
"Borrowers").
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
9,137,704 issued and outstanding shares of Common Stock held of record by
approximately 2,200 Shareholders. As of the Record Date, the members of the
Board and the
-3-
<PAGE> 6
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. The full
text of the written opinion of Stonebridge is included as Appendix B to this
Proxy Statement and incorporated herein by reference. 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
-4-
<PAGE> 7
60661. Copies of such material can be obtained from the Public Reference
Section of the 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, located at 727 Atlantic
Avenue, Suite 600, Boston, Massachusetts 02111, during regular business hours
by any Shareholder or such Shareholder's representative who has been so
designated in writing. A copy of the Schedule 13E-3 and any amendments
thereto, including exhibits filed as a part thereof, will be transmitted by the
Company to any Shareholder or such Shareholder's representative who has been so
designated in writing upon written request and at the expense of the requesting
Shareholder.
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.
-5-
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Heading Page
- ------- ----
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Financing of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Holdings and Sub Determination of Fairness
of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Interest of Certain Persons in Matters to be Acted Upon and
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Opinion of Stonebridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Material Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Regulatory Requirements and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Rights of Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
VOTING AND PROXY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Record Date; Outstanding Shares; Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Revocability of Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SPECIAL FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Bank and Equipment Lease Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Shareholder Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Seller, Landlord and Municipal Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Equity and Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Current Effects of Borrowings and Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Alternatives Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Payments to the Non-Continuing Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Preliminary Opinion of Bannon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Opinion of Stonebridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
-6-
<PAGE> 9
<TABLE>
<CAPTION>
Heading Page
- ------- ----
<S> <C>
Transaction Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Stock Trading History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Comparable Public Company Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Comparable Transaction Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Premiums Paid Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Discounted Cash Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Base Case Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Base Case Scenario (assuming that the Long Beach club is sold) . . . . . . . . . . . . . . . . 64
Additional Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Board of Directors Determination of Fairness of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Material Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Federal Income Tax Consequences for Continuing
Shareholders Resulting from the Corporate Formation . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Federal Income Tax Consequences for Non-Continuing
Shareholders Resulting from the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Federal Income Tax Consequences for Holders of Warrants to
Purchase Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Federal Income Tax Consequences for Holders of Options to
Purchase Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Purposes and Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Interest of Certain Persons in Matters to be Acted Upon and
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Effect if the Merger is Not Approved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
PROPOSAL TO APPROVE THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Certain Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Amounts Paid in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Payment for Common Stock in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Rights of Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Vote Required and Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
REGULATORY MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
FINANCING OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
MATERIAL TERMS OF THE PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
BUSINESS AND PROPERTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
</TABLE>
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<TABLE>
<CAPTION>
Heading Page
- ------- ----
<S> <C>
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Jillian's Clubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Description of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Administrative Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Jillian's Clubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Anticipated Effects of New Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Stock Options and Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
PRIOR CONTACTS BETWEEN THE COMPANY AND
CERTAIN AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
MARKET INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
DOCUMENTS INCORPORATED BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
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," "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"
and "Special Factors - Opinion of Stonebridge - Stock Trading History." 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, this requirement has not
been 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. Total Entertainment
Corporation has established twelve upscale billiard clubs primarily in the
South, including nine Bailey's billiard clubs in the South and Midwest 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. 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."
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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 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 "Special Factors - Opinion of Stonebridge - Stock Trading History") 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."
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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 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
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<PAGE> 15
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 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 2,200
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 Company retained the Placement
Agent on May 23, 1996.
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 in investing $12,000,000 in
Holdings. No other single prospective investor or group of prospective
investors was willing to invest $12,000,000 in Holdings. Two of the potential
investors each expressed an interest in leading a group of unrelated investors
that would invest up to $6,000,000 in Holdings. The Company did not continue
discussions with these two lead investors after the Childs Group expressed an
interest in investing twice as much in Holdings as either of these two
potential lead investors were interested in investing. In addition, the
Company ended its discussions with the two potential lead investors because it
believed that its transaction costs would be greater if it had to negotiate
with a group of unrelated investors as opposed to a single investor or a group
of related investors. While three other investors engaged in further
discussions with the Placement Agent, none of them indicated an amount that
they were willing to invest in Holdings prior to the point at which the Childs
Group expressed a willingness to invest $12,000,000 in Holdings. Once the
Childs Group indicated its interest and began discussions with the Company, the
Placement Agent discontinued its discussions with these three potential
investors.
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In February 1996, Daniel M. Smith, President, Chief Operating Officer
and a Director of the Company, was introduced to Childs by an individual who
had been referred to the Company by a personal friend of Mr. Foster. An
initial meeting was arranged with Childs, at which Mr. Foster, Mr. Smith and
the Placement Agent (at the invitation of the Company) were present. 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 Current
Management Company Options (as defined below), the Other Option Holders (as
defined below), the Continuing Warrant Holders (as defined below) and the
Borrowers (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 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 engaged Stonebridge on April
4, 1997.
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
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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") 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 recipients of Holdings Management 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 May 27, 1997
(the "Record Date") will be entitled to vote at the Special Meeting. As of the
Record Date, there were 9,137,704 issued and outstanding shares of Common Stock
held by approximately 2,200 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
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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
"Borrowers"). See "Material Terms of the Purchase Agreement."
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.
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<PAGE> 20
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."
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. However, if the Proposal is not approved and the Merger is not
consummated, at that time, the Company will assess whether it will seek to
structure another transaction or continue to retain the Placement Agent to
raise funds for the Company.
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.
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<PAGE> 21
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 all factors which it believed to
be material, which consist of 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, of
the functions of a special committee of the Board in an effort to protect
unaffiliated interests or to otherwise mitigate conflicts of interest, (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, (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, (x) the absence of a safeguard requiring a majority of the
Shareholders who are not controlling persons of the Company to approve the
Merger, and (xi) the loss of the opportunity of the Non-Continuing Shareholders
to gain from any potential appreciation of the market price of the Common Stock
above $0.50 per share (i.e, the Merger Payment). 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
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<PAGE> 22
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.
Interest of Certain Persons in Matters to be Acted Upon and 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").
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 and the Borrowers 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 and Mr. Smith each enter into an
employment/noncompetition agreement with the Surviving Company (collectively,
the "Employment/Noncompetition Agreements"), (ii) Holdings lend Mr. Foster and
his 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
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<PAGE> 23
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. See "Special Factors - Background of the
Merger - Alternatives Considered" for the identity of the 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). Steven Rubin, a
personal friend and business associate of Mr. Foster, held a total of 1,240,765
shares of Common Stock, as of the Record Date (approximately 13.6 percent of
the total shares of Common Stock outstanding). Mr. Rubin is not a member of
the Board or executive officer of the Company. 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 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
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<PAGE> 24
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. Currently, the Company and
Childs are exploring possible acquisition opportunities which the Company
anticipates may be consummated if the Private Placement is consummated.
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 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.
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<PAGE> 25
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.
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<PAGE> 26
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 this Proxy Statement, dated
April 18, 1997, (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.
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. 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
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<PAGE> 27
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 May 27, 1997, the average of high and low bid prices of the Common Stock was
$0.28 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."
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 May 27, 1997 as the record
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<PAGE> 28
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 exercisable, 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 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").
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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 Current Management Company Options, the Other
Option Holders (as defined below), the Continuing Warrant Holders and the
Borrowers (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 Steven L. Foster, Chief Executive Officer and Chairman of the Board
of the Company, and Kevin Troy, a Shareholder and advisor to the Company (the
"Borrowers").
As of the Record Date, there were 9,137,704 issued and outstanding
shares of Common Stock held by approximately 2,200 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."
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"), which 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.
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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.
-------------------------
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.
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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 "Proposal to Approve the Merger
- - Conditions to the Merger," "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" and "Special Factors - Opinion of Stonebridge - Stock Trading
History." 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, this
requirement has not been satisfied.
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."
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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. Total Entertainment
Corporation has established twelve upscale billiard clubs primarily in the
South, including nine Bailey's billiard clubs in the South and Midwest 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.
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 United States Trust
Company, 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
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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 March 31, 1997, Jillian's - Seattle had assets
and cash flow of approximately $740,620 and $767,462, respectively. At
March 31, 1997, the Company was in compliance with its obligations under the
loan, and the loan had a principal balance of $102,722. 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 March 31, 1997, Jillian's - Tacoma had assets and cash flow of
approximately $1,924,327 and $632,816, respectively, and Jillian's - Seattle
had assets and cash flow of approximately $740,620 and $767,462, respectively,
as mentioned above. At March 31, 1997, the Company was in compliance with
its obligations under the loan, and the loan had a principal balance of
$237,868. 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.
The Company obtained the third loan from United States Trust Company
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. At
March 31, 1997, Jillian's - Cleveland had assets and cash flow of
approximately $557,598 and $256,341, respectively. At March 31, 1997, the
Company was in compliance with its obligations under the loan, and the loan had
a principal balance of $201,389. 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
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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."
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
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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
March 31, 1997, Jillian's - Kendall had assets and cash flow of
approximately $422,296 and $31,512, respectively, and Jillian's - Annapolis had
assets and cash flow of approximately $763,381 and $326,864, respectively. At
March 31, 1997, the Company was in compliance with its obligations under the
lease, and $157,219 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.
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, Steven 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 March 31, 1997, 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.
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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 March 31, 1997, 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 interests in the
leasehold improvements, furniture, fixtures and equipment of the Company and
all interests 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 March 31, 1997, the Company was in compliance with
its obligations under the loan, and the loan had a principal balance of
$67,340. The Company believes, based on the historical operations of the
Cleveland Heights 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 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
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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 March 31, 1997, the Company was in compliance with
its obligations under the loan, and the loan had a principal balance of
$81,804. 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 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
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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 March 31, 1997, the Company was in compliance with its
obligations under the loan, and the loan had a principal balance of $440,332.
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 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
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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 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.
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In connection with the consummation of the Merger and the Private
Placement, Jillian's - Worcester 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 agreed to purchase each investor's
interest in the Worcester Limited Partnership, along with each investor's
interest in Jillian's Vending Limited Partnership (the "Vending Partnership"),
for an aggregate base purchase price of $500,000, subject to certain
adjustments described below. The Worcester Limited Partnership also agreed to
purchase all shares of Common Stock held by each investor for $0.50 per share.
The buy-out is contingent upon the Company consummating a private placement on
or before December 31, 1997 that nets at least $7,000,000. In addition, the
buy-out must close on or prior to December 31, 1997. The $500,000 aggregate
base purchase price shall be (i) reduced by any monthly income payments
distributed by the Worcester Limited Partnership to its limited partners, or
increased by any required monthly income payments not distributed to such
limited partners, prior to the closing of the buy-out, (ii) reduced by any
quarterly income payments distributed by the Vending Partnership to its limited
partners, or increased by any required monthly income payments not distributed
to such limited partners, prior to the closing of the buy-out, and (iii)
increased by an interest factor of 7.0 percent per annum because the buy-out
did not close on or before March 24, 1997; provided, however, that such
interest shall accrue only on the $500,000 aggregate base purchase price, as
reduced by any income payments made to the limited partners of the Worcester
Limited Partnership and the Vending Partnership. As of March 31, 1997, the
Worcester Limited Partnership has paid a total of $27,431 to its limited
partners, and the Vending Partnership has paid a total of $14,261 to its
limited partners.
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
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
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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 "Special Factors - Opinion of Stonebridge - Stock Trading History") 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.
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
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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 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.
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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 $2,716,721 was outstanding as of March 31, 1997. 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," "Shareholder Loans" 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 original 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 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
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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 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 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 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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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 2,200 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
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
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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, as an
independent third party, a preliminary opinion with respect to the Merger
Payment 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 attracting
additional potential sources of capital.
The Board also considered whether it would be prudent to sell the
Company at this time. 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 the National Association of Securities Dealers Automated
Quotation System ("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
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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
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.
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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 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
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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. In addition, the
Board decided that certain employees should receive shares of common stock in
the surviving company and 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. Shaw, Pittman, Potts & Trowbridge
advised the Board that the stock options and warrants of its employees could
not be considered for purposes of satisfying the continuity requirement. 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. 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
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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 in the merger.
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 in
investing $12,000,000 in Holdings. No other single prospective investor or
group of prospective investors was willing to invest $12,000,000 in Holdings.
Two of the potential investors each expressed an interest in leading a group of
unrelated investors that would
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invest up to $6,000,000 in Holdings. The Company did not continue discussions
with these two lead investors after the Childs Group expressed an interest in
investing twice as much in Holdings as either of these two potential lead
investors were interested in investing. In addition, the Company ended its
discussions with the two potential lead investors because it believed that its
transaction costs would be greater if it had to negotiate with a group of
unrelated investors as opposed to a single investor or a group of related
investors. While three other investors engaged in further discussions with the
Placement Agent, none of them indicated an amount that they were willing to
invest in Holdings prior to the point at which the Childs Group expressed a
willingness to invest $12,000,000 in Holdings. Once the Childs Group indicated
its interest and began discussions with the Company, the Placement Agent
discontinued its discussions with these three potential investors.
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 in view of 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 engaged
Stonebridge on April 4, 1997.
In February 1996, Daniel M. Smith, President, Chief Operating Officer
and a Director of the Company, was introduced to Childs by an individual who
had been referred to the
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Company by a personal friend of Mr. Foster. An initial meeting was arranged
with Childs, at which Mr. Foster, Mr. Smith and the Placement Agent (at the
invitation of the Company) were present. 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
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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 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.
Toland, 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 L. Meltzer is a partner in 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 the
receipt by Continuing Shareholders of Holdings Performance Options to purchase
a predetermined number of 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 Borrowers. The Other
Option Holders are: Steven L. Foster, Daniel M. Smith, Steven M. Weis, Kevin
Troy, Steven Rubin and Kerry Breitbart. In addition, the Borrowers 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
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bid prices of the Common Stock, as reported by The NASDAQ SmallCap Market, was
$0.53 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."
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.
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
because of 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." During the 52-week period ending April 22, 1997, the date
on which Stonebridge rendered its fairness opinion, the Common Stock traded in
the range of $0.09 to $0.38 per share.
Preliminary Opinion of Bannon
On October 2, 1995, Bannon presented its preliminary opinion, subject
to review 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
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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 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, acting on behalf of the Company in his
capacity as Chairman of the Board, engaged Bannon to undertake a study to
enable it to render a preliminary opinion to the Board with respect to the
proposed Merger Payment. In addition, Mr. Foster, on behalf of the Company,
agreed 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
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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-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
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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.
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
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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 this Proxy Statement, dated
April 18, 1997, (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 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. 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 amount 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 to 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 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,
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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 percent discount to the Company's
stock price as of that date. Over the three-year time period, the 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 percent 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 percent, 178 percent, 194 percent, 150
percent, and 138 percent 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 percent 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 percent was lower than six of the
eight peer companies, but higher than the peer group's mean of 47.5 percent.
The Company's gross margin, while higher than all but one peer company,
declined from 79.19 percent in 1994 to 77.2 percent 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 percent and 5.3 percent, respectively. In 1996, the
Company's EBITDA margin of 3.8 percent was lower than all but one of the peer
companies, and lower than the peer group's mean of 12.1 percent. The Company's
EBIT margin was also negative in 1994 and 1995. In 1996, the Company had an
EBIT margin of (1.7 percent), which
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was lower than six companies in the peer group, and lower than the group's mean
of 3.4 percent. Over the last three years, the Company has reported annual net
losses. In 1996, the Company's net margin of (3.3 percent) was lower than five
of the peer companies and lower than the mean of 3.4 percent. 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 equity 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 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
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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 percent.
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 percent.
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 percent to 0 percent. The mean to median
premiums paid over the target's stock price 30 days prior to the announcement
ranged from 38 percent to 14 percent.
Stonebridge also examined the Company's stock price both one day and
30 days prior to the announcement of the Merger proposed herein. 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 percent premium over the Company's stock price on both March 14, and
February 13, 1997.
Discounted Cash Flow Analysis. Stonebridge performed several
discounted cash flow analyses for the Company, as described below. 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 financial projections for the fiscal year ending March 31, 1998,
which are set forth in the table below, 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.
The Company's management provided to Stonebridge the following
financial projections relating to the operation of the Company's clubs for the
fiscal year ending March 31, 1998. The Board did not review or approve these
projections. The Company does not as a matter of course make public forecasts
or projections as to future revenues or earnings. Such projections were not
prepared with a view to complying with published guidelines of the American
Institute of Certified Public Accountants or the Commission regarding
projections and forecasts and were not prepared in accordance with generally
accepted accounting principles. None of such projections has been reviewed by
the Company's independent public accountants. In addition, because the
projections are based on a number of assumptions that are inherently subject to
significant economic and competitive uncertainties and contingencies, many of
which are beyond the control of the Company, and upon assumptions with respect
to future business decisions which are subject to change, there can be no
assurance that they will be realized, and actual results may vary materially
from those projected.
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<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31, 1998
<S> <C>
Revenues
Revenues from Club Operations $12,375,824
Interest Income 4,806
Other Income 105,673
===========
Total Revenues $12,486,303
Cost of Club Operations
Cost of Goods Sold $ 2,713,506
Wages 3,096,354
Rent 1,723,335
Direct Operating Costs 2,319,656
===========
Total Cost of Club Operations (a) $ 9,852,851
</TABLE>
(a) Earnings after interest but before amortization and depreciation.
In preparing the foregoing projections for fiscal 1998, the Company's
management applied a growth rate of 3.5 percent to the 1997 actual results for
the individual clubs. Management assumed that the Long Beach club would be
sold during fiscal 1998 and, thus, did not include such club in these
projections. In addition, because of the high cost and uncertainty associated
with external financing, in preparing these projections, management assumed
that no additional clubs would be opened.
Management's projections, as delivered to Stonebridge, did not include
certain expenses recorded at the corporate level and were unconsolidated. In
calculating projections for fiscal 1998 to perform its discounted cash flow
analyses for the Company, Stonebridge adjusted the projections of the Company
presented above to include operating expenses at the corporate level.
Stonebridge assumed corporate expenses at the same ratio to revenues as
calculated using the Company's fiscal 1996 results, which were audited by BDO
Seidman, LLP.
In calculating projections for 1999 through 2003 to perform its
discounted cash flow analyses for the Company, Stonebridge applied a growth
rate of 2.5 percent to the 1998 projections for the individual clubs, and
consolidated the results to include certain expenses recorded at the corporate
level. Stonebridge assumed that no additional clubs would be opened during
this four-year period. Further, in the Base Case (as defined below) scenario
(assuming that the Long Beach club is sold), Stonebridge assumed that the Long
Beach club would be sold at the end of fiscal 1998. While this assumption is
based on the objectives of the Company's management, Stonebridge assumed that
the sale would be delayed by one year because, as of the date of the opinion of
Stonebridge, the Company had no significant offers outstanding for the Long
Beach club.
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Base Case Scenario. Stonebridge analyzed the valuation of the Company
based upon an unlevered discounted cash flow analysis of the financial
performance of the Company as presented in the financial projections prepared
by management (the "Base Case"). This performance assumed a 3.5 percent
increase in revenues for fiscal 1998, and a 2.5 percent 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 percent to 35 percent, 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 percent 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 when the opinion was
rendered to the Board. 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.
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
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Company and each Continuing Shareholder who is not a controlling person of the
Company. In reaching this conclusion, the Board considered all factors which
it believed to be material, each of which is set forth below.
(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 supports 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
supports 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. These factors support the Board's
determination that the Merger is fair to the Shareholders.
(4) The performance by John L. Kidde, an independent director of
the Company, of the functions of a special committee of the Board in an effort
to protect unaffiliated interests or to otherwise mitigate conflicts of
interest. In this role, Mr. Kidde, on behalf of the Company, engaged
Stonebridge and coordinated the relationship between the Company and
Stonebridge during Stonebridge's preparation of its fairness opinion. In
addition, with the assistance of counsel, Mr. Kidde, on behalf of the Company,
negotiated the Merger Agreement, the Purchase Agreement and other documents
governing the terms and conditions of the Merger, the Corporate Formation and
the Private Placement. The Board asked Donald R. Leopold, the other
independent director of the Company, to serve on a special committee of the
Board with Mr. Kidde. While Mr. Leopold did participate in every Board meeting
regarding the Merger and related transactions, he informed the Board that he
was unable to commit the substantial amount of time required for participation
on a special committee. Mr. Leopold did not consult with Mr. Kidde outside of
the Board deliberations on the Merger and related transactions. The
performance by Mr. Kidde of the functions of a special committee supports the
Board's determination that the Merger is fair to the Shareholders.
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(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. 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, this requirement has not been satisfied. The Company's failure to
meet this requirement and the probable delisting of the Common Stock support
the Board's view that the Merger is fair. The Board believes that the Merger
will provide the Non-Continuing Shareholders with an opportunity to liquidate
their investment in the Company at a time when the termination of the Common
Stock's public trading market is imminent.
(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 3.5 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, which supports the Board's determination that the
Merger is fair to the Shareholders.
(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 52-week
period ending April 22, 1997, the date on which Stonebridge rendered its
fairness opinion, the Common Stock traded in the range of $0.09 to $0.38 per
share. During the past three 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
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has purchased shares of Common Stock for a price in excess of $0.25 per share.
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, particularly the Merger Payment.
(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.) However, the Board's decision not to solicit
indications of interest does not support the fairness of the Merger.
(10) The absence of a safeguard requiring a majority of the
Shareholders who are not controlling persons of the Company to approve the
Merger. 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
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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. The absence of such
a safeguard does not, however, support the fairness of the Merger.
(11) The loss of the opportunity of the Non-Continuing Shareholders
to gain from any potential appreciation of the market price of the Common Stock
above $0.50 per share (i.e, the Merger Payment). In light of the recent
trading prices and trading volume of the Common Stock (see "Market Information"
and "Special Factors - Opinion of Stonebridge - Stock Trading History") and the
continued poor financial health of the Company, the Board does not believe that
the market value of the Common Stock will attain or surpass $0.50 per share
absent a restructuring of the Company. The Board believes that the Merger
Payment will provide the Non-Continuing Shareholders a significant premium over
the current trading price of the Common Stock. Nevertheless, the loss of this
potential opportunity does not support the fairness of the Merger.
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 above,
factors 1 through 8 support the Board's conclusion; factors 9 through 11 do
not. Even though factors 9 through 11 are not supportive of the Board's
conclusion, the Board is of the view that these factors do not detract from the
overall fairness of the Merger, which is supported by factors 1 through 8.
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.
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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.
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
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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."
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,
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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 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
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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 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
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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 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 by the Shareholders and consummated,
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 by the Shareholders and consummated, 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 such 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
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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 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 2,200 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.
Interest of Certain Persons in Matters to be Acted Upon and 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.
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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 and Mr.
Smith each enter into an employment/noncompetition agreement with the Surviving
Company (collectively, the "Employment/Noncompetition Agreements"), (ii)
Holdings lend Mr. Foster and his 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 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. See "Special
Factors - Background of the Merger - Alternatives Considered" for the identity
of the 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). Steven Rubin, a
personal friend and business associate of Mr. Foster, held a total of 1,240,765
shares of Common Stock, as of the Record Date (approximately 13.6 percent of
the total shares of Common Stock outstanding). Mr. Rubin is not a member of
the Board or executive officer of the Company. 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.
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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 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
$_______, 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. Currently, the Company and Childs are exploring possible
acquisition opportunities which the Company anticipates may be consummated if
the Private Placement is consummated.
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. However, if the Proposal is not approved and
the Merger is not consummated, at that time, the Company will assess whether it
will seek to structure another transaction or continue to retain the Placement
Agent to raise funds for the Company.
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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"), 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 exercisable, 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;
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(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.
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.
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<PAGE> 79
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 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 Mr. Foster and designees, Mr. 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
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<PAGE> 80
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, 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 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
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<PAGE> 81
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 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 September
30, 1996 acceptable to the
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<PAGE> 82
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.
The Placement Agent commenced an offering of preferred stock of
Holdings on June 13, 1996 by mailing 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 in investing $12,000,000 in Holdings. No other single prospective
investor or group of prospective investors was willing to invest $12,000,000 in
Holdings. Two of the potential investors each expressed an interest in leading
a group of unrelated investors that would invest up to $6,000,000 in Holdings.
The Company did not continue discussions with these two lead investors after
the Childs Group expressed an interest in investing twice as much in Holdings
as either of these two potential lead investors were interested in investing.
In addition, the Company ended its discussions with the two potential lead
investors because it believed that its transaction costs would be greater if it
had to negotiate with a group of unrelated investors as opposed to a single
investor or a group of related investors. While the other three investors
engaged in further discussions with the Placement Agent, none of them indicated
an amount that they were willing to invest in Holdings prior to the point at
which the Childs Group expressed a willingness to invest $12,000,000 in
Holdings. Once the Childs Group indicated its interest and began discussions
with the Company, the Placement Agent discontinued its discussions with these
three potential investors.
In February 1996, Daniel M. Smith, President, Chief Operating Officer
and a Director of the Company, was introduced to Childs by an individual who
had been referred to the Company by a personal friend of Mr. Foster. An
initial meeting was arranged with Childs, at which Mr. Foster, Mr. Smith and
the Placement Agent (at the invitation of the Company) were present. 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 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.
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<PAGE> 83
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 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 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.
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<PAGE> 84
<TABLE>
<S> <C> <C>
Private Placement price per share of
Preferred Stock $0.93
Net tangible book value per share of
Common Stock at March 31, 1997
$0.13
Increase in net tangible book value
per share of Common Stock after
consummation of the Private Place-
ment and Merger, assuming the con-
version of Preferred Stock into
Holdings common stock at March
31, 1997
$0.32
-----
Pro forma net tangible book value
of Holdings common stock at
March 31, 1997
$0.45
=====
Dilution of net tangible book value
per share of Holdings common
stock, assuming the conversion of
Preferred Stock into Holdings com-
mon stock at March 31, 1997
$0.48
</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 ___ 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 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 $1,450,000, which consists of $________ 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 $250,000
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in accounting, travel and other expenses (including the fees and expenses of
Stonebridge). In addition, the Company has incurred legal expenses of
approximately $350,000 through March 31, 1997 in connection with the proposed
transaction.
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
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.
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.
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 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
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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. Currently, the Company and Childs are exploring
possible acquisition opportunities which the Company anticipates may be
consummated if the Private Placement is consummated. 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
are assisting 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 has enabled it to provide more efficient and effective
management, including the centralization of its administrative operations.
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<PAGE> 87
Jillian's Clubs. Set forth in the table below are descriptions of the
existing Jillian's clubs.
<TABLE>
<CAPTION>
DATE OF DESCRIPTION OF SPACE NUMBER OF BRUNSWICK
NAME OF COMMENCEMENT (APPROXIMATE BILLIARD TABLES; OTHER
SUBSIDIARY OWNER LOCATION OF CLUB OF OPERATIONS FOOTAGE) AMENITIES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jillian's - Kendall Miami, Florida November 1989 9,600 square feet; 27 tables; other table
located in a shopping top games; high tech
center next to a video games; bar and
nine-screen movie food service
theater
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Seattle Seattle, Washington April 1990 18,500 square feet; 34 tables; other table
two-story free top games; high tech
standing building video games; separate
room available for
private rental; bar
and food service on
both floors
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Cleveland Cleveland, Ohio (on July 1990 13,000 square feet; 25 tables; other table
the banks of the two floors of a top games; high tech
Cuyohoga River) building video games; separate
room available for
private rental; bar
and food service on
both floors
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Cleveland Cleveland Heights, November 1992 9,600 square feet 21 tables; other table
Heights Ohio top games; high tech
video games; bar and
food service
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Pasadena "Old Town" August 1993 7,200 square feet; 16 tables; bar and
Pasadena, two floors of a food service on both
California building with floors
additional outside
seating on the first
floor
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Worcester, December 1993 16,000 square feet, 24 tables; other table
Worcester1/ Massachusetts (near including a 5,000 top games; high tech
Worcester square foot game video games; bar and
Polytechnic room; one-story free food service
Institute) standing building
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Champaign, Illinois August 1994 12,000 square feet; 20 tables; other table
Champaign1/ (adjacent to the two-story free top games; high tech
University of standing building video games; bar and
Illinois campus) food service
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Annapolis, Maryland October 1994 10,000 square feet; 16 tables; other table
Annapolis1/ (near the U.S. one-story free top games; high tech
Naval Academy and standing building video games; bar and
the Annapolis food service
historical
district)
- -------------------------------------------------------------------------------------------------------------------------
Jillian's - Long Long Beach, May 1995 16,000 square feet; 16 tables; bar and
Beach California two floors of a food service;
13-story free nightclub located in
standing building the basement
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
DATE OF DESCRIPTION OF SPACE NUMBER OF BRUNSWICK
NAME OF COMMENCEMENT (approximate BILLIARD TABLES; OTHER
SUBSIDIARY OWNER LOCATION OF CLUB OF OPERATIONS FOOTAGE) AMENITIES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jillian's - Tacoma Tacoma, December 1995 25,000 square feet 25 tables; other table
Washington(near the including a game top games; high tech
University of Puget room; two-story free video games; bar and
Sound campus) standing building food service
- --------------------------------------------------------------------------------------------------------------------------
</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,expired on March 31, 1997, and was extended on a month-to month
basis indefinitely. The required monthly payments are $910.
Jillian's Clubs. Set forth in the table below are descriptions of the
leases for the Jillian's clubs.
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<PAGE> 89
<TABLE>
<CAPTION>
LEASE TERM OTHER & RENTAL PAYMENTS
LESSEE/ LEASE & RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT ENDED 3/31/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 5/26/89; triple net; 10 $192,000 ($16,000 per 6% of gross sales under 3/7/94 amendment,
Kendall amended years; two month); adjusted each in excess of lessor was granted
3/7/94 five-year renewal year based on increases $1,000,000 warrants to purchase
options in the Consumer Price 65,000 shares of
Index ("CPI"), but lessee's common stock
limited to 6% of the at $0.50 per share for
prior year's annual rent; a five-year period
all CPI adjustments rental payments
deferred until 1/1/95 by for FY-97 of $283,513,
3/7/94 amendment which includes taxes
and common area
maintenance charges
- ------------------------------------------------------------------------------------------------------------------------------
Jillian's - 8/29/89 triple net; 10 $258,000 ($21,500 per 3% of gross sales FY-97 rental payments
Seattle years; one month); beginning 3/91 in excess of totaled $359,947, which
five-year renewal and every 12th month $750,000; adjusted included taxes, common
option thereafter, monthly rent annually based on area maintenance
will increase based on increases in CPI, charges and percentage
increase in CPI, but no but no more than rent of $52,618 in cash
more than 6% annually; if 6%; two thirds of
option to renew lease is the percentage
exercised, rent shall be rental payments can
agreed to by both parties be made by issuing
and based on fair market the lessor warrants
value ("FMV") of to purchase shares
comparable rentals of the Company's
Common Stock on a
one share per
dollar basis
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-87-
<PAGE> 90
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RATE ENDED 3/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 4/20/90; triple net; 10 $69,615 ($5,801 per 5% of gross sales in 11/24/93 amendment
Cleveland amended years; two month) for years 1-4; excess of $1,392,300 temporarily limited rent
11/24/93 five-year renewal $80,325 ($6,694 per for years 1-4, and common area
options month) thereafter; $1,606,500 thereafter maintenance charges and
beginning year 7, rent lessor and lessee
will be increased to an subsequently verbally
amount equal to the agreed to limit the rents
lesser of (i) 105% of the indefinitely to $6,833
annual rent payable for per month from October
the prior lease year, or through March and $9,833
(ii) the annual rent per month from April
payable for the prior through September
lease year adjusted for
increases in CPI; if FY-97 rental payments
option to renew lease is totaled $74,502, which
exercised, rent shall be included taxes and common
negotiated, but will not area maintenance charges
be less than the greater
of comparable rentals or
the rent payable for the
last month of the
preceding term; rent for
each year of first
renewal period may not be
greater than 115% of
annual rent of last year
of initial term
- -----------------------------------------------------------------------------------------------------------------------------------
Jillian's - 10/17/91 triple net; 10 $57,240 ($4,770 per month none FY-97 rental payments for
Cleveland years; two starting 5/92) for years primary and option space
Heights five-year renewal 1 and 2; $68,688 ($5,724 totaled $108,399,
options per month) for years 3-6; which included taxes
$76,320 ($6,360 per and common area
month) for years 7-10; if maintenance charges
renewal option is
exercised, minimum annual
rent for each of the
options will be $91,584
and $106,848,
respectively
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-88-
<PAGE> 91
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RATE ENDED 3/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 8/19/93 1st sublease: 10 $33,048 ($2,754 per none FY-97 rental payments
Pasadena years; two month) for each year (for both subleases)
five-year renewal through 9/96; thereafter, totaled $165,656, which
options (1,377 sq. rent will be equal to FMV included taxes and common
ft. on ground of comparable rentals area maintenance charges
floor) with CPI adjustments
starting 4/1/98
2nd sublease: $68,928 ($5,744 per
10 years; expires month) for
8/31/97; three each year through
five-year renewal 9/30/94; thereafter, rent
options (5,744 sq. will be increased by
ft. in basement) CPI
both subleases provide
that if a renewal option
is exercised, rent for
such period shall be
agreed upon by the
parties and based on FMV
of comparable rentals
with certain CPI
adjustments
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-89-
<PAGE> 92
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RATE ENDED 3/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 4/21/93 triple net; 10 $123,780 ($10,315 per none separate lease for
Worcester years; two month starting 8/93) for parking spaces for the
five-year renewal years 1-3; $140,284 same term as building
options ($11,690 per month) for lease; annual rent is
years 4-5; $165,040 $13,200 for years 1-5 and
($13,753 per month) for $15,840 for years 6-10;
years 6-10; if renewal for the first and second
option exercised, rent renewal periods, rent
for each year of the will be $19,000 and
first 5-year period will $22,800, respectively
be $198,048, and of the
second 5-year period will FY-97 rental
be greater of $198,048 or payments totaled
80% of the then FMV for $189,728, which included
similar space taxes, parking rental and
common area maintenance
charges
- -----------------------------------------------------------------------------------------------------------------------------------
Jillian's - 4/14/93 triple net; 10 $64,800 ($5,400 per month none in 10/94, lessee entered
Champaign years; two starting 8/93) for years into separate leasing
five-year renewal 1 and 2; from April 1, agreement for parking;
options 1995, and on April 1 of annual rent is $5,220
each year thereafter, ($435 per month) and the
during the initial term lease expires on 9/1/97
and any extension term,
the monthly rental amount FY-97 rental
shall be adjusted by payments totaled $97,368,
increases in CPI which included taxes,
parking rental and common
area maintenance charges
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-90-
<PAGE> 93
<TABLE>
<CAPTION>
OTHER
LEASE TERM &
& RENTAL PAYMENTS
LESSEE/ LEASE RENEWAL MINIMUM FOR THE YEAR
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RATE ENDED 3/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 4/20/93 triple net; 10 $79,992 ($6,666 per month none FY-97 rental payments
Annapolis years; two starting 4/26/93) for totaled $125,838, which
five-year renewal year 1; $90,000 ($7,500 included taxes and common
options per month) for year 2; area maintenance charges
$99,996 ($8,333 per
month) for year 3;
beginning year 4, the
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; 10 $178,935 ($14,911 per none FY-97 rental payments
Long Beach years, two month starting 1/94) for totaled $286,612,
five-year renewal year 1; $220,790 ($18,399 which included taxes
options per month) for years 2-3; and common area
yearly increases of 5% maintenance charges
for years 4-10; if
renewal option 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; 10 $223,119 ($18,593 per none FY-97 rental payments
Tacoma amended 6/15/95 years month starting totaled $180,337, which
commencement of included taxes and common
operations or 1/1/96) for area maintenance charges
years 1-3; $224,119
($20,343 per month) for
years 4-6; $265,116
($22,093 per month) for
years 7-10
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-91-
<PAGE> 94
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
The Company had a net loss of approximately $941,900 for the fiscal
year ended March 31, 1997 as compared to a net loss of approximately $393,700
for the fiscal year ended March 31, 1996. The increase in the net loss of
approximately $548,200 for the fiscal year ended March 31, 1997 as compared to
the same period in 1996 was primarily due to a non-cash charge for the
impairment of long-lived assets of $450,000 (specifically related to the Long
Beach club), increased depreciation and amortization expense of approximately
$308,100 and additional interest expense of approximately $120,400. These
increases were offset partially by a decrease in general and administrative
expenses of approximately $17,700 and an improvement in club level operating
income of approximately $339,000. Increases in depreciation and interest
expense are primarily related to a full year of operations at the Tacoma club.
The Company's operations include approximately 3.5 months of Tacoma results in
fiscal 1996 compared to a full year in fiscal 1997. The Tacoma club's
operating income also increased by approximately $320,000 in fiscal 1997
compared to fiscal 1996.
The Company had revenues from the clubs of approximately $13,216,500
for the fiscal year ended March 31, 1997 as compared to approximately
$11,999,800 for the fiscal year ended March 31, 1996. The increase of
approximately $1,216,700 for the fiscal year ended March 31, 1997 as compared
to the fiscal year March 31, 1996 was primarily due to an increase in
comparable club sales of approximately $250,000 and increased revenues from the
Tacoma club of approximately $1,296,700, which opened in December 1995. These
increases were partially offset by decreased revenues of approximately $330,000
from the Long Beach club, which opened in May 1995. The increase in comparable
club revenue of approximately $250,000 or 3 percent was primarily attributed to
an increase in the majority of club revenues, with Seattle being the most
noteworthy at 16 percent. These increases were offset by a combined decrease
in club revenues at Miami and Annapolis of approximately 9 percent.
-92-
<PAGE> 95
During the third quarter of fiscal 1997, the Company analyzed numerous
options regarding the Long Beach club, which continues to incur operating
losses, including a sale of the unit. In this regard, the Company recorded a
write down of certain long-lived assets of its Long Beach club based upon its
determination that the projected cash flow from a sale would 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 was recorded during the third quarter of 1997. Since the third quarter,
the Company has not been able to attract a buyer at the current proposed
selling price for the Long Beach club. Accordingly, the Company recorded an
additional charge of $150,000 in the last quarter of fiscal 1997. A charge of
$450,000 for the Long Beach impairment is included as an expense of club
operations in the consolidated statements of operations for the fiscal year
ended March 31, 1997. See "Financial Statements of the Company."
During the fiscal year ended March 31, 1997 and 1996, the Company
pursued various financing alternatives to meet working capital and club
development cash needs. During fiscal 1997, such activities primarily
consisted of negotiating and structuring the Private Placement and the Merger.
In connection with the Company's proposed financing activities, the Company has
incurred legal and other professional fees of approximately $412,000 and
$394,000 in fiscal 1997 and 1996, respectively, which are included in general
and administrative expenses.
Interest expense was approximately $331,900 in fiscal 1997 as compared
to approximately $211,500 in fiscal 1996. This increase was primarily due to
additional borrowing associated with the development and openings of the Long
Beach and Tacoma clubs in 1995.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased by approximately
$24,000 during the fiscal year ended March 31, 1997. Cash provided by
operating activities was approximately $706,000 as a result of the net loss
incurred of approximately $941,900 offset by a non-cash charge for impairment
of long-lived assets, depreciation and amortization and changes in operating
assets and liabilities totaling approximately $1,648,000. The Company also
purchased approximately $201,000 in property and equipment primarily related to
club leasehold improvements and made distributions of approximately $347,500 to
minority interest limited partners during fiscal 1997. The Company obtained
bank and investor financing totaling $500,000 during fiscal 1997. The proceeds
from such borrowings were primarily used to fund required debt maturities
totaling approximately $681,600 for the fiscal year ended March 31, 1997.
The Company had ten clubs fully operational as of March 31, 1997. The
Company continues to experience significant cash flow and liquidity problems
and had a working capital deficiency of approximately $1,934,000 as of March
31, 1997. In addition, current maturities of notes and equipment leases
payable totaled approximately $1,222,900 as of March 31, 1997. The total
monthly payments, including interest, for such notes and leases in fiscal 1998
are set out in the table below. Certain notes payable are scheduled to mature
during fiscal 1998. Such maturities include $280,000 due in June 1997 and
$300,000 due in August 1997.
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<PAGE> 96
The Company's material commitments for capital expenditures as of the
end of the fiscal year ending March 31, 1997 primarily consist of payments for
leases and loans incurred to develop, operate and renovate the Jillian's clubs,
as well as certain cash distributions to limited partners, as described below.
The following table indicates the Company's aggregate lease payments, including
both equipment and building leases, and the aggregate amount of debt maturing
each month during fiscal 1998. Except for June and August, when final payment
comes due for the bridge notes and the note for The Blind Trust UDT 3/26/93
(see "Special Factors - Background of the Merger - Shareholder Loans"),
respectively, aggregate loan payments average $34,919 per month. Aggregate
equipment lease payments amount to $29,629 per month. Aggregate building rent
payments average $157,951 per month. The Company intends to use some of the
proceeds from the Private Placement to meet the aggregate lease and debt
payments when they come due.
<TABLE>
<CAPTION>
FISCAL YEAR 1998
- --------------------------------------------------------------------------------------------------------------------------
APRIL MAY JUNE JULY AUG. SEPT.
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL LOANS $ 37,091 $ 37,148 $352,072 $ 37,148 $334,336 $ 34,260
- ------------------------------------------------------------------------------------------------------------------------
TOTAL EQUIP. LEASES 29,629 29,629 29,629 29,629 29,629 29,629
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BLDG. RENTS 158,160 158,160 158,160 158,994 159,994 159,994
- ------------------------------------------------------------------------------------------------------------------------
TOTAL MONTHLY PAYMENTS $224,880 $224,937 $539,861 $225,771 $523,959 223,883
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
- --------------------------------------------------------------------------------------------------------------------------
OCT. NOV. DEC. JAN. FEB. MARCH
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL LOANS $ 34,336 $ 34,260 $ 34,336 $ 34,336 $ 33,099 $ 33,175
- --------------------------------------------------------------------------------------------------------------------------
TOTAL EQUIP. LEASES 29,629 29,629 29,629 29,629 29,629 29,629
- --------------------------------------------------------------------------------------------------------------------------
TOTAL BLDG. RENTS 156,994 156,994 156,984 156,994 156,994 156,994
- --------------------------------------------------------------------------------------------------------------------------
TOTAL MONTHLY PAYMENTS $220,959 $220,883 $220,949 $220,959 $219,722 $219,798
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Due to the Company's working capital deficiency and the significant
amount of fiscal 1998 debt maturities, the report of BDO Seidman, LLP,
independent certified public accountants to the Company, upon which the
financial statements of the Company as of March 31, 1997 and 1996 rely,
contains an explanatory paragraph regarding the Company's ability to continue
as a going concern. The Company's ability to meet its obligations and to
continue as a going concern is dependent upon consummation of the Merger and
the Private Placement. The Company also plans to refinance and consolidate
certain debt upon consummation of the Merger and the Private Placement.
However, there can be no assurance that the Merger will be approved by the
Shareholders, that the Merger will be consummated or that the Private Placement
will be consummated. For a description of the conditions to consummation of
the Merger, see "Proposal to Approve the Merger - Conditions to the Merger."
If the Merger and the Private Placement are not consummated, 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 Merger Agreement provides that all fees and expenses incurred in
connection with 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 the fees and expenses of Childs, and (ii) the Company
will pay Childs a one-time transaction fee of $200,000. In
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<PAGE> 97
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
Director's recommendation that the Shareholders vote in favor of the Merger.
Upon consummation of the Merger and the Private Placement, the
Surviving Company intends to develop additional Jillian's clubs. The Company
is currently investigating potential sites for clubs in Massachusetts and
certain other areas in the Midwest and Mid-Atlantic states. In fiscal 1997,
the Company executed a new lease for a club to be developed in Raleigh, North
Carolina, and Columbia, South Carolina. The new leases provide for minimum
monthly lease payments of approximately $20,400 through 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 consummating the
Merger and the Private Placement.
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 percent, 75 percent, 57
percent and 21 percent of the partnership interest 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 to repurchase the respective limited
partnership interests at a price calculated as described in the following
paragraph. Such requirement for a 3 percent limited partner investor in the
Cleveland Heights club was December 31, 1995. The Company has offered to
purchase the 3 percent interest for $22,500 in cash payments. To date, the
Company and the 3 percent investor have not agreed upon the terms or payment of
the purchase price.
The purchase price for the interest of a limited partner in any of the
clubs located in Cleveland Heights, Worcester 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 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 such
Common Stock for sale to the public. The Company's ability to fulfill its
obligations and the future value of the Common Stock is dependent on the
success of the Company's business and consummation of the Merger and the
Private Placement. 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. There can be no assurance that the Company can meet its future
cash distribution and other obligations to the partnerships or to the limited
partners, including its obligations under its guarantee to the limited
partners. In addition, there is no assurance as to the value of the Common
Stock in the event the limited partners exercise their options to sell their
units to the Company in exchange for Common Stock.
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<PAGE> 98
The Company intends to negotiate the acquisition of the limited
partnership interests described above upon consummation of the Merger and the
Private Placement. In March 1997, the Company entered into a purchase and sale
agreement to acquire the limited partnership interest in the Worcester Limited
Partnership for an aggregate purchase price of $500,000, payable to each seller
on a pro rata basis. The purchase price is subject to certain adjustments
depending on the date of closing of the sale. The sale is also contingent upon
the Company completing a $7,000,000 private placement on or before December 31,
1997. For a more detailed description of the terms and conditions of the
purchase and sale agreement, see "Special Factors - Background of the Merger -
Equity and Debt Financing."
Anticipated Effects of New Accounting Pronouncements
Stock Options and Warrants. Effective April 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
allows the Company to account for its stock-based compensation plans based upon
either a fair value method or the intrinsic value method previously followed by
the Company. The Company has retained the intrinsic value method of accounting
for stock-based compensation plans, and therefore, the adoption of SFAS No. 123
had no impact on the Company's financial position or results of operations.
As required by SFAS No. 123, the Company has disclosed the effects of applying
the fair value method on the net loss and net loss per share on a pro forma
basis.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued by the
Financial Accounting Standards Board is effective for financial statements for
fiscal years ending after December 15, 1997. The new standard establishes
standards for computing and presenting earnings per share. The Company does
not expect the adoption of this standard to have a material effect on its
consolidated financial statements.
The effect of adopting SFAS No. 128 has not been estimated. The
Company is required to adopt the disclosure required by SFAS No. 128 during the
year ending March 31, 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, at May 27, 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 10,716,976 shares, which
reflects the shares
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<PAGE> 99
issued and outstanding at May 27, 1997 of 9,137,704 and 1,579,272 shares
issuable pursuant to stock options issued under the Stock Option Plans and
warrants of the Company, respectively.
<TABLE>
<CAPTION>
Name, Position & Number of Shares Percent of Shares Outstanding
---------------- ---------------- -----------------------------
Business Address
----------------
<S> <C> <C>
Steven L. Foster, Chief Executive 1,521,100(1) 14.2%
Officer, Chairman of the Board
and a Director of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Daniel M. Smith, President, Chief 230,000(2) 2.1%
Operating Officer and a Director
of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Stephen M. Weis, Vice President of 30,000(3) (6)
Operations of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
Ronald Widman, Vice President of 30,000(4) (6)
Development of the Company
727 Atlantic Avenue, Suite 600
Boston, MA 02111
John L. Kidde, Director of the 68,250(5) (6)
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
All executive officers 1,929,350(10) 18.0%
and directors as a group
(six persons)
</TABLE>
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<PAGE> 100
- -------------
(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) Excludes 230,000 shares issuable pursuant to options held by
Mr. Smith.
(3) Excludes 30,000 shares issuable pursuant to options held by
Mr. Weis.
(4) Excludes 30,000 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 522,500,
230,000, 30,000, 30,000, and 250,000 shares issuable pursuant to options held
by Mr. Foster, Mr. Smith, Mr. Weis, Mr. Widman, and Mr. Troy, respectively.
-98-
<PAGE> 101
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
727 Atlantic Avenue, Officer of the Company since March 1991,
Suite 600 Chairman of the Board of the Company since
Boston, MA 02111 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
727 Atlantic Avenue, Operating Officer and a Director of the
Suite 600 Company since January 1995. Mr. Smith was
Boston, MA 02111 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
727 Atlantic Avenue, Development of the Company since June
Suite 600 1995. Prior to joining the Company, Mr.
Boston, MA 02111 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> 102
<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
727 Atlantic Avenue, Operations of the Company since June 1995.
Suite 600 Mr. Weis was Delivery Operations Manager
Boston, MA 02111 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
727 Atlantic Avenue, Company since its inception. Mr. Kidde is
Suite 600 currently the President of KDM Development
Boston, MA 02111 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
727 Atlantic Avenue, Company since April 1991. For the past
Suite 600 six years, he has been President of Game
Boston, MA 02111 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>
-100-
<PAGE> 103
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.
-101-
<PAGE> 104
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>
Year Ended Year Ended Year Ended Year Ended Year Ended
3/31/97 3/31/96 3/31/95 3/31/94 3/31/93
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
---------------------
Total revenue $13,216,495 $11,995,825 $7,969,247 $5,196,423 $3,620,756
Income/(loss) $ (941,928) $ (393,731) $ (863,056) $ (932,529) $ 64,824
from continuing
operations
Net income (loss) $ (941,928) $ (393,731) $ (863,056) $ (904,282) $ 161,834
Per Share Data:
---------------
Income (loss) $ (0.10) $ (0.04) $ (0.11) $ (0.12) $ 0.01
from continuing
operations
Net income $ (0.10) $ (0.04) $ (0.11) $ (0.12) $ 0.02
(loss)
Weighted average common 9,137,798 9,137,798 8,116,291 7,803,209 6,713,323
and common stock
equivalent shares
outstanding
Balance Sheet Data:
------------------
Working capital $(1,934,076) $(1,209,476) $ (24,485) $ 454,879 $ 555,641
(deficiency)
Total assets $ 8,704,461 $ 9,904,271 $7,847,472 $6,339,345 $5,352,088
Long-term $ 2,525,348 $ 3,374,095 $1,568,171 $ 589,291 $ 406,266
obligations
Stockholders' $ 1,902,500 $ 2,844,428 $3,111,746 $3,600,298 $4,049,771
equity
</TABLE>
-102-
<PAGE> 105
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 May 27, 1997, the Record Date, the average of high and low bid prices of the
Common Stock was $0.28 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
3/31/97 7/32 3/32
</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. Over the three years ended April 18, 1997, the average weekly
trading volume of the Common Stock was 27,387 shares, and over the 52 weeks
ended April 18, 1997, the average weekly trading volume of the Common Stock was
24,840 shares. See "Special Factors - Opinion of Stonebridge - Stock Trading
History." In addition, the Company has never declared a cash dividend and does
not intend to do so in the foreseeable future.
-103-
<PAGE> 106
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 N/A N/A N/A
Ended 12/31/94
Fourth Quarter Steven L. Foster, Chief 850,000 $0.25
Ended 3/31/95 Executive Officer,
Chairman of the Board
and a Director of the
Company
First Quarter N/A N/A N/A
Ended 6/30/95
Second Quarter N/A N/A N/A
Ended 9/30/95
Third Quarter N/A N/A N/A
Ended 12/31/95
Fourth Quarter N/A N/A N/A
Ended 3/31/96
First Quarter N/A N/A N/A
Ended 6/30/96
Second Quarter N/A N/A N/A
Ended 9/30/96
Third Quarter N/A N/A N/A
Ended 12/31/96
Fourth Quarter N/A N/A N/A
Ended
3/31/97
</TABLE>
-104-
<PAGE> 107
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>
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, 1997 and 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.
-105-
<PAGE> 108
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.
-106-
<PAGE> 109
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.
"BTS" means Building Trade Services Construction, Inc.
"Board" means the Board of Directors of the Company.
"Borrower/s" means Steven L. Foster and his designees, Kevin Troy or
Island, and any of them.
"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.
"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 certain Shareholders with whom the
Company has ongoing relationships, and any of them. They consist of Steven L.
Foster, Steven Rubin, Kevin Troy, Kerry Breitbart, Warren Berman, William
Hurlin and The Blind Trust UDT 3/26/93.
"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
-107-
<PAGE> 110
warrants to purchase the same number of shares of common stock of Holdings in
the Corporate Formation. They consist of Kerry Breitbart and the landlord of
the Seattle billiard club.
"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.
"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, who consist of King Cole, Cary
S. Toland, 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.
"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 and Daniel M. Smith will enter into
with the Surviving Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means the bank or trust company mutually acceptable
to the Company and Holdings that will accept the Letters of Transmittal and
Common Stock certificates of the Non-Continuing Shareholders and will
distribute the Merger Payments.
"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.
-108-
<PAGE> 111
"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.
"Foster Loan" means the loan from Holdings to Steven Foster and
designees for the purchase of shares of Holdings common stock.
"Holdings" means Jillian's Entertainment Holdings, Inc., a Delaware
corporation.
"Holdings Management Option/s" means those options to purchase common
stock of 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.
"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.
"Jillian's - Worcester" means Jillian's Billiard Club of Worcester,
Inc.
-109-
<PAGE> 112
"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.
"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. They consist of Steven L. Foster, Daniel M. Smith,
Steven M. Weis, Kevin Troy, Steven Rubin and Kerry Breitbart.
-110-
<PAGE> 113
"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 Current Management Company Options, the
Other Option Holders, the Continuing Warrant Holders and the Borrowers.
"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 May 27, 1997, the date as of which Shareholders
are shown on the Company's records as holders of issued and outstanding shares
of Common Stock.
"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.
-111-
<PAGE> 114
"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 and the Borrowers 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.
-112-
<PAGE> 115
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Financial Statements:
Pro Forma Combined Condensed Balance Sheet as of March 31, 1997....................................... F-3
Pro Forma Combined Condensed Statement of Operations for the Year Ended March 31, 1997................ F-4
Pro Forma Combined Condensed Statement of Operations for the Year Ended March 31, 1996................ F-5
Audited Financial Statements:
Report of BDO Seidman, LLP, Independent Auditors...................................................... F-6
Consolidated Balance Sheets as of March 31, 1997 and 1996............................................. F-7
Consolidated Statements of Operations for the Years Ended March 31, 1997 and 1996 .................... F-8
Consolidated Statements of Changes in Stockholder Equity for the Years Ended March 31, 1997
and 1996 ......................................................................................... F-9
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997 and 1996..................... F-10
Notes to Consolidated Financial Statements ........................................................... F-11
</TABLE>
F-1
<PAGE> 116
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 March 31, 1997 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 March 31, 1997. The
unaudited pro forma combined condensed statement of operations for the year
ended March 31, 1997 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. The
unaudited pro forma combined condensed statement of operations for 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, 1995.
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 elsewhere herein.
F-2
<PAGE> 117
JILLIAN'S ENTERTAINMENT AND HOLDINGS
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31,1997
(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.................. $ 622 $12,000 (a) $(2,577) (b) $ 8,571
(24) (b)
(1,450) (b)
Other current assets....................... 465 - - 465
------ ------- ------- -------
Total current assets 1,087 12,000 (4,051) 9,036
Property, leasehold improvements
and equipment, net............................ 6,556 - - 6,556
Goodwill, net................................... 752 - 3,631 (b) 4,383
Other assets.................................... 309 - - 309
------ ------- ------- -------
$8,704 $12,000 $ (420) $20,284
====== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities............................. $1,798 $ - $ - $ 1,798
Current portion of notes and equipment
leases payable.......................... 1,223 - - 1,223
------ ------- ------- -------
Total current liabilities.............. 3,021 - - 3,021
Notes and equipment leases payable, less
current maturities............................ 1,495 - - 1,495
Deferred rent................................... 1,031 - - 1,031
------ ------- ------- -------
Total liabilities...................... 5,547 - - 5,547
Minority interest............................... 1,255 - - 1,255
Redeemable preferred stock...................... - 12,000 (a) - 12,000
Total stockholders' equity...................... 1,902 - (420) (b) 1,482
625 (c)
(625) (c)
------ ------- ------- -------
$8,704 $12,000 $ (420) $20,284
====== ======= ======= =======
</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 they occurred on March 31, 1997. 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 $1,450,000 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> 118
JILLIAN'S ENTERTAINMENT AND HOLDINGS
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(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............................. $13,217 $ - $ - $13,217
------- ------- -------- -------
Cost of club operations......................... 10,970 - - 10,970
General and administrative expenses............. 1,690 - - 1,690
Depreciation and amortization expense........... 965 - 145 (a) 1,110
Income applicable to minority interests......... 207 - - 207
------- ------- -------- -------
Total costs and expenses............... 13,832 - 145 13,977
------- ------- -------- -------
Other income (expense):
Interest expense........................... (332) - - (332)
Interest income............................ 5 - 49 (b) 54
------- ------- -------- -------
(327) - 49 (278)
------- ------- -------- -------
Net loss ....................................... (942) - (96) (1,038)
Preferred stock dividends....................... - - (1,440) (c) (1,440)
------- ------- -------- -------
Net loss applicable to common and common
equivalent shares............................. $ (942) $ - $ (1,536) $(2,478)
======= ======= ======== =======
Net loss per common and common
equivalent shares............................. $ (.10) $ (.12)
======= =======
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> 119
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............................. $12,000 $ - $ - $12,000
------- --------- -------- -------
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)
Interest income............................ 15 - 49 (b) 64
------- --------- -------- -------
(197) - 49 (148)
------- --------- -------- -------
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............................. $ (.04) $ (.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> 120
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Jillian's Entertainment Corporation
Boston, Massachusetts
We have audited the accompanying consolidated balance sheets of Jillian's
Entertainment Corporation and subsidiaries as of March 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years 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 audits.
We conducted our audits 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 audits provide 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred substantial cash
flow and liquidity problems and has a significant working capital deficiency.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plan in regard to these matters is also described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
May 21, 1997
F-6
<PAGE> 121
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTE 2)
<TABLE>
<CAPTION>
===========================================================================================================================
For the years ended March 31, 1997 1996
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 622 259 $ 646 306
Inventory 178 401 204 581
Accounts receivable 52 611 63 386
Other current assets 234 017 166 035
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 1 087 288 1 080 308
PROPERTY, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net (Notes 3 and 4) 6 556 245 7 687 606
GOODWILL, net of accumulated amortization of
$315,000 and $262,000 752 133 805 384
OTHER ASSETS 308 795 330 973
- ---------------------------------------------------------------------------------------------------------------------------
$ 8 704 461 $ 9 904 271
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 890 031 $ 941 707
Accrued expenses and other liabilities 608 452 535 167
Due to shareholder 300 000 100 000
Current portion of notes and equipment
leases payable (Note 4) 1 222 881 712 910
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3 021 364 2 289 784
DEFERRED RENT 1 030 674 1 187 860
NOTES PAYABLE AND EQUIPMENT LEASES PAYABLE,
less current maturities (Note 4) 1 494 674 2 186 235
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 5 546 712 5 663 879
- ---------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS (NOTE 8) 1 255 249 1 395 964
- ---------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7 and 8):
STOCKHOLDERS' EQUITY (Note 4 and 7):
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 (7 642 915) (6 700 987)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1 902 500 2 844 428
- ---------------------------------------------------------------------------------------------------------------------------
$ 8 704 461 $ 9 904 271
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 122
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
========================================================================================================================
For the years ended March 31, 1997 1996
========================================================================================================================
<S> <C> <C>
REVENUES FROM CLUB OPERATIONS $13 216 495 $11 999 825
- ------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of club operations:
Cost of goods sold 2 983 936 2 736 704
Wages 3 045 320 2 745 768
Rent (Note 6) 1 868 901 1 685 014
Direct operating costs 2 622 356 2 475 614
Charge for impairment of long-lived
assets (Note 3) 450 000 -
General and administrative expenses 1 689 800 1 707 460
Depreciation and amortization expense 964 826 656 768
Income applicable to minority interest 206 790 189 613
- ------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 13 831 929 12 196 941
- ------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (615 434) (197 116)
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (331 904) (211 520)
Interest income 5 410 14 905
- ------------------------------------------------------------------------------------------------------------------------
Total other expense, net (326 494) (196 615)
- ------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (941 928) $ (393 731)
========================================================================================================================
NET LOSS PER SHARE OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS $ (.10) $ (.04)
========================================================================================================================
WEIGHTED AVERAGE COMMON STOCK AND COMMON
STOCK EQUIVALENT SHARES OUTSTANDING 9 137 798 9 137 798
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 123
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Total
For the years ended ------------------- Paid-in Accumulated Notes Stockholders'
March 31, 1997 and 1996 Shares Amount Capital Deficit Receivable Equity
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
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 - - 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
Net loss - - - (941 928) - (941 928)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, at
March 31, 1997 9 137 798 $9 138 $9 536 277 $(7 642 915) $ - $1 902 500
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 124
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31, 1997 1996
========================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (941 928) $ (393 731)
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 964 826 656 768
Charge for impairment of long-lived assets 450 000 -
Increase in paid-in capital for contribution of services - 23 000
Changes in operating assets and liabilities:
Inventory 26 180 (49 014)
Accounts receivable 10 775 (29 698)
Other assets (74 851) 29 706
Accounts payable (51 676) 362 922
Accrued expenses and other liabilities 116 099 282 518
Minority interest 206 790 189 613
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 1 648 143 1 465 815
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 706 215 1 072 084
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (201 167) (1 677 301)
Collection of notes receivable - 103 413
- ------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (201 167) (1 573 888)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 500 000 630 253
Repayment of notes and leases payables (681 590) (506 829)
Distributions to minority interest shareholders (347 505) (229 434)
- ------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (529 095) (106 010)
- ------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (24 047) (607 814)
CASH AND CASH EQUIVALENTS, beginning of year 646 306 1 254 120
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 622 259 $ 646 306
========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 350 044 $ 157 742
Income taxes $ - $ -
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 125
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
Organization 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 are the general partners and own
87%, 25%, 43% and 79% interests,
respectively.
Principles of
Consolidation The consolidated financial statements include
the accounts of Jillian's Entertainment
Corporation, and its wholly-owned
subsidiaries. The limited partnerships which
own the Cleveland Heights, Worcester,
Champaign and Annapolis clubs are
consolidated herein, since the Company
controls the operations of the limited
partnership. 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.
Reclassifications Certain reclassifications have been made to
the March 31, 1996 consolidated financial
statements to conform with the March 31, 1997
presentation.
Cash Equivalents Cash equivalents include interest-bearing
deposits with banks and short-term highly
liquid investments, with original maturities
of less than three months.
F-11
<PAGE> 126
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(Continued)
Inventory Inventory, primarily food and beverage, is
stated at cost. Cost is determined by the
first-in, first-out 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 expected renewal periods) or the useful
lives of the improvement which primarily
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 The excess of the cost 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 reviews at
each balance sheet date the value of its
long-lived assets and the goodwill related to
such assets for impairment in accordance with
Statement of Financial Accounting Standards
("SFAS") No. 121. The Company's valuation is
principally based on the profitability of the
clubs acquired in the original acquisitions
(Kendall, Seattle, and Cleveland) and the
ongoing value of the Jillian's concept based
on the clubs' estimated future cash flows
(undiscounted and without interest charges)
expected to result from the use of such
assets in accordance with SFAS No. 121.
Income Taxes The Company follows the liability method of
accounting for income taxes, as set forth in
SFAS No. 109, "Accounting for Income Taxes".
SFAS No. 109 prescribes an asset and
liability approach, which requires the
recognition of deferred tax liabilities and
assets for the expected future tax
consequences of temporary differences between
the carrying amounts and the tax basis of
assets and liabilities. The Company's policy
is to record a valuation allowance against
deferred tax assets
F-12
<PAGE> 127
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(Continued)
Income Taxes
(Continued) unless it is more likely than not that such
assets will be realized in future periods.
The Company considers estimated future
taxable income or loss and other available
evidence when assessing the need for its
deferred tax valuation allowance.
Due to Shareholder The amount due to shareholder of $300,000 and
$100,000 at March 31, 1997 and 1996,
respectively, represents amounts owed for
services rendered by an officer and
shareholder of the Company. The amount due
is non-interest bearing and has no fixed
repayment terms.
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.
Operating 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 concessions are recorded as
deferred rent and are amortized over the
terms of the lease.
Earnings/Loss
Per Share Primary 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. Fully diluted earnings per
share assumes that the proceeds were used to
purchase common shares outstanding at the
higher of the fair market value per share as
of the end of each period or 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 general and
administrative expenses incurred prior to a
club opening for business.
F-13
<PAGE> 128
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(Continued)
Start-up Costs
(Continued) The Company incurred no start-up costs for
the year ended March 31, 1997. Direct
operating costs included start-up costs
related to development stage clubs of
approximately $82,600 for the year ended
March 31, 1996.
Advertising Costs Advertising costs are charged to operations
as incurred. Advertising expense was
approximately $390,000 and $317,000 for the
years ended March 31, 1997 and 1996,
respectively.
New Accounting
Pronouncements Stock Options and Warrants - Effective April
1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation".
SFAS No. 123 allows the Company to account
for its stock-based compensation plans based
upon either a fair value method or the
intrinsic value method previously followed by
the Company. The Company has retained the
intrinsic value method of accounting for
stock-based compensations plans, and
therefore, the adoption of SFAS No. 123 had
no impact on the Company's financial position
or results of operations. As required by
SFAS No. 123, the Company has disclosed the
effects of applying the fair value method on
the net loss and net loss per share on a pro
forma basis (see Note 7).
Earnings Per Share - SFAS No. 128,"Earnings
Per Share", issued by the Financial
Accounting Standards Board is effective for
financial statements for fiscal years ending
after December 15, 1997. The new standard
establishes standards for computing and
presenting earnings per share. The Company
does not expect the adoption of this standard
to have a material effect on its consolidated
financial statements.
The effect of adopting SFAS No. 128 has not
been estimated. The Company is required to
adopt the disclosure required by SFAS No. 128
during the year ending March 31, 1998.
F-14
<PAGE> 129
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN AND
PROPOSED PRIVATE
PLACEMENT AND
MERGER TRANSACTION The Company's consolidated financial
statements have been prepared on the basis
that it will be able to continue as a going
concern. The Company has incurred
substantial cash flow and liquidity problems
and has a significant working capital
deficiency. Accordingly, the Company's
ability to continue as a going concern is
dependent upon the anticipated proceeds from
its proposed private placement and merger
transaction described below.
In March 1997, the Company entered into a
non-binding letter of intent providing for
the preliminary terms and conditions of a
proposed private placement and merger
transaction. Such transaction is subject to
the Company's stockholders' consideration and
vote. The proposed Merger Agreement 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") provides, among other matters,
for the following:
(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.
F-15
<PAGE> 130
JILLIAN'S ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN AND
PROPOSED PRIVATE
PLACEMENT AND
MERGER TRANSACTION
(Continued) The Company has determined that approximately
$2,600,000 in cash will be required in order
to make the merger payments. The Company
intends to use funds obtained from a private
placement of $12,000,000 of convertible
preferred stock of Holdings, pursuant to the
terms and conditions of a Purchase Agreement,
to make the merger payments. If the Merger
is approved by the Company's shareholders,
subject to the terms and conditions of the
Purchase Agreement, the private placement
will be consummated immediately prior to
consummation of the Merger.
If the Merger is not approved by the
Company's 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. Approval of the Merger will
require the favorable vote of the majority
of all outstanding shares of common stock.
The Merger Agreement also 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
the proposed investor group's fees and
expenses and (ii) the Company will pay the
proposed investor group a one-time
transaction fee of $200,000. In addition,
pursuant to the Merger Agreement, the Company
is obligated to pay the proposed investor
group 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
Director's recommendation that the
shareholders vote in favor of the Merger.
F-16
<PAGE> 131
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY,
LEASEHOLD
IMPROVEMENTS AND
EQUIPMENT, NET Property, leasehold improvements and
equipment consist of the following:
<TABLE>
<CAPTION>
March 31, 1997 1996
======================================================================================
<S> <C> <C>
Leasehold improvements $ 4 564 345 $ 5 487 014
Game equipment 1 393 477 1 391 937
Club and office equipment 1 598 990 1 772 683
Furniture and fixtures 629 231 720 323
Assets held for sale, net 747 032 -
--------------------------------------------------------------------------------------
8 933 075 9 371 957
Less accumulated depreciation (2 376 830) (1 684 351)
--------------------------------------------------------------------------------------
$ 6 556 245 $7 687 606
======================================================================================
</TABLE>
The Company has analyzed numerous options
regarding its Long Beach club, which has
continued to incur operating losses. During
the fourth quarter of 1997, the Company began
actively pursuing the sale of its Long Beach
club and, accordingly, has classified the
club's leasehold improvements and equipment
as "assets held for sale". The Company
wrote-down the value of its Long Beach
long-lived assets based upon its
determination that the estimated net proceeds
from a sale will not be sufficient for the
Company to recover the carrying value of the
club's long-lived assets. A charge of
$450,000 for the estimated impairment of the
club's long-lived assets is included as an
expense of club operations for the year ended
March 31, 1997 in the accompanying
consolidated statements of operations.
F-17
<PAGE> 132
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE Notes and equipment leases payable consist of the
following:
<TABLE>
<CAPTION>
March 31, 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable:
7% note payable to City of Long Beach, collateralized by the
assets of the Long Beach club and shares of the Company's
common stock as described below. The note is also guaranteed
by Jillian's Billiard Club of Pasadena, Inc. and Jillian's
Entertainment Corporation. Principal and interest is payable
in monthly installments of $5,507 beginning April 1, 1996.
Balance due 2006.
$ 440 322 $ 450 000
Note payable to unaffiliated third party with interest at prime
plus 3% (11.25% at March 31, 1997), collateralized by certain
assets of the Long Beach club, the Pasadena club and Jillian's
Entertainment Corporation. Principal and interest due on
August 1, 1997. The Company also issued the lender 50,000
warrants to purchase the Company's common stock (see Note 7).
300 000 -
25% notes payable to affiliated third parties. Interest only
payable semi-annually. Principal and accrued interest due May
and June 1997.
280 000 280 000
9.5% note payable to bank, collateralized by the assets of the
Tacoma club and by certain assets of the Seattle club.
Principal and interest payable in monthly installments of
$6,306. Balance due December 2000.
237 868 284 357
</TABLE>
F-18
<PAGE> 133
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued) Notes and equipment leases payable consist of
the following:
<TABLE>
<CAPTION>
March 31, 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank note payable with interest at the bank's base rate plus
1.5% (9.75% at March 31, 1997), collateralized by certain
property and equipment. Principal and interest payable in
monthly installments of $6,945. Balance due September 9,
1999.
201 389 -
Note payable to unaffiliated third parties with interest
accruing at 15% per annum (currently payable at 12%).
Principal and accrued interest due October 20, 1999.
185 000 185 000
Note payable to U.S. Government without interest. Payable in
monthly installments of $3,000 with principal balance due
April 28, 1998. Collateralized by 200,000 shares of the
Company's common stock.
166 792 199 792
9.5% note payable to bank collateralized by the assets of the
Seattle club. Principal and interest payable in monthly
installments of $4,205. Balance due May 18, 1999.
102 722 144 538
10% note payable to Champaign club landlord, collateralized by
certain assets of the Champaign club. Principal and interest
payable in monthly installments of $3,187. Balance due
September 1, 1999.
81 804 110 301
</TABLE>
F-19
<PAGE> 134
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued) Notes and equipment leases payable consist of
the following:
<TABLE>
<CAPTION>
March 31, 1997 1996
==================================================================================================
<S> <C> <C>
7% note payable to City of Cleveland Heights collateralized by
personal property and fixtures in the Cleveland Heights club.
Principal and interest payable in monthly installments of
$1,161. Balance due in March 1998.
67 340 76 219
8% note payable to seller of Pasadena club. Principal balance
paid in August, 1996.
- 175 000
8.5% note payable to unaffiliated third party. Principal
balance paid in August, 1996.
- 50 000
-----------------------------------------------------------------------------------------------
Total notes payable 2 063 237 1 955 207
-----------------------------------------------------------------------------------------------
Collateralized equipment lease payable:
12.6% leases payable collateralized by Tacoma club assets.
Payable in monthly principal and interest installments of
$6,762. Balance due December 2000.
245 772 294 556
11.9% equipment leases payable to unaffiliated third party.
Payable in monthly principal and interest installments of
$6,673. $30,000 buy-out due June 1999.
157 219 214 633
11.25% equipment leases payable to unaffiliated third party.
Payable in monthly installments of $11,953. Balance due in
March 1998.
135 068 255 826
</TABLE>
F-20
<PAGE> 135
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued) Notes and equipment leases payable consist of
the following:
<TABLE>
<CAPTION>
March 31, 1997 1996
=================================================================================================
<S> <C> <C>
Various other equipment leases payable to unaffiliated third
party. Payable in principal and interest installments
aggregating $4,240 per month, maturing in May 1998 through
September 2001.
116 259 178 923
------------------------------------------------------------------------------------------------
Total capital leases payable 654 318 943 938
------------------------------------------------------------------------------------------------
Total notes and equipment leases payable 2 717 555 2 899 145
Less current portion of notes and
equipment leases payable 1 222 881 712 910
------------------------------------------------------------------------------------------------
Long-term portion of notes
and equipment leases payable $1 494 674 $2 186 235
================================================================================================
</TABLE>
The aggregate amount of required payments
under the notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending March 31, Amount
================================================================================================
<S> <C>
1998 $ 932 486
1999 395 586
2000 357 492
2001 99 432
2002 48 114
Thereafter 230 127
------------------------------------------------------------------------------------------------
$2 063 237
================================================================================================
</TABLE>
As collateral on the City of Long Beach note
payable, 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
F-21
<PAGE> 136
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued) Company has agreed to continue to issue
additional shares of its common stock until
the outstanding loan balance is paid in full.
Future minimum lease payments under capital
lease obligation together with the present
value of the net minimum lease payments are
as follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
================================================================================================
<S> <C>
1998 $355 550
1999 202 095
2000 140 035
2001 77 947
------------------------------------------------------------------------------------------------
Total minimum lease payments 775 627
Less amounts representing interest 121 309
------------------------------------------------------------------------------------------------
Present value of net minimum lease payments $654 318
================================================================================================
</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. The tax
effects of significant items comprising the
Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
March 31, 1997 1996
================================================================================================
<S> <C> <C>
Gross deferred tax liabilities $ - $ -
================================================================================================
Deferred tax assets:
Accruals not yet deductible
for tax purposes $ 113 000 $ -
Charge for long-lived asset
impairment not yet deductible
for tax purposes 169 000 -
Contribution carryforward 8 700 8 000
Net operating loss carryforward 1 970 000 2 202 300
Capital loss carryforward 31 600 31 600
------------------------------------------------------------------------------------------------
Gross deferred tax assets 2 292 300 2 241 900
</TABLE>
F-22
<PAGE> 137
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
5. INCOME TAXES
(Continued) March 31, 1997 1996
================================================================================================
<S> <C> <C>
Deferred tax asset
valuation allowance (2 292 300 ) (2 241 900)
------------------------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
================================================================================================
</TABLE>
As of March 31, 1997, the Company has unused
operating loss carryforwards of approximately
$6,200,000 for federal income tax purposes,
subject to review by the Internal Revenue
Service. Approximately $4,000,000 of this
carryforward is limited, under Section 382 of
the Internal Revenue Code, to approximately
$350,000 per year. The Company may also
experience an additional reduction in its
loss carryforwards as a result of a change in
ownership in excess of 50% upon completion of
its proposed private placement and merger
transactions as described in Note 2. The
Company's loss 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 the Company's loss before income
taxes as follows:
<TABLE>
<CAPTION>
Year ending March 31, 1997 1996
================================================================================================
<S> <C> <C>
Income tax expense (benefit)
at federal statutory rate (34.0) % (34.0) %
Goodwill amortization 2.0 2.2
Operating losses generating
no current tax benefit 32.0 31.8
------------------------------------------------------------------------------------------------
Effective income tax rate 0.0 % 0.0 %
------------------------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE> 138
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OPERATING 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 is
obligated to pay the lessor minimum annual
rent equal to approximately $34,700 for the
second lease year and $37,800 for the third
lease year.
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
approximately as follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
================================================================================================
<S> <C>
1998 $1 839 000
1999 1 935 000
2000 1 587 000
2001 1 398 000
2002 1 306 000
Thereafter 3 275 000
------------------------------------------------------------------------------------------------
$11 340 000
================================================================================================
</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. The Company was
required to pay approximately $53,000 and
$42,000 in additional rent for the years ended
March 31, 1997 and 1996, respectively.
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.
F-24
<PAGE> 139
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS
AND WARRANTS At March 31, 1997, outstanding warrants and
options to purchase shares of the Company's
common stock were as follows:
<TABLE>
<CAPTION>
Amount
================================================================================================
<S> <C>
Warrants issued in connection with the Seattle club lease (a) 76 984
Warrants issued to public relations firm (b) 50 000
Warrants issued to former directors and officers (c) 262 500
Warrants issued in connection with the Miami club lease (d) 65 000
Consolidated Stock Option Plan (e) 145 500
1994 Stock Option Plan (f) 124 000
1995 Stock Option Plan (g) 1 345 000
Warrants issued to the City of Long Beach
note payable (see Note 4) 225 000
Warrants issued in connection with note payable (see Note 4) 50 000
------------------------------------------------------------------------------------------------
Total number of common shares issuable upon exercise
of warrants and stock options 2 343 984
================================================================================================
</TABLE>
(a) Under the terms of an amendment to
the Seattle club lease, the lessor
and the Company 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
were issued on the 15th 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:
<TABLE>
<CAPTION>
For Fiscal Warrants Exercise
Year Issued Price/Share
============================================================================
<S> <C> <C>
1993 12 608 .75
1994 15 637 .70
1995 20 631 .45
1996 28 108 .27
----------------------------------------------------------------------------
76 984
============================================================================
</TABLE>
F-25
<PAGE> 140
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS
AND WARRANTS
(Continued) (b) 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 $.50 per share.
(c) 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>
================================================================================
8/4/93 40 000 $.78
3/31/94 40 000 .70
1/23/95 40 000 .66
2/17/95 67 500 .66
2/17/95 75 000 .33
--------------------------------------------------------------------------------
262 500
================================================================================
</TABLE>
(d) 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). In exchange for the
amendment, the Company issued the
lessor 40,000 shares of its common
stock and granted the lessor warrants
to purchase 65,000 shares of its
common stock at $.50 per share. The
warrants are exercisable for a
five-year period.
F-26
<PAGE> 141
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS
AND WARRANTS
(Continued) (e) 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. As of March 31, 1997,
145,500 of these options are
outstanding. The outstanding options
are exercisable at $.66 per share to
the extent vested which is as
follows: 1) 141,300 options were
exercisable as of March 31, 1997 and
2) 4,200 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) 68,000 options in
fiscal 2004.
(f) On March 31, 1994, the Board of
Directors adopted the 1994 Director,
Adviser and Key Employee Stock Option
Plan (the "1994 Plan"). The following
1994 plan options are outstanding and
fully vested as of March 31, 1997:
<TABLE>
<CAPTION>
Options Exercise
Issued Price/Share Expiration Date
<S> <C> <C>
================================================================================
20 000 $.45 March 31, 2005
104 000 .66 March 31, 2004
--------------------------------------------------------------------------------
124 000
================================================================================
</TABLE>
(g) 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, allowed for the purchase of
1,645,000 shares of the Company's
common stock. As of March 31, 1997,
1,345,000 options remain outstanding.
The outstanding options are
exercisable at $.40 per share to the
extent vested, which is as follows:
1) 650,000 options were exercisable
F-27
<PAGE> 142
JILLIAN'S ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS
AND WARRANTS
(Continued) as of March 31, 1997, 2) 332,500
options will vest during 1998 and
1999, and 3) 30,000 options will vest
during 2000. All outstanding options
issued under the 1995 plan expire in
October 2005.
(h) On July 31, 1996, the Company issued
50,000 warrants to an unaffiliated
third party lender in connection with
a $300,000 loan payable. The
warrants have an exercise price of
$.50 per share and are fully vested
at March 31, 1997. The 50,000
warrants expire on July 31, 2001.
The Company accounts for its stock-based
compensation plans using the intrinsic value
method. Accordingly, no compensation cost
has been recognized since the option's
exercise price to purchase shares of the
Company's common stock was not less than the
common stock's market value on the date of
grant. The Company granted no stock-based
compensation options for the year ended March
31, 1997. Had compensation cost for the
Company's fiscal 1996 stock options (issued
under the 1995 Stock Option Plan) been
determined based on the fair value method,
using an option pricing model in accordance
with SFAS No. 123, the Company's net loss and
net loss per share would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ending March 31, 1997 1996
=====================================================================================
<S> <C> <C>
Net loss (in thousands):
As reported $ (942) $ (394)
Pro forma $ (1 026) $ (502)
Net loss per common share:
As reported $ (.10) $ (.04)
Pro forma $ (.11) $ (.05)
</TABLE>
F-28
<PAGE> 143
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS
AND WARRANTS
(Continued) In determining the pro forma amounts above,
the Company estimated the fair value of the
1996 options using the Black-Scholes option
pricing model with the following
weighted-average assumptions: dividend yield
of 0%, volatility of 35%, risk-free rates
ranging from 6.1% to 6.2% with an expected
life of ten years. The weighted average fair
value of options granted in fiscal 1996 was
approximately $200,000 and have a weighted-
average remaining life of 7.8 years.
8. MINORITY INTEREST
General 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 interest. 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 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
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.
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.
F-29
<PAGE> 144
JILLIAN'S ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTEREST
(Continued)
Jillian's Billiard
Club of Cleveland
Heights, Ltd.
(Continued) A 3% limited partner had the option to sell
their three Units to the Company upon the
transmittal to limited partner of the
financial statements for the partnership for
the 12 months ended December 31, 1995. The
Company has offered to purchase such Units at
a cash price equal to the amount paid by a
limited partner for his Units ($22,500). To
date, the limited partner and the Company has
not agreed upon the terms of the purchase.
A 10% limited partner will have the option to
sell its interest to the Company anytime
after January 1, 1997. The Company has
agreed to purchase the 10% interest at a
price equal to 500% of the annualized cash
flow of JBC 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 10-
day average bid and ask price prior to the
limited partner exercising its option to sell
its interest. To date, the Company and the
10% limited partner have not entered into a
purchase agreement.
Jillian's Billiard
Club of Worcester,
Ltd. The Worcester, Massachusetts club is owned by
Jillian's Billiard Club of Worcester Limited
Partnership (the "Worcester 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% limited partnership interest
was sold for $850,000.
The limited partners will have the option to
sell their Units to the Company during the
60-day period after the transmittal to
limited partners of the financial statements
of the Partnership for the 12 months ending
December 31, 1998.
F-30
<PAGE> 145
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTEREST
(Continued)
Jillian's Billiard
Club of Worcester,
Ltd.
(Continued) In March 1997, the Company entered into
Purchase and Sale Agreements (the
"Agreements") to acquire the 75% limited
partners interest in the Worcester
Partnership for an aggregate purchase price
of $500,000, payable to each seller on a pro
rata basis. The purchase price is subject to
certain adjustments depending on the date of
closing, as defined in the Agreements. The
Agreements are also contingent upon the
Company completing a private placement (see
Note 2) on or before December 31, 1997.
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% limited partnership interest
was sold for $325,000.
Forty-seven percent (47%) of the limited
partners had the option to sell their Units
to the Company, during the 60-day period
after the transmittal to limited partners of
the financial statements for the Partnership
for the 12 months ending December 31, 1996.
The limited partners did not exercise their
option to sell.
A 10% limited partner will have the option to
sell its interest to the Company 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 JBC 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 a 10-day
average bid and ask price, as defined in the
Partnership Agreement. The limited partner
does not have a demand registration right.
The Company has also guaranteed that owners
of the Units will receive distributions from
the Partnership equal to 140% of their
investment over a 6-year period. The
guarantee period commenced at the beginning
of first calendar quarter after the closing
of the sale of Units.
F-31
<PAGE> 146
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTEREST
(Continued)
Jillian's Billiard
Club of Annapolis,
Ltd. The Annapolis, Maryland club is owned by
Jillian's Billiard Club of Annapolis Limited
Partnership ("the 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
79% interest. The remaining 21% limited
partnership interest was sold for $133,084.
The limited partners will have the option to
sell their Units to the Company during the
60-day period after the transmittal to
limited partners of the financial statements
for the Partnership for the 12 months ending
December 31, 1997. If a limited partner
exercises their option, the purchase price
for the Units would be payable 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 is four times 50% of the net
income of the Partnership for the 12 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 also has agreed to
provide a right to the limited partners, for
a limited time, to register their 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 6-year
period. The guarantee period commenced at
the beginning of the first calendar quarter
after the closing of the sale of Units.
F-32
<PAGE> 147
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTEREST
(Continued)
Summary
Information The following is a summary of the limited
partnerships terms:
<TABLE>
<CAPTION>
Percent of
Original Minimum Purchase Price
Investment Annual Purchase Payable
by Limited Return Price in Cash/
Partners Guaranteed Put Date Multiple Common Stock
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Cleveland Heights $ 22 500 - 12/31/95 5 (a) 100%/ 0%
Cleveland Heights 100 000 - 01/01/97 5 0%/ 100%
Worcester 850 000 15% (b) 12/31/98 5 50%/ 50%
Champaign 325 000 23.33% (c) 12/31/96 - Put not exercised
Champaign 100 000 - 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 Company's ability to fulfill the above
obligations and the future value of the
Company's common stock is dependent on the
success of the business and the outcome of
the proposed transaction described at Note 2.
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.
F-33
<PAGE> 148
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTEREST
(Continued)
Summary
Information
(Continued) The minority interest liability balance in
the accompanying consolidated balance sheet
consists of the following:
<TABLE>
<CAPTION>
March 31, 1997 1996
<S> <C> <C>
========================================================================================
Cleveland Heights Limited
Partnership $ 109 400 $ 113 532
Worcester Limited Partnership 570 861 632 930
Champaign Limited Partnership 388 426 446 974
Annapolis Limited Partnership 186 562 202 528
----------------------------------------------------------------------------------------
$1 255 249 $1 395 964
========================================================================================
</TABLE>
F-34
<PAGE> 149
APPENDIX A
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY [ ], 1997
BY AND AMONG
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.,
JILLIAN'S ENTERTAINMENT ACQUISITION CORPORATION
AND
JILLIAN'S ENTERTAINMENT CORPORATION
===============================================================================
<PAGE> 150
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE I THE MERGER.............................................................................2
Section 1.1 The Merger.............................................................................2
Section 1.2 Consummation of the Merger.............................................................2
Section 1.3 Effects of the Merger..................................................................2
Section 1.4 Articles of Incorporation of the
Surviving Corporation..................................................................2
Section 1.5 By-Laws of the Surviving Corporation...................................................2
Section 1.6 Directors and Officers of the Surviving
Corporation............................................................................2
Section 1.7 Closing................................................................................3
Section 1.8 Capital Stock of Sub...................................................................3
Section 1.9 Cancellation of Jillian's Common Owned
by Holdings............................................................................3
Section 1.10 Jillian's Common Not Owned by Holdings
or the Continuing Shareholders.........................................................3
Section 1.11 Jillian's Stock Options................................................................3
Section 1.12 Jillian's Warrants.....................................................................4
Section 1.13 Exchange of Certificates...............................................................4
ARTICLE II REPRESENTATIONS AND WARRANTIES OF
JILLIAN'S..............................................................................6
Section 2.1 Organization of Jillian's..............................................................6
Section 2.2 Jillian's Capital Structure............................................................6
Section 2.3 Authority; No Conflict; Required Filings
and Consents...........................................................................7
Section 2.4 Financial Statements...................................................................9
Section 2.5 No Undisclosed Liabilities.............................................................9
Section 2.6 Accounts Receivable....................................................................9
Section 2.7 Accounts Payable......................................................................10
Section 2.8 Inventory.............................................................................10
Section 2.9 Absence of Certain Changes or Events..................................................10
Section 2.10 Properties; Encumbrances..............................................................10
Section 2.11 Equipment and Leasehold Improvements..................................................10
Section 2.12 Taxes.................................................................................11
Section 2.13 Intellectual Property.................................................................12
Section 2.14 Contracts and Commitments.............................................................14
Section 2.15 Jillian's Suppliers...................................................................15
Section 2.16 Insurance.............................................................................15
Section 2.17 Labor Difficulties....................................................................15
Section 2.18 Litigation............................................................................16
Section 2.19 Environmental Matters.................................................................16
Section 2.20 Employee Benefit Plans................................................................17
</TABLE>
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<TABLE>
<S> <C> <C>
Section 2.21 Personnel.............................................................................19
Section 2.22 Agreements in Full Force and Effect...................................................19
Section 2.23 Compliance with Laws..................................................................19
Section 2.24 Insider Interests.....................................................................19
Section 2.25 Proxy Statement.......................................................................20
Section 2.26 Opinion of Financial Advisor..........................................................20
Section 2.27 Brokers and Finders...................................................................20
Section 2.28 Disclosure............................................................................20
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
HOLDINGS AND SUB......................................................................21
Section 3.1 Organization of Holdings and Sub......................................................21
Section 3.2 Capital Structure of Holdings and Sub.................................................21
Section 3.3 Authority; No Conflict; Required Filings
and Consents..........................................................................22
ARTICLE IV CONDUCT OF BUSINESS...................................................................23
Section 4.1 Covenants of Jillian's................................................................23
Section 4.2 Cooperation...........................................................................26
ARTICLE V ADDITIONAL AGREEMENTS.................................................................26
Section 5.1 Proxy Statement.......................................................................26
Section 5.2 Access to Information.................................................................27
Section 5.3 Supplements to Jillian's Disclosure
Schedule..............................................................................28
Section 5.4 Approval of Stockholders..............................................................28
Section 5.5 Legal Conditions to Merger............................................................28
Section 5.6 Consents..............................................................................28
Section 5.7 Jillian's Management Stock Options....................................................29
Section 5.8 Holdings Agreements...................................................................29
Section 5.9 Jillian's Agreements..................................................................29
Section 5.10 No Solicitation.......................................................................29
Section 5.11 Minority Interests....................................................................30
Section 5.12 Additional Agreements; Reasonable Efforts.............................................30
ARTICLE VI CONDITIONS TO MERGER..................................................................31
Section 6.1 Conditions to Each Party's Obliga-
tion to Effect the Merger.............................................................31
Section 6.2 Additional Conditions to
Obligations of Holdings and Sub.......................................................32
Section 6.3 Additional Conditions to
Obligations of Jillian's..............................................................33
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE VII SURVIVAL AND INDEMNIFICATION..........................................................34
Section 7.1 Survival..............................................................................34
Section 7.2 Indemnification by Jillian's..........................................................35
Section 7.3 Procedures Relating to Indemnifica-
tion..................................................................................36
ARTICLE VIII TERMINATION; FEES AND EXPENSES........................................................37
Section 8.1 Termination...........................................................................37
Section 8.2 Effect of Termination.................................................................38
Section 8.3 Fees and Expenses.....................................................................39
ARTICLE IX MISCELLANEOUS.........................................................................40
Section 9.1 Amendment.............................................................................40
Section 9.2 Extension; Waiver.....................................................................40
Section 9.3 Notices...............................................................................40
Section 9.4 Interpretation........................................................................41
Section 9.5 Counterparts..........................................................................41
Section 9.6 Entire Agreement......................................................................42
Section 9.7 Governing Law.........................................................................42
Section 9.8 Severability..........................................................................42
Section 9.9 Assignment............................................................................42
Exhibit A Form of Purchase Agreement
Exhibit B Form of Voting Agreement
Exhibit C Form of Holdings Stock Option Plan
Exhibit D Form of Holdings Stock Option
Agreement
Exhibit E Form of Employment/Non-Competition Agreement
Exhibit F Form of Management Agreement
Exhibit G Form of Stockholders Agreement
Exhibit H Form of License Agreement
Exhibit I Form of Option Agreement
Exhibit J Matters to be Covered by Opinion of Jillian's
Counsel
Exhibit K Matters to be Covered by Opinion of Counsel to JWC
Schedule 1 Jillian's Rollover Options
Schedule 2 Jillian's Non-Rollover Options
Schedule 3 Additional Jillian's Fees and Expenses
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May [ ], 1997
(this "Agreement"), by and among Jillian's Entertainment Holdings, Inc., a
Delaware corporation ("Holdings"), Jillian's Entertainment Acquisition
Corporation, a Florida corporation and a wholly owned subsidiary of Holdings
("Sub") and Jillian's Entertainment Corporation, a Florida corporation
("Jillian's").
WHEREAS, pursuant to the terms of a purchase agreement, dated
the date hereof, substantially in the form of Exhibit A hereto (the "Purchase
Agreement"), J.W. Childs Equity Partners, L.P., a Massachusetts limited
partnership ("JWC"), and certain related persons or entities (together with
JWC, the "JWC Group") will, at the Closing (as defined below), contribute
$12,000,000 to Holdings in exchange for shares of Series A 12% Convertible
Preferred Stock of Holdings, par value $.001 per share ("Holdings Series A
Preferred Stock");
WHEREAS, pursuant to the terms of the Purchase Agreement,
certain shareholders of Jillian's (collectively, the "Continuing Shareholders")
will, at the Closing, contribute all of the shares of Common Stock of
Jillian's, par value $.001 per share ("Jillian's Common"), owned by them to
Holdings in exchange for shares of Common Stock of Holdings, par value $.001
per share, ("Holdings Common") and options to purchase additional shares of
Holdings Common ("Holdings Options");
WHEREAS, the parties intend that, as soon as practicable
after the execution of this Agreement, Sub will merge with and into Jillian's
(the "Merger"), with Jillian's to be the surviving entity, all pursuant to the
terms and conditions of this Agreement and that, upon the effectiveness of the
Merger, each share of Jillian's Common not owned by Holdings (it being
understood that Holdings will then own the shares of Jillian's Common presently
owned by the Continuing Shareholders) will be converted into the right to
receive $0.50 in cash (the "Merger Consideration");
WHEREAS, in furtherance of the Merger (i) the Boards of
Directors of Jillian's, Holdings and Sub have each approved this Agreement and
the transactions contemplated hereby and (ii) in order to induce Holdings and
Sub to enter into this Agreement, concurrently with the execution hereof,
Holdings, JWC and the Continuing Shareholders are entering into a voting
agreement, dated the date hereof, substantially in the form of Exhibit B hereto
(the "Voting Agreement");
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and
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agreements set forth below, and for other good and valuable consideration, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions
of this Agreement, at the Effective Time (as defined in Section 1.2), Sub shall
merge with and into Jillian's in accordance with the Florida Business
Corporation Act (the "FBCA") and the separate corporate existence of Sub shall
thereupon cease and Jillian's shall continue as the surviving corporation.
Jillian's, in its capacity as the corporation surviving the Merger, is
sometimes hereinafter referred to as the "Surviving Corporation."
Section 1.2 Consummation of the Merger. In order to
effectuate the Merger, on the Closing Date (as defined in Section 1.7),
Jillian's shall cause articles of merger (the "Articles of Merger") to be filed
with the Department of State of Florida, in such form as required by, and
executed in accordance with, the FBCA. The Merger shall be effective as of the
time of filing of the Articles of Merger (the "Effective Time").
Section 1.3 Effects of the Merger. The Merger shall have
the effects provided for in Section 607.1106 of the FBCA.
Section 1.4 Articles of Incorporation of the Surviving
Corporation. At and after the Effective Time, the Articles of Incorporation of
Sub, as in effect immediately prior to the Effective Time (the "Sub Articles of
Incorporation"), shall be the Articles of Incorporation of the Surviving
Corporation, until amended in accordance with the FBCA, except that the name of
the Surviving Corporation shall be Jillian's Entertainment Corporation.
Section 1.5 By-Laws of the Surviving Corporation. At and
after the Effective Time, the By-laws of Sub (the "Sub By-laws"), as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation, until amended in accordance with the FBCA.
Section 1.6 Directors and Officers of the Surviving
Corporation. The directors and officers of the Surviving Corporation shall be
determined by Holdings as the sole shareholder of the Surviving Corporation,
each to hold office in accordance with the Articles of Incorporation and
By-laws of the Surviving Corporation.
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Section 1.7 Closing. Subject to Section 8.1, the closing of
the Merger (the "Closing") shall take place at 10:00 a.m., E.S.T., on the later
of (a) June 20, 1997 or (b) the first business day after satisfaction or waiver
of the latest to occur of the conditions set forth in Article VI, at the
offices of Skadden, Arps, Slate, Meagher & Flom LLP, One Beacon Street, Boston,
Massachusetts or on such other date, or at such other time or place, as is
agreed to in writing by JWC and Jillian's. The date on which the Closing shall
occur is referred to herein as the "Closing Date."
Section 1.8 Capital Stock of Sub. At the Effective Time,
each issued and outstanding share of Common Stock, par value $.001 per share,
of Sub ("Sub Common Stock") shall be converted into and become one fully paid
and nonassessable share of Series A Common Stock, par value $.001 per share, of
the Surviving Corporation and one fully paid and nonassessable share of Series
B Common Stock, par value $.001 per share, of the Surviving Corporation.
Section 1.9 Cancellation of Jillian's Common Owned by
Holdings. At the Effective Time, all shares of Jillian's Common that are owned
by Holdings (it being understood that Holdings will then own the shares of
Jillian's Common presently owned by the Continuing Shareholders) will be
cancelled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
Section 1.10 Jillian's Common Not Owned by Holdings or the
Continuing Shareholders. At the Effective Time, subject to Section 1.13, each
issued and outstanding share of Jillian's Common (other than shares of
Jillian's Common cancelled in accordance with Section 1.9) shall be converted
into the right to receive $0.50 in cash. All such shares of Jillian's Common,
when so converted, shall no longer be outstanding and shall automatically be
cancelled and retired and shall cease to exist, and each holder of a
certificate representing any such shares shall cease to have any rights with
respect thereto, except the right to receive the Merger Consideration pursuant
to this Section 1.10 upon the surrender of such certificate in accordance with
Section 1.13.
Section 1.11 Jillian's Stock Options.
(a) Rollover of Certain Options. As of the
Effective Time, each option (whether or not then vested or exercisable) to
purchase Jillian's Common (a "Jillian's Management Option") granted under the
Consolidated Stock Option Plan, the 1994 Director, Adviser and Key Employee
Stock Option Plan or the 1995 Director, Adviser and Key Employee Stock Option
Plan, (collectively, the "Jillian's Stock Option Plans"), which is listed on
Schedule 1 hereto and which is outstanding as of the Effective
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Time, will, in accordance with the terms of the Purchase Agreement, be
converted into an option (a "Holdings Management Option") to purchase the
number of shares of Holdings Common equal to the number of shares of Jillian's
Common subject to such Jillian's Management Option immediately prior to the
Effective Time, at an exercise price per share equal to the exercise price per
share of such Jillian's Management Option. After the Effective Time, each
Holdings Management Option shall be exercisable upon the terms and conditions
set forth in the Holdings Stock Option Plan and Holdings Stock Option
Agreements, substantially in the form of Exhibits C and D hereto, respectively.
(b) Cashout of Certain Options. As of the
Effective Time, each Jillian's Management Option which is listed on Schedule 2
hereto and which is outstanding as of the Effective Time, will be cancelled in
exchange for a single lump sum cash payment equal to the product of (1) the
number of shares of Jillian's Common subject to such Jillian's Management
Option and (2) the excess, if any, of the Merger Consideration over the
exercise price per share of such Jillian's Management Option.
(c) Consents. Prior to the Effective Time,
Jillian's shall (i) obtain any consents from holders of Jillian's Management
Options and (ii) amend the terms of the Jillian's Stock Option Plans, in each
case as is necessary to give effect to the provisions of paragraphs (a) and (b)
of this Section 1.11.
Section 1.12 Jillian's Warrants. Except as otherwise
provided with warrant holders, at the Effective Time, each outstanding warrant
to purchase Jillian's Common (individually a "Jillian's Warrant" and
collectively the "Jillian's Warrants") will, pursuant to the terms thereof, be
converted into a right to receive $0.50 in cash from Jillian's upon payment to
Jillian's of the exercise price of such Jillian's Warrant.
Section 1.13 Exchange of Certificates.
(a) Exchange Agent. At the Closing, Holdings will
enter into an Exchange Agreement (the "Exchange Agreement") with a bank or
trust company mutually acceptable to Holdings and Jillian's (the "Exchange
Agent"). As of the Effective Time, Holdings will deposit with the Exchange
Agent pursuant to the Exchange Agreement, for the benefit of the holders of
shares of Jillian's Common, for exchange in accordance with this Section 1.13
and the Exchange Agreement, $2,577,154 to be disbursed pursuant to Section 1.10
and the Exchange Agreement in exchange for outstanding shares of Jillian's
Common. All deposits with the Exchange Agent pursuant to this Section 1.13(a)
are referred to herein as the "Exchange Fund."
(b) Exchange Procedures. As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall
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mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Jillian's Common (individually, a "Certificate" and collectively, the
"Certificates") whose shares were each converted pursuant to Section 1.10 into
the right to receive $0.50 in cash (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Holdings and
Jillian's may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor, promptly upon
surrender of such Certificate, $0.50 in cash for each share of Jillian's Common
represented by such Certificate. In no event will the holder of any such
Certificate be entitled to receive interest on the Merger Consideration. Until
surrendered as contemplated by this Section 1.13(b), each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender $0.50 in cash for each share of Jillian's Common
represented by such Certificate.
In the event that any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if Holdings
shall reasonably conclude that such affidavit does not adequately protect
Holdings or the Surviving Corporation, upon the posting by such person of a
bond in such amount as Holdings or the Surviving Corporation may reasonably
direct as indemnity against any claim that may be made against either of them
with respect to such Certificate, the Exchange Agent will distribute, as
provided in this Section 1.13, in respect of such lost, stolen or destroyed
Certificate $0.50 per share of Jillian's Common represented by such lost,
stolen or destroyed Certificate.
(c) Termination of Exchange Fund. Upon the
expiration of the term of the Exchange Agreement, any portion of the Exchange
Fund which remains undistributed to the holders of Jillian's Common shall be
delivered to Holdings, upon demand, and any holders of Jillian's Common who
have not previously complied with this Section 1.13 shall thereafter look only
to Holdings for payment of their claim for the Merger Consideration.
(d) Closing of Stock Transfer Books. The stock
transfer books of Jillian's shall be closed as of the close of business on the
first business day immediately preceding the Closing Date, and thereafter there
shall be no further registration of transfers on the stock transfer books of
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Jillian's or the Surviving Corporation of the shares of Jillian's Common which
were outstanding immediately prior to such time. If, after such time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be cancelled and exchanged as provided in this Section 1.13.
(e) No Liability. Neither Holdings nor Jillian's
shall be liable to any holder of shares of Jillian's Common for such shares (or
dividends or distributions with respect thereto) delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF JILLIAN'S
Jillian's represents and warrants to JWC and Holdings that
the statements contained in this Article II are true and correct, except as set
forth in the disclosure schedule delivered by Jillian's to JWC and Holdings on
or before the date of this Agreement (the "Disclosure Schedule"). The
Disclosure Schedule is arranged in sections corresponding to the numbered and
lettered sections contained in this Article II, and the disclosure in any
section of the Disclosure Schedule qualifies only the corresponding section in
this Article II.
Section 2.1 Organization of Jillian's. Each of Jillian's
and its subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry
on its business as now being conducted and as proposed to be conducted and is
duly qualified or licensed to do business and is in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified or
licensed would, in the aggregate, have or result in a material adverse effect
on the prospects, business, assets (including intangible assets), properties,
liabilities, results of operations or condition (financial or otherwise) (a
"Material Adverse Effect") of Jillian's (taken separately) or Jillian's and its
subsidiaries (taken as a whole). Except as set forth in Section 2.1 of the
Disclosure Schedule, Jillian's does not, directly or indirectly, own any equity
or similar interest in, or any interest convertible into or exchangeable or
exercisable for any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
Section 2.2 Jillian's Capital Structure.
(a) The authorized capital stock of Jillian's
consists (i) of 25,000,000 shares of Jillian's Common and (ii)
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1,000,000 shares of Cumulative Preferred Stock, par value $.001 per share
("Jillian's Preferred Stock"). As of the date of this Agreement, (i) 9,137,798
shares of Jillian's Common are issued and outstanding, all of which are duly
authorized, validly issued, fully paid and nonassessable; (ii) 1,924,500 shares
of Jillian's Common are reserved for future issuance pursuant to stock options
granted and outstanding under the Jillian's Stock Option Plans; (iii) 630,479
shares of Jillian's Common are reserved for future issuance pursuant to the
Jillian's Warrants, and (iv) no shares of Jillian's Preferred Stock are issued
and outstanding. All of the outstanding shares of capital stock of each of
Jillian's subsidiaries are duly authorized, validly issued, fully paid and
nonassessable, and all such shares are owned by Jillian's free and clear of all
security interests, liens, claims, pledges, agreements, limitations in
Jillian's voting rights, charges or other encumbrances of any nature.
(b) Except as set forth in Section 2.2(a) hereof,
there are no equity securities of any class of Jillian's or any security
exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. Except as set forth in Section 2.2(a), there are
no options, warrants, calls, rights, commitments or agreements of any character
to which Jillian's or any of its subsidiaries is a party, or by which Jillian's
or any of its subsidiaries is bound, obligating Jillian's or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Jillian's or any of its
subsidiaries or obligating Jillian's or any of its subsidiaries to grant,
extend or accelerate the vesting of or enter into any such option, warrant,
call, right, commitment or agreement. There are no voting trusts, proxies or
other agreements or understandings with respect to the shares of capital stock
of Jillian's. There are no obligations, contingent or otherwise, of Jillian's
or any of its subsidiaries to repurchase, redeem or otherwise acquire any
shares of capital stock of Jillian's or any of its subsidiaries or to provide
funds to or make any investment (in the form of a loan, capital contribution or
otherwise) in any such subsidiary or any other entity.
Section 2.3 Authority; No Conflict; Required Filings and
Consents.
(a) Jillian's has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Jillian's, subject only to the
approval of this Agreement, the Merger and the transactions contemplated hereby
(the "Merger Proposal") by the holders of a majority of the shares of
outstanding Jillian's Common. This
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Agreement has been duly and validly executed and delivered by Jillian's and
constitutes a valid and binding obligation of Jillian's, enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights and
by general equitable principles (regardless of whether enforceability is
considered in a proceeding in equity or at law).
(b) The execution and delivery by Jillian's of this
Agreement does not, and the consummation of the transactions contemplated
hereby will not, (i) conflict with, or result in any violation or breach of any
provision of the Articles of Incorporation, as amended (the "Jillian's Articles
of Incorporation"), or the By-laws (the "Jillian's By-laws"), of Jillian's,
(ii) result in any violation or breach of, or constitute (with or without
notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Jillian's or any of its subsidiaries is a party or by which
any of them or any of their properties or assets may be bound, or (iii)
conflict with or violate any permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Jillian's or any of its subsidiaries or any of its or their properties or
assets, except in the case of clause (ii) for any such violations, breaches,
defaults, terminations, cancellations, accelerations or conflicts which would
not, in the aggregate, have a Material Adverse Effect on Jillian's (taken
separately) or Jillian's and its subsidiaries (taken as a whole) or impair the
ability of Jillian's to consummate the transactions contemplated by this
Agreement.
(c) Except as set forth in Section 2.3(c) of the
Disclosure Schedule, no consent, approval, order or authorization of, or
registration, declaration or filing (collectively, "Consents") with any person,
including, without limitation, any court, administrative agency or commission
or other governmental authority or instrumentality ("Governmental Entity"), is
required by or with respect to Jillian's or any of its subsidiaries in
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of a Proxy Statement (the "Proxy Statement") on Schedule 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") with the
Securities and Exchange Commission (the "SEC"), (ii) the filing of Articles of
Merger with the Florida Department of State, (iii) such Consents as may be
required under applicable state securities laws and (iv) such other Consents
(other than those of a Governmental Entity) which,
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if not obtained or made, would not, individually or in the aggregate, have a
Material Adverse Effect on Jillian's (taken separately) or Jillian's and its
subsidiaries (taken as a whole) or impair the ability of Jillian's to
consummate the transactions contemplated by this Agreement.
Section 2.4 Financial Statements.
(a) Jillian's has heretofore delivered or made
available to JWC and Holdings: (i) a consolidated balance sheet of Jillian's
as at March 31, 1996 together with related consolidated statements of
operations, cash flows and changes in shareholders' equity audited by BDO
Seidman, (ii) a consolidated balance sheet of Jillian's as at March 31, 1995
together with related statements of operations, cash flows and changes in
shareholders' equity audited by Deloitte & Touche LLP and (iii) an unaudited
consolidated balance sheet as at December 31, 1996 (the "Jillian's Balance
Sheet") together with related unaudited consolidated statements of operations
and cash flows (collectively, the "Jillian's Financial Statements").
(b) Each of the Jillian's Financial Statements
(including, in each case, any related notes), complied, as of their respective
dates, in all material respects with all applicable accounting requirements
with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved and fairly presented the consolidated financial position of Jillian's
and its subsidiaries as at the respective dates and the consolidated results of
its operations and cash flows for the periods indicated, except that the
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in
amount.
Section 2.5 No Undisclosed Liabilities. Jillian's and its
subsidiaries do not have any liabilities or obligations (whether accrued,
contingent, due or to become due or whether or not required to be reflected in
financial statements in accordance with generally accepted accounting
principles) other than (i) liabilities reflected in the Jillian's Financial
Statements or (ii) normal or recurring liabilities incurred since the date of
the Jillian's Balance Sheet in the ordinary course of business consistent with
past practices.
Section 2.6 Accounts Receivable. All accounts receivable of
Jillian's, whether reflected in the Jillian's Balance Sheet or otherwise,
represent sales actually made in the ordinary course of business and are
current and collectible net of any reserves shown on the Jillian's Balance
Sheet (which reserves were calculated consistent with past practices).
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Section 2.7 Accounts Payable. All accounts payable of
Jillian's, whether reflected in the Jillian's Balance Sheet or otherwise,
represent payments incurred in the ordinary course of business.
Section 2.8 Inventory. All of the inventories of Jillian's
are of a quality usable and salable in the ordinary course of business and have
been valued in accordance with generally accepted accounting principles
consistent with past practices, except for items of obsolete materials and
materials of below-standard quality, all of which have been written off or
written down to fair market value consistent with past practices. All
inventories not written off have been priced at cost using the first-in,
first-out method determined in the ordinary course of business consistent with
past practices.
Section 2.9 Absence of Certain Changes or Events. Since
March 31, 1996, Jillian's and its subsidiaries have conducted their businesses
only in the ordinary course and in a manner consistent with past practices and,
since such date, there has not been any event or circumstance which has had or
would reasonably be expected to have a Material Adverse Effect on Jillian's
(taken separately) or Jillian's and its subsidiaries (taken as a whole).
Section 2.10 Properties; Encumbrances. Jillian's and each
of its subsidiaries have good, valid and marketable title to, or a valid
leasehold interest in, all the properties and assets which it purports to own
or lease (real, personal and mixed, tangible and intangible), including,
without limitation, all the properties and assets reflected in the Jillian's
Balance Sheet (except for personal property sold since the date of the
Jillian's Balance Sheet in the ordinary course of business and consistent with
past practices). All properties and assets reflected in the Jillian's Balance
Sheet are free and clear of all title defects or objections, liens, claims,
charges, security interests or other encumbrances of any nature whatsoever,
except for liens reflected on the Jillian's Balance Sheet and liens for current
Taxes (as defined below) not yet due and other liens that do not materially
detract from the value or impair the use of the property or assets subject
thereto.
Section 2.11 Equipment and Leasehold Improvements. The
equipment of or leased by Jillian's or any of its subsidiaries and leasehold
improvements are structurally sound with no material defects and are in good
operating condition and repair and are adequate for the uses to which they are
being put; and none of such equipment or leasehold improvements are in need of
maintenance and repairs except for ordinary, routine maintenance and repairs
which are not material in nature or cost. Neither Jillian's nor any of its
subsidiaries has received notification that it is in violation of any
applicable building,
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zoning, anti-pollution, health or other law, ordinance or regulation in respect
of such structures or equipment or their operations.
Section 2.12 Taxes.
(a) Jillian's and each of its subsidiaries have
filed all Tax Returns (as defined herein) required to have been filed on or
prior to the date hereof, or appropriate extensions therefor have been properly
obtained and such Tax Returns are true, correct and complete, except to the
extent that any failure to be true, correct and complete would not,
individually or in the aggregate, have a Material Adverse Effect on Jillian's
(taken separately) or Jillian's and its subsidiaries (taken as a whole).
(b) All Taxes shown to be due on such Tax Returns
have been timely paid or such Taxes are being contested in good faith and in a
timely manner and Jillian's and each of its subsidiaries have complied with all
rules and regulations relating to the withholding of Taxes (including, without
limitation, amounts required to be withheld with respect to employee
compensation), except to the extent that any failure to comply with such rules
and regulations would not, individually or in the aggregate, have a Material
Adverse Effect on Jillian's (taken separately) or Jillian's and its
subsidiaries (taken as a whole).
(c) There are no material liens for Taxes on the
assets of Jillian's or any of its subsidiaries except for statutory liens for
current Taxes not yet due.
(d) Neither Jillian's nor any of its subsidiaries
has waived any statute of limitations in respect of its Taxes.
(e) Except as set forth in Section 2.12(e) of the
Disclosure Schedule, each Tax Return of Jillian's and of each of its
subsidiaries has been audited by the relevant taxing authorities or the statute
of limitations with respect to such Tax Return has closed, and no Tax Return is
under examination.
(f) Neither Jillian's nor any of its subsidiaries
has received any notice of deficiency or assessment from any federal, state,
local, foreign or provincial taxing authority with respect to liabilities for
Taxes which have not been fully paid, finally settled or are being contested in
good faith through appropriate proceedings.
(g) The charges, accruals and reserves on the books
of Jillian's and its subsidiaries in respect of Taxes have been established and
maintained in accordance with generally accepted accounting principles.
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(h) Neither Jillian's nor any of its subsidiaries
is a party to any agreement, contract or arrangement that could result,
separately, or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code").
(i) Jillian's has filed, as a common parent
corporation of an "affiliated group" (within the meaning of Section 1504(a) of
the Code) a consolidated return for federal income tax purposes on behalf of
itself and all of its subsidiaries which are "includible corporations" (within
the meaning of Section 1504(b) of the Code).
(j) Jillian's is not, and has not been, a United
States real property holding company (as defined in Section 897(c)(2) of the
Code) during the applicable period specified in Section 897(c)(1)(ii) of the
Code.
(k) For purposes of this Agreement: (i) "Taxes"
means any federal, state, local, foreign or provincial income, gross receipts,
property, sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or added minimum, ad valorem, transfer or excise tax,
or any other tax, custom, duty, governmental fee or other like assessment or
charge of any kind whatsoever, together with any interest or penalty, imposed
by any Governmental Entity; and (ii) "Tax Return" means any return, report or
similar statement (including any attached schedules) required to be filed with
respect to any Tax, including any information return, claim for refund, amended
return or declaration of estimated Tax.
Section 2.13 Intellectual Property.
(a) Jillian's and its subsidiaries own, or have a valid
license to use, all patents and applications for patents, trademarks, trade
names, service marks, copyrights, technology, know-how, trade secrets, software
programs and tangible or intangible proprietary information, rights or
materials that are necessary to conduct the businesses of Jillian's or any of
its subsidiaries as currently conducted and as currently proposed to be
conducted (collectively, the "Jillian's Intellectual Property Rights").
(b) Section 2.13(b) of the Disclosure Schedule contains a
complete and accurate list of (i) all patents and patent applications; all
registered trademarks and service marks; all material unregistered trademarks,
service marks and trade names; and all registered copyrights and copyright
applications which are included in Jillian's Intellectual Property Rights and
owned in whole or in part by Jillian's or any subsidiary, (ii) all licenses,
sublicenses and other agreements as to which Jillian's or any of its
subsidiaries is a party and pursuant to which (a)
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any person is authorized to use any of Jillian's Intellectual Property Rights,
or (b) Jillian's or any of its subsidiaries is authorized to use any third
party intellectual property rights (together, the "License Agreements").
(c) All of Jillian's Intellectual Property Rights and
Jillian's and its subsidiaries' rights under the License Agreements are free
and clear of all liens, claims and encumbrances, and free and clear of all
licenses to third parties except to the extent set forth in subsection (ii)(a)
of paragraph (b) above. Jillian's or the subsidiary specified on Section
2.13(b) of the Disclosure Schedule is the record owner of all registrations and
applications set forth thereon. All items set forth in Section 2.13(b) of the
Disclosure Schedule are valid and subsisting, in full force and effect and have
been duly maintained.
(d) Jillian's is not, nor will it be, as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in breach of any License Agreement.
(e) The execution of this Agreement will not result in the
loss of any of Jillian's Intellectual Property Rights or rights of Jillian's or
any of its subsidiaries under the License Agreements, nor will it require the
consent of any Governmental Agency or third party.
(f) Neither Jillian's nor any of its subsidiaries is, or
since March 11, 1990 has been, a party to any suit, action or proceeding,
pending or threatened, challenging its rights to own or use the Jillian's
Intellectual Property Rights or its rights under any License Agreements, or
involving a claim of infringement, violation, unenforceability, invalidity,
misuse or abandonment of any intellectual property rights of any third party,
and neither Jillian's nor any of its subsidiaries otherwise has knowledge of
any such claim. To the best of Jillian's and its subsidiaries' knowledge, the
manufacturing, marketing, licensing, sale, distribution and/or use of Jillian's
products and services do not infringe, misappropriate, violate or otherwise
conflict with any intellectual property right of any third party. To the best
of Jillian's and its subsidiaries' knowledge, no third party is violating,
infringing or misappropriating any of Jillian's Intellectual Property Rights or
Jillian's or its subsidiaries' rights under any License Agreements.
(g) To the best of Jillian's and its subsidiaries'
knowledge, neither Jillian's nor any of its subsidiaries is a party to or is
bound by any settlements, consents, judgments, orders or any other agreements
which restrict Jillian's or its subsidiaries' rights to use any of Jillian's
Intellectual Proper-
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ty Rights or restrict Jillian's or its subsidiaries' rights under any License
Agreements.
Section 2.14 Contracts and Commitments. Section 2.14 of the
Disclosure Schedule contains a list of all material agreements, contracts,
leases or other commitments in effect to which Jillian's or any of its
subsidiaries is a party, copies of each of which have been delivered to JWC and
Holdings prior to the date of this Agreement. Except as set forth in Section
2.14 of the Disclosure Schedule:
(a) All such agreements, contracts, leases and
commitments are in full force and effect and are valid, binding and enforceable
in accordance with their respective terms;
(b) No purchase contracts of Jillian's or any of
its subsidiaries continue for a period of more than 12 months or are in excess
of the normal, ordinary and usual requirements of Jillian's business;
(c) Neither Jillian's nor any of its subsidiaries
has outstanding contracts with officers, employees, agents, consultants,
advisors, salespeople, sales representatives, distributors or dealers that are
not cancelable by it on notice of not longer than 30 days and without
liability, penalty or premium or that provide for the payment of any bonus or
commission based on sales or earnings;
(d) Neither Jillian's nor any of its subsidiaries
has any employment agreement, or any other agreement that contains any
severance or termination pay liabilities or obligations;
(e) Neither Jillian's nor any of its subsidiaries
is in default under or in violation of, nor is there any basis for any valid
claim of default under or violation of, any material agreement, contract, lease
or commitment to which it is a party or by which it is bound;
(f) Neither Jillian's nor any of its subsidiaries
has an officer, director or employee to whom it is paying compensation at an
annual rate of more than $150,000;
(g) Neither Jillian's nor any of its subsidiaries
is restricted by any agreement, contract or commitment from carrying on its
business anywhere in the world;
(h) Neither Jillian's nor any of its subsidiaries
has any debt obligation for borrowed money, including guarantees of or
agreements to acquire any such debt obligation of others;
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(i) Neither Jillian's nor any of its subsidiaries
has any outstanding loan to any person, other than travel advances to employees
in the ordinary course of business consistent with past practices; and
(j) Neither Jillian's nor any of its subsidiaries
has any power of attorney outstanding or any obligations or liabilities
(whether absolute, accrued, contingent or otherwise), as guarantor, surety,
co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization or other entity.
Section 2.15 Jillian's Suppliers. No supplier of Jillian's
and its subsidiaries accounted for more than 10% of their purchases during the
fiscal year ended March 31, 1996. Since March 31, 1996, there has not been any
material adverse change in the business relationship of Jillian's with any
material supplier.
Section 2.16 Insurance. Section 2.16 of the Disclosure
Schedule contains an accurate and complete list of all policies of fire,
liability, workers' compensation and other forms of insurance, including, but
not limited to, all group insurance programs in effect for employees of
Jillian's or any of its subsidiaries, owned or held by Jillian's or any of its
subsidiaries. All such policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including the date of the
Closing have been paid and no notice of cancellation or termination has been
received with respect to any such policy. Such policies (i) are sufficient for
compliance with all requirements of law and of all agreements to which
Jillian's or any of its subsidiaries is a party; (ii) are valid, outstanding
and enforceable policies; (iii) provide insurance coverage for the assets and
operations of Jillian's or any of its subsidiaries in scope and amount
customary and reasonable for the business in which it is engaged; (iv) will
remain in full force and effect through the respective dates set forth in
Section 2.16 of the Disclosure Schedule without the payment of additional
premiums; and (v) will not be affected by or terminate or lapse by reason of,
the transactions contemplated by this Agreement. Neither Jillian's nor any of
its subsidiaries has been refused any insurance with respect to its assets or
operations, nor has its coverage been limited, by any insurance carrier to
which it has applied for any such insurance or with which it has carried
insurance.
Section 2.17 Labor Difficulties. None of the employees of
Jillian's or any of its subsidiaries are represented by a union. Jillian's
believes it (i) is in compliance with all applicable laws respecting employment
and employment practices,
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terms and conditions of employment and wages and hours and (ii) is not engaged
in any unfair labor practice.
Section 2.18 Litigation. There is no action, suit or
proceeding, claim, arbitration or investigation pending or, to the best
knowledge of Jillian's, threatened against Jillian's or any of its subsidiaries
which would have or result in a Material Adverse Effect on Jillian's (taken
separately) or Jillian's and its subsidiaries (taken as a whole) or impair the
ability of Jillian's to consummate the transactions contemplated by this
Agreement, nor has Jillian's or any of its subsidiaries received notice of any
judgment, decree, injunction, rule or order of any Governmental Entity
outstanding against Jillian's or any of its subsidiaries having, or which is
reasonably likely to have, a Material Adverse Effect on Jillian's (taken
separately) or Jillian's and its subsidiaries (taken as a whole). Jillian's or
any of its subsidiaries is not in violation of any term of any judgment,
decree, injunction or order outstanding against it of which it has received
notice.
Section 2.19 Environmental Matters.
(a) Jillian's and its subsidiaries are in full
compliance with all applicable Environmental Laws (as defined be low); neither
Jillian's nor any of its subsidiaries have received any communication (written
or oral), whether from a governmental authority, citizens group, employee or
otherwise, that alleges that Jillian's or any of its subsidiaries are not in
such full compliance and, to Jillian's best knowledge, there are no circum
stances that may prevent or interfere with such full compliance in the future.
(b) There is no Environmental Claim (as defined
below), pending or threatened against Jillian's or any of its subsidiaries or,
to Jillian's best knowledge, against any person or entity whose liability for
any Environmental Claim Jillian's or any of its subsidiaries have or may have
retained or assumed either contractually or by operation of law.
(c) There are no past or present actions, activi-
ties, circumstances, conditions, events or incidents, including the release,
emission, discharge or disposal of any Materials of Environmental Concern (as
defined below), that could form the basis of any Environmental Claim against
Jillian's or any of its subsidiaries or, to Jillian's best knowledge, against
any person or entity whose liability for any Environmental Claim Jillian's or
any of its subsidiaries have or may have retained or assumed either
contractually or by operation of law.
(d) "Environmental Claim" means any notice (written
or oral) by any person or entity alleging potential liability arising out of,
based on or resulting from (i) the
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presence, or release into the environment, of any Materials of Environmental
Concern at any location, whether or not owned by Jillian's or any of its
subsidiaries or (ii) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
(e) "Environmental Laws" means all federal, state,
local and foreign laws and regulations relating to pollution or protection of
human health or the environment including laws and regulations relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
(f) "Materials of Environmental Concern" means
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products.
Section 2.20 Employee Benefit Plans.
(a) Section 2.20(a) of the Disclosure Schedule
contains a true and complete list of each deferred compensation and each
incentive compensation, equity compensation plan, "welfare" plan, fund or
program (within the meaning of section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")); "pension" plan, fund or program
(within the meaning of section 3(2) of ERISA); each employment, termination or
severance agreement; and each other employee benefit plan, fund, program,
agreement or arrangement, in each case, that is sponsored, maintained or
contributed to or required to be contributed to by Jillian's or by any trade or
business, whether or not incorporated (an "ERISA Affiliate"), that together
with Jillian's would be deemed a "single employer" within the meaning of
section 4001(b) of ERISA, or to which Jillian's or an ERISA Affiliate is party,
whether written or oral, for the benefit of any employee or former employee of
Jillian's or any subsidiary of Jillian's (the "Plans").
(b) With respect to each Plan, Jillian's has
heretofore delivered to JWC and Holdings true and complete copies of the Plan
and any amendments thereto (or if the Plan is not a written Plan, a description
thereof), any related trust or other funding vehicle, any reports or summaries
required under ERISA or the Code and the most recent determination letter
received from the Internal Revenue Service with respect to each Plan intended
to qualify under section 401 of the Code.
(c) No liability under Title IV or section 302 of
ERISA has been incurred by Jillian's or any ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a material risk to
Jillian's or any ERISA Affiliate of
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incurring any such liability, other than liability for premiums due the Pension
Benefit Guaranty Corporation (which premiums have been paid when due).
(d) With respect to each Plan which is subject to
Title IV of ERISA ("Title IV Plan"), the present value of accrued benefits
under such plan, based upon the actuarial assumptions used for funding purposes
in the most recent actuarial report prepared by such plan's actuary with
respect to such plan did not exceed, as of its latest valuation date, the then
current value of the assets of such plan allocable to such accrued benefits.
(e) No Title IV Plan is a "multiemployer pension
plan," as defined in section 3(37) of ERISA, nor is any Title IV Plan a plan
described in section 4063(a) of ERISA.
(f) Each Plan has been operated and administered in
all material respects in accordance with its terms and applicable law,
including but not limited to ERISA and the Code.
(g) Each Plan intended to be "qualified" within the
meaning of section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under section 501(a) of the Code.
(h) No Plan provides medical, surgical, hospi-
talization, death or similar benefits (whether or not insured) for employees or
former employees of Jillian's or any subsidiary of Jillian's for periods
extending beyond their retirement or other termination of service, other than
(i) coverage mandated by applicable law, (ii) death benefits under any "pension
plan," or (iii) benefits the full cost of which is borne by the current or
former employee (or his beneficiary).
(i) No amounts payable under the Plans will fail to
be deductible for federal income tax purposes by virtue of section 280G of the
Code.
(j) The consummation of the transactions contem-
plated by this Agreement will not, either alone or in combination with another
event, (i) entitle any current or former employee or officer of Jillian's or
any ERISA Affiliate to severance pay, unemployment compensation or any other
payment, except as expressly provided in this Agreement, or (ii) accelerate the
time of payment or vesting, or increase the amount of compensation due any such
employee or officer.
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(k) There are no pending, threatened or antici-
pated claims by or on behalf of any Plan, by any employee or beneficiary
covered under any such Plan, or otherwise involving any such Plan (other than
routine claims for benefits).
Section 2.21 Personnel.
(a) Section 2.21(a) of the Disclosure Schedule sets
forth a true and complete list of:
(i) the names and current salaries of all
directors and elected and appointed officers of Jillian's, the number
of shares of Jillian's Common owned beneficially or of record, or
both, by each such person and the family relationships, if any, among
such persons; and
(ii) the wage rates for nonsalaried and
nonexecutive salaried employees of Jillian's, by classification.
(b) Section 2.21(b) of the Disclosure Schedule sets
forth a summary of Jillian's policy concerning pay raises for officers and
other employees of Jillian's.
Section 2.22 Agreements in Full Force and Effect. No
contracts, agreements, leases, commitments, policies or licenses referred to in
the Disclosure Schedule have been abandoned or terminated by Jillian's and true
copies thereof have been delivered to or have been made available to JWC and
Holdings prior to the date of this Agreement.
Section 2.23 Compliance with Laws. Jillian's and each of its
subsidiaries has complied with, is not in violation of, and has not received
any notices of violation with respect to, any federal, state, local or foreign
statute, law or regulation with respect to the conduct of its business or the
ownership or operation of its business, except for failures to comply or
violations which would not in the aggregate have or result in a Material
Adverse Effect on Jillian's (taken separately) or Jillian's and its
subsidiaries (taken as a whole).
Section 2.24 Insider Interests. Other than their interests
as stockholders in Jillian's or as holders of minority interests in certain
Jillian's clubs, no officer or director of Jillian's has any material interest
in any property, real or personal, tangible or intangible, including, without
limitation,
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inventions, copyrights, trademarks or trade names, used in or pertaining to the
businesses of Jillian's or any of its subsidiaries, except with respect to
Jillian's Billiard Club, Inc. ("Jillian's Boston") as set forth in Section 2.24
of the Disclosure Schedule.
Section 2.25 Proxy Statement. The information included in
the Proxy Statement (the "Proxy Statement") to be sent to the stockholders of
Jillian's in connection with the solicitation of proxies to approve the Merger
Proposal shall not, on the date the Proxy Statement is first mailed to
stockholders of Jillian's or at the Effective Time, contain any statement
which, at such time and in light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made in the Proxy
Statement not false or misleading or necessary to correct any statement in any
earlier communication which has become false or misleading.
Section 2.26 Opinion of Financial Advisor. The financial
advisor of Jillian's, Stonebridge Associates, LLC, has delivered to Jillian's
an opinion dated April 22, 1997 to the effect that, as of such date, the Merger
Consideration is fair, from a financial point of view, to the stockholders of
Jillian's. Jillian's has provided a true and correct copy of such opinion to
JWC and Holdings.
Section 2.27 Brokers and Finders. No broker, finder or
investment banker (other than Island Partners, Ltd. and Hampshire Securities
Corporation) is entitled to any brokerage, finder's or other fee or commission
in connection with the transactions contemplated hereby based upon arrangements
made by or on behalf of Jillian's or any of its subsidiaries.
Section 2.28 Disclosure. No representations or warranties
by Jillian's in this Agreement and no statement contained in any document
(including, without limitation, the Jillian's Financial Statements and the
Disclosure Schedule) or certificate furnished or to be furnished by Jillian's
to JWC, Holdings or any of their representatives pursuant to the provisions
hereof, contains or will contain any untrue statement of material fact or omits
or will omit to state any material fact necessary, in light of the
circumstances under which it was made, in order to make the statements herein
or therein not misleading.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND SUB
Holdings and Sub represent and warrant to Jillian's as
follows:
Section 3.1 Organization of Holdings and Sub. Each of
Holdings and Sub is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry
on its business as now being conducted and is duly qualified or licensed to do
business and is in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified or licensed would have or result in a
Material Adverse Effect on Holdings (taken separately) or Holdings and Sub
(taken as a whole). Except for Sub, Holdings does not, directly or indirectly,
own any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or
entity.
Section 3.2 Capital Structure of Holdings and Sub.
(a) The authorized capital stock of Holdings
consists of 55,000,000 shares of Holdings Common and 42,000,000 shares of
Preferred Stock. As of the date hereof, one share of Holdings Common is issued
and outstanding and is registered in the name of J.W. Childs Associates, L.P.,
such share being duly authorized, validly issued, fully paid and nonassessable
and no shares of Preferred Stock are issued and outstanding. It is the intent
of the parties that such share of Holdings Common be surrendered by JWC at the
Closing in exchange for one dollar.
(b) The authorized capital stock of Sub consists of
1,000 shares of Sub Common Stock, of which 10 shares are issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
nonassessable.
(c) Except as set forth in Section 3.2(a) and (b)
hereof, there are no equity securities of any class of Holdings or Sub or any
security exchangeable into or exercisable for such equity securities, issued,
reserved for issuance or outstanding. Except for the Purchase Agreement, there
are no options, warrants, calls, rights, commitments or agreements of any
character to which Holdings or Sub is a party, or by which
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Holdings or Sub is bound, obligating Holdings or Sub to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
Holdings or Sub or obligating Holdings or Sub to grant, extend or accelerate
the vesting or enter into any such option, warrant, call, right, commitment or
agreement. There are no voting trusts, proxies or other agreements or
understandings with respect to the shares of capital stock of Holdings. There
are no obligations, contingent or otherwise, of Holdings or Sub to repurchase,
redeem or otherwise acquire any shares of capital stock of Holdings or Sub or
to provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any such subsidiary or any other entity.
Section 3.3 Authority; No Conflict; Required Filings and
Consents.
(a) Each of Holdings and Sub has all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Holdings
and Sub. This Agreement has been duly and validly executed and delivered by
Holdings and Sub and constitutes valid and binding obligations of Holdings and
Sub, enforceable in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and by general equitable principles (regardless
of whether enforceability is considered in a proceeding in equity or at law).
(b) The execution and delivery of this Agreement by
Holdings and Sub does not, and the consummation of the transactions
contemplated by this Agreement will not, (i) conflict with, or result in any
violation or breach of any provision of the Certificate of Incorporation of
Holdings, the Sub Articles of Incorporation, the By-laws of Holdings or Sub
By-laws, (ii) result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Holdings or Sub is a party or by which Holdings, Sub or any
of their properties or assets may be bound, or (iii) conflict
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with or violate any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Holdings, Sub
or any of their properties or assets, except in the case of clause (ii) for any
such violations, breaches, defaults, terminations, cancellations, accelerations
or conflicts which would not, in the aggregate, have or result in a Material
Adverse Effect on Holdings (taken separately) or Holdings and Sub (taken as a
whole) or impair the ability of Holdings or Sub to consummate the transactions
contemplated by this Agreement.
(c) No Consent of any person, including without
limitation, any Governmental Entity, is required by or with respect to Holdings
or Sub in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Proxy Statement with the SEC, (ii) the filing of Articles of Merger with
the Florida Department of State, (iii) such Consents as may be required under
applicable state securities laws and (iv) such other Consents (other than those
of a Governmental Entity) which, if not obtained or made, would not,
individually or in the aggregate, have a Material Adverse Effect on Holdings
(taken individually) or Holdings and Sub (taken as a whole) or impair the
ability of Holdings or Sub to consummate the transactions contemplated by this
Agreement.
ARTICLE IV
CONDUCT OF BUSINESS
Section 4.1 Covenants of Jillian's. During the period from
the date of this Agreement and continuing until the earlier of the termination
of the Agreement or the Effective Time, Jillian's agrees as to itself and its
subsidiaries (except to the extent that JWC and Holdings shall otherwise
consent in writing), to carry on its business in the usual, regular and
ordinary course in substantially the same manner as previously conducted, to
pay its debts and Taxes when due subject to good faith disputes over such debts
or Taxes, to pay or perform other obligations when due, and, to the extent
consistent with such business, use all reasonable efforts consistent with past
practices and policies to preserve intact its present business organization,
keep available the services of its present officers and key employees and
preserve its relationships with customers, suppliers, distributors, licensors,
licensees and others having business dealings with it, to the end that its
goodwill and
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ongoing businesses shall be unimpaired at the Effective Time. Except as
expressly contemplated by this Agreement, Jillian's shall not (and shall not
permit any of its subsidiaries to), without the prior written consent of JWC:
(a) Accelerate, amend or change the period of
exercisability of options or restricted stock granted under any employee stock
plan or authorize cash payments in exchange for any options granted under any
of such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(b) Transfer or license to any person or entity or
otherwise extend, amend or modify any rights to the Jillian's Intellectual
Property Rights, other than in the ordinary course of business consistent with
past practices;
(c) Declare, set aside or pay any dividends on or
make any other distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, or redeem or
otherwise acquire, directly or indirectly, any shares of its capital stock;
(d) Issue, deliver or sell or authorize or propose
the issuance, delivery or sale of any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue, any such shares or convertible securities,
except pursuant to Jillian's Management Options or Jillian's Warrants that are
outstanding as of the date hereof;
(e) Merge or consolidate with another corporation,
partnership or other business organization, or acquire or purchase an equity
interest in or a substantial portion of the assets of another corporation,
partnership or other business organization or otherwise acquire any assets
outside the ordinary course of business consistent with past practices or
otherwise enter into any material contract, commitment or transaction outside
the ordinary course of business consistent with past practices;
(f) Sell, lease, license, waive, release, transfer,
encumber or otherwise dispose of any of its properties
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or assets, except in the ordinary course of business consistent with past
practices;
(g) (i) Incur, assume or prepay any indebtedness or
any other liabilities other than in the ordinary course of business consistent
with past practices; (ii) assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, contingently or otherwise) for the
obligations of any other person other than a subsidiary of Jillian's in the
ordinary course of business and consistent with past practices; (iii) make any
loans, advances (other than travel advances consistent with Jillian's policy)
or capital contributions to, or investments in, any other person, other than to
subsidiaries of Jillian's consistent with past practices; (iv) authorize or
make capital expenditures in excess of the amounts currently budgeted therefor;
or (v) permit any insurance policy naming Jillian's or any subsidiary of
Jillian's as a beneficiary or a loss payee to be cancelled or terminated other
than in the ordinary course of business consistent with past practices;
(h) (i) Increase in any manner the compensation or
fringe benefits of, or pay any bonus to, any director, officer or employee,
except for (x) normal increases in salaried compensation in the ordinary course
of business consistent with past practices and (y) bonuses payable, in the
ordinary course of business consistent with past practice as adjusted for an
interim payment, pursuant to the discretionary profit sharing cash bonus and
incentive cash bonus arrangements in effect on the date hereof disclosed in
Section 2.20(a) of the Disclosure Schedule; (ii) grant any severance or
termination pay to, or enter into any employment or severance agreement, with
any director, officer or employee, except in the ordinary course of business
consistent with past practices, (iii) enter into any collective bargaining
agreement or (iv) establish, adopt, enter into or amend any bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, trust, fund, policy or arrangement for the benefit of any directors,
officers or employees;
(i) Take any action with respect to, or make any
material change in its accounting or tax policies or procedures in effect at
March 31, 1996, except as may be required by changes in generally accepted
accounting principles upon the advice of its independent accountants;
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(j) Revalue any of its assets, including writing
down the value of inventory or writing off notes or accounts receivable, other
than revaluations in the ordinary course of business consistent with past
practices;
(k) Amend or propose to amend the Jillian's
Articles of Incorporation or Jillian's By-laws (or comparable organizational
documents of its subsidiaries); or
(l) Enter into any contract, agreement, lease,
commitment or arrangement requiring payment of more than $50,000 that cannot be
terminated by Jillian's, without liability, at will.
(m) Enter into any contract, agreement, commitment
or arrangement with respect to any of the actions described in Sections (a)
through (l) above, or any action which would be reasonably likely to make any
of Jillian's representations or warranties contained in this Agreement untrue
or incorrect in any material respect as of the date of this Agreement or the
Closing Date.
Section 4.2 Cooperation. Subject to compliance with
applicable law, from the date hereof until the Effective Time, (a) Jillian's
shall confer on a regular and frequent basis with one or more representatives
of JWC to report operational matters of materiality and the general status of
ongoing operations, (b) Jillian's shall promptly provide JWC or its counsel
with copies of all filings made by such party with any Governmental Entity in
connection with the Merger Proposal and (c) Jillian's shall take all reasonable
actions to assist JWC in the refinancing of Jillian's existing debt on terms
acceptable to JWC.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Proxy Statement.
(a) As promptly as practical after the execution of
this Agreement, Jillian's shall prepare and file with the SEC the definitive
Proxy Statement. The definitive Proxy Statement shall include the
recommendation of the Board of Directors of Jillian's in favor of the Merger
Proposal. If at any time prior to the Effective Time any event or circumstance
relating to
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Jillian's, Holdings or any of their respective subsidiaries, affiliates,
officers or directors should be discovered by such party which should be set
forth in an amendment or a supplement to the Proxy Statement, such party shall
promptly inform the other parties hereto and take appropriate action in respect
thereof.
(b) Jillian's shall make any necessary filings with
respect to the Merger under the Exchange Act and the rules and regulations
thereunder.
Section 5.2 Access to Information.
(a) Upon reasonable notice, during normal business
hours during the period prior to the Effective Time, Jillian's shall (and shall
cause its subsidiaries to) (i) afford to the partners, officers, directors,
employees, accountants, counsel and other representatives of Holdings,
reasonable access to all its properties, plants, personnel, books, contracts,
commitments and records (other than privileged documents) and (ii) all other
information concerning its business, properties and personnel as Holdings may
reasonably request during such period. No information or knowledge obtained in
any investigation pursuant to this Section 5.2 shall affect or be deemed to
modify any representation or warranty contained in this Agreement or the
conditions to the obligations or the parties to consummate the Merger. If, in
any investigation pursuant to this Section 5.2, Holdings obtains knowledge or
information that Jillian's has breached any of its representations or
warranties in this Agreement, Holdings shall inform Jillian's of such breach,
and Jillian's shall have whatever rights to cure such breach as are provided
for in this Agreement.
(b) Jillian's shall, until the Effective Time,
provide Holdings with unaudited financial statements prepared on a monthly
basis.
(c) During the period prior to the Effective Time
or following the termination of this Agreement pursuant to Article VIII hereof,
Holdings will maintain the confidentiality of all non-public information
provided by Jillian's pursuant to Sections 5.2(a) and (b) hereof, unless (i)
any such information becomes generally available to the public other than as a
result of disclosure by Holdings or (ii) Holdings is requested or required (by
oral question, interrogatories, requests for information or documents,
subpoena, civil investigative demand or similar process) to disclose any such
information, in which case
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Holdings will promptly notify Jillian's of such request or requirement, so that
Jillian's may seek an appropriate protective order, and will cooperate with
Jillian's, at its expense, in seeking such an order.
Section 5.3 Supplements to Jillian's Disclosure Schedule.
From time to time prior to the Closing, Jillian's shall give prompt notice to
JWC and Holdings and thereafter promptly supplement or amend the Disclosure
Schedule with respect to any matter hereafter arising which, if existing or
occurring at the date of this Agreement, would have been required to be set
forth or described in the Disclosure Schedule. No supplement or amendment of
the Disclosure Schedule made pursuant to this Section 5.3 shall be deemed to
cure any breach of any representation or warranty made in this Agreement unless
JWC and Holdings specifically agree thereto in writing.
Section 5.4 Approval of Stockholders. Jillian's shall,
subject to and in accordance with the Jillian's Articles of Incorporation,
Jillian's By-laws and the FBCA, as promptly as practicable following the date
of this Agreement, (i) submit the Merger Proposal to the holders of the
outstanding shares of Jillian's Common at a meeting of such shareholders for
approval and adoption of the Merger Proposal and (ii) use its best efforts to
obtain the necessary approval for the Merger Proposal. Jillian's shall
promptly notify JWC and Holdings upon obtaining the requisite shareholder vote.
Section 5.5 Legal Conditions to Merger. Each of Holdings
and Jillian's will take all reasonable actions necessary to comply promptly
with all legal requirements which may be imposed on itself with respect to the
Merger and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon any of them or any of
their subsidiaries in connection with the Merger. Each of Holdings and
Jillian's will, and will cause its subsidiaries to, take all reasonable actions
necessary to obtain (and will cooperate with each other in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity required to be obtained or made by Holdings, Jillian's or
any of their subsidiaries in connection with the Merger or the taking of any
action contemplated thereby or by this Agreement.
Section 5.6 Consents. Each of Holdings and Jillian's shall
use all reasonable efforts to obtain all necessary consents, waivers and
approvals under any of Holdings' or
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Jillian's material agreements, contracts, licenses, leases or commitments in
connection with the Merger.
Section 5.7 Jillian's Management Stock Options. Jillian's
will use its best efforts to ensure that no person shall have any right under
any Jillian's Stock Option Plan (including any Jillian's Management Option) or
otherwise, to acquire equity securities of Jillian's or any of its subsidiaries
following the Effective Time.
Section 5.8 Holdings Agreements. Holdings will execute and
deliver the Exchange Agreement, the Stockholders Agreement (as defined below)
and the Employment Agreements (as defined below) at or prior to the Closing.
Section 5.9 Jillian's Agreements. Jillian's will execute
and deliver the Management Agreement, the License Agreement and the Boston
Option Agreement (each as defined below) at or prior to the Closing.
Section 5.10 No Solicitation.
(a) Jillian's and each of its subsidiaries and
affiliates will not, directly or indirectly, through the Continuing
Shareholders or any employee or agent of Jillian's or any of its subsidiaries,
(i) solicit, initiate, facilitate or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets, sale
of shares of capital stock or similar transactions involving Jillian's or any
of its subsidiaries, other than the transactions contemplated by this Agreement
(any of the foregoing inquiries or proposals being referred to in this
Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal, or (iii) agree to, approve or
recommend any Acquisition Proposal; provided, however, that nothing contained
in this Agreement shall prevent Jillian's or its Board of Directors from
furnishing non-public information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona-
fide written Acquisition Proposal by such person or entity or recommending an
unsolicited bona fide written Acquisition Proposal to the shareholders of
Jillian's, if and only to the extent that the Board of Directors of Jillian's
determines in good faith by a majority vote, (x) after consultation with its
financial advisor, that such Acquisition
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Proposal would, if consummated, result in a transaction more favorable to the
shareholders of Jillian's from a financial point of view than the transaction
contemplated by this Agreement (any such more favorable Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal") and (y) based on
the written opinion of outside legal counsel, that failing to take such action
would result in a breach of its fiduciary duties to shareholders under
applicable law.
(b) Jillian's will notify JWC and Holdings
immediately (and no later than 24 hours) after receipt by Jillian's (or its
advisors) of any Acquisition Proposal or any request for non-public information
in connection with an Acquisition Proposal or for access to the properties,
books or records of Jillian's or any of its subsidiaries by any person or
entity that informs Jillian's that it is considering making, or has made, an
Acquisition Proposal. Such notice to JWC and Holdings shall be made orally and
in writing and shall indicate in reasonable detail the identity of the offeror
and the terms and conditions of such proposal, inquiry or contact. Jillian's
will keep JWC and Holdings informed of all material developments and the status
of any Acquisition Proposal, any negotiations or discussions with respect to
any Acquisition Proposal or any request for non-public information in
connection with any Acquisition Proposal or for access to the properties, books
or records of Jillian's or any of its subsidiaries by any person or entity that
is considering making, or has made, an Acquisition Proposal. Jillian's will
provide JWC and Holdings with copies of all documents received from or
delivered or sent to any person or entity that is considering making or has
made, an Acquisition Proposal.
Section 5.11 Minority Interests. Jillian's will use its
reasonable best efforts to purchase the existing joint venture and partnership
interests in individual clubs and subsidiaries of Jillian's not owned by
Jillian's (the "Minority Interests") at or prior to the Closing.
Section 5.12 Additional Agreements; Reasonable Efforts.
Subject to the terms and conditions of this Agreement, each of the parties
agrees to use all reasonable efforts to take, or cause to be taken, all action
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving
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Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either of Sub or Jillian's, the proper officers
and directors of each party to this Agreement shall take all such necessary
action.
ARTICLE VI
CONDITIONS TO MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect
the Merger. The respective obligations of each party to this Agreement to
effect the Merger shall be subject to the satisfaction prior to the Closing
Date of the following conditions:
(a) Shareholder Approval. The Merger Proposal
shall have been approved and adopted by the holders of a majority of the
outstanding shares of Jillian's Common at a meeting of such shareholders called
for such purpose, in accordance with the FBCA.
(b) Approvals. Other than the filing provided for
by Section 1.2, all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, or expirations of waiting periods
imposed by, any Governmental Entity the failure of which to obtain would be
reasonably likely to have a Material Adverse Effect on Holdings and Sub or
Jillian's and its subsidiaries, in each case taken as a whole, shall have been
filed, occurred or been obtained. For purposes of this Section 6.1(b), the
loss of a liquor license by any Jillian's club will be deemed to have a
Material Adverse Effect on Jillian's and its subsidiaries taken as a whole.
(c) No Injunctions or Restraints; Illegality. No
order, ruling or injunction issued by any court of competent jurisdiction or
other Governmental Entity restraining, enjoining or otherwise prohibiting the
consummation of the Merger or limiting or restricting Holdings' or Jillian's
conduct or the operation of the business of Holdings or Jillian's after the
Merger shall have been issued and then be in effect; nor shall there be any
statute, rule or regulation enacted, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal.
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(d) Exchange Agreement. Holdings and the Exchange
Agent shall have executed and delivered the Exchange Agreement.
(e) Employment Agreements. Holdings and Steven
Foster and Daniel Smith shall have executed and delivered
employment/non-competition agreements substantially in the form of Exhibit E
hereto (the "Employment Agreements").
(f) Management Agreement. JWC and Jillian's shall
have executed and delivered a management agreement substantially in the form of
Exhibit F hereto (the "Management Agreement").
(g) Stockholders Agreement. Holdings, JWC and the
Continuing Shareholders shall have executed and delivered a stockholders
agreement substantially in the form of Exhibit G hereto (the "Stockholders
Agreement").
(h) Jillian's Boston. Jillian's Boston shall have
transferred the right to the Jillian's name and all other trademarks of
Jillian's Boston to Jillian's and Jillian's and Jillian's Boston shall have
executed a license agreement substantially in the form of Exhibit H hereto (the
"License Agreement") and an option agreement substantially in the form of
Exhibit I hereto (the "Boston Option Agreement").
(i) Purchase Agreement. Pursuant to the terms of
the Purchase Agreement, the JWC Group shall have contributed $12,000,000 to
Holdings in exchange for Holdings Series A Preferred Stock and the Continuing
Shareholders shall have exchanged all of the shares of Jillian's Common owned
by them for shares of Holdings Common and Holdings Options and the other
transactions contemplated by the Purchase Agreement shall have been
consummated.
Section 6.2 Additional Conditions to Obligations of Holdings
and Sub. The obligations of Holdings and Sub to effect the Merger are subject
to the satisfaction of each of the following conditions, any of which may be
waived in writing exclusively by Holdings and Sub:
(a) Representations and Warranties. The
representations and warranties of Jillian's set forth in this Agreement shall
be true and correct as of the date of this Agreement and as of the Closing Date
as though made on and as of the Closing Date, except for changes contemplated
by this
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Agreement and except for failures of such representations and warranties
(without regard to any requirement in such representations and warranties that
an event or fact be material, meet a minimum dollar threshold or have a
Material Adverse Effect) to be true and correct which would not, in the
aggregate, have a Material Adverse Effect on Jillian's (taken individually) or
Jillian's and its subsidiaries (taken as a whole); and Holdings shall have
received a certificate signed on behalf of Jillian's by the chief executive
officer and the chief operating officer of Jillian's to such effect.
(b) Performance of Obligations of Jillian's.
Jillian's shall have performed all obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and Holdings shall have
received a certificate signed on behalf of Jillian's by the chief executive
officer and the chief operating officer of Jillian's to such effect.
(c) Opinions. Jillian's shall have delivered to
Holdings the opinion of Shaw Pittman Potts & Trowbridge, in form and substance
reasonably acceptable to Holdings and JWC, dated the Closing Date, covering the
matters set forth on Exhibit J hereto.
(d) Refinancing. Jillian's shall have refinanced
its existing debt on terms acceptable to JWC.
(e) Registration Rights. All existing rights to
register securities of Jillian's or any successor thereto shall have been
cancelled at or prior to the Closing except (i) where the failure to cancel any
such rights would, in the determination of JWC, have a de minimis effect on
Jillian's or Holdings or (ii) as shall otherwise be approved by JWC.
(f) FIRPTA Statement. Jillian's shall have
delivered to Holdings and Sub a statement (the "Statement"), as contemplated
by, and meeting the requirements of, Sections 1.1445-2(c)(3) and 1.897-2(h) of
the Treasury regulations, certifying that the shares of Jillian's Common being
transferred by the shareholders of Jillian's in the Merger are not U.S. real
property interests within the meaning of the Code and applicable Treasury
regulations.
Section 6.3 Additional Conditions to Obligations of
Jillian's. The obligation of Jillian's to effect the Merger is subject to the
satisfaction of each of the following conditions, any of which may be waived,
in writing, exclusively by Jillian's:
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(a) Representations and Warranties. The
representations and warranties of Holdings and Sub set forth in this Agreement
shall be true and correct as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, except for changes
contemplated by this Agreement and except for failures of such representations
and warranties (without regard to any requirement in such representations and
warranties that an event or fact be material, meet a minimum dollar threshold
or have a Material Adverse Effect) to be true and correct which would not, in
the aggregate, have a Material Adverse Effect on Holdings (taken individually)
or Holdings and Sub (taken as a whole); and Jillian's shall have received a
certificate signed on behalf of Holdings by an officer of Holdings to such
effect.
(b) Performance of Obligations of Holdings and Sub.
Holdings and Sub shall have performed all obligations required to be performed
by them under this Agreement at or prior to the Closing Date, and Jillian's
shall have received a certificate signed on behalf of Holdings by an officer of
Holdings to such effect.
(c) Opinions. JWC shall have delivered to
Jillian's the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, in form and
substance reasonably acceptable to Jillian's, dated the Closing Date, covering
the matters set forth on Exhibit K hereto.
ARTICLE VII
SURVIVAL AND INDEMNIFICATION
Section 7.1 Survival.
(a) The respective representations and warranties
of Jillian's, Holdings and Sub contained in this Agreement shall survive the
Closing for a period of two years and shall terminate and be of no further
force or effect as of the date two years after the Effective Time, except that
the representations and warranties contained in Sections 2.2, 2.12, 2.20 and
2.25 shall survive until the expiration of the applicable statute of
limitations.
(b) The respective covenants and agreements of
Jillian's, Holdings and Sub contained in this Agreement shall survive the
Closing and shall be fully effective and enforceable
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for the periods therein indicated or where not indicated, forever.
(c) JWC will not be entitled to any indemnification
under Section 7.2 with respect to any breach of a representation or warranty,
covenant or agreement after the termination thereof pursuant to Sections 7.1(a)
or (b), except for claims previously asserted pursuant to Section 7.3(a).
Section 7.2 Indemnification by Jillian's.
(a) In consideration of its $12,000,000 investment
in Holdings and as an inducement to the JWC Group to make such investment,
Jillian's (or Holdings in the event that shares of Holdings Common are issued
pursuant to Section 7.2(b)) will indemnify the JWC Group and its affiliates and
their respective partners, officers, directors, employees and agents against
and hold them harmless from any loss, liability, damage, demand, claim, cost,
suit, action or cause of action, judgment, award, assessment, interest, penalty
or expense (including, without limitation, reasonable expenses of investigation
and reasonable attorneys' and consultants' fees) (any of the foregoing being
hereinafter referred to individually as a "Loss" and collectively, as "Losses")
suffered or incurred by any such indemnified person for or on account of or
arising from or in connection with any breach of any representation, warranty,
covenant or agreement of Jillian's contained in this Agreement.
(b) Any indemnification payable pursuant to Section
7.2(a) shall be paid, at the election of JWC, (i) in cash, (ii) in shares of
Holdings Common, valued at $0.50 per share (the "Indemnification Valuation") or
(iii) in any combination of cash and shares of Holdings Common, valued at $0.50
per share. The Indemnification Valuation will be proportionately adjusted for
any (i) subdivision or combination of the outstanding shares of Holdings
Common, (ii) dividend pay able in shares of Holdings Common, (iii) issuance or
sale of shares of Holdings Common at a price less than $0.50 per share or (iv)
issuance or sale of any rights, warrants or options to purchase Holdings Common
with an exercise price of less than $0.50 per share (excluding the issuance of
Holdings Management Options as set forth in Section 1.11 and warrants to
purchase Holdings Common if approved by JWC prior to issuance).
(c) No indemnification for any Loss shall be made
pursuant to Sections 7.2(a) and (b) until the aggregate amount of all Losses
suffered or incurred by the JWC Group and its
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affiliates and their respective partners, officers, directors, employees and
agents first exceeds $50,000 (the "Indemnification Minimum"), in which event
Jillian's (or Holdings in the event that shares of Holdings Common are issued
pursuant to Section 7.2(b)) shall be liable for the aggregate amount of such
Losses, including the Indemnification Minimum.
Section 7.3 Procedures Relating to Indemnification.
(a) An indemnified person under Section 7.2 (the
"Indemnified Party") shall give prompt written notice to Jillian's (the
"Indemnifying Party") of any Loss in respect of which such Indemnifying Party
has a duty to indemnify such Indemnified Party under Section 7.2 (a "Claim"),
specifying in reasonable detail the nature of the Loss for which indemnifica-
tion is sought, the section or sections of this Agreement to which the Claim
relates and the amount of the Loss involved (or, if not then determinable, a
reasonable good faith estimate of the amount of the Loss involved), except that
any delay or failure so to notify the Indemnifying Party shall only relieve the
Indemnifying Party of its obligations hereunder to the extent, if at all, that
it is prejudiced by reason of such delay or failure.
(b) If a Claim results from any claim, suit, action
or cause of action brought or asserted by a third party (a "Third Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third Party Claim and participate in such defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party; provided that the Indemnified Party shall have the right
to employ one counsel of its choice to represent them if, in the Indemnified
Party's reasonable judgement, a conflict of interest between the Indemnified
Party and the Indemnifying Party exists in respect of such claim, and in that
event the reasonable fees and expenses of such separate counsel shall be the
responsibility of the Indemnifying Party (and shall constitute Losses incurred
or suffered by the Indemnified Party within the meaning of Section 7.2(a)
hereof). If the Indemnifying Party fails to assume the defense of any Third
Party Claim within 10 days after notice thereof, the Indemnified Party shall
have the right to undertake the defense, compromise or settlement of such Third
Party Claim for the account of the Indemnifying Party, subject (i) to the right
of the Indemnifying Party to assume the defense of such Third Party Claim with
counsel reasonably satisfactory to the
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Indemnified Party at any time prior to the compromise, settlement or final
determination thereof and (ii) to the right of the Indemnifying Party to
approve, by prior written consent, any settlement, compromise or consent to the
entry of judgement with respect to any such Third Party Claim. Anything in this
Section 7.3 to the contrary notwithstanding, the Indemnifying Party shall not,
without the Indemnified Party's prior written consent, settle or compromise any
Third Party Claim or consent to the entry of any judgment with respect to any
Third Party Claim which would have an adverse effect on the Indemnified Party;
provided, however, that the Indemnifying Party may, without the Indemnified
Party's prior written consent, compromise or settle any such Third Party Claim
or consent to the entry of any judgment with respect to any Third Party Claim
which requires solely money damages paid by the Indemnifying Party and which
includes as an unconditional term thereof the release by the claimant or the
plaintiff of the Indemnified Party from all liability in respect of such Third
Party Claim.
(c) With respect to any Claim other than a Third
Party Claim, the Indemnifying Party shall have 20 days from receipt of notice
from the Indemnified Party of such Claim within which to respond thereto. If
the Indemnifying Party does not respond within such twenty-day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such twenty-day
period that it rejects such Claim in whole or in part, the Indemnified Party
shall be free to pursue such remedies as may be available to the Indemnified
Party under applicable law.
ARTICLE VIII
TERMINATION; FEES AND EXPENSES
Section 8.1 Termination. This Agreement may be terminated
at any time prior to the Effective Time (with respect to Sections 8.1(b)
through 8.1(f), by written notice by the terminating party to the other party),
whether before or after approval of the matters presented in connection with
the Merger by the shareholders of Jillian's:
(a) by mutual written consent of Holdings and
Jillian's;
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(b) by either Holdings or Jillian's if the Merger
shall not have been consummated by July 31, 1997 (provided that (i) the right
to terminate this Agreement under this Section 8.1(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date);
(c) by either Holdings or Jillian's if a court of
competent jurisdiction or other Governmental Entity shall have issued a
nonappealable final order, ruling or injunction or taken any other action, in
each case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger;
(d) by Holdings or Jillian's, if the requisite vote
of the shareholders of Jillian's in favor of the Merger Proposal is not
obtained;
(e) by Holdings, if (i) the Board of Directors of
Jillian's shall have withdrawn or modified its recommendation in favor of the
Merger Proposal in a manner adverse to Holdings or shall have resolved to do
any of the foregoing, (ii) Jillian's or its Board of Directors or the
Continuing Shareholders takes any action prohibited by Section 5.10 or (iii)
Jillian's or its Board of Directors, in accordance with the provisions of
Section 5.10(a)(iii), furnishes non-public information to, or enters into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such entity or the Board
of Directors of Jillian's recommends an unsolicited bona fide written
Acquisition Proposal to the shareholders of Jillian's;
(f) by Holdings or Jillian's, if there has been a
breach of any representation, warranty, covenant or agreement on the part of
the other party set forth in this Agreement, which breach shall not have been
cured, in the case of a representation or warranty, prior to the Closing (and
which breach would result in the condition to Closing in Sections 6.2(a) or
6.3(a), as the case may be, not being satisfied as of the Closing) or, in the
case of a covenant or agreement, within 10 business days following receipt by
the breaching party of written notice of such breach from the other party;
Section 8.2 Effect of Termination. In the event of
termination of this Agreement as provided in Section 8.1, this Agreement shall
immediately become void, and there shall be no liability or obligation on the
part of Holdings, Jillian's, Sub
38
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or their respective officers, directors, stockholders or affiliates, except (i)
as set forth in Section 8.3 and (ii) in addition to any payments required in
Section 8.3, a party may have liability to the other parties if the basis of
termination is a willful or reckless material breach by such party of one or
more provisions of this Agreement.
Section 8.3 Fees and Expenses.
(a) Except as set forth in this Section 8.3, all
fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby (including attorneys' and accountants' fees
and fees incurred in connection with the transactions contemplated by the
Purchase Agreement) shall be paid by the party incurring such expenses. In the
event that the Merger is consummated pursuant to the terms of this Agreement,
(i) at the Closing Jillian's will pay, in immediately available funds, all of
JWC's legal, accounting, professional and out of pocket expenses relating to
the JWC Group's investment in Holdings and the transactions contemplated by
this Agreement (including fees incurred in connection with the transactions
contemplated by the Purchase Agreement), (ii) at the Closing Jillian's will pay
JWC, in immediately available funds, a one-time transaction fee of $200,000
(the "JWC Transaction Fee") and (iii) all other fees and expenses incurred in
connection with this Agreement, and the transactions contemplated hereby shall
be paid by the party incurring such expenses. Jillian's total transactional
expenses will not exceed $1,130,000 (excluding the JWC Transaction Fee) plus
any additional fees up to $300,000 payable in accordance with Schedule 3
hereto.
(b) Jillian's shall pay JWC all of JWC's out-of-
pocket fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby plus $250,000, not to exceed $500,000 in the
aggregate, upon the termination of this Agreement (i) by Holdings or Jillian's
pursuant to Section 8.1(d) or (ii) by Holdings pursuant to Sections 8.1(e) or
(f); provided, however, that no termination fee will be payable by Jillian's
upon the termination of this Agreement by Holdings pursuant to Section 8.1(f),
unless the breach resulting in such termination prevents Holdings from
consummating the transactions contemplated by this Agreement by July 31, 1997
or the aggregate effect on the value of Jillian's or the value of the Merger to
Holdings, as it exists or as it was represented hereunder, exceeds $500,000.
39
<PAGE> 192
(c) The fees, if applicable, payable pursuant to
Section 8.3(b) shall be paid within five business days after the first to occur
of the events described in Section 8.3(b).
(d) The provisions of this Section 8.3 and Section
8.2 shall survive any termination of this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Amendment. This Agreement may be amended by the
parties hereto, by action taken or authorized by their respective Boards of
Directors, at any time before or after approval of the Merger Proposal by the
shareholders of Jillian's, but after any such approval, no amendment shall be
made which by law requires further approval by such shareholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
Section 9.2 Extension; Waiver. At any time prior to the
Effective Time, the parties hereto, by action taken or authorized by their
respective Boards of Directors, may, to the extent legally allowed, (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on
behalf of such party.
Section 9.3 Notices. All notices and other communications
hereunder shall be in writing and shall be delivered personally or by next-day
courier or telecopied with confirmation of receipt to the parties at the
addresses specified below (or at such other address for a party as shall be
specified by like notice). Any such notice or other communication shall be
effective upon receipt, if personally delivered or telecopied, or one day after
delivery to a courier for next-day delivery.
40
<PAGE> 193
(a) if to the JWC Group, Holdings or Sub, to
J.W. Childs Associates, L.P.
One Federal Street, 21st Floor
Boston, MA 02110
Attention: Glenn A. Hopkins
Telecopy: (617) 753-1101
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, MA 02108
Attention: Louis A. Goodman
Telecopy: (617) 573-4822
(b) if to Jillian's, to
Jillian's Entertainment Corporation
727 Atlantic Avenue
Boston, MA 02111
Attention: Steven L. Foster
Telecopy: (617) 350-5606
with a copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attention: Steven L. Meltzer
Telecopy: (202) 663-8007
Section 9.4 Interpretation. When a reference is made in
this Agreement to Sections, such reference shall be to a Section of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. As used in
this Agreement, the term "affiliate(s)" shall have the meaning set forth in
Rule 12b-2 of the Exchange Act.
Section 9.5 Counterparts. This Agreement may be executed in
two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts have been
signed by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
41
<PAGE> 194
Section 9.6 Entire Agreement. This Agreement constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof.
Section 9.7 Governing Law. This Agreement shall be governed
and construed in accordance with the laws of the Commonwealth of Massachusetts
without regard to any applicable conflicts of law.
Section 9.8 Severability. In case any one or more of the
provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect against a party hereto, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired thereby and such invalidity, illegality or
unenforceability shall only apply as to such party in the specific jurisdiction
where such judgment shall be made.
Section 9.9 Assignment. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
42
<PAGE> 195
IN WITNESS WHEREOF, Holdings, Sub and Jillian's have caused
this Agreement to be signed under seal by their respective officers thereunto
duly authorized as of the date first written above.
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.
By
------------------------------------------
Name: Glenn A. Hopkins
Title: President
JILLIAN'S ENTERTAINMENT ACQUISITION
CORPORATION
By
------------------------------------------
Name: Glenn A. Hopkins
Title: President
JILLIAN'S ENTERTAINMENT CORPORATION
By
------------------------------------------
Name: Steven L. Foster
Title: Chairman of the Board and
Chief Executive Officer
<PAGE> 196
APPENDIX B
[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> 197
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> 198
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> 199
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> 200
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
<PAGE> 1
EXHIBIT(d)(2)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Jillian's Entertainment Corporation
Boston, Massachusetts
We hereby consent to the use in Jillian's Entertainment Corporation's
Rule 13E-3 Transaction Statement on Schedule 13E-3, as amended, of our report
dated May 21, 1997 relating to the Jillian's Entertainment Corporation and
subsidiaries consolidated balance sheet as of March 31, 1997 and 1996 and the
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended.
BDO Seidman, LLP
Boston, Massachusetts
May 29, 1997
