<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 6 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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
TRANSACTION VALUATION(1) AMOUNT OF FILING FEE
- ----------------------------------------------------------------------------------------
<S> <C>
$2,131,632 $426.33
- ----------------------------------------------------------------------------------------
</TABLE>
[x] CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE
0-11(a)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS
PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT
NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING.
<TABLE>
<S> <C>
Amount previously paid: $426.33 Filing parties: Jillian's Entertainment Corporation
Form or registration no: Schedule 14A Date filed: November 13, 1995
</TABLE>
(1) Pursuant to Rule 0-11(b), the filing fee was determined at 1/50 of 1%
of $2,131,632, the amount to be received by the Non-Continuing Shareholders
for their shares of Common Stock in the Merger.
<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item in
-------
Schedule 13E-3 Caption in Preliminary Proxy Statement
-------------- --------------------------------------
<S> <C>
Item 1(a) . . . . . . . . . INTRODUCTION
Item 1(b) . . . . . . . . . VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting
Item 1(c)-(d) . . . . . . . MARKET INFORMATION
Item 1(e)-(f) . . . . . . . Not Applicable
Item 2 . . . . . . . . . . AVAILABLE INFORMATION and EXECUTIVE OFFICERS AND
DIRECTORS OF THE COMPANY
Item 3 . . . . . . . . . . PRIOR CONTACTS BETWEEN THE COMPANY AND CERTAIN AFFILIATES
Item 4(a) . . . . . . . . . PROPOSAL TO APPROVE THE MERGER
Item 4(b) . . . . . . . . . SPECIAL FACTORS -- Alternatives Considered and PROPOSAL
TO APPROVE THE MERGER
Item 5(a)-(e) . . . . . . . Not Applicable
Item 5(f)-(g) . . . . . . . SPECIAL FACTORS -- Certain Effects of the Merger
Item 6(a) . . . . . . . . . FINANCING OF THE MERGER
Item 6(b) . . . . . . . . . FEES AND EXPENSES
Item 6(c)-(d) . . . . . . . Not Applicable
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Item in
-------
Schedule 13E-3 Caption in Preliminary Proxy Statement
-------------- --------------------------------------
<S> <C>
Item 7(a)-(c) . . . . . . . SPECIAL FACTORS -- Background of the Merger and --
Purposes and Reasons for the Merger
Item 7(d) . . . . . . . . . SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger, -- Certain Effects of the Merger,
-- Material Federal Income Tax Consequences, -- Purposes
and Reasons for the Merger and -- Interests of Certain
Persons in the Merger
Item 8(a)-(b) . . . . . . . SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger and -- Opinion of Stonebridge
Item 8(c) . . . . . . . . . VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting and PROPOSAL TO APPROVE THE MERGER -- Vote
Required and Recommendation of the Board of Directors
Item 8(d)-(e) . . . . . . . SPECIAL FACTORS -- Board of Directors Determination of
Fairness of the Merger
Item 8(f) . . . . . . . . . Not Applicable
Item 9(a)-(b) . . . . . . . SPECIAL FACTORS -- Background of the Merger -- Current
Effects of Borrowings and Equity Financing and --
Opinion of Stonebridge
Item 9(c) . . . . . . . . . AVAILABLE INFORMATION
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
</TABLE>
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Item in
-------
Schedule 13E-3 Caption in Preliminary Proxy Statement
-------------- --------------------------------------
<S> <C>
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
</TABLE>
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Item in
-------
Schedule 13E-3 Caption in Preliminary Proxy Statement
-------------- --------------------------------------
<S> <C>
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
</TABLE>
-5-
<PAGE> 6
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.
-6-
<PAGE> 7
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.
-7-
<PAGE> 8
ITEM 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(b) The information set forth in the Preliminary Proxy
Statement under "SPECIAL FACTORS "-- Background of the Merger," "-- Current
Effects of Borrowings and Equity Financing" and " -- Opinion of Stonebridge" is
incorporated herein by reference.
(c) The information set forth in the Preliminary Proxy Statement
under "AVAILABLE INFORMATION" is incorporated herein by reference
ITEM 10. Interest in Securities of the Issuer.
(a) The information set forth in the Preliminary Proxy Statement
under "VOTING AND PROXY INFORMATION -- Record Date; Outstanding Shares;
Voting," "SPECIAL FACTORS -- Interests of Certain Persons in the Merger" and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
(b) Not applicable.
ITEM 11. Contracts, Arrangements or Understandings with Respect
to the Issuer's Securities.
The information set forth in the Preliminary Proxy Statement under
"SPECIAL FACTORS -- Background of the Merger," "-- Alternatives Considered,"
"PROPOSAL TO APPROVE THE MERGER -- Certain Effects of the Merger," "-- Payment
for Common Stock in the Merger," "-- Conditions to the Merger," "FINANCING OF
THE MERGER" and "MATERIAL TERMS OF THE PURCHASE AGREEMENT" is incorporated
herein by reference.
ITEM 12. Present Intention and Recommendation of Certain
Persons with Regard to the Transaction.
(a) The information set forth in the Preliminary Proxy Statement
under "INTRODUCTION," "VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting" and "PROPOSAL TO APPROVE THE MERGER -- Vote Required and
Recommendation of the Board of Directors" is incorporated herein by reference.
(b) The information set forth in the Preliminary Proxy Statement
under "INTRODUCTION," "VOTING AND PROXY INFORMATION -- Record Date; Outstanding
Shares; Voting," "SPECIAL FACTORS -- Purposes and Reasons for the Merger" and
"PROPOSAL TO APPROVE THE MERGER -- Vote Required and Recommendation of the
Board of Directors" is incorporated herein by reference.
-8-
<PAGE> 9
ITEM 13. Other Provisions of the Transaction.
(a) The information set forth in the Preliminary Proxy Statement
under "PROPOSAL TO APPROVE THE MERGER -- Rights of Dissenting Shareholders" is
incorporated herein by reference.
(b)-(c) Not applicable.
ITEM 14. Financial Information.
(a) The information set forth in the Preliminary Proxy Statement
under "SELECTED FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "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)* Draft Fairness Opinion, dated October 2, 1995, of
Bannon & Co., Inc.
(b) (2)* Presentation of Bannon & Co., Inc. to the Board of
Directors of Jillian's Entertainment Corporation, dated October 2, 1995.
(b) (3) Fairness Opinion, dated April 22, 1997, of Stonebridge
Associates, LLC, attached as Appendix B to Exhibit (d)(1).
(b) (4) Presentation of Stonebridge Associates, LLC to the Board
of Directors of Jillian's Entertainment Corporation, dated April 22, 1997.
-9-
<PAGE> 10
(c) (1)+ Letter, dated May 23, 1996, relating to the engagement
of Hampshire Securities Corporation by Jillian's Entertainment Corporation.
(c) (2)++ Letter, dated May 23, 1996, relating to the purchase
of common stock of Jillian's Entertainment Corporation by Island Partners, Ltd.
(c)(3)* Letter, dated April 4, 1997, relating to the
engagement of Stonebridge Associates, LLC by Jillian's Entertainment
Corporation.
(c)(4) Form of 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 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.
(c)(11) Form of Voting Agreement among J.W. Childs Equity
Partners, L.P., Jillian's Entertainment Holdings, Inc., and the shareholders
of Jillian's Entertainment Corporation.
(d) (1) Letter to Shareholders, 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.
- ------------------
* Previously filed.
+ Previously filed as Exhibit (b)(3) of Amendment No. 2 to Schedule 13E-3.
++ Previously filed as Exhibit (b)(4) of Amendment No. 2 to Schedule 13E-3.
+++ Previously filed as Exhibit (c)(8) of Amendment No. 3 to Schedule 13E-3.
-10-
<PAGE> 11
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete
and correct.
June 12, 1997
JILLIAN'S ENTERTAINMENT
CORPORATION
By: /s/ Steven L. Foster
--------------------
Steven L. Foster
Chief Executive Officer
-11-
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
(b)(1) Draft Fairness Opinion, dated October 2, 1995, of Bannon & Co., *
Inc.
(b)(2) Presentation of Bannon & Co., Inc. to the Board of Directors of *
Jillian's Entertainment Corporation, dated October 2, 1995.
(b)(3) Fairness Opinion, dated April 22, 1997, of Stonebridge Associates,
LLC, attached as Appendix B to Exhibit (d)(1).
(b)(4) Presentation of Stonebridge Associates, LLC to the Board of
Directors of Jillian's Entertainment Corporation, dated April 22,
1997.
(c)(1) Letter, dated May 23, 1996, relating to the engagement of Hampshire +
Securities Corporation by Jillian's Entertainment Corporation.
(c)(2) Letter, dated May 23, 1996, relating to the purchase of common ++
stock of Jillian's Entertainment Corporation by Island Partners,
Ltd.
(c)(3) Letter, dated April 4, 1997, relating to the engagement of *
Stonebridge Associates, LLC by Jillian's Entertainment Corporation.
(c)(4) Form of 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 +++
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.
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
(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.
(c)(11) Form of Voting Agreement among J.W. Childs Equity Partners, L.P.,
Jillian's Entertainment Holdings, Inc., and the shareholders of
Jillian's Entertainment Corporation.
(d)(1) Letter to Shareholders, 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>
- ------------------
* Previously filed.
+ Previously filed as Exhibit (b)(3) of Amendment No. 2 to Schedule 13E-3.
++ Previously filed as Exhibit (b)(4) of Amendment No. 2 to Schedule 13E-3.
+++ Previously filed as Exhibit (c)(8) of Amendment No. 3 to Schedule 13E-3.
-13-
<PAGE> 1
EXHIBIT (b)(4)
CONFIDENTIAL
[JILLIAN'S ENTERTAINMENT LOGO]
PRESENTATION TO THE BOARD OF DIRECTORS
April 22, 1997
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 2
JILLIAN'S ENTERTAINMENT CORP.
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXECUTIVE SUMMARY 1
ADVISOR'S ROLE 3
SUMMARY OF VALUATION RESULTS
I. STOCK TRADING HISTORY AND EQUITY MARKET REVIEW 4
II. MERGER VALUATION ANALYSIS 5
III. COMPARABLE COMPANY ANALYSIS 6
IV. COMPARABLE TRANSACTION ANALYSIS 8
V. PREMIUMS PAID ANALYSIS 8
VI. DISCOUNTED CASH FLOW ANALYSES 9
CONCLUSION 14
</TABLE>
EXHIBITS:
I. Stock Trading Graphs and Equity Market Review
II. Merger Consideration Analysis
III. Comparable Company Analysis
IV. Comparable Transaction Analysis
V. Premiums Paid Analysis
VI. Discounted Cash Flow Analyses
VII. Other Supplemental Analyses
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 3
JILLIAN'S ENTERTAINMENT CORP.
EXECUTIVE SUMMARY
================================================================================
* Stonebridge Associates, LLC ("Stonebridge") has been retained by the Board
of Directors of Jillian's Entertainment Corporation ("Jillian's" or the
"Company") and John L. Kidde in his capacity as the outside director of the
Company for the purpose of providing a fairness opinion with regard to a
merger transaction contemplated by 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 $0.50 in cash
for each share of Company common stock owned by such shareholder (the
"Merger Consideration").
- Summary of Selected Merger Provisions: Subject to Board of Directors'
("Board") approval, the Merger Agreement contemplates that:
- Each share of common stock held by Non-continuing Shareholders
(5,154,308 shares) will have the right to receive $.50 per share in
cash;
- 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 the Merger Consideration for
each share of Common Stock as to which the option is exercisable,
less the exercise price for each such share; and
- Each warrant to purchase a share or shares of Common Stock held
immediately prior to consummation of the Merger by any person with
whom the Company does not have ongoing relationships will be
converted into the right to receive, upon the exercise of such
warrant, the Merger Consideration for each share of Common Stock to
which the warrant is exercisable, upon payment of the exercise price
for each such share.
- Stonebridge will deliver to the Board an opinion as to the fairness,
from a financial point of view, to the Company's Non- continuing
Shareholders of the Merger Consideration to be offered for the
outstanding shares of Jillian's common stock, options and warrants to
be purchased in the Merger ("Fairness Opinion"). Stonebridge has not
been requested to opine as to, and its opinion will not in any manner
address, any other terms or provisions of the Merger or the Merger
Agreement or the Company's underlying decision to proceed with the
Merger.
1 STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 4
JILLIAN'S ENTERTAINMENT CORP.
EXECUTIVE SUMMARY
================================================================================
* Fairness Opinion Summary
- Employing several methodologies, Stonebridge observed that the Merger
Consideration:
1) Falls within a reasonable range of values of Jillian's, as
derived through two comparative valuation analyses; and
2) Exceeds a reasonable range of value derived by analyzing the
Company's projected operating and financial performance.
- The Merger Consideration represents a 284.6% premium to the Company's
common stock price both one day and 30 days prior to the announcement,
compared to the mean one day and 30 day premiums of 14.1% and 38.0%,
respectively, paid in comparable transactions involving small market
capitalization companies.
* Conclusion
- Based on Stonebridge's analyses, the Merger Consideration of $0.50 per
share in cash is fair to the Non-continuing Shareholders from a
financial point of view.
2 STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 5
JILLIAN'S ENTERTAINMENT CORP.
ADVISOR'S ROLE
================================================================================
* Prepared a valuation assessment of Jillian's
- Met with Management in Boston
- Interviewed Jillian's management team, including:
- Dan Smith, President and Chief Operating Officer
- Sara Nyberg, Controller
- Reviewed Company's business plan and discussed strategic focus and
future plans
- Reviewed historical operating and financial performance, and financial
statements
- Examined Company's 1998 budget and, along with Management, developed
five year projections
- Reviewed certain documentation with regard to existing club operations
- Prepared valuation utilizing several valuation techniques:
- Comparable Company Analysis
- Comparable Transaction Analysis
- Discounted Cash Flow Analysis
* Reviewed public equity market trading activity
- Examined historical and current trading activity for Jillian's over a
variety of time horizons
- Reviewed historical and current trading activity for comparable public
companies in the entertainment and themed restaurant industry
- Determined range of premiums paid in merger and acquisition transactions
over a target's stock price one day and thirty days prior to the
announcement of the transaction.
3 STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 6
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
I. STOCK TRADING HISTORY (SEE EXHIBIT I)
* Stonebridge examined Jillian's historical weekly stock price and trading
volume over the past three years.
- Jillian's highest stock price over the past three years was $0.81 in
May 1994. The Merger Consideration represents a 38.3% discount to
the Company's stock price as of that date. Over the three year time
period, average weekly trading volume was 27,387 shares.
- During the past 52 weeks, Jillian's highest stock price was $0.38.
The Merger Consideration represents a 31.6% premium to the Company's
stock price as of that date. Over this time period, average weekly
trading volume was 24,840 shares.
* Stonebridge examined the trading volume history of Jillian's stock over
a 360, 180, 90, 60 and 30 day period. Stonebridge then compared each
period's average stock price, weighted by the volume traded within that
period, to the $0.50 per share Merger Consideration.
- The Merger Consideration represents a 127% premium over the 360 day
weighted average stock price of $0.22.
- The Merger Consideration represents a 177.8% premium over the 180 day
weighted average stock price of $0.18.
- The Merger Consideration represents a 194.1% premium over the 90 day
weighted average stock price of $0.17.
- The Merger Consideration represents a 150.0% premium over the 60 day
weighted average stock price of $0.20.
- The Merger Consideration represents a 138.1% premium over the 30 day
weighted average stock price of $0.21.
- The transaction was announced on March 17, 1997. The 30 day
weighted average stock price may reflect market reactions to the
announcement.
<TABLE>
<CAPTION>
================================================================================
STOCK TRADING HISTORY ANALYSIS
================================================================================
$0.50 PER SHARE
JILLIAN'S OFFER PRICE
MEASURE STOCK PRICE PREMIUM
------- ----------- -------
<S> <C> <C>
High over three years $0.81 (38.3%)
High over 52 weeks 0.38 31.6%
360 day weighted average 0.22 127.3%
180 day weighted average 0.18 177.8%
90 day weighted average 0.17 194.1%
60 day weighted average 0.20 150.0%
30 day weighted average 0.21 138.1%
</TABLE>
4
<PAGE> 7
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
* Stonebridge also compared Jillian's stock price history over the past
three years to an index comprised of comparable public companies in the
entertainment and themed restaurant industries, as well as the S&P 500
and the S&P 600 Small Cap Index.
- The comparable public company index contains eight public companies
in the entertainment/ themed restaurant industry:
- 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.
- The public companies used in this analysis have similar operating
formats and customer bases to Jillian's. However, they may not be
directly comparable because of their greater size and general market
focus.
- Over the last three years, Jillian's stock price has significantly
underperformed the comparable company index, the S&P 500 Index and
the S&P 600 Small Cap Index, reflecting the Company's disappointing
operating and financial performance, as well as its small public
float, limited trading activity and lack of investor following.
* Stonebridge examined selected equity market measures for Jillian's and
compared them to corresponding measures for the comparable companies in
the index.
- Jillian's was one of only two companies with a stock price below
$1.00.
- The Company had the lowest public float market value of any company
analyzed.
- The Company's current NASDAQ Small Cap Market listing is subject to
discontinuation as of May 7, 1997.
- Average monthly trading volume for the past twelve months was the
second lowest of the averages observed.
- The Company has less than 1.0% institutional ownership and is not
followed by any equity research analysts.
II. MERGER CONSIDERATION ANALYSIS (SEE EXHIBIT II)
* Stonebridge calculated the total equity value of Jillian's based on the
$0.50 per share Merger Consideration to be offered in the transaction.
5 STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 8
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
- Stonebridge multiplied the 9,137,798 outstanding shares of common
stock by $0.50 to arrive at an equity value of the common stock of
$4,568,899.
- Stonebridge also assumed the exercise of all outstanding options and
warrants that could be exercised at a price of $0.50 per share or
less. Total consideration of the options and warrants is
approximately $176,350.
- Therefore, at $.50 per share, Jillian's total equity valuation
would be approximately $4,745,245.
III. COMPARABLE COMPANY ANALYSIS (SEE EXHIBIT III)
* The Comparable Company Analysis performed by Stonebridge values the
Company on a stand-alone basis using appropriate multiples of operating
performance of the peer group of public companies.
- The peer group of comparable public companies used in this analysis
is the same eight companies used in the stock trading analysis
discussed above. While the public companies used in this analysis
are not directly comparable due to their greater size and general
market focus, their similar operating formats and customer base make
them relevant for this analysis. Stonebridge believes the composite
performance of these companies provides a meaningful basis of
comparison to Jillian's.
- Stonebridge examined Jillian's operating performance over the last
three years with three year operating performances of the peer group.
- Jillian's calculated annual revenue growth rate of 53% was lower
than six of the peer companies, but higher than the group's mean
of 47.5%.
- Jillian's gross margin, while higher than all but one peer
company, declined from 79.1% in 1994 to 77.2% in 1996. The
Company's 1996 gross margin was approximately 26.0% higher than
the peer group's mean of 61.3%.
- Jillian's earnings before interest, taxes, depreciation and
amortization (EBITDA) was negative in 1994 and 1995, and lower
than the peer group means of 4.4% and 5.3%, respectively. In
1996, the Company's EBITDA margin of 3.8% was lower than all but
one of the peer companies, and lower than the peer group's mean
of 12.1%.
- Jillian's earnings before interest and taxes (EBIT) was negative
in 1994 and 1995, and lower than the peer group means of (1.6%)
and (0.6%), respectively. In 1996, the Company's EBIT margin of
(1.7%) was lower than six companies in the peer group, and lower
than the group's mean of 3.4%.
- Over the last three years, Jillian's incurred net losses. In
1996, the Company's net margin of (3.3%) was higher than three of
the peer companies, but lower than the mean of 1.6%.
- Stonebridge observed that, in general, Jillian's operating and
financial performance
6
<PAGE> 9
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
compares unfavorably to the mean operating and financial performance
of the comparable companies analyzed.
- Utilizing those valuation methods that properly reflect the Company's
current operating performance, historical lack of profitability, and
leveraged capital structure, Stonebridge calculated the mean to
median range of EBITDA, EBIT, and book value multiples of the eight
public comparable companies.
- The mean to median EBITDA multiple range was 8.8x - 7.6x
- The mean to median EBIT multiple range was 15.1x - 17.4x
- The mean to median book value multiple range was 0.9x - 1.0x
- These multiples, when applied to Jillian's latest twelve month
results, reflect the theoretical valuation of the Company based on
the valuation parameters of the comparable public companies.
- Stonebridge used Jillian's latest twelve month financial results
as of December 31, 1996, as adjusted, to be consistent with the
eight peer companies, most of which were trading on results as of
that date.
- Stonebridge adjusted Jillian's latest twelve month financial
results to remove $300,000 related to a writedown of assets
associated with the Long Beach club, as well as $200,000 in
legal fees related to the Merger.
<TABLE>
<CAPTION>
====================================================================================================================================
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE COMPANY ANALYSIS RESULTS
-----------------------------------
($000'S)
====================================================================================================================================
JILLIAN'S
COMPARABLE JILLIAN'S JILLIAN'S PER SHARE
VALUATION COMPANY IMPLIED TOTAL IMPLIED EQUITY IMPLIED EQUITY
MEASURE MULTIPLE RANGE VALUATION RANGE VALUATION RANGE VALUATION RANGE
------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
EBITDA 7.6x - 8.8x $10,421 - $12,042 $8,155 - $9,776 $0.89 - $1.07
EBIT 15.1x - 17.4x $7,639 - $8,766 $5,373 - $6,500 $0.59 - $0.71
Book Value 0.9x - 1.0x $4,325 - $4,708 $2,059 - $2,442 $0.23 - $0.27
</TABLE>
- Employing this methodology, Jillian's per share implied equity
valuation ranges from $0.23 to $1.07.
- Given the Company's current operating performance, its historical
lack of profitability, and its leveraged capital structure,
Stonebridge believes Jillian's valuation would fall in the lower end
of the range outlined above.
7 STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 10
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
IV. COMPARABLE TRANSACTION ANALYSIS (SEE EXHIBIT IV)
* The Comparable Transaction Analysis developed by Stonebridge examined
mergers or acquisitions in the past three years in comparable industries
to determine the multiples of operating performance paid by acquirors in
an arms-length transaction.
- Stonebridge examined 39 mergers or acquisitions in the entertainment
and restaurant industries during the period from May 1994 - April
1997. Of these transactions, 10 companies reported revenue
information, two companies provided EBITDA information, one company
provided EBIT information, and three companies provided book value
information from which multiples could be determined.
- The mean and median EBITDA multiple was 4.3x.
- The mean and median EBIT multiple was 12.5x.
- The mean to median book value multiple range was 2.0x - 2.5x.
<TABLE>
<CAPTION>
===============================================================================================================
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS RESULTS
---------------------------------------
($000'S)
===============================================================================================================
JILLIAN'S
COMPARABLE JILLIAN'S JILLIAN'S PER SHARE
VALUATION TRANSACTION IMPLIED TOTAL IMPLIED EQUITY IMPLIED EQUITY
MEASURE MULTIPLE RANGE VALUATION RANGE VALUATION RANGE VALUATION RANGE
------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
EBITDA 4.3x - 4.3x $5,832 - $5,832 $3,566 - $3,566 $0.39 - $0.39
EBIT 12.5x - 12.5x $6,304 - $6,304 $4,038 - $4,038 $0.44 - $0.44
Book Value 2.0x - 2.5x $6,980 - $8,122 $4,714 - $5,856 $0.52 - $0.64
</TABLE>
- Employing this methodology, Jillian's per share implied equity
valuation ranges from $0.39 to $0.64.
- Stonebridge observed that this analysis incorporated only a limited
number of transactions, some of which occurred over two years ago.
IV. PREMIUMS PAID ANALYSIS (SEE EXHIBIT V)
* In an arms-length acquisition, an acquiror generally pays a premium over
the target's stock price to account for the acquisition of controlling
interest in the company. The Premiums Paid Analysis examined the
relative premiums paid in recent merger and acquisition transactions
over the target's stock price one day and thirty days prior to the
announcement of the transaction.
- Stonebridge examined the same 39 transactions in the entertainment
and restaurant industry that were reviewed in the Comparable
Transaction Analysis. Of these, only
8
<PAGE> 11
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
three transactions provided information relevant to the premiums paid
analysis.
- The mean and median premium paid over the target's stock price
one day prior to the announcement date was 51%. For the thirty
day period prior to the announcement, the mean and median premium
paid was 50%.
- Stonebridge also examined the range of premiums paid for companies
with a market capitalization below $10 million both one day and
thirty days prior to the announcement date of the transaction.
- From January 1995 to March 1997, 32 transactions involving
companies with market capitalizations under $10 million occurred.
Of these, 26 provided information relevant to this analysis.
- The mean to median premium range over the target's stock price
one day prior to the announcement date was 14% to 0%.
- For the thirty day period prior to the announcement, the mean to
median premium range was 38% to 14%.
- On March 14, 1997, one trading day prior to the announcement date of
the proposed transaction Jillian's stock price was $0.13. The $.50
per share Merger Consideration represents a 284.6% premium to the
Company's stock price as of March 14, 1997.
- On February 13, 1997, thirty days prior to the announcement of the
proposed transaction, Jillian's stock price was also $0.13. The
$0.50 per share Merger Consideration represents a 284.6% premium over
the Company's stock price as of that date.
V. DISCOUNTED CASH FLOW ANALYSES (SEE EXHIBIT VI)
* The discounted cash flow (DCF) model developed by Stonebridge determined
the estimated value of Jillian's based on the net present value (NPV) of
its future income streams plus the NPV of the terminal value of the
Company at some future date.
* The DCF model was constructed based on pro forma projections of
Jillian's for a five year period. The NPV was calculated by discounting
the future free cash flows from operating the business and the terminal
value of the business in the final year using an appropriate discount
rate that is determined by a weighted average cost of capital analysis.
* The discount rate typically selected reflects the relative risk of the
projected future income streams of the business. The discount rate is
further affected by the capitalization structure of a company.
- Stonebridge first calculated Jillian's cost of debt based on the
weighted average interest rate of the Company's total debt
outstanding as of March 31, 1997.
9
<PAGE> 12
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
- Jillian's cost of debt was approximately 11.0%.
- Stonebridge then examined the average returns of private equity funds
during 1996 to determine an appropriate cost of equity. Due to the
lack of liquidity in Jillian's stock as well as its disappointing
operating results, Stonebridge concluded that the return required by
equity investors in Jillian's would approximate that return required
by risk prone investors in private equity funds.
- The average equity return for private equity funds in 1996, based
on research performed by Venture Economics Information Services,
was 42.7%.
- Jillian's, however, is a public company. Therefore, Stonebridge
used a range of 38% - 42% for the Company's implied cost of
equity.
- Due to Jillian's history of losses, the Company's book value does
not accurately reflect the basis of calculating required equity
returns. Paid in capital represents the actual dollar amount of
equity that has been invested in Jillian's to date, and more
accurately reflects the invested equity on which an equity return
should be earned.
- Jillian's paid in capital as of March 31, 1997 was $9.5
million.
- Using the weighted average cost of capital formula, Stonebridge
calculated a range of discount rates from 31.0% - 35.0%.
* The terminal value for Jillian's was determined by multiplying its
EBITDA in 2003 by a range of multiples, based on the Comparable Company
Analysis.
- The high to low EBITDA multiple range determined by the Comparable
Company Analysis was 3.6x - 15.0x.
- Due to Jillian's operating performance in comparison to those of
the peer group, Stonebridge believes that the appropriate EBITDA
multiple is between the low of 3.6x and the median for the peer
group of 8.8x.
- The average of these two multiples is 6.2x.
- Therefore, Stonebridge used a range of EBITDA multiples of 5.0x -
7.0x to determine the Company's terminal value.
* Jillian's operating budget, as provided by Management, provides for a
revenue growth rate of 3.5% in 1998. Thereafter, Management projects
revenues to grow at 2.5%.
- Management assumes, both in its 1998 operating budget and its
projections, that no additional clubs would be opened if the
contemplated transaction is not consummated because of the high cost
and uncertainty associated with required financing.
- Even though certain commitments have been entered into with regard to
the opening of two new clubs, Management believes that the Company
may not be able to honor these commitments if the Merger is not
consummated.
STONEBRIDGE
ASSOCIATES, LLC
10
<PAGE> 13
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
* Management has indicated an interest in selling the Long Beach, CA club
due to poor operating performance. To date, there have been few
indications of interest from potential buyers. Therefore, Stonebridge
analyzed Jillian's projections two ways.
- Stonebridge assumed Jillian's would continue to operate the Long
Beach club going forward.
- Stonebridge also examined a scenario in which Long Beach would be
sold at the end of 1998. Total consideration paid would be equivalent
to the remaining debt outstanding relating to the Long Beach club.
* Given the revenue growth of better performing companies in the
entertainment and restaurant industries, Stonebridge analyzed each
scenario described above using a 5.0% revenue growth assumption
beginning in 1998.
- However, corporate overhead growth and rent are assumed to grow at
2.5%, given the generally fixed nature of overhead costs and the
inflation rate for rental adjustments. Other costs were adjusted
accordingly to reflect higher revenue levels.
* The four sensitivity scenarios which Stonebridge examined are outlined
below:
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY OF DCF SENSITIVITY ANALYSES
====================================================================================================================================
<S> <C>
Base Case Projections, including Long Beach Base Case Projections, assuming Long Beach is sold at the end of
fiscal 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
5% Revenue Growth Projections, assuming Long Beach 5% Revenue Growth Projections, including Long Beach
the end of fiscal 1998.
====================================================================================================================================
</TABLE>
* The Base Case scenario utilizes the original Management projections,
which assume a 3.5% revenue growth in 1998 and 2.5% revenue growth
thereafter, as well as the continuation of the Long Beach club.
<TABLE>
<CAPTION>
======================================================================================================
BASE CASE DCF VALUATION RESULTS
($000'S)
======================================================================================================
JILLIAN'S IMPLIED
JILLIAN'S IMPLIED JILLIAN'S IMPLIED PER SHARE
TOTAL VALUATION RANGE EQUITY VALUATION RANGE EQUITY VALUATION RANGE
--------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
$3,256 - $4,070 $1,311 - $2,125 $0.14 - $0.23
======================================================================================================
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
11
<PAGE> 14
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
* The Base Case (Long Beach Sold) scenario assumes Long Beach is sold at
the end of fiscal 1998 for the amount of debt outstanding related to the
Long Beach club.
<TABLE>
<CAPTION>
================================================================================================
BASE CASE DCF (LONG BEACH SOLD) VALUATION RESULTS
($000'S)
================================================================================================
JILLIAN'S IMPLIED
JILLIAN'S IMPLIED JILLIAN'S IMPLIED PER SHARE
TOTAL VALUATION RANGE EQUITY VALUATION RANGE EQUITY VALUATION RANGE
--------------------- ---------------------- ----------------------
<S> <C> <C>
$3,461 - $4,348 $1,516 - $2,403 $0.17 - $0.26
================================================================================================
</TABLE>
* The Adjusted Revenue scenario assumes a revenue growth of 5% per year,
beginning in 1998.
<TABLE>
<CAPTION>
==================================================================================================
ADJUSTED REVENUE DCF VALUATION RESULTS
($000'S)
==================================================================================================
JILLIAN'S IMPLIED
JILLIAN'S IMPLIED JILLIAN'S IMPLIED PER SHARE
TOTAL VALUATION RANGE EQUITY VALUATION RANGE EQUITY VALUATION RANGE
--------------------- ---------------------- ----------------------
<S> <C> <C>
$4,387 - $5,642 $2,442 - $3,697 $0.27 - $0.40
==================================================================================================
</TABLE>
* The Adjusted Revenue (Long Beach Sold) scenario assumes that the Long
Beach club is sold at the end of fiscal 1998 for the amount of the
remaining debt outstanding related to Long Beach at the time of the
sale.
<TABLE>
<CAPTION>
==================================================================================================
ADJUSTED REVENUE (LONG BEACH SOLD) DCF VALUATION RESULTS
($000'S)
==================================================================================================
JILLIAN'S IMPLIED
JILLIAN'S IMPLIED JILLIAN'S IMPLIED PER SHARE
TOTAL VALUATION RANGE EQUITY VALUATION RANGE EQUITY VALUATION RANGE
--------------------- ---------------------- ----------------------
<S> <C> <C>
$4,667 - $6,000 $2,722 - $4,055 $0.30 - $0.44
==================================================================================================
</TABLE>
* The four scenarios outlined above suggest that the Company may not
able to pay its debt obligations when due, while supporting the cash
working capital requirements of the existing clubs. In addition,
Stonebridge did not account for a potential cash requirement
12
<PAGE> 15
JILLIAN'S ENTERTAINMENT CORP.
SUMMARY OF VALUATION RESULTS
================================================================================
that could arise if any of the participants in the four limited partnerships
elect to exercise their put option.
* In aggregate, Jillian's could potentially incur additional cash
requirements in fiscal 1999 ranging from approximately $160,000 to
$850,000. The range is dependent upon the financial condition of the
clubs, primarily the Worcester club, as of the twelve months ended
December 31, 1998.
STONEBRIDGE
ASSOCIATES, LLC
13
<PAGE> 16
JILLIAN'S ENTERTAINMENT CORP.
CONCLUSION
================================================================================
CONCLUSION
* The table below summarizes the per share equity valuation derived from
each of the analyses described above.
<TABLE>
<CAPTION>
===================================================================================================================
SUMMARY OF IMPLIED VALUATION AND PREMIUM
===================================================================================================================
IMPLIED PER SHARE IMPLIED MERGER CONSIDERATION
----------------- ----------------------------
VALUATION ANALYSIS VALUATION PREMIUM
------------------ --------- -------
<S> <C> <C>
Comparable Company Analysis $0.23 - $1.07 (53.3%) - 117.4%
Comparable Transaction Analysis $0.39 - $0.64 (21.9%) - 28.2%
Premiums Paid Analysis:
-----------------------
Market Capitalizations under $10
MM $0.13 - $0.14 257.1% - 284.6%
One Day $0.14 - $0.17 194.1% - 257.1%
Thirty Days
Comparable Transactions $0.19 163.2%
One Day $0.19 163.2%
Thirty Days
DCF Analyses $0.14 - $0.44 13.6% - 257.1%
===================================================================================================================
</TABLE>
* Employing these methodologies, Stonebridge observed that the Merger
Consideration:
1) Falls within a reasonable range of values of Jillian's, as
derived through the Comparable Company and Comparable Transaction
analyses;
2) Exceeds a reasonable range of implied values of Jillian's, as
derived through the Premiums Paid Analysis; and
3) Exceeds a reasonable range of value as derived through the
Discounted Cash Flow Analysis.
STONEBRIDGE
ASSOCIATES, LLC
14
<PAGE> 17
JILLIAN'S ENTERTAINMENT CORP.
CONCLUSION
================================================================================
CONCLUSION:
BASED ON STONEBRIDGE'S ANALYSES, AND SUBJECT TO THE ASSUMPTIONS AND
CONSIDERATIONS SUMMARIZED IN THE FAIRNESS OPINION DATED APRIL 22, 1997, THE
MERGER CONSIDERATION OF $0.50 PER SHARE IN CASH IS FAIR TO THE NON-CONTINUING
SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW.
STONEBRIDGE
ASSOCIATES, LLC
15
<PAGE> 18
WEEKLY PRICE/VOLUME FOR LAST 3 YEARS QBAL
================================================================================
[LINE GRAPH]
- ---------------------------
Closing stock prices and total trading volume for the weeks ending April 15,
1994 through April 18,1997.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 19
TOTAL TRADING VOLUME FOR LAST 360 DAYS QBAL
================================================================================
[BAR GRAPH]
- ------------------------
Daily closing common stock price for the 360 days prior to April 21, 1997
Total volume for the 360 day period was 1,274,500 shares traded.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 20
TOTAL TRADING VOLUME FOR LAST 180 DAYS QBAL
================================================================================
[BAR GRAPH]
- ---------------------------------------
Daily closing common stock price for the 180 days prior to April 21, 1997.
Total volume for the 180 day period was 704,200 shares traded.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 21
TOTAL TRADING VOLUME FOR LAST 90 DAYS QBAL
================================================================================
[BAR GRAPH]
- --------------------------------------
Daily closing common stock price for the 90 days prior to April 21, 1997.
Total volume for the 90 day period was 361,300 shares traded.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 22
TOTAL TRADNG VOLUME FOR LAST 60 DAYS QBAL
================================================================================
[BAR GRAPH]
- --------------------------------------------
Daily closing common stock price for the 60 days prior to April 21, 1997.
Total volume for the 60 day period was 197,00 shares traded.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 23
TOTAL TRADING VOLUME FOR LAST 30 DAYS QBAL
================================================================================
[BAR GRAPH]
- ---------------------------------------------
Daily closing common stock price for the 30 days prior to April 21, 1997.
Total volume for the 30 day period was 181,500 shares traded.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 24
QBAL V. COMPARABLE PUBLIC COMPANY INDEX, S&P 500,
AND S&P 600 SMALLCAP
WEEKS ENDING APRIL 15, 1994 THROUGH APRIL 18, 1997
[LINE GRAPH]
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 25
JILLIAN'S ENTERTAINMENT CORP.
STOCK TRADING HISTORY
COMPARABLE COMPANY EQUITY MARKET DATA (a)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
BOWL DAVE & GRAND LASER
JILLIAN'S AMERICA BUSTERS HAVANA STORM
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock Price $ 0.25 $ 6.75 $ 19.50 $ 2.56 $ 0.63
Shares Outstanding (000) 9,138 4,145 7,268 7,509 3,825
Market Capitalization (000) $ 2,285 $ 27,979 $ 141,726 $ 19,242 $ 2,391
Public Float:
Shares Outstanding (000) 6,037 1,220 6,280 1,430 2,420
Market Value (000) $ 1,509 $ 8,235 $ 122,460 $ 3,664 $ 1,513
Listing NASDAQ Small AMSE NASDAQ NASDAQ NASDAQ
Cap. (Delisting pending) Natl. Market Small Cap. Small Cap.
LTM Monthly Average Trading Volume 102,216 74,800 2,810,000 1,740,000 260,772
Approximate Institutional Ownership 0% 32% 26% 1% 3%
Research Analyst Coverage 0 1 10 1 1
Total Returns:
1 Year -33% 2% -6% 43% 7%
3 Year -34% -7% 7% -6% NA
</TABLE>
- ------------------------------------------------------------------------------
FOOTNOTES:
- ------------------------------------------------------------------------------
(a) All data of April 18, 1997, except 3 Year Total Returns which are as of
March 31, 1997.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 26
JILLIAN'S ENTERTAINMENT CORP.
STOCK TRADING HISTORY
COMPARABLE COMPANY EQUITY MARKET DATA (a)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MICHIGAN PLANET ROCK WESTERN
JILLIAN'S BREWERY HOLLYWOOD BOTTOM COUNTRY CLUBS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock Price $ 0.25 $ 2.25 $ 17.13 $ 11.00 $ 1.13
Shares Outstanding (000) 9,138 5,225 95,973 7,907 3,120
Market Capitalization (000) $ 2,285 $ 11,756 $ 1,643,538 $ 86,977 $ 3,510
Public Float:
Shares Outstanding (000) 6,037 2,890 22,920 5,090 1,730
Market Value (000) $ 1,509 $ 6,503 $ 392,505 $ 55,990 $ 1,946
Listing NASDAQ Small NASDAQ NASDAQ NASDAQ NASDAQ
Cap. (Delisting pending) Small Cap. Natl. Market Natl. Market Small Cap.
LTM Monthly Average Trading Volume 102,216 145,250 7,670,000 1,470,000 193,025
Approximate Institutional Ownership 0% 10% 11% 33% 0%
Research Analyst Coverage 0 1 7 13 0
Total Returns:
1 Year -33% -45% -35% -4% -77%
3 Year -34% NA NA 8% -42%
</TABLE>
- ------------------------------------------------------------------------------
FOOTNOTES:
- ------------------------------------------------------------------------------
(a) All data of April 18, 1997, except 3 Year Total Returns which are as of
March 31, 1997.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 27
JILLIAN'S ENTERTAINMENT CORP.
MERGER CONSIDERATION ANALYSIS
<TABLE>
<CAPTION>
CONSIDERATION ANALYSIS:
<S> <C>
Total Primary Shares 9,137,798
Acquisition Price per Share 0.50
--------------
Total Primary Share Considerations $4,568,899
Exercisable Option Shares 1,670,000
Average Net Option Consideration (a) 0.10
--------------
Total Option Consideration $166,000
Exercisable Warrant Shares 191,239
Average Net Warrant Consideration (a) 0.05
--------------
Total Warrant Consideration $10,346
TOTAL EQUITY TRANSACTION VALUE $4,745,245
==============
Plus: Total Debt Outstanding 2,861,494
Less: Cash and Equivalents 595,313
TOTAL TRANSACTION VALUE $7,011,426
==============
</TABLE>
- -------------------------------
(a) Consideration paid is equal to the spread between the $.50 per share Merger
Consideration and the average exercise price of the options or warrants.
STONEBRIDGE
ASSOCIATES, LLC
Page 1
<PAGE> 28
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
MARKET MULTIPLE ANALYSIS FOR COMPARABLE PUBLIC COMPANIES (a)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SHARES
12 MOS. OUTSTANDING STOCK MARKET PREF. TOTAL
COMPANY PEER GROUP ENDING (MM) PRICE (b) CAP. (c) STOCK DEBT (d)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jillian's Entertainment 12/96 9.14 $0.22 $2.0 $0.0 $2.9
Bowl America, Inc. 12/96 4.15 6.88 28.5 0.0 0.0
Dave & Buster's Inc. 10/96 7.27 19.25 139.9 0.0 8.9
Grand Havana (h) 12/96 7.51 2.44 18.3 0.0 0.0
Laser Storm, Inc. (i) 9/96 3.82 0.66 2.5 0.0 0.0
Michigan Brewery, Inc. 12/96 5.28 2.00 10.6 0.0 2.4
Planet Hollywood International, Inc. 12/96 95.97 17.13 1,643.5 0.0 8.3
Rock Bottom Restaurants, Inc. 12/96 7.91 11.00 87.0 0.0 12.9
Western Country Clubs, Inc. (j) 9/96 3.12 1.13 3.5 0.0 0.6
<CAPTION>
- ------------------------------------------------------------------------------------------------------
TOTAL BOOK
COMPANY PEER GROUP CASH CAP. (e) REVENUES EBITDA (f) EBIT (g) VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jillian's Entertainment $0.6 $4.3 $13.6 $1.4 $0.5 $2.3
Bowl America, Inc. 8.9 19.6 26.8 5.5 3.4 32.6
Dave & Buster's Inc. 0.1 148.7 78.2 14.4 9.2 73.3
Grand Havana (h) 1.0 17.3 4.7 NM NM 3.0
Laser Storm, Inc. (i) 2.0 0.5 5.9 (0.4) (0.6) 6.0
Michigan Brewery, Inc. 0.3 12.6 4.3 0.4 (0.9) 12.5
Planet Hollywood International, Inc. 49.8 1,602.0 373.4 106.9 79.6 312.1
Rock Bottom Restaurants, Inc. 0.0 99.9 109.2 13.2 5.4 65.3
Western Country Clubs, Inc. (j) 0.2 3.9 7.6 0.5 0.1 4.0
</TABLE>
- --------------------------------------------------------------------------------
FOOTNOTES:
- --------------------------------------------------------------------------------
(a) All dollar figures except stock price expressed in millions.
(b) Representing the price as of April 21, 1997.
(c) Market Capitalization = (# of Shares Outstanding) x (Price).
(d) Total Debt = (Short-Term Notes) + (Current Portion of LT Debt) + (LT Debt)
+ (Convertible Debt) + (Mortgages) + (Capital Leases).
(e) Total Capitalization = (Market Capitalization) + (Total Debt) + (Preferred
Stock) - (Cash).
(f) EBITDA = (Earnings Before Interest and Taxes) + (Depreciation and
Amortization).
(g) EBIT = (Earnings Before Interest and Taxes)
(h) Company disposed of Love's Restaurant chain in December 1996 to focus on
Cigar Clubs and On Canon restaurant. Results above include only continuing
operations. Operating Income and Operating Cash Flow for the continuing
business was unavailable as company FYE is September 30.
(i) Revenue and net income are as of 12/31/96. FYE 12/31/96 financials are
unavailable. Company has filed Form 12b-25, Notification of Late Filing,
with SEC.
(j) FYE 12/31/96 financials are unavailable. Company has filed Form 12b-25,
Notification of Late Filing, with SEC due to a change in auditors.
<PAGE> 29
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
MARKET MULTIPLE ANALYSIS FOR COMPARABLE PUBLIC COMPANIES
<TABLE>
<CAPTION>
TOTAL CAPITALIZATION (a) TO: MARKET CAPITALIZATION (b) TO:
---------------------------------- -----------------------------------------
BOOK
COMPANY PEER GROUP EBITDA EBIT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bowl America, Inc. 3.6x 5.7x 0.9x
Dave & Buster's Inc. 10.3x 16.1x 1.9x
Grand Havana NM NM 6.1x (c)
Laser Storm, Inc. NM NM 0.4x
Michigan Brewery, Inc. 28.7x (c) NM 0.8x
Planet Hollywood International, Inc. 15.0x 20.1x 5.3x (c)
Rock Bottom Restaurants 7.6x 18.7x 1.3x
Western Country Clubs, Inc. 7.4x 33.7x (c) 0.9x
- --------------------------------------------------------------------------------------------------------------------------------
HIGH 14.98x 20.12x 1.91x
LOW 3.58 5.70 0.42
MEAN 8.77 15.15 1.04
MEDIAN 7.59 17.38 0.88
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FOOTNOTES:
- --------------------------------------------------------------------------------
(a) Total Capitalization = (Market Capitalization) + (Total Debt) + (Preferred
Stock) - (Cash).
(b) Market Capitalization = (# of Shares Outstanding) x (Stock Price).
(c) Not included in high, low, mean and median calculations.
<PAGE> 30
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
IMPLIED VALUATION USING TRADING MULTIPLES FOR COMPARABLE PUBLIC COMPANIES (a)
($000'S)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL VALUATION EQUITY VALUATION PER SHARE EQUITY
MULTIPLE RANGE RANGE (b) RANGE (c) VALUATION RANGE
JILLIAN'S -------------------- --------------------- --------------------- ----------------------
ENTERTAINMENT MEAN MEDIAN MEAN MEDIAN MEAN MEDIAN MEAN MEDIAN
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA $1,372 8.8 x - 7.6 x 12,042 - 10,421 9,776 - 8,155 1.07 - 0.89
EBIT $504 15.1 - 17.4 7,639 - 8,766 5,373 - 6,500 0.59 - 0.71
Book Value $2,342 1.0 - 0.9 4,708 - 4,325 2,442 - 2,059 0.27 - 0.23
</TABLE>
- --------------------------------------------------------------------------------
FOOTNOTES:
- --------------------------------------------------------------------------------
(a) Valuation estimates based on the mean and median multiples of comparable
companies.
(b) Total Valuation Range estimates based on multiples of Revenues and
Operating Income are derived using Total Capitalization (Stock
Price*Shares Outstanding +Debt-Cash) while valuations based on multiples
of Net Income and Book Value are derived using Market Capitalization
(Stock Price*Shares Outstanding).
(c) Total Valuation Range estimates are calculated by subtracting total debt
and adding cash and equivalents to the Equity Valuation Range.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 31
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
RATIO ANALYSIS FOR COMPARABLE PUBLIC COMPANIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
DEBT TO DEBT TO
EBIT EBITDA DEBT TO TOTAL BOOK TOTAL
COMPANY PEER GROUP MARGIN MARGIN EQUITY CAP. CAP.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's Entertainment 3.7% 10.1% 122.1% 55.0% 67.1%
Bowl America, Inc. 12.9% 20.5% 0.0% 0.0% 0.0%
Dave & Buster's Inc. 11.8% 18.4% 12.1% 10.8% 6.0%
Grand Havana NM NM 0.0% 0.0% 0.0%
Laser Storm, Inc. NM NM 0.6% 0.6% 6.8%
Michigan Brewery, Inc. NM 10.1% 18.9% 15.9% 18.9%
Planet Hollywood International, Inc. 21.3% 28.6% 2.6% 2.6% 0.5%
Rock Bottom Restaurants 4.9% 12.0% 19.8% 16.5% 12.9%
Western Country Clubs, Inc. 1.5% 6.9% 14.5% 12.7% 14.8%
- --------------------------------------------------------------------------------------------------------
HIGH 21.3% 28.6% 19.8% 16.5% 18.9%
LOW 1.5% 1.5% 0.0% 0.0% 0.0%
MEAN 10.5% 13.1% 8.6% 7.4% 7.5%
MEDIAN 11.8% 11.8% 7.4% 6.7% 6.4%
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 32
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
SUMMARY DESCRIPTION OF COMPARABLE PUBLIC COMPANIES
BOWL AMERICA, INC. BOWL AMERICA OPERATES 26 BOWLING CENTERS IN
WASHINGTON DC, BALTIMORE, ORLANDO AND
JACKSONVILLE, FLORIDA AND RICHMOND, VIRGINIA. THE
COMPANY CHARGES BOWLING FEES AND SELLS FOOD AND
BEVERAGES, AS WELL AS BOWLING MERCHANDISE, ON THE
PREMISES.
Dave & Buster's Inc. Dave & Busters operates ten
restaurants/entertainment complexes under the
"Dave & Buster's" name. The complexes offer a
full menu of food and beverage items combined
with an extensive array of entertainment
attractions such as billiards, interactive
simulators, virtual reality systems, and
traditional carnival-style games of skill.
GRAND HAVANA
ENTERPRISES, INC, GRAND HAVANA CURRENTLY OPERATES A PRIVATE CIGAR
CLUB IN BEVERLY HILLS, CA AS WELL AS AN UPSCALE
ITALIAN RESTAURANT, ALSO IN BEVERLY HILLS, CALLED
"ON CANON." THE COMPANY HAS ANNOUNCED PLANS TO
OPEN TWO ADDITIONAL CIGAR CLUBS IN NEW YORK AND
WASHINGTON, DC. THE CLUBS OFFER FOOD AND BAR
SERVICE, A SMOKING LOUNGE AND DIVERSIONS
INCLUDING BILLIARDS. REVENUES ARE REALIZED
THROUGH FOOD, BEVERAGE AND CIGAR SALES AS WELL AS
MEMBERSHIP FEES.
Laser Storm, Inc. Laser Storm operates eight themed laser tag
entertainment centers in the United States. The
company also manufactures, designs, develops and
distributes themed laser tag games and systems for
the entertainment industry. The company has
placed over 200 "Laser Storm" game systems in 18
countries.
MICHIGAN BREWERY, INC. MICHIGAN BREWERY OWNS MICROBREWERY/RESTAURANTS
UNDER THE NAME "BIG BUCK BREWERY AND STEAKHOUSE."
THE COMPANY OFFERS CASUAL DINING AND A SELECTION
OF BEER BREWED ON PREMISE AT ITS TWO LOCATIONS IN
MICHIGAN. THE COMPANY ALSO HAS PLANS TO OPEN TWO
ADDITIONAL SITES IN THE NEXT NINE MONTHS.
Planet Hollywood
International, Inc. Planet Hollywood operates 39 company-owned and 22
franchised "Planet Hollywood" restaurants, five
"Official All Star Cafe" restaurants, and one
"Marvel Mania" restaurant. The company also
operates themed merchandise stores at each of its
properties.
ROCK BOTTOM RESTAURANTS ROCK BOTTOM OPERATES 13 BREWPUBS UNDER THE NAME
"ROCK BOTTOM RESTAURANT AND BREWERY" AND 34 "OLD
CHICAGO RESTAURANTS". ALL OF THE PROPERTIES
OFFER A SELECTION OF MICROBREWED AND SPECIALTY
BEERS AS WELL AS MODERATELY PRICED FOOD, THE ROCK
BOTTOM FACILITIES HAVE ON-PREMISE BREWING
FACILITIES.
WESTERN COUNTRY CLUBS, INC. WESTERN COUNTRY CLUBS OPERATES FOUR
COUNTRY-WESTERN THEME NIGHTCLUBS IN ATLANTA,
INDIANAPOLIS, ST. LOUIS AND TUCSON, ARIZONA. THE
CLUBS FEATURE LIVE ENTERTAINMENT, DANCING, AND
FOOD AND BEVERAGE ITEMS. THE COMPANY IS CURRENTLY
EXAMINING EXPANSION OPTIONS IN FOUR CITIES.
<PAGE> 33
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
OPERATING PERFORMANCE FOR COMPARABLE PUBLIC COMPANIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JILLIAN'S BOWL AMERICA DAVE & BUSTER'S GRAND HAVANA (a) LASER STORM (b)
- ----------------------------------------------------------------------------------------------------------------------------------
$$ Margin $$ Margin $$ Margin $$ Margin $$ Margin
------------------ -------------------- ---------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FY 1994 Sales 5.1 NM 28.2 NM 32.9 NM 2.6 NM 2.8 NM
FY 1995 Sales 8.0 NM 29.5 NM 49.4 NM 5.8 NM 5.5 NM
FY 1996 Sales 12.0 NM 27.3 NM 52.5 NM 8.0 NM 7.8 NM
3 Year CAGR 53% -2% 26% 76% 67%
FY 1994 Gross Inc. 4.1 79.1% 19.6 69.7% 26.1 79.3% 1.5 57.7% 1.4 50.7%
FY 1995 Gross Inc. 6.3 78.2% 20.0 67.9% 39.3 79.6% 3.9 66.8% 3.1 57.0%
FY 1996 Gross Inc. 9.3 77.2% 18.4 67.3% 41.6 79.2% 5.5 68.1% 3.8 48.9%
3 Year CAGR 51% -3% 26% 91% 65%
FY 1994 EBITDA (0.5) -9.9% 7.3 26.0% 3.9 11.8% (0.9) -33.5% (0.2) -6.1%
FY 1995 EBITDA (0.3) -3.2% 6.5 21.9% 6.9 13.9% (1.7) -30.2% 0.3 6.3%
FY 1996 EBITDA 0.5 3.8% 5.5 20.2% 8.4 16.1% 1.4 17.4% (0.5) -5.9%
3 Year CAGR NM -13% 48% NM NM
FY 1994 EBIT (0.9) -17.6% 5.6 19.9% 1.9 5.9% (1.0) -37.2% (0.2) -7.8%
FY 1995 EBIT (0.8) -9.7% 4.5 15.3% 4.0 8.2% (2.0) -34.5% 0.2 4.2%
FY 1996 EBIT (0.2) -1.7% 3.5 12.8% 4.9 9.3% (1.0) -12.5% (0.6) -7.7%
3 Year CAGR NM -21% 59% NM NM
FY 1994 Net Income (0.9) -17.6% 2.3 8.0% 1.2 3.6% (1.0) -38.5% (0.2) -7.8%
FY 1995 Net Income (0.9) -10.8% 1.8 6.3% 2.4 4.8% (1.8) -30.7% 0.2 4.1%
FY 1996 Net Income (0.4) -3.3% 1.6 5.7% 2.9 5.6% (1.5) -18.3% (0.4) -4.5%
3 Year CAGR NM -17% 58% NM NM
FY 1994 Book Value 3.6 NA 25.0 6.7 NM
FY 1995 Book Value (6.3) 32.4 27.7 4.9 1.3
FY 1996 Book Value (6.7) 32.9 69.0 3.5 7.0
</TABLE>
- --------------------------------------------------------------------------------
FOOTNOTES
- --------------------------------------------------------------------------------
(a) Reflects operations of United Restaurants, predecessor to Grand Havana,
and includes results from Love's restaurants as well as cigar clubs.
(b) LTM 9/30/96 used instead of FY 1996 (12/31). FYE 12/31/96 not available.
<PAGE> 34
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE PUBLIC COMPANY ANALYSIS
OPERATING PERFORMANCE FOR COMPARABLE PUBLIC COMPANIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
WESTERN COUNTRY
JILLIAN'S MICHGAN BREWERY (a) PLANET HOLLYWOOD ROCK BOTTOM RESTUARANTS CLUBS (b)
- ---------------------------------------------------------------------------------------------------------------------------------
$$ Margin $$ Margin $$ Margin $$ Margin $$ Margin
------------------ ------------------- ------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FY 1994 Sales 5.1 NM NM NM 125.93 NM 38.9 NM 6.3 NM
FY 1995 Sales 8.0 NM 2.7 NM 270.61 NM 74.0 NM 8.5 NM
FY 1996 Sales 12.0 NM 4.3 NM 373.36 NM 109.2 NM 7.7 NM
3 Year CAGR 53% 62% 72% 68% 11%
FY 1994 Gross Inc. 4.1 79.1% NM NM 90.64 72.0% 29.1 74.8% 4.4 69.5%
FY 1995 Gross Inc. 6.3 78.2% 1.4 51.6% 194.14 71.7% 55.5 75.0% 6.2 72.4%
FY 1996 Gross Inc. 9.3 77.2% 2.8 63.5% 279.94 75.0% 82.1 75.2% 5.4 69.9%
3 Year CAGR 51% 99% 76% 68% 11%
FY 1994 EBITDA (0.5) -9.9% NM NM 11.316 9.0% 4.6 11.7% 0.8 12.1%
FY 1995 EBITDA (0.3) -3.2% (0.4) -15.1% 58.13 21.5% 8.1 11.0% 1.1 13.2%
FY 1996 EBITDA 0.5 3.8% 0.4 10.1% 106.92 28.6% 13.2 12.0% 0.5 6.8%
3 Year CAGR NM NM 207% 70% -17%
FY 1994 EBIT (0.9) -17.6% NM NM -4.915 -3.9% 3.2 8.3% 0.2 3.8%
FY 1995 EBIT (0.8) -9.7% (0.6) -20.9% 35.948 13.3% 3.9 5.3% 0.3 4.0%
FY 1996 EBIT (0.2) -1.7% 0.0 0.0% 79.627 21.3% 5.4 4.9% (0.1) -1.0%
3 Year CAGR NM NM NM 29% NM
FY 1994 Net Income (0.9) -17.6% NM NM -9.268 -7.4% 1.9 5.0% 0.1 0.8%
FY 1995 Net Income (0.9) -10.8% 1.1 41.1% 20.727 7.7% 3.3 4.4% (0.2) -2.5%
FY 1996 Net Income (0.4) -3.3% 0.7 16.2% 37.659 10.1% 4.0 3.7% (0.5) -5.9%
3 Year CAGR NM -36% NM 45% NM
FY 1994 Book Value 3.6 0.3 NA NM 3.5
FY 1995 Book Value (6.3) 1.4 28.145 55.3 3.6
FY 1996 Book Value (6.7) 12.5 312.13 65.3 4.0
</TABLE>
- --------------------------------------------------------------------------------
FOOTNOTES
- --------------------------------------------------------------------------------
(a) The company did not begin operations until FY 1995. CAGR is for two years
(FY 1995 and FY 1996)
(b) LTM 9/30/96 used instead of FY 1996 (12/31). FYE 12/31/96 not available.
<PAGE> 35
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
IMPLIED VALUATION USING TRANSACTION MULTIPLES FOR COMPARABLE
PUBLIC COMPANIES (a)
($000's)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
MULTIPLE RANGE TOTAL VALUATION RANGE (b)
------------------------------ -------------------------
JILLIAN'S ENTERTAINMENT MEAN MEDIAN MEAN MEDIAN
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA 1,372 4.3 x - 4.3 x 5,832 - 5,832
EBIT 504 12.5 - 12.5 6,304 - 6,304
Book Value 2,342 2.0 - 2.5 6,980 - 8,122
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
EQUITY VALUATION RANGE (c) EQUITY PER SHARE VALUATION RANGE
------------------------------ --------------------------------
JILLIAN'S ENTERTAINMENT MEAN MEDIAN MEAN MEDIAN
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA 1,372 3,566 - 3,566 0.39 - 0.39
EBIT 504 4,038 - 4,038 0.44 - 0.44
Book Value 2,342 4,714 - 5,856 0.52 - 0.64
</TABLE>
- -------------------------------------------------------------------------------
FOOTNOTES:
- -------------------------------------------------------------------------------
(a) Valuation estimates based on the mean and median multiples of comparable
transactions.
(b) Total Valuation Range estimates based on multiples of Revenues and
Operating Income are derived using Total Capitalization (Stock Price*Shares
Outstanding +Debt-Cash) while valuations based on multiples of Net Income
and Book Value are derived using Market Capitalization (Stock Price*Shares
Outstanding).
(c) Total Valuation Range estimates are calculated by subtracting total debt
and adding cash and equivalents to the Equity Valuation Range.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 36
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
SUMMARY OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME TARGET BUSINESS DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
05/26/94 09/23/94 Yankee Diner Inc Spectra Grp of Restaurants Inc Own and op restaurants
07/06/94 11/07/94 Schaden & Schaden Inc Quizno's Franchise Corp Own,op restaurants
7/14/94 9/16/94 Red Carpet Bowling American Recreation Centers Own, op bowling centers
07/21/94 11/11/94 Clucker's Wood Roasted Ckn Roasters Corp Own,op fast food restaurants
07/27/94 07/27/94 Taco Cabana of El Paso-Rest(5) Taco Cabana Inc Own,op restaurants
10/19/94 12/21/94 MG III Inc Miami Subs Corp Own,op fast-food restaurants
12/05/94 12/05/94 Roasters Corp-Restaurants (6) Clucker's Wood Roasted Ckn Own,op chicken restaurants
12/06/94 12/06/94 Quiz One Quizno's Franchise Corp Own,op restaurant
01/13/95 03/30/95 Oh La La Inc Java Centrale Inc(Baycor) Own and operate cafes
04/07/95 10/03/95 Round the Corner Restaurants Investor Group Own and operate restaurants
04/13/95 05/23/95 Mascott Corp DINE LLC Restaurant holding company
05/25/95 07/06/95 Abdow's Corp-Abdow's Family Bickford's Family Restaurants Own,operate restaurants
06/23/95 08/29/95 Family Chicken Inc Capital Brands Inc Own,operate restaurant
06/29/95 01/29/96 Original Pasta Co Watermarc Food Management Own,operate restaurant chain
09/11/95 09/11/95 Fables Innkeepers Mgmt-Mr American Family Restaurants Own,operate family restaurants
10/11/95 01/05/96 Shoex Inc O'Charley's Inc Own,operate restaurants
12/01/95 12/01/95 Kentuckiana Pizza Ltd Papa John's International Inc Own,op restaurant
12/15/95 12/15/95 Festive Pizza-IN Pizza(13) Papa John's International Inc Own,op pizza parlors
12/18/95 01/02/96 Paradise Bakery(Java Centrale) Java Centrale Inc(Baycor) Own, op bakeries
01/08/96 01/08/96 Cabo Restaurant,Houston,TX BFX Hospitality Group Own,op restaurant
01/12/96 01/12/96 Bubble Room Rest, Orlando, FL Investor Own,operate restaurant
02/15/96 04/30/96 Deli King Inc Saratoga Brands Inc Own,op catering company
02/15/96 04/23/96 Grill Restaurant,CA Grill Concepts Inc Own,op restaurant
02/15/96 03/05/96 LoneStar Hospitality-Miami Miami Subs Corp Own,op restaurants
03/19/96 05/14/96 Islands Resturants-Florida(6) Islands Florida LP Own,op restuarants
03/19/96 05/14/96 Island Rest(Chart House) Islands California Arizona LP Own,op restaurants
05/21/96 07/01/96 Gamblers Supply Mgt. Sodak Gaming Inc Own,op restaurant,casino
06/04/96 07/16/96 Big River Grill & Brewing Rock Bottom Restaurants Inc Own,op grell restaurant,bar
07/01/96 01/31/97 Ground Round Rest-Rest(16) Lone Star Steakhouse & Saloon Own,op restaurants
07/26/96 07/26/96 Hudson's Grill-Hornblowers Kian Farzadam Own and operate restaurant
08/05/96 08/05/96 Ridgefield Coffee Co New World Coffee Inc Own and operate coffee bar
09/18/96 10/28/96 Willoughbys Coffee & Tea New World Coffee Inc Own and operate coffee bar
09/30/96 09/30/96 Jeff Eateries LP New York Bagel Enterprises Own,op restaurant
10/16/96 10/16/96 Alamo Grill Elephant & Castle Group Inc Own,op restaurant
11/26/96 12/09/96 Lots A' Bagels Inc New York Bagel Enterprises Own,op fast food restaurants
11/26/96 12/20/96 Oh La La Inc Good Food Fast Cos Own and operate cafes
01/03/97 02/06/97 Mick's Restaurants(Morton's) MRI Acquisition Corp Own,op restaurant
01/13/97 01/13/97 Frat House Bar & Grill AM-PAC International Inc Own,op bar and grill
03/03/97 03/03/97 Bagel Buds Inc(New York Bagel) New York Bagel Enterprises Own,op restaurants
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TRANSACTION MARKET MULTIPLES
VALUE ---------------------------------------------
($ MIL) SALES EBITDA EBIT BOOKVALUE
- ------------------------------------------------------------
<C> <C> <C> <C> <C>
5.6 NM NM NM NM
2.0 0.8 NM NM NM
8.0 1.1 NM NM NM
10.5 3.3 NM NM 2.8
8.5 NM NM NM NM
2.5 0.5 5.0 12.5 2.5
3.1 NM NM NM NM
0.3 NM NM NM 0.4
2.8 NM NM NM NM
0.3 NM NM NM NM
0.7 0.1 3.5 NM 0.7
3.8 NM NM NM NM
0.2 NM NM NM NM
10.0 1.0 NM NM NM
2.7 NM NM NM NM
9.2 NM NM NM NM
6.2 NM NM NM NM
5.1 NM NM NM NM
6.7 NM NM NM NM
1.2 0.9 NM NM NM
0.9 NM NM NM NM
3.3 0.7 NM NM NM
1.2 0.4 NM NM NM
2.2 NM NM NM NM
3.0 NM NM NM NM
20.0 NM NM NM NM
5.4 NM NM NM NM
5.9 NM NM NM NM
16.0 NM NM NM NM
0.3 NM NM NM NM
0.3 NM NM NM NM
3.8 NM NM NM NM
0.2 NM NM NM NM
1.5 0.6 NM NM NM
2.7 0.9 NM NM NM
2.7 NM NM NM NM
6.8 NM NM NM NM
2.9 NM NM NM NM
0.4 NM NM NM NM
MEAN 0.9 4.3 12.5 2.0
MEDIAN 0.8 4.3 12.5 2.5
HIGH 3.3 5.0 12.5 2.8
LOW 0.1 3.5 12.5 0.7
NUMBER 10 2 1 3
</TABLE>
<PAGE> 37
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME TARGET BUSINESS DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
05/26/94 09/23/94 Yankee Diner Inc Spectra Grp of Restaurants Inc Own and op restaurants
07/06/94 11/07/94 Schaden & Schaden Inc Quizno's Franchise Corp Own,op restaurants
07/14/94 09/16/94 Red Carpet Bowling American Recreation Centers Own, op bowling centers
07/21/94 11/11/94 Clucker's Wood Roasted Chicken Roasters Corp Own,op fast food restaurant
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
DATE
ANNOUNCED TRANSACTION SYNOPIS
- ------------------------------------------------------------
<S> <C>
05/26/94 Spectra Group of Great
Restaurants acquired Yankee
Diner for an amended $5.6 mil.
Spectra had originally offered
$3.9 mil in cash and $1.275
mil in the assumption of
liabilities. In December
1993, Sytje's Pannekoeken
Huis Family Restaurants had
signed a letter of intent to
acquire Yankee Diner which
was later withdrawn.
07/06/94 Quizno's Franchise acquired
Schaden & Schaden for $2 mil.
Consideration offered
consisted of $.263 mil in
cash, $.876 mil in preferred
stock convertible into 146,000
common shares after 3 years,
and $.861 mil in the
assumption of liabilities.
Quizno's had retained Hanifen,
Imhoff, and Cypress Consulting
as its financial advisor.
07/14/94 American Recreation Centers
acquired the Red Carpet bowling
chain of Orange Tree Holdings,a
units of First Band Natl. Assoc. for
$8 mil. in cash.
07/21/94 Roasters acquired a 56%
interest in Clucker's Wood
Roasted Chicken by purchasing
1.745 mil common shares at $6
per share, or a total of
$10.472 mil. Concurrently,
Roasters agreed to acquire 2
mil shares of Clucker's common
stock via warrants with an
exercise price of $6 per
share. The warrants were to
expire in November 1995.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 38
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE ---------------------------------- -----------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yankee Diner Inc Spectra Grp of Restaurants 5.6 NM NM NM NM NM NM
Schaden & Schaden Inc Quizno's Franchise Corp 2.0 0.8 NM NM NM NM NM
Red Carpet Bowling American Recreation Center 8.0 1.1 NM NM NM NM NM
Clucker's Wood Roasted Chicken Roasters Corp 10.5 3.3 NM NM 2.8 30.4% NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 39
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME TARGET BUSINESS DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
07/27/94 07/27/94 Taco Cabana of El Paso-Rest(5) Taco Cabana Inc Own,op restaurants
10/19/94 12/21/94 MG III Inc Miami Subs Corp Own,op fast-food restaurant
12/05/94 12/05/94 Roasters Corp-Restaurants(6) Clucker's Wood Roasted Chicken Own,op chicken restaurants
12/06/94 12/06/94 Quiz One Quizno's Franchise Corp Own,op restaurant
01/13/95 03/30/95 Oh La La Inc Java Centrale Inc(Baycor) Own and operate cafes
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
DATE
ANNOUNCED TRANSACTION SYNOPIS
- ---------------------------------------------------------
<S> <C>
07/27/94 Taco Cabana acquired 5
restaurants from Taco Cabana
of El Paso for $8.5 mil.
Consideration consisted of
$1.5 mil in common shares and
$7 mil in notes.
10/19/94 Miami Subs acquired MG III in
exchange for 1 mil common
shares valued at $2.5 mil, and
a non-competition agreement.
The shares were valued based
on Miami Subs' closing stock
price of $2.50 on Oct 18, the
last full trading day prior
to the announcement.
12/05/94 Clucker's Wood Roasted Chicken
acquired 6 restaurants of
Roasters for $3.1 mil.
Consideration offered
consisted of $1.85 mil in cash
and $1.25 mil in a note
payable. Of the restaurants
purchased, four are in Dade
County, and two are in
Atlanta.
12/06/94 Quizno's Franchise raised
its stake to 92% from 23%
in Quiz One by acquiring a
69% stake for $.271 mil in
cash.
01/13/95 Java Centrale acquired
bankrupt Oh La La for $2.8 mil
in a combination of cash,
stock and notes.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 40
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE --------------------------------- --------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Taco Cabana of El Paso-Rest(5) Taco Cabana Inc 8.5 NM NM NM NM NM NM
MG III Inc Miami Subs Corp 2.5 0.5 5.0 12.5 2.5 NM NM
Roasters Corp-Restaurants(6) Clucker's Wood Roasted Chicken 3.1 NM NM NM NM NM NM
Quiz One Quizno's Franchise Corp 0.3 NM NM NM 0.4 NM NM
Oh La La Inc Java Centrale Inc(Baycor) 2.8 NM NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 41
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
04/07/95 10/03/95 Round the Corner Restaurants Investor Group
04/13/95 05/23/95 Mascott Corp DINE LLC
05/25/95 07/06/95 Abdow's Corp-Abdow's Family Bickford's Family Restaur
06/23/95 08/29/95 Family Chicken Inc Capital Brands Inc
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DATE
ANNOUNCED TARGET BUSINESS DESCRIPTION TRANSACTION SYNOPIS
- --------------------------------------------------------------------------------
<S> <C>
04/07/95 Own and operate restaurants An investor group, including
management, acquired Round the
Corner Restaurants from Good
Times Restaurants for an
amended $.3 mil in a leveraged
buyout transaction.
Consideration consisted of $.1
mil in cash and $.2 mil in
the assumption of liabilities.
Earlier the group had offered
a $.325 mil note, $.1 mil in
cash, and the assumption of
liabilities. Originally, the
investor group offered a
$.275 mil note and $.15 mil
in cash. Good Times
Restaurants had disclosed that
several undisclosed firms
offered to acquire the unit.
04/13/95 Restaurant holding company DINE acquired the remaining
25% stake, or 434,134 common
shares, that it did not
already own in its Mascott
subsidiary for $1.55 in cash
per share, or a total value of
$.673 mil, concurrent with the
completion of its tender
offer. DINE completed its
tender offer for Mascott by
accepting 297,974 shares, or a
17% of Mascott's shares, thus
raising its interest in
Mascott to 92%.
05/25/95 Own,operate restaurants Bickford's Family Restaurants,
a unit of ELXSI, acquired
sixteen Abdow's Family
Restaurants in Massachusetts
and Connecticut from Abdow's
for $3.8 mil.
06/23/95 Own,operate restaurant Capital Brands acquired Family
Chicken in exchange for a
$150,450 note.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 42
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE --------------------------------- -------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Round the Corner Restaurants Investor Group 0.3 NM NM NM NM NM NM
Mascott Corp DINE LLC 0.7 0.1 3.5 NM 0.7 71.4% 50.0%
Abdow's Corp-Abdow's Family Bickford's Family Restaurants 3.8 NM NM NM NM NM NM
Family Chicken Inc Capital Brands Inc 0.2 NM NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 43
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
06/29/95 01/29/96 Original Pasta Co Watermarc Food Management
09/11/95 09/11/95 Fables Innkeepers Mgmt-Mr American Family Restaurants
10/11/95 01/05/96 Shoex Inc O'Charley's Inc
12/01/95 12/01/95 Kentuckiana Pizza Ltd Papa John's International Inc
12/15/95 12/15/95 Festive Pizza-IN Pizza(13) Papa John's International Inc
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DATE
ANNOUNCED TARGET BUSINESS DESCRIPTION TRANSACTION SYNOPIS
- ---------------------------------------------------------------------------------
<S> <C> <C>
06/29/95 Own,operate restaurant chain Watermarc Food Management (WF)
acquired Original Pasta for
$9.98 mil. The consideration
consisted of 1,666,667 WF
common shares valued at $3.13
mil, $3.75 mil in notes and
$3.1 mil in the assumption of
debt. The shares were valued
based on WF's closing stock
price of $1.875 on Sep 6, the
last full trading day prior to
the announcement of terms.
09/11/95 Own,operate family restaurants American Family Restaurants
acquired 11 Mr. Fable's
restaurants, located in
Western Michigan, of Fables
Innkeepers Management for $2.7
mil in cash and the assumption
of liabilities.
10/11/95 Own,operate restaurants O'Charley's (OC) acquired all
the outstanding stock of Shoex
in exchange for 666,666 common
shares valued at $9.17 mil.
The shares were valued based
on OC's closing stock price of
$13.75 on Oct 10, the last
full trading day prior to the
announcement. The transaction
was accounted for as a pooling
of interests.
12/01/95 Own,op restaurant Papa John's International
(PJ) acquired Kentuckiana
Pizza and Kentuckiana Pizza II
for $6.2 mil. The
consideration consisted of
$5.1 mil PJ common shares and
$1.1 mil in the assumption
of liabilities.
12/15/95 Own,op pizza parlors Papa John's International
(PPJ) acquired the 13
Indianapolis, Indiana, pizza
outlets of Festive Pizza for
$5.1 mil in PPJ common stock.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 44
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE ----------------------------------- --------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original Pasta Co Watermarc Food Management 10.0 1.0 NM NM NM NM NM
Fables Innkeepers Mgmt-Mr American Family Restaurants 2.7 NM NM NM NM NM NM
Shoex Inc O'Charley's Inc 9.2 NM NM NM NM NM NM
Kentuckiana Pizza Ltd Papa John's International Inc 6.2 NM NM NM NM NM NM
Festive Pizza-IN Pizza(13) Papa John's International Inc 5.1 NM NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 45
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12/18/95 01/02/96 Paradise Bakery(Java Centrale) Java Centrale Inc(Baycor)
01/08/96 01/08/96 Cabo Restaurant,Houston,Texas BFX Hospitality Group
01/12/96 01/12/96 Bubble Room Restaurant,Orlando Investor
02/15/96 04/30/96 Deli King Inc Saratoga Brands Inc
02/15/96 04/23/96 Grill Restaurant,CA Grill Concepts Inc
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DATE
ANNOUNCED TARGET BUSINESS DESCRIPTION TRANSACTION SYNOPIS
- ------------------------------------------------------------------------------------
<S> <C> <C>
12/18/95 Own, op bakeries Java Centrale acquired all the
outstanding shares of Paradise
Bakery, a unit of Chart House
Enterprises, for $6.725 mil.
The consideration consisted of
$5.375 mil in cash and a $1.35
mil promissory note.
01/08/96 Own,op restaurant BFX Hospitality Group, a unit
of Buffton, acquired Cabo
Restuarant, Houston, Texas,
for $1.245 mil. The
consideration consisted of
$.589 mil in cash and .375 mil
Buffton common shares valued
at $.656 mil. The shares were
valued based on Buffton's
closing stock price of $1.75
on Jan 5, the last full
trading day prior to the
announcement.
01/12/96 Own,operate restaurant Investor Roy Scheid acquired
the Bubble Room Restaurant,
Orlando, Florida, a unit of
Bubble Room, for $.899 mil cash
02/15/96 Own,op catering company Saratoga Brands acquired Deli
King for $3.25 mil.
Consideration consisted of
$1.3 mil in cash, restricted
common shares with a stated
value of $1.5 mil, and a $.45
mil 4-year note.
02/15/96 Own,op restaurant Grill Concepts (GC) acquired
Grill Restaurant, Beverly
Hills, California, in exchange
for .850 mil common shares
valued at $1.169 mil. The
shares were valued based on
GC's closing stock price of
$1.375 on February 14, the
last full trading day prior to
the announcement.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 46
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE ----------------------------------- --------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paradise Bakery(Java Centrale) Java Centrale Inc(Baycor) 6.7 NM NM NM NM NM NM
Cabo Restaurant,Houston,Texas BFX Hospitality Group 1.2 0.9 NM NM NM NM NM
Bubble Room Restaurant,Orlando Investor 0.9 NM NM NM NM NM NM
Deli King Inc Saratoga Brands Inc 3.3 0.7 NM NM NM NM NM
Grill Restaurant,CA Grill Concepts Inc 1.2 0.4 NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 47
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
02/15/96 03/05/96 LoneStar Hospitality-Miami Miami Subs Corp
03/19/96 05/14/96 Islands Resturants-Florida(6) Islands Florida LP
03/19/96 05/14/96 Island Rest (Chart House) Islands California Arizona LP
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DATE
ANNOUNCED TARGET BUSINESS DESCRIPTION TRANSACTION SYNOPIS
- --------------------------------------------------------------------------------------------
<S> <C> <C>
02/15/96 Own,op restaurants Miami Subs (SUBS) acquired 5
Miami Subs Grill restaurants,
located in Dallas, Texas, of
LoneStar Hospitality in
exchange for approximately
1.325 mil SUBS common shares
valued at $2.15 mil. The
shares were valued based on
SUBS's closing stock price of
$1.625 on Feb 14, the last
full trading day prior to the
announcement.
03/19/96 Own,op restuarants Islands Florida acquired a 75%
interest in 6 southern Florida
restuarants of Islands
Restaurants (IR), a unit of
Chart House Enterprises (CH)
in exchanged for $3 mil 9%
secured note. Concurrently,
Island California Florida
acquired a 75% interest in the
remaining 12 restaurants
located in Phoenix and
California in exchange for $20
mil 9% secured note. In
December 1995, CH announced it
was seeking a buyer for its
Island Restaurants subsidiary.
03/19/96 Own,op restuarants Islands California Arizona
acquired a 75% interest in Islands
Restaurants (IR), a unit of Chart
House Enterprises (CH), in exchange
for a $20 mil 9% secured note. The
transaction consisted of 12
restaurants located in Phoenix and
southern California. Concurrently,
Islands Florida acquired a 75%
interest in the remaining six
southern Florida restaurants of
Islands Restaurants in exchange for
a $3 mil 9% secured note. In December
1995, CH announced that it was
seeking a buyer for its Islands
Restaurants subsidiary.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 48
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE ----------------------------------- --------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LoneStar Hospitality-Miami Miami Subs Corp 2.2 NM NM NM NM NM NM
Islands Resturants-Florida(6) Islands Florida LP 3.0 NM NM NM NM NM NM
Island Rest(Chart House) Islands California AZ LP 20.0 NM NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 49
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
05/21/96 07/01/96 Gamblers Supply Management Co Sodak Gaming Inc
06/04/96 07/16/96 Big River Grill & Brewing Rock Bottom Restaurants Inc
07/01/96 01/31/97 Ground Round Rest-Rest(16) Lone Star Steakhse & Saloon
07/26/96 07/26/96 Hudson's Grill-Hornblowers Kian Farzadam
08/05/96 08/05/96 Ridgefield Coffee Co New World Coffee Inc
09/18/96 10/28/96 Willoughbys Coffee & Tea New World Coffee Inc
09/30/96 09/30/96 Jeff Eateries LP New York Bagel Enterprises
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DATE
ANNOUNCED TARGET BUSINESS DESCRIPTION TRANSACTION SYNOPIS
- ------------------------------------------------------------------------------------
<S> <C> <C>
05/21/96 Own,op restaurant,casino Sodak Gaming acquired all the
outstanding shares of Gamblers
Supply Management for $5.4
mil. The consideration
consisted of $1 mil in cash
and a $4.4 mil note. The
transaction had been subject
to regulatory approval.
06/04/96 Own,op grell restaurant,bar Rock Bottom Restaurants (RB)
acquired a 50% interest in Big
River Grill & Brewing Works in
exchange for 450,000 RB
common shares valued at $5.85
mil. The shares were valued
based on RB's closing stock
price of $13 on June 3, the
last full trading day prior to
the announcement.
07/01/96 Own,op restaurants Lone Star Steakhouse & Saloon
acquired 16 restaurant
locations of Ground Round
Restaurants for approximately
$16 mil.
07/26/96 Own and operate restaurant Kian Farzadam acquired the
Hornblowers restaurant of
Hudson's Grill of America for
$.3 mil, including the
assumption of liabilities.
08/05/96 Own and operate coffee bar New World Coffee acquired
Ridgefield Coffee for $.325
mil. The consideration
consisted of $.15 mil cash and
a $.175 mil 2-year 6% note.
09/18/96 Own and operate coffee bar New World Coffee (NWC)
acquired Willoughby's Coffee &
Tea for $3.8 mil.
Consideration consisted of
$3.1 mil and the assumption
of $.7 mil in liabilities.
09/30/96 Own,op restaurant New York Bagel Enterprises
acquired Jeff Eateries for
approximately $244,000. The
consideration consisted of
approximately $84,000 and the
assumption of up to $160,000
in liabilities.
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 50
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE ----------------------------------- --------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gamblers Supply Management Co Sodak Gaming Inc 5.4 NM NM NM NM NM NM
Big River Grill & Brewing Rock Bottom Restaurants Inc 5.9 NM NM NM NM NM NM
Ground Round Rest-Rest(16) Lone Star Steakhse & Saloon 16.0 NM NM NM NM NM NM
Hudson's Grill-Hornblowers Kian Farzadam 0.3 NM NM NM NM NM NM
Ridgefield Coffee Co New World Coffee Inc 0.3 NM NM NM NM NM NM
Willoughbys Coffee & Tea New World Coffee Inc 3.8 NM NM NM NM NM NM
Jeff Eateries LP New York Bagel Enterprises 0.2 NM NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 51
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/16/96 10/16/96 Alamo Grill Elephant & Castle Group Inc
11/26/96 12/09/96 Lots A' Bagels Inc-Certain New York Bagel Enterprises
11/26/96 12/20/96 Oh La La Inc Good Food Fast Cos
01/03/97 02/06/97 Mick's Restaurants(Morton's) MRI Acquisition Corp
01/13/97 01/13/97 Frat House Bar & Grill AM-PAC International Inc
03/03/97 03/03/97 Bagel Buds Inc(New York Bagel) New York Bagel Enterprises
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
DATE
ANNOUNCED TARGET BUSINESS DESCRIPTION TRANSACTION SYNOPIS
- ----------------------------------------------------------------------------------
<S> <C> <C>
10/16/96 Own,op restaurant Elephant and Castle
acquired Alamo Grill for
approximately $1.5 mil in
common stock and the
assumption of liabilities.
11/26/96 Own,op fast food restaurants New York Bagel Enterprises
acquired certain assets of
Lots A' Bagels for
approximately $2.7 mil in
cash, debt, common stock
purchase warrants, the
assumption of liabilities and
profit-related payments.
11/26/96 Own and operate cafes Good Food Fast (GFF) acquired
Oh La La, a unit of Java
Centrale, for $2.7 mil. The
consideration consisted of
$1.25 mil in cash, $.7 mil in
GFF convertible preferred
stock, and a $.75 mil 3-year
convertible note.
01/03/97 Own,op restaurant MRI Acquisition (MRI) acquired
an 80.1% interest in Mick's
Restaurants (MR), a unit of
Morton's Restaurant Group
(MRG). Concurrently, MRI
acquired an 80.1% interest in
Peasant Restaurant (PR), also
a unit of MRG. The two
transactions had a combined
value of $6.8 mil. The
consideration was to consist
of $4.3 mil in cash and $2.5
in promissory notes. MRG
retained the remaining 19.9%
stake in MR and PR.
01/13/97 Own,op bar and grill AM-PAC International (AP)
acquired Frat House Bar &
Grill for $2.9 mil in a
combination of cash and AP
common stock.
03/03/97 Own,op restaurants New York Bagel Enterprises
acquired Bagel Buds for
approximately $.415 mil in a
combination of cash and the
assumption of liabilities.
</TABLE>
Source: Securities Data Company, Inc.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 52
JILLIAN'S ENTERTAINMENT CORP.
COMPARABLE TRANSACTION ANALYSIS
DESCRIPTION OF COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION MARKET MULTIPLES DAYS PRIOR:
VALUE ----------------------------------- ------------
TARGET NAME ACQUIROR NAME ($ MIL) SALES EBITDA EBIT BOOKVALUE 1 30
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alamo Grill Elephant & Castle Group Inc 1.5 0.6 NM NM NM NM NM
Lots A' Bagels Inc-Certain New York Bagel Enterprises 2.7 0.9 NM NM NM NM NM
Oh La La Inc Good Food Fast Cos 2.7 NM NM NM NM NM NM
Mick's Restaurants(Morton's) MRI Acquisition Corp 6.8 NM NM NM NM NM NM
Frat House Bar & Grill AM-PAC International Inc 2.9 NM NM NM NM NM NM
Bagel Buds Inc(New York Bagel) New York Bagel Enterprises 0.4 NM NM NM NM NM NM
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 53
JILLIAN'S ENTERTAINMENT CORP.
PREMIUMS PAID ANALYSIS
IMPLIED VALUATION USING PRICE PREMIUM OF COMPARABLE TRANSACTIONS (a)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
ENTERTAINMENT AND RESTAURANT GROUP:
- -----------------------------------------------------------------------------------------
PRICE PREMIUM (b)
-------------------------------------------------
1 DAY 30 DAYS
MEAN MEDIAN MEAN MEDIAN
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jillian's Entertainment Per Share Value $ 0.13 $ 0.13
Comparable Company Group (c) 51% - 51% 50% - 50%
Implied Jillian's Equity Value $ 0.19 - $ 0.19 $ 0.19 - $ 0.19
Per Share (d)
- -----------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
SMALL CAPITALIZATION GROUP:
- -----------------------------------------------------------------------------------------
PRICE PREMIUM (b)
-------------------------------------------------
1 DAY 30 DAYS
MEAN MEDIAN MEAN MEDIAN
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jillian's Entertainment Per Share Value $ 0.13 $ 0.13
Comparable Company Group (c) 14% - 0% 38% - 14%
Implied Jillian's Equity Value $ 0.14 - $0.14 $ 0.17 - $ 0.14
Per Share (d)
- -----------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
FOOTNOTES:
- -------------------------------------------------------------------------------
(a) Valuation estimates based on the mean and median stock price premiums prior
to transaction announcement date.
(b) Represents price premium 1 day and 30 days prior to transaction announce-
ment.
(c) Represents mean and median price premiums for comparable transactions
(d) Valuation estimates based on the mean and median price premiums of
comparable transactions
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 54
==============================================================================
JILLIAN'S ENTERTAINMENT CORP.
==============================================================================
Premiums Paid Analysis
Summary of Comparable Transactions by Companies with
Capitalization below $10 Million
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME TARGET BUSINESS DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
01/04/95 12/30/94 Industrial Funding Corp Investor Group Lease small-ticket equipment
01/09/95 01/09/95 Sierra Home Service Companies Investor Group Pvd housing svcs;holding co
01/13/95 07/13/95 Community Health Computing ADAC Laboratories Manufacture medical equipment
01/26/95 08/16/95 Telios Pharmaceuticals Inc Integra LifeSciences Corp Mnfr pharmaceutical products
02/15/95 03/31/95 Title Wave Stores Inc Hollywood Entertainment Corp Own, op record & tape stores
03/29/95 04/28/95 NHD Stores Inc ACO Hardware East Inc Whl,ret hardware, paints
04/13/95 05/23/95 Mascott Corp DINE LLC Restaurant holding company
04/24/95 04/24/95 Vegas Chips Inc(Pacific Snax) Rovne Investments Produce potato chips
06/08/95 06/08/95 US Medical Products Inc Smith Management Co Mnfr,whl surgical supplies
06/19/95 12/20/95 BioSafety Systems Inc HVB Ltd Mnfr healthcare gloves, masks
06/30/95 01/15/96 Founders Financial Corp Chase Federal(TAC Bancshares) Commercial bank; holding co
08/11/95 02/01/96 Seaboard Bancorp Inc Life Bancorp Inc Bank holding company
08/22/95 12/29/95 Iowa Bancorp Inc First Midwest Finl,Iowa Commercial bank
08/29/95 09/29/95 American Consumer Products Inc Vista 2000 Inc Mnfr consumer hardward prods
08/31/95 02/01/96 Check Express Inc Ace Cash Express Inc Provide check cashing services
09/26/95 01/15/96 Capital Associates Intl Inc MCC Financial Corp Pvd equip rental,leasing svcs
10/12/95 03/05/96 Rexon Inc Legacy Storage Sys Intl Inc Mnfr computer tape drivers
10/25/95 06/27/96 Aspen Imaging International Pubco Corp Manufacture computer ribbons
10/25/95 06/27/96 Bobbie Brooks Inc(Pubco Corp) Pubco Corp Manufacture women's apparel
11/16/95 04/16/96 Prime Management Group Inc FirstService Corp Real estate agency
12/01/95 03/15/96 Condor Services Inc Amwest Insurance Group Inc Property, casualty ins svcs
12/20/95 02/05/96 SCS/Compute Inc Thomson US Holdings Inc Pvd income tax processing svcs
12/20/95 03/14/96 Sierra Home Service Companies American Home Shield Pvd housing svcs;holding co
01/18/96 08/23/96 AMSERV Healthcare Inc Star Multi Care Services Inc Pvd temp nursing employment
01/23/96 05/09/96 Portage Industries Corp Spartech Corp Mnfr extruded plastic sheets
02/05/96 09/30/96 Customedix Corp CUS Acquisition Inc Mnfr dental, medical products
04/09/96 10/28/96 Mutual Bancompany Inc,MO Roosevelt Finl Group,Missouri Bank holding co; savings bank
06/05/96 06/05/96 YES Clothing Co Investor Mnfr, whl women's clothing
06/14/96 11/14/96 Seven Hills Financial Western Ohio Financial Corp Savings and loan
09/09/96 09/09/96 Innovir Laboratories Inc Investor Group Mnfr biological products
12/09/96 02/28/97 Houston Biotechnology Inc Medarex Inc Mnfr monoclonal antibodies
01/07/97 02/10/97 Bonray Drilling Corp DLB Oil & Gas Inc On-shore oil and gas drilling
</TABLE>
================================================================================
JILLIAN'S ENTERTAINMENT CORP.
================================================================================
Premiums Paid Analysis
Summary of Comparable Transactions by Companies with
Capitalization below $10 Million
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PRICE PREMIUMS
TRANSACTION PRICE PRICE PRICE -------------------------------
VALUE ANNOUNCE 1 DAY 30 DAYS 1 DAY PRIOR 30 DAYS PRIOR
($ MIL.) DATE PRIOR PRIOR
- --------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
0.6 1.00 1.00 1.38 .0% -19.8%
0.8 - - - NM NM
16.5 - - - NM NM
34.9 0.28 0.28 0.16 0.0% 512.0%
8.5 1.88 1.50 1.31 16.7% 32.7%
2.1 1.50 1.13 0.75 29.6% 133.3%
0.7 1.50 0.88 1.00 81.6% 50.0%
1.2 - - - NM NM
3.0 0.69 0.50 0.50 75.0% 75.0%
10.6 2.94 2.25 2.13 13.6% 18.0%
8.1 4.75 5.00 3.75 -1.0% 7.1%
8.2 1.50 1.31 1.25 10.9% 16.0%
9.0 17.75 17.00 15.25 0.3% 1.1%
13.8 3.75 4.13 3.38 -2.2% 3.3%
6.2 1.00 1.00 0.94 0.0% 7.1%
1.8 - - - NM NM
20.0 - - - NM NM
3.3 0.66 0.66 0.75 0.0% -16.7%
0.5 1.13 1.13 1.31 0.0% -10.9%
6.6 - - - NM NM
17.2 7.00 3.50 3.50 28.6% 28.6%
17.4 6.38 2.88 2.44 42.3% 66.3%
4.6 0.75 1.00 1.13 -25.0% -29.6%
9.2 2.75 2.50 2.19 4.0% 11.8%
15.8 5.81 4.50 3.69 6.5% 15.6%
3.6 1.94 1.94 2.13 0.0% -4.2%
7.7 16.75 16.75 16.75 0.0% 0.0%
0.0 1.63 2.13 1.25 -11.1% 24.0%
11.0 16.00 16.00 16.00 0.0% 0.0%
2.0 1.94 1.13 1.38 64.2% 29.8%
8.6 1.25 0.94 0.94 35.6% 35.6%
12.7 29.63 25.50 23.00 0.6% 1.3%
</TABLE>
Source: Securities Data Company, Inc.
<PAGE> 55
================================================================================
JILLIAN'S ENTERTAINMENT CORP.
PREMIUMS PAID ANALYSIS
SUMMARY OF COMPARABLE TRANSACTIONS WITHIN ENTERTAINMENT AND RESTAURANT INDUSTRY
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DATE DATE
ANNOUNCED EFFECTIVE TARGET NAME ACQUIROR NAME
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
01/24/94 03/15/94 Lucca's Pasta Bar Restaurant Monterey Pasta Co
04/08/94 04/13/94 Apple Tenn-Flo LP Apple South Inc
04/20/94 04/20/94 Undisclosed Lousiana Outback Outback Steakhouse Inc
04/26/94 04/26/94 Patrizio Restaurants Inc Sixx Holdings Inc
05/26/94 09/23/94 Yankee Diner Inc Spectra Grp of Restaurants Inc
07/06/94 11/07/94 Schaden & Schaden Inc Quizno's Franchise Corp
7/14/94 9/16/94 Red Carpet Bowling American Recreation Centers
07/21/94 11/11/94 Clucker's Wood Roasted Ckn Roasters Corp
07/27/94 07/27/94 Taco Cabana of El Paso-Rest(5) Taco Cabana Inc
10/19/94 12/21/94 MG III Inc Miami Subs Corp
12/05/94 12/05/94 Roasters Corp-Restaurants (6) Clucker's Wood Roasted Ckn
12/06/94 12/06/94 Quiz One Quizno's Franchise Corp
01/13/95 03/30/95 Oh La La Inc Java Centrale Inc(Baycor)
04/07/95 10/03/95 Round the Corner Restaurants Investor Group
04/13/95 05/23/95 Mascott Corp DINE LLC
05/25/95 07/06/95 Abdow's Corp-Abdow's Family Bickford's Family Restaurants
06/23/95 08/29/95 Family Chicken Inc Capital Brands Inc
06/29/95 01/29/96 Original Pasta Co Watermarc Food Management
09/11/95 09/11/95 Fables Innkeepers Mgmt-Mr American Family Restaurants
10/11/95 01/05/96 Shoex Inc O'Charley's Inc
12/01/95 12/01/95 Kentuckiana Pizza Ltd Papa John's International Inc
12/15/95 12/15/95 Festive Pizza-IN Pizza(13) Papa John's International Inc
12/18/95 01/02/96 Paradise Bakery(Java Centrale) Java Centrale Inc(Baycor)
01/08/96 01/08/96 Cabo Restaurant,Houston,TX BFX Hospitality Group
01/12/96 01/12/96 Bubble Room Rest, Orlando, FL Investor
02/15/96 04/30/96 Deli King Inc Saratoga Brands Inc
02/15/96 04/23/96 Grill Restaurant,CA Grill Concepts Inc
02/15/96 03/05/96 LoneStar Hospitality-Miami Miami Subs Corp
03/19/96 05/14/96 Islands Resturants-Florida(6) Islands Florida LP
03/19/96 05/14/96 Island Rest(Chart House) Islands California Arizona LP
05/21/96 07/01/96 Gamblers Supply Mgt. Sodak Gaming Inc
06/04/96 07/16/96 Big River Grill & Brewing Rock Bottom Restaurants Inc
07/01/96 01/31/97 Ground Round Rest-Rest(16) Lone Star Steakhouse & Saloon
07/26/96 07/26/96 Hudson's Grill-Hornblowers Kian Farzadam
08/05/96 08/05/96 Ridgefield Coffee Co New World Coffee Inc
09/18/96 10/28/96 Willoughbys Coffee & Tea New World Coffee Inc
09/30/96 09/30/96 Jeff Eateries LP New York Bagel Enterprises
10/16/96 10/16/96 Alamo Grill Elephant & Castle Group Inc
11/26/96 12/09/96 Lots A' Bagels Inc New York Bagel Enterprises
11/26/96 12/20/96 Oh La La Inc Good Food Fast Cos
01/03/97 02/06/97 Mick's Restaurants(Morton's) MRI Acquisition Corp
01/13/97 01/13/97 Frat House Bar & Grill AM-PAC International Inc
03/03/97 03/03/97 Bagel Buds Inc(New York Bagel) New York Bagel Enterprises
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PREMIUM PAID
TRANSACTION DAYS PRIOR:
VALUE ----------------------
TARGET BUSINESS DESCRIPTION ($ MIL) 1 30
- --------------------------------------------------------------------------------
<C> <C> <C> <C>
Own,op pasta restaurants 1.8 NM NM
Own,op restaurants 17.0 NM NM
Own,op restaurants 19.6 NM NM
Own,op restaurants 8.0 NM NM
Own and op restaurants 5.6 NM NM
Own,op restaurants 2.0 NM NM
Own, op bowling centers 8.0 NM NM
Own,op fast food restaurants 10.5 30.4% NM
Own,op restaurants 8.5 NM NM
Own,op fast-food restaurants 2.5 NM NM
Own,op chicken restaurants 3.1 NM NM
Own,op restaurant 0.3 NM NM
Own and operate cafes 2.8 NM NM
Own and operate restaurants 0.3 NM NM
Restaurant holding company 0.7 71.4% 50.0%
Own,operate restaurants 3.8 NM NM
Own,operate restaurant 0.2 NM NM
Own,operate restaurant chain 10.0 NM NM
Own,operate family restaurants 2.7 NM NM
Own,operate restaurants 9.2 NM NM
Own,op restaurant 6.2 NM NM
Own,op pizza parlors 5.1 NM NM
Own, op bakeries 6.7 NM NM
Own,op restaurant 1.2 NM NM
Own,operate restaurant 0.9 NM NM
Own,op catering company 3.3 NM NM
Own,op restaurant 1.2 NM NM
Own,op restaurants 2.2 NM NM
Own,op restuarants 3.0 NM NM
Own,op restaurants 20.0 NM NM
Own,op restaurant,casino 5.4 NM NM
Own,op grell restaurant,bar 5.9 NM NM
Own,op restaurants 16.0 NM NM
Own and operate restaurant 0.3 NM NM
Own and operate coffee bar 0.3 NM NM
Own and operate coffee bar 3.8 NM NM
Own,op restaurant 0.2 NM NM
Own,op restaurant 1.5 NM NM
Own,op fast food restaurants 2.7 NM NM
Own and operate cafes 2.7 NM NM
Own,op restaurant 6.8 NM NM
Own,op bar and grill 2.9 NM NM
Own,op restaurants 0.4 NM NM
</TABLE>
Source: Securities Data Company, Inc.
<PAGE> 56
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED INCOME STATEMENT
BASE CASE
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
---------------------------------------- ------------ --------------------------
1994 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $2,494 $2,534 $2,618 $2,683
Cafe 2,154 2,310 2,431 2,492
Beer, Wine and Liquor 6,285 7,053 7,286 7,468
Pro Shop 121 152 174 179
Games 722 947 976 1,001
Other Income(a) 215 223 186 190
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 5,148 7,969 11,992 13,218 13,672 14,013
Cost of Goods Sold 1,079 1,749 2,737 2,994 3,040 3,116
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 4,069 6,220 9,255 10,224 10,632 10,897
Gross Margin 79.0% 78.0% 77.2% 77.3% 77.8% 77.8%
OPERATING EXPENSES
Wages 2,763 3,030 2,989 3,063
Repairs 36 68 104 106
Rent 1,713 1,818 1,986 2,030
Taxes 474 551 574 588
Advertising 314 352 394 404
Travel/ Entertainment 41 19 24 25
Professional Fees 32 34 28 29
Insurance 268 284 329 338
Utilities 435 472 476 488
Depreciation & Amortization 394 524 657 889 889 889
Other Expenses (b) 2,539 2,527 2,554 2,581
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 5,001 7,040 9,271 10,044 10,347 10,540
Minority Interest 190 203 223 235
Operating Income (932) (820) (205) (24) 61 122
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin (18.1%) (10.3%) (1.7%) (0.2%) 0.4% 0.9%
EBITDA (538) (296) 452 865 951 1,011
EBITDA Margin (10.4%) (3.7%) 3.8% 6.5% 7.0% 7.2%
Net Interest Expense (Income) 1 43 189 206 147 83
Other Expense (Income) (28) 0 0 0 0 0
------------ ------------ ------------ ------------ ------------ ------------
Total Other Expense (Income) (27) 43 189 206 147 83
Pretax Income (904) (863) (394) (230) (86) 39
Taxes
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME ($904) ($863) ($394) ($230) ($86) $39
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------------------------------------
PROJECTED
------------------------------------------ ------------
2000 2001 2002 2003
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales:
Table Time $2,750 $2,819 $2,890 $2,962
Cafe 2,554 2,618 2,683 2,750
Beer, Wine and Liquor 7,655 7,847 8,043 8,244
Pro Shop 183 188 193 197
Games 1,026 1,051 1,078 1,105
Other Income(a) 195 200 205 210
------------ ------------ ------------- ------------
Total Sales 14,364 14,723 15,091 15,468
Cost of Goods Sold 3,194 3,274 3,356 3,439
------------ ------------ ------------- ------------
Gross Profit 11,170 11,449 11,735 12,029
Gross Margin 77.8% 77.8% 77.8% 77.8%
OPERATING EXPENSES
Wages 3,140 3,218 3,299 3,381
Repairs 109 112 115 117
Rent 2,075 2,121 2,168 2,217
Taxes 603 618 633 649
Advertising 414 424 435 446
Travel/ Entertainment 26 26 27 27
Professional Fees 29 30 31 32
Insurance 346 355 364 373
Utilities 500 513 525 538
Depreciation & Amortization 889 889 889 889
Other Expenses (b) 2,654 2,729 2,806 2,886
------------ ------------ ------------- ------------
Total Expenses 10,784 11,035 11,292 11,555
Minority Interest 245 255 264 273
Operating Income 141 160 180 200
------------ ------------ ------------- ------------
Operating Margin 1.0% 1.1% 1.2% 1.3%
EBITDA 1,030 1,049 1,069 1,089
EBITDA Margin 7.2% 7.1% 7.1% 7.0%
Net Interest Expense (Income) 46 25 18 14
Other Expense (Income) 0 0 0 0
------------ ------------ ------------- ------------
Total Other Expense (Income) 47 25 18 15
Pretax Income 95 135 162 185
Taxes
------------ ------------ ------------- ------------
NET INCOME $95 $135 $162 $185
============ ============ ============= ============
</TABLE>
- ------------------------------------------------
(a) Includes miscellaneous income related to club operations.
(b) 1997 excludes approximately $200,000 in legal fees related to the
transaction contemplated herein. Includes $30,000 for a sales tax audit,
$42,500 for the settlement of a lawsuit related to the Long Beach club,
$10,000 for cash deposits on potential new sites, and $25,000 in
architectural fees.
1
<PAGE> 57
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED BALANCE SHEET
BASE CASE
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
---------------------------------------- ------------ ---------------------------
1994 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash 1,130 1,254 646 562 105 406
Accounts Receivable 39 34 63 75 78 80
Inventory 117 156 205 215 218 224
Other Current Assets 143 264 166 230 238 244
Investments 44 40 40 40 40 40
Net Fixed Assets 3,646 4,989 7,688 6,849 6,010 5,171
Startup Cost & Other 1,220 1,112 1,097 1,052 1,088 1,115
TOTAL ASSETS $6,339 $7,847 $9,904 $9,022 $7,776 $7,279
============ ============ ============ ============ ============ ============
LIAB. & S.E.
Accounts Payable 398 683 942 925 957 981
Accrued Expenses 270 565 635 475 491 504
Intercompany Balances 0 0 0 0 0 0
Minority Interest 1,176 1,436 1,396 1,201 1,201 1,201
------------ ------------ ------------ ------------ ------------ ------------
Total Current Liabilities 1,845 2,683 2,973 2,601 2,648 2,685
Deferred Rent 0 0 1,188 1,301 1,251 1,201
Long-Term Debt 895 2,052 2,899 2,507 1,349 826
Equity:
Common Stock 8 9 9 9 9 9
Paid-In Capital 9,036 9,410 9,536 9,536 9,536 9,536
Retained Earnings (5,444) (6,307) (6,701) (6,932) (7,018) (6,979)
------------ ------------ ------------ ------------ ------------ ------------
Shareholders' Equity 3,600 3,112 2,844 2,614 2,528 2,566
TOTAL LIAB. & EQUITY $6,339 $7,847 $9,904 $9,022 $7,776 $7,279
============ ============ ============ ============ ============ ============
0 (0) 0 (0) 0 (0)
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------
PROJECTED
------------------------------------------- ------------
2000 2001 2002 2003
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash 844 1,640 2,538 3,455
Accounts Receivable 82 84 86 88
Inventory 229 235 241 247
Other Current Assets 250 256 263 269
Investments 40 40 40 40
Net Fixed Assets 4,332 3,493 2,654 1,815
Startup Cost & Other 1,143 1,172 1,201 1,231
TOTAL ASSETS $6,919 $6,919 $7,021 $7,145
============ ============ ============= ============
LIAB. & S.E.
Accounts Payable 1,005 1,030 1,056 1,082
Accrued Expenses 516 529 542 556
Intercompany Balances 0 0 0 0
Minority Interest 1,201 1,201 1,201 1,201
------------ ------------ ------------- ------------
Total Current Liabilities 2,722 2,760 2,799 2,839
Deferred Rent 1,151 1,101 1,051 1,001
Long-Term Debt 385 262 214 162
Equity:
Common Stock 9 9 9 9
Paid-In Capital 9,536 9,536 9,536 9,536
Retained Earnings (6,884) (6,750) (6,588) (6,403)
------------ ------------ ------------- ------------
Shareholders' Equity 2,661 2,796 2,958 3,143
TOTAL LIAB. & EQUITY $6,919 $6,919 $7,021 $7,145
============ ============ ============= ============
0 0 0 0
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
2
<PAGE> 58
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED CASH FLOW STATEMENT
BASE CASE
<TABLE>
<CAPTION>
($ IN 000'S)
------------------------------
ESTIMATED PROJECTED
------------ -------------
1997 1998
------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ($230) ($86)
Depreciation 889 889
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (11) (4)
Inventory (11) (3)
Other Current Assets (64) (8)
A/P (17) 32
Accrued Expense (160) 16
Minority Interest (195) 0
------------ ------------ ------------ ------------ ------------
Total Adjustments (458) 33
------------ ------------ ------------ ------------ ------------
Cash from Operations 201 837
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs 44 (36)
Change in Deferred Rent 113 (50)
Capital Expenditures (50) (50)
------------ ------------ ------------ ------------ ------------
Cash from Investing 107 (136)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0
Changes in Paid In Capital 0 0
Notes Payable (392) (1,158)
------------ ------------ ------------ ------------ ------------
Cash from Financing (392) (1,158)
Net Increase in Cash (84) (457)
Cash at Beg. Period 646 562
------------ ------------ ------------ ------------ ------------
Cash at End of Period 562 105
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S)
-------------------------------------------------------------------------
PROJECTED
--------------------------------------------------------- ------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $39 $95 $135 $162 $185
Depreciation 889 889 889 889 889
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (2) (2) (2) (2) (2)
Inventory (5) (6) (6) (6) (6)
Other Current Assets (6) (6) (6) (6) (7)
A/P 24 25 25 26 26
Accrued Expense 12 13 13 13 14
Minority Interest 0 0 0 0 0
------------ ------------ ------------ ------------- ------------
Total Adjustments 23 23 24 25 25
------------ ------------ ------------ ------------- ------------
Cash from Operations 951 1,007 1,048 1,075 1,099
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs (27) (28) (29) (29) (30)
Change in Deferred Rent (50) (50) (50) (50) (50)
Capital Expenditures (50) (50) (50) (50) (50)
------------ ------------ ------------ ------------- ------------
Cash from Investing (127) (128) (129) (129) (130)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0 0 0 0
Changes in Paid In Capital 0 0 0 0 0
Notes Payable (523) (441) (123) (48) (52)
------------ ------------ ------------ ------------- ------------
Cash from Financing (523) (441) (123) (48) (52)
Net Increase in Cash 301 438 796 898 918
Cash at Beg. Period 105 406 844 1,640 2,538
------------ ------------ ------------ ------------- ------------
Cash at End of Period 406 844 1,640 2,538 3,455
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
3
<PAGE> 59
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED OPERATING RATIOS
BASE CASE
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------
ACTUAL ESTIMATED
---------------------------------------- ------------
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
A/R Collection 2.8 1.5 1.9 2.1
Inventory Turn 9.2x 11.2x 13.4x 13.9x
Other Current Assets % Sales 2.8% 3.3% 1.4% 1.7%
Depr. 394 524 657 889
Cap. Expenditures 1,211 1,776 1,677 50
Startup Costs % Sales 23.7% 14.0% 9.1% 8.0%
A/P Collection 28.3 31.3 28.7 25.5
Accrued Exp. % Sales 5.3% 7.1% 5.3% 3.6%
Minority Interest % Sales 22.8% 18.0% 11.6% 9.1%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
PROJECTED
---------------------------------------------------------------------- ------------
1998 1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
A/R Collection 2.1 2.1 2.1 2.1 2.1 2.1
Inventory Turn 13.9x 13.9x 13.9x 13.9x 13.9x 13.9x
Other Current Assets % Sales 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%
Depr. 889 889 889 889 889 889
Cap. Expenditures 50 50 50 50 50 50
Startup Costs % Sales 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
A/P Collection 25.5 25.5 25.5 25.5 25.5 25.5
Accrued Exp. % Sales 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%
Minority Interest % Sales 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
4
<PAGE> 60
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS
BASE CASE
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------
ACTUAL ESTIMATED
---------------------------------------- ------------
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue 11,992 13,218
Operating Cash Flow 452 865
Net Income (394) (230)
Book Value 2,844 2,614
Cash $0
Debt 0
0=Book Value 2,614
1=Revenue 13,218
2=Operating Cash Flow 865
3=Net Income (230)
Choice: 2
0= LBO
1= Equity
Choice: 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------
PROJECTED
---------------------------------------------------------------------- ------------
1998 1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 13,672 14,013 14,364 14,723 15,091 15,468
Operating Cash Flow 951 1,011 1,030 1,049 1,069 1,089
Net Income (86) 39 95 135 162 185
Book Value 2,528 2,566 2,661 2,796 2,958 3,143
Cash $0 $0 $0 $0 $0 $0
Debt 0 0 0 0 0 0
0=Book Value 2,528 2,566 2,661 2,796 2,958 3,143
1=Revenue 13,672 14,013 14,364 14,723 15,091 15,468
2=Operating Cash Flow 951 1,011 1,030 1,049 1,069 1,089
3=Net Income (86) 39 95 135 162 185
Choice:
0= LBO
1= Equity
Choice:
</TABLE>
- ----------------------
(a) Unlevered Net Free Cash Flow = (Operating Income)*(1-Tax Rate)+
(Depreciation and Amortization)+(Changes in Working Capital)+(Capital
Expenditures)
STONEBRIDGE
ASSOCIATES, LLC
5
<PAGE> 61
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS
BASE CASE
DISCOUNTED CASH FLOW CALCULATION:
==================================
Terminal Value: Book Value
Last Year: 2003
==================================
<TABLE>
<CAPTION>
($000'S)
- -----------------------------------------------------------------------------------------------------------------------
TERMINAL VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT RATE 5.0x 6.0x 7.0x
31.00% $3,639 $3,854 $4,070 Total Enterprise Value
1,694 1,909 2,125 Equity Enterprise Value (a)
$0.19 $0.21 $0.23 Per Share Equity Enterprise Value (b)
1,077 1,293 1,508 NPV of Terminal Value
29.6% 33.5% 37.0% Term. Val./ Total Enterprise Value
33.00% $3,439 $3,636 $3,833 Total Enterprise Value
1,494 1,691 1,888 Equity Enterprise Value (a)
$0.16 $0.19 $0.21 Per Share Equity Enterprise Value (b)
984 1,180 1,377 NPV of Terminal Value
28.6% 32.5% 35.9% Term. Val./ Total Enterprise Value
35.00% $3,256 $3,436 $3,616 Total Enterprise Value
1,311 1,491 1,671 Equity Enterprise Value (a)
$0.14 $0.16 $0.18 Per Share Equity Enterprise Value (b)
899 1,079 1,259 NPV of Terminal Value
27.6% 31.4% 34.8% Term. Val./ Total Enterprise Value
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
FOOTNOTES:
- -------------------------------------------------------------------------------
(a) Calculated as Total Net Present Value minus Debt Outstanding plus Cash
Balances:
Debt Outstanding as of March 31, 1997= 2,507
Cash Balances as of March 31, 1997= 562
(b) Number of shares outstanding as of March 31, 1997 was: 9,137,798
STONEBRIDGE
ASSOCIATES, LLC
6
<PAGE> 62
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED INCOME STATEMENT
BASE CASE (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
---------------------------------------- ------------ ----------------------------------
1994 1995 1996 1997 1998 1999 2000
------------ ------------ ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $ 2,494 $ 2,534 $ 2,618 $ 2,634 $ 2,700
Cafe 2,154 2,310 2,431 2,330 2,389
Beer, Wine and Liquor 6,285 7,053 7,286 6,557 6,721
Pro Shop 121 152 174 176 180
Games 722 947 976 1,001 1,026
Other Income(a) 215 223 186 108 111
-------- -------- -------- -------- -------- -------- --------
Total Sales 5,148 7,969 11,992 13,218 13,672 12,806 13,126
Cost of Goods Sold 1,079 1,749 2,737 2,994 3,040 2,781 2,851
-------- -------- -------- -------- -------- -------- --------
Gross Profit 4,069 6,220 9,255 10,224 10,632 10,025 10,275
Gross Margin 79.0% 78.0% 77.2% 77.3% 77.8% 78.3% 78.3%
OPERATING EXPENSES
Wages 2,763 3,030 2,989 2,682 2,749
Repairs 36 68 104 104 107
Rent 1,713 1,818 1,986 1,774 1,813
Taxes 474 551 574 536 550
Advertising 314 352 394 359 368
Travel/ Entertainment 41 19 24 21 22
Professional Fees 32 34 28 10 11
Insurance 268 284 329 304 311
Utilities 435 472 476 435 445
Depreciation & Amortization 394 524 657 889 889 784 784
Other Expenses (b) 2,539 2,527 2,554 2,458 2,528
-------- -------- -------- -------- -------- -------- --------
Total Expenses 5,001 7,040 9,271 10,044 10,347 9,467 9,687
Minority Interest 190 203 223 235 245
Operating Income (932) (820) (205) (24) 61 322 344
-------- -------- -------- -------- -------- -------- --------
Operating Margin (18.1%) (10.3%) (1.7%) (0.2%) 0.4% 2.5% 2.6%
EBITDA (538) (296) 452 865 951 1,106 1,128
EBITDA Margin (10.4%) (3.7%) 3.8% 6.5% 7.0% 8.6% 8.6%
Net Interest Expense (Income) 1 43 189 206 147 68 20
Other Expense (Income) (28) 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total Other Expense (Income) (27) 43 189 206 147 69 20
Pretax Income (904) (863) (394) (230) (86) 254 324
Taxes
-------- -------- -------- -------- -------- -------- --------
NET INCOME ($ 904) ($ 863) ($ 394) ($ 230) ($ 86) $ 254 $ 324
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------
PROJECTED
---------------------- ---------
2001 2002 2003
----------- --------- ---------
<S> <C> <C> <C>
Sales:
Table Time $ 2,767 $ 2,836 $ 2,907
Cafe 2,448 2,509 2,572
Beer, Wine and Liquor 6,889 7,062 7,238
Pro Shop 185 189 194
Games 1,051 1,078 1,105
Other Income(a) 114 117 120
-------- -------- --------
Total Sales 13,454 13,791 14,136
Cost of Goods Sold 2,922 2,995 3,070
-------- -------- --------
Gross Profit 10,532 10,796 11,065
Gross Margin 78.3% 78.3% 78.3%
OPERATING EXPENSES
Wages 2,818 2,889 2,961
Repairs 110 112 115
Rent 1,852 1,893 1,935
Taxes 563 577 592
Advertising 377 386 396
Travel/ Entertainment 22 23 23
Professional Fees 11 11 11
Insurance 319 327 335
Utilities 457 468 480
Depreciation & Amortization 784 784 783
Other Expenses (b) 2,600 2,674 2,751
-------- -------- --------
Total Expenses 9,913 10,145 10,382
Minority Interest 255 264 273
Operating Income 365 387 410
-------- -------- --------
Operating Margin 2.7% 2.8% 2.9%
EBITDA 1,149 1,171 1,193
EBITDA Margin 8.5% 8.5% 8.4%
Net Interest Expense (Income) 3 0 0
Other Expense (Income) 0 0 0
-------- -------- --------
Total Other Expense (Income) 3 0 0
Pretax Income 362 387 410
Taxes
-------- -------- --------
NET INCOME $ 362 $ 387 $ 410
======== ======== ========
</TABLE>
- ----------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
(a) Includes miscellaneous income related to club operations.
(b) 1997 excludes approximately $200,000 in legal fees related to the
transaction contemplated herein. Includes $30,000 for a sales tax audit,
$42,500 for the settlement of a lawsuit related to the Long Beach club,
$10,000 for cash deposits on potential new sites, and $25,000 in
architectural fees.
1
<PAGE> 63
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED BALANCE SHEET
BASE CASE (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
---------------------------------- --------- -----------------------------
1994 1995 1996 1997 1998 1999 2000
------------ ----------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash 1,130 1,254 646 562 105 155 791
Accounts Receivable 39 34 63 75 78 73 74
Inventory 117 156 205 215 218 200 205
Other Current Assets 143 264 166 230 238 223 228
Investments 44 40 40 40 40 40 40
Net Fixed Assets 3,646 4,989 7,688 6,849 6,010 5,276 4,543
Startup Cost & Other 1,220 1,112 1,097 1,052 1,088 1,019 1,045
TOTAL ASSETS $ 6,339 $ 7,847 $ 9,904 $ 9,022 $ 7,776 $ 6,985 $ 6,925
======= ======= ======= ======= ======= ======= =======
LIAB. & S.E
Accounts Payable 398 683 942 925 957 896 919
Accrued Expenses 270 565 635 475 491 460 472
Intercompany Balances 0 0 0 0 0 0 0
Minority Interest 1,176 1,436 1,396 1,201 1,201 1,201 1,201
------- ------- ------- ------- ------- ------- -------
Total Current Liabilities 1,845 2,683 2,973 2,601 2,648 2,557 2,592
Deferred Rent 0 0 1,188 1,301 1,251 1,201 1,151
Long-Term Debt 895 2,052 2,899 2,507 1,349 445 78
Equity:
Common Stock 8 9 9 9 9 9 9
Paid-In Capital 9,036 9,410 9,536 9,536 9,536 9,536 9,536
Retained Earnings (5,444) (6,307) (6,701) (6,932) (7,018) (6,764) (6,440)
------- ------- ------- ------- ------- ------- -------
Shareholders' Equity 3,600 3,112 2,844 2,614 2,528 2,781 3,105
TOTAL LIAB. & EQUITY $ 6,339 $ 7,847 $ 9,904 $ 9,022 $ 7,776 $ 6,985 $ 6,925
======= ======= ======= ======= ======= ======= =======
0 (0) 0 (0) 0 0 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------------
PROJECTED
-------------------- ----------
2001 2002 2003
-------- --------- ----------
<S> <C> <C> <C>
Cash 1,754 2,821 3,910
Accounts Receivable 76 78 80
Inventory 210 215 220
Other Current Assets 234 240 246
Investments 40 40 40
Net Fixed Assets 3,809 3,075 2,342
Startup Cost & Other 1,071 1,098 1,125
TOTAL ASSETS $ 7,193 $ 7,566 $ 7,963
======= ======= =======
LIAB. & S.E
Accounts Payable 942 965 989
Accrued Expenses 484 496 508
Intercompany Balances 0 0 0
Minority Interest 1,201 1,201 1,201
------- ------- -------
Total Current Liabilities 2,627 2,662 2,698
Deferred Rent 1,101 1,051 1,001
Long-Term Debt 0 0 0
Equity:
Common Stock 9 9 9
Paid-In Capital 9,536 9,536 9,536
Retained Earnings (6,079) (5,691) (5,282)
------- ------- -------
Shareholders' Equity 3,467 3,855 4,264
TOTAL LIAB. & EQUITY $ 7,193 $ 7,566 $ 7,963
======= ======= =======
0 0 0
</TABLE>
- -----------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
STONEBRIDGE
ASSOCIATES, LLC
2
<PAGE> 64
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED CASH FLOW STATEMENT
BASE CASE (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S)
-------------------------------------------
ESTIMATED PROJECTED
------------ --------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ($230) ($86) $254
Depreciation 889 889 784
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (11) (4) 5
Inventory (11) (3) 19
Other Current Assets (64) (8) 15
A/P (17) 32 (61)
Accrued Expense (160) 16 (31)
Minority Interest (195) 0 0
------------ ------------ ------------ ------------ ------------
Total Adjustments (458) 33 (53)
------------ ------------ ------------ ------------ ------------ ------------
Cash from Operations 201 837 985
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs 44 (36) 69
Change in Deferred Rent 113 (50) (50)
Capital Expenditures (50) (50) (50)
------------ ------------ ------------ ------------ ------------ ------------
Cash from Investing 107 (136) (31)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0 0
Changes in Paid In Capital 0 0 0
Notes Payable (392) (1,158) (904)
------------ ------------ ------------ ------------ ------------ ------------
Cash from Financing (392) (1,158) (904)
Net Increase in Cash (84) (457) 49
Cash at Beg. Period 646 562 105
------------ ------------ ------------ ------------ ------------ ------------
Cash at End of Period 562 105 155
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S)
----------------------------------------------------------
PROJECTED
------------------------------------------ ------------
2000 2001 2002 2003
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $324 $362 $387 $410
Depreciation 784 784 784 783
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (2) (2) (2) (2)
Inventory (5) (5) (5) (5)
Other Current Assets (6) (6) (6) (6)
A/P 22 23 24 24
Accrued Expense 12 12 12 12
Minority Interest 0 0 0 0
------------ ------------ ------------- ------------
Total Adjustments 21 22 23 23
------------ ------------ ------------- ------------
Cash from Operations 1,129 1,167 1,194 1,216
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs (25) (26) (27) (27)
Change in Deferred Rent (50) (50) (50) (50)
Capital Expenditures (50) (50) (50) (50)
------------ ------------ ------------- ------------
Cash from Investing (125) (126) (127) (127)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0 0 0
Changes in Paid In Capital 0 0 0 0
Notes Payable (367) (78) 0 0
------------ ------------ ------------- ------------
Cash from Financing (367) (78) 0 0
Net Increase in Cash 636 963 1,067 1,089
Cash at Beg. Period 155 791 1,754 2,821
------------ ------------ ------------- ------------
Cash at End of Period 791 1,754 2,821 3,910
</TABLE>
- ----------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
STONEBRIDGE
ASSOCIATES, LLC
3
<PAGE> 65
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED OPERATING RATIOS
BASE CASE (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
---------------------------------------- ------------ ------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
A/R Collection 2.8 1.5 1.9 2.1 2.1
Inventory Turn 9.2x 11.2x 13.4x 13.9x 13.9x
Other Current Assets % Sales 2.8% 3.3% 1.4% 1.7% 1.7%
Depr. 394 524 657 889 889
Cap. Expenditures 1,211 1,776 1,677 50 50
Startup Costs % Sales 23.7% 14.0% 9.1% 8.0% 8.0%
A/P Collection 28.3 31.3 28.7 25.5 25.5
Accrued Exp. % Sales 5.3% 7.1% 5.3% 3.6% 3.6%
Minority Interest % Sales 22.8% 18.0% 11.6% 9.1% 9.1%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-------------------------------------------------------------------------
PROJECTED
--------------------------------------------------------- ------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
A/R Collection 2.1 2.1 2.1 2.1 2.1
Inventory Turn 13.9x 13.9x 13.9x 13.9x 13.9x
Other Current Assets % Sales 1.7% 1.7% 1.7% 1.7% 1.7%
Depr. 784 784 784 784 783
Cap. Expenditures 50 50 50 50 50
Startup Costs % Sales 8.0% 8.0% 8.0% 8.0% 8.0%
A/P Collection 25.5 25.5 25.5 25.5 25.5
Accrued Exp. % Sales 3.6% 3.6% 3.6% 3.6% 3.6%
Minority Interest % Sales 9.1% 9.1% 9.1% 9.1% 9.1%
</TABLE>
- --------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
STONEBRIDGE
ASSOCIATES, LLC
4
<PAGE> 66
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS
BASE CASE (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------
ACTUAL ESTIMATED
---------------------------------------- ------------
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C>
Revenue 11,992 13,218
Operating Cash Flow 452 865
Net Income (394) (230)
Book Value 2,844 2,614
Cash $0
Debt 0
0=Book Value 2,614
1=Revenue 13,218
2=Operating Cash Flow 865
3=Net Income (230)
Choice: 2
0= LBO
1= Equity
Choice: 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-------------------------------------------------------------------------------------
PROJECTED
---------------------------------------------------------------------- ------------
1998 1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 13,672 12,806 13,126 13,454 13,791 14,136
Operating Cash Flow 951 1,106 1,128 1,149 1,171 1,193
Net Income (86) 254 324 362 387 410
Book Value 2,528 2,781 3,105 3,467 3,855 4,264
Cash $0 $0 $0 $0 $0 $0
Debt 0 0 0 0 0 0
0=Book Value 2,528 2,781 3,105 3,467 3,855 4,264
1=Revenue 13,672 12,806 13,126 13,454 13,791 14,136
2=Operating Cash Flow 951 1,106 1,128 1,149 1,171 1,193
3=Net Income (86) 254 324 362 387 410
Choice:
0= LBO
1= Equity
Choice:
</TABLE>
- ----------------------------
(a) Unlevered Net Free Cash Flow = (Operating Income)*(1-Tax Rate)+
(Depreciation and Amortization)+(Changes in Working Capital)+(Capital
Expenditures)
STONEBRIDGE
ASSOCIATES, LLC
5
<PAGE> 67
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS*
BASE CASE (LONG BEACH SOLD)
DISCOUNTED CASH FLOW CALCULATION:
=============================================
Terminal Value: Book Value
Last Year: 2003
=============================================
<TABLE>
<CAPTION>
($000'S)
- ---------------------------------------------------------------------------------------------------------------------
TERMINAL VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT RATE 5.0x 6.0x 7.0x
31.00% $3,876 $4,112 $4,348 Total Enterprise Value
1,931 2,167 2,403 Equity Enterprise Value (a)
$0.21 $0.24 $0.26 Per Share Equity Enterprise Value (b)
1,181 1,417 1,654 NPV of Terminal Value
30.5% 34.5% 38.0% Term. Val./ Total Enterprise Value
33.00% $3,659 $3,875 $4,090 Total Enterprise Value
1,714 1,930 2,146 Equity Enterprise Value (a)
$0.19 $0.21 $0.23 Per Share Equity Enterprise Value (b)
1,078 1,294 1,510 NPV of Terminal Value
29.5% 33.4% 36.9% Term. Val./ Total Enterprise Value
35.00% $3,461 $3,658 $3,855 Total Enterprise Value
1,516 1,713 1,910 Equity Enterprise Value (a)
$0.17 $0.19 $0.21 Per Share Equity Enterprise Value (b)
986 1,183 1,380 NPV of Terminal Value
28.5% 32.3% 35.8% Term. Val./ Total Enterprise Value
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
FOOTNOTES:
- ---------------------------------------------------------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
(a) Calculated as Total Net Present Value minus Debt Outstanding plus Cash
Balances:
Debt Outstanding as of March 31, 1997= 2,507
Cash Balances as of March 31, 1997= 562
(b) Number of shares outstanding as of March 31, 1997 was: 9,137,798
STONEBRIDGE
ASSOCIATES, LLC
6
<PAGE> 68
JILLIAN'S OF KENDALL
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ --------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $384 $326 $343 $352 $360 $369
Cafe 148 108 111 113 116 119
Beer, Wine and Liquor 454 464 473 485 497 510
Pro Shop 41 39 38 39 40 41
Games 34 28 28 29 29 30
Other Income 3 5 2 2 2 2
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 1,063 968 994 1,019 1,044 1,070
Cost of Goods Sold 225 223 218 223 229 235
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 838 746 776 796 816 836
Gross Margin 78.8% 77.0% 78.1% 78.1% 78.1% 78.1%
OPERATING EXPENSES
Wages 209 220 217 222 228 233
Repairs 7 7 9 9 9 10
Rent 263 276 285 292 299 307
Taxes 44 46 45 46 47 49
Advertising 31 33 19 19 19 20
Travel/ Entertainment 1 1 1 1 1 1
Professional Fees 0 0 0 0 0 0
Insurance 24 26 29 30 31 31
Utilities 36 37 42 43 44 45
Depreciation & Amortization 53 53 53 53 53 53
Other Expenses 64 68 71 73 74 76
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 732 768 771 789 807 826
Minority Interest 0 0 0 0 0 0
Operating Income 106 (22) 6 7 9 10
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 9.9% (2.3%) 0.6% 0.7% 0.8% 0.9%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
-------------- ------------
2002 2003
-------------- ------------
<S> <C> <C>
Sales:
Table Time $379 $388
Cafe 122 125
Beer, Wine and Liquor 522 535
Pro Shop 42 43
Games 31 32
Other Income 2 2
------------- ------------
Total Sales 1,097 1,125
Cost of Goods Sold 240 246
------------- ------------
Gross Profit 857 878
Gross Margin 78.1% 78.1%
OPERATING EXPENSES
Wages 239 245
Repairs 10 10
Rent 314 322
Taxes 50 51
Advertising 20 21
Travel/ Entertainment 1 1
Professional Fees 0 0
Insurance 32 33
Utilities 46 47
Depreciation & Amortization 53 53
Other Expenses 78 80
------------- ------------
Total Expenses 845 865
Minority Interest 0 0
Operating Income 12 13
------------- ------------
Operating Margin 1.1% 1.2%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 69
JILLIAN'S OF SEATTLE
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ -------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $670 $709 $751 $770 $789 $809
Cafe 549 642 696 713 731 750
Beer, Wine and Liquor 770 945 996 1,020 1,046 1,072
Pro Shop 30 24 25 26 26 27
Games 135 150 166 170 175 179
Other Income 1 10 2 2 2 3
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 2,155 2,480 2,637 2,702 2,770 2,839
Cost of Goods Sold 353 429 462 474 486 498
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 1,801 2,051 2,174 2,228 2,284 2,341
Gross Margin 83.6% 82.7% 82.5% 82.5% 82.5% 82.5%
OPERATING EXPENSES
Wages 530 575 533 546 560 574
Repairs 13 14 22 22 23 23
Rent 305 330 374 384 393 403
Taxes 91 99 108 111 114 117
Advertising 37 40 44 46 47 48
Travel/ Entertainment 1 2 3 3 3 3
Professional Fees 0 0 1 1 1 1
Insurance 43 47 49 50 52 53
Utilities 39 42 43 44 45 46
Depreciation & Amortization 86 90 90 90 90 90
Other Expenses 95 103 172 176 180 185
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 1,239 1,341 1,439 1,473 1,507 1,543
Minority Interest 0 0 0 0 0 0
Operating Income 562 709 735 756 777 799
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 26.1% 28.6% 27.9% 28.0% 28.0% 28.1%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
------------ ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $829 $850
Cafe 768 787
Beer, Wine and Liquor 1,099 1,126
Pro Shop 28 28
Games 184 188
Other Income 3 3
------------- ------------
Total Sales 2,910 2,983
Cost of Goods Sold 510 523
------------- ------------
Gross Profit 2,400 2,460
Gross Margin 82.5% 82.5%
OPERATING EXPENSES
Wages 588 603
Repairs 24 24
Rent 413 423
Taxes 120 123
Advertising 49 50
Travel/ Entertainment 3 3
Professional Fees 1 1
Insurance 54 56
Utilities 47 48
Depreciation & Amortization 90 90
Other Expenses 190 194
------------- ------------
Total Expenses 1,579 1,616
Minority Interest 0 0
Operating Income 821 844
------------- ------------
Operating Margin 28.2% 28.3%
</TABLE>
1
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 70
JILLIAN'S OF CLEVELAND
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ --------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $210 $220 $225 $230 $236 $242
Cafe 132 141 147 151 155 159
Beer, Wine and Liquor 549 582 604 619 635 651
Pro Shop 13 33 41 42 43 44
Games 18 20 21 21 22 22
Other Income 13 16 3 3 3 3
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 934 1,010 1,041 1,067 1,094 1,121
Cost of Goods Sold 227 261 255 261 267 274
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 707 749 786 806 826 847
Gross Margin 75.7% 74.1% 75.5% 75.5% 75.5% 75.5%
OPERATING EXPENSES
Wages 202 202 206 212 217 222
Repairs 1 1 7 7 8 8
Rent 118 119 113 116 119 122
Taxes 35 35 35 36 37 38
Advertising 35 35 38 39 40 41
Travel/Entertainment 1 1 1 1 1 1
Professional Fees 0 0 0 0 0 0
Insurance 25 25 26 26 27 28
Utilities 39 39 49 50 51 53
Depreciation & Amortization 58 57 57 57 57 57
Other Expenses 64 64 77 78 80 82
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 578 577 609 622 637 651
Minority Interest 0 0 0 0 0 0
Operating Income 129 172 178 184 190 196
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 13.8% 17.0% 17.1% 17.2% 17.3% 17.5%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
------------- ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $248 $254
Cafe 163 167
Beer, Wine and Liquor 667 684
Pro Shop 45 46
Games 23 23
Other Income 3 3
------------- ------------
Total Sales 1,149 1,178
Cost of Goods Sold 281 288
------------- ------------
Gross Profit 868 890
Gross Margin 75.5% 75.5%
OPERATING EXPENSES
Wages 228 233
Repairs 8 8
Rent 125 128
Taxes 39 39
Advertising 42 43
Travel/Entertainment 1 1
Professional Fees 0 0
Insurance 28 29
Utilities 54 55
Depreciation & Amortization 57 57
Other Expenses 84 87
------------- ------------
Total Expenses 666 681
Minority Interest 0 0
Operating Income 202 209
------------- ------------
Operating Margin 17.6% 17.7%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 71
JILLIAN'S OF CLEVELAND HEIGHTS
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ -------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $232 $236 $240 $246 $252 $258
Cafe 133 132 142 145 149 153
Beer, Wine and Liquor 525 566 583 598 613 628
Pro Shop 7 13 21 21 22 22
Games 32 32 31 32 33 34
Other Income 5 11 4 4 4 4
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 934 989 1,021 1,046 1,072 1,099
Cost of Goods Sold 210 228 234 240 246 252
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 724 761 787 807 827 848
Gross Margin 77.5% 77.0% 77.1% 77.1% 77.1% 77.1%
OPERATING EXPENSES
Wages 214 200 207 212 218 223
Repairs 1 7 7 7 7 7
Rent 111 109 112 114 117 120
Taxes 45 41 41 42 44 45
Advertising 29 39 39 40 41 42
Travel/ Entertainment 0 0 1 1 1 1
Professional Fees 0 0 0 0 0 0
Insurance 25 25 28 29 29 30
Utilities 54 51 51 53 54 55
Depreciation & Amortization 47 47 47 47 47 47
Other Expenses 72 71 76 78 81 83
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 598 591 609 624 638 653
Minority Interest 9 15 16 19 20 21
Operating Income 117 155 162 164 169 173
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 12.5% 15.7% 15.9% 15.7% 15.7% 15.7%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
------------- ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $265 $271
Cafe 157 160
Beer, Wine and Liquor 644 660
Pro Shop 23 24
Games 34 35
Other Income 4 4
------------- ------------
Total Sales 1,127 1,155
Cost of Goods Sold 258 264
------------- ------------
Gross Profit 869 890
Gross Margin 77.1% 77.1%
OPERATING EXPENSES
Wages 229 234
Repairs 7 7
Rent 123 126
Taxes 46 47
Advertising 43 44
Travel/ Entertainment 1 1
Professional Fees 0 0
Insurance 31 31
Utilities 57 58
Depreciation & Amortization 47 47
Other Expenses 85 88
------------- ------------
Total Expenses 669 685
Minority Interest 21 22
Operating Income 179 184
------------- ------------
Operating Margin 15.9% 15.9%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 72
JILLIAN'S OF PASADENA
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------- ------------ -------------------------------------------------------
1996 1997 1998 1999 2000 2001
--------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $188 $152 $155 $159 $163 $167
Cafe 286 247 259 265 272 279
Beer, Wine and Liquor 401 473 490 502 515 528
Pro Shop 1 4 5 5 5 5
Games 4 8 6 6 6 7
Other Income 10 7 1 1 1 1
------------- ------------ ------------ ------------ ------------ ------------
Total Sales 889 891 915 938 962 986
Cost of Goods Sold 232 244 241 247 254 260
------------- ------------ ------------ ------------ ------------ ------------
Gross Profit 657 648 674 691 708 726
Gross Margin 73.9% 72.6% 73.6% 73.6% 73.6% 73.6%
OPERATING EXPENSES
Wages 221 242 227 233 239 245
Repairs 0 0 7 7 8 8
Rent 148 162 186 191 195 200
Taxes 28 31 39 40 41 42
Advertising 4 5 11 11 11 12
Travel/ Entertainment 3 3 3 3 3 3
Professional Fees 0 0 0 0 1 1
Insurance 26 28 26 27 28 28
Utilities 31 34 34 35 36 37
Depreciation & Amortization 25 26 26 26 26 26
Other Expenses 65 71 62 63 65 66
------------- ------------ ------------ ------------ ------------ ------------
Total Expenses 551 602 622 637 652 668
Minority Interest 0 0 0 0 0 0
Operating Income 105 45 52 54 56 58
------------- ------------ ------------ ------------ ------------ ------------
Operating Margin 11.9% 5.1% 5.7% 5.7% 5.8% 5.9%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------
PROJECTED
------------- ------------
2002 2003
------------ ------------
<S> <C> <C>
Sales:
Table Time $171 $175
Cafe 286 293
Beer, Wine and Liquor 541 555
Pro Shop 5 5
Games 7 7
Other Income 1 1
------------ ------------
Total Sales 1,010 1,035
Cost of Goods Sold 266 273
------------ ------------
Gross Profit 744 762
Gross Margin 73.6% 73.6%
OPERATING EXPENSES
Wages 251 257
Repairs 8 8
Rent 205 210
Taxes 43 44
Advertising 12 12
Travel/ Entertainment 3 3
Professional Fees 1 1
Insurance 29 30
Utilities 38 39
Depreciation & Amortization 26 26
Other Expenses 68 70
------------ ------------
Total Expenses 684 700
Minority Interest 0 0
Operating Income 60 62
------------ ------------
Operating Margin 5.9% 6.0%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 73
JILLIAN'S OF WORCESTER
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ -------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $231 $233 $240 $246 $252 $258
Cafe 73 90 98 100 103 105
Beer, Wine and Liquor 628 626 638 654 670 687
Pro Shop 4 3 3 3 4 4
Games 108 89 105 108 110 113
Other Income 37 44 34 35 36 37
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 1,080 1,085 1,118 1,146 1,175 1,204
Cost of Goods Sold 255 233 239 245 251 257
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 825 851 879 901 923 947
Gross Margin 76.3% 78.5% 78.6% 78.6% 78.6% 78.6%
OPERATING EXPENSES
Wages 225 225 218 224 229 235
Repairs 6 10 6 6 6 6
Rent 183 164 188 193 198 203
Taxes 44 54 46 47 48 49
Advertising 23 36 30 31 31 32
Travel/ Entertainment 7 1 2 2 2 2
Professional Fees 6 6 1 1 1 1
Insurance 30 24 36 37 38 39
Utilities 54 51 49 50 52 53
Depreciation & Amortization 60 87 87 87 87 87
Other Expenses 80 57 74 76 78 79
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 719 716 737 753 769 787
Minority Interest 39 61 65 68 71 75
Operating Income 67 75 78 80 83 85
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 6.2% 6.9% 6.9% 7.0% 7.0% 7.1%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
------------- ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $265 $271
Cafe 108 111
Beer, Wine and Liquor 704 722
Pro Shop 4 4
Games 116 119
Other Income 38 39
------------- ------------
Total Sales 1,234 1,265
Cost of Goods Sold 264 270
------------- ------------
Gross Profit 970 994
Gross Margin 78.6% 78.6%
OPERATING EXPENSES
Wages 241 247
Repairs 7 7
Rent 208 213
Taxes 50 52
Advertising 33 34
Travel/ Entertainment 2 2
Professional Fees 1 1
Insurance 40 41
Utilities 54 56
Depreciation & Amortization 87 87
Other Expenses 81 84
------------- ------------
Total Expenses 804 822
Minority Interest 78 82
Operating Income 88 91
------------- ------------
Operating Margin 7.1% 7.2%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 74
JILLIAN'S OF CHAMPAIGN
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ --------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $167 $156 $157 $161 $165 $170
Cafe 301 316 336 344 353 361
Beer, Wine and Liquor 604 604 620 635 651 667
Pro Shop 10 7 8 8 8 9
Games 79 79 81 83 85 87
Other Income 23 26 20 20 21 21
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 1,184 1,189 1,221 1,252 1,283 1,315
Cost of Goods Sold 310 303 298 305 313 321
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 874 886 923 946 970 994
Gross Margin 73.8% 74.5% 75.6% 75.6% 75.6% 75.6%
OPERATING EXPENSES
Wages 251 242 253 259 266 272
Repairs 1 8 9 10 10 10
Rent 90 98 99 101 104 107
Taxes 37 33 37 38 39 40
Advertising 40 45 45 46 47 48
Travel/ Entertainment 1 0 1 1 1 1
Professional Fees 0 1 0 0 0 0
Insurance 21 23 23 23 24 25
Utilities 40 43 41 42 43 45
Depreciation & Amortization 82 84 84 84 84 84
Other Expenses 82 83 58 59 61 62
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 645 658 650 664 678 693
Minority Interest 93 89 114 118 122 127
Operating Income 137 138 159 164 169 174
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 11.5% 11.6% 13.1% 13.1% 13.2% 13.3%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------
PROJECTED
--------------- ------------
2002 2003
--------------- ------------
<S> <C> <C>
Sales:
Table Time $174 $178
Cafe 370 380
Beer, Wine and Liquor 684 701
Pro Shop 9 9
Games 89 91
Other Income 22 22
------------- ------------
Total Sales 1,348 1,382
Cost of Goods Sold 329 337
------------- ------------
Gross Profit 1,019 1,045
Gross Margin 75.6% 75.6%
OPERATING EXPENSES
Wages 279 286
Repairs 10 11
Rent 109 112
Taxes 41 42
Advertising 49 51
Travel/ Entertainment 1 1
Professional Fees 0 0
Insurance 25 26
Utilities 46 47
Depreciation & Amortization 84 84
Other Expenses 64 65
------------- ------------
Total Expenses 709 724
Minority Interest 131 135
Operating Income 180 185
------------- ------------
Operating Margin 13.3% 13.4%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 75
JILLIAN'S OF ANNAPOLIS
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ --------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $204 $169 $176 $180 $185 $189
Cafe 107 103 108 111 114 117
Beer, Wine and Liquor 904 813 830 851 872 894
Pro Shop 13 15 15 16 16 17
Games 171 162 169 174 178 182
Other Income 25 17 9 9 9 9
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 1,424 1,279 1,308 1,340 1,374 1,408
Cost of Goods Sold 333 296 301 309 316 324
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 1,090 983 1,006 1,032 1,057 1,084
Gross Margin 76.6% 76.8% 77.0% 77.0% 77.0% 77.0%
OPERATING EXPENSES
Wages 266 243 267 274 281 288
Repairs 3 14 16 16 16 17
Rent 128 136 149 153 157 161
Taxes 44 48 53 54 56 57
Advertising 53 58 63 65 67 68
Travel/ Entertainment 21 6 6 7 7 7
Professional Fees 3 5 5 5 6 6
Insurance 24 26 28 29 30 31
Utilities 51 47 51 53 54 55
Depreciation & Amortization 62 64 64 64 64 64
Other Expenses 112 84 93 95 97 100
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 767 730 796 815 833 853
Minority Interest 48 38 29 30 31 32
Operating Income 275 215 181 187 193 199
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 19.3% 16.8% 13.9% 14.0% 14.1% 14.1%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
------------- ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $194 $199
Cafe 119 122
Beer, Wine and Liquor 916 939
Pro Shop 17 17
Games 187 192
Other Income 10 10
------------- ------------
Total Sales 1,443 1,479
Cost of Goods Sold 332 341
------------- ------------
Gross Profit 1,111 1,139
Gross Margin 77.0% 77.0%
OPERATING EXPENSES
Wages 295 302
Repairs 17 18
Rent 165 169
Taxes 58 60
Advertising 70 72
Travel/ Entertainment 7 7
Professional Fees 6 6
Insurance 31 32
Utilities 57 58
Depreciation & Amortization 64 64
Other Expenses 102 105
------------- ------------
Total Expenses 872 893
Minority Interest 33 34
Operating Income 205 212
------------- ------------
Operating Margin 14.2% 14.3%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 76
JILLIAN'S OF LONG BEACH
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ --------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $100 $47 $48 $50 $51 $52
Cafe 285 154 157 161 165 169
Beer, Wine and Liquor 943 867 889 911 934 957
Pro Shop 0 3 3 3 3 3
Games 16 0 0 0 0 0
Other Income 99 78 80 82 84 86
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 1,443 1,149 1,178 1,207 1,237 1,268
Cost of Goods Sold 417 318 326 335 343 352
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 1,026 831 851 873 894 917
Gross Margin 71.1% 72.3% 72.3% 72.3% 72.3% 72.3%
OPERATING EXPENSES
Wages 443 363 372 381 391 400
Repairs 2 2 2 2 2 2
Rent 297 243 249 256 262 268
Taxes 60 50 51 52 53 55
Advertising 53 43 44 45 46 48
Travel/ Entertainment 4 4 4 4 4 4
Professional Fees 21 17 18 18 19 19
Insurance 39 32 33 34 35 35
Utilities 62 51 52 53 55 56
Depreciation & Amortization 68 105 105 105 105 105
Other Expenses 143 117 120 123 126 129
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 1,194 1,026 1,049 1,073 1,097 1,122
Minority Interest 0 0 0 0 0 0
Operating Income (167) (196) (198) (200) (203) (205)
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin (11.6%) (17.0%) (16.8%) (16.6%) (16.4%) (16.2%)
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------
PROJECTED
------------ ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $53 $55
Cafe 174 178
Beer, Wine and Liquor 981 1,006
Pro Shop 3 3
Games 0 0
Other Income 88 91
------------- ------------
Total Sales 1,300 1,333
Cost of Goods Sold 360 369
------------- ------------
Gross Profit 940 963
Gross Margin 72.3% 72.3%
OPERATING EXPENSES
Wages 410 421
Repairs 2 2
Rent 275 282
Taxes 56 57
Advertising 49 50
Travel/ Entertainment 4 4
Professional Fees 20 20
Insurance 36 37
Utilities 57 59
Depreciation & Amortization 105 105
Other Expenses 132 135
------------- ------------
Total Expenses 1,147 1,173
Minority Interest 0 0
Operating Income (208) (210)
------------- ------------
Operating Margin (16.0%) (15.8%)
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 77
JILLIAN'S OF TACOMA
HISTORICAL AND PROJECTED INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ------------ -------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $108 $288 $282 $290 $297 $304
Cafe 143 377 377 387 396 406
Beer, Wine and Liquor 508 1,112 1,164 1,193 1,222 1,253
Pro Shop 3 11 16 16 16 17
Games 125 379 369 378 388 398
Other Income (0) 10 31 32 33 34
------------ ------------ ------------ ------------ ------------ ------------
Total Sales 886 2,177 2,240 2,296 2,353 2,412
Cost of Goods Sold 173 459 465 477 489 501
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 713 1,719 1,774 1,819 1,864 1,911
Gross Margin 80.5% 78.9% 79.2% 79.2% 79.2% 79.2%
OPERATING EXPENSES
Wages 202 519 488 500 513 526
Repairs 2 6 19 20 20 21
Rent 70 181 230 230 230 230
Taxes 44 114 119 122 125 128
Advertising 7 19 62 63 65 67
Travel/ Entertainment 1 2 3 3 3 3
Professional Fees 2 4 1 1 1 1
Insurance 11 29 51 52 54 55
Utilities 30 76 63 65 66 68
Depreciation & Amortization 52 212 212 212 212 212
Other Expenses 55 143 104 106 109 112
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 477 1,305 1,352 1,375 1,399 1,422
Minority Interest 0 0 0 0 0 0
Operating Income 236 414 422 443 465 488
------------ ------------ ------------ ------------ ------------ ------------
Operating Margin 26.6% 19.0% 18.8% 19.3% 19.8% 20.2%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
------------- ------------
2002 2003
------------- ------------
<S> <C> <C>
Sales:
Table Time $312 $320
Cafe 416 427
Beer, Wine and Liquor 1,284 1,316
Pro Shop 17 18
Games 408 418
Other Income 35 36
------------- ------------
Total Sales 2,472 2,534
Cost of Goods Sold 514 527
------------- ------------
Gross Profit 1,958 2,007
Gross Margin 79.2% 79.2%
OPERATING EXPENSES
Wages 539 552
Repairs 21 22
Rent 230 230
Taxes 131 135
Advertising 68 70
Travel/ Entertainment 3 4
Professional Fees 1 1
Insurance 56 58
Utilities 70 72
Depreciation & Amortization 212 212
Other Expenses 114 117
------------- ------------
Total Expenses 1,447 1,472
Minority Interest 0 0
Operating Income 511 535
------------- ------------
Operating Margin 20.7% 21.1%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 78
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- ---------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $2,494 $2,534 $2,661 $2,794 $2,933 $3,080
Cafe 2,154 2,310 2,426 2,547 2,674 2,808
Beer, Wine and Liquor 6,285 7,053 7,405 7,776 8,164 8,573
Pro Shop 121 152 159 167 176 184
Games 722 947 994 1,044 1,096 1,151
Other Income(a) 215 223 234 245 258 270
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Sales 5,148 7,969 11,992 13,218 13,879 14,573 15,301 16,066
Cost of Goods Sold 1,079 1,749 2,737 2,994 3,087 3,241 3,403 3,573
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Gross Profit 4,069 6,220 9,255 10,224 10,792 11,331 11,898 12,493
Gross Margin 79.0% 78.0% 77.2% 77.3% 77.8% 77.8% 77.8% 77.8%
OPERATING EXPENSES
Wages 2,763 3,030 3,182 3,341 3,508 3,684
Repairs 36 68 71 75 78 82
Rent 1,713 1,818 1,986 2,036 2,086 2,139
Taxes 474 551 578 607 638 670
Advertising 314 352 370 388 408 428
Travel/ Entertainment 41 19 20 21 22 24
Professional Fees 32 34 36 37 39 41
Insurance 268 284 298 313 329 345
Utilities 435 472 495 520 546 573
Depreciation & Amortization 394 524 657 889 889 889 889 889
Other Expenses (b) 2,539 2,527 2,565 2,606 2,694 2,786
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Expenses 5,001 7,040 9,271 10,044 10,491 10,834 11,238 11,661
Minority Interest 190 203 203 244 269 298
Operating Income (932) (820) (205) (24) 97 254 391 534
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Operating Margin (18.1%) (10.3%) (1.7%) (0.2%) 0.7% 1.7% 2.6% 3.3%
EBITDA (538) (296) 452 865 986 1,143 1,280 1,423
EBITDA Margin (10.4%) (3.7%) 3.8% 6.5% 7.1% 7.8% 8.4% 8.9%
Net Interest Expense (Income) 1 43 189 206 147 83 46 25
Other Expense (Income) (28) 0 0 0 0 0 0 0
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Other Expense (Income) (27) 43 189 206 147 83 47 25
Pretax Income (904) (863) (394) (230) (50) 171 344 509
Taxes
--------- ---------- --------- ---------- --------- ---------- --------- ----------
NET INCOME ($904) ($863) ($394) ($230) ($50) $171 $344 $509
========= ========== ========= ========== ========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
---------- -----------
2002 2003
--------- ----------
<S> <C> <C>
Sales:
Table Time $3,234 $3,396
Cafe 2,948 3,096
Beer, Wine and Liquor 9,001 9,451
Pro Shop 194 203
Games 1,208 1,269
Other Income(a) 284 298
--------- ----------
Total Sales 16,870 17,713
Cost of Goods Sold 3,752 3,940
--------- ----------
Gross Profit 13,117 13,773
Gross Margin 77.8% 77.8%
OPERATING EXPENSES
Wages 3,868 4,061
Repairs 87 91
Rent 2,192 2,247
Taxes 703 738
Advertising 450 472
Travel/ Entertainment 25 26
Professional Fees 43 46
Insurance 362 381
Utilities 602 632
Depreciation & Amortization 889 889
Other Expenses (b) 2,882 2,981
--------- ----------
Total Expenses 12,102 12,563
Minority Interest 324 354
Operating Income 691 856
--------- ----------
Operating Margin 4.1% 4.8%
EBITDA 1,580 1,745
EBITDA Margin 9.4% 9.9%
Net Interest Expense (Income) 18 14
Other Expense (Income) 0 0
--------- ----------
Total Other Expense (Income) 19 15
Pretax Income 673 841
Taxes
--------- ----------
NET INCOME $673 $841
========= ==========
</TABLE>
- ---------------------------------------
(a) Includes miscellaneous income related to club operations.
(b) 1997 excludes approximately $200,000 in legal fees related to the
transaction contemplated herein. Includes $30,000 for a sales tax audit,
$42,500 for the settlement of a lawsuit related to the Long Beach club,
$10,000 for cash deposits on potential new sites, and $25,000 in
architectural fees.
1
<PAGE> 79
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED BALANCE SHEET
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- ---------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash 1,130 1,254 646 562 139 567 1,249 2,414
Accounts Receivable 39 34 63 75 79 83 87 91
Inventory 117 156 205 215 222 233 244 257
Other Current Assets 143 264 166 230 242 254 266 280
Investments 44 40 40 40 40 40 40 40
Net Fixed Assets 3,646 4,989 7,688 6,849 6,010 5,171 4,332 3,493
Startup Cost & Other 1,220 1,112 1,097 1,052 1,105 1,160 1,218 1,279
TOTAL ASSETS $6,339 $7,847 $9,904 $9,022 $7,835 $7,506 $7,436 $7,852
========= ========== ========= ========== ========= ========== ========= ==========
LIAB. & S.E.
Accounts Payable 398 683 942 925 971 1,020 1,071 1,124
Accrued Expenses 270 565 635 475 499 524 550 577
Intercompany Balances 0 0 0 0 0 0 0 0
Minority Interest 1,176 1,436 1,396 1,201 1,201 1,201 1,201 1,201
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Current Liabilities 1,845 2,683 2,973 2,601 2,671 2,744 2,821 2,902
Deferred Rent 0 0 1,188 1,301 1,251 1,201 1,151 1,101
Total Debt 895 2,052 2,899 2,507 1,349 826 385 262
Equity:
Common Stock 8 9 9 9 9 9 9 9
Paid-In Capital 9,036 9,410 9,536 9,536 9,536 9,536 9,536 9,536
Retained Earnings (5,444) (6,307) (6,701) (6,932) (6,981) (6,811) (6,467) (5,958)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Shareholders' Equity 3,600 3,112 2,844 2,614 2,564 2,735 3,079 3,588
TOTAL LIAB. & EQUITY $6,339 $7,847 $9,904 $9,022 $7,835 $7,506 $7,436 $7,852
========= ========== ========= ========== ========= ========== ========= ==========
0 (0) 0 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
---------- -----------
2002 2003
--------- ----------
<S> <C> <C>
Cash 3,817 5,386
Accounts Receivable 96 101
Inventory 269 283
Other Current Assets 294 308
Investments 40 40
Net Fixed Assets 2,654 1,815
Startup Cost & Other 1,343 1,410
TOTAL ASSETS $8,512 $9,341
========= ==========
LIAB. & S.E.
Accounts Payable 1,181 1,240
Accrued Expenses 606 637
Intercompany Balances 0 0
Minority Interest 1,201 1,201
--------- ----------
Total Current Liabilities 2,987 3,077
Deferred Rent 1,051 1,001
Total Debt 214 162
Equity:
Common Stock 9 9
Paid-In Capital 9,536 9,536
Retained Earnings (5,285) (4,444)
--------- ----------
Shareholders' Equity 4,260 5,102
TOTAL LIAB. & EQUITY $8,512 $9,341
========= ==========
0 0
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
2
<PAGE> 80
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED CASH FLOW STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S)
-----------------------------------------------------------
ESTIMATED PROJECTED
---------- ---------------------------------------------
1997 1998 1999 2000 2001
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ($230) ($50) $171 $344 $509
Depreciation 889 889 889 889 889
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (12) (4) (4) (4) (4)
Inventory (10) (7) (11) (12) (12)
Other Current Assets (64) (12) (12) (13) (13)
A/P (17) 46 49 51 54
Accrued Expense (160) 24 25 26 27
Minority Interest (195) 0 0 0 0
---------- --------- ---------- --------- ---------- --------- ----------
Total Adjustments (458) 48 46 49 51
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash from Operations 200 887 1,106 1,282 1,449
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs 44 (53) (55) (58) (61)
Change in Deferred Rent 113 (50) (50) (50) (50)
Capital Expenditures (50) (50) (50) (50) (50)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash from Investing 107 (153) (155) (158) (161)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0 0 0 0
Changes in Paid In Capital 0 0 0 0 0
Notes Payable (392) (1,158) (523) (441) (123)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash from Financing (392) (1,158) (523) (441) (123)
Net Increase in Cash (84) (423) 428 682 1,165
Cash at Beg. Period 646 562 139 567 1,249
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash at End of Period 562 139 567 1,249 2,414
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S)
------------------------
PROJECTED
---------- ----------
2002 2003
--------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $673 $841
Depreciation 889 889
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (5) (5)
Inventory (13) (13)
Other Current Assets (14) (15)
A/P 56 59
Accrued Expense 29 30
Minority Interest 0 0
--------- ----------
Total Adjustments 54 56
--------- ----------
Cash from Operations 1,615 1,787
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs (64) (67)
Change in Deferred Rent (50) (50)
Capital Expenditures (50) (50)
--------- ----------
Cash from Investing (164) (167)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0
Changes in Paid In Capital 0 0
Notes Payable (48) (52)
--------- ----------
Cash from Financing (48) (52)
Net Increase in Cash 1,403 1,568
Cash at Beg. Period 2,414 3,817
--------- ----------
Cash at End of Period 3,817 5,386
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
3
<PAGE> 81
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED OPERATING RATIOS
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- --------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A/R Collection 2.8 1.5 1.9 2.1 2.1 2.1 2.1 2.1
Inventory Turn 9.2x 11.2x 13.4x 13.9x 13.9x 13.9x 13.9x 13.9x
Other Current Assets % Sales 2.8% 3.3% 1.4% 1.7% 0.0x 1.7% 1.7% 1.7%
Depr. 394 524 657 889 889 889 889 889
Cap. Expenditures 1,211 1,776 1,677 50 50 50 50 50
Startup Costs % Sales 23.7% 14.0% 9.1% 8.0% 0.1x 8.0% 8.0% 8.0%
A/P Collection 28.3 31.3 28.7 25.5 25.5x 25.5 25.5 25.5
Accrued Exp. % Sales 5.3% 7.1% 5.3% 3.6% 3.6% 3.6% 3.6% 3.6%
Minority Interest % Sales 22.8% 18.0% 11.6% 9.1% 9.1% 9.1% 9.1% 9.1%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
--------- ----------
2002 2003
--------- ----------
<S> <C> <C>
A/R Collection 2.1 2.1
Inventory Turn 13.9x 13.9x
Other Current Assets % Sales 1.7% 1.7%
Depr. 889 889
Cap. Expenditures 50 50
Startup Costs % Sales 8.0% 8.0%
A/P Collection 25.5 25.5
Accrued Exp. % Sales 3.6% 3.6%
Minority Interest % Sales 9.1% 9.1%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
4
<PAGE> 82
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- ---------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue 11,992 13,218 13,879 14,573 15,301 16,066
Operating Cash Flow 452 865 986 1,143 1,280 1,423
Net Income (394) (230) (50) 171 344 509
Book Value 2,844 2,614 2,564 2,735 3,079 3,588
Cash $0 $0 $0 $0 $0
Debt 0 0 0 0 0
0=Book Value 2,614 2,564 2,735 3,079 3,588
1=Revenue 13,218 13,879 14,573 15,301 16,066
2=Operating Cash Flow 865 986 1,143 1,280 1,423
3=Net Income (230) (50) 171 344 509
Choice: 2
0= LBO
1= Equity
Choice: 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------
PROJECTED
--------- ----------
2002 2003
--------- ----------
<S> <C> <C>
Revenue 16,870 17,713
Operating Cash Flow 1,580 1,745
Net Income 673 841
Book Value 4,260 5,102
Cash $0 $0
Debt 0 0
0=Book Value 4,260 5,102
1=Revenue 16,870 17,713
2=Operating Cash Flow 1,580 1,745
3=Net Income 673 841
Choice:
0= LBO
1= Equity
Choice:
</TABLE>
- ----------------------------------------------------
(a) Unlevered Net Free Cash Flow = (Operating Income)*(1-Tax Rate)+(Depreciation
and Amortization)+(Changes in Working Capital)+(Capital Expenditures)
STONEBRIDGE
ASSOCIATES, LLC
5
<PAGE> 83
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS
ADJUSTED REVENUE- 5% GROWTH
DISCOUNTED CASH FLOW CALCULATION:
============================
Terminal Value: Book Value
Last Year: 2003
============================
<TABLE>
<CAPTION>
($000'S)
- -------------------------------------------------------------------------------------------------------------
TERMINAL VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT RATE 5.0x 6.0x 7.0x
31.00% $4,951 $5,297 $5,642 Total Enterprise Value
3,006 3,352 3,697 Equity Enterprise Value (a)
$0.33 $0.37 $0.40 Per Share Equity Enterprise Value (b)
1,727 2,072 2,417 NPV of Terminal Value
34.9% 39.1% 42.8% Term. Val./ Total Enterprise Value
33.00% $4,656 $4,972 $5,287 Total Enterprise Value
2,712 3,027 3,342 Equity Enterprise Value (a)
$0.30 $0.33 $0.37 Per Share Equity Enterprise Value (b)
1,577 1,892 2,207 NPV of Terminal Value
33.9% 38.1% 41.7% Term. Val./ Total Enterprise Value
35.00% $4,387 $4,675 $4,963 Total Enterprise Value
2,442 2,730 3,019 Equity Enterprise Value (a)
$0.27 $0.30 $0.33 Per Share Equity Enterprise Value (b)
1,441 1,730 2,018 NPV of Terminal Value
32.9% 37.0% 40.7% Term. Val./ Total Enterprise Value
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
FOOTNOTES:
- -------------------------------------------------------------------------------
(a) Calculated as Total Net Present Value minus Debt Outstanding plus Cash
Balances:
Debt Outstanding as of March 31, 1997= 2,507
Cash Balances as of March 31, 1997= 562
(b) Number of shares outstanding as of March 31, 1997 was: 9,137,798
STONEBRIDGE
ASSOCIATES, LLC
6
<PAGE> 84
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED INCOME STATEMENT*
ADJUSTED REVENUE- 5% GROWTH (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- --------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $2,494 $2,534 $2,661 $2,742 $2,879 $3,023
Cafe 2,154 2,310 2,426 2,378 2,496 2,621
Beer, Wine and Liquor 6,285 7,053 7,405 6,820 7,161 7,519
Pro Shop 121 152 159 164 172 181
Games 722 947 994 1,044 1,096 1,151
Other Income(a) 215 223 234 159 167 175
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Sales 5,148 7,969 11,992 13,218 13,879 13,306 13,971 14,670
Cost of Goods Sold 1,079 1,749 2,737 2,994 3,087 2,890 3,035 3,187
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Gross Profit 4,069 6,220 9,255 10,224 10,792 10,415 10,936 11,483
Gross Margin 79.0% 78.0% 77.2% 77.3% 77.8% 78.3% 78.3% 78.3%
OPERATING EXPENSES
Wages 2,763 3,030 3,182 2,941 3,088 3,243
Repairs 36 68 71 73 76 80
Rent 1,713 1,818 1,986 1,774 1,813 1,852
Taxes 474 551 578 553 580 609
Advertising 314 352 370 341 358 376
Travel/ Entertainment 41 19 20 17 18 19
Professional Fees 32 34 36 18 19 20
Insurance 268 284 298 278 292 306
Utilities 435 472 495 464 487 512
Depreciation & Amortization 394 524 657 889 889 784 784 784
Other Expenses (b) 2,539 2,527 2,565 2,477 2,559 2,644
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Expenses 5,001 7,040 9,271 10,044 10,491 9,720 10,075 10,445
Minority Interest 190 203 203 244 269 298
Operating Income (932) (820) (205) (24) 97 452 592 739
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Operating Margin (18.1%) (10.3%) (1.7%) (0.2%) 0.7% 3.4% 4.2% 5.0%
EBITDA (538) (296) 452 865 986 1,236 1,376 1,523
EBITDA Margin (10.4%) (3.7%) 3.8% 6.5% 7.1% 9.3% 9.8% 10.4%
Net Interest Expense (Income) 1 43 189 206 147 68 20 3
Other Expense (Income) (28) 0 0 0 0 0 0 0
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Other Expense (Income) (27) 43 189 206 147 69 20 3
Pretax Income (904) (863) (394) (230) (50) 383 572 736
Taxes
--------- ---------- --------- ---------- --------- ---------- --------- ----------
NET INCOME ($904) ($863) ($394) ($230) ($50) $383 $572 $736
========= ========== ========= ========== ========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------
PROJECTED
---------- ----------
2002 2003
--------- ----------
<S> <C> <C>
Sales:
Table Time $3,174 $3,333
Cafe 2,752 2,890
Beer, Wine and Liquor 7,895 8,289
Pro Shop 190 199
Games 1,208 1,269
Other Income(a) 184 193
--------- ----------
Total Sales 15,403 16,173
Cost of Goods Sold 3,346 3,513
--------- ----------
Gross Profit 12,057 12,660
Gross Margin 78.3% 78.3%
OPERATING EXPENSES
Wages 3,405 3,575
Repairs 84 88
Rent 1,893 1,935
Taxes 640 672
Advertising 395 414
Travel/ Entertainment 20 21
Professional Fees 21 22
Insurance 322 338
Utilities 537 564
Depreciation & Amortization 784 784
Other Expenses (b) 2,733 2,824
--------- ----------
Total Expenses 10,832 11,237
Minority Interest 324 354
Operating Income 900 1,069
--------- ----------
Operating Margin 5.8% 6.6%
EBITDA 1,684 1,853
EBITDA Margin 10.9% 11.5%
Net Interest Expense (Income) 0 0
Other Expense (Income) 0 0
--------- ----------
Total Other Expense (Income) 0 0
Pretax Income 900 1,068
Taxes
--------- ----------
NET INCOME $900 $1,068
========= ==========
</TABLE>
- ---------------------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
(a) Includes miscellaneous income related to club operations.
(b) 1997 excludes approximately $200,000 in legal fees related to the
transaction contemplated herein. Includes $30,000 for a sales tax audit,
$42,500 for the settlement of a lawsuit related to the Long Beach club,
$10,000 for cash deposits on potential new sites, and $25,000 in
architectural fees.
1
<PAGE> 85
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED BALANCE SHEET
ADJUSTED REVENUE- 5% GROWTH (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- --------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash 1,130 1,254 646 562 278 447 1,334 2,674
Accounts Receivable 39 34 63 75 114 109 115 121
Inventory 117 156 205 215 192 180 189 198
Other Current Assets 143 264 166 230 222 213 224 235
Investments 44 40 40 40 40 40 40 40
Net Fixed Assets 3,646 4,989 7,688 6,849 6,010 5,276 4,542 3,809
Startup Cost & Other 1,220 1,112 1,097 1,052 1,069 1,025 1,076 1,130
TOTAL ASSETS $6,339 $7,847 $9,904 $9,022 $7,923 $7,289 $7,518 $8,205
========= ========== ========= ========== ========= ========== ========= ==========
LIAB. & S.E.
Accounts Payable 398 683 942 925 962 922 968 1,017
Accrued Expenses 270 565 635 475 597 572 601 631
Intercompany Balances 0 0 0 0 0 0 0 0
Minority Interest 1,176 1,436 1,396 1,201 1,201 1,201 1,201 1,201
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total Current Liabilities 1,845 2,683 2,973 2,601 2,759 2,695 2,770 2,848
Deferred Rent 0 0 1,188 1,301 1,251 1,201 1,151 1,101
Total Debt 895 2,052 2,899 2,507 1,349 445 78 0
Equity:
Common Stock 8 9 9 9 9 9 9 9
Paid-In Capital 9,036 9,410 9,536 9,536 9,536 9,536 9,536 9,536
Retained Earnings (5,444) (6,307) (6,701) (6,932) (6,981) (6,598) (6,026) (5,290)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Shareholders' Equity 3,600 3,112 2,844 2,614 2,564 2,947 3,519 4,256
TOTAL LIAB. & EQUITY $6,339 $7,847 $9,904 $9,022 $7,923 $7,289 $7,518 $8,205
========= ========== ========= ========== ========= ========== ========= ==========
0 (0) 0 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------
PROJECTED
--------- ----------
2002 2003
--------- ----------
<S> <C> <C>
Cash 4,255 6,006
Accounts Receivable 127 133
Inventory 208 218
Other Current Assets 246 259
Investments 40 40
Net Fixed Assets 3,075 2,341
Startup Cost & Other 1,186 1,245
TOTAL ASSETS $9,137 $10,242
========= ==========
LIAB. & S.E.
Accounts Payable 1,068 1,121
Accrued Expenses 662 695
Intercompany Balances 0 0
Minority Interest 1,201 1,201
--------- ----------
Total Current Liabilities 2,931 3,017
Deferred Rent 1,051 1,001
Total Debt 0 0
Equity:
Common Stock 9 9
Paid-In Capital 9,536 9,536
Retained Earnings (4,390) (3,321)
--------- ----------
Shareholders' Equity 5,155 6,224
TOTAL LIAB. & EQUITY $9,137 $10,242
========= ==========
0 0
</TABLE>
- -----------------------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
STONEBRIDGE
ASSOCIATES, LLC
2
<PAGE> 86
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED CASH FLOW STATEMENT
ADJUSTED REVENUE- 5% GROWTH (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S)
----------------------------------------------------------
ESTIMATED PROJECTED
---------- --------------------------------------------
1997 1998 1999 2000 2001
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ($230) ($50) $383 $572 $736
Depreciation 889 889 784 784 784
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (12) (39) 5 (5) (6)
Inventory (10) 23 12 (9) (9)
Other Current Assets (64) 8 9 (11) (11)
A/P (17) 37 (40) 46 48
Accrued Expense (160) 122 (25) 29 30
Minority Interest (195) 0 0 0 0
---------- --------- ---------- --------- ---------- --------- ----------
Total Adjustments (458) 151 (38) 50 52
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash from Operations 200 990 1,129 1,405 1,572
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs 44 (17) 44 (51) (54)
Change in Deferred Rent 113 (50) (50) (50) (50)
Capital Expenditures (50) (50) (50) (50) (50)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash from Investing 107 (117) (56) (151) (154)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0 0 0 0
Changes in Paid In Capital 0 0 0 0 0
Notes Payable (392) (1,158) (904) (367) (78)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash from Financing (392) (1,158) (904) (367) (78)
Net Increase in Cash (84) (284) 169 887 1,340
Cash at Beg. Period 646 562 278 447 1,334
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Cash at End of Period 562 278 447 1,334 2,674
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S)
-----------------------
PROJECTED
--------- ----------
2002 2003
--------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $900 $1,068
Depreciation 784 784
Non-Cash Adjustments
Adjustments to Working Capital
Accounts Receivable (6) (6)
Inventory (10) (10)
Other Current Assets (12) (12)
A/P 51 53
Accrued Expense 32 33
Minority Interest 0 0
--------- ----------
Total Adjustments 55 57
--------- ----------
Cash from Operations 1,738 1,910
CASH FLOW FROM INVESTING ACTIVITIES:
Change in Startup Costs (56) (59)
Change in Deferred Rent (50) (50)
Capital Expenditures (50) (50)
--------- ----------
Cash from Investing (156) (159)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Common Stock 0 0
Changes in Paid In Capital 0 0
Notes Payable 0 0
--------- ----------
Cash from Financing 0 0
Net Increase in Cash 1,582 1,750
Cash at Beg. Period 2,674 4,255
--------- ----------
Cash at End of Period 4,255 6,006
</TABLE>
- -----------------------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
STONEBRIDGE
ASSOCIATES, LLC
3
<PAGE> 87
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED OPERATING RATIOS
ADJUSTED REVENUE- 5% GROWTH (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- --------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A/R Collection 2.8 1.5 1.9 3.0 3.0 3.0 3.0 3.0
Inventory Turn 9.2x 11.2x 13.4x 16.1x 16.1x 16.1x 16.1x 16.1x
Other Current Assets % Sales 2.8% 3.3% 1.4% 1.6% 1.6% 1.6% 1.6% 1.6%
Depr. 394 524 657 889 889 784 784 784
Cap. Expenditures 1,211 1,776 1,677 50 50 50 50 50
Startup Costs % Sales 23.7% 14.0% 9.1% 7.7% 7.7% 7.7% 7.7% 7.7%
A/P Collection 28.3 31.3 28.7 25.3 25.3 25.3 25.3 25.3
Accrued Exp. % Sales 5.3% 7.1% 5.3% 4.3% 4.3% 4.3% 4.3% 4.3%
Minority Interest % Sales 22.8% 18.0% 11.6% 9.3% 9.3% 9.3% 9.3% 9.3%
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------
PROJECTED
--------- ----------
2002 2003
--------- ----------
<S> <C> <C>
A/R Collection 3.0 3.0
Inventory Turn 16.1x 16.1x
Other Current Assets % Sales 1.6% 1.6%
Depr. 784 784
Cap. Expenditures 50 50
Startup Costs % Sales 7.7% 7.7%
A/P Collection 25.3 25.3
Accrued Exp. % Sales 4.3% 4.3%
Minority Interest % Sales 9.3% 9.3%
</TABLE>
- -----------------------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
STONEBRIDGE
ASSOCIATES, LLC
4
<PAGE> 88
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS
ADJUSTED REVENUE- 5% GROWTH (LONG BEACH SOLD)
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
--------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
-------------------------------- ---------- --------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue 11,992 13,218 13,879 13,306 13,971 14,670
Operating Cash Flow 452 865 986 1,236 1,376 1,523
Net Income (394) (230) (50) 383 572 736
Book Value 2,844 2,614 2,564 2,947 3,519 4,256
Cash $0 $0 $0 $0 $0
Debt 0 0 0 0 0
0= Book Value 2,614 2,564 2,947 3,519 4,256
1= Revenue 13,218 13,879 13,306 13,971 14,670
2= Operating Cash Flow 865 986 1,236 1,376 1,523
3= Net Income (230) (50) 383 572 736
Choice: 2
0= LBO
1= Equity
Choice: 0
</TABLE>
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
------------------------------
PROJECTED
------------- ----------
2002 2003
------------- ----------
<S> <C> <C>
Revenue 15,403 16,173
Operating Cash Flow 1,684 1,853
Net Income 900 1,068
Book Value 5,155 6,224
Cash $0 $0
Debt 0 0
0= Book Value 5,155 6,224
1= Revenue 15,403 16,173
2= Operating Cash Flow 1,684 1,853
3= Net Income 900 1,068
Choice:
0= LBO
1= Equity
Choice:
</TABLE>
- ----------------------------------------------------
(a) Unlevered Net Free Cash Flow = (Operating Income)*(1-Tax
Rate)+(Depreciation and Amortization)+(Changes in Working
Capital)+(Capital Expenditures)
STONEBRIDGE
ASSOCIATES, LLC
5
<PAGE> 89
JILLIAN'S ENTERTAINMENT CORP.
DISCOUNTED CASH FLOW ANALYSIS*
ADJUSTED REVENUE- 5% GROWTH (LONG BEACH SOLD)
DISCOUNTED CASH FLOW CALCULATION:
============================
Terminal Value: Book Value
Last Year: 2003
============================
<TABLE>
<CAPTION>
($000'S)
- --------------------------------------------------------------------------------------------------------------
TERMINAL VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT RATE 5.0x 6.0x 7.0x
31.00% $5,267 $5,634 $6,000 Total Enterprise Value
3,322 3,689 4,055 Equity Enterprise Value (a)
$0.36 $0.40 $0.44 Per Share Equity Enterprise Value (b)
1,833 2,199 2,566 NPV of Terminal Value
34.8% 39.0% 42.8% Term. Val./ Total Enterprise Value
33.00% $4,954 $5,288 $5,623 Total Enterprise Value
3,009 3,344 3,678 Equity Enterprise Value (a)
$0.33 $0.37 $0.40 Per Share Equity Enterprise Value (b)
1,673 2,008 2,343 NPV of Terminal Value
33.8% 38.0% 41.7% Term. Val./ Total Enterprise Value
35.00% $4,667 $4,973 $5,279 Total Enterprise Value
2,722 3,028 3,334 Equity Enterprise Value (a)
$0.30 $0.33 $0.36 Per Share Equity Enterprise Value (b)
1,530 1,836 2,142 NPV of Terminal Value
32.8% 36.9% 40.6% Term. Val./ Total Enterprise Value
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
FOOTNOTES:
- -------------------------------------------------------------------------------
* Assumes Long Beach is sold in 1999 for the amount of the remaining debt
outstanding related to the club.
(a) Calculated as Total Net Present Value minus Debt Outstanding plus Cash
Balances:
Debt Outstanding as of March 31, 1997= 2,507
Cash Balances as of March 31, 1997= 562
(b) Number of shares outstanding as of March 31, 1997 was: 9,137,798
STONEBRIDGE
ASSOCIATES, LLC
6
<PAGE> 90
JILLIAN'S OF KENDALL
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- ------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $384 $326 $342 $359 $377 $396 $416 $436
Cafe 148 108 113 119 125 131 137 144
Beer, Wine and Liquor 454 464 487 511 537 564 592 622
Pro Shop 41 39 40 43 45 47 49 52
Games 34 28 29 31 32 34 35 37
Other Income 3 5 5 6 6 6 6 7
------------ ----------- ---------- ------------ ---------- ---------- ----------- ----------
Total Sales 1,063 968 1,017 1,068 1,121 1,177 1,236 1,298
Cost of Goods Sold 225 223 222 233 245 257 270 284
------------ ----------- ---------- ------------ ---------- ---------- ----------- ----------
Gross Profit 838 746 795 834 876 920 966 1,014
Gross Margin 78.8% 77.0% 78.1% 78.1% 78.1% 78.1% 78.1% 78.1%
OPERATING EXPENSES
Wages 209 220 231 242 255 267 281 295
Repairs 7 7 7 8 8 9 9 10
Rent 263 276 285 292 299 307 314 322
Taxes 44 46 49 51 54 56 59 62
Advertising 31 33 34 36 38 40 42 44
Travel/ Entertainment 1 1 1 1 1 1 1 1
Professional Fees 0 0 0 0 0 0 0 0
Insurance 24 26 27 28 30 31 33 34
Utilities 36 37 39 41 43 46 48 50
Depreciation & Amortization 53 53 53 53 53 53 53 53
Other Expenses 64 68 71 75 78 82 86 91
------------ ----------- ---------- ------------ ---------- ---------- ----------- ----------
Total Expenses 732 768 798 828 860 893 927 963
Minority Interest 0 0 0 0 0 0 0 0
Operating Income 106 (22) (4) 6 16 27 39 52
------------ ----------- ---------- ------------ ---------- ---------- ----------- ----------
Operating Margin 9.9% (2.3%) (0.3%) 0.6% 1.5% 2.3% 3.2% 4.0%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 91
JILLIAN'S OF SEATTLE
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $670 $709 $744 $782 $821 $862 $905 $950
Cafe 549 642 675 708 744 781 820 861
Beer, Wine and Liquor 770 945 992 1,042 1,094 1,149 1,206 1,266
Pro Shop 30 24 25 26 28 29 30 32
Games 135 150 157 165 173 182 191 201
Other Income 1 10 10 10 11 12 12 13
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 2,155 2,480 2,604 2,734 2,870 3,014 3,165 3,323
Cost of Goods Sold 353 429 455 477 501 526 553 580
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 1,801 2,051 2,149 2,256 2,369 2,488 2,612 2,743
Gross Margin 83.6% 82.7% 82.5% 82.5% 82.5% 82.5% 82.5% 82.5%
OPERATING EXPENSES
Wages 530 575 603 633 665 698 733 770
Repairs 13 14 15 15 16 17 18 19
Rent 305 330 374 384 393 403 413 423
Taxes 91 99 104 109 114 120 126 132
Advertising 37 40 42 44 46 48 51 53
Travel/ Entertainment 1 2 2 2 2 2 2 2
Professional Fees 0 0 0 0 0 0 0 0
Insurance 43 47 49 52 54 57 60 63
Utilities 39 42 45 47 49 52 54 57
Depreciation & Amortization 86 90 90 90 90 90 90 90
Other Expenses 95 103 108 114 119 125 132 138
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 1,239 1,341 1,431 1,489 1,549 1,613 1,679 1,748
Minority Interest 0 0 0 0 0 0 0 0
Operating Income 562 709 718 767 820 875 933 995
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 26.1% 28.6% 27.6% 28.1% 28.6% 29.0% 29.5% 29.9%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 92
JILLIAN'S OF CLEVELAND
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $210 $220 $231 $242 $254 $267 $280 $294
Cafe 132 141 148 155 163 171 179 188
Beer, Wine and Liquor 549 582 611 642 674 708 743 780
Pro Shop 13 33 34 36 38 40 42 44
Games 18 20 21 22 23 24 25 26
Other Income 13 16 16 17 18 19 20 21
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 934 1,010 1,061 1,114 1,170 1,228 1,290 1,354
Cost of Goods Sold 227 261 260 272 286 300 315 331
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 707 749 801 842 884 928 974 1,023
Gross Margin 75.7% 74.1% 75.5% 75.5% 75.5% 75.5% 75.5% 75.5%
OPERATING EXPENSES
Wages 202 202 212 222 234 245 258 270
Repairs 1 1 1 1 1 1 1 1
Rent 118 119 113 116 119 122 125 128
Taxes 35 35 37 39 41 43 45 47
Advertising 35 35 37 39 41 43 45 47
Travel/ Entertainment 1 1 1 1 1 1 1 1
Professional Fees 0 0 0 0 0 0 0 0
Insurance 25 25 26 28 29 30 32 33
Utilities 39 39 41 43 45 47 49 52
Depreciation & Amortization 58 57 57 57 57 57 57 57
Other Expenses 64 64 68 71 75 78 82 86
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 578 577 592 616 641 668 695 724
Minority Interest 0 0 0 0 0 0 0 0
Operating Income 129 172 209 225 242 260 279 299
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 13.8% 17.0% 19.7% 20.2% 20.7% 21.2% 21.6% 22.1%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 93
JILLIAN'S OF CLEVELAND HEIGHTS
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $232 $236 $247 $260 $273 $286 $301 $316
Cafe 133 132 139 146 153 161 169 177
Beer, Wine and Liquor 525 566 594 624 655 688 722 758
Pro Shop 7 13 13 14 15 16 16 17
Games 32 32 34 36 37 39 41 43
Other Income 5 11 11 12 12 13 14 14
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 934 989 1,039 1,091 1,145 1,203 1,263 1,326
Cost of Goods Sold 210 228 237 249 262 275 289 303
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 724 761 801 841 883 928 974 1,023
Gross Margin 77.5% 77.0% 77.1% 77.1% 77.1% 77.1% 77.1% 77.1%
OPERATING EXPENSES
Wages 214 200 210 221 232 243 256 268
Repairs 1 7 7 7 8 8 8 9
Rent 111 109 112 114 117 120 123 126
Taxes 45 41 43 45 47 49 52 54
Advertising 29 39 41 43 45 48 50 52
Travel/ Entertainment 0 0 0 0 0 0 0 0
Professional Fees 0 0 0 0 0 0 0 0
Insurance 25 25 26 27 29 30 32 33
Utilities 54 51 54 56 59 62 65 69
Depreciation & Amortization 47 47 47 47 47 47 47 47
Other Expenses 72 71 86 89 92 95 98 101
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 598 591 626 651 677 704 732 761
Minority Interest 9 15 15 20# 22# 26# 26# 29#
Operating Income 117 155 160 171 185 198 216 233
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 12.5% 15.7% 15.4% 15.7% 16.2% 16.4% 17.1% 17.6%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 94
JILLIAN'S OF PASADENA
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $188 $152 $159 $167 $176 $185 $194 $203
Cafe 286 247 259 272 286 300 315 331
Beer, Wine and Liquor 401 473 497 522 548 576 604 635
Pro Shop 1 4 5 5 5 5 6 6
Games 4 8 9 9 10 10 11 11
Other Income 10 7 7 8 8 8 9 9
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 889 891 936 983 1,032 1,084 1,138 1,195
Cost of Goods Sold 232 244 247 259 272 286 300 315
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 657 648 689 724 760 798 838 880
Gross Margin 73.9% 72.6% 73.6% 73.6% 73.6% 73.6% 73.6% 73.6%
OPERATING EXPENSES
Wages 221 242 254 267 280 294 309 325
Repairs 0 0 0 0 0 0 0 0
Rent 148 162 186 191 195 200 205 210
Taxes 28 31 32 34 36 37 39 41
Advertising 4 5 5 5 6 6 6 6
Travel/ Entertainment 3 3 4 4 4 4 4 5
Professional Fees 0 0 0 0 0 0 0 0
Insurance 26 28 30 31 33 34 36 38
Utilities 31 34 35 37 39 41 43 45
Depreciation & Amortization 25 26 26 26 26 26 26 26
Other Expenses 65 71 74 78 82 86 90 95
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 551 602 647 673 701 730 760 791
Minority Interest 0 0 0 0 0 0 0 0
Operating Income 105 45 42 50 59 68 78 88
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 11.9% 5.1% 4.5% 5.1% 5.7% 6.3% 6.9% 7.4%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 95
JILLIAN'S OF WORCESTER
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $231 $233 $244 $257 $269 $283 $297 $312
Cafe 73 90 95 99 104 109 115 121
Beer, Wine and Liquor 628 626 658 690 725 761 799 839
Pro Shop 4 3 3 3 3 3 4 4
Games 108 89 94 98 103 108 114 119
Other Income 37 44 46 48 51 53 56 59
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 1,080 1,085 1,139 1,196 1,256 1,318 1,384 1,453
Cost of Goods Sold 255 233 243 255 268 282 296 310
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 825 851 896 940 987 1,037 1,089 1,143
Gross Margin 76.3% 78.5% 78.6% 78.6% 78.6% 78.6% 78.6% 78.6%
OPERATING EXPENSES
Wages 225 225 236 248 260 273 287 301
Repairs 6 10 10 11 11 12 12 13
Rent 183 164 188 193 198 203 208 213
Taxes 44 54 57 60 63 66 69 73
Advertising 23 36 38 40 42 44 46 48
Travel/ Entertainment 7 1 1 1 1 2 2 2
Professional Fees 6 6 7 7 7 8 8 9
Insurance 30 24 25 26 28 29 30 32
Utilities 54 51 54 57 59 62 66 69
Depreciation & Amortization 60 87 87 87 87 87 87 87
Other Expenses 80 57 60 63 66 70 73 77
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 719 716 764 793 823 855 889 923
Minority Interest 39 61# 61# 66# 76# 87# 98# 110#
Operating Income 67 75 71 82 88 95 102 109
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 6.2% 6.9% 6.2% 6.8% 7.0% 7.2% 7.4% 7.5%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 96
JILLIAN'S OF CHAMPAIGN
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $167 $156 $164 $172 $180 $189 $199 $209
Cafe 301 316 332 349 366 385 404 424
Beer, Wine and Liquor 604 604 634 666 699 734 771 809
Pro Shop 10 7 8 8 9 9 9 10
Games 79 79 83 87 92 96 101 106
Other Income 23 26 27 29 30 32 33 35
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 1,184 1,189 1,248 1,310 1,376 1,445 1,517 1,593
Cost of Goods Sold 310 303 304 320 336 352 370 389
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 874 886 943 991 1,040 1,092 1,147 1,204
Gross Margin 73.8% 74.5% 75.6% 75.6% 75.6% 75.6% 75.6% 75.6%
OPERATING EXPENSES
Wages 251 242 254 267 280 294 309 324
Repairs 1 8 8 8 9 9 10 10
Rent 90 98 99 101 104 107 109 112
Taxes 37 33 35 36 38 40 42 44
Advertising 40 45 47 49 52 54 57 60
Travel/ Entertainment 1 0 0 0 0 0 0 0
Professional Fees 0 1 1 1 1 1 1 1
Insurance 21 23 24 25 26 27 29 30
Utilities 40 43 45 47 50 52 55 58
Depreciation & Amortization 82 84 84 84 84 84 84 84
Other Expenses 82 83 87 91 96 100 105 111
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 645 658 683 710 739 769 801 834
Minority Interest 93 89 89 115 124 135 145 156
Operating Income 137 138 171 165 176 188 200 213
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 11.5% 11.6% 13.7% 12.6% 12.8% 13.0% 13.2% 13.4%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 97
JILLIAN'S OF ANNAPOLIS
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $204 $169 $177 $186 $196 $205 $216 $226
Cafe 107 103 108 114 120 126 132 138
Beer, Wine and Liquor 904 813 853 896 941 988 1,037 1,089
Pro Shop 13 15 15 16 17 18 19 20
Games 171 162 170 178 187 197 207 217
Other Income 25 17 18 19 20 21 22 23
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 1,424 1,279 1,343 1,410 1,481 1,555 1,632 1,714
Cost of Goods Sold 333 296 309 324 341 358 375 394
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 1,090 983 1,034 1,086 1,140 1,197 1,257 1,320
Gross Margin 76.6% 76.8% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0%
OPERATING EXPENSES
Wages 266 243 255 268 281 295 310 325
Repairs 3 14 15 16 16 17 18 19
Rent 128 136 149 153 157 161 165 169
Taxes 44 48 51 53 56 59 61 65
Advertising 53 58 60 63 67 70 74 77
Travel/ Entertainment 21 6 6 6 7 7 7 8
Professional Fees 3 5 5 5 6 6 6 6
Insurance 24 26 27 29 30 31 33 35
Utilities 51 47 49 52 54 57 60 63
Depreciation & Amortization 62 64 64 64 64 64 64 64
Other Expenses 112 84 88 93 97 102 107 113
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 767 730 770 801 834 869 905 943
Minority Interest 48 38 38 43 47 51 55 59
Operating Income 275 215 226 241 259 277 297 318
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 19.3% 16.8% 16.8% 17.1% 17.5% 17.8% 18.2% 18.5%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 98
JILLIAN'S OF LONG BEACH
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $100 $47 $50 $52 $55 $57 $60 $63
Cafe 285 154 161 169 178 187 196 206
Beer, Wine and Liquor 943 867 910 956 1,004 1,054 1,107 1,162
Pro Shop 0 3 3 3 3 4 4 4
Games 16 0 0 0 0 0 0 0
Other Income 99 78 82 86 91 95 100 105
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 1,443 1,149 1,206 1,267 1,330 1,397 1,466 1,540
Cost of Goods Sold 417 318 334 351 368 387 406 427
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 1,026 831 872 916 962 1,010 1,060 1,113
Gross Margin 71.1% 72.3% 72.3% 72.3% 72.3% 72.3% 72.3% 72.3%
OPERATING EXPENSES
Wages 443 363 381 400 420 441 463 486
Repairs 2 2 2 2 2 2 3 3
Rent 297 243 249 256 262 268 275 282
Taxes 60 50 52 55 57 60 63 66
Advertising 53 43 45 48 50 52 55 58
Travel/ Entertainment 4 4 4 4 4 4 5 5
Professional Fees 21 17 18 19 20 21 22 23
Insurance 39 32 34 35 37 39 41 43
Utilities 62 51 53 56 59 62 65 68
Depreciation & Amortization 68 105 105 105 105 105 105 105
Other Expenses 143 117 122 129 135 142 149 156
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 1,194 1,026 1,066 1,108 1,152 1,198 1,246 1,296
Minority Interest 0 0 0 0 0 0 0 0
Operating Income (167) (196) (194) (192) (190) (188) (185) (182)
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin (11.6%) (17.0%) (16.1%) (15.2%) (14.3%) (13.5%) (12.6%) (11.8%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 99
JILLIAN'S OF TACOMA
HISTORICAL AND PROJECTED INCOME STATEMENT
ADJUSTED REVENUE- 5% GROWTH
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
-----------------------------------------------------------------------------------------------------
ACTUAL ESTIMATED PROJECTED
------------ ----------- -------------------------------------------------------------- ----------
1996 1997 1998 1999 2000 2001 2002 2003
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Table Time $108 $288 $302 $317 $333 $350 $367 $386
Cafe 143 377 396 416 437 459 482 506
Beer, Wine and Liquor 508 1,112 1,168 1,226 1,288 1,352 1,420 1,491
Pro Shop 3 11 12 13 13 14 15 15
Games 125 379 398 418 438 460 483 508
Other Income (0) 10 10 11 11 12 12 13
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Sales 886 2,177 2,286 2,400 2,520 2,646 2,779 2,918
Cost of Goods Sold 173 459 476 499 524 550 578 607
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Gross Profit 713 1,719 1,811 1,901 1,996 2,096 2,201 2,311
Gross Margin 80.5% 78.9% 79.2% 79.2% 79.2% 79.2% 79.2% 79.2%
OPERATING EXPENSES
Wages 202 519 545 573 601 631 663 696
Repairs 2 6 6 6 7 7 7 8
Rent 70 181 230 236 242 248 254 261
Taxes 44 114 120 126 132 139 146 153
Advertising 7 19 20 21 22 23 25 26
Travel/ Entertainment 1 2 2 2 2 2 2 2
Professional Fees 2 4 4 4 4 5 5 5
Insurance 11 29 30 32 34 35 37 39
Utilities 30 76 80 84 89 93 98 102
Depreciation & Amortization 52 212 212 212 212 212 212 212
Other Expenses 55 143 150 157 165 173 182 191
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Total Expenses 477 1,305 1,400 1,454 1,510 1,569 1,630 1,695
Minority Interest 0 0 0 0 0 0 0 0
Operating Income 236 414 411 448 487 527 571 616
------------ ----------- ---------- ------------ ----------- ---------- ----------- ----------
Operating Margin 26.6% 19.0% 18.0% 18.6% 19.3% 19.9% 20.5% 21.1%
</TABLE>
STONEBRIDGE
ASSOCIATES, LLC
1
<PAGE> 100
JILLIAN'S ENTERTAINMENT CORP.
WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS
<TABLE>
<CAPTION>
=======================================================================================
SCENARIO SCENARIO SCENARIO
ONE TWO THREE
--------- --------- ---------
<S> <C> <C> <C>
COST OF DEBT (a) 11.0% 11.0% 11.0%
Tax Rate 0.0% 0.0% 0.0%
--------- --------- ---------
TOTAL COST OF DEBT 11.0% 11.0% 11.0%
COST OF EQUITY (b) 38.0% 40.0% 42.0%
Jillian's Debt to Cap. Ratio=(c) 23.08% 23.08% 23.08%
Implicit Equity to Cap. Ratio=(c) 76.92% 76.92% 76.92%
WEIGHTED AVERAGE COST OF CAPITAL(d) 31.8% 33.3% 34.8%
========= ========= =========
=======================================================================================
</TABLE>
- --------------
(a) Jillian's cost of debt is calculated as the weighted average interest rate
on Jillian's total debt outstanding as of March 31, 1997.
(b) Cost of Equity is based on the average realized return on venture capital
funds during 1996 of 42.7%. Since Jillian's is a public company and does
not quite fit the risk profile of pure private equity companies,
Stonebridge chose to utilize a range of 38.0% to 42.0%.
(c) Jillian's Debt to Cap. Ratio-(Total Debt/[Total Debt + Paid In Capital]),
Implicit Equity to Cap. Ratio=(Paid In Capital/[Total Debt + Paid In
Capital]).
(d) Weighted average cost of capital=(Cost of Debt x Debt to Cap. Ratio) +
(Cost of Equity x Equity to Cap. Ratio).
<PAGE> 101
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL INCOME STATEMENT
<TABLE>
<CAPTION>
($ IN 000'S) FISCAL YEAR ENDING MARCH 31,
---------------------------------------------------------------------------------------
AUDITED
---------------------------------- LTM
1995 % 1996 % 12/31/96 %
---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of Clubs Open 8 10 10
Sales Per Club $1,001 $1,199 $1,361
Sales Per Sq. Ft. 84 88 99
Total Sales (a) 8,009 100.0% 11,992 100.0% 13,609 100.0%
Sales Growth 49.7% 13.5%
Cost of Goods Sold 1,749 21.8% 2,737 22.8% 3,021 22.2%
---------- ---------- ---------- ---------- ----------- -------------
Gross Profit 6,260 78.2% 9,255 77.2% 10,588 77.8%
Wages 1,870 23.4% 2,746 22.9% 3,074 22.6%
Rent 1,224 15.3% 1,685 14.1% 1,822 13.4%
Direct Operating Expenses 1,590 19.9% 2,393 20.0% 2,665 19.6%
Start-up Costs Related to Development
Stage Clubs 535 6.7% 83 0.7% 0 0.0%
General & Administrative Exp. (b) 1,187 14.8% 1,707 14.2% 1,438 10.6%
Depreciation and Amortization 524 6.5% 657 5.5% 868 6.4%
Minority Interest 110 1.4% 190 1.6% 217 1.6%
---------- ---------- ---------- ---------- ----------- -------------
Total Expenses (c) 7,040 87.9% 9,460 78.9% 10,084 74.1%
Operating Income (780) (9.7%) (205) (1.7%) 504 3.7%
---------- ---------- ---------- ---------- ----------- -------------
EBITDA (256) (3.2%) 452 3.8% 1,372 10.1%
Net Interest Expense (Income) 83 1.0% 189 1.6% 316 2.3%
Other Expense (Income) 0 0.0% 0 0.0% 0 0.0%
---------- ---------- ---------- ---------- ----------- -------------
Total Other Expense (Income) 83 1.0% 189 1.6% 316 2.3%
Pretax Income (863) (10.8%) (394) (3.3%) 188 1.4%
Taxes 0 0.0% 0 0.0% 0 0.0%
---------- ---------- ---------- ---------- ----------- -------------
NET INCOME ($863) (10.8%) ($394) (3.3%) $188 1.4%
========== ========== ========== ========== =========== =============
</TABLE>
- ---------------------------------------
(a) Includes miscellaneous income related to club operations.
(b) LTM 1997 excludes approximately $200,000 in legal fees related to the
transaction contemplated herein.
(c) Operating expenses do not include a $300,000 expense related to the
writedown of the Long Beach club's assets.
STONEBRIDGE
ASSOCIATES, LLC
<PAGE> 102
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED DEBT TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDING MARCH 31,
-----------------------------------------------------------------------------------------
ACTUAL PROJECTED
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOTE TO U.S. GOVERNMENT:
Repayments (Borrowings) 30,000 54,000 36,000 109,792 0 0 0 0
Outstanding Beginning 229,792 199,792 145,792 109,792 0 0 0 0
Ending 199,792 145,792 109,792 0 0 0 0 0
Annual Interest Rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Period Interest 0 0 0 0 0 0 0 0
NOTE PAYABLE TO U.S. TRUST:
Repayments (Borrowings) 0 (201,389) 83,333 83,333 34,723 0 0 0
Outstanding Beginning 0 0 201,389 118,056 34,723 0 0 0
Ending 0 201,389 118,056 34,723 0 0 0 0
Annual Interest Rate 9.75% 9.75% 9.75% 9.75% 9.75% 9.75% 9.75% 9.75%
Period Interest 0 9,818 15,573 7,448 1,693 0 0 0
NOTE TO CITY OF CLEVELAND:
Repayments (Borrowings) 8,282 13,241 62,978 0 0 0 0 0
Outstanding Beginning 84,501 76,219 62,978 0 0 0 0 0
Ending 76,219 62,978 0 0 0 0 0 0
Annual Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Period Interest 5,625 4,872 2,204 0 0 0 0 0
NOTE TO JAKES CORP. (PASADENA):
Repayments (Borrowings) 0 175,000 0 0 0 0 0 0
Outstanding Beginning 175,000 175,000 0 0 0 0 0 0
Ending 175,000 0 0 0 0 0 0 0
Annual Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Period Interest 12,250 6,125 0 0 0 0 0 0
NOTE TO EVERGREEN (SEATTLE):
Repayments (Borrowings) 31,989 63,785 42,511 38,242 0 0 0 0
Outstanding Beginning 176,527 144,538 80,753 38,242 0 0 0 0
Ending 144,538 80,753 38,242 0 0 0 0 0
Annual Interest Rate 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%
Period Interest 15,251 10,701 5,652 1,816 0 0 0 0
NOTE TO BANK ONE (CHAMPAIGN):
Repayments (Borrowings) 25,796 42,391 31,481 36,429 0 0 0 0
Outstanding Beginning 136,097 110,301 67,910 36,429 0 0 0 0
Ending 110,301 67,910 36,429 0 0 0 0 0
Annual Interest Rate 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Period Interest 12,320 8,911 5,217 1,821 0 0 0 0
NOTE TO ANN STILLMAN:
Repayments (Borrowings) 0 0 0 0 185,000 0 0 0
Outstanding Beginning 185,000 185,000 185,000 185,000 185,000 0 0 0
Ending 185,000 185,000 185,000 185,000 0 0 0 0
Annual Interest Rate 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Period Interest 27,750 27,750 27,750 27,750 13,875 0 0 0
</TABLE>
Page 1
<PAGE> 103
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED DEBT TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDING MARCH 31,
-----------------------------------------------------------------------------------------
ACTUAL PROJECTED
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOTE TO CITY OF LONG BEACH:
Repayments (Borrowings) 26,226 36,397 387,377 0 0 0 0
Outstanding Beginning 450,000 423,774 387,377 0 0 0 0
Ending 450,000 423,774 387,377 0 0 0 0 0
Annual Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Period Interest 15,750 30,582 28,390 13,558 0 0 0 0
NOTE 1 TO JOE O'DONNELL:
Repayments (Borrowings) (50,000) 50,000 0 0 0 0 0 0
Outstanding Beginning 0 50,000 0 0 0 0 0 0
Ending 50,000 0 0 0 0 0 0 0
Annual Interest Rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Period Interest 2,125 2,125 0 0 0 0 0 0
NOTE 2 TO JOE O'DONNELL:
Repayments (Borrowings) (300,000) 300,000 0 0 0 0 0
Outstanding Beginning 0 300,000 0 0 0 0 0
Ending 0 300,000 0 0 0 0 0 0
Annual Interest Rate 11.25% 11.25% 11.25% 11.25% 11.25% 11.25% 11.25% 11.25%
Period Interest 0 16,875 16,875 0 0 0 0 0
NOTE TO EVERGREEN (TACOMA):
Repayments (Borrowings) 284,357 67,040 55,424 60,924 66,958 34,011 0 0
Outstanding Beginning 0 284,357 217,317 161,893 100,969 34,011 0 0
Ending 284,357 217,317 161,893 100,969 34,011 0 0 0
Annual Interest Rate 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%
Period Interest 13,507 23,830 18,012 12,486 6,412 1,616 0 0
BRIDGE NOTES:
Repayments (Borrowings) (280,000) 0 280,000 0 0 0 0 0
Outstanding Beginning 0 280,000 280,000 0 0 0 0 0
Ending 280,000 280,000 0 0 0 0 0 0
Annual Interest Rate 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%
Period Interest 35,000 70,000 35,000 0 0 0 0 0
ANNAPOLIS CAP. LEASE:
Repayments (Borrowings) 40,367 85,264 64,695 64,674 0 0 0 0
Outstanding Beginning 255,000 214,633 129,369 64,674 0 0 0 0
Ending 214,633 129,369 64,674 0 0 0 0 0
Annual Interest Rate 11.90% 11.90% 11.90% 11.90% 11.90% 11.90% 11.90% 11.90%
Period Interest 27,943 20,468 11,546 3,848 0 0 0 0
ANNAPOLIS CAP. LEASE:
Repayments (Borrowings) 32,851 32,061 0 0 0 0 0 0
Outstanding Beginning 64,912 32,061 0 0 0 0 0 0
Ending 32,061 0 0 0 0 0 0 0
Annual Interest Rate 11.90% 11.90% 11.90% 11.90% 11.90% 11.90% 11.90% 11.90%
Period Interest 5,770 1,908 0 0 0 0 0 0
</TABLE>
Page 2
<PAGE> 104
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED DEBT TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDING MARCH 31,
-----------------------------------------------------------------------------------------
ACTUAL PROJECTED
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG BEACH CAP. LEASE:
Repayments (Borrowings) 22,202 13,129 9,073 0 0 0 0 0
Outstanding Beginning 0 22,202 9,073 0 0 0 0 0
Ending 22,202 9,073 0 0 0 0 0 0
Annual Interest Rate 14.60% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60%
Period Interest 1,621 2,283 662 0 0 0 0 0
LONG BEACH CAP. LEASE:
Repayments (Borrowings) 33,929 (4,523) 7,552 30,900 0 0 0 0
Outstanding Beginning 0 33,929 38,452 30,900 0 0 0 0
Ending 33,929 38,452 30,900 0 0 0 0 0
Annual Interest Rate 13.89% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89%
Period Interest 2,356 5,027 4,816 2,146 0 0 0 0
LONG BEACH CAP. LEASE:
Repayments (Borrowings) 45,648 14,179 9,876 21,593 0 0 0 0
Outstanding Beginning 0 45,648 31,469 21,593 0 0 0 0
Ending 45,648 31,469 21,593 0 0 0 0 0
Annual Interest Rate 13.30% 13.30% 13.30% 13.30% 13.30% 13.30% 13.30% 13.30%
Period Interest 3,036 5,128 3,529 1,436 0 0 0 0
JEC EQUIPMENT LEASE:
Repayments (Borrowings) 10,884 2,540 2,059 2,465 2,962 858 0 0
Outstanding Beginning 0 10,884 8,344 6,285 3,820 858 0 0
Ending 10,884 8,344 6,285 3,820 858 0 0 0
Annual Interest Rate 18.20% 18.20% 18.20% 18.20% 18.20% 18.20% 18.20% 18.20%
Period Interest 990 1,750 1,331 920 426 78 0 0
JEC EQUIPMENT LEASE:
Repayments (Borrowings) 34,199 8,411 6,635 7,750 9,052 2,351 0 0
Outstanding Beginning 0 34,199 25,788 19,153 11,403 2,351 0 0
Ending 34,199 25,788 19,153 11,403 2,351 0 0 0
Annual Interest Rate 15.60% 15.60% 15.60% 15.60% 15.60% 15.60% 15.60% 15.60%
Period Interest 2,668 4,679 3,505 2,383 1,073 183 0 0
TACOMA EQUIPMENT LEASE:
Repayments (Borrowings) 294,557 71,493 53,219 60,316 68,358 41,171 0 0
Outstanding Beginning 0 294,557 223,064 169,845 109,529 41,171 0 0
Ending 294,557 223,064 169,845 109,529 41,171 0 0 0
Annual Interest Rate 12.60% 12.60% 12.60% 12.60% 12.60% 12.60% 12.60% 12.60%
Period Interest 18,557 32,610 24,753 17,601 9,494 2,594 0 0
</TABLE>
Page 3
<PAGE> 105
JILLIAN'S ENTERTAINMENT CORP.
HISTORICAL AND PROJECTED DEBT TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDING MARCH 31,
-----------------------------------------------------------------------------------------
ACTUAL PROJECTED
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JEC EQUIPMENT LEASE:
Repayments (Borrowings) (255,825) 179,460 76,365 0 0 0 0 0
Outstanding Beginning 0 255,825 76,365 0 0 0 0 0
Ending 255,825 76,365 0 0 0 0 0 0
Annual Interest Rate 11.25% 11.25% 11.25% 11.25% 11.25% 11.25% 11.25% 11.25%
Period Interest 14,390 18,686 4,296 0 0 0 0 0
Total Debt $2,899,145 $2,506,837 $1,349,239 $445,444 $78,391 $0 $0 $0
Total Interest (a) $216,909 $304,127 $209,113 $93,214 $32,972 $4,471 $0 $0
Total Debt (Less Long Beach) $2,347,366 $2,004,069 $909,369 $445,444 $78,391 $0 $0 $0
Total Interest (Less Long Beach) (a) $194,146 $261,106 $171,715 $76,073 $32,972 $4,471 $0 $0
</TABLE>
- ------------------------------
(a) Represents Stonebridge's estimate. Will not foot to audited or projected
financials due to timing issues and variable interest rate parameters on the US
Trust debt.
Page 4
<PAGE> 1
EXHIBIT (c)(4)
Jillian's Entertainment Corporation
727 Atlantic Avenue
Boston, MA 02111
June [ ], 1997
Steven L. Foster
727 Atlantic Avenue
Boston, MA 02111
Dear Mr. Foster:
This letter agreement is the Employment Agreement with you
referred to in Section 6.1(e) of the Agreement and Plan of Merger dated as of
June [ ], 1997 (the "Merger 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"). As you know, subject to the terms and conditions of the Merger
Agreement, Sub will merge with and into Jillian's (the "Merger"), with
Jillian's to be the surviving entity (Jillian's, in its capacity as the
corporation surviving the Merger, is sometimes hereinafter referred to as the
"Company").
You currently serve as Chief Executive Officer of Jillian's
and this Employment Agreement is being entered into as inducement for Holdings,
Sub and Jillian's to consummate the Merger and the other transactions
contemplated by the Merger Agreement, for other good and valuable consideration
and to provide for your services to the Company following the Merger as
follows:
1. Position; Duties. You shall serve as Chief Executive
Officer of the Company. As such, you shall report to the Board of Directors of
the Company (and committees thereof) and shall have supervision and control
over, and responsibility for, the general management and operations of the
Company. You shall use your best efforts to perform these and such other duties
generally associated with your position as Chief Execu-
<PAGE> 2
Steven L. Foster
June [ ], 1997
Page 2
tive Officer as are reasonably assigned by the Board of Directors of the
Company. The Company hereby agrees that, for so long as you serve as Chief
Executive Officer of the Company you shall also serve as a member of the Board
of Directors of the Company. You shall in good faith devote substantially all
of your time and efforts to the performance of your duties hereunder and shall
be permitted, from time to time as you determine, to change your residence and
to perform such duties from the city of your place of residence or elsewhere.
2. Term of Employment Agreement. The term of this Employment
Agreement shall begin as of the Effective Time (as defined in Section 1.2 of
the Merger Agreement) and end as of the close of business on the date which is
four years from the Effective Time, subject to earlier termination pursuant to
Paragraphs 4(a), (b), (c), (d) or (g).
3. Compensation and Benefits.
(a) Base Salary. Your base salary shall
be at the annual rate of $200,000, payable in accordance with the Company's
normal pay practices. The Company acknowledges that as of May 31, 1997 you had
accrued salary in the amount of $333,333.00 and that you will accrue salary at
the rate of $16,667.00 per month until the Effective Time. The Company
anticipates that such accrued salary will be paid to you when reasonably
practicable given the financial condition of the Company as determined by the
Board of Directors of the Company.
(b) Bonus; Options. In addition to your
base salary, you shall be entitled to receive such bonus as the Board of
Directors of the Company may, in its sole discretion, award you. You will also
receive such options to purchase shares of common stock, par value $.001 per
share, of Holdings as are set forth in the Purchase Agreement dated as of June
[ ], 1997, by and among Holdings, J.W. Childs Equity Partners, L.P. and the
other signatories thereto, upon the terms and subject to the conditions set
forth therein.
<PAGE> 3
Steven L. Foster
June [ ], 1997
Page 3
(c) Other. You shall be entitled to
reimbursement for all reasonable expenses incurred in the performance of your
duties hereunder in accordance with the policies of the Company with respect to
expenses of its senior executives. You shall be entitled to participate in and
receive benefits under the employee benefit plans and arrangements made
available to the Company's senior executives. You shall be entitled to four
weeks of vacation per year at full compensation, to be taken at such times and
intervals as you shall determine, consistent with your duties as Chief
Executive Officer of the Company.
4. Termination.
(a) Death. This Employment Agreement
shall terminate upon your death. Upon such termination, the Company shall
continue to pay to your estate (or as you or your estate shall direct) your
base salary for six months following the Date of Termination (as defined in
Paragraph 4(e)).
(b) Disability. This Employment Agree-
ment may be terminated by the Company by written notice to you if you are
unable to fully perform your duties hereunder for a period of 90 days during
any period of 12 consecutive months by reason of a medically determinable
illness or injury (a "Disability"). Upon such termination, the Company shall
continue to pay you your base salary for six months following the Date of
Termination.
(c) Cause. This Employment Agreement may
be terminated by the Company by written notice to you for Cause (as defined in
this Paragraph 4(c)). The Company shall have Cause to terminate this Employment
Agreement for one or more of the following reasons: (i) disregard of lawful
instructions of the Board of Directors of the Company relating to the business
or affairs of the Company (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), (ii) dishonesty or willful
misconduct injurious to the Company, whether monetarily or
<PAGE> 4
Steven L. Foster
June [ ], 1997
Page 4
otherwise, of a material nature, (iii) conviction of a felony or any crime
involving moral turpitude, (iv) habitual drunkenness or drug abuse or (v)
excessive absenteeism not related to your Disability. Upon such termination,
the Company shall continue to pay you your base salary through the Date of
Termination.
(d) Without Cause. This Employment
Agreement may be terminated by the Company by written notice to you without
Cause. Upon such termination, the Company shall continue to pay you your base
salary through the date which is four years from the Effective Time.
(e) Date and Effect of Termination. The
date of termination of this Employment Agreement shall be, (i) in the case of
Paragraph 4(a), the date of your death, (ii) in the case of Paragraphs 4(b),
(c) or (d), the date specified in the Company's notice to you of such
termination or (iii) in the case of Paragraph 4(g), the date of your notice to
the Company of such termination (in each case, the "Date of Termination"). Upon
any termination of this Employment Agreement pursuant to this Paragraph 4, you
shall not be entitled to any further payments or benefits of any nature
pursuant to this Employment Agreement, or as a result of such termination or
election, except as specifically provided for in this Employment Agreement, in
the Company's 1997 Non-Qualified Stock Option Plan or any Option Agreement to
which you are a party thereunder, or as may be required by law.
(f) Other Employment. Notwithstanding
anything in this Employment Agreement to the contrary, if this Employment
Agreement is terminated by the Company pursuant to Paragraph 4(d) or (g), and
if prior to the date which is four years from the Effective Time you find other
employment, your salary due after termination shall be reduced by the value of
your compensation in your new employment through the date which is four years
from the Effective Time; provided, however, that your salary due after
termination shall not be reduced by compensation that you receive from entities
in which you have an ownership interest as of the date hereof, as set forth on
<PAGE> 5
Steven L. Foster
June [ ], 1997
Page 5
Schedule 1 hereto, in exchange for the performance of duties substantially
similar to those performed by you for such entities as of the date hereof.
(g) Change in Control. Notwithstanding
any provision herein to the contrary, you shall have the right to terminate
this Employment Agreement by written notice received by the Company within 30
days following a Change in Control (as defined below) of the Company or
Holdings. Upon such termination, the Company shall continue to pay you your
base salary through the Date of Termination. In the event that this Employment
Agreement is terminated by the Company without Cause within three months
following a Change in Control of the Company or Holdings, the Company shall
continue to pay you your base salary through the date which is four years from
the Effective Time; provided, however, that if, in such Change in Control, you
are given the opportunity (regardless of whether you exercise such opportunity
in whole, in part or not at all) to sell or dispose of, on the same terms as
afforded other selling equity holders, all of the shares of common stock then
held by you in Holdings, then the Company shall have no obligation to continue
to pay you any salary pursuant to this Paragraph 4(g) or otherwise. For
purposes of this Paragraph 4(g), a "Change in Control" shall be deemed to have
occurred if any person, or any two or more persons acting as a group, and all
affiliates of such person or persons (a "Group"), who prior to such time owned
less than fifty percent (50%) of the then outstanding capital stock of the
Company or Holdings, shall acquire such additional shares of the Company's or
Holdings' capital stock in one or more transactions or series of transactions,
and after such transaction or transactions such Group and its affiliates
beneficially own fifty percent (50%) or more of the Company's or Holdings'
outstanding capital stock.
5. Confidentiality. You agree that during the term of this
Employment Agreement and thereafter you will maintain the confidentiality of
all confidential information of the Company (including, without limitation,
all trade secrets, customer lists, business plans, budgets, forecasts and any
other knowledge, information
<PAGE> 6
Steven L. Foster
June [ ], 1997
Page 6
or materials concerning the products, services, research and development,
business concepts, marketing, pricing or financial matters of the Company)
learned by you in connection with the performance of your duties hereunder or
with Jillian's prior hereto, unless (a) any such information becomes generally
available to the public other than as a result of disclosure by you, (b) you
are 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 you will promptly
notify the Company of such request or requirement, so that the Company may seek
an appropriate protective order, and cooperate with the Company, at its
expense, in seeking such an order, (c) such information is being disclosed by
you to members of the senior management of Jillian's Billiard Club, Inc.
("Jillian's Boston") in furtherance of the business of Jillian's Boston or (d)
such information consists only of general business knowledge, concepts or
similar information (but not trade secrets, customer lists, business plans and
the like specifically related to the Company) and is being disclosed by you to
members of the senior management of another entertainment facility, restaurant,
bar or nightclub in which you have an ownership interest (provided that you are
not in violation of any of the provisions of Paragraph 6 hereof at the time of
such disclosure and will not be in violation of any of the provisions of
Paragraph 6 hereof as a result of such disclosure). You further agree that you
will use such confidential information only in connection with the performance
of your duties as described herein.
6. Non-competition. During the period from and after the
Effective Time to and including the latest of: (a) the date four years from the
Effective Time; or (b) the date two years after the Date of Termination (or
date of resignation) as a result of your resignation or your termination by the
Company with Cause; or (c) the date one year after the Date of Termination
relating to your termination by the Company without Cause (the applicable
period being referred to herein as the "Prohibition Period"), you will not,
directly or indirectly, own, operate or invest in any billiards club or
entertainment
<PAGE> 7
Steven L. Foster
June [ ], 1997
Page 7
facility that primarily features billiards or other indoor 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 Boston at its current location or
(ii) the business of Jillian's Boston at such other location, within a two mile
radius of its current location, to which Jillian's Boston may move, shall not
constitute a violation of this Paragraph 6; and further provided that any
investment by you in a public company resulting in an ownership interest of
less than one percent shall not itself constitute a violation of this Paragraph
6.
7. Non-solicitation. During the Prohibition Period, you 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 the Company or any of its subsidiaries
to discontinue his or her position or relationship or violate any agreement
with the Company 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 the Company, which consent
shall be given at the sole discretion of the Board.
8. Equitable Relief. You: (a) acknowledge that any breach or
attempted breach of the provisions of any of Paragraphs 5, 6 or 7 will cause
immediate and irreparable harm to the Company and that a remedy at law for any
such breach or attempted breach shall be inadequate; (b) agree that the Company
shall be entitled to an injunction before trial, specific performance and such
other legal or equitable remedies as may be available to it with respect to any
such breach or attempted breach; and (c) agree to waive any requirements for
the securing or posting of any bond in connection with the obtaining of any
such injunctive or equitable relief.
9. Life Insurance. The Company may, at its discretion, and at
any time after the Effective Time, apply for and procure, as owner and for its
own benefit, and at its own expense, insurance on your life, in such
<PAGE> 8
Steven L. Foster
June [ ], 1997
Page 8
amount and in such form or forms as the Company may determine. You shall have
no right or interest whatsoever in such policy or policies, but you agree that
you will, at the request of the Company, submit yourself to such medical
examinations, supply such information and execute and deliver such documents as
may be required by the insurance company or companies to which the Company has
applied for such insurance.
10. Successors; Assigns; Amendment; Notice. This Employment
Agreement shall be binding upon and shall inure to the benefit of the Company
and its successors. This Employment Agreement shall be binding upon you and
shall inure to the benefit of your heirs, executors, administrators and legal
representatives, but shall not be assignable by you. This Employment Agreement
may be amended or altered only by the written agreement of the Company and you.
All notices or other communication permitted or required under this Employment
Agreement shall be in writing and shall be deemed to have been duly given if
delivered by hand, by facsimile transmission or mailed (certified or registered
mail, postage prepaid, return receipt requested) to you or the Company at the
respective addresses on the first page of this Employment Agreement, or such
other address as shall be furnished in writing by you or the Company to the
other.
11. Entire Agreement. This Employment Agreement embodies the
entire agreement and understanding between you and the Company with respect to
the subject matter hereof and supersedes all such prior agreements and
understandings.
12. Severability. If any term, provision, covenant or
restriction of this Employment Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Employment Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
<PAGE> 9
Steven L. Foster
June [ ], 1997
Page 9
13. Governing Law. This Employment Agreement shall be
governed by and construed and enforced in accordance with the laws of the
Commonwealth of Massachusetts applicable to contracts under seal made and to be
performed in such Commonwealth without giving effect to the principles of
conflicts of laws thereof.
<PAGE> 10
If you accept and agree to the foregoing, please signify by
signing and returning a counterpart of this letter, whereupon this letter will
become a binding Employment Agreement between you and the Company as of the
Effective Time.
Very truly yours,
JILLIAN'S ENTERTAINMENT CORPORATION
By:
--------------------------------
Name: Daniel M. Smith
Title: President and Chief
Operating Officer
Accepted and agreed to:
- --------------------------------
Steven L. Foster
<PAGE> 1
EXHIBIT (c)(5)
Jillian's Entertainment Corporation
727 Atlantic Avenue
Boston, MA 02111
June [ ], 1997
Daniel M. Smith
727 Atlantic Avenue
Boston, MA 02111
Dear Mr. Smith:
This letter agreement is the Employment Agreement with you
referred to in Section 6.1(e) of the Agreement and Plan of Merger dated as of
June [ ], 1997 (the "Merger 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"). As you know, subject to the terms and conditions of the Merger
Agreement, Sub will merge with and into Jillian's (the "Merger"), with
Jillian's to be the surviving entity (Jillian's, in its capacity as the
corporation surviving the Merger, is sometimes hereinafter referred to as the
"Company").
You currently serve as President and Chief Operating Officer
of Jillian's and this Employment Agreement is being entered into as inducement
for Holdings, Sub and Jillian's to consummate the Merger and the other
transactions contemplated by the Merger Agreement, for other good and valuable
consideration and to provide for your services to the Company following the
Merger as follows:
1. Position; Duties. You shall serve as President and Chief
Operating Officer of the Company. As such, you shall report to the Board of
Directors (and committees thereof) and the Chief Executive Officer of the
Company and shall, in conjunction with the Chief Executive Officer, have
supervision and control over, and responsibility for, the general management
and operations
<PAGE> 2
Daniel M. Smith
June [ ], 1997
Page 2
of the Company. You shall use your best efforts to perform these and such other
duties generally associated with your position as President and Chief Operating
Officer as are reasonably assigned by the Board of Directors or the Chief
Executive Officer of the Company. The Company hereby agrees that, for so long
as you serve as President and Chief Operating Officer of the Company you shall
also serve as a member of the Board of Directors of the Company. You shall in
good faith devote substantially all of your time and efforts to the performance
of your duties hereunder.
2. Term of Employment Agreement. The term of this Employment
Agreement shall begin as of the Effective Time (as defined in Section 1.2 of
the Merger Agreement) and end as of the close of business on the date which is
four years from the Effective Time, subject to earlier termination pursuant to
Paragraphs 4(a), (b), (c), (d) or (g).
3. Compensation and Benefits.
(a) Base Salary. Your base salary shall
be at the annual rate of $150,000, payable in accordance
with the Company's normal pay practices.
(b) Bonus; Options. In addition to your
base salary, you shall be entitled to receive such bonus as the Board of
Directors of the Company may, in its sole discretion, award you. The Company
anticipates that you will receive a target bonus of fifty percent (50%) of your
base salary, based on the achievement of certain performance objectives under
the business plan approved by the Board of Directors of the Company for the
relevant fiscal year. You will also receive such options to purchase shares of
common stock, par value $.001 per share, of Holdings as are set forth in the
Purchase Agreement dated as of June [ ], 1997, by and among Holdings, J.W.
Childs Equity Partners, L.P. and the other signatories thereto, upon the terms
and subject to the conditions set forth therein.
<PAGE> 3
Daniel M. Smith
June [ ], 1997
Page 3
(c) Other. You shall be entitled to
reimbursement for all reasonable expenses incurred in the performance of your
duties hereunder in accordance with the policies of the Company with respect to
expenses of its senior executives. You shall be entitled to participate in and
receive benefits under the employee benefit plans and arrangements made
available to the Company's senior executives. You shall also be entitled to
reasonable vacations consistent with the performance of your duties hereunder
and the Company's vacation policy for its senior executives.
4. Termination.
(a) Death. This Employment Agreement
shall terminate upon your death. Upon such termination, the Company shall
continue to pay to your estate (or as you or your estate shall direct) your
base salary for six months following the Date of Termination (as defined in
Paragraph 4(e)).
(b) Disability. This Employment Agree-
ment may be terminated by the Company by written notice to you if you are
unable to fully perform your duties hereunder for a period of 90 days during
any period of 12 consecutive months by reason of a medically determinable
illness or injury (a "Disability"). Upon such termination, the Company shall
continue to pay you your base salary for six months following the Date of
Termination.
(c) Cause. This Employment Agreement may
be terminated by the Company by written notice to you for Cause (as defined in
this Paragraph 4(c)). The Company shall have Cause to terminate this Employment
Agreement for one or more of the following reasons: (i) disregard of lawful
instructions of the Board of Directors of the Company relating to the business
or affairs of the Company (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), (ii) dishonesty or willful
misconduct injurious to the Company, whether monetarily or otherwise, of a
material nature, (iii) conviction of a
<PAGE> 4
Daniel M. Smith
June [ ], 1997
Page 4
felony or any crime involving moral turpitude, (iv) habitual drunkenness or
drug abuse or (v) excessive absenteeism not related to your Disability. Upon
such termination, the Company shall continue to pay you your base salary
through the Date of Termination.
(d) Without Cause. This Employment
Agreement may be terminated by the Company by written notice to you without
Cause. Upon such termination, the Company shall continue to pay you your base
salary through the date which is four years from the Effective Time.
(e) Date and Effect of Termination. The
date of termination of this Employment Agreement shall be, (i) in the case of
Paragraph 4(a), the date of your death, (ii) in the case of Paragraphs 4(b),
(c) or (d), the date specified in the Company's notice to you of such
termination or (iii) in the case of Paragraph 4(g), the date of your notice to
the Company of such termination (in each case, the "Date of Termination"). Upon
any termination of this Employment Agreement pursuant to this Paragraph 4, you
shall not be entitled to any further payments or benefits of any nature
pursuant to this Employment Agreement, or as a result of such termination or
election, except as specifically provided for in this Employment Agreement, in
the Company's 1997 Non-Qualified Stock Option Plan or any Option Agreement to
which you are a party thereunder, or as may be required by law.
(f) Other Employment. Notwithstanding
anything in this Employment Agreement to the contrary, if this Employment
Agreement is terminated by the Company pursuant to Paragraph 4(d) or (g), and
if prior to the date which is four years from the Effective Time you find other
employment, your salary due after termination shall be reduced by the value of
your compensation in your new employment through the date which is four years
from the Effective Time.
(g) Change in Control. Notwithstanding any
provision herein to the contrary, you shall have the right to terminate this
Employment Agreement by written
<PAGE> 5
Daniel M. Smith
June [ ], 1997
Page 5
notice received by the Company within 30 days following a Change in Control (as
defined below) of the Company or Holdings. Upon such termination, the Company
shall continue to pay you your base salary through the Date of Termination. In
the event that this Employment Agreement is terminated by the Company without
Cause within three months following a Change in Control of the Company or
Holdings, the Company shall continue to pay you your base salary through the
date which is four years from the Effective Time; provided, however, that if,
in such Change in Control, you are given the opportunity (regardless of whether
you exercise such opportunity in whole, in part or not at all) to sell or
dispose of, on the same terms as afforded other selling equity holders, the
equity securities then held by you in Holdings, then the Company shall have no
obligation to continue to pay you any salary pursuant to this Paragraph 4(g) or
otherwise. For purposes of this Paragraph 4(g), a "Change in Control" shall be
deemed to have occurred if any person, or any two or more persons acting as a
group, and all affiliates of such person or persons (a "Group"), who prior to
such time owned less than fifty percent (50%) of the then outstanding capital
stock of the Company or Holdings, shall acquire such additional shares of the
Company's or Holdings' capital stock in one or more transactions or series of
transactions, and after such transaction or transactions such Group and its
affiliates beneficially own fifty percent (50%) or more of the Company's or
Holdings' outstanding capital stock.
5. Confidentiality. You agree that during the term of this
Employment Agreement and thereafter you will maintain the confidentiality of
all confidential information of the Company (including, without limitation, all
trade secrets, customer lists, business plans, budgets, forecasts and any other
knowledge, information or materials concerning the products, services, research
and development, business concepts, marketing, pricing or financial matters of
the Company) learned by you in connection with the performance of your duties
hereunder or with Jillian's prior hereto, unless (a) any such information
becomes generally available to the public other than as a result of disclosure
by you or (b) you are requested
<PAGE> 6
Daniel M. Smith
June [ ], 1997
Page 6
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 you will promptly notify the Company of
such request or requirement, so that the Company may seek an appropriate
protective order, and cooperate with the Company, at its expense, in seeking
such an order. You further agree that you will use such confidential
information only in connection with the performance of your duties as described
herein.
6. Non-competition. During the period from and after the
Effective Time to and including the latest of: (a) the date four years from the
Effective Time; or (b) the date two years after the Date of Termination (or
date of resignation) as a result of your resignation or your termination by the
Company with Cause; or (c) the date one year after the Date of Termination
relating to your termination by the Company without Cause (the applicable
period being referred to herein as the "Prohibition Period"), you will not,
directly or indirectly, own, operate or invest in any billiard club or
entertainment facility that primarily features billiards or other indoor games,
including an entertainment facility that includes a restaurant; provided,
however, that any investment by you in a public company resulting in an
ownership interest of less than one percent shall not itself constitute a
violation of this Paragraph 6.
7. Non-solicitation. During the Prohibition Period, you 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 the Company or any of its subsidiaries
to discontinue his or her position or relationship or violate any agreement
with the Company 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 the Company, which consent
shall be given at the sole discretion of the Board.
<PAGE> 7
Daniel M. Smith
June [ ], 1997
Page 7
8. Equitable Relief. You: (a) acknowledge that any breach or
attempted breach of the provisions of any of Paragraphs 5, 6 or 7 will cause
immediate and irreparable harm to the Company and that a remedy at law for any
such breach or attempted breach shall be inade- quate; (b) agree that the
Company shall be entitled to an injunction before trial, specific performance
and such other legal or equitable remedies as may be available to it with
respect to any such breach or attempted breach; and (c) agree to waive any
requirements for the securing or posting of any bond in connection with the
obtaining of any such injunctive or equitable relief.
9. Life Insurance. The Company may, at its discretion, and at
any time after the Effective Time, apply for and procure, as owner and for its
own benefit, and at its own expense, insurance on your life, in such amount and
in such form or forms as the Company may determine. You shall have no right or
interest whatsoever in such policy or policies, but you agree that you will, at
the request of the Company, submit yourself to such medical examinations,
supply such information and execute and deliver such documents as may be
required by the insurance company or companies to which the Company has applied
for such insurance.
10. Successors; Assigns; Amendment; Notice. This Employment
Agreement shall be binding upon and shall inure to the benefit of the Company
and its successors. This Employment Agreement shall be binding upon you and
shall inure to the benefit of your heirs, executors, administrators and legal
representatives, but shall not be assignable by you. This Employment Agreement
may be amended or altered only by the written agreement of the Company and you.
All notices or other communication permitted or required under this Employment
Agreement shall be in writing and shall be deemed to have been duly given if
delivered by hand, by facsimile transmission or mailed (certified or registered
mail, postage prepaid, return receipt requested) to you or the Company at the
respective addresses on the first page of this Employment Agreement, or such
other address as shall be furnished in writing by you or the Company to the
other.
<PAGE> 8
Daniel M. Smith
June [ ], 1997
Page 8
11. Entire Agreement. This Employment Agreement embodies the
entire agreement and understanding between you and the Company with respect to
the subject matter hereof and supersedes all such prior agreements and
understandings.
12. Severability. If any term, provision, covenant or
restriction of this Employment Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Employment Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
13. Governing Law. This Employment Agreement shall be
governed by and construed and enforced in accordance with the laws of the
Commonwealth of Massachusetts applicable to contracts under seal made and to be
performed in such Commonwealth without giving effect to the principles of
conflicts of laws thereof.
<PAGE> 9
If you accept and agree to the foregoing, please signify by
signing and returning a counterpart of this letter, whereupon this letter will
become a binding Employment Agreement between you and the Company as of the
Effective Time.
Very truly yours,
JILLIAN'S ENTERTAINMENT CORPORATION
By:
--------------------------------
Name: Steven L. Foster
Title: Chairman of the Board and
Chief Executive Officer
Accepted and agreed to:
- --------------------------------
Daniel M. Smith
<PAGE> 1
EXHIBIT (c)(7)
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.
STOCKHOLDERS AGREEMENT
Dated as of June [ ], 1997
<PAGE> 2
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.
STOCKHOLDERS AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
PREAMBLE................................................................. 1
ARTICLE I Definitions............................................. 2
ARTICLE II Covenants and Conditions................................ 8
Section 2.1 Restrictions on Transfers............................... 7
Section 2.2 Call by the Company..................................... 9
Section 2.3 Come Along.............................................. 13
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.............................. 21
Section 3.5 Furnish Information..................................... 25
Section 3.6 Expenses of Registration................................ 25
Section 3.7 Underwriting Requirements............................... 25
Section 3.8 Indemnification......................................... 26
Section 3.9 Lock-Up Agreement....................................... 29
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
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 4.6 Governing Law........................................... 33
Section 4.7 Termination............................................. 33
Section 4.8 Recapitalization, Exchanges, Etc........................ 33
Section 4.9 JWC Group Stockholder Representative.................... 34
Section 4.10 Action Necessary to Effec-
tuate 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................................. 36
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.......................................... 37
EXHIBIT A Schedule of Stockholders
EXHIBIT B Form of Note
</TABLE>
ii
<PAGE> 4
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (this "Agreement") is entered
into as of the [ ] day of June, 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 June [ ], 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:
<PAGE> 5
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
3
<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 from any Stockholder
which is a trust to the beneficiaries of such trust or to another trust with
the same beneficiaries, provided such Transfer is reasonably acceptable to the
Company;
(g) 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
4
<PAGE> 8
partnership (or other entity for collective investment, such as a fund) which
is controlled by, controlling or under common control with JWC Associates; or
(h) a Transfer of Shares by a Management
Stockholder to another Management Stockholder.
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
5
<PAGE> 9
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 distribution 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.
6
<PAGE> 10
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.
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 (i)
$0.9322 per Share of Common Stock with respect to Shares issued after the
Effective Time or with respect to Shares issued pursuant to incentive options,
granted as of the Effective Time and exercisable at $0.9322 per Share, under
the Company's 1997 Non-Qualified Stock Option Plan (the "Plan") and (ii) $0.50
per Share of Common Stock with respect to Shares issued and outstanding as of
the Effective Time or with respect to Shares issued pursuant to options granted
under the Plan (excluding those options set forth in (i) above); in each
7
<PAGE> 11
case 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
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 Stockholder's or
Non-Management Stockholder's 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
8
<PAGE> 12
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.
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 (except such Management
Stockholder's Permitted Transferees who are Management Stockholders and who
received such Transferred Shares pursuant to a good faith Permitted Transfer)
(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
9
<PAGE> 13
(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);
provided, however, that if any JWC Group Stockholder does not elect to purchase
the number of Call Securities which such JWC 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 Transferees) 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.
10
<PAGE> 14
(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 simultaneously, and none shall be deemed completed until all have been
completed. Notwithstanding anything in this 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
11
<PAGE> 15
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
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 upon the
termination of the employment of Steven L. Foster or Daniel M. Smith to any
Shares
12
<PAGE> 16
owned by Steven L. Foster or Daniel M. Smith or their Permitted Transferees.
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
percent (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 Transfer- or, 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 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 Board, 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, as determined in good faith by the Board) 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
13
<PAGE> 17
(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.
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
Stockholders 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
14
<PAGE> 18
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 the
Board, 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, as
determined in good faith by the Board. 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.
(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
15
<PAGE> 19
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 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
16
<PAGE> 20
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.
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
17
<PAGE> 21
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.
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
18
<PAGE> 22
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 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
19
<PAGE> 23
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.
(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
(including
20
<PAGE> 24
the JWC Group Stockholders) 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 registration 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
disposition 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
21
<PAGE> 25
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
Registrable 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 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 Securities
in the United States;
(6) notify each seller of Registrable
Securities covered by such registration statement, at any time when
a prospec-
22
<PAGE> 26
tus 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 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
23
<PAGE> 27
(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, whether 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
24
<PAGE> 28
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 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
25
<PAGE> 29
requesting a demand registration, in the case of a registration 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 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 registration 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
26
<PAGE> 30
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 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
27
<PAGE> 31
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
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.
28
<PAGE> 32
(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 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
29
<PAGE> 33
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.
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
30
<PAGE> 34
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 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:
31
<PAGE> 35
(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
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
32
<PAGE> 36
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).
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.
33
<PAGE> 37
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
incapacity 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
34
<PAGE> 38
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 June [ ], 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."
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.
35
<PAGE> 39
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 Permitted 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.
36
<PAGE> 40
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.
37
<PAGE> 41
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> 42
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> 43
Management Stockholders:
-----------------------------
Steven L. Foster
-----------------------------
Daniel M. Smith
<PAGE> 44
Non-Management Stockholders:
-----------------------------
Steven Rubin
-----------------------------
Kevin Troy
-----------------------------
Kerry Breitbart
THE BLIND TRUST
UDT 3/26/93
By: --------------------------
Name:
Title:
-----------------------------
Warren Berman
-----------------------------
William Hurlin
<PAGE> 1
EXHIBIT (c)(10)
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 June [ ], 1997
<PAGE> 2
TABLE OF CONTENTS
PURCHASE AGREEMENT
<TABLE>
<CAPTION>
ARTICLE I
PURCHASE OF PREFERRED STOCK; EXCHANGE
OF COMMON STOCK; CONVERSION OF OPTIONS
<S> <C> <C>
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> 3
<TABLE>
<CAPTION>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE CONTINUING
OPTION HOLDERS AND THE CONTINUING WARRANT HOLDERS
<S> <C> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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 . . . . . . . . . . . . . . . . . . . 21
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE IX
TERMINATION
<S> <C>
9.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE X
SURVIVAL
10.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XI
MISCELLANEOUS
11.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.2 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Schedule 1 Continuing Shareholders; Other Option Holders
Schedule 2 Continuing Option Holders
Schedule 3 Continuing Warrant Holders
Schedule 4 Borrowers
Exhibit A Form of Holdings Option
Exhibit B Form of Holdings Warrant
Exhibit C Form of Foster Promissory Note
Exhibit D Form of Troy Promissory Note
</TABLE>
iii
<PAGE> 5
PURCHASE AGREEMENT
This Purchase Agreement (this "Agreement") is made and entered into
as of this [ ] day of June, 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
3
<PAGE> 8
such other instruments or documents as may be reasonably 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 severally 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).
10
<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
11
<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.
12
<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
13
<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
14
<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
15
<PAGE> 20
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 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
16
<PAGE> 21
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, 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
17
<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
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
18
<PAGE> 23
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. Steven Foster 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 C
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 the lesser of the cost of
capital of Jillian's under its bank financing as of the Effective Time and the
Prime Rate plus 2%, substantially in the form of Exhibit D hereto, at or prior
to the Closing. The Foster Promissory Note and the Troy Promissory Note are
collectively referred to herein as the "Debt Instruments." Each of 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, Holdings will deliver to
each Borrower the number of shares of Holdings Common set forth on Schedule 4
hereto. 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 Continu-
19
<PAGE> 24
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.
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
21
<PAGE> 25
ing 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 Common (each a "Jillian's Warrant") held by them (whether or not
exercisable).
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE PARTIES
20
<PAGE> 26
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.
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.
22
<PAGE> 27
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.
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
23
<PAGE> 28
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:
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.
24
<PAGE> 29
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.
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.
25
<PAGE> 30
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> 31
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> 32
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> 33
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> 34
CONTINUING OPTION HOLDERS (continued):
-----------------------------------------
Stephen M. Weis
-----------------------------------------
Ron Widman
BORROWERS:
-----------------------------------------
Steven L. Foster
-----------------------------------------
Kevin Troy
<PAGE> 35
CONTINUING WARRANT HOLDERS:
-----------------------------------------
Kerry Breitbart
<PAGE> 36
CONTINUING WARRANT HOLDERS (continued):
KENNEY PROPERTIES
By:
-----------------------------------------
Name:
Title:
<PAGE> 37
CONTINUING WARRANT HOLDERS (Continued):
THE BLIND TRUST UDT 3/26/93
By:
--------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT (c)(11)
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of May [ ],
1997, by and among J.W. Childs Equity Partners, L.P., a Delaware limited
partnership ("JWC"), Jillian's Entertainment Holdings, Inc., a Delaware
corporation ("Holdings"), and the shareholders of Jillian's Entertainment
Corporation, a Florida corporation ("Jillian's"), listed on Schedule A hereto
(the "Shareholders").
WHEREAS, concurrently with the execution of this Agreement,
Holdings, Jillian's and Jillian's Entertainment Acquisition Corporation, a
Florida corporation and a wholly owned subsidiary of Holdings ("Sub"), have
entered into an Agreement and Plan of Merger (as the same may be amended from
time to time, the "Merger Agreement"), providing for the merger (the "Merger")
of Sub with and into Jillian's pursuant to the terms and conditions of the
Merger Agreement; and
WHEREAS, the Shareholders own of record and beneficially the
shares (the "Shares") of the common stock, par value $.001 per share, of
Jillian's (the "Jillian's Common") set forth opposite their respective names on
Schedule A hereto and desire to enter into this Agreement with respect to the
Shares; and
WHEREAS, in order to induce Holdings to enter into the Merger
Agreement and to induce JWC and Holdings to enter into the Purchase Agreement,
dated as of the date hereof, with Jillian's, the Continuing Shareholders, the
Other Option Holders, the Continuing Option Holders, the Continuing Warrant
Holders and the Borrowers (each as defined therein), the Shareholders have
agreed, upon the terms and subject to the conditions set forth herein, to vote
the Shares at a meeting of Jillian's shareholders in favor of approval of the
Merger Proposal (as defined in the Merger Agreement) pursuant to the terms of
the Merger Agreement;
NOW, THEREFORE, in consideration of the premises and
agreements set forth herein, and for other good and valuable consideration, the
receipt, sufficiency and adequacy of which is hereby acknowledged, the parties
hereto agree as follows:
<PAGE> 2
1. Agreement to Vote Shares.
(a) Each of the Shareholders agrees, during the term
of this Agreement, to vote the Shares as to which it has voting power or
control, in person or by proxy, in favor of approval of the Merger Proposal and
against approval of any matter which is inconsistent with the Merger Agreement
and the transactions contemplated thereby, at every meeting of the shareholders
of Jillian's at which such matters are considered and at every adjournment
thereof (each, a "Shareholder Meeting").
2. No Voting Trusts. Each of the Shareholders agrees that
such Shareholder will not, nor will such Shareholder permit any entity under
such Shareholder's control to, deposit any of such Shareholder's Shares in a
voting trust or subject any of its Shares to any arrangement with respect to
the voting of the Shares that is inconsistent with this Agreement.
3. Limitation on Dispositions and Proxies. During the term
of this Agreement, each of the Shareholders agrees not to sell, assign, pledge,
transfer or otherwise dispose of (each a "Transfer"), or grant any proxies with
respect to (except for a proxy which is not inconsistent with the terms of this
Agreement) any of such Shareholder's Shares.
4. Representations and Warranties of the Shareholders.
Each of the Shareholders represents and warrants to JWC and Holdings as of the
date hereof that:
(a) such Shareholder is the record or beneficial
owner of the Shares set forth opposite such Shareholder's name on Schedule A
hereto, and such Shares represent all of the Jillian's Common owned of record
or beneficially by such Shareholder, directly or indirectly;
(b) such Shareholder has full legal power and
authority to execute and deliver this Agreement;
(c) the Shares set forth opposite such Shareholder's
name on Schedule A hereto are free and clear of all proxies; and
(d) such Shareholder has duly executed and delivered
this Agreement and this Agreement constitutes a valid and binding obligation of
such Shareholder
2
<PAGE> 3
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).
5. Specific Performance. Each party hereto acknowledges
that it will be impossible to measure in money the damage to the other parties
if a party hereto fails to comply with the obligations imposed by this
Agreement, and that, in the event of any such failure, the other parties will
not have an adequate remedy at law or in damages. Accordingly, each party
hereto agrees that injunctive relief or other equitable remedy, in addition to
remedies at law or damages, is the appropriate remedy for any such failure and
will not oppose the granting of such relief on the basis that the other parties
have an adequate remedy at law. Each party hereto agrees that it will not
seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such equitable
relief.
6. Term of Agreement; Termination. The term of this
Agreement shall commence on the date hereof, and such term and this Agreement
shall terminate upon the earliest to occur of (i) the Effective Time (as
defined in the Merger Agreement); (ii) the date on which the Merger Agreement
is terminated in accordance with its terms; or (iii) the date on which the
Board of Directors of Jillian's withdraws or materially modifies or changes its
recommendation of the Merger Proposal if the Board of Directors of Jillian's,
based on the written opinion of outside legal counsel, determines, in good
faith by majority vote, that the failure to take such action would be deemed a
breach of its fiduciary duties to the Jillian's shareholders under applicable
law. Upon such termination, no party shall have any further obligations or
liabilities hereunder; provided, however, that such termination shall not
relieve any party from liability for any breach of this Agreement prior to such
termination.
7. Entire Agreement. This Agreement supersedes all prior
agreements, written or oral, among the parties hereto with respect to the
subject matter hereof and contains the entire agreement among the parties with
3
<PAGE> 4
respect to the subject matter hereof. This Agreement may not be amended,
supplemented or modified, and no provisions hereof may be modified or waived,
except by an instrument in writing signed by all parties hereto. No waiver of
any provisions hereof by any party shall be deemed a waiver of any other
provisions hereof by any such party, nor shall any such waiver be deemed a
continuing waiver of any provision hereof by such party.
8. 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.
If to the Shareholders, to the addresses
listed on Schedule A hereto.
With a copy to Jillian's counsel:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attention: Steven L. Meltzer
Telecopy: (202) 663-8007
If to JWC or Holdings:
J.W. Childs Associates, L.P.
One Federal Street, 21st Floor
Boston, MA 02110
Attention: Glenn A. Hopkins
Telecopy: (617) 573-1101
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108
Attention: Louis A. Goodman
Telecopy: (617) 573-4822
4
<PAGE> 5
Nothing in this Section 8 shall be deemed to constitute consent to the manner
and address for service of process in connection with any legal proceeding
(including litigation arising out of or in connection with this Agreement),
which service shall be effected as required by applicable law.
9. Miscellaneous.
(a) Nothing contained in this Agreement shall be
construed as creating any liability on the part of JWC under the Merger
Agreement.
(b) This Agreement shall be deemed a contract made
under, and for all purposes shall be construed in accordance with, the laws of
the State of Delaware without reference to its conflicts of law principles.
(c) 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.
(d) This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall be come 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.
(e) All Section headings herein are for convenience
of reference only and are not part of this Agreement, and no construction or
reference shall be derived therefrom.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed under
seal and delivered this Agreement 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
JILLIAN'S ENTERTAINMENT
HOLDINGS, INC.
By:
-----------------------------
Name: Glenn A. Hopkins
Title: President
<PAGE> 7
SHAREHOLDERS:
--------------------------------
Steven L. Foster
--------------------------------
Steven Rubin
--------------------------------
Kevin Troy
--------------------------------
Kerry Breitbart
THE BLIND TRUST UDT
3/26/93
By:
-----------------------------
Name:
Title:
--------------------------------
Warren Berman
--------------------------------
William Hurlin
<PAGE> 8
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Outstanding
Shareholder Shares Owned
----------- ------------
<S> <C>
Steven L. Foster 1,323,600
Oakwood Apartments H-210
3686 Barham Boulevard
Los Angeles, CA 90068
Steven Rubin 1,240,765
[ ]
Kevin Troy 551,667
[ ]
Kerry Breitbart 400,000
[ ]
The Blind Trust UDT 206,625
3/26/93
[ ]
Warren Berman 133,333
[ ]
William Hurlin 127,500
[ ]
</TABLE>
8
<PAGE> 1
JILLIAN'S ENTERTAINMENT CORPORATION
727 ATLANTIC AVENUE, SUITE 600
BOSTON, MASSACHUSETTS 02111
June __, 1997
Dear Shareholder:
You are cordially invited to attend 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,
to be held at the Company's principal executive offices, located at 727
Atlantic Avenue, Suite 600, Boston, Massachusetts, at 10:00 a.m., Eastern Time,
on July __, 1997.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve a merger (the "Merger") by and between the Company and
Jillian's Entertainment Acquisition Corporation ("Sub"), a wholly owned
subsidiary of Jillian's Entertainment Holdings, Inc. ("Holdings"), with the
Company surviving as a wholly owned subsidiary of Holdings (the "Surviving
Company").
The Merger will be effected subject to the terms and conditions of an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of
the Merger Agreement, among other matters, all holders of shares of the
Company's common stock, par value $.001 per share (the "Common Stock"), other
than seven Shareholders who each have an ongoing relationship with the Company
(the "Continuing Shareholders"), will be entitled to receive $0.50 in cash,
without interest (a "Merger Payment"), in exchange for each outstanding share
of Common Stock held by them at the effective time of the Merger (collectively,
the "Non-Continuing Shareholders"). The treatment in the Merger of outstanding
stock options and warrants to purchase shares of Common Stock is described in
the accompanying Proxy Statement.
The affirmative vote of the holders of at least a majority of all
shares of Common Stock outstanding is required under Florida law to approve the
Merger.
If the Merger is approved by the Shareholders, immediately prior to
consummation of the Merger, the Continuing Shareholders will participate in a
transaction (the "Corporate Formation") whereby, among other things, each such
Shareholder shall exchange each share of Common Stock owned by the Shareholder
for one share of common stock of Holdings and shall receive options to purchase
a predetermined number of shares of common stock of Holdings. Further,
simultaneously with the Corporate Formation, $12,000,000 of convertible
preferred stock of Holdings will be placed (the "Private Placement") with J.W.
Childs Equity Partners, L.P. and certain related persons or entities (the
"Childs Group"). The Company intends to use funds obtained from the Private
Placement to make the Merger Payments.
<PAGE> 2
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.
The Board of Directors of the Company (the "Board") authorized John L.
Kidde, an independent director who is not employed by the Company, to perform
the functions of a special committee of the Board to protect the interests of
those persons unaffiliated with the Company in connection with the Merger and
related transactions. In addition to negotiating, with the assistance of
counsel, with the Childs Group the terms and conditions of the Merger Agreement
and associated agreements and the Private Placement, Mr. Kidde engaged
Stonebridge Associates, LLC ("Stonebridge") to render a fairness opinion to the
Board. Stonebridge has rendered its opinion to the Board that, as of the date
of such opinion, the Merger Payment was fair, from a financial point of view,
to the Non-Continuing Shareholders. Such opinion is attached to the
accompanying Proxy Statement as Appendix B and, together with the analyses
supporting it, is discussed in greater detail in the Proxy Statement.
The Board believes that the Merger is fair to all of the Shareholders,
including the Non-Continuing Shareholders, and in the best interest of the
Company and the Shareholders. The Board unanimously approved the Merger and
recommends that you vote FOR approval of the Merger.
A Notice of Special Meeting of Shareholders, Proxy Statement
containing a discussion of the background of, reasons for and terms of the
Merger, and Proxy are enclosed. We urge you to read this material carefully.
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.
YOUR VOTE IS IMPORTANT FOR THE APPROVAL OF THE MERGER. 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.
<PAGE> 3
If you require assistance in voting your shares or if you have
questions, please call Daniel M. Smith at (617) 350-3111.
Very truly yours,
Steven L. Foster
Chief Executive Officer and
Chairman of the Board of Directors
Enclosures
<PAGE> 4
PRELIMINARY COPY
JILLIAN'S ENTERTAINMENT CORPORATION
727 Atlantic Avenue, Suite 600
Boston, Massachusetts 02111
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY __, 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 the principal executive offices of the
Company, located at 727 Atlantic Avenue, Suite 600, Boston, Massachusetts at
10:00 a.m., Eastern Time, on July __, 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> 5
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,
Daniel M. Smith
------------------------------------
Secretary
Boston Massachusetts
June __, 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> 6
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 JULY __, 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 the shareholders of
the Company (the "Shareholders"). The Special Meeting is to be held at 10:00
a.m., Eastern Time, on July __, 1997, at the Company's principal executive
offices, located at 727 Atlantic Avenue, Suite 600, Boston, Massachusetts. This
Proxy Statement and the Proxy are first being mailed to Shareholders on or
about June __, 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
<PAGE> 7
"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, and (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 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 Current Management Company Option will be exchanged for a Holdings Management
Option.
- --------------------------------------------------------------------------------------------
</TABLE>
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.
The Company is currently negotiating the repurchase of each stock option to
purchase a share or shares of Common Stock that is held by a former director,
officer or employee of the Company (a "Former Management Company Option") for a
purchase price of $0.50 for each share of Common Stock as to which the option
is exercisable, less the exercise price for each such share. Any
-2-
<PAGE> 8
Former Management Company Option that is not repurchased by the Company prior
to consummation of the Merger will remain outstanding after completion of the
Merger.
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 $28,000 in cash will be required in order
to make payments to the Non-Continuing Warrant Holders and to all of the
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 and the payments to the Non-Continuing Warrant Holders and
holders of Former Management Company Options. 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
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
-3-
<PAGE> 9
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 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
-4-
<PAGE> 10
following regional offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the 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 June __, 1997.
-5-
<PAGE> 11
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..............................................................................26
Record Date; Outstanding Shares; Voting..........................................................26
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.......................................................................34
Seller, Landlord and Municipal Financing................................................34
Equity and Debt Financing...............................................................37
Current Effects of Borrowings and Equity Financing......................................41
Alternatives Considered.................................................................45
Payments to the Non-Continuing Shareholders......................................................52
Preliminary Opinion of Bannon....................................................................53
Opinion of Stonebridge...........................................................................55
</TABLE>
-6-
<PAGE> 12
<TABLE>
<CAPTION>
Heading Page
- ------- ----
<S> <C> <C>
Transaction Overview....................................................................57
Stock Trading History...................................................................58
Comparable Public Company Analysis......................................................59
Comparable Transaction Analysis.........................................................60
Premiums Paid Analysis..................................................................60
Discounted Cash Flow Analysis...........................................................61
Base Case Scenario.............................................................62
Base Case Scenario (assuming that the Long Beach club is sold).................63
Additional Scenarios...........................................................63
Board of Directors Determination of Fairness of the Merger.......................................65
Certain Effects of the Merger....................................................................69
Material Federal Income Tax Consequences.........................................................70
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..............................................................73
Purposes and Reasons for the Merger..............................................................74
Interest of Certain Persons in Matters to be Acted Upon and
Conflicts of Interest...................................................................74
Effect if the Merger is Not Approved.............................................................76
PROPOSAL TO APPROVE THE MERGER............................................................................77
General .........................................................................................77
Certain Effects of the Merger....................................................................77
Effective Time of the Merger.....................................................................78
Amounts Paid in the Merger.......................................................................78
Payment for Common Stock in the Merger...........................................................78
Conditions to the Merger.........................................................................79
Waiver and Amendment.............................................................................80
Fees and Expenses................................................................................80
Rights of Dissenting Shareholders................................................................80
Vote Required and Recommendation of the Board of Directors.......................................81
REGULATORY MATTERS........................................................................................81
FINANCING OF THE MERGER...................................................................................81
MATERIAL TERMS OF THE PURCHASE AGREEMENT..................................................................83
BUSINESS AND PROPERTIES OF THE COMPANY....................................................................85
Description of Business..........................................................................85
</TABLE>
-7-
<PAGE> 13
<TABLE>
<CAPTION>
Heading Page
- ------- ----
<S> <C>
General.................................................................................85
Jillian's Clubs.........................................................................86
Description of Properties........................................................................88
Administrative Operations...............................................................88
Jillian's Clubs.........................................................................88
Legal Proceedings................................................................................93
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................94
Results of Operations............................................................................94
Liquidity and Capital Resources..................................................................95
Anticipated Effects of New Accounting Pronouncements.............................................98
Stock Options and Warrants..............................................................98
Earnings Per Share......................................................................98
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................................................................98
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY..........................................................101
PRIOR CONTACTS BETWEEN THE COMPANY AND
CERTAIN AFFILIATES....................................................................................103
SELECTED FINANCIAL DATA..................................................................................104
MARKET INFORMATION.......................................................................................105
FEES AND EXPENSES........................................................................................107
INDEPENDENT ACCOUNTANTS..................................................................................107
MISCELLANEOUS............................................................................................108
DOCUMENTS INCORPORATED BY REFERENCE......................................................................108
GLOSSARY.................................................................................................109
INDEX TO FINANCIAL STATEMENTS ...........................................................................F-1
</TABLE>
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
-8-
<PAGE> 14
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 of the Company (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
-9-
<PAGE> 15
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 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."
-10-
<PAGE> 16
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."
-11-
<PAGE> 17
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
-12-
<PAGE> 18
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."
-13-
<PAGE> 19
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 assist the
Company in raising $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 Company and/or the Placement Agent from
June 1996 to March 1997. Among this group was J.W. Childs Equity Partners, L.P.
("Childs"), which had previously been in discussions with the Company, as set
forth below. 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.
-14-
<PAGE> 20
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) (the "Purchase Agreement"). 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 (as defined below), 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 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 will be converted into the right to receive one share of
Series A Common Stock, par value $.001 per share, of the
-15-
<PAGE> 21
Surviving Company and one share of Series B Common Stock, par value $.001 per
share, of the Surviving Company, (iii) each Shareholder that is not a Continuing
Shareholder (a "Non-Continuing Shareholder") will have the right to receive cash
of $0.50 per share, without interest (a "Merger Payment") for each share of
Common Stock beneficially owned by such Shareholder, (iv) each warrant to
purchase a share or shares of Common Stock held immediately prior to
consummation of the Merger by certain persons with whom the Company has ongoing
relationships (the "Continuing Warrant Holders") will be exchanged for a warrant
to purchase the same number of shares of common stock of Holdings on
substantially the same terms and conditions, (v) each warrant to purchase a
share or shares of Common Stock held immediately prior to consummation of the
Merger by any person other than a Continuing Warrant Holder (a "Non-Continuing
Warrant Holder") will be converted into the right to receive, upon the exercise
of such warrant, a Merger Payment for each share of Common Stock to which the
warrant is exercisable, upon payment of the exercise price for each such share,
and (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
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 also decided to offer to repurchase
each stock option to purchase a share or shares of Common Stock that is held by
a former director, officer or employee of the Company (a "Former Management
Company Option") for a purchase price of $0.50 for each share of Common Stock as
to which the option is exercisable, less the exercise price for each such share.
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 10:00 a.m., Eastern Time, on
July __, 1997, at the Company's principal executive offices, located at 727
Atlantic Avenue, Suite 600, Boston, Massachusetts, 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
-16-
<PAGE> 22
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 Current Management Company Option
outstanding immediately prior to consummation of the Merger will be exchanged
for an option to receive a Holdings Management Option; (vii) the Company will
be the Surviving Company in the Merger, and Sub will cease to exist as a result
of the Merger; (viii) the articles of incorporation and by-laws of Sub will be
the articles of incorporation and by-laws of the Surviving Company; and (ix)
the name of the Company shall be the name of the Surviving Company.
Immediately after consummation of the Corporate Formation and the
Private Placement and the Effective Time, the Non-Continuing Shareholders will
possess no interest in, or rights as Shareholders of, the Company or Holdings,
Holdings will be owned by the
-17-
<PAGE> 23
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 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 $28,000 in cash will be required in order
to make payments to the Non-Continuing Warrant Holders and to all of the
holders of Former Management Company Options. The Company intends to use funds
obtained from the Private Placement to make the Merger Payments and the
payments to the Non-Continuing Warrant Holders and holders of Former Management
Company Options, 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 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.
-18-
<PAGE> 24
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 Stock 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
-19-
<PAGE> 25
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
$375,000 for the purchase of shares of common stock of Holdings, and (iii)
Holdings lend Kevin Troy, a Shareholder and advisor to the Company, $50,000 for
the purchase of shares of common stock of Holdings. Except as described in this
Proxy Statement, there will be no other relationships that will continue
between the Company or Holdings and any persons who are officers, directors or
Shareholders of the Company.
Mr. Foster's and Mr. Smith's continuing interest in the Company
presents each of them with a conflict of interest in voting for the Proposal or
recommending that the Non-Continuing Shareholders vote for the Proposal. In
addition, each Continuing Shareholder, even if not a member of management or
employee of the Company, may have an interest in voting their shares of Common
Stock in favor of the Proposal because their interests in the
-20-
<PAGE> 26
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 2,060,000 shares of common stock of Holdings
(approximately 11.4 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 1,240,765 shares of common stock of
Holdings (approximately 6.9 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 1,138,190
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 881,869 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 1,210,000 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 4,819,890 shares of common stock of Holdings
(approximately 26.6 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, approximately $28,000 for payments
to Non-Continuing Warrant Holders and holders of Former Management Company
Options and expenses associated with consummation of the
-21-
<PAGE> 27
Merger and the Private Placement of approximately $1,472,000, Holdings will have
approximately $7,943,046 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 that 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 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 the Company no longer will be required to comply with the
rules and regulations relating to The NASDAQ SmallCap Market listing.
-22-
<PAGE> 28
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 analyses 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.
-23-
<PAGE> 29
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
24
<PAGE> 30
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.
25
<PAGE> 31
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 date (the "Record Date") for
determination of the 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, and (vi) each stock option
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 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
26
<PAGE> 32
"Holdings Management Option"). The Company is currently negotiating the
repurchase of each stock option under the Stock Option Plans to purchase a share
or shares of Common Stock that is held by a former director, officer or employee
of the Company (a "Former Management Company Option") for a purchase price of
$0.50 for each share of Common Stock as to which the option is exercisable, less
the exercise price for each such share. Any Former Management Company Option
that is not repurchased by the Company prior to consummation of the Merger will
remain outstanding after completion of the Merger.
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 &
Trust Company (the "Transfer Agent"), which will
27
<PAGE> 33
determine whether a quorum is present. The Proposal will be approved if and only
if it receives the favorable vote of the majority of all shares of Common Stock
outstanding on the Record Date. The Transfer Agent will treat abstentions as
shares of Common Stock that are present and entitled to vote for purposes of
determining the approval of such matter. In addition, if a broker submits a
proxy indicating that it does not have discretionary authority as to certain
shares of Common Stock to vote on a particular matter, those shares will not be
treated as present and entitled to vote for purposes of determining the approval
of such matter, but will be treated as present for purposes of determining
whether a quorum is present at the Special Meeting.
Proxy
The proxy set forth on the proxy card which is enclosed with this
Proxy Statement (the "Proxy") contains a space where each Shareholder may
indicate whether such Shareholder chooses to vote such Shareholder's shares of
Common Stock in favor of or against the Proposal or to abstain from voting. If
the Proxy is duly completed and returned to the Transfer Agent, the Proxy will
be voted in accordance with the instructions thereon. If a Shareholder returns
the Proxy duly executed, but does not indicate the manner in which the Proxy is
to be voted, the Proxy will be voted FOR the Proposal.
Revocability of Proxy
A Shareholder may revoke or amend the Shareholder's Proxy at any time
prior to the Proxy's exercise at the Special Meeting by executing a
subsequently dated Proxy or by filing a written request with Daniel M. Smith,
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. In addition to the solicitation by mail, the
Board and certain officers or other employees of the Company, without
additional compensation, may solicit proxies by telephone, personal contact or
other means. The Company also has retained D. F. King & Co., Inc. to assist in
the solicitation, at a cost of $6,000. The Company will reimburse brokers and
other persons holding shares of Common Stock in their names, or in the names of
nominees, for reasonable expenses in forwarding proxy materials to the
beneficial owners of such shares.
If you have any questions concerning this proxy solicitation or the
procedure to be followed to execute and deliver a Proxy, please contact Daniel
M. Smith at 727 Atlantic Avenue, Suite 600, Boston, Massachusetts 02111 or by
telephone at (617) 350-3111.
28
<PAGE> 34
The principal executive offices of the Company are located at 727
Atlantic Avenue, Suite 600, Boston, Massachusetts 02111, and the telephone
number of the Company at such address is (617) 350-3111. The principal
executive offices of Holdings are located at One Federal Street, 21st Floor,
Boston, Massachusetts 02110, and the telephone number of Holdings at such
address is (617) 753-1100.
SPECIAL FACTORS
Background of the Merger
General. The Board's decision to present the Proposal to the
Shareholders marked the culmination of a process that began in late 1994. The
Merger is subject to satisfaction of various conditions, including, but not
limited to, consummation of the Corporate Formation and the private placement
(the "Private Placement") of $12,000,000 of convertible preferred stock of
Holdings (the "Preferred Stock") with the Childs Group pursuant to the terms
and conditions of the Purchase Agreement. See "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
29
<PAGE> 35
owns, operates and manages ten billiard clubs, which are located in Miami,
Florida; Seattle, Washington; Cleveland, Ohio; Cleveland Heights, Ohio;
Pasadena, California; Worcester, Massachusetts; Champaign, Illinois; Annapolis,
Maryland; Long Beach, California; and Tacoma, Washington. The Cleveland Heights,
Worcester, Champaign and Annapolis clubs are owned by limited partnerships in
which wholly owned subsidiaries of the Company are the general partners, with 87
percent, 25 percent, 43 percent and 79 percent ownership interests,
respectively. See "Business and Properties of the Company."
The Company was one of the pioneers in the concept of upscale billiard
clubs. However, the billiard club business requires significant amounts of
cash, and the Company has not had sufficient cash to operate optimally or
expand its business in accordance with its business plans. As a result, the
Company was not able to develop billiard clubs quickly enough to attain a
dominant position in the upscale billiard club market prior to the entry 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
30
<PAGE> 36
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 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. However, based on the Company's
current cash shortage, there can be no assurance that it will have sufficient
working capital in the future to make the scheduled loan payments. 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 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.
However, based on the Company's current cash shortage, there can be no
assurance that it will have sufficient working capital in the future to make
the scheduled loan payments. 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 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.
31
<PAGE> 37
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. However, based on the Company's current cash shortage,
there can be no assurance that it will have sufficient working capital in the
future to make the scheduled loan payments. 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 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."
32
<PAGE> 38
In addition to bank financing, the Company also has attempted to
obtain $10,000 to $300,000 in equipment financing from leasing companies during
the past six years. During this time, the Company submitted at least 30
applications for equipment financing to leasing companies, 11 of which were
accepted. The approximately 19 applications that were rejected were denied
because the Company had a history of poor performance and lacked available
collateral other than the equipment to be purchased.
The Company was successful in obtaining two equipment leases from
Leasing Technology, Inc. However, both of these leases resulted in the
encumbrance of the assets of one of its clubs and the stock of another one of
its clubs. Specifically, in March 1994, the Company financed with Leasing
Technology, Inc. certain equipment for, and leasehold improvements in, the
Annapolis, Maryland billiard club for $300,000 at an annual lease rate of 12
percent. The lease was collateralized by all of the equity securities of the
subsidiary through which the Company owns the Kendall club, which is located in
Miami, Florida, Jillian's Billiard Club of Kendall, Inc. ("Jillian's -
Kendall"), and all of the assets of the subsidiary through which the Company
owns the Annapolis billiard club, Jillian's Billiard Club of Annapolis, Inc.
("Jillian's - Annapolis"). At the time of the lease, Jillian's - Kendall had
assets of approximately $646,000 and was generating approximately $173,000 in
cash flow, and the Company projected that Jillian's Annapolis would have
$600,000 in assets within three months after commencement of the loan. At 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. However, based on the Company's
current cash shortage, there can be no assurance that it will have sufficient
working capital in the future to make the scheduled lease payments. 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 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. At March 31, 1997, the Company was in compliance with its obligations
under the lease, and $245,772 remained payable under the lease. Based on the
Company's current cash shortage, there can be no assurance that it will have
sufficient working capital in the future to make the scheduled lease payments.
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 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.
33
<PAGE> 39
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. At March 31, 1997, the Company was in
compliance with its obligations under the leases, and $116,259 remained payable
under the leases. Based on the Company's current cash shortage, there can be no
assurance that it will have sufficient working capital in the future to make
the scheduled lease payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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.
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.
34
<PAGE> 40
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.
However, based on the Company's current cash shortage, there can be no
assurance that it will have sufficient working capital in the future to make
the scheduled loan payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." If the Company fails to make such payments, it could effectively
lose all rights to continue the operations of the Cleveland Heights club if the
City of Cleveland Heights becomes the owner of the club's assets. The Company
also attempted to raise $150,000 in June 1992 through the private placement of
interests in the limited partnership, Jillian's Billiard Club of Cleveland
Heights Limited Partnership (the "Cleveland Heights Limited Partnership"), in
which Jillian's - Cleveland Heights is the general partner and currently has an
87 percent ownership interest. The Company raised only $22,500, out of the
$150,000 that it attempted to raise, from a single unaffiliated third party
even though the Company offered each investor, and the single investor
accepted, an option to sell the investor's partnership interest to the Company
at a cash price equal to the greater of the price paid for the investment or
500 percent of the adjusted net income of the Cleveland Heights Limited
Partnership for the 12 months ending December 31, 1995, multiplied by a
fraction representing a percentage interest in such Partnership's profits and
losses of the investment to be sold to the Company. The option was exercised in
accordance with its terms, within 60 days of the transmittal to the investor of
the financial statements of the Cleveland Heights Limited Partnership for the
12 months ending December 31, 1995. The Company and the investor currently are
negotiating the terms by which the Company will purchase the interest of the
$22,500 investor. As of the date of this Proxy Statement, the Company believes
that it has sufficient cash flow to meet its obligation to purchase the
interest. The Company's failure to honor this commitment could result in a suit
by the investor to obtain the price, as well as the investor's cost and
expenses, including reasonable attorneys' fees. The Company financed the
remaining $527,500 needed to develop the Cleveland Heights club using $427,500
in cash generated from the Company's operations and the proceeds from a
$100,000 four-year convertible note, bearing interest at a rate of 12.5
percent, issued by the Company in February 1992 in favor of an unaffiliated
third party. On January 1, 1993, the third party exchanged the note for a 10
percent equity interest in the Cleveland Heights Limited Partnership.
In 1993, the Company paid $150,000 in cash and obtained the remaining
$175,000 of the $325,000 necessary to acquire an existing billiard club in
Pasadena, California, through a loan from the club's seller. The Company issued
the seller a three-year note collateralized by the assets of Jillian's -
Pasadena. The Company repaid the note in August 1996.
In 1994, the landlord of the Champaign, Illinois club loaned the
Company $150,000 of the $700,000 required to develop the Champaign club. The
loan is collateralized by the assets
35
<PAGE> 41
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. However, based on the Company's current cash
shortage, there can be no assurance that it will have sufficient working capital
in the future to make the scheduled loan payments. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." 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 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 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
36
<PAGE> 42
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. However, based on the Company's current
cash shortage, there can be no assurance that it will have sufficient working
capital in the future to make the scheduled loan payments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." 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
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
37
<PAGE> 43
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.
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
38
<PAGE> 44
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 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
39
<PAGE> 45
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 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
40
<PAGE> 46
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.
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. Based on the Company's current cash
shortage, there can be no assurance that it will have sufficient working
capital in the future to make the scheduled payments with respect to the
foregoing indebtedness. 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
41
<PAGE> 47
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 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,
42
<PAGE> 48
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. Consequently, 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 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.
43
<PAGE> 49
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
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
44
<PAGE> 50
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 its 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 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
45
<PAGE> 51
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 to consider that the Company's consummation of a transaction with On
Cue would have resulted in greater distributions to the Shareholders than the
Merger Payment. In fact, the Company's experience with On Cue (in which the
entity initiating a bid on an unsolicited basis lacked the interest necessary
to pursue the matter) led the Board to conclude that it was likely to be
unproductive to invest Company resources in seeking additional bids for the
Company in order to assist the Board in determining the Company's value. Even
if the Company had obtained one or more additional bids for the Company, it
would be necessary for the Board to assess the likelihood that any particular
bid could result in a sale of the Company on terms acceptable to all parties in
order to utilize the bids as a measure of the value of the Company.
At the meeting held on April 4, 1995, the Board made an informal,
initial determination that Shareholders should be paid approximately $0.50 per
share in any transaction that the Board structured that would have the effect
of eliminating the Company's status as a publicly held company. For a
discussion of the Board's determination of this distribution amount, see
"Payments to the Non-Continuing Shareholders," below.
In light of the Board's belief that it is not in the best interests of
the Company and the Shareholders to sell the Company at this time, the Board
considered transactions at the meeting held on October 2, 1995 that could have
the effect of taking the Company private, but would retain the interest in the
Company or any successor to the Company of certain Shareholders. The Board
considered (i) a tender offer by the Company, (ii) a tender offer by the
Company and a subsequent merger of the Company into a newly formed company to
eliminate any non-tendering Shareholders that the Company did not want to have
a continuing interest in the Company, and (iii) a merger of the Company into a
newly formed corporation organized for that purpose.
The Board rejected the first alternative as impractical because there
could be no assurance that any Shareholders would elect to tender their Common
Stock to the Company. Further, in light of its recent difficulty in obtaining
financing from financial institutions and other sources, it was unlikely that
the Company could obtain financing sufficient to acquire all of the tendered
Common Stock. Because the Board had determined that it was in the best interest
of the Company and the Shareholders for the Company to become a private company
not
46
<PAGE> 52
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 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
47
<PAGE> 53
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 companies and providing
such companies with business valuations and strategic advice on non-recurring
transactions such as mergers and acquisitions and restructurings, to assist the
Company in raising $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 affiliates 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
48
<PAGE> 54
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 Securities and
Exchange Act of 1934, as amended (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 Company and/or the Placement Agent from
June 1996 to March 1997. Among this group was Childs, which had previously been
in discussions with the Company, as set forth below. 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 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
49
<PAGE> 55
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 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
50
<PAGE> 56
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; and (vi) 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. The Board also decided to offer to repurchase
each stock option to purchase a share or shares of Common Stock that is held by
a former director, officer or employee of the Company (a "Former Management
Company Option") for a purchase price of $0.50 for each share of Common Stock as
to which the option is exercisable, less the exercise price for each such share.
While the Board had determined at its meeting on October 2, 1995, as
discussed above, that Shareholders owning more than 101,000 shares of Common
Stock and certain employees of the Company should continue as shareholders in
the surviving company in a merger, the Board decided, after consultation with
Childs and the Placement Agent, that the Merger, as proposed herein, should be
structured so that certain persons with whom the Company has ongoing
relationships would be shareholders in Holdings and holders of Holdings stock
options and warrants. In addition, after the initial draft of this Proxy
Statement was filed with the Commission in 1995, the Company was contacted by
certain Shareholders who owned more than 101,000 shares of Common Stock who
expressed an interest to have their investment in the Company liquidated in any
merger in which the Company engaged. The Company also considered these
Shareholders when it decided, in consultation with the Childs Group and the
Placement Agent, to liquidate the investment of most of its Shareholders
through the combination of the Merger and the Corporate Formation to facilitate
the 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,
The Blind Trust UDT 3/26/93 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
51
<PAGE> 57
Ambur, Steven L. Meltzer, Donald Leopold, John L. Kidde, Steven L. Foster, Kevin
Troy, Daniel M. Smith, Stephen M. Weis and Ron Widman.
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 Kevin Troy.
Payments to the Non-Continuing Shareholders
At its meeting on April 4, 1995, the Board made a preliminary
determination that Shareholders should receive a distribution of approximately
$0.50 per share of Common Stock in any transaction that would have the effect
of eliminating the Company's status as a publicly held company. The Board based
this determination on the market value of the Common Stock at that time, which
the Board believes is a reasonable and reliable measure of the value of the
Common Stock. During the first three months of 1995, the average of high and
low bid prices of the Common Stock, as reported by The NASDAQ SmallCap Market,
was $0.53 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.
52
<PAGE> 58
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 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
53
<PAGE> 59
opinion to the Board with respect to the proposed Merger Payment. In addition,
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 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.
54
<PAGE> 60
The foregoing summary does not purport to be a complete description
of the analyses performed by Bannon. The preparation of financial analyses and
fairness opinions is a complex process and is not necessarily susceptible to
partial analysis or summary description. Bannon believes that its analyses (and
the summary set forth above) must be considered as a whole, and that selecting
portions of such analyses and of the factors considered by Bannon, without
considering all of such analyses and factors, could create an incomplete view
of the processes underlying the analyses conducted by Bannon and of its
preliminary opinion. Bannon made no attempt to assign specific weights to
particular analyses. Any estimates contained in Bannon's analyses are not
necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth therein. Estimates of values of companies do
not purport to be appraisals or necessarily to reflect the prices at which
companies may actually be sold.
Based on the foregoing, on October 2, 1995, Bannon delivered to the
Board its preliminary opinion, subject to review and revision, that the
proposed Merger Payment of $0.50 per share was fair to the Non-Continuing
Shareholders, as of October 2, 1995. For its services in rendering its
preliminary opinion, the Company paid Bannon a $75,000 fee and reimbursed
Bannon for out-of-pocket expenses totaling $5,090, which consisted of $3,599 in
travel expenses, $715 in legal expenses and $776 in miscellaneous expenses.
The Company and Bannon anticipated that the Company would engage
Bannon to render a final opinion immediately prior to the mailing of this Proxy
Statement to the Shareholders. When the Company contacted Bannon in March 1997
to discuss the terms under which Bannon would render the final opinion, the
Company learned that Bannon had become affiliated with another entity. As a
result of that affiliation and the lapse of time, Bannon indicated that it
would be unable to render the final opinion within the price range that the
Company and Bannon had discussed when Bannon was originally engaged in March
1995. Consequently, the Company decided to engage Stonebridge.
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
55
<PAGE> 61
Company or solicit indications of interest or negotiate with any
party with respect to the acquisition of any such shares in connection with the
rendering of its opinion.
Stonebridge rendered to the Board and Mr. Kidde on April 22, 1997 an
oral and written opinion to the effect that, as of the date of such opinion and
based upon and subject to certain assumptions, the Merger Payment was fair,
from a financial point of view, to the Non-Continuing Shareholders. The full
text of the written opinion of Stonebridge, dated April 22, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is included as Appendix B to this Proxy Statement and incorporated
herein by reference. The Non-Continuing Shareholders are urged to read that
opinion carefully in its entirety. The opinion is directed only to the fairness
of the Merger Payment to the Non-Continuing Shareholders from a financial point
of view and has been provided for the use of the Board in its evaluation of the
Merger and does not constitute a recommendation to any Shareholder as to how
such Shareholder should vote at the Special Meeting. The summary of the opinion
of Stonebridge set forth in this Proxy Statement is a description of the
material aspects of the opinion and is qualified in its entirety by reference
to the full text of such opinion.
In rendering its opinion, Stonebridge took into account its
assessment of general economic, market, financial and other conditions, as well
as its experience in connection with similar transactions and securities
evaluation, generally. The opinion was necessarily based upon conditions as
they existed and could be evaluated as of the date of the opinion. Stonebridge
was not engaged to solicit, and did not solicit, potential purchasers for the
Company, and did not consider specific alternative transactions involving the
Company. For the purposes of rendering its opinion, Stonebridge assumed that
all conditions precedent to the 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,
56
<PAGE> 62
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, 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
57
<PAGE> 63
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, 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
58
<PAGE> 64
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 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 1.6 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
59
<PAGE> 65
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
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.
60
<PAGE> 66
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.
<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 (a) 2,319,656
=========
------------------------------------------------------------------------------------
Total Cost of Club Operations $9,852,851
------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest expense.
61
<PAGE> 67
In preparing the foregoing projections for fiscal 1998, the Company's
management applied a growth rate of 3.5 percent to the 1997 estimated 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.
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 table below shows projected summary income statements for
the Company for fiscal years 1998 through 2003, as derived by Stonebridge from
the financial projections prepared by management (the "Base Case").
BASE CASE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
$ in thousands FISCAL YEAR ENDING MARCH 31,
- ------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL SALES $13,672 $14,013 $14,364 $14,723 $15,091 $15,468
- ------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD 3,040 3,116 3,194 3,274 3,356 3,439
- ------------------------------------------------------------------------------------------------------
GROSS PROFIT 10,632 10,897 11,170 11,449 11,735 12,029
- ------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 10,347 10,540 10,784 11,035 11,292 11,555
- ------------------------------------------------------------------------------------------------------
MINORITY INTEREST 223.00 235.00 245.00 255.00 264.00 273.00
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 61.00 122.00 141.00 160.00 180.00 200.00
- ------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 68
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. The table
below shows projected summary income statements for the Company for fiscal
years 1998 through 2003 under the Base Case (assuming that the Long Beach club
is sold).
BASE CASE (ASSUMING THAT THE LONG BEACH CLUB IS SOLD)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
$ in thousands FISCAL YEAR ENDING MARCH 31,
- ------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL SALES $13,672 $12,806 $13,126 $13,454 $13,791 $14,136
- ------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD 3,040 2,781 2,851 2,922 2,995 3,070
- ------------------------------------------------------------------------------------------------------
GROSS PROFIT 10,632 10,025 10,275 10,532 10,796 11,065
- ------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 10,347 9,467 9,687 9,913 10,144 10,382
- ------------------------------------------------------------------------------------------------------
MINORITY INTEREST 223.00 235.00 245.00 255.00 264.00 273.00
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 61.00 322.00 344.00 365.00 388.00 410.00
- ------------------------------------------------------------------------------------------------------
</TABLE>
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. The tables below show projected summary income
statements for the Company for fiscal years 1998 through 2003, as derived by
Stonebridge from financial projections prepared by management, under these
additional scenarios.
63
<PAGE> 69
ADJUSTED REVENUE - 5% GROWTH
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
$ in thousands FISCAL YEAR ENDING MARCH 31,
- ------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL SALES $13,879 $14,573 $15,301 $16,066 $16,870 $17,713
- ------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD 3,087 3,241 3,403 3,573 3,752 3,940
- ------------------------------------------------------------------------------------------------------
GROSS PROFIT 10,792 11,331 11,898 12,493 13,117 13,773
- ------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 10,491 10,834 11,238 11,661 12,102 12,563
- ------------------------------------------------------------------------------------------------------
MINORITY INTEREST 203.00 244.00 269.00 298.00 324.00 354.00
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 97.00 254.00 391.00 534.00 691.00 856.00
- ------------------------------------------------------------------------------------------------------
</TABLE>
ADJUSTED REVENUE - 5% GROWTH
(ASSUMING THAT THE LONG BEACH CLUB IS SOLD)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
$ in thousands FISCAL YEAR ENDING MARCH 31,
- ------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL SALES $13,879 $13,306 $13,971 $14,670 $15,403 $16,173
- ------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD 3,087 2,890 3,035 3,187 3,346 3,513
- ------------------------------------------------------------------------------------------------------
GROSS PROFIT 10,792 10,415 10,936 11,483 12,057 12,660
- ------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 10,491 9,720 10,075 10,445 10,832 11,237
- ------------------------------------------------------------------------------------------------------
MINORITY INTEREST 203.00 244.00 269.00 298.00 324.00 354.00
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 97.00 452.00 592.00 739.00 900.00 1,069
- ------------------------------------------------------------------------------------------------------
</TABLE>
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.
Although Stonebridge made certain adjustments which it deemed
appropriate, it primarily relied upon the financial projections prepared by the
Company's management in performing its analysis described above and assumes no
responsibility for the accuracy or completeness of such projections or the
information presented in the foregoing tables. For the reasons set forth above,
projections are inherently uncertain and the inclusion of the projected results
set forth above should not be regarded as a representation by Stonebridge, the
Company, Childs or any other person or entity that the projected results will
be achieved. Future performance may be significantly less favorable or more
favorable than as set forth above, and holders of shares of Common Stock are
cautioned not to rely on the information set forth above as being indicative of
the Company's future financial performance.
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
64
<PAGE> 70
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 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
65
<PAGE> 71
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.
(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. The Company did not give any
consideration to the use of a reverse stock split to meet the bid price
requirement. 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 adjusted net income 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
66
<PAGE> 72
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 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, approximately $28,000 for payments to the Non-Continuing Warrant
Holders and holders of Former Management Company Options and expenses
associated with consummation of the Merger and the Private Placement of
approximately $1,472,000, Holdings will have approximately $7,943,046 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
67
<PAGE> 73
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 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
68
<PAGE> 74
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 inability to obtain financing and attract investors as a public company, but
also obtained an opinion from an independent third party as to the fairness of
the Merger Payment.
No firm offers, other than in conjunction with the Merger, of which
the Board is aware have been made by an unaffiliated person during the
preceding two years for (i) the merger or consolidation of the Company into or
with such person, (ii) the sale or other transfer of all or any substantial
part of the assets of the Company, or (iii) the purchase of a number of shares
of Common Stock that would enable the holder thereof to exercise control of the
Company. In addition, the Board did not solicit any such offers. The Board did
not consider the unsolicited share exchange proposal from On Cue a "firm offer"
because the Company did not have an opportunity to evaluate the relative merits
of the proposal or engage in negotiations with On Cue with respect to the
proposal. Although the Company made several attempts to pursue the matter, On
Cue took no affirmative steps after it made its initial contact with the
Company to indicate that it was serious about engaging in a transaction with
the Company. For a detailed discussion of the On Cue proposal, see "Background
of the Merger -- Alternatives Considered," above.
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 that there will be any future
distributions by Holdings. The Company has never
69
<PAGE> 75
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 Exchange Act will terminate, resulting in the suspension of the
Company's obligations to file periodic reports such as Forms 10-KSB, 10-QSB and
8-K. Since the Common Stock will no longer be publicly held, the Company will
be relieved of the obligation to comply with the proxy rules of Regulation 14A
under Section 14 of the Exchange Act, and the executive officers and directors
of the Company and Shareholders owning more than 10 percent of the Common Stock
will be relieved of the reporting requirements and "short swing" trading
restrictions under Section 16 of the Exchange Act. In addition, the Common
Stock will be delisted from The NASDAQ SmallCap Market, which will terminate
the Company's public trading market and the Company no longer will be required
to comply with the rules and regulations relating to The NASDAQ SmallCap Market
listing.
If the Merger is consummated, all of the Company's loan obligations
and guaranteed return, buy-out and registration rights obligations undertaken
in connection with the private placement of the securities of certain of its
subsidiaries will continue in the Surviving Company. See "Current Effects of
Borrowings and Equity Financing," above. However, it is a condition to
Holdings' and Sub's obligation to effect the Merger that the Company refinance
its existing debt. See "Proposal to Approve the Merger -Conditions to the
Merger."
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.
70
<PAGE> 76
No ruling on the federal income tax consequences of the Corporate
Formation or the Merger has been or will be requested from the Internal Revenue
Service or from any other tax authority. In addition, this discussion is not
binding upon any tax authority or any court and no assurance can be given that
a position contrary to those expressed in this discussion will not be asserted
and sustained. Moreover, this discussion does not address any foreign, state or
local income or other tax consequences of the Corporate Formation or the
Merger.
ACCORDINGLY, EACH SHAREHOLDER IS STRONGLY URGED TO CONSULT SUCH
SHAREHOLDER'S OWN TAX ADVISOR REGARDING ANY SPECIFIC TAX CONSEQUENCES TO THE
SHAREHOLDER OF THE CORPORATE FORMATION AND THE MERGER, INCLUDING THE FEDERAL,
FOREIGN, STATE, AND LOCAL INCOME AND OTHER TAX CONSEQUENCES OF THE CORPORATE
FORMATION AND THE MERGER AND POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Federal Income Tax Consequences for Continuing Shareholders Resulting
from the Corporate Formation. The Corporate Formation will, in part, consist of
an exchange by the Continuing Shareholders of their Common Stock for Holdings
common stock and Holdings Performance Options. Generally, in corporate
formations the contribution of property to a newly formed company in exchange
for solely stock in the new company is a tax-free transaction for the
contributor of property. However, when the contribution of property in a
corporate formation is in exchange for not only stock but also for "other
property," gain, but not loss, may be recognized on the exchange. In the
Corporate Formation, the Continuing 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
71
<PAGE> 77
Shareholder's basis in the Holdings common stock will be the Continuing
Shareholder's basis in the Common Stock decreased by the fair market value of
the Holdings Performance Options received and increased by the amount of gain
recognized (if any). The Continuing Shareholder's basis in the Holdings
Performance Options received in the exchange will be their fair market value.
Certain Continuing Shareholders may also receive Holdings Performance
Options in the Corporate Formation in addition to those issued in exchange for
Common Stock. To the extent the Holdings Performance Options are received
pursuant to a plan similar to the Stock Option Plans, the holders of these
options should not recognize taxable income as a result of their issuance.
Income will instead be recognized as ordinary income at the time such options
are exercised in an amount equal to any excess in the value of the Holdings
common stock received at the time of exercise over the exercise price paid.
However, to the extent the options are not received pursuant to a plan similar
to the Stock Option Plans, holders of these options will recognize gain on the
issuance of the options to the extent of the option's value, if any.
Federal Income Tax Consequences for Non-Continuing Shareholders
Resulting from the Merger. As a result of the Merger, Non-Continuing
Shareholders will receive a cash payment in exchange for all of their Common
Stock (i.e., the Merger Payment), resulting in taxable gain or loss to such
Shareholders. This gain or loss will be equal to the difference, if any,
between (i) the Merger Payment received by the Non-Continuing Shareholder and
(ii) such 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 a 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 a 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 a 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
72
<PAGE> 78
percent (39 percent for certain corporations in order to effect the phase-out of
the benefits of the graduated rates applied to income below $75,000) and
generally will be able to use any capital losses only to offset capital gains.
However, unused capital losses of corporate Shareholders may be (i) carried back
to each of the three taxable years preceding the taxable year in which the loss
is recognized and (ii) carried forward to each of the five taxable years
following the taxable year in which the loss is recognized.
Federal Income Tax Consequences for Holders of Warrants to Purchase
Common Stock. If the Merger is approved, each warrant to purchase a share or
shares of Common Stock outstanding immediately prior to consummation of the
Merger will be exchanged, if held by a Continuing Warrant Holder, for a warrant
to purchase the same number of shares of common stock of Holdings on the same
terms and conditions or, if held by a Non-Continuing Warrant Holder, will be
converted into the right to receive, upon the exercise of such warrant, cash
equal to the Merger Payment for each of the shares of Common Stock for which
such warrant may be exercised, less the exercise price for each such share.
The exchange of the Continuing Warrant Holders' warrants to purchase
Common Stock for warrants to purchase Holdings' common stock will be a taxable
exchange. Each Continuing Warrant Holder will recognize gain or loss equal to
the difference, if any, between (i) the value of the Holdings' common stock
warrant received by the Continuing Warrant Holder in the exchange and (ii) the
Continuing Warrant Holder's adjusted tax basis 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
73
<PAGE> 79
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.
The Company has offered each Former Management Company Option holder
the opportunity to sell each such option for $0.50 for each share of Common
Stock as to which such option is exercisable, less the exercise price for each
such share. Any such sale of a Former Management Company Option will be a
taxable exchange, and the Former Management Company Option holder will
recognize gain equal to the cash payment that such holder receives. That is,
the Former Management Company Option holder will recognize gain for each share
of Common Stock as to which the Former Management Company Option was
exercisable equal to $0.50, less the exercise price of the option. Former
Management Company Options not repurchased by the Company prior to the
consummation of the Merger will remain outstanding after consummation of the
Merger. Retention of a Former Management Company Option will have no federal
income tax consequences for the Former Management Company Option holder.
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,
74
<PAGE> 80
which will wholly own the Surviving Company, and he will own Holdings Management
Options and Holdings Performance Options. In addition, Mr. Foster and each of
the other Continuing Shareholders entered into the Voting Agreement whereby they
each agreed to vote the shares of Common Stock owned by them in favor of the
Proposal.
Daniel M. Smith, President, Chief Operating Officer and a Director of
the Company, is also a participant on both sides of the proposed Merger
because, upon consummation of the Merger and related transactions, he will own
Holdings Management Options and Holdings Performance Options.
Further, it is a condition to consummation of the Merger that the
Continuing Shareholders enter into the Stockholders Agreement. In addition, it
is a condition to consummation of the Merger that (i) Mr. Foster and Mr. Smith
each enter into an employment/ noncompetition agreement with the Surviving
Company (collectively, the"Employment/ Noncompetition Agreements"), (ii)
Holdings lend Mr. Foster $375,000 for the purchase of shares of common stock of
Holdings, and (iii) Holdings lend Kevin Troy, a Shareholder and advisor to the
Company, $50,000 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 2,060,000 shares of common stock of Holdings
(approximately 11.4 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 1,240,765 shares of common stock of
Holdings (approximately 6.9 percent
75
<PAGE> 81
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 1,138,190 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 881,869 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 1,210,000 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 4,819,890 shares of common stock of Holdings
(approximately 26.6 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, approximately
$28,000 for payments to Non-Continuing Warrant Holders and holders of Former
Management Company Options and expenses associated with consummation of the
Merger and the Private Placement of approximately $1,472,000, Holdings will
have approximately $7,943,046 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
76
<PAGE> 82
Merger is not consummated, at that time, the Company will assess whether it will
seek to structure another transaction or retain the Placement Agent to raise
funds for the Company.
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 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 a 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 Current Management Company Option outstanding
immediately prior to consummation of the Merger will be exchanged for a
Holdings Management Option;
77
<PAGE> 83
(vii) the Company will be the Surviving Company in the Merger, and
Sub will cease to exist as a result of the Merger;
(viii) the articles of incorporation and by-laws of Sub will be the
articles of incorporation and by-laws of the Surviving Company;
(ix) the name of the Company shall be the name of the Surviving
Company; and
(x) 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
78
<PAGE> 84
SEND ANY COMMON STOCK CERTIFICATES WITH THE ENCLOSED PROXY OR AT ANY TIME PRIOR
TO RECEIPT OF A LETTER OF TRANSMITTAL.
The Merger Agreement provides that Holdings shall deposit in trust
with the Exchange Agent for the benefit of Non-Continuing Shareholders 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 Kevin Troy under which Holdings will lend funds
to Messrs. Foster and Troy 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'
79
<PAGE> 85
and Sub's obligation to effect the Merger is subject to the fulfillment or
written waiver of the following conditions: (i) the Company's having performed
all its obligations contained in the Merger Agreement at or prior to the
Effective Time; (ii) the representations and warranties of the Company being
true and correct in all material respects at the Effective Time; (iii) the
Company's delivery to Holdings of a legal opinion covering certain matters with
respect to the Merger; (iv) the Company's refinancing of its existing debt; (v)
the cancellation of all registration rights with respect to securities of the
Company; and (vi) the Company's certification to Holdings and Sub that the
shares of Common Stock being transferred in the Merger are not U.S. real
property interests within the meaning of the Internal Revenue Code of 1986, as
amended, 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 $100,000. 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.
80
<PAGE> 86
Vote Required and Recommendation of the Board of Directors
The Merger will be approved if and only if it receives the favorable
vote of the majority of all Common Stock outstanding on the Record Date. As of
the Record Date, members of the Board and executive officers of the Company
owned 1,327,250 shares of Common Stock (approximately 14.5 percent of the total
shares of Common Stock outstanding). Steven L. Foster, as Chief Executive
Officer and Chairman of the Board of the Company, is the only member of the
Board and/or executive officer of the Company that is a Continuing Shareholder.
Such Shareholder held a total of 1,310,000 shares of Common Stock
(approximately 14.3 percent of the total shares of Common Stock outstanding) as
of the Record Date. In addition, such Shareholder, along with the other
Continuing Shareholders, entered into the Voting Agreement under which he
agreed, among other matters, to vote all of the shares of Common Stock held by
him in favor of the Proposal.
The board of directors of Holdings has approved the Merger, the
execution and delivery of the Merger Agreement by Holdings and consummation of
the Merger. The board of 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 $28,000 in cash will be required in order
to make payments to Non-Continuing Warrant Holders and to all of the 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 the payments to the Non-Continuing Warrant Holders
and holders of Former Management Company Options, 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 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
81
<PAGE> 87
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 "Engagement Letter"), the
Company granted the Placement Agent an exclusive right to present a merger
proposal by September 30, 1996 acceptable to the Company designed to raise
$6,000,000 to $12,000,000 in gross proceeds through the private placement of
equity and/or subordinated debt securities to a limited number of accredited
investors. As of the date of this Proxy Statement, the Placement Agent and its
controlling persons do not beneficially own any equity securities of the
Company. Neither the Placement Agent nor its controlling persons is affiliated
with, or has ever had any relationship with, the Company or any of its
controlling persons.
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 Agreementin 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, was executed on
82
<PAGE> 88
____________, 1997. For a detailed description of the material terms of the
Purchase Agreement, see "Material Terms of the Purchase Agreement," below.
MATERIAL TERMS OF THE PURCHASE AGREEMENT
Pursuant to the terms of the Purchase Agreement, if the Merger is
approved by the Shareholders, immediately prior to the consummation of the
Merger, the Corporate Formation will be consummated and the Childs Group will
purchase the Preferred Stock (as defined below) in the Private Placement.
In the Private Placement, the Childs Group would purchase 12,872,774
shares of 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. 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.
83
<PAGE> 89
<TABLE>
<CAPTION>
Increase in Net Tangible Book Value of Holdings Common Stock
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<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 Placement
and Merger, assuming the conversion 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
common stock at March 31, 1997 $0.48
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company is currently engaged in discussions with the Placement
Agent concerning the Placement Agent's compensation in connection with the
Private Placement. The Placement Agent has informed the Company that, under the
terms of the Engagement Letter, the Placement Agent believes it will be
entitled to a fee of $600,000 following consummation of the Private Placement.
The Company disagrees and has indicated to the Placement Agent that, subject to
certain conditions, it may be willing to pay the Placement Agent, following
consummation of the Private Placement, $300,000 to resolve this matter. The
Company is continuing its efforts to resolve this matter with the Placement
Agent. As of the date of this Proxy Statement, this matter has not been
resolved. In addition, Holdings may lend to Island and its officers,
concurrently with the consummation of the Private Placement, up to $200,000 in
the aggregate, which would be used to purchase up to 400,000 shares of common
stock of Holdings for a price of $0.50 per share.
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.
Theestimated fees and expenses incurred, or to be incurred, by the Company 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, are included under "Fees and Expenses," below.
84
<PAGE> 90
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
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,
85
<PAGE> 91
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.
Jillian's Clubs. Set forth in the table below are descriptions of the
existing Jillian's clubs.
86
<PAGE> 92
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF
DATE OF SPACE NUMBER OF BRUNSWICK
NAME OF COMMENCEMENT (APPROXIMATE BILLIARD TABLES;
SUBSIDIARY OWNER LOCATION OF CLUB OF OPERATIONS FOOTAGE) OTHER 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 theater food service
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Seattle Seattle, April 1990 18,500 square feet; 34 tables; other table
Washington two-story free standing top games; high tech
building video games; separate
room available for
private rental; bar
and food service on
both floors
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Cleveland Cleveland, Ohio July 1990 13,000 square feet; two 25 tables; other table
(on the banks floors of a building top games; high tech
of the Cuyohoga video games; separate
River) room available for
private rental; bar
and food service on
both floors
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Cleveland Cleveland November 1992 9,600 square feet 21 tables; other table
Heights1/ Heights, Ohio top games; high tech
video games; bar and
food service
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Pasadena "Old Town" August 1993 2/ 7,200 square feet; two 16 tables; bar and
Pasadena, floors of a building food service on both
California with additional outside floors
seating on the first
floor
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Worcester1/ Worcester, December 1993 16,000 square feet, 24 tables; other table
Massachusetts including a 5,000 square top games; high tech
(near Worcester foot game room; video games; bar and
Polytechnic one-story free standing food service
Institute) building
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Champaign1/ Champaign, August 1994 12,000 square feet; 20 tables; other table
Illinois two-story free standing top games; high tech
(adjacent to building video games; bar and
the University food service
of Illinois
campus)
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Annapolis1/ Annapolis, October 1994 10,000 square feet; 16 tables; other table
Maryland (near one-story free standing top games; high tech
the U.S. Naval building video games; bar and
Academy and the food service
Annapolis
historical
district)
- -----------------------------------------------------------------------------------------------------------------
Jillian's - Long Beach Long Beach, May 1995 16,000 square feet; two 16 tables; bar and
California floors of a 13-story food service;
free standing building nightclub located in
the basement
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE> 93
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF
DATE OF SPACE NUMBER OF BRUNSWICK
NAME OF COMMENCEMENT (APPROXIMATE BILLIARD TABLES;
SUBSIDIARY OWNER LOCATION OF CLUB OF OPERATIONS FOOTAGE) OTHER AMENITIES
---------------- ---------------- -------------- -------------- --------------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jillian's - Tacoma Tacoma, December 1995 25,000 square feet 25 tables; other table
Washington including a game room; top games; high tech
(near the two-story free standing video games; bar and
University of building food service
Puget Sound
campus)
- ----------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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.
88
<PAGE> 94
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER
LEASE TERM & &
LESSEE/ LEASE RENEWAL MINIMUM RENTAL PAYMENTS FOR THE
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT YEAR ENDED 3/31/97
- --------- ------ ------------ ----------- --------------- -------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 5/26/89; triple net; $192,000 ($16,000 per 6% of gross sales in under 3/7/94 amendment,
Kendall amended 10 years; month); adjusted each year excess of $1,000,000 lessor was granted
3/7/94 two based on increases in the warrants to purchase
five-year Consumer Price Index 65,000 shares of
renewal ("CPI"), but limited to 6% lessee's common stock at
options of the prior year's annual $0.50 per share for a
rent; all CPI adjustments five-year period
deferred until 1/1/95 by
3/7/94 amendment
rental payments for
FY-97 of $283,513, which
includes taxes and
common area maintenance
charges
- ----------------------------------------------------------------------------------------------------------------------------------
Jillian's - 8/29/89 triple net; $258,000 ($21,500 per 3% of gross sales in FY-97 rental payments
Seattle 10 years; month); beginning 3/91 and excess of $750,000; totaled $359,947, which
one every 12th month adjusted annually included taxes, common
five-year thereafter, monthly rent based on increases in area maintenance charges
renewal will increase based on CPI, but no more than and percentage rent of
option increase in CPI, but no 6% $52,618 in cash
more than 6% annually; if
option to renew lease is
exercised, rent shall be
agreed to by both parties
and based on fair market
value ("FMV") of comparable
rentals
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE> 95
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER
LEASE TERM & &
LESSEE/ LEASE RENEWAL MINIMUM RENTAL PAYMENTS FOR THE
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT YEAR ENDED 3/31/97
- --------- ------ ------------ ----------- --------------- -------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 4/20/90; triple net; $69,615 ($5,801 per month) 5% of gross sales in 11/24/93 amendment
Cleveland amended 10 years; for years 1-4; $80,325 excess of $1,392,300 temporarily limited rent
11/24/93 two ($6,694 per month) for years 1-4, and common area
five-year thereafter; beginning year $1,606,500 thereafter maintenance charges and
renewal 7, rent will be increased lessor and lessee
options to an amount equal to the subsequently verbally
lesser of (i) 105% of the agreed to limit the
annual rent payable for rents indefinitely to
the prior lease year, or $6,833 per month from
(ii) the annual rent October through March
payable for the prior and $9,833 per month
lease year adjusted for from April through
increases in CPI; if September
option to renew lease is
exercised, rent shall be
negotiated, but will not
be less than the greater FY-97 rental payments
of comparable rentals or totaled $74,502, which
the rent payable for the included taxes and
last month of the common area maintenance
preceding term; rent for charges
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; $57,240 ($4,770 per month none FY-97 rental payments
Cleveland 10 years; starting 5/92) for years 1 for primary and option
Heights two and 2; $68,688 ($5,724 per space totaled $108,399,
five-year month) for years 3-6; which included taxes and
renewal $76,320 ($6,360 per month) common area maintenance
options for years 7-10; if renewal charges
option is exercised,
minimum annual rent for
each of the options will
be $91,584 and $106,848,
respectively
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE> 96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
OTHER
LEASE TERM & &
LESSEE/ LEASE RENEWAL MINIMUM RENTAL PAYMENTS FOR THE
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT YEAR ENDED 3/31/97
- --------- ------ ------------ ----------- --------------- -------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 8/19/93 1st $33,048 ($2,754 per month) none FY-97 rental payments
Pasadena sublease: for each year through (for both subleases)
10 years; 9/96; thereafter, rent totaled $165,656, which
two will be equal to FMV of included taxes and
five-year comparable rentals with common area maintenance
renewal CPI adjustments starting charges
options 4/1/98
(1,377 sq.
ft. on
ground floor)
$68,928 ($5,744 per month)
for each year through
9/30/94; thereafter, rent
2nd will be increased by CPI
sublease:
5 years;
expires
9/30/01 both subleases provide
; three that if a renewal option
five-year is exercised, rent for
renewal such period shall be
options agreed upon by the parties
(5,744 sq. and based on FMV of
ft. in comparable rentals with
basement) certain CPI adjustments
- --------------------------------------------------------------------------------------------------------------------
Jillian's - 4/21/93 triple net; $123,780 ($10,315 per none separate lease for
Worcester 10 years; month starting 8/93) for parking spaces for the
two years 1-3; $140,284 same term as building
five-year ($11,690 per month) for lease; annual rent is
renewal years 4-5; $165,040 $13,200 for years 1-5
options ($13,753 per month) for and $15,840 for years
years 6-10; if renewal 6-10; for the first and
option exercised, rent for second renewal periods,
each year of the first rent will be $19,000 and
5-year period will be $22,800, respectively
$198,048, and of the
second 5-year period will
be greater of $198,048 or
80% of the then FMV for FY-97 rental payments
similar space totaled $189,728, which
included taxes, parking
rental and common area
maintenance charges
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE> 97
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER
LEASE TERM & &
LESSEE/ LEASE RENEWAL MINIMUM RENTAL PAYMENTS FOR THE
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT YEAR ENDED 3/31/97
- --------- ------ ------------ ----------- --------------- -------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 4/14/93 triple net; $64,800 ($5,400 per month none in 10/94, lessee entered
Champaign 10 years; starting 8/93) for years 1 into separate leasing
two and 2; from April 1, 1995, agreement for parking;
five-year and on April 1 of each annual rent is $5,220
renewal year thereafter, during ($435 per month) and the
options the initial term and any lease expires on 9/1/97
extension term, the
monthly rental amount
shall be adjusted by
increases in CPI FY-97 rental payments
totaled $97,368, which
included taxes, parking
rental and common area
maintenance charges
- --------------------------------------------------------------------------------------------------------------------
Jillian's - 4/20/93 triple net; $79,992 ($6,666 per month none FY-97 rental payments
Annapolis 10 years; starting 4/26/93) for year totaled $125,838, which
two 1; $90,000 ($7,500 per included taxes and
five-year month) for year 2; $99,996 common area maintenance
renewal ($8,333 per month) for charges
options 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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE> 98
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER
LEASE TERM & &
LESSEE/ LEASE RENEWAL MINIMUM RENTAL PAYMENTS FOR THE
SUBLESSEE DATE OPTION ANNUAL RENT PERCENTAGE RENT YEAR ENDED 3/31/97
- --------- ------ ------------ ----------- --------------- -------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jillian's - 7/12/93 triple net; $178,935 ($14,911 per none FY-97 rental payments
Long Beach 10 years, month starting 1/94) for totaled $286,612, which
two year 1; $220,790 ($18,399 included taxes and
five-year per month) for years 2-3; common area maintenance
renewal yearly increases of 5% for charges
options 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; $223,119 ($18,593 per none FY-97 rental payments
Tacoma amended 10 years month starting totaled $180,33, which
6/15/95 commencement of operations included taxes and
or 1/1/96) for years 1-3; common area maintenance
$224,119 ($20,343 per charges
month) for years 4-6;
$265,116 ($22,093 per
month) for years 7-10
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
93
<PAGE> 99
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.
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."
94
<PAGE> 100
During the fiscal years 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.
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.
95
<PAGE> 101
FISCAL YEAR 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MARCH
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL $37,091 $37,148 $352,072 $37,148 $334,336 $34,260 $34,336 $34,260 $34,336 $34,336 $33,099 $33,175
LOANS
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 29,629 29,629 29,629 29,629 29,629 29,629 29,629 29,629 29,629 29,629 29,629 29,629
EQUIP.
LEASES
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 158,160 158,160 158,160 158,994 159,994 159,994 156,994 156,994 156,984 156,994 156,994 156,994
BLDG.
RENTS
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $224,880 $224,937 $539,861 $225,771 $523,959 223,883 $220,959 $220,883 $220,949 $220,959 $219,722 $219,798
MONTHLY ======== ======== ======== ======== ======== ======= ======== ======== ======== ======== ======== ========
PAYMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
</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 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 $100,000. 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 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 new leases for clubs 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
96
<PAGE> 102
that the Company will be successful in developing additional billiard clubs or
that it can meet its new lease obligations 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 interests 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 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.
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."
97
<PAGE> 103
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, as of June 10, 1997, the beneficial
ownership of shares of Common Stock and shares of common stock of the Company's
subsidiaries, by (i) each person known to the Company to own more than five
percent of such shares, (ii) each executive officer of the Company, (iii) each
director of the Company, and (iv) all executive officers and directors of the
Company as a group. Under rules of the Commission, beneficial ownership
includes any shares as to which a person has the sole or shared voting power or
investment power and also any shares which a person has the right to acquire
within 60 days through the exercise of any stock option or other right.
98
<PAGE> 104
<TABLE>
<CAPTION>
Name, Position & Number of Shares Percent of Outstanding Shares
- ---------------- ---------------- -----------------------------
Business Address
- ----------------
<S> <C> <C>
Steven L. Foster, Chief Executive 1,708,600(1) 18.7%
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) 2.5%
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 676,667(8) 7.4%
145 Ipswich Street
Boston, MA 02215
Steven Rubin 1,240,765(9) 13.6%
508 North Second Street
Fairfield, IA 52556
All executive officers and 2,116,850(10) 23.2%
directors as a group (six persons)
</TABLE>
-99-
<PAGE> 105
-------------
(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)
375,000 shares issuable pursuant to options held by Mr. Foster that have vested
and are or will become exercisable within 60 days of June 10, 1997, (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 375,000
shares issuable pursuant to options held by Mr. Foster.
(2) All shares issuable pursuant to options held by Mr. Smith that have
vested and are or will become exercisable within 60 days of June 10, 1997.
Excludes 230,000 shares issuable pursuant to options held by Mr. Smith.
(3) All shares issuable pursuant to options held by Mr. Weis that have
vested and are or will become exercisable within 60 days of June 10, 1997.
Excludes 30,000 shares issuable pursuant to options held by Mr. Weis.
(4) All shares issuable pursuant to options held by Mr. Widman that have
vested and are or will become exercisable within 60 days of June 10, 1997.
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 that have vested and are or will become exercisable within 60
days of June 10, 1997. 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 that have
vested and are or will become exercisable within 60 days of June 10, 1997.
(8) Consists of (i) 551,667 shares, and (ii) 125,000 shares issuable
pursuant to options held by Mr. Troy that have vested and are or will become
exercisable within 60 days of June 10, 1997. Excludes 125,000 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, and (ii) 1,230,765 shares held by Mr.
Rubin.
(10) Includes 375,000, 230,000, 30,000, 30,000, 50,000, and 50,000 shares
issuable pursuant to options held by Mr. Foster, Mr. Smith, Mr. Weis, Mr.
Widman, Mr. Kidde, and Mr. Leopold, respectively, that have vested and are or
will become exercisable within 60 days of June 10, 1997. Excludes 375,000,
230,000, 30,000, and 30,000 shares issuable pursuant to options held by Mr.
Foster, Mr. Smith, Mr. Weis, and Mr. Widman, respectively.
-100-
<PAGE> 106
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Set forth below is the name, age and principal occupation or employment
during the past five years of each executive officer and director of the
Company, each of whom is a citizen of the United States.
<TABLE>
<CAPTION>
Positions with the Company;
Name and Business Address Principal Occupation and Business Experience
- ------------------------- --------------------------------------------
<S> <C>
Steven L. Foster, age 48 Mr. Foster has been Chief Executive Officer of the Company since March 1991, Chairman of the Board
727 Atlantic Avenue, Suite 600 of the Company since March 1994 and a Director of the Company since April 1991. He is the
Boston, MA 02111 principal founder and co-creator of the Jillian's billiard club concept. He has been actively
involved in creating and operating entertainment clubs since 1979 and is co-owner of a Jillian's
billiard club in Boston, Massachusetts. In addition, Mr. Foster is co-founder of United Fuels
International, Inc., an international energy brokerage firm, and its affiliates. Mr. Foster
graduated magna cum laude from Boston University School of Law in 1978 with a Juris Doctor (J.D.)
degree.
Daniel M. Smith, age 35 Mr. Smith has been President, Chief Operating Officer and a Director of the Company since January
727 Atlantic Avenue, Suite 600 1995. Mr. Smith was most recently a Vice President of KFC (Kentucky Fried Chicken), where he was
Boston, MA 02111 employed from 1990 to 1995 and prior to that was employed as Vice President-European Operations of
Domino's Pizza during his tenure from 1986 to 1990. He received a Masters of Management (M.M.A.)
degree from Northwestern University.
Ronald Widman, age 32 Mr. Widman has been Vice President of Development of the Company since June 1995. Prior to
727 Atlantic Avenue, Suite 600 joining the Company, Mr. Widman was employed by KFC/Pepsico for over 11 years where he was most
Boston, MA 02111 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>
-101-
<PAGE> 107
<TABLE>
<CAPTION>
Positions with the Company;
Name and Business Address Principal Occupation and Business Experience
- ------------------------- --------------------------------------------
<S> <C>
Stephen M. Weis, age 31 Mr. Weis has been Vice President of Operations of the Company since June 1995. Mr. Weis was
727 Atlantic Avenue, Suite 600 Delivery Operations Manager of KFC from 1991 to 1995 where he oversaw the field operations of over
Boston, MA 02111 100 delivery restaurants. Prior to that, Mr. Weis was Senior Operations Supervisor of Domino's
Pizza in the Mid-Atlantic region from 1987 to 1991. He received a Bachelor of Arts (B.A.) degree
in marketing from The American University.
John L. Kidde, age 62 Mr. Kidde has been a Director of the Company since its inception. Mr. Kidde is currently the
727 Atlantic Avenue, Suite 600 President of KDM Development Corporation, an investment management firm. Mr. Kidde currently
Boston, MA 02111 serves as a member of the board of directors of The Futures Group of Washington, D.C.; Asset
Management Advisors, Inc., Palm Beach, Florida; International Resources Group, Washington, D.C.;
Australasia Inc., Cayman Islands; Continental Europe '90, Cayman Islands; International Agritech
Resources, New York; Juniper Partners, Inc., New York; and HFG Expansion Management Inc.,
Massachusetts. He currently serves as a trustee of Stevens Institute of Technology, Hoboken, New
Jersey; Open Space Institute, New York; and the Frost Valley YMCA, Montclair, New Jersey. He is a
general partner of Claflin Capital Management I-VII and The Opportunity Fund, both of Boston,
Massachusetts, and North American Venture Capital II, L.P. of Madison, New Jersey. From June 1968
through January 1988, Mr. Kidde was Vice President and Director of International Operations of
Kidde, Inc., a multi-industrial conglomerate.
Donald R. Leopold, age 46 Mr. Leopold has been a Director of the Company since April 1991. For the past six years, he has
727 Atlantic Avenue, Suite 600 been President of Game Plan, Inc., a Boston-area based marketing and strategic planning consulting
Boston, MA 02111 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>
-102-
<PAGE> 108
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.
-103-
<PAGE> 109
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) from continuing
operations $ (941,928) $ (393,731) $ (863,056) $ (932,529) $ 64,824
Net income (loss) $ (941,928) $ (393,731) $ (863,056) $ (904,282) $ 161,834
Per Share Data:
- --------------
Income (loss) from continuing
operations $ (0.10) $ (0.04) $ (0.11) $ (0.12) $ 0.01
Net income (loss) $ (0.10) $ (0.04) $ (0.11) $ (0.12) $ 0.02
Weighted average common
and common stock equivalent
shares outstanding 9,137,798 9,137,798 8,116,291 7,803,209 6,713,323
Balance Sheet Data:
- ------------------
Working capital (deficiency) $(1,934,076) $(1,209,476) $ (24,485) $ 454,879 $ 555,641
Total assets $ 8,704,461 $ 9,904,271 $7,847,472 $6,339,345 $5,352,088
Long-term obligations $ 2,525,348 $ 3,374,095 $1,568,171 $ 589,291 $ 406,266
Stockholders' equity $ 1,902,500 $ 2,844,428 $3,111,746 $3,600,298 $4,049,771
</TABLE>
-104-
<PAGE> 110
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.
-105-
<PAGE> 111
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 March 31, 1995.
<TABLE>
<CAPTION>
Number of Average Purchase
Company/Director/Officer Shares Purchased Price Paid
------------------------ ---------------- ----------
<S> <C> <C> <C>
Fourth Quarter Ended 3/31/95 Steven L. Foster, Chief 850,000 $0.25
Executive Officer, Chairman
of the Board and a Director
of the Company
First Quarter Ended 6/30/95 N/A N/A N/A
Second Quarter Ended 9/30/95 N/A N/A N/A
Third Quarter Ended 12/31/95 N/A N/A N/A
Fourth Quarter Ended 3/31/96 N/A N/A N/A
First Quarter Ended 6/30/96 N/A N/A N/A
Second Quarter Ended 9/30/96 N/A N/A N/A
Third Quarter Ended 12/31/96 N/A N/A N/A
Fourth Quarter Ended 3/31/97 N/A N/A N/A
</TABLE>
-106-
<PAGE> 112
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 and the Private Placement 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
Payments to Non-Continuing Warrant Holders and
holders of Former Management Company Options........ 28,000
Commission Filing Fee................................. 426
Stonebridge Fees and Expenses......................... 80,000
Placement Agent Expense............................... 300,000
Childs Transaction Fee................................ 100,000
Legal Fees............................................ 743,000
Accounting Fees....................................... 45,000
Solicitation Expenses................................. 10,000
Mailing Expense....................................... 15,000
Printing Costs........................................ 80,000
Miscellaneous......................................... 99,000
TOTAL.............................................. 4,077,580
</TABLE>
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.
-107-
<PAGE> 113
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.
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.
-108-
<PAGE> 114
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 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 or Kevin Troy, 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 warrants to purchase the same number of shares of common stock
of Holdings in the Corporate
-109-
<PAGE> 115
Formation. They consist of Kerry Breitbart, The Blind Trust UDT 3/26/93 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 and Ron
Widman.
"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.
"Engagement Letter" means the written agreement dated May 23, 1996
wherein the Company granted the Placement Agent an exclusive right to present
a merger proposal by September 30, 1996 acceptable to the Company designed to
raise $6,000,000 to $12,000,000 in gross proceeds through the private
placement of equity and/or subordinated debt securities to a limited number of
accredited investors.
"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.
-110-
<PAGE> 116
"Exchange Agreement" means the exchange agreement between Holdings and
the Exchange Agent which governs the Exchange Agent's duties and
responsibilities with respect to distribution of the Merger Payments and
related matters.
"First Union" means First Union Bank.
"FMV" means fair market value.
"Former Management Company Option/s" means those options that are not
Current Management Company Options.
"Foster Group" means Steven L. Foster, The Frank and Celia Foster Family
Trust, Steven Rubin and Kevin Troy.
"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.
-111-
<PAGE> 117
"Jillian 's - Tacoma" means Jillian's Billiard Club of Tacoma, Inc.
"Jillian's - Worcester" means Jillian's Billiard Club of Worcester, Inc.
"Letter of Transmittal" means a duly executed letter of transmittal that
each Non-Continuing Shareholder will be required to submit to the Exchange
Agent in order to receive the Merger Payment for each share of Other Common
Stock owned by each of them.
"License Agreement" means the agreement under which the Company will grant
Jillian's Boston a license to use the trade names, trademarks and service
marks of the Company.
"LTM" means the twelve month period ended June 30, 1995.
"Management Agreement" means the agreement under which Childs will
provide consulting and management advisory services to the Surviving Company
and Holdings and their subsidiaries.
"Merger" means the merger between the Company and Sub to be effected
subject to the terms and conditions of the Merger Agreement.
"Merger Agreement" means the proposed Agreement and Plan of Merger by and
among the Company, Holdings and Sub.
"Merger Payment" means the cash payment of $0.50 per share of Common
Stock, without interest.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Non-Continuing Shareholder" means any Shareholder that is not a
Continuing Shareholder.
"Non-Continuing Warrant Holder" means any warrant holder that is not a
Continuing Warrant Holder.
"On Cue" means On Cue Limited, a company operating four billiard club
restaurants in Canada.
"Option Agreement" means the agreement under which the owners of
Jillian's Boston will grant the Surviving Company an option to acquire
Jillian's Boston.
"Other Common Stock" means each share of Common Stock held by
Non-Continuing Shareholders which at the Effective Time will be converted into
the right to receive the Merger Payment.
-112-
<PAGE> 118
"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.
"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.
-113-
<PAGE> 119
"Representative" means the representative of, and attorney-in-fact for,
certain members of the Childs Group.
"Resignation Date" means March 21, 1996, the date Deloitte resigned as
principal accountant to the Company.
"Schedule 13E-3" means the Rule 13e-3 Transaction Statement on Schedule
13E-3 under the Exchange Act, and any amendments thereto, including exhibits
filed as a part thereof, that the Company has filed with the Commission.
"Shareholder/s" means the shareholders of the Company, and any of them.
"Special Meeting" means the special meeting, together with adjournments
thereof, at which the Shareholders will vote on the Proposal.
"Stockholders Agreement" means the stockholders agreement among the
Continuing Shareholders, Holdings, the Childs Group 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 & Trust Company.
"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.
-114-
<PAGE> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTE 2)
<TABLE>
<CAPTION>
===========================================================================================================================
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> 127
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> 128
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> 129
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> 130
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 preparation 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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued)
<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> 139
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued)
<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> 140
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES AND
EQUIPMENT
LEASES PAYABLE
(Continued)
<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> 141
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> 142
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> 143
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> 144
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) 1,595,000
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 2,593,984
================================================================================================
</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> 145
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> 146
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,
1,595,000 options remain outstanding.
The outstanding options are
exercisable at $.40 per share to the
extent vested, which is as follows:
1) 775,000 options were exercisable
F-27
<PAGE> 147
JILLIAN'S ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS
AND WARRANTS
(Continued) as of March 31, 1997, 2) 395,000
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> 148
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 INTERESTS
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> 149
JILLIAN'S ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTERESTS
(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 the 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
have 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 the
limited partners of the financial statements
of the Partnership for the 12 months ending
December 31, 1998.
F-30
<PAGE> 150
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTERESTS
(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 the 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> 151
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTERESTS
(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 the
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> 152
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTERESTS
(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> 153
JILLIAN'S ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MINORITY INTERESTS
(Continued)
Summary
Information
(Continued) The minority interest liability balance in
the accompanying consolidated balance sheets
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> 154
APPENDIX A
============================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE [ ], 1997
BY AND AMONG
JILLIAN'S ENTERTAINMENT HOLDINGS, INC.,
JILLIAN'S ENTERTAINMENT ACQUISITION CORPORATION
AND
JILLIAN'S ENTERTAINMENT CORPORATION
============================================================
<PAGE> 155
TABLE OF CONTENTS
<TABLE>
<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 Corpora-
tion.................................................................................... 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>
<PAGE> 156
<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>
ii
<PAGE> 157
<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
</TABLE>
iii
<PAGE> 158
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June [ ], 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
1
<PAGE> 159
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 Bylaws"), 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.
2
<PAGE> 160
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
3
<PAGE> 161
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
4
<PAGE> 162
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
5
<PAGE> 163
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)
6
<PAGE> 164
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
7
<PAGE> 165
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,
8
<PAGE> 166
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).
9
<PAGE> 167
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,
10
<PAGE> 168
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.
11
<PAGE> 169
(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)
12
<PAGE> 170
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-
13
<PAGE> 171
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;
14
<PAGE> 172
(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,
15
<PAGE> 173
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 below); 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
circumstances 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
16
<PAGE> 174
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
17
<PAGE> 175
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.
18
<PAGE> 176
(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,
19
<PAGE> 177
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 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.
20
<PAGE> 178
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
21
<PAGE> 179
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
22
<PAGE> 180
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
23
<PAGE> 181
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
24
<PAGE> 182
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;
25
<PAGE> 183
(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
26
<PAGE> 184
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
27
<PAGE> 185
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
28
<PAGE> 186
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
29
<PAGE> 187
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
30
<PAGE> 188
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.
31
<PAGE> 189
(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
32
<PAGE> 190
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:
33
<PAGE> 191
(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
34
<PAGE> 192
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 payable 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
35
<PAGE> 193
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 indemnification
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
36
<PAGE> 194
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;
37
<PAGE> 195
(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
<PAGE> 196
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 $100,000 (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
$1,730,000 (excluding the JWC Transaction Fee).
(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> 197
(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> 198
(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> 199
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> 200
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> 201
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> 202
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> 203
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> 204
PRELIMINARY COPY
JILLIAN'S ENTERTAINMENT CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
July __, 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 July __, 1997, at 10:00 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 June __, 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> 205
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
