<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
---------------------------
Commission File Number: 33-55254-05
JUMPIN' JAX CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 87-0485319
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3025 Harbor Lane North, Suite 315, Plymouth, Minnesota 55447
(Address of principal executive offices) (Zip Code)
(612) 550-1460
(Registrant's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
14,637,489 shares of Common Stock as of August 14, 1996
<PAGE>
INDEX
Part I FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 (unaudited) 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1996 and
1995 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and
1995 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan
of Operations 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 18
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jumpin' Jax Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
CURRENT ASSETS: 1996 1995
-------------- ----------------
<S> <C> <C>
Accounts receivable $194 253
Certificate of deposit 50 50
Inventories 207 323
Other current assets 38 76
-------------- ----------------
TOTAL CURRENT ASSETS 489 702
Property and equipment, net 3,063 3,136
Other assets 216 87
-------------- ----------------
TOTAL OTHER ASSETS 3,279 3,223
============== ================
TOTAL ASSETS $3,768 $3,925
============== ================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Bank overdraft 120 38
Accounts payable 2,102 1,956
Current portion of long term debt 1,417 1,141
Current portion of notes payable, related parties 53 54
Sales taxes payable 2,180 2,137
Accrued expenses 1,097 1,030
Deposits on account 373 479
Landlord Advances 89 89
-------------- ----------------
TOTAL CURRENT LIABILITIES 7,431 6,924
Long term debt 116 145
Notes payable, related parties 16 19
Landlord advances 695 717
Reserve for additional investment in Playpal 380 667
============== ================
TOTAL LIABILITIES 8,638 8,472
============== ================
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares
authorized, 14,395,820 and 12,967,395 issued and
outstanding at March 31, 1996 and December 31, 1995,
respectively 14 13
Additional paid-in capital 5,500 4,993
Common stock issuable 2 2
Accumulated Deficit (10,386) (9,555)
-------------- ----------------
TOTAL SHAREHOLDERS' EQUITY (4,870) (4,547)
============== ================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,768 $3,925
============== ================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Condensed Consolidated Statement of Operations
(Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
----------- ------------
<S> <C> <C>
Operating revenues
Store operating revenues 245 190
Equipment sales 1,529 352
----------- ------------
Total revenues 1,774 542
Store operating and sales costs
Cost of store operations 245 317
Cost of equipment sales 1,446 297
----------- ------------
Gross margin 83 (72)
Selling, general and administrative expense 833 406
Interest expense (income) 81 25
----------- ------------
Net loss (831) (503)
=========== ============
Loss per share ($0.06) ($0.06)
=========== ============
Number of shares used to compute per
share amount 13,566,855 8,206,724
=========== ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1996 March 31, 1995
---------------- --------------
<S> <C> <C>
Cash Flows from operating activities:
Net income (loss) $ (831) $ (503)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 73 23
Amortization of landlord advances (22) --
Interest expense on sales tax liability 43 --
Changes in operating assets and liabilities:
Accounts receivable 58 38
Inventories 115 (19)
Other current assets 37 (6)
Accounts payable 369 436
Accrued expenses and other current liabilities (39) (110)
---------- ----------
Net cash provided by (used in) operating activities (197) (141)
---------- ----------
Cash flows from investing activities:
Collection of amount advanced to shareholder -- 100
Investment in Playpal (288) (210)
Purchase of equipment -- (441)
Increase in other assets (128) 4
---------- ----------
Net cash provided by (used in) investing activities (416) (547)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock 510 758
Proceeds from bridge debt 82 --
Principal payment on debt and notes payable - related parties (61) (70)
Increase (decrease) in bank overdraft 82 (37)
---------- ----------
Net cash provided by financing activities 613 651
---------- ----------
Net decrease in cash 0 (37)
Cash beginning of period 0 37
Cash end of period 0 0
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The financial statements included in this Form 10-QSB have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995, as previously filed with
the Securities and Exchange Commission.
The financial statements presented herein as of March 31, 1996 and
for the three months ended March 31, 1996 and 1995 reflect, in the opinion
of management, all adjustments necessary for a fair presentation of
financial position and the results of operations for the periods presented.
The results of operations for the periods presented are not necessarily
indicative of operating results to be expected for the full year.
2. Organization and Business Acquisitions
The Company was originally incorporated in April 1988 under the
name Four Star Ranch, Inc. The Company initially was formed without any
specific business plan, other than to seek potential business opportunities
for acquisition, and was essentially inactive until 1994.
In November 1994, as the first step of the December 1994
acquisition of the net assets of GymMania Venture Capital Corporation
("GVCC"), a predecessor business discussed below, the Company issued an
aggregate of 6,708,394 shares of Common Stock to certain investors who held
the majority voting common stock control of GVCC in exchange for $30,772 in
stock subscription and a $180,063 note receivable from GVCC and changed its
business plan to that of developing indoor fun centers. In addition, as the
first step of the December 1994 acquisition of Gymania Corporation
("Gymania"), another predecessor business discussed below, the Company
entered into a stock purchase agreement with shareholders of Gymania to
issue 450,868 shares of the Company's Common Stock at $.0074 per share and
register such shares. In December 1994, the Company changed its corporate
name to Jumpin' Jax Corporation.
<PAGE>
On December 30, 1994, the Company acquired substantially all of
the assets of GVCC, a corporation existing under the laws of the Province
of Ontario, Canada for no cash consideration. The transaction was a reverse
acquisition whereby certain shareholders of GVCC became the controlling
shareholders of the Company. The principal asset of GVCC was an advance
receivable of approximately $492,000 from Gymania. GVCC was formed in June
1994 to finance the development of indoor fun centers.
Also on December 30, 1994, the Company, through its wholly-owned
retail subsidiary, Jumpin' Jax Entertainment, Inc., ("Jumpin' Jax
Entertainment") acquired substantially all of the assets (totaling
$512,361) of Gymania in exchange for assuming substantially all of
Gymania's obligations (totaling $1,012,187), including the advances payable
of approximately $492,000 to GVCC. During 1994, prior to the acquisition of
Gymania, the Company advanced $159,288 to Gymania. Gymania was formed in
1991 and had developed and was operating, on a limited basis, indoor fun
centers since its inception.
The acquisitions of GVCC and Gymania were recorded at the
historical cost of such predecessor businesses, as all such businesses were
effectively under common control through common shareholders and related
debt transactions as described above.
On March 13, 1995, the Company issued 351,000 shares of Common
Stock valued at $1,033,815 and paid $210,000 of cash at closing, and agreed
to pay an additional $100,000 90 days after closing, in exchange for all of
the issued and outstanding capital stock of Playpal, Inc. of Rockledge,
Florida ("Playpal"). Playpal is a manufacturer of modular soft-play
equipment for indoor fun centers and playgrounds. On or about the same
time, the Company established Playpal Sales Corporation, a wholly-owned
subsidiary formed to distribute those products manufactured by Playpal,
Inc.. On April 24, 1996, Playpal, Inc. filed for protection under Chapter
11 of the U.S. Bankruptcy Code.
The acquisition of Playpal, Inc. was accounted for as a purchase
and, accordingly, the results of Playpal's operations since March 14, 1995
have been included in the financial statements, notes, and text contained
in this report.
Jumpin' Jax Entertainment subleases space for the operation of
two existing centers from a related party, Jumpin' Jax Corporation, a
Minnesota Corporation ("JJC"), who leases the space from a mall operator.
Due to a lack of working capital, JJC filed for Chapter 11 bankruptcy
protection on July 3, 1996. It is probable that this case will convert into
a Chapter 7 liquidation proceeding. Jumpin' Jax Entertainment intends to
cease all operations of the two centers by August 31, 1996 and file for
bankruptcy protection shortly thereafter.
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Notes to Condensed Financial Statements (continued)
(Unaudited)
The Company, through its partially-owned subsidiaries Children's
Choice Learning Centers, a Nevada corporation ("CCLC"), JJAX Corp., a
Nevada corporation ("JJAX") and JJAX Entertainment, Inc., a Nevada
corporation ("JJAXE"), is exploring opportunities for engaging in the
business of constructing and operating indoor destination entertainment and
child care centers (the "Entertainment and Child Care Centers"), in
conjunction with strategic partners (primarily in the casino industry), as
a revenue enhancer for such partners.
3. Other Financial Statement Data:
Inventories:
Inventories, which consist principally of food and retail
merchandise for the Company's indoor fun centers and of modular soft-play
parts for the Company's manufacturing subsidiary, are stated at the lower
of cost or market, with cost determined on the first-in, first-out method.
Inventories at March 31, 1996 and December 31, 1995 consisted of the
following:
March 31, December 31,
1996 1995
------------- --------------
Food and retail merchandise $ 17 $ 18
Raw material 88 127
Work-in-process 102 178
---- ----
$207 $323
==== ====
4. Shareholders' Equity
During the period from January 1, 1996 through March 31, 1996, the
Company issued 1,428,425 shares of Common Stock sold through various
private placements for the net proceeds of approximately $509,159, after
deducting discounts and commissions associated with the private placements.
5. Industry Segment Information
The Company's wholly-owned Jumpin' Jax Entertainment, Inc.
subsidiary owned and operated two indoor family fun centers in the
Minneapolis-St. Paul metropolitan area. The Company's wholly-owned Playpal
subsidiary custom designed, manufactured, and assembled at customer sites
modular soft-play equipment for customers worldwide in the fast food and
family entertainment industries. Since the Company's acquisition of
Playpal, the Company's wholly-owned Playpal Sales Corporation subsidiary
acted as the U.S. distributor of Playpal's products.
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Notes to Condensed Financial Statements (continued)
(Unaudited)
6. Legal Proceedings
No material legal proceedings exist against the Company, its
officers or directors except as follows:
In December 1994, PlayPal was served with a third party
complaint relating to an alleged personal injury claim for unspecified
damages by a patron of a fun center operated by a Playpal customer.
Playpal's insurance carrier has agreed to defend the matter. The bankruptcy
of Playpal has stayed the action, and in view of the conversion of the
Chapter 11 proceeding to a liquidation proceeding under Chapter 7, such
legal proceedings will be terminated.
In 1994, Playpal was served with a complaint alleging
personal injury suffered by a customer of an indoor fun center containing a
Playpal modular soft-play unit. Playpal's insurance carrier at the time of
the incident has refused to defend or pay the claim. Playpal believes that
liability, if any, lies with the center operator as a result of the facts
and circumstances. The bankruptcy of Playpal has stayed the action, and in
view of the conversion of the Chapter 11 proceeding to a liquidation
proceeding under Chapter 7, such legal proceedings will be terminated.
In October 1995, the Company was served with a complaint
by a real estate brokerage firm seeking payment of $29,000 for a commission
on the sublease of the space formerly occupied by Gymania Corporation. The
Company executed a confession of judgment for such amount and agreed to
repay the obligation, with interest, in quarterly installments beginning
November 30, 1995.
In September 1995, Jumpin' Jax Entertainment was served
with a complaint by an advertising agency seeking payment of $44,000 for
unpaid advertising, publication, and printing services. In January 1996,
the Company agreed to repay the obligation over an eleven month period and
executed a confession of judgment for such amount; the Company has made
some, but not all of the payments.
In August 1995, the former President of Playpal commenced
suit against Playpal and the Company seeking specific performance,
injunctive relief, and damages for, among other matters, an alleged breach
of the stock purchase agreement between the Company and the former
President. In November 1995, the claim was settled by the Company's
agreement to pay him $120,000 in two installments of $60,000 each prior to
February 1996. The first payment of $60,000 was made in December 1995,
however Playpal did not pay the balance. Summary judgment was granted in
March 1996 against Playpal and the Company in the amount of approximately
$65,000. The bankruptcy of Playpal has stayed the action, and in view of
the conversion of the Chapter 11 proceeding to a liquidation proceeding
under Chapter 7, such legal proceedings will be terminated.
In August 1995, Jumpin' Jax Entertainment was served with
a complaint by a sign construction company which installed signage at the
Company's Maplewood and Burnsville, Minnesota indoor fun centers. In
January, the Company agreed to repay the
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Notes to Condensed Financial Statements (continued)
(Unaudited)
obligation over an eleven month period and executed a confession of judgment for
such amount; the Company has made some, but not all of the payments.
In December 1995, Playpal was served with a complaint by
a transportation company seeking payment of $128,000 for unpaid shipping
charges. Plaintiff was awarded summary judgment in the amount of $140,279
in April 1996. The bankruptcy of Playpal has stayed the action, and in view
of the conversion of the Chapter 11 proceeding to a liquidation proceeding
under Chapter 7, such legal proceedings will be terminated.
In November 1995, a Statement of Claim was issued by a
shareholder of the Company alleging breach of contract by the Company in
connection with a stock purchase agreement. The Statement of Claim was not
provided to the Company until January 1996. The Company does not believe it
was a party to the contract allegedly breached and is vigorously defending
against this claim.
In April 1996, a complaint was filed against the Company
by William Auer seeking repayment of a note and interest in the amount of
$40,000. The Company has filed an answer to the complaint.
In May 1996, a complaint was filed against the Company by
a supplier of materials to Playpal. The complaint alleged that the Company
had guaranteed the obligations of Playpal to such supplier. The complaint
seeks $101,195 in damages. The Company is currently defending the action.
The bankruptcy of Playpal has stayed the action, and in view of the
conversion of the Chapter 11 proceeding to a liquidation proceeding under
Chapter 7, such legal proceedings will be terminated.
In July 1996, a complaint was filed against the Company
by a supplier of materials to Playpal seeking payment under a guaranty
agreement provided by the Company for the collection of Playpal's
obligations to this supplier. The complaint seeks $48,579. The Company is
currently defending the action.
The Company has received claims for indemnification
pursuant to certain provisions of a stock purchase agreement, under which
the Company allegedly agreed to indemnify certain individuals for sales tax
liabilities in connection with certain sales tax owed by Playpal. To date,
claims totaling $274,000 have been made. The Company believes that it is
not required to provide such indemnification and intends to defend such
action if funds are available for such purpose.
In July 1996, a complaint was filed against Jumpin' Jax
Entertainment by a supplier of equipment to the existing Centers seeking
repayment of a note in the amount of $90,000. Jumpin' Jax Entertainment has
not filed a defense to this claim and is attempting to renegotiate the
terms of the note.
<PAGE>
Jumpin' Jax Corporation and Subsidiaries
Notes to Condensed Financial Statements (continued)
(Unaudited)
In June 1996, a notice of eviction was served upon JJC in
connection with its leaseholds for the Centers. The action has been stayed
under the provisions of the Chapter 11 bankruptcy proceeding filed by JJC.
In May 1995, Jumpin' Jax Entertainment entered into a
ten-year lease agreement, guaranteed by the Company, for space located in a
shopping center in Green Bay, Wisconsin. Jumpin' Jax Entertainment has
informed the landlord that it will not be occupying the space and, in
September 1995, the landlord instituted an action against the Company for
breach of contract. In January 1996, a motion for summary judgment on the
issue of liability was granted to the landlord. In June 1996, the landlord
filed a motion for summary judgment as to the issue of damages and the
Company does not currently possess sufficient funds to retain counsel to
defend the action; accordingly the Company believes that damages will be
awarded in connection with the action.
In January 1996, Jumpin' Jax Entertainment entered into a
ten-year lease agreement for space located in a shopping center in
Nashville, Tennessee. Jumpin' Jax Entertainment does not have the funds
required to construct and equip the facility and has informed the landlord
that it will not be able to begin this process unless working capital funds
can be obtained, which is highly improbable. Therefore, the Company does
not intend to continue with respect to this project although it is liable
for amounts under this lease.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is a discussion and analysis of the Company's
unaudited historical consolidated results of operations for the three
months ended March 31, 1996 compared with both the Company's unaudited
historical results of operations for the three months ended March 31, 1995
and the pro forma unaudited results of operations of the Company and
Playpal, Inc. (together referred to as the "Predecessor Business") for the
three months ended March 31, 1995 as if the acquisition of Playpal had
occurred on January 1, 1995.
The following table sets forth selected pro forma operating
statement data for the Company and pro forma operating data for the
Predecessor Business.
($000s)
---------------------------------------
Three Months Ended Three Months Ended
March 31, 1996 March 31,1995
----------------- ---------------------
The
The The Predecessor
Company Company Businesses
Historical Historical Pro-Forma
---------- ---------- ----------
Revenues
Store operating revenue $ 245 $ 190 $ 190
Equipment sales 1,529 352 1,148
------- ------- -------
Total revenues 1,774 542 1,338
Store Operating and Sales Costs
Cost of store operations 245 317 317
Cost of equipment sales 1,446 297 1,300
------- ------- -------
Gross Margin 83 (72) (279)
Other Expenses
Selling, General and
Administrative Expenses 833 406 609
Interest Expense 81 25 90
------- ------- -------
Net Loss $ (831) $ (503) $ (978)
======= ======= =======
<PAGE>
Comparison of the Company's Unaudited Historical Results of Operations for
the Three Months ended March 31, 1996 and 1995
Playpal
On March 13, 1995, the Company acquired all of the stock of Playpal for an
aggregate cost of $1,588,000. The results of operations for Playpal are
included in the financial statements from March 14 to present.
For the three months ended March 31, 1996, the Company recorded $1,529,000
of equipment sales, principally of Playpal modular soft-play units. This
increased substantially from the prior year, as the 1995 period included
only 18 days of Playpal operations. The cost of the play units sold during
the first three months of 1996 was $1,446,000, or 94.6% of sales, up from
84.4% in the prior year. The depressed margins in both periods were
directly the result of Playpal's lack of working capital; due to a lack of
cash and in an effort to regain and retain customer confidence, efforts
were made to complete job installations on a timely basis. Materials would
be shipped to job sites in partial loads, thus requiring a second shipment
(and increasing freight costs) for completion. Installation crews would
have to make multiple visits to job sites as materials would arrive, and
ultimately work overtime in order to meet the customer's deadlines, greatly
increasing the total cost of the project. Playpal believed that the
additional costs incurred in the short-term would be more than offset by
the impact of future sales once it was able to obtain a substantial capital
infusion.
In addition, Playpal incurred $678,000 of selling, general, and
administrative expenses during the first quarter of fiscal 1996, $26,000 of
depreciation expense, and $68,000 of interest expense, primarily as a result of
accruals on the $2.1 million sales tax liability. This resulted in a net loss
for Playpal of $689,000. As outlined below, the Company's statement of
operations for the three months ended March 31, 1996, reflects $402,000 of this
loss.
On April 24, 1996, due to a lack of working capital and an inability
to arrange conventional financing, Playpal filed for Chapter 11 protection
under the U.S. Bankruptcy Code. In accordance with GAAP, the Company
recorded an accrual for Playpal's 1996 losses which it had funded
subsequent to year end totalling $667,200 ($287,000 of which were
experienced in the three months ended March 31, 1996). As of August 21,
1996, the Company intends to begin the process of converting such Chapter 11
proceeding to liquidation under Chapter 7. No adjustments have been
recorded to reflect the fact that the assets of Playpal will be liquidated
and the liabilities of Playpal will be compromised through the bankruptcy
proceedings.
Jumpin' Jax Entertainment
Until August 1996, Jumpin' Jax Entertainment was the owner/operator of
the Company's two existing family entertainment centers which opened for
business in February 1995. The Company's financial
<PAGE>
results reflect the operation of these two centers during the three months
ended March 31, 1996 as compared to 1.5 months of operation of these two
locations and 2.5 months of operations of Gymania's single facility during
the three months ended March 31, 1995. During the three months ended March
31, 1996, Jumpin' Jax Entertainment had total store revenues of $245,000
with equivalent associated costs of store operations, resulting in
breakeven results at the store level; this compared favorably with the
$127,000 loss experienced at the store level during the three months ended
March 31, 1995 (which could be attributed mostly to the opening and closing
of the various locations). The inability of these locations to generate
profits to cover overhead costs and provide an adequate return, combined
with the fact that Jumpin' Jax Entertainment has been unable to enter into
a strategic alliance which would enable it to attract capital has resulted
in this entity becoming insolvent. In addition, a related party which
leased the space from the mall operator utilized by the two Centers and
then subleased the space to Jumpin' Jax Entertainment filed for Chapter 11
bankruptcy protection in July 1996. This case is expected to convert to a
Chapter 7 liquidation. Jumpin' Jax Entertainment intends to cease all
operations of the two centers by August 31, 1996 and file for bankruptcy
protection shortly thereafter.
In addition to Center operating costs, Jumpin' Jax Entertainment
incurred $178,000 in selling, general and administrative costs during the
first three months of 1996 related to the development, management, and
attempted growth of the operations. Jumpin' Jax Entertainment also recorded
depreciation expense of $47,000 and interest expense of $13,000 during this
period, resulting in a net loss of $238,000. This compares favorably to the
$403,000 loss experienced during the same period of 1995.
In addition to the operations of Playpal and Jumpin' Jax
Entertainment, the Company employs a small senior management staff to
coordinate and manage the overall affairs of the corporation. This group
incurred $191,000 of costs on the Company's behalf during the three months
ended March 31, 1996, consisting primarily of legal and professional fees
related to being a publicly held corporation, salaries and benefits, and
various travel related costs arising from the development and growth of a
multi-location entity. This has increased from $77,000 during the same
period in 1995 due to increased business development costs and increasing
legal costs resulting from litigation related to the Company's lack of
working capital.
Comparison of the Company's Historical Results of Operations for the Three
months ended March 31, 1996 to the Predecessor Businesses' Unaudited Pro
Forma Results of Operations for the Three months ended March 31, 1995
The pro forma results of operations for the three months ended March 31,
1995 differ from the Company's historical results of operations due to the
inclusion in the pro forma statements of the results of Playpal, Inc. for
the 2.5 months prior to the March 13, 1995 acquisition by the Company.
<PAGE>
During the three months ended March 31, 1996, the Company's revenues
increased $436,000 (32.6%) to $1,774,000 from $1,338,000 during the
proforma period a year earlier. This increase was due to improved sales in
both segments of the Company, but primarily at Playpal, where sales rose
$381,000 (33.2%). Gross margin improved to $83,000 from a loss of $279,000
in the prior year, also as a result of improved results in both segments.
Increased overhead costs associated with the addition of senior management
personnel and higher business development costs resulted in a net loss for
the three months ended March 31, 1996 of $831,000 as compared to a loss of
$978,000 a year earlier.
Liquidity and Capital Resources
The Company sustained substantial losses in the fiscal three months ended
March 31, 1996 totaling $831,000. In addition, the Company's working
capital deficit at March 31, 1996 was $6,942,000. The Company also had a
stockholder's deficit of $4,870,000 at March 31, 1996. The Company
continued to sustain substantial losses in the three month period ending
June 30, 1996 and there is substantial doubt as to whether the Company can
continue as a going concern. In April 1996, Playpal filed a petition for
protection as a debtor-in-possession under Chapter 11 of the federal
bankruptcy laws, which is in the process of converting to a full
liquidation under Chapter 7 of the federal bankruptcy laws. Such event will
likely result in the filing of a petition in the near future by Playpal
Sales for liquidation under Chapter 7 of the bankruptcy laws. In addition,
a related party which had leased the mall space occupied by the two Centers
operated by Jumpin' Jax Entertainment has filed for Chapter 11 protection
under federal bankruptcy laws, with a conversion to Chapter 7 liquidation
likely. This will result in a cessation of all operations of the two
centers and the filing of bankruptcy by Jumpin' Jax Entertainment. At that
point, all of the Company's current sources of revenue will cease to exist.
During the first quarter of fiscal 1996, the Company raised $510,000
through private placements of equity and $82,000 through debt financings.
The Company also generated $540,000 net by increasing its working capital
deficit primarily in the Playpal subsidiaries. As of March 31, 1996, the
Company had expended all of these funds and was left with no cash reserves.
Of the $592,000 of cash raised in the capital markets, $288,000 was
invested by the Company into the Playpal operations in an effort to restore
the business to profitability and $128,000 was expended by the Company
toward developing future Jumpin' Jax Entertainment locations. The
remainder, along with the $540,000 generated through an increased working
capital deficit, was utilized to reduce its principal obligations on debt
($61,000) and to fund deficit operations. This left the Company in an
overdraft position as of March 31, 1996.
Since March 31, the Company has raised an additional $720,000, all of which
has been expended to fund deficit operations and service existing
obligations
Management's current plan is to cease primarily all of the existing
operations of the Company with the exception of JJAX, JJAXE, and CCLC.
Although management is currently seeking additional funding for such
entities, to date they have received no binding commitments for
<PAGE>
any such funding, and in the event that working capital is not received
within the near future, it is likely that the Company will be required to
cease all operations.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
No material legal proceedings exist against the Company,
its officers or directors except as follows:
In December 1994, PlayPal was served with a third party
complaint in the 24th Judicial District Court, Jefferson Parish, Louisiana,
relating to an alleged personal injury claim for unspecified damages by a
patron of a fun center operated by a Playpal customer. Playpal's insurance
carrier has agreed to defend the matter. The bankruptcy of Playpal has
stayed the action, and in view of the conversion of the Chapter 11
proceeding to a liquidation proceeding under Chapter 7, such legal
proceedings will be terminated.
In 1994, Playpal was served with a complaint in Suffolk
County (New York) Supreme Court alleging personal injury suffered by a
customer of an indoor fun center containing a Playpal modular soft-play
unit. Playpal's insurance carrier at the time of the incident has refused
to defend or pay the claim. Playpal believes that liability, if any, lies
with the center operator as a result of the facts and circumstances. The
bankruptcy of Playpal has stayed the action, and in view of the conversion
of the Chapter 11 proceeding to a liquidation proceeding under Chapter 7,
such legal proceedings will be terminated.
In October 1995, the Company was served with a complaint
in Hennepin County (Minnesota) District Court by a real estate brokerage
firm seeking payment of $29,000 for a commission on the sublease of the
space formerly occupied by Gymania Corporation. The Company executed a
confession of judgment for such amount and agreed to repay the obligation,
with interest, in quarterly installments beginning November 30, 1995.
In September 1995, Jumpin' Jax Entertainment was served
with a complaint in Hennepin County (Minnesota) District Court by an
advertising agency seeking payment of $44,000 for unpaid advertising,
publication, and printing services. In January 1996, the Company agreed to
repay the obligation over an eleven month period and executed a confession
of judgment for such amount; the Company has made some, but not all of the
payments.
In August 1995, the former President of Playpal commenced
suit against Playpal and the Company in Brevard County (Florida) Circuit
Court seeking specific performance, injunctive relief, and damages for,
among other matters, an alleged breach of the stock purchase agreement
between the Company and the former President. In November 1995, the claim
was settled by the Company's agreement to pay him $120,000 in two
installments of $60,000 each prior to February 1996. The first payment of
$60,000 was made in December 1995, however Playpal did not pay the balance.
Summary judgment was granted in March 1996 against Playpal and the Company
in the amount of approximately $65,000. The bankruptcy of Playpal has
stayed the action, and in view of the conversion of the Chapter 11
proceeding to a liquidation proceeding under Chapter 7, such legal
proceedings will be terminated.
In August 1995, Jumpin' Jax Entertainment was served with
a complaint in Hennepin County (Minnesota) District Court by a sign
construction company which installed signage at the Company's Maplewood and
Burnsville, Minnesota indoor fun centers. In January,
<PAGE>
the Company agreed to repay the obligation over an eleven month period and
executed a confession of judgment for such amount; the Company has made
some, but not all of the payments.
In December 1995, Playpal was served with a complaint in
Brevard County (Florida) Circuit Court by a transportation company seeking
payment of $128,000 for unpaid shipping charges. Plaintiff was awarded
summary judgment in the amount of $140,279 in April 1996. The bankruptcy of
Playpal has stayed the action, and in view of the conversion of the Chapter
11 proceeding to a liquidation proceeding under Chapter 7, such legal
proceedings will be terminated.
In November 1995, a Statement of Claim was issued in the
Ontario (Canada) Court of Justice by a shareholder of the Company alleging
breach of contract by the Company in connection with a stock purchase
agreement. The Statement of Claim was not provided to the Company until
January 1996. The Company does not believe it was a party to the contract
allegedly breached and is vigorously defending against this claim.
In April 1996, a complaint was filed against the Company
in Hennepin County (Minnesota) by William Auer seeking repayment of a note
and interest in the amount of $40,000. The Company has filed an answer to
the complaint.
In May 1996, a complaint was filed against the Company in
Hennepin County (Minnesota) District Court by a supplier of materials to
Playpal. The complaint alleged that the Company had guaranteed the
obligations of Playpal to such supplier. The complaint seeks $101,195 in
damages. The Company is currently defending the action.
In July 1996, a complaint was filed against the Company
in Orange County (Florida) by a supplier of materials to Playpal seeking
payment under a guaranty agreement provided by the Company for the
collection of Playpal's obligations to this supplier. The complaint seeks
$48,579. The Company is currently defending the action.
The Company has received claims for indemnification
pursuant to certain provisions of a stock purchase agreement, under which
the Company allegedly agreed to indemnify certain individuals for sales tax
liabilities in connection with certain sales tax owed by Playpal. To date,
claims totaling $274,000 have been made. The Company believes that it is
not required to provide such indemnification and intends to defend such
action if funds are available for such purpose.
In July 1996, a complaint was filed against Jumpin' Jax
Entertainment in Hennepin County (Minnesota) District Court by a supplier
of equipment to the existing Centers seeking repayment of a note in the
amount of $90,000. Jumpin' Jax Entertainment has not filed a defense to
this claim and is attempting to renegotiate the terms of the note.
In June 1996, a notice of eviction was served upon JJC in
connection with its leaseholds for the Centers. The action has been stayed
under the provisions of the Chapter 11 bankruptcy proceeding filed by JJC.
In May 1995, Jumpin' Jax Entertainment entered into a
ten-year lease agreement, guaranteed by the Company, for approximately
15,000 square feet of space located in a shopping
<PAGE>
center in Green Bay, Wisconsin. Base rent is approximately $12,000 per
month and began accruing in September 1995. The lease also requires
additional rent of 12% of gross sales in excess of $925,000 plus 3% of
gross sales in excess of $1,100,000 per lease year. Jumpin' Jax
Entertainment has informed the landlord that it will not be occupying the
space and, in September 1995, the landlord instituted an action against the
Company for breach of contract. In January 1996, a motion for summary
judgment on the issue of liability was granted to the landlord. In June
1996, the landlord filed a motion for summary judgment as to the issue of
damages and the Company does not currently possess sufficient funds to
retain counsel to defend the action; accordingly the Company believes that
damages will be awarded in connection with the action.
In January 1996, Jumpin' Jax Entertainment entered into a
ten-year lease agreement for approximately 20,000 square feet of space
located in a shopping center in Nashville, Tennessee. Base rent is
approximately $13,000 per month for the first five years of the lease and
approximately $15,000 per month for the second five years of the lease and
began accruing in July 1996. The lease also requires additional rent of 6%
of gross sales in excess of $4,013,000 per lease year for the first five
years of the lease and in excess of $4,514,625 for the second five years of
the lease. Jumpin' Jax Entertainment does not have the funds required to
construct and equip the facility and has informed the landlord that it will
not be able to begin this process unless working capital funds can be
obtained, which is highly improbable. Therefore, the Company does not
intend to continue with respect to this project although it is liable for
amounts under this lease.
ITEM 5. Other Information
From year end through August 20, 1996, the Company raised an additional
$1,312,222, all of which has been expended to fund deficit operations and
service existing obligations. Such amounts include a private placement in
December 1995 and January 1996 (the "Private Placement"), in which the
Company sold a total of 33.5 units for $837,500. Each unit, which was
purchasable for $25,000, contained such number of shares of Common Stock and
warrants to purchase Common Stock as equaled the purchase price of the unit
divided by the lesser of (i) $1.00 or (ii) 67% of the closing high bid price
(the "Market Price") of the Common Stock on the day immediately prior to the
effective date of a registration statement in which the Common Stock and
warrants are included. The warrants were made exercisable at a price of equal
to the lesser of $1.00 or the Market Price, for a period of two years from
the effective date. In addition, the Company was obligated to issue an
additional unit for each unit issued in the Private Placement in the event
that the Company failed to register the Common Stock and warrants by May 31,
1996 and issue an additional unit for each unit issued in the Private
Placement in the event that the Company's Common Stock was not listed on
NASDAQ by May 31, 1996. The Company did not file a registration statement in
connection with the Private Placement and its Common Stock was not listed on
NASDAQ; accordingly, investors in the Private Placement are entitled to
receive (and were issued) at least 2,512,500 shares of Common Stock and
warrants to purchase an additional 2,512,500 shares of Common Stock. The
placement agent received commissions totaling $83,750 and a non-accountable
expense allowance equal to $25,125. The net proceeds were utilized by the
Company for working capital purposes.
<PAGE>
In May 1996, the Company also engaged in a private placement offering
(the "May Offering") of 12.5 units for $625,000. Each unit, which was
purchasable for $50,000, consisted of (1) a $50,000 principal amount 10%
subordinated promissory note due on the earlier of (a) the closing date of
any public debt or equity offering by the Company (the "Public Offering")
or (b) one year from the initial closing date of the May Offering and (2)
the issuance on the effective date of a registration statement filed with
the Securities and Exchange Commission of (a) 30,000 shares of Common Stock
and (b) a total of 300,000 warrants to purchase shares of Common Stock
which warrants were to be identical to any warrants to be issued to the
public in connection with any secondary public offering. In the event that
the Company does not complete a secondary public offering by April 30,
1997, the investor is to be issued, on April 30, 1997 (a) 210,000 shares of
Common Stock; (b) warrants to purchase 1,050,000 shares of Common Stock,
exercisable at $.75 per share for a period of five years from the initial
closing; and (c) warrants to purchase 1,050,000 shares of Common Stock,
exercisable at a price of $1.00 per share for a period of five years from
the initial closing. The securities contain certain piggyback registration
rights.
All proceeds of the 1996 offerings have been used by the Company for
working capital purposes.
Management's current plan is to cease primarily all of the operations
of the Company with the exception of JJAX, JJAXE, and CCLC. Although
management is currently seeking additional funding for such entities, to
date they have received no binding commitments for any such funding, and in
the event that working capital is not received within the near future, it
is likely that the Company will be required to cease all operations.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or l5(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
JUMPIN' JAX CORPORATION
By: /s/ Richmond W. A. Chandler
-----------------------------------
Richmond W. A. Chandler
Chairman and Chief Executive Officer
(Principal Executive and Financial
Officer)
