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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 33-5525405
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Jumpin' Jax Corporation
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(Name of Small Business Issuer in Its Charter)
Nevada 87-0485319
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3025 Harbor Lane North. Suite 315. Plymouth. Minnesota
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(Address of Principal Executive Offices) (Zip Code)
(612) 550-1460
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: [ x ]
Common Stock, par value $.001 per share
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(Title of class)
[Cover page 1 of 2 pages]
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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.
Yes No X
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ].
State issuer's revenues for its most recent fiscal year:
$7,039,134
State the aggregate market value of the voting stock held by
non-affiliates of the issuer computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days. (See definition of affiliate in Rule 12b-2 of the
Exchange Act.): $955,546.75
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
[Cover page 2 of 2 pages]
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PART I
ITEM 1. Description of Business.
General
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From March 1995 until August 1996, Jumpin' Jax Corporation, a Nevada
corporation ("Jumpin' Jax"), through its wholly-owned subsidiaries, Playpal,
Inc., a Florida corporation ("Playpal") and Playpal Sales Corporation, a
Minnesota corporation ("Playpal Sales"), was primarily engaged in the business
of manufacturing and selling soft modular-play equipment. In addition, through
its wholly-owned subsidiary Jumpin' Jax Entertainment, Inc., a Minnesota
corporation ("Jumpin' Jax Entertainment") and a related company, Jumpin' Jax
Corporation, a Minnesota corporation ("JJC"), the Company operated two indoor
family entertainment centers (the "Centers"), both of which are located in the
Minneapolis-St. Paul metropolitan area since February 1995 and provide
activities for the entire family emphasizing fun, safety, and fitness. In
addition, JJAX Corp., a Nevada corporation ("JJAX") and JJAX Entertainment,
Inc., a Nevada corporation ("JJAXE"), (both partially owned subsidiaries of the
Company) and Children's Choice Learning Centers, a Nevada corporation ("CCLC"),
and a wholly-owned subsidiary of JJAXE, have recently been formed to explore
opportunities to engage 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. Jumpin' Jax and its
wholly-owned subsidiaries Playpal, Playpal Sales and Jumpin' Jax Entertainment
are collectively referred to hereinafter as the "Company."
Current Financial Condition of the Company
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Primarily as a result of a lack of working capital, the
Company has sustained substantial losses in the fiscal year ended December 31,
1995, which total $9,273,884 (of which $4,640,377 represents a write-off of
goodwill associated with the bankruptcy of Playpal). In addition, the Company's
working capital deficit at December 31, 1995 was $6,222,163. The Company also
had a stockholders' deficit of $4,547,453 at December 31, 1995. The Company
continued to sustain substantial losses in the six 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. As a result, it is expected that all or a substantial
portion of the assets of Playpal and Playpal Sales will be sold or otherwise
disposed of. Further, the liquidation of Playpal and Playpal Sales will result
in a loss of substantially all of the Company's revenues. In addition, in June
1996, JJC, a related company and lessor of the space in which the two Centers
were operated, filed for protection as a debtor-in-
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possession under Chapter 11 of the federal bankruptcy laws. It is likely that
such Chapter 11 proceeding will be converted into a Chapter 7 liquidation
proceeding. It is also likely that Jumpin' Jax Entertainment will file for
protection under Chapter 11 of the federal bankruptcy laws. Such event will
result in the loss of all of the Company's revenues and fixed assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements.
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,
no binding commitments for any such funding have been received, and in the event
that working capital is not obtained within the near future, it is likely that
the Company will be required to cease all operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Former Operations of Playpal and Playpal Sales
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Prior to the bankruptcy of Playpal, which is located in Rockledge,
Florida, Playpal custom designed, manufactured and assembled units which
included such equipment as tunnel, tubes, slides, ropes, gymnastic mats,
trapezes, spider walks, ball pits, and obstacle courses for customers in the
fast food and family entertainment industries. Playpal Sales engaged in the
business of selling and distributing the soft-play units manufactured by
Playpal. Customers of such entities included Burger King, McDonalds, Kentucky
Fried Chicken, Pizza Hut, Hardee's, Disney World, Universal Studios and Mystic
Lake Casino, as well as other gaming facilities. Playpal soft-play units were
sold within the United States and in over 30 countries worldwide, including
units in Mexico, Venezuela, the Peoples Republic of China, Japan, Argentina,
Brazil, Barbados, Chile, Dominican Republic, Honduras, Korea, Mexico, Puerto
Rico, Singapore, Spain, Taiwan and Trinidad.
As indicated above, as a result of substantial sales tax and other
unsecured and secured obligations, Playpal was required to file for protection
under Chapter 11 of the bankruptcy laws in April 1996. Since that date, the
Company has been unsuccessful in its attempts to secure working capital for the
continuation of the businesses of Playpal and Playpal Sales and the businesses
of both entities have been terminated. Accordingly, in August 1996, management
determined that the Chapter 11 proceeding with respect to Playpal should be
converted to a liquidation under Chapter 7 and that Playpal Sales will also file
for bankruptcy protection. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Operations of Jumpin' Jax Entertainment
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The Company currently operates two Centers in the Minneapolis St. Paul
metropolitan area through Jumpin' Jax Entertainment and a related company, JJC.
Both are located in shopping malls; Maplewood Mall in suburban St. Paul and
Burnsville Center in suburban Minneapolis. These Centers were designed to occupy
approximately 12,000 square feet. The Centers each maintain a DynaMaze play
structure, which is a large, custom-designed, sequentially-structured play area
tailored to the developmental needs of children in the fourteen and under age
group and which occupies approximately 2,500 square feet. The equipment was
designed with safety and fitness in mind and is comprised of tunnels, cushioned
areas for jumping and bouncing, ropes, trapezes, gymnastic mats, spider walks,
ball pits and other similar equipment. Parents are permitted and encouraged to
participate in the DynaMaze structure experience with their children. The
Company's party theme areas for birthdays and other events were designed by a
group of theatrical set designers and oriented around different concepts such as
a shipwreck, a fort, a cave and a circus tent. The party sets are moveable to
enable the Company to change the sets and alter the floor layout of the Center
from time to time.
For older children and adults, the Centers offer the Laser Crusaders
laser tag arena and arcade game facilities. In the laser tag arena, players
divide into teams and match tactical and "hide-and-go-seek" skills with
low-powered lasers in an obstacle course housed in a darkened, ultraviolet lit
room. When hit by an opponent's ray, a player's laser unit vibrates, signaling
to the player that he or she must return to "base" to reenergize the laser. In
the Company's arcade facility, players are challenged by video games provided by
NAMCO Cybertainment, a manufacturer and operator of arcade games and facilities.
To cater to the safety concerns of infants and toddlers, a separate
play area known as MiniJax is provided. This space, physically separated within
the Center from the activities for older children, contains large building
blocks, small slides, and climbing equipment designed for the motor skills of
younger children. The Centers also maintain a Jax Diner facility which features
a menu designed for both children and adults. Each Center has a merchandise area
where "Jumpin' Jax" apparel, toys and other products are sold. The Centers
charge admission fees for each child, ranging from $2.99 to $5.99, depending on
location and intended use of the facility. Laser tag is charged by the game,
with a minimum fee required for entrance to the Center. The Centers were
designed and constructed with a view toward safety and security. All parents and
children entering the facility register at the entrance counter. The Company
uses closed circuit televisions to monitor all entrances. All play area
equipment is equipped with protective cushions and padding, and Company staff is
available throughout the facility to assist and monitor children with respect to
the play activities.
As reported above, the Company operates the Centers through Jumpin'
Jax Entertainment and a related company, JJC. As a result of a lack of working
capital and unprofitable operations, the lease payments from Jumpin' Jax
Entertainment to JJC for the spaces in which the two Centers operate were not
adequate to allow JJC to meet its obligations to the
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landlord. Consequently, in June 1996, the landlord commenced eviction
proceedings for lack of rental payments against JJC and JJC filed a petition
under Chapter 11 of the bankruptcy laws. Due to the Company's current financial
condition, it unlikely that the operations of Jumpin' Jax Entertainment can be
continued at such locations and, in such event, the JJC Chapter 11 proceeding
will be converted to a liquidation under Chapter 7 and Jumpin' Jax Entertainment
will be compelled to file for either Chapter 11 or Chapter 7 bankruptcy
protection. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Proposed Business Operations
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JJAX, JJAXE and CCLC were recently formed to explore opportunities to
engage 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. The approach of such
entities has been to propose and structure strategic alliances with companies
engaged in a variety of industries, particularly casinos and other captive
entertainment environments, which would benefit from the operation of both
entertainment centers and centers which offered hourly, daily and weekly
contract child care services located adjacent to, or at the site of their
businesses. Management believes that such Entertainment and Child Care Centers,
in providing readily accessible child care services and unique play activities
for the children of the patrons (and employees) of such businesses, will allow
customers uninterrupted freedom to engage in gambling, shopping, sporting, or
other activities while their children are cared for, and play at the
Entertainment and Child Care Centers. In addition such Centers may be utilized
as a child care and entertainment facility for the employees of such businesses.
JJAX, JJAXE and CCLC anticipate that the Entertainment and Child Care
Centers offered will range from 18,000 to 30,000 square feet in size, and will
contain the following:
DynaMaze Play Land
It is intended that children will be physically challenged in the
custom-designed indoor play space by conquering and exploring a multi level
soft-play unit which is anticipated to include slides, tubes, ball pools, air
bounces and other soft-play equipment. The play units are intended to have a
built-in fitness course and curriculum to create constructive play environments
with a premium on fun.
Mini-Jax Toddler Area
It is intended that a small scale play area for ages 1-4 with drawing
walls, craft areas, role playing and motor skill toys will be created.
Themed JaxDay Party Sets
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It is intended that children and adults will be able to test their skill in a
state of the art arena which will offer a variety of contests against their
opponents.
Videonics Hall
The Centers will include an area which will test patrons' skills in a variety of
areas, including driving, flying and skiing.
The JaxDiner
The Centers will include a JaxDiner, which will offer a variety of healthful and
appealing meals for children.
Children's Choice Hourly Child Care through Children's Choice Learning Centers
It is intended that the Centers will provide hourly child care which will
encompass a wide variety of activities to entertain customers' children while
they visit the facility. Activities are anticipated to include: computer play
and learning stations; movie rooms and libraries; arts and crafts play and learn
stations; a stage area; manipulative play and learn stations; infant and toddler
rooms; large muscle play and learn stations and "edutainment." It is intended
that security will be provided by the use of customized parent/child computer
chip identification and photo imaging systems. It is also anticipated that POS
system monitors will be utilized to view entry and exit by children and adults.
Marketing is intended to be accomplished through promotions, direct mail, and
through the strategic alliance partnerships, who will include, when feasible,
the Centers in their advertising.
The Company anticipates that a strategic partner will utilize such
services for both patrons of its business and its employees. JJAX and JJAXE
intend to provide child care services through CCLC, which is anticipated to be a
fully licensed child care provider for the hourly and contract child care at the
Centers.
The Company believes that each Center will require capital
expenditures for equipment of between approximately $400,000 and $600,000,
depending upon such factors as the size and location of the facility and the mix
of product offered.
In connection with the proposed business operations described above,
JJAXE has entered into arrangements with St. Charles Gaming Company ("St.
Charles Gaming") an affiliate of Casino America ("Casino America"), under which
JJAXE and St. Charles Gaming established JJAX Lake Charles, L.L.C. ("JJAX Lake
Charles"), a Louisiana corporation, substantially all of which is owned by
JJAXE. Under the arrangement between JJAXE and St. Charles Gaming, JJAX Lake
Charles was established in March 1996, for the construction, operation and
management of an Entertainment and Child Care Center to be located at, and serve
the patrons and employees of the "Isle of Capri" riverboat casino, located in
Lake Charles, Louisiana. The arrangement provides that JJAXE will contribute the
management, personnel, equipment and expertise for the operation of the
Entertainment and Child Care Center and St. Charles Gaming will contribute
certain properties and assets to establish and maintain the JJAX Lake Charles
Center. Casino America also granted JJAXE a right of first refusal to construct
and operate Entertainment and Child Care Centers in all of its other
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existing and proposed gaming facilities. The parties have set a target
opening date of early 1997, however certain funding will be required in
order to begin the project. Currently, no firm commitment for such funding has
been obtained and the project cannot proceed unless funds are obtained in the
near future.
In addition, in July 1996, JJAXE entered into an agreement with Lady
Luck, Bettendorf, L.C. ("Lady Luck"), an existing casino located in Bettendorf,
Iowa, under which JJAXE is to establish, operate and manage an Entertainment and
Child Care Center to be located at, and serve the patrons and employees of the
Lady Luck Casino and the Quad Cities of Davenport and Bettendorf Iowa, and
Moline and Rock Island, Illinois. Lady Luck is to contribute certain
properties and leasehold to establish and maintain the Lady Luck Center. The
parties have set a target opening date of October 1996; however JJAXE will
require certain working capital in order to begin the Lady Luck project.
Currently, JJAXE has no firm commitment for such funding and will be unable to
engage in such project unless funds are obtained in the near future.
The Company continues to seek to develop strategic partners for the
construction and operation of Entertainment and Child Care Centers at their
locations.
Competition
Numerous companies compete in the indoor family entertainment center
market, the most significant of which is Discovery Zone, a major owner and
franchiser of indoor recreational facilities. Management believes that the
business strategy of JJAX, JJAXE and CCLC will differ from Discovery Zone, since
such entities do not intend to operate "stand-alone" Entertainment and Child
Care Centers, but rather, manage and operate such facilities only in conjunction
with existing or proposed casino and other gaming, mall, sporting, and
entertainment facilities for the purpose of providing a service to such
businesses and industries in attracting and expanding their customer bases, as
well as increasing the average time patrons spend at such locations.
There are also single unit operations with facilities similar to the
Entertainment and Child Care Centers in many metropolitan areas. The Company
believes that as the indoor family entertainment industry develops, more
companies will enter into the market, most of which will have significantly
greater financial and other resources than the Company. The Company believes
that the principal competitive factors within its industry are location,
availability of new and distinct product and service offerings, and, to a lesser
extent, cost per visit. The Company also competes with a variety of public and
private day care and other facilities servicing the pay-for-play market
including Kids Quest (a company offering hourly child care with a large play
structure located principally in casino operations), Showbiz Pizza, larger
arcade-oriented family entertainment centers, and various other types of sports,
recreation, and fitness services, such as park district programs, amusement
parks, arcades and specialty restaurants. In addition, the Company competes with
other children's entertainment activities such as museums, zoos, sporting
events, movies, television, and computer games.
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Insurance
The Company maintains general liability insurance policies covering
various types of liability including products liability. The product liability
insurance has policy limits of $1,000,000 per occurrence and $2,000,000 in the
aggregate per year. These policies are subject to exclusions and other terms
which the Company believes are typical for policies of similarly situated
companies. The Company believes that its insurance coverage is adequate for its
needs, but there can be no assurance that the Company will not be subjected to
claims in the future which are not covered by its insurance or which exceed its
insurance coverage.
Trademarks
The Company applied to register its Jumpin' Jax name and logo as a
trademark and service mark in the United States but received opposition thereto
and has determined to abandon such application. If sufficient working capital
funds are obtained, the Company intends to apply for registration of the marks
JJAX, JJAX Day, JJAX Choice Care, Jax Snacks, JaxDiner, DynaMaze, Mini-Jax, Jax
Camp and Children's Choice Learning Centers. There can be no assurance that the
Company will obtain sufficient funding to apply for registration of its marks,
or that if applications are made, that it will be successful in registering such
names and logos or that third parties will not infringe on such logos and
trademarks. In the event that the Company is required to engage in litigation to
protect its logos and trademarks, such litigation can be time consuming and
costly.
Employees
As a result of the Company's lack of working capital, the Company was
compelled to dismiss substantially all of its employees. As of August 14, 1996,
the Company and its subsidiaries employed fifteen full-time employees, all of
which are in administration or store management. None of the Company's employees
are represented by a labor union, and the Company considers its employee
relations to be satisfactory.
ITEM 2. Description of Properties
JJC, a related company, entered into leases for each of the two
Centers and the corporate offices of Jumpin' Jax Entertainment, all of which are
located in Minnesota and subleases such space to Jumpin' Jax Entertainment. The
Company's two existing Centers are located at Maplewood Mall in Maplewood,
Minnesota and Burnsville Center in Burnsville, Minnesota. The Company has leased
approximately 12,000 square feet at each location for a ten-year term ending in
February, 2005. Base rent under each Center lease is approximately $11,000 per
month plus additional payments equal to 10% of gross sales for each Center
greater than $40,000 and less than $85,000 per month and 8% of gross sales over
$85,000 per month, throughout the term. The monthly rent is also subject to
adjustment upward by 10% upon the opening of any new department store (defined
as a store occupying at least 50,000 square feet) within either Mall. In June,
1996, the lessor of such properties commenced an action for eviction against JJC
for failure to pay rent and JJC was compelled
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to file for bankruptcy protection. Due to the Company's current
financial condition, it unlikely that the operations of Jumpin' Jax
Entertainment and JJC can be continued at such locations and, in such event, the
JJC Chapter 11 proceeding will be converted to a liquidation under Chapter 7 and
Jumpin' Jax Entertainment will be compelled to file for either Chapter 11 or
Chapter 7 bankruptcy protection. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Legal Proceedings."
The Company also owns real property and a building situated thereon
where the former operations of Playpal were located in Rockledge, Florida. Such
property consists of an approximately 37,800 square foot building on
approximately 8.8 acres of land. The property is subject to a mortgage in the
original principal amount of $944,000. In view of the Playpal bankruptcy
proceedings, this Company anticipates that the property will be transferred or
otherwise disposed of by the creditors of Playpal. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In February 1995, Jumpin' Jax Entertainment entered into a new lease
agreement for its corporate office located in Plymouth, Minnesota commencing
March 1995 and running through July 1998 at the rate of $1,500 per month.
Beginning in September 1996, Jumpin' Jax Entertainment has the option to cancel
the office lease for a payment of $5,000.
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 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.
See "Legal Proceedings."
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 on continuing with respect to this project although it is liable for
amounts under the lease. See "Legal Proceedings."
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ITEM 3. 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.
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. This action has been stayed by the
bankruptcy proceeding.
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. This
action has been stayed by the bankruptcy proceeding.
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, 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.
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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. This action has been stayed by the
bankruptcy proceeding.
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 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 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
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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 4. Submission of Matters to a Vote of Security-Holders
None.
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
Jumpin' Jax Corporation:
We have audited the accompanying consolidated balance sheet of Jumpin' Jax
Corporation (formerly Four Star Ranch, Inc.) and subsidiary as of December 31,
1994, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Jumpin' Jax
Corporation and subsidiary as of December 31, 1994, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred a loss from
operations and continues to experience losses associated with its limited retail
operations, has a significant working capital deficit, and is in default of its
bank debt. Furthermore, subsequent to December 31, 1994, the Company acquired a
financially troubled company (Note 11). These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
April 11, 1995, except as to
Note 5, for which the date is
April 28, 1995.
<PAGE>
Consolidated Financial Statements
Jumpin' Jax Corporation
Years ended December 31, 1995 and 1994
<PAGE>
Jumpin' Jax Corporation
Consolidated Financial Statements
Years ended December 31, 1995 and 1994
Contents
Report of Independent Auditors...........................................1
Audited Consolidated Financial Statements
Consolidated Statements of Financial Position............................3
Consolidated Statements of Operations....................................5
Consolidated Statement of Changes in Shareholders' Equity (Deficiency)...6
Consolidated Statements of Cash Flows....................................7
Notes to Consolidated Financial Statements...............................9
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Jumpin' Jax Corporation
We have audited the consolidated statement of financial position of Jumpin' Jax
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in shareholders' equity
(deficiency), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of Jumpin' Jax Corporation for the year ended December 31,
1994 were audited by other auditors whose report dated April 11, 1995, except as
to Note 5, for which the date is April 28, 1995, expressed an unqualified
opinion on those financial statements and included an explanatory paragraph that
described the substantial doubt about the Company's ability to continue as a
going concern as discussed in Note 3 to these financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the December 31, 1995 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Jumpin' Jax Corporation and subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
1
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred a loss from
operations and continues to experience losses associated with operations and has
a significant working capital deficit. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Ernst & Young LLP
Minneapolis, Minnesota
May 7, 1996, except for Notes 3, 13 and 14,
as to which the date is August 13, 1996
2
<PAGE>
Jumpin' Jax Corporation
Consolidated Statements of Financial Position
December 31
-------------------
1995 1994
---- ----
Assets
Current assets:
Cash and cash equivalents $ - $ 38,674
Restricted marketable securities 50,000 -
Accounts receivable 252,827 8,354
Inventories 322,517 5,687
Other receivables 624 87,740
Due from shareholder and from officer of subsidiary,
including $30,772 stock subscription, $130,772
collected in 1995 - 133,772
Advances to officers 54,930 -
Prepaid expenses 20,981 3,443
--------- --------
Total current assets 701,879 277,670
Furniture and equipment, less accumulated
depreciation 3,135,740 266,734
Other assets 87,664 234,337
---------- --------
Total assets $3,925,283 $778,741
========== ========
3
<PAGE>
December 31
----------------------
1995 1994
---- ----
Liabilities and shareholders' equity (deficiency)
Current liabilities:
Bank overdraft $ 37,794 $ -
Accounts payable 1,955,898 37,930
Accrued sales taxes 2,136,769 -
Customer deposits 479,226 -
Accrued expenses 977,615 449,313
Landlord advances 88,776 -
Deferred income 52,626 -
Current portion of notes payable-related parties 54,028 106,251
Current portion of long-term debt 1,141,310 164,375
----------- ---------
Total current liabilities 6,924,042 757,869
Notes payable - related parties 19,270 -
Long-term debt 144,638 7,047
Landlord advances 717,586 -
Reserve for additional advances to bankrupt subsidiary 667,200 -
Shareholders' equity (deficiency):
Common Stock, $.001 par value:
Authorized shares-50,000,000 in 1995 and
50,000,000 in 1994
Issued and outstanding shares-12,967,395 in
1995 and 8,043,210 in 1994 12,967 8,043
Additional paid-in capital 4,992,243 284,561
Common Stock issuable 2,300 2,300
Accumulated deficit (9,554,963) (281,079)
----------- --------
Total shareholders' equity (deficiency) (4,547,453) 13,825
----------- --------
Total liabilities and shareholders' equity (deficiency) $ 3,925,283 $ 778,741
=========== =========
See accompanying notes.
4
<PAGE>
Jumpin' Jax Corporation
Consolidated Statements of Operations
Year ended December 31
----------------------
1995 1994
---- ----
Revenues:
Store operations $ 788,291 $ 1,794
Equipment sales 6,250,843 -
----------- ----------
7,039,134 1,794
Cost of goods sold:
Store operations 1,254,631 1,556
Equipment sales 5,705,075 -
----------- ----------
6,959,706 1,556
----------- ----------
Gross margin 79,428 238
Operating expenses:
Selling, general and administrative: 32,807
Salaries and benefits 1,059,685
Business development costs 76,000
Store opening costs 94,521
Other legal and professional fees 224,082
Other 1,331,104
----------- ----------
2,785,392 32,807
Depreciation and amortization 515,949 134
Acquisition costs 101,000 147,950
Expenses associated with store closing 262,995 100,128
Write-off of goodwill 4,640,377 -
Reserve for advances to bankrupt subsidiary
(Note 14) 667,200 -
Interest expense (income) 380,399 (702)
----------- ----------
9,353,312 280,317
----------- ----------
Loss before income taxes (9,273,884) (280,079)
Income taxes - -
----------- ----------
Net loss $(9,273,884) $ (280,079)
=========== ==========
Net loss per share $(0.96) $(0.16)
=========== ==========
Weighted average number of shares outstanding 9,682,877 1,798,991
=========== ==========
See accompanying notes.
5
<PAGE>
Jumpin' Jax Corporation
Consolidated Statement of Changes in Shareholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Total
Common Stock Additional Common Shareholders'
-------------------- Paid-In Stock Accumulated Equity
Shares Amount Capital Issuable Deficit (Deficiency)
--------- ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 1,000,000 $ 1,000 $ - $ - $ (1,000) $ -
Shares issued for cash at $1.00 per share 100,000 100 99,900 - - 100,000
Issuance of additional shares to the controlling
shareholders of GymMania Venture Capital Company
(GVCC) in exchange for the net assets of GVCC,
and the commitment to issue 479,606 additional
shares for a nominal value to the shareholders
of Gymania Corporation (Gymania) in exchange
for the operations of Gymania, net of reduction
of $140,197 to reflect the excess liabilities
assumed over Gymania assets acquired 6,708,394 6,708 63,930 - - 70,638
Shares (230,000) issuable at $.01 per share,
in connection with professional services charged
to operations in 1994 - - - 2,300 - 2,300
Shares issued at $.01 per share in exchange for
services valued at $1,150 115,000 115 1,035 - - 1,150
Shares issued upon the conversion of debt at
$1.00 per share 119,816 120 119,696 - - 119,816
Net loss - - - - (280,079) (280,079)
----------- ------- --------- ------- --------- ----------
Balance at December 31, 1994 8,043,210 8,043 284,561 2,300 (281,079) 13,825
Shares issued for investment in PlayPal 351,000 351 1,033,649 - - 1,034,000
Shares issued for settlement of vendor balances 24,720 25 49,450 - - 49,475
Shares issued for cash 4,548,465 4,548 3,624,583 - - 3,629,131
Net loss - - - - (9,273,884) (9,273,884)
----------- ------- --------- ------- ---------- -----------
Balance at December 31, 1995 12,967,395 $12,967 $4,992,243 $2,300 $(9,554,963) $(4,547,453)
=========== ======= ========== ======= =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
Jumpin' Jax Corporation
Consolidated Statements of Cash Flows
Year ended December 31
-----------------------
1995 1994
---- ----
Operating activities
Net loss $(9,273,884) $(280,079)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 265,975 134
Amortization of intangible assets 249,974 -
Amortization of landlord advances (81,376) -
Write-down of fixed assets 134,621 -
Asset transfer in lieu of rent 149,493 -
Write-off of goodwill 4,640,377 -
Reserve for advances to bankrupt subsidiary 667,200 -
Interest accrued on sales tax obligation 146,700 -
Debt assumed from related party 53,153 -
Loss on disposal of leasehold improvements - 22,981
Prepaid business plan cost - 25,000
Common Stock issued as compensation for services - 3,450
Changes in operating assets and liabilities:
Accounts receivable 140,638 -
Other receivables 87,116 -
Inventories 54,662 -
Advances to officers (54,930) -
Prepaid expenses (32,337) -
Accounts payable 63,434 -
Sales tax payable (24,027) -
Customer deposits (82,673) -
Accrued expenses 211,622 220,043
Deferred income 30,122 -
------------ ---------
Net cash used in operating activities (2,654,140) (8,471)
Investing activities
Payments on notes receivable - related parties 133,772 70,288
Purchase of marketable securities (50,000) -
Purchases of property and equipment (1,215,021) -
Acquisition of PlayPal (514,000) -
Increase in other assets (6,210) -
Advance to Gymania Corporation prior to
acquisition, net of cash acquired of $36,145 - (123,143)
------------ ---------
Net cash used in investing activities (1,651,459) (52,855)
Financing activities
Proceeds from landlord advances 887,738 -
Principal payment on notes
payable-related parties (86,106) -
Principal payments on notes payable
and long-term debt (201,632) -
Proceeds from issuance of shares 3,629,131 100,000
------------ ---------
Net cash provided by financing activities 4,229,131 100,000
------------ ---------
(Decrease) increase in cash (76,468) 38,674
Cash at beginning of year 38,674 -
------------ ---------
Cash (overdraft) at end of year $ (37,794) $ 38,674
============ =========
7
<PAGE>
Jumpin' Jax Corporation
Consolidated Statements of Cash Flows (continued)
Supplemental disclosure to statement of cash flows:
Interest paid was approximately $160,552 and $-0- in 1995 and 1994,
respectively.
State income taxes paid were approximately $1,200 and $-0- in 1995 and 1994,
respectively.
The Company converted $49,475 and $119,816 of payables to common stock in
1995 and 1994, respectively.
The Company incurred $-0- and $87,740 of refundable construction costs
associated with new indoor fun center location development in 1995 and 1994,
respectively. Amounts were included in other receivables and accrued
expenses.
The Company incurred debt of $281,000 and $-0- for the acquisition of fixed
assets in 1995 and 1994, respectively.
The Company converted $113,000 and $-0- of accounts payable into notes
payable in 1995 and 1994, respectively.
See accompanying notes.
8
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Jumpin' Jax Entertainment, Inc., PlayPal Sales
Corporation and PlayPal, Inc., after elimination of significant intercompany
accounts and transactions.
Organization and Business Acquisition
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.
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.
9
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Also on December 30, 1994, the Company, through its wholly-owned retail
subsidiary, Jumpin' Jax Entertainment, Inc., 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 ninety days after closing, in exchange for all of the issued and
outstanding capital stock of PlayPal, Inc. of Rockledge, Florida. PlayPal, Inc.
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.
The acquisition of PlayPal, Inc. was accounted for as a purchase and,
accordingly, the results of PlayPal, Inc.'s operations since March 14, 1995 have
been included in the financial statements, notes and text contained in this
report. As discussed more fully in Notes 3 and 14, in April 1996, PlayPal filed
for protection under Chapter 11 of the U.S. Bankruptcy Code and may soon file
Chapter 7.
Cash Equivalents
The Company considers cash equivalents to be investments with remaining
maturities of three months or less at the time of acquisition.
10
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Marketable Securities
Investments with a remaining maturity of more than ninety days at the date of
purchase are classified as marketable securities. The restricted investment of
$50,000 represents a Certificate of Deposit which collateralizes the loan for
PlayPal's land and building in Florida.
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 carried at the lower of cost (first-in, first-out
basis) or market.
Inventories at December 31, 1995 and 1994 consisted of the following:
December 31
-----------------
1995 1994
---- ----
Food and retail merchandise $ 17,465 $5,687
Raw material 126,856 -
Work-in-process 178,196 -
-------- ------
$322,517 $5,687
======== ======
Fixed Assets
Fixed assets are stated at cost. The Company provides for depreciation at rates
calculated to amortize the cost of the property over its estimated useful life
(3-10 years) using the straight-line method. Leasehold improvements are
amortized over the related lease term or estimated useful life, whichever is
shorter. Amortization of assets recorded under capital leases is included in
depreciation expense.
Preopening Costs
Advertising, sales promotion and expenditures associated with the opening of new
locations are expensed as incurred. Architectural and equipment design costs are
capitalized and charged to operations over the term of the location lease.
11
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Landlord Advances
Incentives provided by the landlord of the store locations to induce the Company
to locate a facility in its location are capitalized and amortized as an off-set
to rent expense over the term of the lease.
Revenue Recognition
The Company recognizes revenue as the services are performed.
Goodwill
In March 1995, the Company acquired all of the issued and outstanding capital
stock of PlayPal, Inc. The acquisition was accounted for as a purchase,
resulting in goodwill of $4,890,351 being recorded on the books of PlayPal, Inc.
at March 13, 1995. The Company has reviewed this asset for impairment and, in
light of the April 24, 1996 bankruptcy filing by PlayPal, Inc. (as discussed
more fully in Note 3), the unamortized goodwill of $4,640,377 was expensed as of
December 31, 1995.
Income Taxes
For federal income tax purposes, the Company and its wholly-owned subsidiaries
file a consolidated income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred income tax assets and liabilities are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse. Valuation allowances
are established to the extent it is more likely than not that some portion or
all of the deferred income tax assets will not be ultimately realized.
12
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Loss Per Share
Loss per share of Common Stock is computed by dividing the net loss for the
period by the weighted average number of shares outstanding during the period.
Common stock equivalents were excluded from net loss per share computation as
their effect is antidilutive.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassification
Certain amounts presented in the 1994 financial statements have been
reclassified to conform with the 1995 presentation.
2. Acquisition of PlayPal, Inc.
As noted in Note 1 to the consolidated financial statements, on March 13, 1995,
Jumpin' Jax Corporation acquired all of the outstanding shares of PlayPal, Inc.
for total cash and stock consideration of $1.34 million. The acquisition was
accounted for as a purchase.
13
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisition of PlayPal, Inc. (continued)
The following unaudited pro forma summary represents the consolidated results of
operations of the Company as if the acquisition had occurred at the beginning of
1994, after giving effect to certain adjustments including the amortization of
goodwill and increased interest expense. The pro forma information does not
purport to be indicative of the results of operations that would have occurred
had the acquisition been made as of those dates or of future results of
operations.
Year ended December 31
--------------------------
1995 1994
---- ----
Net sales $ 7,835,334 $11,670,563
Net (loss) before taxes and extraordinary item (9,748,667) (2,255,347)
Net (loss) (9,748,667) (2,125,581)
(Loss) per share before extraordinary item (1.02) (0.27)
(Loss) per share (1.02) (0.25)
3. Financial Condition and Management's Plans
As shown in the accompanying financial statements, the Company incurred a net
loss of $9,273,884 for the year ended December 31, 1995. The Company's current
liabilities exceeded its current assets by $6,222,163 at December 31, 1995.
Furthermore, the Company had an accumulated deficit of $9,554,963 at December
31, 1995.
Subsequent to December 31, 1995, the Company has raised additional equity
capital through sales of common stock. The related funds raised have been
expended to fund retail and manufacturing operations and corporate expenses
subsequent to December 31, 1995. These factors create significant uncertainties
about the Company's ability to continue as a going concern.
In July 1996, a related party of the Company filed for protection under Chapter
11 of the United States Bankruptcy Code. This related party leased retail mall
space and then subleased the space through an oral agreement to Jumpin' Jax
Entertainment, Inc., a wholly-owned subsidiary of the Company (see related
comments in Note 9). The likely liquidation of this related party makes it
probable that the Company will have to vacate these premises and cease their
current retail operations, which is operating stand-alone entertainment centers.
14
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
3. Financial Condition and Management's Plans (continued)
Management is taking steps to address these issues by concentrating its focus on
further developing and expanding its retail operations. The Company plans to
expend resources, if available, on developing strategic alliances with companies
which will benefit from co-locating with a quality family entertainment and
childcare facility. The Company has also made the decision to discontinue its
efforts to achieve vertical integration of the family entertainment business
through the manufacturing of soft, modular play equipment. On April 24, 1996,
PlayPal, Inc. (the manufacturer of this equipment) filed for protection under
Chapter 11 of the United States Bankruptcy Code. Because PlayPal has been unable
to obtain debtor-in-possession financing necessary to continue operations, the
Company is seeking to arrange liquidation of the PlayPal subsidiaries. These
subsidiaries accounted for $7,000,725 of the Company's losses for the year ended
December 31, 1995.
Management's current plan is to cease primarily all of the existing operations
of the Company and focus its efforts and resources in growing its operations
with strategic partners.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to raise substantial capital and its ability to implement and
profitably operate the strategic alliances it is pursuing. However, there can be
no assurance that this capital will be raised or be sufficient to fund
operations or that revenues from the Company's operations will ever lead to
profitability.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
----------------------
1995 1994
---- ----
Land $ 313,363 $ -
Building 1,358,659 -
Equipment 960,454 315,168
Leasehold improvements 860,788 44,263
Furniture and fixtures 48,884 23,643
---------- ---------
3,542,148 383,074
Less accumulated depreciation (406,408) (116,340)
---------- ---------
$3,135,740 $ 266,734
========== =========
15
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
5. Notes Payable - Related Parties
Notes payable to related parties consist of the following at December 31, 1995
and 1994:
1995 1994
---- ----
Note payable to a shareholder due May 1, 1995,
including accrued interest on Toronto Dominion
Bank Prime (8% at December 31, 1994) plus 2.5%,
paid in full on April 28, 1995 $ - $ 35,625
Noninterest-bearing demand note payable to
a related party - 35,626
Note payable to a related party, bearing an
effective interest at 15%, payable on
April 17, 1994 35,000 35,000
Note payable to an officer of the Company,
bearing interest at 24%, payable on
November 21, 1997 38,298 -
------- --------
73,298 106,251
Current maturities 54,028 (106,251)
------- --------
$19,270 $ -
======= ========
6. Long-Term Debt
Long-term debt at December 31, 1995 and 1994 is as follows:
1995 1994
---- ----
Bank debt, bearing interest at Bank prime rate
(8.5% at December 31, 1995) plus 1%, payable
through May 1996, in monthly installments of
approximately $10,600 with a balloon payment
of $853,664, secured by specific property of
PlayPal, Inc. $867,776 $ -
Promissory note, bearing interest at 12%,
payable through December 22, 1996, in monthly
installments of $2,500, unsecured 153,823 -
16
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt (continued)
1995 1994
---- ----
Gymania bank debt, assumed by the Company,
bearing interest at New York Prime
(8.5% at December 31, 1995) plus 2%, payable
through November 1997, in monthly installments
of approximately $4,400, guaranteed by the Small
Business Administration secured by specific assets
of the Company $ 94,652 $137,099
Promissory note, bearing interest at 8%, payable
through August 20, 1998, in monthly installments
of $2,220, unsecured 63,781 -
Promissory note, bearing interest at 8%, payable
through August 31, 1996, in quarterly installments
of $7,794, unsecured 22,467 -
Promissory note, bearing interest at 10%, payable
through October 1, 1997, in monthly installments
of $600, secured by specific property of PlayPal, Inc. 12,508 -
Promissory note, bearing interest at 9.87%, payable
through August 1, 2001, in monthly installments of
$291, secured by specific equipment of PlayPal, Inc. 9,353 -
Promissory note, bearing interest at 12%, payable on
January 27, 1997, unsecured 7,869 7,047
Promissory note, bearing interest at 10%, payable on
March 10, 1995, unsecured 5,000 -
Promissory note, bearing interest at 7.5%, payable
through July 20, 1996, in monthly installments of
$502, secured by specific equipment of PlayPal, Inc. 4,823 -
17
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt (continued)
1995 1994
---- ----
Gymania bank debt, assumed by the Company,
bearing interest at the bank's reference rate
(8.5% at December 31, 1994) plus 2%, payable
through October 1995, guaranteed by the Small
Business Administration, secured by all assets
of the Company $ - $ 18,200
Other 1,393 -
Obligations under capital leases 42,503 -
---------- --------
1,285,948 162,346
Less current maturities 1,141,310 155,299
---------- --------
Amount classified at long-term debt $ 144,638 $ 7,047
========== ========
Aggregate maturities of long-term debt for the five years subsequent to December
31, 1995 are as follows:
1996 $1,878,810
1997 100,971
1998 33,921
1999 9,746
2000 -
----------
$2,023,448
==========
7. December 1995 Private Placement Agreement
In December 1995 and January 1996, the Company raised $737,500 and $100,000
(less associated transaction costs), respectively, of private placement funding.
In return, the Company committed to issue 29.5 units and 4.0 units,
respectively. Each unit consists of a number of shares of the Company's common
stock and warrants as determined by dividing $25,000 by the lesser of 1) $1.00
or 2) two-thirds of the market price per share of the common stock one day
immediately prior to the registration of such stock. In addition, the agreement
stipulated that two additional units would be issued for each of the original
18
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
7. December 1995 Private Placement Agreement (continued)
units if certain conditions were not met by the Company; such conditions were
not met. As a result, the Company has reflected issuance of 88.5 total units as
of December 31, 1995. Because the registration has yet to occur, the actual
number of shares and warrants (units) is currently indeterminable. The Company
has reflected issuance of 2,212,500 shares as of December 31, 1995 related to
this agreement; however, actual number of shares to be issued may be
substantially more.
8. Stock Warrants
As outlined in Note 1, the Company issued warrants to the shareholders of
Gymania Corporation to acquire 450,868 shares of the Company's common stock at a
purchase price of $.0074 per share as part of the December 1994 Asset Purchase
Agreement between the parties. During 1995, the Company committed to issue
250,000 warrants to an investment advisor with exercise prices ranging from
$1.00 per share to $3.00 per share and an additional 2,212,500 as per the terms
of the December 1995 private placement as discussed more fully in Note 7.
In addition, the Company committed to issue 246,000 warrants to certain key
management employees. The Company follows Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
inter-pretations in accounting for its stock warrants. Under APB 25,
compensation expense is recognized to the extent that the market price of the
common stock exceeds the warrant price on the date of the grant. It is generally
the Company's policy to grant warrants with the exercise price equal to the
market price of the common stock on the date of the grant. The exercise price of
the warrants granted equaled the market price of the stock on the grant date.
Therefore, no compensation expense is recognized in association with these
options. All stock warrants vesting periods range from immediate to four years
and expire from five years to ten years after their grant date.
19
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
8. Stock Warrants (continued)
Following is activity with respect to stock warrants:
Price Per
Shares Share
--------- -----------
Balance January 1, 1995 450,868 $ .0074
Warrants granted 2,708,500 1.00-3.00
Warrants exercised -- --
Warrants canceled -- --
---------
Outstanding at December 31,
1995, of which 3,159,368
were exercisable 3,159,368 $.0074-$3.00
=========
Subsequent to December 31, 1995, the Company granted an additional 425,000
warrants to certain key members of management; these warrants include an
exercise price also equal to the market price of the shares on the date of
grant and expire between five and ten years from the date of grant.
9. Leases
The Company, through its wholly-owned subsidiary, Jumpin' Jax Entertainment,
Inc., is committed under long-term operating leases for the rental of its store
locations and its corporate office. The terms of the leases range from two to
ten years. The Company is generally required to pay rent based on a percentage
of sale and, in most cases, real estate taxes and other expenses.
In November 1994, a related party of the Company entered into two lease
agreements for space with a mall operator commencing in March 1995 and running
through February 2005 (the "Headleases"). Jumpin' Jax Entertainment, Inc. then
entered into oral agreements with the related party (the "Subleases") to use the
spaces, and other equipment, for its store locations. Terms of the Subleases are
comparable to those of the Headleases. In July 1996, the related party filed for
protection under Chapter 11 of the United States Bankruptcy Code. It is probable
that the related party will be forced to liquidate upon which Jumpin' Jax
Entertainment will lose its ability to sublease this space and its use of the
related leased equipment. Upon vacating the space, all current retail operations
of the Company will cease.
20
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
9. Leases (continued)
In February 1995, Jumpin' Jax Entertainment, Inc. entered into a new lease
agreement for its corporate office commencing in March 1995 and running through
July 1998. Beginning in September 1996, the Company has the option to cancel the
office lease for a payment of $5,000.
In March 1995, the Company entered into a sublease agreement for its previous
store facility and will receive monthly rentals of approximately $8,000 per
month over the remaining term of the facility lease agreement through March
1998. The above aggregate minimum lease and sublease payments are included in
the following schedule.
As of December 31, 1995, future minimum lease and sublease payments (excluding
percentage rents based on sales) due under noncancelable operating leases and
sublease are as follows:
Sublease
Lease Rentals
Obligations to be Net Lease
to be Paid Received Obligations
----------- -------- -----------
Fiscal year:
1996 $ 485,930 $ 95,600 $ 390,330
1997 483,133 95,600 387,533
1998 476,782 95,600 381,182
1999 381,793 23,900 357,893
2000 351,520 -- 351,520
Thereafter 1,465,500 -- 1,465,500
---------- -------- ----------
$3,644,658 $310,700 $3,333,958
---------- -------- ----------
---------- -------- ----------
Rent expense was approximately $372,873 and $300 during the years ended
December 31, 1995 and 1994, respectively.
21
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
10. Income Taxes
The Company experienced a significant operating loss of $9,273,884. At December
31, 1995, the Company had net operating loss carryforwards of approximately
$3,600,000 which are available to offset future taxable income through 2009. The
Company paid income taxes of $-0- and $20,000 in 1995 and 1994, respectively.
Components of deferred tax assets and liabilities are as follows:
December 31
1995 1994
----------- ----------
Deferred tax assets:
Net operating loss carryforwards $1,425,077 $ --
Write-off of goodwill 1,856,151 --
Sales tax accrual 865,038 --
Reserve for investment in PlayPal 266,880 --
Bad debt reserve 228,716 --
Department of Labor accrual 70,404 --
Warranty accrual 29,152 --
Litigation accrual 27,690 --
Inventory obsolescence reserve 11,322 --
Start-up costs -- 112,000
----------- ----------
Net deferred tax assets before
valuation allowance 4,780,430 112,000
Less valuation allowance (4,780,430) (112,000)
----------- ----------
Net deferred tax assets $ -- $ --
------------ ----------
------------ ----------
11. Fair Values of Financial Instruments
The carrying amounts of the Company's financial instruments at December 31, 1995
approximate their fair values.
22
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
12. Contingencies
The Company is involved in various lawsuits, claims and proceedings resulting
from its undercapitalization. As a result of the April 24, 1996 bankruptcy
filing, all suits brought against PlayPal, Inc. have been stayed by law. Summary
judgment as to the issue of liability has been entered against the Company for
the breach of a shopping center lease. The lease is for a ten-year period. The
Company is unable to reasonably estimate the amount of damages that may be
incurred, but believes that the minimum amount will be $100,000 and has
therefore accrued this amount.
In January 1996, Jumpin' Jax Entertainment, Inc. 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/month for the
first five years of the lease and escalates to approximately $15,000/month for
the second five years of the lease, which began accruing in July 1996. There are
additional provisions requiring Jumpin' Jax Entertainment to pay a percentage of
sales over various amounts. Jumpin' Jax Entertainment has informed the landlord
that it will not be occupying the space unless working capital funds can be
obtained. No legal proceedings have been initiated and the ultimate liability
can not be estimated at this time.
13. Related Party Transactions
As previously noted in other footnote disclosures, the Company has had
transactions in the normal course of its business with various companies and
officers and directors of the Company.
The Company has an oral agreement to sublease retail space in two mall
facilities with a company whose director and senior management hold similar
responsibilities with the Company.
The Company has notes payable to a member of management and a relative of that
member as a result of the previous acquisition of Gymania Corp. These notes
represent a total liability of $73,298 to the Company at December 31, 1995.
During 1995, the Company paid $90,000 related to management fees to a company
whose only two shareholders are officers of the Company.
23
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
13. Related Party Transactions (continued)
In connection with the financing for the Company in December 1995, a member of
the Company's corporate counsel purchased one unit for a purchase price of
$25,000.
14. PlayPal
In March, 1995, the Company acquired all of the issued and outstanding capital
stock of PlayPal, Inc. of Rockledge, Florida. PlayPal, Inc. was a financially
troubled company which manufactured soft, modular play equipment for use in
indoor fun centers and quick-serve restaurants. The Company believed that the
acquisition of PlayPal, Inc. would provide it with a strategic advantage by
lowering the cost of the play equipment to be used in its future family
entertainment centers.
At the time of the acquisition, PlayPal, Inc.'s $6.0 million of liabilities
exceeded its assets by $3.4 million. The liabilities consisted primarily of
trade payables ($2.0 million), sales taxes which PlayPal, Inc. had failed to
collect from customers ($2.0 million), and a construction loan on its facility
($.9 million). In an attempt to insulate the acquired entity from the negative
effects of the sales tax liability, the Company created another wholly-owned
subsidiary, PlayPal Sales Corporation, to provide the sales and marketing
expertise while PlayPal, Inc. continued to manufacture the equipment (PlayPal,
Inc. and PlayPal Sales Corporation referred to collectively as "PlayPal").
Prior to the acquisition, PlayPal's reputation in the marketplace had been
severely damaged due to an inability to deliver its product on a timely basis.
The Company believed that with a substantial capital infusion and proper
management, PlayPal could regain its customer base, restructure its balance
sheet and return to profitability. Although PlayPal did regain many of its
customers, sales did not reach the requisite level for sustained profitability,
making the restructuring strategy more difficult than expected to implement. On
April 24, 1995, PlayPal, Inc. filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code. PlayPal, Inc. has since made the decision to
seek liquidation of its assets, as it has not been able to secure
Debtor-in-Possession financing necessary to continue operations under
Chapter 11.
24
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
14. PlayPal (continued)
As of December 31, 1995, the accompanying consolidated financial statements
included approximately $2.1 million of accrued sales tax obligations (up from
the acquisition date as a result of continuing interest charges) and $1.4
million of trade accounts payable of PlayPal. As of the Petition Date, the
accrued sales tax obligation remained outstanding and the trade accounts payable
exceeded $1.8 million.
PlayPal's impact on the consolidated financial statements of the Company is
summarized as follows:
Condensed Balance Sheet
December 31, 1995
-----------------
Assets
Current assets $ 575,160
Property, plant and equipment 1,812,937
Other 3,894
----------
$2,391,991
==========
Liabilities and shareholders' equity
Current liabilities $7,756,705
Long-term debt 88,011
----------
7,844,716
Capital stock 1,548,000
Accumulated deficit (7,000,725)
----------
(5,452,725)
----------
$2,391,991
==========
25
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
14. PlayPal (continued)
Condensed Statement of Operations
For Period ended
December 31, 1995
-----------------
Revenues $ 6,250,843
Cost of sales 5,705,075
------------
Gross margin 545,768
Operating expenses:
Selling, general and administrative 1,645,589
Depreciation and amortization 333,546
Interest expense 259,781
Write-off of goodwill 4,640,377
Reserve for advances from JJAX-1996 667,200
-----------
7,546,493
-----------
Net loss $(7,000,725)
===========
Of the $9.3 million loss recorded by the Company for the year ended December 31,
1995, $7.0 million can be attributed to the operations of PlayPal and the
write-off of the related investment by the Company. Included in the $7.0 million
is $667,200 which the Company has accrued for expense related to advances made
to PlayPal after year-end but prior to its closure. The Company believes that a
substantial portion of the PlayPal obligations will be discharged as a result of
the liquidation process, although there is no assurance that this will occur.
26
<PAGE>
Jumpin' Jax Corporation
Notes to Consolidated Financial Statements (continued)
15. Subsequent Event
In January 1996, Jumpin' Jax Entertainment, Inc. 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/month for the
first five years of the lease and escalates to approximately $15,000/month for
the second five years of the lease, which began accruing in July 1996. There are
additional provisions requiring Jumpin' Jax Entertainment to pay a percentage of
sales over various amounts. Jumpin' Jax Entertainment has informed the landlord
that it will not be occupying the space unless working capital funds can be
obtained. No legal proceedings have been initiated and the ultimate liability
can not be estimated at this time.
27
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq Bulletin
Board under the symbol "JJAX." There was no trading market for the Common Stock
prior to November 29, 1994. The following table sets forth, for the periods
indicated, the range of high and low bid prices for the Company's Common Stock.
The bid information presented below was compiled from reports furnished by
NASDAQ and reflects inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Bid
---
High Low
---- ---
Quarter Ending
- --------------
1996
11
<PAGE>
June 30 $ .6875 $ .15625
March 31 1.03125 .625
1995
December 31 1.9375 .9375
September 30 3.0625 1.50
June 30 4.50 1.875
March 31 4.375 .50
1994
December 31 3.875 1.125
- ------------------
The foregoing quotations represent prices between dealers and
do not include retail mark-up, mark-down, or commissions, and may not
necessarily represent actual transactions.
As of August 14, 1996, the Company had approximately 450
shareholders of record.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive such dividends
as may be declared by the Board of Directors of the Company. To date, the
Company has neither declared nor paid any dividends on its Common Stock nor does
the Company anticipate that such dividends will be paid in the foreseeable
future. Rather, the Company intends to reinvest any earnings to the expansion
and development of its business. Any payment of cash dividends on its Common
Stock in the future will be dependent on the Company's earnings, financial
condition, capital requirements and other factors which the Board of Directors
deems relevant.
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following is a discussion and analysis of the Company's historical
consolidated results of operations for the year ended December 31, 1995 compared
with the Company's historical results of operations for the year ended December
31, 1994, and a discussion and analysis of the pro forma unaudited results of
operations for the year ended December 31, 1995 of the Company and Playpal, Inc.
("Playpal") compared with the pro forma unaudited results of operations of the
Company and each of Gymania Corporation ("Gymania"), Gymania Venture Capital
Corporation ("GVCC"), and Playpal, Inc. ("Playpal") (Gymania, GVCC, and Playpal
together referred to as the "Predecessor Businesses")
12
<PAGE>
for the year ended December 31, 1994 as if the acquisitions of the Predecessor
Businesses had occurred on January 1, 1994.
The following table sets forth selected pro forma operating statement
data for the Company and pro forma operating data for the Predecessor
Businesses.
13
<PAGE>
Year Ended Year Ended
December 31, 1995 December 31,1994
----------------- ----------------
The The
The Predecessor The Predecessor
Company Businesses Company Businesses
Historical Pro-Forma Historical Pro-Forma
---------- ---------- ---------- -----------
Revenues
Store operating
revenue $ 788,291 $ 788,291 $ 1,794 $ 394,038
Equipment sales 6,250,843 7,047,043 0 11,276,525
---------- ---------- ---------- -----------
Total revenues 7,039,134 7,835,334 1,794 11,670,563
Store Operating
and Sales Costs
Cost of store
operations 1,254,631 1,254,631 1,556 635,501
Cost of equipment
sales 5,705,075 6,708,475 0 9,564,100
--------- --------- ---------- ----------
Gross Margin 79,428 (127,772) 238 1,470,962
Other Expenses
Selling, General
and Administrative
Expenses 3,149,387 3,269,087 280,885 3,220,844
Depreciation &
Amortization 515,949 599,132 134 463,477
Write off of Goodwill 4,640,377 4,640,377 0 0
Add'l Playpal Advances 667,200 667,200 0 0
Interest Expense 380,399 445,099 (702) 41,988
--------- ---------- --------- ---------
Net Loss before
Extraordinary Item (9,273,884) (9,748,667) (280,079) (2,255,347)
Extraordinary Gain 0 0 0 129,766
---------- ---------- --------- ---------
Net Loss (9,273,884) (9,748,667) (280,079) (2,125,581)
========== ========== ========= ==========
Comparison of the Company's Historical Results of Operations
for the Years Ended December 31, 1995 and 1994
December 31, 1994
For the year ended December 31, 1994, the Company's only operational
history related to expenses incurred related to the acquisitions of GVCC and
Gymania, totaling approximately $148,000. In addition, the Company accrued
expenses totaling approximately $100,000 related to the expected closure of
Gymania's existing indoor fun center location. The remaining operational results
of the Company relate to miscellaneous general and administrative costs and
insignificant store revenues and related store expenses of the Company for the
one day of operations subsequent to the acquisition of Gymania.
14
<PAGE>
Playpal
On March 13, 1995, the Company acquired all of the stock of Playpal for an
aggregate cost of $1,588,000. Because Playpal's liabilities exceeded its assets
at the date of acquisition by $3,302,351, goodwill totaling $4,890,351 was
recorded on the books in accordance with generally accepted accounting
principles ("GAAP") and was planned to be amortized over a 15 year period. The
results of operations for Playpal are included in the financial statements from
March 14 to present.
For the year ended December 31, 1995, the Company recorded $6,250,843 of
equipment sales, principally of Playpal modular soft-play units. The cost of the
play units sold was $5,705,075, or 91.3% of sales, resulting in a gross margin
of 8.7%. The depressed margins were directly the result of Playpal's lack of
working capital; due to a lack of cash and in an effort to regain customer
loyalty, 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 paid $581,047 in indirect labor costs, recorded
$333,546 in depreciation and amortization expense and $259,781 in interest
expense. Playpal also incurred $1,064,542 of other operational costs, primarily
for costs such as advertising and trade shows ($157,638), legal and professional
fees ($196,217), insurance premiums ($126,617), bad debt expense ($110,274), and
other operational expenses.
15
<PAGE>
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, Playpal expensed, as of
December 31, 1995, the remainder of the unamortized goodwill ($4,640,377) and
the Company recorded an accrual for Playpal's 1996 losses which it had funded
subsequent to year end ($667,200). No adjustments have been recorded to reflect
the fact that it is likely that a substantial amount of Playpal's liabilities
will be compromised through the bankruptcy proceedings, although there is no
assurance that this will occur. The Playpal operations consumed $1,565,068 of
the capital raised by the Company during 1995.
Jumpin' Jax Entertainment
Jumpin' Jax Entertainment is the owner/operator of the Company's two
existing Centers which opened for business in February 1995. The construction,
equipment and opening costs for these Centers totaled $1,309,542, of which
$887,738 was funded by the landlord as per the terms of the lease agreement.
During the year ended December 31, 1995, Jumpin' Jax Entertainment had total
store revenues of $788,291 with associated costs of store operations of
$1,254,631 (including $373,284 of rent expense), resulting in a net loss at the
store level of $466,340. A portion of this loss can be attributed to higher
employee costs related to the opening of the new Centers. The unprofitable
operations and 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, at which
time Jumpin' Jax Entertainment will have to vacate the premises, thus ceasing
all current retail operations. These combined factors will most probably result
in Jumpin' Jax Entertainment filing for bankruptcy protection in the near
future.
In addition to Center operating costs, Jumpin' Jax Entertainment
incurred $478,638 in salaries and benefits costs related to the development,
management, and attempted growth of the operations. Jumpin' Jax Entertainment
also recorded additional costs in 1995 related to its 1994 acquisition of
Gymania ($101,000), costs related to the closing of Gymania's original location
and the decision not to proceed with the Green Bay, Wisconsin mall project
($262,995), interest expense ($112,544) and other associated costs of
management. Jumpin' Jax Entertainment utilized $1,576,368 of the capital
proceeds raised by the Company to fund the Center openings and deficit
operations.
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 $465,101 of costs on the
Company's behalf during the year ended December 31, 1995, consisting primarily
of legal and professional fees related to being a
15
<PAGE>
publicly held corporation, salaries and benefits, and various travel related
costs arising from the development and growth of a multi-location entity.
Comparison of the Company's Unaudited Pro Forma Results of Operations
for the Year Ended December 31, 1995 to the Predecessor Businesses'
Results of Operations for the Year ended December 31, 1994
Operating Revenues
On a pro forma basis, operating revenues decreased 32.9% to $7,835,334
for the year ended December 31, 1995 compared to $11,670,563 for the Predecessor
Businesses during the same period in 1994. Store operating revenues increased
$394,253 or 100.1% to $788,291 for the year ended December 31, 1995 over the
1994 period due to the opening of the Company's two fun centers in February
1995, compared with Gymania's single entertainment facility in 1994. Equipment
sales at Playpal decreased approximately $4,229,482 for the twelve month. The
decline in sales at Playpal is primarily the result of (1) a deterioration in
sales force morale and customer perception as a result of Playpal not being
timely in the payment of sales commissions and the completion of projects prior
to its acquisition by the Company and (2) the continued inability of Playpal to
meet customer deadlines during the last quarter of 1995 due to cash flow
constraints. Continuing financial pressures did not permit Playpal to ever
consistently meet customer expectations.
Store Operating and Sales Costs
Total store operating and sales costs decreased 21.9%, or $2,236,495
for the year ended December 31, 1995, to $7,963,106 or 101.6% of total revenues,
from $10,199,601 or 87.4% of total revenues for the Predecessor Businesses
during 1994. Cost of store operations was 161.3% of store operating revenues
during the year ended December 31, 1994 from the operation of Gymania's single
facility and increased by $619,130 to 159.2% of store operating revenue for the
year ended December 31, 1995, due principally to the opening of the Company's
two fun centers and the closing of Gymania's former facility. The pro forma cost
of equipment sales decreased 29.9% for the year ended December 31, 1995, because
of the significant drop in equipment sales. Cost of equipment sales as a
percentage of revenues from equipment sales increased to 95.2% for the year
ended December 31, 1995, compared to 84.8% of such revenues for the year ended
December 31, 1994. The increase in cost of equipment sales as a percentage of
revenues from equipment sales is due primarily to increases in costs of raw
materials, freight and installation charges related to cash flow constraints,
and increased discounting of sales.
Other Expenses
With the exception of charges incurred by the Company as a result of
the April 1996 bankruptcy of Playpal, other expenses increased $587,009 to
$4,313,318 in 1995 from
17
<PAGE>
$3,726,309 in 1994. Increased costs in the JJE segment of the Company more than
offset cost reductions experienced at Playpal. The increases at JJE included
one-time costs to market the opening of the two current store locations
($94,521) and increased charges for depreciation of the new facilities (up
$126,713). The Company also experienced charges in changing its strategic focus
for Family Entertainment and Child Care Centers from the retail industry to that
of the casino industry; this change necessitated increased marketing ($76,000),
development of a corporate infrastructure to meet the industry's expected needs
(salaries and benefits up $274,727), and a decision not to open an additional
mall facility which has resulted in litigation ($105,000 accrued). The Company
incurred increased legal and professional costs related to its obligations as a
public company and to various litigation brought against the Company and its
subsidiaries (up $81,085). These costs have left the Company without cash and
unable to meet its obligations as they come due.
In addition, 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. As of December 31, 1995, Playpal
expensed the remainder of the unamortized goodwill ($4,640,377) and the Company
recorded an accrual for Playpal's 1996 losses which it had funded subsequent to
year end ($667,200). No adjustments have been recorded to reflect the fact that
it is likely that a substantial amount of Playpal's liabilities will be
compromised through the bankruptcy proceedings, although there is no assurance
that this will occur.
Net Loss
On a pro forma basis, the Company's net loss for the year ended
December 31, 1995, increased to $9,748,667 from a net loss of $2,125,581 for the
Predecessor Businesses for 1994.
Extraordinary Gain
The extraordinary gain for the pro forma year ended December 31, 1994 primarily
relates to various amounts owed by Gymania to shareholders and relatives of
shareholders of the Company that were forgiven by these individuals prior to the
acquisition of certain assets and liabilities of Gymania by the Company.
Liquidity and Capital Resources
The Company sustained substantial losses in the fiscal year ended December 31,
1995 totaling $9,273,884 (of which $7,000,725 is attributable to the Playpal
operation, $4,890,351 of that being the expensing of goodwill). In addition, the
Company's working capital deficit at December 31, 1995 was $6,222,163. The
Company also had a stockholder's deficit of $4,547,453 at December 31, 1995. The
Company continued to sustain substantial losses in the six month period
18
<PAGE>
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 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 Jumpin' Jax Entertainment
having to vacate the premises and ceasing all current Center operations, and
will likely result in a filing for protection under federal bankruptcy laws.
At that point, all of the Company's current sources of revenue will cease
to exist.
During fiscal 1995, the Company raised $3,699,131 through private placements of
equity and received advances from the landlord of the two Jumpin' Jax
Entertainment Centers totaling $887,738. The Company also collected $133,772
from notes receivable and generated $540,353 net by increasing its working
capital deficit. As of December 31, 1995, the Company had expended all of these
funds and was left with no cash reserves.
Of the $5,260,994 of cash generated, $514,000 was utilized to acquire Playpal,
Inc. and an additional $1,475,068 was invested by the Company into the Playpal
operations in an effort to restore the business to profitability. From these
funds, Playpal made principal payments totaling $146,718 on its debt obligations
and funded its cash earnings shortfall of $1,212,902.
The Company also utilized funds to develop and open its two Jumpin' Jax
Entertainment Centers. Capital costs related to the two stores opened in 1995
totaled $1,215,021; Jumpin' Jax Entertainment also made principal payments on
certain indebtedness under which it was obligated of $54,914 and used $1,563,843
to fund its deficit retail operations and management staff costs. The capital to
fund these costs came from two sources -- the $887,738 advanced by the landlord
as an incentive to locate in the malls and advances from the Company totaling
$1,576,368 which were ultimately funded out of the proceeds of the equity
offerings.
The Company used the remainder of the funds raised during 1995 to purchase a
$50,000 certificate of deposit (required by the bank holding the construction
loan on the Playpal building in Florida as collateral before it would consent to
the acquisition), as well as to pay down certain indebtedness under which it was
obligated of $86,106 and to fund the cash costs of the Company's senior
management operations ($271,022). This left the Company with virtually no cash
resources as of year end.
Since year end, the Company has 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
19
<PAGE>
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)
2,512,500 shares of Common Stock and warrants to purchase an additional
2,512,500 shares of Common Stock. Additional shares will be due to such
investors if a registration statement is filed and declared effective and the
price of the stock is less than $1.00 at such time. 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.
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.
In addition, in June 1996, the Company entered into a factoring arrangement with
Allstate Financial Corporation pursuant to which the Company received funds of
$35,000. All of the Company's assets were pledged to secure such indebtedness.
In addition, all of the shares of Reytan, a company owned 50% by Mr. Chandler
and 50% by Mr. Newman, were pledged to secure such indebtedness.
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 and file for protection under
bankruptcy laws.
ITEM 7. Financial Statements.
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
20
<PAGE>
ITEM 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
The Company changed its principal accounting firm from Smith &
Company to Coopers & Lybrand L.L.P., effective as of January 12, 1995.
Smith & Company's report on the financial statements for the
preceding two years did not contain an adverse opinion or disclaimer of opinion,
nor been qualified or modified as to uncertainty, audit scope or accounting
principles.
The change of accountants was approved by the Company's Board
of Directors. There have been no disagreements with Smith & Company on any
matter of accounting principles or practice, financial statement disclosure or
auditing scope or procedure.
The Company ceased its auditing relationship with its
principal accounting firm Coopers & Lybrand L.L.P. on December 22, 1995. On May
1, 1996 the Company changed its principal accounting firm to Ernst & Young
L.L.P. Coopers & Lybrand L.L.P.'s report on the financial statements for the
preceding year did not contain an adverse opinion or disclaimer of opinion, nor
been qualified or modified as to uncertainty (except that the opinion indicated
that certain matters contained in the financial statements raised substantial
doubt about the Company's ability to continue as a going concern), audit scope
or accounting principles. The change of accountants was approved by the
Company's Board of Directors. There were no disagreements with Coopers &
Lybrand, L.L.P., on any matter of accounting principles or practice, financial
statement disclosure or auditing scope in procedure.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth certain information regarding the
officers and directors of the Company as of August 14 1996:
<PAGE>
OFFICERS AND DIRECTORS
Name Age Position
Richmond W.A. Chandler 53 Chairman of the Board and
Chief Executive Officer
21
<PAGE>
G. Michael Newman 50 Executive Vice President and
Director
Stephen M. Spellman 34 Vice President - Finance
David W. Powell 39 President - PlayPal Sales
Corporation
Leslie A. Wulf 35 President - JJAX Entertainment, Inc.
and Jumpin' Jax Entertainment, Inc.
<PAGE>
The following is a list of each of the
above person's principal occupations or employment during the past five
years. All directors have been elected to serve until their successors have been
duly elected and qualified, or until their earlier resignation or removal
pursuant to the Bylaws of the Company. Executive officers are appointed by the
Board of Directors to serve until their successors are duly elected and
qualified, or until their earlier resignation or removal.
Richmond W.A. Chandler. Mr. Chandler has
been the Chairman of the Board of Directors and Chief Executive Officer of
the Company since November 1994. He has been a licensee of McDonalds
Restaurants of Canada Ltd. in the Toronto metropolitan area since 1975.
G. Michael Newman. Mr. Newman has been
the Executive Vice-President and a director of the Company since November
1994. Since 1991, Mr. Newman also has been managing director of ADEVAM
Investments Inc. and Boardwalk Capital Inc., both Toronto-based private
investment banking firms. From 1987 to 1991, Mr. Newman was President of Bridge
Integrated Technologies Inc., a Canadian public company and manufacturer of
electronic equipment. On August 13, 1996, Mr. Newman tendered his resignation
from the Company in all capacities effective August 19, 1996.
Stephen M. Spellman. Mr. Spellman has
been Vice President of Finance of the Company since September 1995. From
February 1994 until Mr. Spellman joined the Company, he was Controller of
Travelers Express Company, Inc., a company which was engaged in payment
processing for banks and credit unions. From April 1988 until February 1994, Mr.
Spellman was the Director of Capital Markets for Northwest Airlines, a
commercial airline carrier. Prior to that time, Mr. Spellman was a Senior
Auditor for Ernst & Whinney, an accounting firm.
David W. Powell. Mr. Powell has been
President of Playpal Sales Corporation since April 1995. Between 1991 and
1995, Mr. Powell was President of Gymania Corporation, a Minneapolis-based
indoor fun center operator whose assets were acquired by the Company in December
1994, and subsequently Jumpin' Jax Entertainment. Between 1987 and 1991, Mr.
Powell was a Vice President of Vitaphone Corporation of Menlo Park, California,
a medical device company.
22
<PAGE>
Leslie A. Wulf. Mr. Wulf has been President
of JJAX Entertainment, Inc. since March 1996 and President of Jumpin' Jax
Entertainment, Inc., since July 1995. From October 1994 until July 1995, Mr.
Wulf served as President and Chief Executive Officer of Kidsport's
International, Inc., a company which owns and operates 42 family entertainment,
educational and fitness centers in eleven countries. Mr. Wulf also served as
President of Funster's from January 1992 until October 1994, a company engaged
in the operation of family entertainment facilities in conjunction with adult
health clubs. In addition, during the period 1987 until January 1992, Mr. Wulf
served as President, Vice President of Operations and Vice President of
Development of Grandma Lee's, Australia, a bakery and restaurant franchising
operation.
ITEM 10. Executive Compensation
The following table sets forth a summary of
the compensation paid to or accrued by the Company during the fiscal year
ended December 31, 1994 to the Company's Chief Executive Officer and each of the
other most highly compensated executive officers of the Company, determined as
of the end of the last fiscal year
<TABLE>
<CAPTION>
Securities
Annual Underlying All Other
Name and Principal Position Year Compensation (1) Options SARS Compensation
- --------------------------- ---- ---------------- ------- ---- ------------
<S> <C> <C> <C> <C> <C>
Richmond Chandler 1994 -- -- --
Chief Executive 1995 (2)
Officer
Michael Newman 1994 --
Executive Vice 1995 (2) -- --
President
Stephen M. Spellman 1995 $ 22,750 250,000 (3) -- $ 2,200
Vice President - Finance
David W. Powell 1995 $100,000 200,000 -- $ 8,753
President - Playpal 1994 --
Sales Corporation
23
<PAGE>
Leslie A. Wulf 1995 $ 50,000 175,000 (4) -- $3,600
President - JJAX 1994 -
Entertainment, Inc.
and Jumpin' Jax
Entertainment, Inc.
(1) The Company did not issue any bonuses, other annual compensation, stock
appreciation rights or long term incentive plan payouts to any of the named
individuals in the Summary Compensation Table.
(2) Does not include $90,000 in management fees paid to Reytan Holdings,
a company owned 50% by Mr. Chandler and 50% by Mr. Newman. Does
not include reimbursement for actual expenses totaling approximately
$162,000. See "Certain Transactions."
(3) Such options were issued in April 1996.
(4) Such options were issued in June 1996.
During the fiscal year ended December 31, 1995, the Company did not pay any cash
compensation to Richmond W.A. Chandler, its Chief Executive Officer, nor to
Michael Newman, Executive Vice President, except for reimbursement of certain
travel and business related expenses and except with respect to a management fee
paid of $90,000 to Reytan Holdings, a company owned 50% by Mr. Chandler and 50%
by Mr. Newman. Directors presently receive no compensation for acting in such
capacities, other than reimbursement for actual, demonstrable out-of-pocket
expenses incurred on behalf of the Company.
Employment Agreements
The only employment agreements entered into between the
Company and any of its executive officers are as follows:
In December 1994, the Company entered into a two-year
employment agreement with David W. Powell. Pursuant to the employment agreement,
Mr. Powell's base salary is $100,000, and he is eligible for discretionary
bonuses from the Company from time to time. Mr. Powell's employment may be
terminated at any time; however, he is entitled to certain severance
payments if his employment is terminated without cause. He has agreed not to
compete against the Company for two years after any termination of employment.
The Company also agreed to assume the payment of certain debt on behalf of Mr.
Powell equal to $53,153.
In January 1996, the Company entered into an employment
agreement with Michael Newman pursuant to which Mr. Newman agreed to act as
President of the Company until January 6, 2006. Mr. Newman is to receive
compensation of $175,000 per year and an annual bonus equal to 2.5% of net
income, as well as certain other benefits. Mr. Newman agreed that he would serve
in such capacity without cash compensation until he and the Company shall
otherwise agree. Mr. Newman was also granted options to purchase 650,000 shares
of Common Stock, exercisable at a price of $.865 per share during the term of
the agreement in consideration of his service as an executive with the Company
since November 1994 for which he has received no cash compensation (with the
exception of certain amounts paid to Reytan Holdings, Inc., a company of which
Mr. Newman is a 50% stockholder. See "Certain Transactions.").
In April 1996, the Company entered into a two-year employment
agreement with Stephen M. Spellman. Pursuant to the employment agreement,
Mr. Spellman's base salary will be $100,000, payable at a rate of $78,000 per
annum until such time as the Company closes on an offering of Common Stock of at
least $3,000,000, at which time he will receive a lump sum payment for the
arrearages; he also is eligible for discretionary bonuses from the Company from
time to time. Mr. Spellman's employment may be terminated at any time; however,
he is entitled to certain severance
24
<PAGE>
payments if his employment is terminated without cause. He has agreed not to
compete against the Company for two years after any termination of employment.
In June 1996, the Company entered into a three-year employment
agreement with Leslie A. Wulf. Pursuant to the employment agreement, Mr. Wulf's
base salary will be $100,000, payable at a rate of $75,000 per annum until such
time as the Company closes on an offering of Common Stock of at least
$3,000,000, at which time he will receive a lump sum payment for the arrearages;
he also is eligible for discretionary bonuses from the Company from time to
time. Mr. Wulf's employment may be terminated at any time; however, he is
entitled to certain severance payments if his employment is terminated without
cause. He has agreed not to compete against the Company for two years after any
termination of employment.
The compensation of the Company's executive officers during
the fiscal year ended December 31, 1995 was determined by the Board of
Directors. Such determination was based upon the Board's assessment of each
executive's performance to date.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% shareholders are required
by the Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and representations that no
other reports were required during the fiscal year ended December 31, 1995, the
following Section 16(a) report was not filed on a timely basis: David Powell -
one report.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 14, 1996, the
record and beneficial ownership of Common Stock of the Company by each officer
and director, all officers and directors as a group, and each person known to
the Company to own beneficially or of record five percent or more of the
outstanding shares of the Company:
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
Richmond W.A. Chandler (2) 6,234,577 42.4%
c/o Jumpin' Jax Corporation
3025 Harbor Lane North
Suite 315
Plymouth, Minnesota 55447
G. Michael Newman (2) 6,884,577 45.0%
c/o Jumpin' Jax Corporation
3025 Harbor Lane North
Suite 315
Plymouth, Minnesota 55447
Reytan Holdings, Inc. 2,417,022 16.5%
69 Northmeadow Crescent
Thornhill, Ontario L4J 3C4
Stephen M. Spellman (3) 250,000 1.7%
c/o Jumpin' Jax Corporation
3025 Harbor Lane North
25
<PAGE>
Suite 315
Plymouth, Minnesota 55447
David W. Powell (4) 573,798 3.8%
c/o Playpal Sales Corporation
3025 Harbor Lane North
Suite 315
Plymouth, Minnesota 55447
Leslie A. Wulf (5) 175,000 1.2%
c/o JJAX Entertainment, Inc.
3025 Harbor Lane North
Suite 315
Plymouth, Minnesota 55447
All Executive Officers and Directors
as a Group (five persons) (2)(3)(4)(5)
- ------------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities, shares of Common Stock
subject to options, warrants and convertible notes currently
exercisable or convertible, or exercisable or convertible within 60
days, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person.
(2) Includes 2,417,022 shares owned by Reytan Holdings, Inc. ("Reytan"),
an Ontario corporation owned by Messrs. Chandler and Newman, and
3,742,555 shares as to which Messrs. Chandler and Newman exercise
voting authority. Also includes 75,000 shares acquired as part of the
Private Placement. All of the shares owned by Reytan were pledged to
secure certain indebtedness in connection with certain secured
financing obtained by the Company in June 1996. Also includes options
held by Mr. Newman to acquire 650,000 shares of Common Stock at $.865
per share during the term of his employment. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Relationships and Related Transactions."
(3) Represents warrants to acquire 250,000 shares at $.6875 per share for
ten years.
(4) Represents options to acquire 373,798 shares which Mr. Powell and his
spouse were granted in connection with the acquisition of substantially
all of the assets of Gymania in December 1994 (the "Gymania
Acquisition") which are exercisable at a price of $.0074. Mr. Powell
and his spouse were substantial shareholders of Gymania. Also includes
warrants to acquire 200,000 shares at $1.9375 per share for 5 years.
(5) Represents warrants to acquire 175,000 shares at $.3437 per share for
five years.
26
<PAGE>
ITEM 12. Certain Relationships and Related Transactions
In November 1994, the Company's predecessor, Four Star Ranch,
Inc. ("Four Star") issued 2,595,000 shares of Common Stock to Reytan Holding,
Inc., an entity owned and controlled 50% by Richmond W.A. Chandler and 50% by G.
Michael Newman, the Company's Chief Executive Officer and Executive Vice
President, respectively, in consideration of Reytan causing the Company to
change its business plan to that of developing a chain of indoor fun centers,
and in furtherance of such objective, to pursue negotiations for the purchase of
substantially all of the operating assets of Gymania Corporation by December
31,1994. The Reytan Stock Purchase constituted a majority of the shares of the
Company's Common Stock at that time. Four Star Ranch was a developmental stage
enterprise, the business of which was changed by Messrs. Chandler and Newman to
that of constructing and operating Centers. In connection with the Reytan Stock
Purchase, the founding shareholders of Four Star Ranch agreed to restrict the
public sale of their shares to no more than 20,000 shares per month for two
years following the Reytan Stock Purchase.
In June 1996, the Company entered into a secured lending
agreement pursuant to which it pledged all of the assets of the Company in
consideration of an accounts receivable arrangement. Such assets also included
all of the shares of Common Stock owned by Reytan which were pledged to secure
the Company's obligations thereunder under the factoring agreement.
On December 30, 1994, the Company acquired substantially all
of the assets of Gymania Venture Capital Corporation ("GVCC"), a Canadian
corporation (the "GVCC Acquisition"). Such assets included cash, a note
receivable from Gymania Corporation, a Minnesota corporation ("Gymania") and
certain prepaid expenses, as well as the right to use the name Jumpin' Jax in
Canada. In consideration of the purchase of the assets, the Company assumed
certain obligations of GVCC, including a loan in the form of a convertible
debenture from Gatesway Holding Company, S.A. ("Gatesway"), a non-affiliate of
GVCC for $107,143, which debenture was simultaneously converted into 107,143
shares of the Company's Common Stock. Several of GVCC's principal shareholders
have, in the past, been principal stockholders of the Company. Additionally,
Messrs. Chandler and Newman, executive officers and directors of the Company are
also directors of GVCC.
Also, on December 30, 1994, the Company's wholly-owned
subsidiary, Jumpin' Jax Entertainment purchased substantially all of the assets
of Gymania (the "Gymania Acquisition"). Such assets primarily included soft play
equipment for the operation of the Centers. In consideration of the Gymania
Acquisition, the Company assumed approximately $974,000 of Gymania indebtedness,
including approximately $600,000 of accounts payable owed to GVCC. The Company
also agreed to indemnify David Powell, formerly President of Gymania and
currently President of Playpal Sales Corporation, a wholly-owned subsidiary of
the Company, against certain liabilities incurred by Gymania prior to the
Gymania Acquisition. Such liabilities included personal guaranties by Mr. Powell
and his wife in connection with a loan from Riverside Bank to Gymania, which
guaranties are collateralized by a mortgage on their personal residence. The
Company also agreed to make reasonable efforts, as soon as reasonably may be
accomplished, to relieve Mr. Powell and his wife from
27
<PAGE>
such liability to Riverside Bank. Further, the Company agreed to relieve Mr. and
Mrs. Powell from certain guaranties provided in connection with indebtedness of
approximately $44,000 to Mr. William Auer (who is Mrs. Powell's father) and
approximately $5,000 owed to Mr. Ronald Yamamoto. The shareholders of Gymania
were also issued options to purchase an aggregate of 450,868 shares of the
Company's Common Stock, until December 30, 1997, at a purchase price of $.0074
per share (the "Gymania Options"). Further, the Company agreed to issue and
register such 450,868 shares underlying the Gymania Options. The Company also
assumed certain debt on behalf of Mr. Powell equal to $53,123.
In March 1995, the Company issued 351,000 shares of Common
Stock, a note for $100,000 ($60,000 of which was subsequently paid), and paid
$210,000 in exchange for all of the capital stock of the Company's wholly-owned
subsidiary Playpal.
Reytan, a company owned equally by the Company's Chief
Executive Officer and President, received approximately $90,000 in management
fees from the Company for the fiscal year ended December 31, 1995.
During fiscal 1995, the Company raised additional equity
capital of $3,699,131 primarily through the sale of Common Stock to foreign
investors, almost all of which was expended to fund deficit retail operations
and corporate expenses. In addition, during the first six months of fiscal 1996,
the Company raised an additional approximately $1,300,000, all of which was
expended primarily to fund deficit operations of the Company. Such amounts
included the Private Placement in December 1995 and January 1996, 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 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 identical 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 identical unit for each unit issue 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) shares of
Common Stock equal to 2,512,500 and warrants to purchase 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. In May 1996, the Company
also engaged in the May Offering, in which it sold 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; or (b) one year from
the initial closing date of the Offering); and (2) the issuance, on the
effective date of a registration statement filed with the Commission of:
(a) 30,000 shares of Common Stock; and (b) a total of
28
<PAGE>
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; (ii) 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 (iii) warrants to purchase 1,050,000
shares of Common Stock, exercisable at a price of $1.00 per share for a period
five years from the initial closing. The securities contain certain piggyback
registration rights. The proceeds were utilized by the Company for working
capital purposes.
In connection with a financing for the Company in December
1995, the Keogh and Profit Sharing Plan of a partner of a law firm representing
the Company purchased one unit for a purchase price of $25,000.
In July 1996, the Company entered into a Settlement Agreement
with Parsinen, Bowman, Kaplan & Levy, P.A. (the "Parsinen Firm"), a firm which
acts as counsel to the Company whereby the Company confessed judgment for
$170,324 due and owing to the Parsinen Firm for legal fees and expenses. In
addition, the Company issued a warrant to purchase the lesser of (1) 50,000
shares or Common Stock or (2) a number of shares of Common Stock equal to 1% of
the fully diluted shares outstanding.
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of the report:
Exhibit
Number Title Method of Filing
- ------- ----- ----------------
2.1 Asset Purchase Agreement dated Incorporated by
December 30, 1994, between Gymania reference to the
Venture Capital Corporation and Company's Form 8-K
Jumpin' Jax Corporation dated
December 30, 1994
2.2 Asset Purchase Agreement dated Incorporated by
December 30, 1994, between Gymania reference to the
Corporation and Jumpin' Jax Retail Company's Form 8-K
Stores USA, Inc. dated December 30, 1994
2.3 Stock Purchase Agreement dated Incorporated by
March 10, 1995, between F. Charles reference to the
George, David A. Yates, and Mark C. Company's Form 8-K
Hallenberg and Jumpin' Jax
29
<PAGE>
dated March 13, 1995
Corporation
3.1 Restated Articles of Incorporation Incorporated by
of the Company, as amended reference to the
Company's Form 10-K
dated May 12, 1995
3.2 Bylaws of the Company Incorporated by
reference to the
Company's Form 10-K
dated May 12, 1995
4 Instruments defining rights of Incorporated by
security holders reference to the
Company's Form 10-K
dated May 12, 1995
10.1 Executive Compensation Agreement Incorporated by
dated December 30, 1994, between reference to the
David W. Powell and Jumpin' Jax Company's Form 8-K
Retail Stores USA, Inc. dated December 30, 1994
10.2 Employment Agreement dated Filed herewith
June 14, 1996, between Les Wulf
and JJAX Entertainment, Inc.
10.3 Undertaking and Indemnity Agreements Incorporated by
between David W. and Cynthia A. reference to the
Powell and Jumpin' Jax Corporation Company's Form 8-K
dated December 30, 1994
10.4 Executive Compensation Agreement Filed herewith
dated April 9, 1996, between
Stephen Spellman and Jumpin' Jax
Corporation
16 Letters dated January 16, 1995 Incorporated by
re change in certifying accountants reference to the
Company's Form 8-K
dated January 12, 1995
[ ] Letters dated December 22, 1995 Incorporated by
30
<PAGE>
re change in certifying accountants reference to the
Company's Form 8-K
dated December 22, 1995
[ ] Letters dated May 1, 1996 Incorporated by
re change in certifying accountants reference to the
Company's Form 8-K
dated May 1, 1996
22 Subsidiaries of the Company Filed herewith
(b) Reports on Form 8-K. During the last fiscal quarter of the
period covered by this report, the Company filed reports on Form 8-K dated
December 22, 1995 (Items 1 and 16 reported).
31
<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
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name Date
---- ----
/s/ Richmond W. A. Chandler August 16, 1996
-----------------------------
Richmond W.A. Chandler
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
/s/ G. Michael Newman August 16, 1996
-----------------------------
G. Michael Newman
Vice President and a Director
(Principal Financial Officer)
32
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy material has been sent to
security-holders of the Company for its fiscal year ended December 31, 1995. The
Company intends to furnish to its security-holders an annual report and proxy
materials subsequent to the filing of this annual report on Form 10-KSB. When
such reports are furnished to security-holders, copies thereof will be sent to
the Securities and Exchange Commission.
33
</TABLE>
<PAGE>
EMPLOYEE COMPENSATION AGREEMENT
THIS AGREEMENT is made as of the 14th day of June 1996 between
JJAX ENTERTAINMENT, INC.
a corporation incorporated under the laws of the State of
Nevada, U.S.A.
(hereinafter referred to as the "Corporation")
OF THE FIRST PART,
- and -
LESLIE A. WULF
of the Town of River John in the Province of Nova Scotia,
Canada
(hereinafter referred to as "Wulf"),
OF THE SECOND PART.
WHEREAS the Corporation wishes to retain the services of
Wulf to provide the services hereinafter described during the term hereinafter
set out;
AND WHEREAS in order to include execution to enter into the transaction
with the Corporation the Guarantor has agreed to guarantee the obligation of the
Corporation hereunder;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
mutual covenants and agreements herein contained and for other good and valuable
consideration, the receipt and sufficiency of which is acknowledged, the parties
agree, intending to be legally bound, as follows:
1. TERM
The Corporation shall employ Wulf for a period of three years
from the 1st of July, 1995, unless such employment shall be terminated earlier
as hereinafter provided. Upon the expiry of the term of this agreement, and on
each anniversary of such date falling thereafter, the term of this agreement
shall automatically be extended for one additional year on the same terms and
conditions unless, not less than six months prior to any such anniversary,
either Wulf or the Corporation shall have given written notice to the other that
it does not wish to further extend this agreement.
<PAGE>
2. DUTIES
Wulf shall serve the Corporation and any subsidiaries of the
Corporation in such capacity or capacities, and shall perform duties and
exercise such powers pertaining to the management and operation of the
Corporation, and any subsidiaries and associates of the Corporation, as may be
determined from time to time by the Chief Executive Officer and Board of
Directors of the Corporation consistent with the duties of his office as
President of the Corporation.
Without limitation of the foregoing, Wulf shall occupy the office of
President and shall:
(a) devote his full time (which shall not be less than 40 hours
per week), attention and best efforts during normal business hours to
the business and affairs of the Corporation;
(b) diligently and faithfully, to the best of Wulf's abilities
and in the best interests of the Corporation, perform those duties
that may reasonably be assigned to Wulf;
(c) provide input on continuing development of the Corporation;
(d) participate in corporate financing presentations, as required;
(e) use his best efforts to promote the interests and goodwill
of the Corporation;
(f) not allow any conflict of his interests to exist.
(g) report, no less frequently than monthly, the material results
and plans of the Corporation to the Chief Executive Officer and Board
of Directors.
3. REPORTING PROCEDURES
Wulf shall report on a regular basis to the Chief Executive
Officer of the Corporation. Wulf shall report fully on the Corporation's
management, operations and business affairs, and shall advise to the best of his
ability and in accordance with reasonable business standards on business matters
that may arise from time to time during the term of this Agreement.
2
<PAGE>
4. REMUNERATION
A. Base Salary.
The annual base salary payable to Wulf for his services hereunder for
each year of the term of this agreement initially shall be One Hundred Thousand
(US$100,000.00) United States Dollars per annum, exclusive of bonuses, benefits
and other compensation. Despite the foregoing, the Corporation shall pay Wulf at
the rate of Seventy Five Thousand (US$75,000.00) United States Dollars per annum
until such time as the Corporation or the parent Corporation closes on a private
placement, public offering or secondary offering, of its Common Stock of at
least US $3,000,000.00 after the date of this agreement. Assuming such placement
is successful during the term of this agreement, the Corporation shall pay Wulf
a lump-sum within 30 days after the closing on the private placement in order to
bring his base salary current to the US$100,000.00 level.
The annual base salary payable to Wulf pursuant to the provisions of
this Section shall be paid in equal bi-weekly installments, in arrears, or in
such other manner as may be mutually agreed upon, less, in any case, any
deductions or withholding required by law.
B. Employee Benefits.
The Corporation shall provide Wulf with employee benefits comparable to
those, if any, provided by the Corporation from time to time to senior employees
of the Corporation, and shall permit Wulf to participate in any share option
plan, share purchase plan, retirement plan or similar plan offered by the
Corporation from time to time to senior employees in the manner and to the
extent authorized by the Board of Directors of the Corporation. Without limiting
the generality of the foregoing, Wulf shall be provided with medical insurance
paid by the Corporation providing benefits to Wulf and his dependents living in
the United States with him substantially.
C. Moving Expenses.
The Corporation shall reimburse Wulf for all reasonable out of pocket
moving expenses actually incurred, and legal cost of obtaining or changing
Wulf's L-1A Visa and obtaining a US Green Card, promptly upon submission of
receipts.
5. PERFORMANCE BONUS
In addition to Wulf's annual base salary, he shall participate
in:
a) the Guarantor's Incentive Stock Option Plan (the "ISOP")
through the grant of 175,000 options thereunder (and such future options as may
be determined by the Board of Directors) to purchase Common Stock of the
Guarantor, exercisable at any time during the five years from the date hereof
(subject to the provisions of the ISOP) at an exercise price equal to the
closing high bid price for such stock as reported by the Nasdaq Bulletin Board
as of the date of this Agreement; and
b) the Corporation's Bonus Plan as it may exist from
time to time.
3
<PAGE>
6. FURTHER SALARY OR BONUS ADJUSTMENTS
Other than as herein provided, there shall be no
cost-of-living increase or merit increase in the annual base salary of Wulf
unless agreed to in writing by the Corporation. The annual base salary of Wulf
shall be reviewed on an annual basis by the Board of Directors of the
Corporation.
7. VACATION
Wulf shall be entitled to three (3) weeks paid vacation per
fiscal year of the Corporation at a time approved in advance by the Board of
Directors of the Corporation, which approval shall not be unreasonably withheld
but shall take into account the staffing requirements of the Corporation and the
need for the timely performance of Wulf's responsibilities. In the event that
Wulf decides not to take all the vacation to which he is entitled in any fiscal
year, Wulf shall be entitled to take up one week of such vacation in the next
following fiscal year (but not to be carried over into the second succeeding
fiscal year) at a time approved in advance by the Chief Executive Officer of the
Corporation.
8. VEHICLE ALLOWANCE
Wulf shall be supplied with a $600 per month automobile
allowance. In addition, the Corporation shall pay or reimburse Wulf for gasoline
expenses properly incurred or to be incurred in connection with Wulf carrying
out his duties hereunder. Wulf shall supply the Corporation with the originals
of all invoices or statements in respect of which Wulf seeks reimbursement.
9. EXPENSES
Wulf shall be reimbursed for all reasonable travel and other
out-of-pocket expenses actually and properly incurred by Wulf from time to time
in connection with carrying out his duties hereunder. For all such expenses Wulf
shall furnish to the Corporation originals of all invoices or statements in
respect of which Wulf seeks reimbursement.
10. TERMINATION
a) For Cause
The Corporation may terminate the employment of Wulf
immediately without notice for cause which, without limiting the generality of
the foregoing, shall include:
(i) if Wulf is convicted of a criminal offense involving
fraud, or dishonest, or such other criminal offense that could bring into
question Wulf's integrity or moral standing;
4
<PAGE>
(ii) if Wulf or any member of his family makes any personal
profit arising out of or in connection with a transaction to which the
Corporation is a party or with which it is associated without making disclosure
to and obtaining the prior written consent of the Chief Executive Officer or
Directors; or
(iii) if Wulf breaches any of his duties specified above
in paragraph 2.
b) For Failure to Perform Duties
(i) if there is a repeated and demonstrated failure on the
part of Wulf to perform the material duties of Wulf's position in a competent
manner and Wulf fails to substantially remedy the failure within a period of
thirty (30) days after receiving written notice of such failure from the
Corporation;
(ii) if Wulf disobeys reasonable instructions given in the
course of employment by the Chief Executive Officer of the Corporation, that are
not inconsistent with Wulf's management position, and such disobeyance by Wulf
has a material impact on the business of the Corporation and is not remedied by
Wulf within thirty (30) days after receiving written notice of such
disobedience.
c) For Death or Disability. Upon the event of Wulf's death prior
to the completion of the term of this employment agreement, his employment will
immediately terminate. This agreement may be immediately terminated by the
Corporation by notice to Wulf if Wulf becomes permanently disabled. Wulf shall
be deemed to have become permanently disabled if in any year during the
employment period, because of ill health, physical or mental disability, or for
other causes beyond the control of Wulf, Wulf has been continuously unable or
unwilling or has failed to perform Wulf's duties for 120 consecutive days, or
if, during any year of the employment period, Wulf has been unable or unwilling
or has failed to perform his duties for a total of 180 days, consecutive or
not. The term "any year of the employment period" means any period of 12
consecutive months during the employment period.
d) Voluntary Resignation. On the sixtieth (60th) day following
the date upon which Wulf gives notice of his intention to resign during any
year of his employment, or if he elects to not renew the within Agreement; and
11. SEVERANCE PAYMENTS
a) Upon termination of Wulf's employment (i) due to his
voluntary resignation or by virtue of the non-renewal of this Agreement or (ii)
in the vent Wulf is terminated for cause as described in subsection 10(a)
above, Wulf shall not be entitled to any severance payments other than
compensation earned by Wulf before the date of termination calculated pro rata
up to and including the date of termination, together with any amount to which
Wulf is entitled under applicable legislation, as amended and in force from
time to time; and
5
<PAGE>
b) for any other reason other than the reasons set forth in
subsection 10(a), Wulf shall be entitled to a lump-sum severance payment equal
to three months' base salary plus all compensation earned by Wulf before the
date of termination calculated pro rata up to and including the date of
termination, together with any amount to which Wulf is entitled under
applicable legislation, as amended and in force from time to time; and Wulf
agrees to accept said severance payments if any in full satisfaction of any
liability that the Corporation might have to him.
12. CONFIDENTIALITY
Wulf acknowledges and agrees that:
a) in the course of performing his duties and responsibilities
as an officer and employee of the Corporation, he has had and will continue to
have access to, and has been and will be entrusted with, detailed confidential
information and trade secrets (printed or otherwise) concerning past, present,
future and contemplated products, services, operations and marketing techniques
and procedures of the Corporation and its subsidiaries, including, without
limitation, information relating to addressees, preferences, needs and
requirements of past, present and prospective clients, customers, suppliers
(which, for all purposes of this agreement, shall be deemed to include, without
limitation, all affiliates, subsidiaries, shareholders, directors, key
employees and related corporations) and employees of the Corporation and its
subsidiaries (collectively, "Trade Secrets"), the disclosure of any of which to
competitors of the Corporation or to the general public, or the use of same by
Wulf or any competitor of the Corporation or any of its subsidiaries, would be
highly detrimental to the Corporation's interests;
b) in the course of performing his duties and responsibilities
for the Corporation, Wulf has been and will continue in the future to be a
representative of the Corporation to its customers, clients and suppliers, and
as such, has had and will continue in the future to have significant
responsibility for maintaining an enhancing the goodwill of the Corporation
with such customers, clients and supplier sand would not have, except by virtue
of his employment with the Corporation, developed a close and direct
relationship with the customers, clients and suppliers of the Corporation;
c) Wulf, as an officer of the Corporation, owes fiduciary duties
to the Corporation, including the duty to act in the best interests of the
Corporation, and to disclose any conflicts of interest or potential conflicts
of interest in writing to the Corporation; and
d) the Corporation is entitled to protect, by way of injunction
or otherwise:
i. the right to maintain the confidentiality of the
Trade Secrets;
ii. the right to preserve the goodwill of the
Corporation; and
6
<PAGE>
iii. the right to the benefit of any relationships that
have developed between Wulf and the customers, clients and suppliers of the
Corporation by virtue of Wulf's employment with the Corporation,
all of which constitute proprietary rights exclusive to the
Corporation.
In acknowledgment of the matters described above and in consideration
of the payments to be received by Wulf pursuant to this Agreement, Wulf hereby
agrees that he will not once he ceases to be employed by the Corporation,
directly or indirectly disclose to any person or in any way make use of (other
that for that benefit of the Corporation), in any manner, any of the Trade
Secrets, provided that such Trade Secrets shall be deemed not to include
information that is or becomes generally available to the public other than as a
result of disclosure by Wulf, the onus of which to prove on a balance of
probabilities shall be on Wulf.
13. NON-SOLICITATION
Wulf hereby agrees that he will not, during the period commencing on
the date hereof and ending two years following the expiration of the term of
this Agreement, be a party to or abet any solicitation of customers, clients or
suppliers of the Corporation, parent company, or any of its subsidiaries, to
transfer business from the Corporation or any of its subsidiaries to any other
person, or seek in any way to persuade or entice any employee of the Corporation
or any of its subsidiaries to leave that employment or to be a party to or abet
any such action.
14. NON-COMPETITION
Wulf hereby agrees and undertakes that he shall not, at any time during
the period commencing on the date hereof and ending two (2) years from the day
when Wulf ceases to be employed by the Corporation, on his own behalf or on
behalf of any person, directly, in any capacity whatsoever including, without
limitation, as an employer, employee, principal, agent, joint venture, partner,
shareholder or other equity holder, independent contractor, licenser, licensee,
franchiser, franchisee, distributor, consultant, supplier, or trustee, or by or
through any corporation, co-operative, partnership, unincorporated association,
company, limited liability company or limited liability partnership, trust,
entity with juridical personality, or otherwise in connection with any person,
carry on or be engaged in or have any financial or other interest in, or be
otherwise commercially involved, in any endeavor, activity or business in all or
part of the United States of America and Canada, where such endeavor, activity
or business carries on the same business as or in direct competition with the
business carried on by the Corporation, save and except that Wulf may be a
shareholder in such an endeavor, activity or business provided that Wulf shall
be a passive investor owning less than five percent of the issued and
outstanding voting securities of such endeavor, activity or business on a fully
diluted basis.
7
<PAGE>
15. REFORMATION
It is expressly understood and agreed that although the
parties hereto consider the restrictions contained in Sections 12, 13 and 14 of
this Agreement to be reasonable for the purpose of preserving the goodwill,
proprietary rights and going business value of the Corporation, if a final
judicial determination is made by a court having jurisdiction that the time or
territory or any other restrictions set forth in Sections 12, 13 and 14 in this
Agreement is an unreasonable or otherwise unenforceable restriction against
Wulf, the parties to this Agreement do hereby authorize such court to revise and
amend this Agreement so to produce a legally enforceable agreement and, if the
court refuses to do so, the parties hereto agree that the provisions of Sections
12, 13 and 14 hereof shall not be rendered void but shall be deemed amended to
apply to such maximum time and territory and to such other extent as such court
may judicially determine or indicate to be reasonable.
16. DISCLOSURE
During the employment period, Wulf shall promptly disclose to
the Chief Executive Officer or Board of the Corporation full information
concerning any interest, direct or indirect, of Wulf (as owner, shareholder,
partner, lender or other investor, director, officer, employee, consultant or
otherwise) or any member of his family in any business that is reasonably known
to Wulf to purchase or otherwise obtain services or products from, or to sell or
otherwise provide services or products to the Corporation or to any of its
supplier or customers.
17. RETURN OF MATERIALS
All files, forms, brochures, books, materials, written
correspondence, memoranda, documents, manuals, computer disks, software products
and lists (including lists of suppliers, products and prices) pertaining to the
business of the Corporation or any of its subsidiaries and associates that may
come into the possession or control of Wulf from and after the date of the
execution hereof, including but not limited to the Trade Secrets, shall at all
times remain the property of the Corporation or such subsidiary or associates,
as the case may be. On termination of Wulf's employment for any reason, Wulf
shall deliver promptly to the Corporation all such property of the Corporation
in the possession or power of Wulf or directly or indirectly under the control
of Wulf. Wulf agrees not to make for his personal or business use or that of any
other party, reproductions or copies of any such property or other property of
the Corporation, provided that the making of such reproductions or copies shall
be permitted if the purpose thereof is not inconsistent with any express term of
this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, exclusive of its conflict of
laws rules.
8
<PAGE>
19. SEVERABILITY
If any provision of this Agreement, including the breadth or
scope of such provision, shall be held by any court of competent jurisdiction to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remaining provisions, or part thereof, of this Agreement and such remaining
provisions, or part thereof, shall remain enforceable and binding.
20. ENFORCEABILITY
Wulf hereby confirms and agrees that the covenants and
restrictions pertaining to Wulf contained in this agreement, including, without
limitation, those contained in Sections 12, 13 and 14 hereof, are reasonable and
valid and hereby further acknowledges and agrees that the Corporation would
suffer irreparable injury in the vent of any breach by Wulf of his obligations
under any such covenant or restriction. Accordingly, Wulf hereby acknowledges
and agrees that damages would be an inadequate remedy at law in connection with
any such breach and that the Corporation shall therefore be entitled in addition
to any action for damages, temporary and permanent injunctive relief enjoining
and restraining Wulf from any such breach.
21. NO ASSIGNMENT
Wulf may not assign, pledge or encumber Wulf's interest in
this Agreement nor assign any of the rights or duties of Wulf under this
Agreement without the prior written consent of the Corporation.
22. SUCCESSORS
This Agreement shall be binding on and inure to be benefit of
the successors and assigns of the Corporation and the heirs, executors, personal
legal representatives and permitted assigns of Wulf.
23. NOTICES
Any notice or other communication required or permitted to be
given hereunder shall be in writing and either delivered by hand or mailed by
prepaid registered mail. At any time other than during a general discontinuance
of postal service due to strike, lock-out or otherwise, a notice so mailed shall
be deemed to have been received three (3) business days after the postmarked
date thereof or, if delivered by hand, shall be deemed to have been received at
the time it is delivered. If there is a general discontinuance of postal service
due to strike, lock-out or otherwise, a notice sent by prepaid registered mail
shall be deemed to have been received three (3) business days after the
resumption of postal service. Notices shall be addressed as follows:
9
<PAGE>
(a) If to the Corporation:
3025 Harbor Lane N, Suite 315
Minneapolis, MN USA 55447
(b) If to Wulf:
RR # 2, River John
Nova Scotia, CANADA B0K 1N0
(c) If to the Guarantor:
c/o Felice Mischel
Schneck Weltman Hashmall & Mischel
1285 Avenue of Americas
New York, NY 10019
24. GUARANTEE
(a) The Guarantor, in order to induce executive to enter into the
transactions with the Corporation, hereby guarantees to Executive the due and
prompt payment, and not just the collectability, of all of the obligations,
financial or otherwise of the Corporation to the Executive as set forth in the
Agreement.
(b) The Guarantor may insist that the Executive proceed against
the Corporation prior to enforcing this Guaranty; provided, however, that any
pursuit of remedies against the Corporation shall not impair or otherwise affect
Executive's ability to enforce the terms of this Agreement against the
Guarantor. Without limiting the generality of the foregoing, and only to the
extent that a defense has not previously been asserted by the Corporation, the
Guarantor may assert against the Executive: (i) any defense which may be
available to the Corporation in respect of this Agreement; or (ii) any set-off
available against the Executive to the Corporation, whether or not on account of
a related transaction. The liability of the Guarantor shall not be affected or
impaired by any voluntary or involuntary dissolution, sale or other disposition
of all or substantially all the assets, marshaling of assets and liabilities,
receivership, insolvency, or readjustment of, or similar event or proceeding,
affecting the Corporation or any of its assets and that, upon the institution of
any of the above actions, at the Corporation's sole discretion, and without
notice thereof or demand therefor, the Guarantor's obligations shall become
enforceable against the Guarantor.
25. LEGAL ADVICE
Wulf hereby represents and warrants to the Corporation and
acknowledges and agrees that he had the opportunity to seek, and was not
prevented nor discouraged by the Corporation from seeking independent legal
advice, prior to the execution and delivery of this Agreement and that, in the
event that he did not avail himself of that opportunity prior to signing this
Agreement, he did so voluntarily without any undue pressure and agrees that his
failure to obtain independent legal advice shall not be used by him as a defense
to the enforcement of his obligations under this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, this agreement has been executed by the
parties hereto as of the date first above written.
JJAX ENTERTAINMENT, INC.
By:
---------------------------------
Richmond W.A. Chandler, Chief Executive Officer
---------------------------------
Leslie A. Wulf
Guarantor: JUMPIN' JAX CORPORATION
By:
---------------------------------
Richmond W.A. Chandler, Chief Executive Officer
11
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 9th day of April, 1996 between JUMPIN' JAX
CORPORATION, a corporation incorporated under the laws of the State of Nevada,
U.S.A. (the "Corporation"), and STEPHEN M. SPELLMAN, an individual residing at
4608 Cascade Lane, Edina, Minnesota 55436, U.S.A. ("Spellman").
WHEREAS, the Corporation wishes to retain the services of Spellman as
Vice President, Finance of the Corporation and Spellman is willing, upon the
terms and conditions set forth herein, to serve as Vice President, Finance of
the Corporation.
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree, intending to be legally bound, as follows:
1 . TERM. The Corporation shall employ Spellman for a period of two
years beginning on the date hereof until April 9, 1998 (the "Initial Term")
unless earlier terminated pursuant to Paragraph 7 below. Thereafter, this
Agreement shall be automatically renewed for additional one year terms on the
same terms and conditions contained herein, (each a "Renewal Term") unless
within ninety (90) days prior to the end of any Initial Term or Renewal Term, a
party has given notice not to further extend this Agreement to the other party.
2 . DUTIES. Spellman shall serve the Corporation (and any affiliates
or subsidiaries of the Corporation) in such capacity or capacities, and shall
perform such duties and exercise such powers pertaining to the management and
operation of the Corporation, as may be determined from time to time by the
Chairman of the Corporation (the "Chairman") and Board of Directors of the
Corporation (the "Board") consistent with the duties of his office as Vice
President, Finance. Spellman shall (i) devote his full time (which shall not be
less than 40 hours per week), attention and best efforts during normal business
hours to the business and affairs of the Corporation, (ii) diligently and
faithfully perform those duties that may reasonably be assigned to Spellman; and
(iii) use his best efforts to promote the interests and goodwill of the
Corporation.
3. COMPENSATION.
.1 Base Salary. In full consideration of the services
to be rendered by Spellman, including without limitation, any services which
may be rendered by Spellman as an officer, director or member of any committee
of the Corporation, or any subsidiary or affiliate of the Corporation, the
Corporation shall pay Spellman, and Spellman shall accept, exclusive of bonuses,
benefits or other compensation, an annual base salary of One Hundred Thousand
Dollars ($100,000) which may be further reviewed and adjusted periodically
(upward, but not downward) by the Board (the "Base Salary"). The Base Salary
shall be payable in equal installments in accordance with the usual payroll
practices of the Corporation which are in effect from time to time but in no
event less frequently than monthly. Spellman's Base Salary shall be subject to
all applicable withholding and other taxes to the extent required by law. Not
withstanding the foregoing, the Corporation shall pay Spellman at the rate of
Seventy Eight Thousand Dollars
<PAGE>
($78,000) per annum until such time as the Corporation closes on an offering of
its Common Stock of at least $3,000,000 after the date of this agreement. Upon
closure of such offering, the Corporation shall pay Spellman a lump-sum within
30 days after such closing in order to bring his base salary current to the
$100,000 level.
.2 Performance Bonus. In addition to Spellman's Base
Salary, Spellman shall also be entitled to a performance bonus from time to
time in the discretion of the Board which shall also be subject to all
applicable withholding and other taxes to the extent required by law.
4. STOCK OPTION. The Corporation hereby grants to Spellman a
qualified stock option ("ISO") pursuant to and in accordance with the
Corporation's Incentive Stock Option Plan (the "ISOP") to purchase all or any
part of an aggregate of 250,000 shares of common stock of the Corporation,
subject to the terms and conditions of the ISOP. The purchase price of the
common stock covered by the ISO shall be the closing price of the Corporation's
common stock on the date hereof as reported by the Nasdaq Bulletin Board. The
ISO shall expire ten years from the date hereof subject to Article 7 and contain
a cashless exercise feature. The ISO may be, but is not required to be,
evidenced by a stock option grant agreement.
5. EXPENSES. Spellman shall be reimbursed for all reasonable and
necessary travel and other out-of-pocket expenses actually and properly incurred
by Spellman from time to time in connection with carrying out his duties
hereunder. For all such expenses Spellman shall furnish to the Corporation
originals of all invoices or statements in respect of which Spellman seeks
reimbursement.
6. BENEFITS.
.1 Vacation. Spellman shall be entitled to three (3)
weeks paid vacation per fiscal year of the Corporation at a time approved in
advance by the Board, which approval shall not be unreasonably withheld but
shall take into account the staffing requirements of the Corporation and the
need for the timely performance of Spellman's responsibilities. In the event
that Spellman decides not to take all the vacation to which he is entitled in
any fiscal year, Spellman shall be entitled to take up to one week of such
vacation in the next following fiscal year (but not to be carried over into the
second succeeding fiscal year) at a time approved in advance by the Board.
.2 Automobile Allowance. The Corporation shall provide
Spellman with a $600 per month automobile allowance. In addition, the
Corporation shall pay or reimburse Spellman for gasoline expenses properly
incurred or to be incurred in connection with Spellman carrying out his duties
hereunder. Spellman shall supply the Corporation with the originals of all
invoices or statements in respect of which Spellman seeks reimbursement.
.3 Additional Benefits. While employed by the
Corporation pursuant to this Agreement, Spellman shall be entitled to (i)
participate, subject to qualification requirements, in medical or other
insurance or hospitalization plan and policies which are presently in effect or
hereinafter instituted by the Corporation and applicable to its executive
officers generally, (iii) participate, subject to classification requirements
and continued maintenance thereof by the
-2-
<PAGE>
Corporation, in other employee benefit plans, such as profit sharing plans,
which are from time to time applicable to the Corporation's executive officers
generally, and (iv) such other employment benefits as the Board may determine in
its sole discretion from time to time.
7. TERMINATION. Spellman's employment hereunder may be terminated
as follows:
.1 Cause. The Corporation may terminate Spellman's
employment immediately upon notice to Spellman for "cause," which shall mean (i)
acts of fraud, dishonesty, gross negligence, or willful misconduct, (ii) felony
convictions, (iii) violation of the terms and conditions of this Agreement, or
(iv) if Spellman or any member of his family makes any personal profit arising
out of or in connection with a transaction to which the Corporation is a party
or with which it is associated without making disclosure to and obtaining the
prior written consent of the Board. In the event that Spellman's employment is
terminated hereunder for "cause," (i) the Corporation shall have no further
obligations to Spellman in connection with Spellman's employment except for
salary and bonus (if any) earned by Spellman as of the date of termination, and
(ii) that portion of the ISO vested through the time of such termination, and
any and all other rights accruing under the ISO, shall be immediately forfeited
and terminated.
.2 Failure to Perform Duties. The Corporation may
terminate Spellman's employment hereunder if (i) there is a repeated and
demonstrated failure on the part of Spellman to perform the material duties of
Spellman's position in a competent manner and Spellman fails to substantially
remedy the failure within a period of thirty (30) days after receiving written
notice of such failure from the Corporation, or (ii) Spellman disobeys
reasonable instructions given in the course of employment by the Board, that are
not inconsistent with Spellman's position and is not remedied by Spellman within
thirty (30) days after receiving written notice of such disobedience. In such an
event, the Corporation shall have no further liability or obligation hereunder
except for salary and bonus (if any) earned by Spellman as of the date of
termination. Spellman shall also be entitled to exercise in accordance with the
ISOP that portion of the ISO which is vested as of the date of such resignation.
.3 Without Cause. The Corporation may terminate
Spellman's employment hereunder at any time upon notice to Spellman without
"cause" (as defined above) and without failure to perform duties, for any reason
or no reason. In such event, Spellman shall be entitled to receive the total of:
.1 that number of months' salary as set
forth below times the then applicable Base Salary rate:
i. if the employment was less than three
years, eight months' salary;
ii. if the employment was more than three
years but less than five years, twelve months' salary; and
iii. if the employment was more than five
years, fifteen months' salary.
-3-
<PAGE>
.2 the present value, as determined by the
Chairman of the Corporation, of (i) the amounts that would have been paid by the
Corporation or reimbursed to the Spellman pursuant to Section 6.2 and (ii) the
benefits described in Section 6.3, that, in each case, would have been enjoyed
by Spellman for the four months following his termination had he not been
terminated.
Spellman agrees to accept said severance payments in full satisfaction of any
liability that the Corporation might have to him. Spellman shall also be
entitled to exercise in accordance with the ISOP that portion of the ISO which
is vested as of the date of such termination.
.4 Death or Disability. Spellman's employment hereunder
shall terminate upon his death or disability. In either event, Spellman or his
estate, as applicable, shall be entitled to receive, within 30 days of the date
of such termination, the balance of the Base Salary that would otherwise be paid
to him during the remainder of the then existing term of this Agreement.
Spellman agrees upon the request of the Corporation to comply with the
requirements necessary for the Corporation to obtain key-man life insurance on
Spellman. Spellman, or his estate, as applicable shall also be entitled to
exercise in accordance with the ISOP that portion of the ISO which is vested as
of the date of such death or disability. Spellman shall be deemed to have become
permanently disabled if in any year during the employment period, because of ill
health, physical or mental disability, or for other causes beyond the control of
Spellman, Spellman has been continuously unable or unwilling or has failed to
perform Spellman's duties for 120 consecutive days, or if, during any year of
the employment period, Spellman has been unable or unwilling or has failed to
perform his duties for a total of 180 days, consecutive or not. The term "any
year of the employment period" means any period of 12 consecutive months during
the employment period.
.5 Voluntary Resignation. Spellman may terminate his
employment with the Corporation upon 60 days' prior written notice in which case
the Corporation shall have no further liability or obligation hereunder except
for salary and bonus (if any) earned by Spellman as of the date of termination.
Spellman shall also be entitled to exercise in accordance with the ISOP that
portion of the ISO which is vested as of the date of such resignation.
8. CONFIDENTIALITY. Spellman acknowledges and agrees that:
.1 In the course of performing his duties and
responsibilities as an officer and employee of the Corporation, he has had and
will continue to have access to, and has been and will be entrusted with,
detailed confidential information and trade secrets (printed or otherwise)
concerning past, present, future and contemplated products, services, operations
and marketing techniques and procedures of the Corporation and its affiliates
and subsidiaries, including, without limitation, information relating to
addresses, preferences, needs and requirements of past, present and prospective
clients, customers, suppliers and employees of the Corporation and its
affiliates and subsidiaries (collectively, the "Trade Secrets"), the disclosure
of which, or the use of which by Spellman other than in the course of his
employment or other person or entity, would be highly detrimental to the
Corporation's interests.
-4-
<PAGE>
.2 In the course of performing his duties and
responsibilities for the Corporation, Spellman has been and will continue in the
future to be a representative of the Corporation to its customers, clients and
suppliers, and as such, has had and will continue in the future to have
significant responsibility for maintaining and enhancing the goodwill of the
Corporation with such customers, clients and suppliers and would not have,
except by virtue of his employment with the Corporation, developed a close and
direct relationship with the customers, clients and suppliers of the
Corporation.
.3 Spellman, as an officer of the Corporation, owes
fiduciary duties to the Corporation, including the duty to act in the best
interests of the Corporation, and to disclose any conflicts of interest or
potential conflicts of interest in writing to the Corporation.
.4 Except as may be in furtherance of Spellman's
performance of his duties under this Agreement, Spellman agrees that he shall
not at anytime (whether during the employment period or thereafter), directly or
indirectly disclose or furnish, or knowingly permit others to disclose or
furnish, to any other person or entity, or use for his own benefit or the
benefit of others, any Trade Secrets, data, records or other confidential
information relating to the business, techniques, operations and condition
(financial or otherwise) of the Corporation. Without limiting the generality of
the foregoing, confidential information about Employer shall include but not be
limited to information about product development, research endeavors, license
and patent applications, regulatory approvals, operational methods, other
technical and scientific processes and know-how and other business affairs and
methods, plans for future developments, names and addresses of any customers or
prospective customers or the particulars of Employer's dealings with any such
customers, and any other information of Employer not readily available to the
public.
9 . NON-SOLICITATION. Spellman hereby agrees that he will not, during
the period commencing on the date hereof and ending two years following the
expiration of the term of this Agreement for any reason, (i) solicit, canvass,
or accept any business for any other business similar to, or in direct
competition with, the Corporation, from any past, present or future ("future" as
used herein shall mean at or prior to the time of termination of employment)
customer of the Corporation, (ii) directly or indirectly induce or attempt to
influence any employee of the Corporation to terminate his or her employment, or
(iii) directly or indirectly contact or request any present or future (as
defined above) customer of the Corporation to curtail or cancel their business
with the Corporation.
10 . NON-COMPETITION. Spellman hereby agrees and undertakes that he
shall not, at any time during the period commencing on the date hereof and
ending two (2) years following the expiration of the term of this Agreement for
any reason, on his own behalf or on behalf of any person, directly, in any
capacity whatsoever including, without limitation, as an employer, employee,
principal, agent, joint venture, partner, shareholder or other equity holder,
independent contractor, licenser, licensee, franchiser, franchisee, distributor,
consultant, supplier, or trustee, or by or through any corporation,
co-operative, partnership, unincorporated association, company, limited
liability company or limited liability partnership, trust, entity with juridical
personality, or otherwise in connection with any person, carry on or be engaged
in or have any financial or other interest in, or be otherwise commercially
involved, in any endeavor, activity or business in any territory where such
endeavor, activity or business carries on the same business as or is in direct
competition with the business carried on by the Corporation, except that
Spellman may be a shareholder in such an endeavor, activity or business provided
that Spellman shall be a passive investor owning less than five per cent of the
issued and outstanding voting securities of such endeavor, activity or business
on a fully diluted basis.
11 . ENFORCEABILITY. Spellman hereby confirms and agrees that the
covenants and restrictions pertaining to Spellman contained in this Agreement,
including, without limitation, those contained in Paragraphs 8, 9 and 10 hereof,
are reasonable and valid and hereby further acknowledges and agrees that the
Corporation would suffer irreparable injury in the event of any breach by
Spellman of his obligations under any such covenant or restriction. Accordingly,
Spellman hereby acknowledges and agrees that damages would be an inadequate
remedy at law in connection with any such breach and that the Corporation shall
therefore be entitled to, in addition to any action for damages, temporary and
permanent injunctive relief enjoining and restraining Spellman from any such
breach.
12 . REFORMATION. It is expressly understood and agreed that although
the parties hereto consider the restrictions contained in Paragraphs 8, 9 and 10
of this Agreement to be reasonable for the purpose of preserving the goodwill,
proprietary rights and going business value of the Corporation, if a final
judicial determination is made by a court having jurisdiction that the time or
territory or any other restriction set forth in Paragraphs 8, 9 and 10 in this
Agreement is an unreasonable or otherwise unenforceable restriction against
Spellman, the parties to this Agreement do hereby authorize such court to revise
and amend this Agreement so to produce a legally enforceable agreement and, if
the court refuses to do so, the parties hereto agree that the provisions of
Paragraphs 8, 9, and 10 hereof shall not be rendered void but shall be deemed
amended to apply to such time, territory and to such other extent as such court
may judicially determine or indicate to be reasonable.
13 . PROPERTY RIGHTS. Subject to the last sentence of this Paragraph,
the Corporation shall acquire exclusive right, title, and interest to all
inventions, discoveries, improvements, designs, ideas, know-how, technology and
the like developed, conceived, or invented by Spellman, in whole or in part,
whether written or in some other form and whether or not patentable or eligible
for protection under any copyright law. Without limiting the generality of the
foregoing, Spellman hereby assigns to the Corporation (i) all rights to any
inventions, or to improvements, and all rights to apply for United States and/or
foreign letters of patent granted upon such inventions, and (ii) any copyrights
Spellman may have in materials created by him or otherwise generated during the
employment term, and the Corporation shall have the sole right to apply for and
obtain copyright protection for any materials for which such protection can be
obtained and to obtain such copyright renewals. Despite any of the foregoing,
nothing in this Paragraph 13 shall apply to an invention for which no equipment,
supplies, facility or trade secret information of the Corporation is used and
which is developed entirely on Spellman's own time, and (i) does not relate
directly to the business of the Corporation or to the Corporation's actual or
demonstrably anticipated research or development, or (ii) which does not result
from any work performed by Spellman for the Corporation.
14 . REPRESENTATIONS OF SPELLMAN. Spellman hereby represents and
warrants to the Corporation that (i) Spellman is not a party to any other
employment agreement, agreement not to compete or similar agreement with any
other party, and (ii) entering into this Agreement in no way contravenes or
conflicts with the terms and conditions of any other agreement to which Spellman
is a party.
15 . DISCLOSURE. During the employment period, Spellman shall
promptly disclose to the Board full information concerning any interest, direct
or indirect, of Spellman (as owner, shareholder, partner, lender or other
investor, director, officer, employee, consultant or otherwise) or any member of
his family in any business that is reasonably known to Spellman to purchase or
otherwise obtain services or products from, or to sell or otherwise provide
services or products to the Corporation or to any of its suppliers or customers.
16 . RETURN OF MATERIALS. All files, forms, brochures, books,
materials, written correspondence, memoranda, documents, manuals, computer
disks, software products and lists (including lists of suppliers, products and
prices) pertaining to the business of the Corporation or any of its subsidiaries
and associates that may come into the possession or control of Spellman from and
after the date of the execution hereof, including but not limited to the Trade
Secrets, shall at all times remain the property of the Corporation or such
subsidiary or associates, as the case may be. On termination of Spellman's
employment for any reason, Spellman shall deliver promptly to the Corporation
all such property of the Corporation in the possession or power of Spellman or
directly or indirectly under the control of Spellman. Spellman agrees not to
make for his personal or business use or that of any other party, reproductions
or copies of any such property or other property of the Corporation, provided
that the making of such reproductions or copies shall be permitted if the
purpose thereof is not inconsistent with any express term of this Agreement.
17 . NOTICES. Any notice or other communication required or permitted
to be given hereunder shall be in writing and either delivered by hand or mailed
by prepaid registered mail. At any time other than during a general
discontinuance of postal service due to strike, lock-out or otherwise, a notice
so mailed shall be deemed to have been received three (3) business days after
the postmarked date thereof or, if delivered by hand, shall be deemed to have
been received at the time it is delivered. If there is a general discontinuance
of postal service due to strike, lock-out or otherwise, a notice sent by prepaid
registered mail shall be deemed to have been received three (3) business days
after the resumption of postal service. Notices shall be addressed as follows:
If to the Corporation: 3025 Harbor Ln. N., Suite. 315
Minneapolis, MN USA 55447
Attn: Richmond W.A. Chandler
- -
with a copy to: Schneck Weltman Hashmall & Mischel LLP
1285 Avenue of the Americas
New York, NY 10019
Attn: Felice F. Mischel
If to Spellman: 4608 Cascade Lane
Edina, Minnesota 55436
18 . LEGAL ADVICE. Spellman hereby represents and warrants to the
Corporation and acknowledges and agrees that he had the opportunity to seek, and
was not prevented nor discouraged by the Corporation from seeking independent
legal advice, prior to the execution and delivery of this Agreement and that, in
the event that he did not avail himself of that opportunity prior to signing
this Agreement, he did so voluntarily without any undue pressure and agrees that
his failure to obtain independent legal advice shall not be used by him as a
defense to the enforcement of his obligations under this Agreement.
19 . NO ASSIGNMENT. Spellman may not assign, pledge or encumber
Spellman's interest in this Agreement nor assign any of the rights or duties of
Spellman under this Agreement without the prior written consent of the
Corporation. This Agreement shall be binding on and inure to the benefit of the
successors and assigns of the Corporation and the heirs, executors, personal and
legal representatives and permitted assigns of Spellman.
20 . MISCELLANEOUS. The failure of any party to insist on the strict
performance of any of the terms, conditions, and provisions of this Agreement
shall not be construed as a waiver or relinquishment of future compliance
therewith. No waiver of any term or condition of this Agreement on the part of
either party shall be effective for any purpose whatsoever unless such waiver is
in writing and signed by such waiving party. This Agreement constitutes the
entire agreement between the parties hereto relating to the subject matter
hereof and supersedes all prior or contemporaneous negotiations,
representations, agreements and understandings (both oral and written) of the
parties relating thereto. No supplement, modification or amendment of this
Agreement shall be binding unless it is in writing and executed by the parties
hereto. If for any reason any portion of any provision of this Agreement is
declared invalid, void or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining provisions of this Agreement
shall remain in full force and effect to the fullest extent possible as if this
Agreement had been executed with the invalid, void or unenforceable portion or
provision eliminated.
21. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota, exclusive of
its conflict of laws rules.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first above written.
JUMPIN' JAX CORPORATION
By:__________________________
Name:
Title:
-----------------------------
Stephen M. Spellman
<PAGE>
JUMPIN' JAX CORPORATION
LIST OF SUBSIDIARIES
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Jumpin' Jax Entertainment, Inc. Minnesota
Playpal, Inc. Florida
Playpal Sales Corporation Minnesota
Jumpin' Jax Corporation Minnesota
JJAX Entertainment, Inc. Nevada
JJAX Corp. Nevada
Children's Choice Learning Nevada
Centers, Inc.
