Jillian's Billiard Club Runs the Table - A Case Study
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Jillian’s Billiard Club Runs the Table ­ A Case Study

How do you achieve success in the entertainment industry? Meditate, meditate, meditate.

That, at least, seems to be the system used by Steve Foster, founder of Jillian’s Billiard Club, who entered the entertainment business in 1979 when he gave up a budding law career in New York and opened a roller skating rink called Spinoff in his native Boston.

Foster describes it as "one of the first upscale roller rinks in the country." But roller skating’s popularity began to slow down after only a few years, and to inject new life into Spinoff, he added a Saturday night feature called The Dance Factory, an under 21 dance club. But trends are relentless, and in 1987 Spinoff’s wheels ground to a halt for good. During the downturn in roller skating, Foster’s company had entered the precious metals business, which it abruptly exited in 1989, and later dabbled briefly in speculative real estate through a subsidiary.

When the spin went out of the skating business, Foster divined that it was time to create an upscale pool hall to capture the night market and, unlike his skating/dancing business, this one would feature alcohol and allow smoking, two things in which neither he nor his wife, Gillian, indulged.

Jillian’s is Born

Jillian’s locations feature, in addition to pool: a cigar lounge, several bars, extensive video and virtual reality entertainment systems such as virtual golf and virtual roller coasters, table tennis, darts and foosball, as well as arcade games that offer merchandise redemption, similar to Dave & Busters and Chuck E Cheese. The company is currently considering adding bowling to its repertoire.

The Profile of a Lease

Trouble in Paradise

From the March, 1989 sale of assets until April 1990 when the company acquired an interest in a billiard club, the company’s primary business was conducted through its wholly owned subsidiary Dixie Run Corporation, a company involved in purchasing and developing raw land suitable for subdivision or resale to builders and developers of luxury residential homes. In June 1990, the board decided to discontinue operations of Dixie Run.

July of 1990 marked the opening of a 13,000-square-foot Jillian’s in Cleveland, Ohio on the banks of the Cuyohoga River, at a site six miles from its Cleveland Heights location and one-quarter of a mile from John Harvard’s Brew House. In April of 1990, the company entered a lease for the Cleveland site and the lease was amended in November of 1993.

In March of 1991, the board approved the acquisition of a majority interest in Jillian’s, Inc., formerly Jillian’s Entertainment Corp., a Delaware corporation formed to acquire and operate billiard clubs in Seattle and Miami. The acquisition entailed a $1.5 million cash payment and a $500,000 subordinated loan for a 51% equity stake. The new ownership also consisted of The Foster Group (specifically involving Steven Foster, The Frank and Celia Foster Family Trust, Steven Rubin and Kevin Troy) having a 49% stake in consideration for its 100% contribution of stock in the Seattle club and the Florida club. The acquisition did not include the Jillian’s operating in Boston, Massachusetts. Foster is a co-owner of the Jillian’s in Boston, Massachusetts and the principal founder and co-creator of the Jillian’s concept.

In November of 1992, the company opened a 9,600-square-foot club in Cleveland Heights, Ohio, about six miles from its Cleveland site. The transaction included obtaining a $100,000 loan from the City of Cleveland Heights, Ohio in 1991 as an incentive to enter into a lease and to contribute to the $580,000 needed to build and fixture a club in an area deemed as a "redevelopment urban area." The loan, which bore a 7% interest rate matured in April 1998 and was collateralized by the Cleveland Heights club. The company also attempted to raise $150,000 through mid 1992 through the private placement of interest in the limited partnership of its Cleveland Heights club, however the company only raised $22,500 even though the company offered each investor an option to sell the investor’s interest at a cash price equal to the greater of the price paid for the investment or 500% of the adjusted net income of the Cleveland Heights limited partnership for the 12 months ending December 31, 1995, multiplied by a fraction representing a percentage interest in the partnership’s profits and losses. Eventually, a limited partnership with a 15% interest was sold for the Cleveland Heights club for $122,500. The company financed the remaining $457,500 needed to develop the Cleveland Heights club using cash flow from its other clubs, a private placement and a loan made by an unaffiliated third party. The loan was converted into a 10% equity interest in the Cleveland Ohio club.

Everybody into the Pool In August of 1993, the company operated a 7,200-square-foot club trading as Jake’s Billiards & Diner in the "Old Town" section of Pasadena, California. The location has nine competing billiard clubs operating within a five-mile radius. In 1993, the company paid $150,000 in cash and obtained the remaining $175,000 through seller financing of the $325,000 purchase price of an existing billiard club in Pasadena, California. The company issued the seller a three-year note collateralized by the subsidiary through which the company owns the Pasadena club. The interest on the $175,000 note was 8% and the loan matured in April 1996. This was followed by a December 1993 opening of a 16,000 square foot club, including a 5,000-square-foot game room in a one-story freestanding building near Worcester Polytechnic Institute and one-half mile from the Boston Billiard Club. During fiscal 1993, the company raised $874,000 through a private placement, of which $850,000 needed to open the club in Worcester, Massachusetts was obtained by selling a 75% limited partnership stake in the Worcester club. The partnership included an entity identified as Jillian’s Vending Limited Partnership.

August 1994, the company opened with 12,000 square feet in a two-story freestanding building in Champaign, Illinois at a site adjacent to the University of Illinois campus. The lease commenced in April 1993, and in 1994, the landlord of the Champaign, Illinois club loaned the company $150,000 of the $700,000 required to develop the club. The loan was collateralized by the assets of the subsidiary through which the company owns the Champaign club. The loan bore an interest rate of 10% and matures in September 1999. The company raised an additional $425,000 through a private placement, of which $60,000 was derived from existing shareholders and $365,000 from an unaffiliated third party through the sale of limited partnership interest. A 57% limited partnership interest in the Champaign club was sold for $325,000. The company guaranteed investors a 140% return on their investment within six years, a 1997 buy-out to be paid as 15% in cash and 85% in common stock and the purchase price would be five times 50% of the net profits of the Champaign partnership for the 12 months ending December 31, 1996. The remaining $125,000 needed for the Champaign club’s development was raised from cash flow from the company’s other clubs. Furthermore, in 1994 the company tried to privately place a $750,000 debt instrument guaranteed by the company, but was only able to raise $60,000 from existing shareholders and $125,000 from third parties.

During October 1994, the company opened a 10,000-square-foot club in a one-story freestanding building in Annapolis, Maryland at a site near the U.S. Naval Academy and the Annapolis historical district. The Annapolis lease commenced April 1993. A 21% limited partnership stake was sold for $133,084 in the Annapolis club. In March 1994, the company financed certain equipment and leasehold improvements for its Annapolis, Maryland club for $300,000 at an annual lease rate of 12% collateralized by all the equity securities of the subsidiary trading as Jillian’s Billiard Club of Kendall, Inc. operating a club in Miami, Florida and all the assets of the subsidiary through which the company owned the Annapolis club. At the time of the lease, the Miami, Florida club had assets of $650,000 and was generating $175,000 in cash flow. The company projected the Annapolis club to have assets of $600,000 within three months after commencement of the loan. As of March, 1995, the Annapolis club had assets of $748,000 and $308,000 in cash flow.

An Open and Shut Case

In May of 1995, the company opened a 16,000-square-foot club in a 13-story freestanding building in Long Beach, California, which closed mid 1998 at the expense of Jillian’s taking a $450,000 write down. In 1995, the City of Long Beach, California loaned the company $450,000 of the $1.5 million needed to build and equip a club in a "redevelopment urban area" with the assets of the Long Beach club and the assets of the Pasadena club, through a second lien, pledged as collateral. The loan has an interest rate of 6% and matures January 2006. The remaining $1,050,000 was raised through a $250,000 landlord contribution, equipment financing and cash flow from its other clubs. The lease commenced July 1993.

If the company had not secured the additional $500,000 it would have ceased development. The company originally planned the cost to be $1.6 million, however due to its decision to install higher quality equipment and fixtures the estimated cost was increased to $2.1 million. The company made an effort to raise the short fall through bridge financing at the rate of 12.5% to 15% per annum for a six-month period and the company considered paying an interest rate as high as 25% to 30% per annum to obtain a loan from a conventional lender. The company attempted to obtain loans in principal amounts between $100,000 and $600,000 for working capital and expansion from at least 15 financial institutions for a period of 1990 through 1995, however all but one loan request were denied due to the company’s poor financial condition and lack of available collateral. These loan requests included secured and unsecured credit lines. The one loan obtained came from Evergreen National Bank of Seattle, Washington. In 1994, the bank loaned the company $200,000 for working capital with a maturing date of May 1999 at the rate of 9.5% and collateralized by all of the stock in Jillian’s - Seattle. At the time of the loan, Jillian’s Seattle had assets of $860,000 and generated an annual cash flow of $350,000. In addition, the loan was guaranteed by the company. If the company fails to make the loan payments, it could lose all ownership interest in its Seattle club.

A Reverse Merger Attempt

At the time of the proposed merger, the company operated, through wholly owned subsidiaries wholly or partially owned as general partnerships, nine billiard clubs in Miami; Seattle; Cleveland and Cleveland Heights, Ohio; Pasadena, California; Worcester, Massachusetts; Champaign, Illinois; Annapolis, Maryland; and Long Beach, California, while a unit in Tacoma, Washington was under development. At the time of the merger vote, the board recognized that since the company’s inception in 1990, it had experienced a net operating loss in each year other than 1993 and encountered substantial difficulty in obtaining financing for the development of additional clubs.

Since 1993, the company’s stock had not traded above $1.06 per share and had not traded above $0.50 per share during 1995 then dropped to trading at $0.30 per share. A cash dividend had never been declared by the company. Due to the billiard club business’ inherent need for significant amounts of cash, the company at the time of the proposed merger lacked sufficient cash to operate optimally or expand its business in accordance with its plans.

Since it began the billiard club operations, the company had been more successful in obtaining financing from landlord or municipal contributions than conventional financing, and used such funds in the acquisition or construction of four of its billiard clubs. In each case of landlord or municipal contributions, the company collateralized the financing with assets or stock, leaving the company with reduced sources of collateral to obtain additional financing for both working capital and expansion. Moreover, the company attempted to raise capital through private placements of equity and debt. Because of the dilutive effect that such issuances would have on the value of the stock, the company used this avenue as a last resort.

As of 1995, the company had raised $3.7 million, excluding landlord contributions, for working capital to open or acquire its nine clubs. Through 1995, the locations in large part had been dictated by the availability of seller, landlord or municipal financing. The company had not been able to open clubs in more attractive locations due to the lack of seller, landlord or municipal financing. A few times, the company delayed openings due to the lack of funds for construction and the company in some cases had to pay rent prior to the club opening. obtaining financing from landlord or municipal contributions than conventional financing, and used such funds in the acquisition or construction of four of its billiard clubs. In each case of landlord or municipal contributions, the company collateralized the financing with assets or stock, leaving the company with reduced sources of collateral to obtain additional financing for both working capital and expansion. Moreover, the company attempted to raise capital through private placements of equity and debt. Because of the dilutive effect that such issuances would have on the value of the stock, the company used this avenue as a last resort.

By late 1994, the board deemed it to be no longer prudent to seek short term financing on less than favorable terms due to the anticipated difficulty of repaying such loans as a result of slow to nonexistent growth and the increasing level of competition from better capitalized entities. In addition to bank financing, the company attempted to obtain equipment financing in the amounts of $30,000 to $300,000 from approximately 15 leasing companies. One of the leases obtained through Leasing Technologies, Inc. in the amount of $300,000 at an annual lease rate of 12% resulted in the encumbrance of the assets of one of its clubs and the stock of another one of its clubs. The company then obtained seven additional equipment leases of approximately $350,000 at annual rates ranging from 11.25 to 18.2 percent. In late 1995, the company looked to shareholders for a bridge loan and raised $280,000 from these sources, which included Steven Foster and Steven Rubin, at an interest rate of 25 percent. The bridge loan was extended with $280,000 in principal and $35,000 interest payment to be due June 1997.

During June 1996, the company retained Hampshire Securities Corporation to contact 20 institutional investors. Eight of these institutional investors declined an interest without a meeting. Meetings were held with 12 prospective investors, at which time six declined an interest in a private placement. The remaining six continued discussions from June of 1996 through March of 1997. As of March 31, 1997 the company operated ten clubs and had a working capital deficiency of $1.9 million and current maturities of notes and equipment leases totaling approximately $1.2 million, while company-wide revenues were $13.2 million.

An Angel Emerges

At the time it formulated its opinion, Stonebridge valued Jillian’s at approximately $4.7 million. In the fairness opinion, Stonebridge made comparisons in a peer group of publicly traded entertainment and theme restaurant companies including Dave & Busters, Inc., Laser Storm, Inc, Planet Hollywood, and Rockbottom Restaurants. Stonebridge addressed poor performances at the Long Beach, California club while scheduling this location to be sold by 1999 (note the Long Beach location was closed in the middle of 1998 which created a $450,000 expense related to a write down of the Long Beach assets), and noted a possible financial condition for the Worcester, Massachusetts club.

Delistings and Deficit Operations

At stealth speed, by July 1997 the company had entered into a merger agreement with J.W. Childs Equity Partners. The merger created a subsidiary of Jillian’s Entertainment Holdings, Inc., an entity owned by an affiliate of J.W. Childs, merged with and into Jillian’s. The merger did not include the Jillian’s Boston location and allowed a licensing agreement for the Boston operation to continuing using the Jillian’s name. Other terms of the merger required Jillian’s to obtain refinancing of its existing debt on terms acceptable to J.W. Childs. Fees and expenses relating to the merger to be incurred by Jillian’s was capped at $1.8 million based on consummating the merger.

Openings for 1999 are slated for Indianopolis, Indiana and Portland, Oregon and undisclosed locations in Arizona and Texas. Current management of Jillian’s reported that the company would be operating 21 locations at press time, however researchers of this article were only able to confirm 18 units in operation as of mid December 1998.

Competition stemming from Dave & Buster’s in the Ohio market may heat up for the Jillian’s chain, with Dave & Buster’s operating a location in Cincinatti and plans to open a unit in Columbus this year.

Currently, the Mills Corporation, owners of 14 specialty megamalls, is working with Jillian’s to locate clubs in several of its centers. One industry source said there are six locations involved, and that Mills is prepared to grant Jillian’s $36 million in tenant improvement allowances. Steve Walsh, head of investor relations for Mills, said he has no information on that deal but confirmed the Mills Corp. is planning to bring Jillian’s into some of its malls. So how do you determine what Jillian’s really is, and whether you want to do business with the company? Meditate, meditate, meditate.

For more information on sites, contact Ron Widman of Jillian’s at 1387 South Fourth Street, Louisville, KY; or by phone at 502-638-9008, Fax 638-0984.