<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995
----------------------
[_] Transition report under Section 13 or 15(d) of the
Exchange Act
For the transition period from _________ to _________
Commission file number 0-17001
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Choices Entertainment Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1529536
- - - --------------------------- --------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
220 Continental Drive, Suite 102, Newark, Delaware 19713
- - - -------------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code (302) 366-8684
--------------
81 Big Oak Road, Suite 205, Morrisville, PA 19067
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of the issuer's Common Stock,
as of November 10, 1995: 21,964,395
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
PART I: FINANCIAL INFORMATION
- - - ------------------------------
ITEM 1. FINANCIAL STATEMENTS
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- - - ------
Current assets:
Cash........................................ $ 123,809 $ 129,389
Accounts receivable......................... 597 1,439
Merchandise inventories..................... 201,443 425,357
Prepaid expenses............................ 50,034 24,112
------------ ------------
Total current assets....................... 375,883 580,297
Videocassette rental inventory, net.......... 833,022 841,966
Equipment, net (Note 2)...................... 226,158 346,956
Intangible assets, net....................... 193,653 206,282
Other deferred costs......................... 238,750
Other assets................................. 71,734 68,227
------------ ------------
$ 1,700,450 $ 2,282,478
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- - - -------------------------------------
Current liabilities:
Notes payable............................... $ 180,061 $ 480,362
Accounts payable............................ 394,227 779,659
Accrued merger and acquisition..............
expenses (Note 4).......................... 689,614 119,054
Accrued professional fees................... 87,720 745,374
Accrual for lease cancellation and
litigation reserves........................ 17,500 103,486
Accrued salaries............................ 71,610 58,670
Other accrued expenses...................... 80,261 98,920
------------ ------------
Total current liabilities.................. 1,520,993 2,385,525
Other liabilities (Note 5)................... 680,000 200,000
Other accrued expenses....................... 138,750
------------ ------------
Total liabilities.......................... 2,200,993 2,724,275
------------ ------------
Stockholders' deficit:
Preferred stock, par value $.01 per share:
authorized 5,000 shares; 34 shares issued
and outstanding in 1995 and no shares
issued or outstanding in 1994 (Note 5).....
Common stock, par value $.01 per share:
authorized 50,000,000 shares; issued
and outstanding 21,964,395 shares in
1995 and 18,654,934 in 1994................ 219,644 186,549
Additional paid-in capital.................. 20,394,803 18,631,441
Accumulated deficit......................... (21,114,990) (19,259,787)
------------ ------------
Total stockholders' deficit................ (500,543) (441,797)
------------ ------------
$ 1,700,450 $ 2,282,478
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
1995 1994 1995 1994
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Movie rentals..................... $1,030,926 $1,095,267 $ 2,956,259 $3,233,382
Merchandise sales................. 171,842 346,160 613,672 1,173,523
---------- ---------- ----------- ----------
1,202,768 1,441,427 3,569,931 4,406,905
---------- ---------- ----------- ---------
Operating costs and expenses:
Cost of goods sold................ 185,063 296,213 615,113 975,813
Cost of movie rentals 605 16,686 8,315 107,906
Store payroll..................... 261,719 276,662 799,728 858,242
Store rents....................... 226,730 236,770 713,142 693,800
Other store operating
expenses......................... 122,320 99,035 343,765 337,864
Selling and administrative
expenses......................... 209,185 224,740 659,405 581,218
Merger and acquisition
expenses (Note 4)................ 270,180 1,648,995
Professional and consulting
expenses......................... 55,175 105,274 169,465 228,751
Loss on disposal of video-
cassette rental inventory........ 28,466 (68) 108,178 104,688
Store closing, lease termination
and litigation provisions........ 17,888 21,607
Depreciation and amortization..... 134,047 313,926 742,158 930,309
---------- ---------- ----------- ----------
1,493,490 1,587,126 5,808,264 4,840,198
---------- ---------- ----------- ---------
Other income (expenses):
Gain on settlement of debt
(Note 4)......................... 395,640
Interest expense, net............. (6,407) (4,872) (12,510) (17,486)
---------- ---------- ----------- ----------
(6,407) (4,872) 383,130 (17,486)
---------- ---------- ----------- ----------
Net loss.......................... $ (297,129) $ (150,571) $(1,855,203) $ (450,779)
========== ========== =========== ==========
Net loss per share of common
stock (Note 3)................... $(0.01) $(0.01) $(0.09) $(0.02)
========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Additional
--------- ------------ Paid-In Accumulated
Shares Shares Amount Capital Deficit Total
--------- ------------ -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 18,478,934 $184,789 $18,420,976 $(18,271,648) $ 334,117
Reversal of costs associated
with previous warrant exercises 144,578 144,578
Issuance of Common Stock upon
exercise of a stock option 5,000 50 1,100 1,150
Net Loss for the nine
months ended September 30, 1994 (450,779) (450,779)
---------- -------- ----------- ------------ -----------
Balance at September 30, 1994 18,483,934 $184,839 $18,566,654 $(18,722,427) $ 29,066
========== ======== =========== ============ ===========
Balance at December 31, 1994 18,654,934 $186,549 $18,631,441 $(19,259,787) $ (441,797)
Issuance of Common Stock for
cash from exercise of stock
options and warrants 2,146,000 21,460 875,095 896,555
Issuance of Common Stock for cash
to two private foreign investors,
net of related costs 900,000 9,000 387,000 396,000
Issuance of Common Stock to
satisfy debt obligations 113,461 1,135 146,417 147,552
Issuance of Common Stock in
conjunction with consulting
services 150,000 1,500 137,250 138,750
Issuance of Preferred Stock to
private investors, net of
related costs (Note 5) 34 217,600 217,600
Net Loss for the nine months
ended September 30, 1995 (1,855,203) (1,855,203)
-- ---------- -------- ---------- ------------ -----------
Balance at September 30, 1995 34 21,964,395 $219,644 $20,394,803 $(21,114,990) $( 500,543)
== ========== ======== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------
1995 1994
-------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(1,855,203) $ (450,779)
----------- ----------
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization.................... 742,158 930,309
Gain on settlement of debt....................... (395,640)
Cost of rental films sold........................... 237,068 154,370
Loss on disposal of rental films.................... 108,178 104,688
Amortization and write-off of other deferred
costs, net.......................................... 38,750
Change in assets and liabilities:
Decrease in accounts receivable................ 842 15,326
Decrease in merchandise inventories............ 223,914 52,038
Increase in prepaid expenses................... (25,922) (10,614)
(Increase) decrease in other assets............ (3,507) 17,999
Increase (decrease) in accounts payable........ (272,931) 82,842
Increase in accrued merger and
acquisition expenses......................... 570,560
Increase (decrease) in accrued
professional fees............................ (374,497) 73,552
Increase in accrued salaries................... 12,940 995
Decrease in accrual for lease cancellation
and litigation reserves...................... (10,000) (77,056)
Decrease in other accrued expenses............. (18,659) (27,583)
----------- ----------
Total adjustments................................... 833,254 1,316,866
----------- ----------
Net cash provided by (used in) operating
activities........................................ (1,021,948) 866,087
----------- ----------
Cash flows from investing activities:
Purchase of equipment, net........................ (76,662)
Purchase of videocassette rental films............ (944,376) (923,975)
----------- ----------
Net cash used in investing activities............... (1,021,038) (923,975)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 1,292,607 1,150
Proceeds from private offering of preferred
stock, net..................................... 897,600
Proceeds from notes payable...................... 80,000
Repayment of notes payable....................... (152,801) (45,996)
----------- ----------
Net cash provided by financing activities........... 2,037,406 35,154
----------- ----------
Net decrease in cash................................ (5,580) ( 22,734)
Cash at beginning of period......................... 129,389 185,125
----------- ----------
Cash at end of period............................... $ 123,809 $ 162,391
=========== ==========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest........... $ -0- $ -0-
=========== ==========
See accompanying notes to financial statements.
</TABLE>
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis Of Presentation And Significant
Accounting Policies
----------------------------------------------
The financial information included herein for the three-month and
nine-month periods ended September 30, 1995 and 1994, and as of September 30,
1995, is unaudited. In addition, the financial information does not include all
disclosures required under generally accepted accounting principles because
certain note information has been omitted; however, such information reflects
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods and such adjustments are of a
normal recurring nature. The results of operations for the three-month and
nine-month periods ended September 30, 1995, are not necessarily indicative of
the results to be expected for the full year.
Note 2 - Equipment
- - - ------------------
Equipment at September 30, 1995, is primarily comprised of
furnishings, leaseholds, and computers related to the Company's retail stores.
Note 3 - Loss Per Common Share
- - - ------------------------------
Loss per common share for the three-month and nine-month periods ended
September 30, 1995 and 1994, was computed by dividing the net loss by the
weighted average number of common shares outstanding during the period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1994 1995 1994
---------- ---------- ---------- ----------
Number of shares
used in calculations 21,963,000 18,479,000 21,542,000 18,479,000
========== ========== ========== ==========
</TABLE>
Note 4 - Liquidity
- - - ------------------
The financial statements have been presented on the basis that the Company is
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses, aggregating $21,114,990 from inception to September 30,
1995, including a net loss of $1,855,203 for the nine-month period ended
September 30, 1995.
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Note 4 - Liquidity (Continued)
- - - ------------------------------
The Company is currently operating in a severely distressed financial
condition. As of September 30, 1995, the Company had a net working capital
deficiency of approximately $1,145,000. The Company is currently funding its
business on a day-to-day basis from revenues generated from its 11 store
operations. However, as the revenues from the Company's existing 11 stores are
insufficient, the Company is operating on a negative cash flow basis and is in
immediate need of financing to fund its short-term working capital needs. In
that regard, the Company is presently in default on three 10% promissory notes
totalling $180,000 plus accrued interest. Furthermore, although the Company has
negotiated equity and discounted cash settlements during the year with several
creditors which eliminated approximately $1,006,000 of debt for approximately
$463,000 and 263,000 shares of the Company's common stock, thereby resulting in
a net gain of approximately $396,000 to the Company, the Company's viability is
and will continue to be dependent upon its ability to secure needed capital or
extend the due dates of liabilities for the foreseeable future.
The Company, as previously reported, made a private offering of units
consisting of preferred stock, promissory notes, and warrants to purchase
preferred stock, which offering terminated in accordance with its terms on
September 30, 1995 (see Note 5). The terms of the private offering provided for
gross maximum and minimum proceeds of approximately $4,020,000 and $1,020,000,
respectively. As previously reported, the Company had raised and drawn down
$1,020,000, the minimum amount under the offering. No additional amounts were
raised prior to the termination of the offering and all amounts raised were used
to satisfy certain existing obligations of the Company. However, as noted
above, the Company remains in a severely distressed financial condition and is
in immediate need of financing to fund its short-term working capital needs.
As previously reported, during September 1995, the merger agreements between
the Company and JD Store Equipment, Inc., VA Entertainment Corp., d/b/a Video
Junction, and Palmer Corporation, were terminated. In addition, all previously
announced letters of intent with other acquisition candidates have expired.
Although the Company is no longer pursuing an acquisition program, and certain
executive officers brought in in connection with the acquisition program have
resigned, the Company is exploring a possible merger with one or more companies.
However, there is no assurance the Company's efforts will be successful in
connection with any potential merger. In
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Note 4 - Liquidity (Continued)
- - - ------------------------------
the event the Company is not successful in pursuing a potential merger, it is
likely that it will continue to operate through the 11 stores currently owned,
which have historically provided insufficient revenues to enable the Company to
operate profitably. The Company may also explore the possibility of selling its
video stores, although no assurance can be given that it would be successful in
that regard.
Note 5 - Private Placement
- - - --------------------------
The Company, in connection with a private offering of units of
preferred stock, promissory notes and warrants to purchase preferred stock,
which terminated in September 1995, issued a total of: (i) 34 shares of the
Company's Series C Convertible Preferred Stock ("Preferred Stock"), convertible
(subject to shareholder approval as provided below) into 1,360,000 shares of
common stock, (ii) 5% unsecured promissory notes in the aggregate principal
amount of $680,000 due in September 1997, with interest payable annually in cash
or, at the election of the Company, in shares of Preferred Stock (valued at $.25
per share), and with principal and any accrued but unpaid interest convertible
into Preferred Stock (valued at $.25 per share) at the sole option of the holder
in the event the Company defaults in the payment of principal or is otherwise in
default, and (iii) three-year warrants to purchase 10.2 shares of Preferred
Stock at an exercise price of $10,000 per share, convertible (subject to
shareholder approval as provided below) into a total of 408,000 shares of common
stock.
Additionally, the Company paid a placement fee consisting of $122,400
and five-year warrants to purchase 5.1 shares of Preferred Stock at an exercise
price of $10,000 per share and a finder's fee consisting of five-year warrants
to purchase 8.5 shares of Preferred Stock at an exercise price of $37,500 per
share, all of which Preferred Stock being convertible (subject to shareholder
approval as provided below) into an aggregate of 544,000 shares of common stock.
Each share of Preferred Stock will become convertible, at the option
of the holder thereof, into 40,000 shares of the Company's common stock, subject
to adjustment, only after receipt of approval by the Company's stockholders of
an amendment to the Company's Certificate of Incorporation increasing the number
of authorized shares of the Company's common stock (as provided by the terms of
the Preferred Stock). However, as the conversion of the Preferred Stock is
contingent upon stockholder approval of
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<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Note 5 - Private Placement (Continued)
- - - --------------------------------------
the increase in authorized common stock, no assurances can be given that the
Preferred Stock will become convertible. Holders of the Preferred Stock will be
entitled to vote on this and any other matter submitted to a vote of the
Company's stockholders, with each share of Preferred Stock entitled to 40,000
votes. Holders of Preferred Stock have no liquidation or other preferences upon
the liquidation, dissolution, or winding up of the Company, and are entitled to
certain piggyback and demand registration rights for the shares of common stock
into which the Preferred Stock may be converted.
Note 6 - Common Stock and Stock Options
- - - ---------------------------------------
Between January 1, 1995 and September 30, 1995, the Company issued
3,309,461 shares of common stock as follows.
In January 1995, the Company completed a private placement of stock
for 900,000 shares of the Company's common stock to two private foreign
investors.
The Company issued 113,461 shares of common stock to a vendor in
settlement of a debt, and 150,000 shares of common stock to a firm in connection
with a consulting agreement. Additionally, former employees of the Company
exercised stock options to purchase 1,992,000 shares and a warrant holder
exercised its option to purchase 150,000 shares of common stock.
In May 1995, an option previously granted to an officer of the Company
to purchase 1,000,000 shares of the Company's common stock expired by its terms
upon the resignation of the officer from the Company. Additionally, options to
purchase 2,200,000 shares of the Company's common stock expired by their terms
upon the resignation of four officers of the Company during September 1995.
On September 27, 1995, the Company granted options, under the Stock
Option and Appreciation Rights Plan of 1987, to purchase 457,000 shares of the
Company's common stock to various employees of the Company, and a non-qualified
option to purchase 100,000 shares of the Company's common stock to a director of
the Company, at an exercise price of $.19 per share, the average fair market
value on that date.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company is currently operating in a severely distressed financial
condition. As of September 30, 1995, the Company had a net working capital
deficiency of approximately $1,145,000. The Company is currently funding its
business on a day-to-day basis from revenues generated from its 11 store
operations. However, as the revenues from the Company's existing 11 stores are
insufficient, the Company is operating on a negative cash flow basis and is in
immediate need of financing to fund its short-term working capital needs. In
that regard, the Company is presently in default on three 10% promissory notes
totalling $180,000 plus accrued interest. Furthermore, although the Company has
negotiated equity and discounted cash settlements during the year with several
creditors which eliminated approximately $1,006,000 of debt for approximately
$463,000 and 263,000 shares of the Company's common stock, thereby resulting in
a net gain of approximately $396,000 to the Company, the Company's viability is
and will continue to be dependent upon its ability to secure needed capital or
extend the due dates of liabilities for the foreseeable future.
The Company, as previously reported, made a private offering of units
consisting of preferred stock, promissory notes, and warrants to purchase
preferred stock, which offering terminated in accordance with its terms on
September 30, 1995 (see Note 5 to the Financial Statements). The terms of the
private offering provided for gross maximum and minimum proceeds of
approximately $4,020,000 and $1,020,000, respectively. As previously reported,
the Company had raised and drawn down $1,020,000, the minimum amount under the
offering, and issued 34 shares of the Company's preferred stock and other
securities. No additional amounts were raised prior to the termination of the
offering and all amounts raised were used to satisfy certain existing
obligations of the Company. However, as noted above, the Company remains in a
severely distressed financial condition and is in immediate need of financing to
fund its short-term working capital needs.
As previously reported, during September 1995, the merger agreements
between the Company and JD Store Equipment, Inc., VA Entertainment Corp., d/b/a
Video Junction, and Palmer Corporation, were terminated. In addition, all
previously announced letters of intent with other acquisition candidates have
expired. Although the Company is no longer pursuing an acquisition program, and
certain executive officers brought in in connection with the acquisition program
have resigned, the Company is exploring a possible merger with one or more
companies. However, there is no assurance the Company's efforts
-10-
<PAGE>
will be successful in connection with any potential acquisition or merger. In
the event the Company is not successful in pursuing any potential acquisition or
merger, it is likely that it will continue to operate through the 11 stores
currently owned, which have historically provided insufficient revenues to
enable the Company to operate profitably. The Company may also explore the
possibility of selling its video stores, although no assurance can be given that
it would be successful in that regard.
CAPITAL EXPENDITURES
During the nine-month period ended September 30, 1995, the Company's
capital expenditures were approximately $944,000 and $77,000 relating to the
purchase of videocassette rental films and the purchase of fixtures for use in
its video stores, respectively, compared to $924,000 for videocassette rental
films purchased during the same period in 1994. The Company does not anticipate
any significant capital expenditures for the remainder of the current year other
than the replenishment of videocassette rental films through the normal course
of business.
MATERIAL CHANGES IN FINANCIAL CONDITION
Assets:
Total assets decreased by approximately $582,000 between December 31,
1994 and September 30, 1995 primarily due to the net decrease in inventories due
to the elimination of the sale of music product in the Company's stores and to
the write-off of certain deferred costs which related to the Company's
previously reported merger and acquisition program.
Liabilities:
Total liabilities decreased by approximately $523,000 between December
31, 1994 and September 30, 1995, primarily due to the decreases in notes
payable, accounts payable, and accrued professional fees, related to the
elimination of approximately $1,006,000 of debt from discounted cash
settlements. In conjunction with the Company's previously reported acquisition
program, accrued merger and acquisition expenses increased approximately
$571,000. Additionally, other accrued expenses decreased by approximately
$139,000 primarily due to the issuance of 150,000 shares of common stock to a
firm in settlement of obligations under a consulting agreement.
Stockholders' Deficit:
Between December 31, 1994 and September 30, 1995, the net increase in
Stockholders' Deficit of $59,000 was due to the loss during the period of
approximately $1,855,000, which was offset
-11-
<PAGE>
by the issuance of 2,146,000 shares of common stock in connection with various
stock option and warrant exercises, the issuance in a private placement of
900,000 shares of common stock to two foreign investors, the issuance of 113,461
shares of common stock in settlement of a debt obligation, the issuance of
150,000 shares of common stock to a consulting firm, and, as noted above, the
issuance of 34 shares of the Company's Preferred Stock in connection with a
private offering of such stock and other securities. Net proceeds from the
issuance of the common stock and the Preferred Stock were approximately
$1,291,000 and $217,600, respectively.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Following are the results of operations for the three-month and nine-
month periods ended September 30, 1995 and 1994:
Revenues decreased by approximately $239,000 and $837,000 during the
three-month and nine-month periods ended September 30, 1995, respectively.
Approximately $174,000 and $560,000, respectively, of the decrease is related to
the decrease in merchandise sales as a result of the elimination of the sale of
music products in the Company's stores. Approximately $84,000 of the decrease
in revenue during the nine-month period is related to the closing of one of the
Company's stores during March 1994, with the balance of the decreases during the
two periods primarily due to weather factors, increased industry competition and
fewer highly-rented titles released during the period ended September 30, 1995.
Cost of goods sold decreased approximately $111,000 and $361,000 but
increased approximately 22% and 17% as a percentage of revenue during the three-
month and nine-month periods, respectively. The percentage increases are
primarily attributable to the increase in reserves established against
merchandise inventories in conjunction with the elimination of the sale of music
products in the Company's stores and to the sale of previously viewed rental
films at less than carrying value to provide additional cash flow for
operations.
Operating expenses, which include store payroll, rents and other
operating expenses, decreased approximately $2,000 and $33,000, respectively,
during the comparative periods. The decreases are primarily the result of
closing one of the Company's stores during March 1994 and of continuing efforts
to reduce operating costs.
Selling and administrative expenses decreased approximately $14,000
and increased $78,000, respectively, during the comparative periods. The
increase in expenses related to the support of the Company's previously reported
merger and acquisition program.
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<PAGE>
Merger and acquisition expenses of approximately $270,000 and
$1,649,000 during the comparative periods are attributable to professional and
consulting expenses and employee expenses directly related to the Company's
previously reported merger and acquisition program. (See Note 4 to the
Financial Statements.)
Loss on disposal of videocassette rental inventory increased
approximately $28,000 and $4,000, respectively, during the comparative periods
due to re-merchandising the Company's stores.
Professional fee and consulting expenses, unrelated to the previously
reported merger and acquisition program, decreased approximately $50,000 and
$60,000 during the three-month and nine-month comparative periods, respectively.
The decreases are primarily related to the Company's continuing efforts to
reduce costs.
Depreciation and amortization expenses decreased approximately
$180,000 and $188,000, respectively, during the comparative periods, primarily
due to the quantity of videocassette rental films depreciated down to their
salvage value during the periods ended 1994. In addition, approximately $75,000
of the decrease during both periods is primarily due to the reversal of excess
depreciation taken on certain fixed assets in prior periods.
The gain on settlement of debt of $396,000 during the nine-month
period ended September 30, 1995 is primarily attributable to the discounted cash
settlement of approximately $1,006,000 of debt (see Note 4 to the accompanying
financial statements).
As a result of the foregoing, the Company incurred net losses of
approximately $297,000 and $1,855,000 during the three-month and nine-month
periods ended September 30, 1995, respectively.
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<PAGE>
PART II - OTHER INFORMATION
- - - ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
The exhibits listed in the Index to Exhibits appearing on Page E-1 are
included as part of this report.
(b) Reports on Form 8-K
-------------------
The Company filed a Form 8-K dated September 11, 1995. Such report
included disclosure under Item 5 of the termination of merger agreements between
the Company and JD Store Equipment, Inc., VA Entertainment Corp. d/b/a Video
Junction, and Palmer Corporation.
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<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHOICES ENTERTAINMENT CORPORATION
Date: November 10, 1995 By: /s/ Ronald W. Martignoni
---------------------------------
Ronald W. Martignoni
Chief Executive Officer
Date: November 10, 1995 By: /s/ Lorraine E. Cannon
---------------------------------
Lorraine E. Cannon
Chief Financial Officer
-15-
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
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3(a) Certificate of Incorporation, as amended (1)
(b) Certificate of Designations of Series C Preferred Stock,
as amended (2)
(c) By-Laws, as amended (3)
4(a) Form of Certificate Evidencing Shares of
Common Stock (4)
(b) Form of 5% Promissory Note (2)
27(a) Financial Data Schedule (2)
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(1) Filed as an Exhibit to Registrant's Registration Statement on Form S-8
(File No. 33-87016) and incorporated herein by reference.
(2) Filed herewith.
(3) Filed as an Exhibit to Registrant's 1992 Annual Report on Form 10-K and
incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Registration Statement on Form S-1,
inclusive of Post-Effective Amendment No. 1 thereto (File No.: 33-198983)
and incorporated herein by reference.
<PAGE>
Exhibit 3(b)
AMENDMENT NO. 1
TO
CERTIFICATE OF DESIGNATIONS OF
SERIES C PREFERRED STOCK
OF
CHOICES ENTERTAINMENT CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
CHOICES ENTERTAINMENT CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that, pursuant to (i) the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, (ii) the
provisions of Section 151 of said General Corporation Law, and (iii) the
resolutions adopted by the Board of Directors of the Corporation by unanimous
written consent dated August 11, 1995, the Board of Directors duly adopted
resolutions providing for the amendment of the Certificate of Designations of
Series C Preferred Stock of the Corporation to increase from 300 to 500 the
number of shares designated for issuance as Series C Preferred Stock (none of
which have been issued to date), and increasing from 25,000 to 40,000 the number
of votes to which each share of Series C Preferred Stock is entitled and the
number of shares of Common Stock into which each share of Series C Preferred
Stock may become convertible (and making similar conforming changes), which
resolutions are as follows:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board
of Directors does hereby approve the issuance up to 500 shares of Preferred
Stock, par value $.01 per share, of the Corporation, to be designated
"Series C Preferred Stock" of the presently authorized shares of Preferred
Stock. The voting powers, designations, preferences, and other rights of
the Series C Preferred Stock authorized hereunder and the qualifications,
limitations and restrictions of such preferences and rights are as follows:
1. Cash Dividends. Cash dividends shall be paid with respect to
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the shares of Series C Preferred Stock on the same basis as dividends are
paid to holders of common stock of the Corporation (the "Common Stock"),
and shall be distributed ratably to holders of the Series C Preferred Stock
and holders of Common Stock on the basis that each 1/40,000 share of Series
C Preferred Stock shall be pro rata with each whole share of Common Stock.
<PAGE>
2. Voting. The holders of Series C Preferred Stock shall be
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entitled to vote on any matter required to be or otherwise submitted to a
vote of stockholders of the Corporation together with the Common Stock and
not as a separate class, unless otherwise required by law. Each share of
Series C Preferred Stock shall be entitled to 40,000 votes.
3. Conversion. The Series C Preferred Stock shall not be
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convertible when issued, but shall automatically become convertible into
shares of Common Stock (at the rate of 40,000 shares of Common Stock for
every one share of Series C Preferred Stock (the "Conversion Rate")) upon
the filing of an amendment to the Corporation's Certificate of
Incorporation (the "Amendment") which increases the number of authorized
shares of Common Stock by a number equal to or greater than the sum of (i)
40,000 multiplied by the number of then outstanding shares of Series C
Preferred Stock, plus (ii) that number of additional shares of Common
Stock, if any, needed to be reserved for issuance upon the conversion or
exercise of all other then outstanding convertible or exercisable
securities of the Corporation. Upon filing of the Amendment, the number of
shares approved for issuance as Series C Preferred Stock shall
automatically be decreased from 500 to a number equaling the number of then
outstanding shares of Series C Preferred Stock (thus preventing the
issuance of any additional shares of Series C Preferred Stock). The
following provisions shall apply after the Series C Preferred Stock becomes
convertible:
(a) Any holder of shares of Series C Preferred Stock electing to
convert such shares into Common Stock shall surrender the certificate or
certificates for such shares at the office of the Corporation (or at such
other place as the Corporation may designate by notice to the holders of
shares of Series C Preferred Stock) during regular business hours, duly
endorsed to the Corporation or in blank, or accompanied by instruments of
transfer to the Corporation in blank, in form satisfactory to the
Corporation and shall give written notice to the Corporation at such office
that such holder elects to convert such shares of Series C Preferred Stock.
The Corporation shall, as soon as practicable after such deposit of
certificates for shares of Series C Preferred Stock, accompanied by the
written notice above prescribed, issue and deliver at such office to the
holder for whose account such shares were surrendered, or to his nominee,
certificates representing the number of shares of Common Stock to which
such holder is entitled upon such conversion.
(b) Conversion shall be deemed to have been made as of the date
of surrender of certificates for the shares of Series C Preferred Stock to
be converted and the delivery of written notice as hereinabove provided;
and the person entitled to receive the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such
Common Stock on such date.
(c) The Conversion Rate shall be adjusted from time to time as
follows:
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i) In case the Corporation shall (A) subdivide its outstanding
shares of Common Stock, (B) combine its outstanding shares of Common Stock
into a smaller number of shares or, (C) issue by reclassification of its
shares of Common Stock any shares of capital stock of the Corporation, the
conversion right and each Conversion Rate in effect immediately prior to
such action shall be adjusted so that the holder of any shares of the
Series C Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of capital stock of the
Corporation which such holder would have owned immediately following such
action had such shares of the Series C Preferred Stock been converted
immediately prior thereto. An adjustment made pursuant to this
subparagraph shall become effective retroactively immediately after the
record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this subparagraph, the holder of any shares of
the Series C Preferred Stock thereafter surrendered for conversion shall
become entitled to receive shares of two or more classes of capital stock
of the Corporation, the Board of Directors (whose determination shall be
conclusive) shall determine the allocation of the adjusted Conversion Rate
between or among shares of such classes of capital stock.
ii) Notwithstanding the foregoing, the Corporation shall not be
required to make any adjustment of the Conversion Rate unless such
adjustment would require an increase or decrease of at least 5% in such
rate. Any lesser adjustment shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment which,
together with any adjustment or adjustments so carried forward, shall
amount to an increase or decrease of at least 5% in such rate.
iii) Whenever an adjustment in the Conversion Rate is required,
the Corporation shall forthwith place on file with its Secretary a
statement signed by its Chairman of the Board, President or a Vice
President and by its Secretary or Treasurer or one of its Assistant
Secretaries or Assistant Treasurers, stating the adjusted Conversion Rate
determined as provided herein. Such statement shall set forth in
reasonable detail such facts as shall be necessary to show the reason and
the manner of computing such adjustment. Promptly after the adjustment of
the Conversion Rate, the Corporation shall mail a notice thereof to each
holder of shares of Series C Preferred Stock.
iv) In case of either (A) any consolidation or merger to which
the Corporation is a party, other than a merger or consolidation in which
the Corporation is the surviving or continuing corporation and which does
not result in any reclassification of, or change (other than a change in
par value or from par value to no par value or from no par value to par
value, or as a result of a subdivision or combination) in, outstanding
shares of Common Stock, or (B) any sale or conveyance to another
corporation of all or substantially all of the assets of the Corporation,
then the Corporation, or such successor corporation, as the case may be,
shall make appropriate provision so that the holder of each share of Series
C Preferred Stock then outstanding
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<PAGE>
shall have the right to convert such shares of Series C Preferred Stock
into the kind and amount of shares or other securities and property
receivable upon such consolidation, merger, sale or conveyance by a holder
of the number of shares of Common Stock into which such shares of Series C
Preferred Stock might have been converted immediately prior to such
consolidation, merger, sale or conveyance, subject to adjustments which
shall be as nearly equivalent as may be practicable to the adjustments
provided for hereunder. The provisions of this subparagraph shall apply
similarly to successive consolidations, mergers, sales or conveyances.
v) The Corporation shall take all necessary action to cause any
shares of Series C Preferred Stock which shall at any time have been
converted to resume the status of authorized but unissued shares of
Preferred Stock, without designation as to series, until such shares are
once more designated as part of a particular series by the Board of
Directors. At the time when the Series C Preferred Stock first becomes
convertible, and at all times thereafter, the Corporation shall reserve and
keep available out of its authorized but unissued stock, for the purpose of
effecting the conversion of the shares of the Series C Preferred Stock,
such number of its duly authorized shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series C Preferred Stock; provided, however, that nothing
contained herein shall preclude the Corporation from satisfying its
obligations in respect of the conversion of the shares by delivery of
purchased shares of Common Stock which are held in the treasury of the
Corporation.
vi) The Corporation shall pay any and all issue or transfer
taxes that may be payable in respect of any issuance or delivery of shares
of Common Stock on conversion of shares of Series C Preferred Stock
pursuant hereto. The Corporation shall not, however, be required to pay
any tax which is payable in respect of any transfer involved in the issue
or delivery of Common Stock in a name other than that in which the shares
of Series C Preferred Stock so converted were registered, and no such issue
or delivery shall be made unless and until the person requesting such issue
has paid to the Corporation the amount of such tax, or has established, to
the satisfaction of the Corporation, that such tax has been paid.
vii) Before taking any action that would result in the effective
price of the shares of Common Stock issuable upon conversion of Series C
Preferred Stock being less than the then par value of the Common Stock, the
Corporation shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common Stock.
4. Fractional Shares. The Series C Preferred Stock may be
-----------------
issued as fractional shares in increments of 1/40,000 of a share. Each
fractional share of Series C Preferred Stock shall be entitled to the same
rights and powers on a pro rata basis as a whole share of Series C
Preferred Stock.
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<PAGE>
5. Liquidation, Dissolution, Winding Up. The Series C Preferred
------------------------------------
Stock shall have no liquidation or other preference over the Corporation's
Common Stock. Upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, its net assets shall be distributed
ratably to holders of the Series C Preferred Stock and holders of Common
Stock on the basis that each 1/40,000 share of Series C Preferred Stock
shall be pro rata with each whole share of Common Stock.
IN WITNESS WHEREOF, CHOICES ENTERTAINMENT CORPORATION, has caused this
Certificate to be signed by ______________, its ____________, and attested by
______________, its Secretary, this ___ day of ____________, 1995.
CHOICES ENTERTAINMENT CORPORATION
By: /s/ Ronald W. Martignoni
------------------------
Ronald W. Martignoni, CFO
ATTEST:
By: ____________________________
_________________, Secretary
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<PAGE>
Exhibit 4(b)
THIS NOTE AND THE SHARES INTO WHICH THIS NOTE IS CONVERTIBLE (THE "SHARES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NEITHER THE
NOTE NOR THE SHARES MAY BE SOLD OR OTHERWISE TRANSFERRED UNDER SAID ACT, WITHOUT
REGISTRATION OR UPON RECEIPT BY PAYOR OF AN OPINION OF LEGAL COUNSEL OR A COPY
OF A LETTER FROM THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION, IN EITHER
CASE SATISFACTORY TO PAYOR THAT SUCH NOTE OR THE SHARES MAY LEGALLY BE SOLD OR
TRANSFERRED WITHOUT SUCH REGISTRATION.
PROMISSORY NOTE
---------------
$___________________ ____________________, 1995
FOR VALUE RECEIVED, the undersigned, Choices Entertainment Corporation
("Payor"), hereby promises to pay to the order of the undersigned ("Holder") the
principal sum of $_________, with interest from the date hereof on unpaid
principal at the rate of Five Percent (5%) per year, principal due and payable
Twenty-Five (25) Months from the date hereof and interest payable annually. At
the option of the Payor, any or all accrued interest may be paid, when due, in
shares of Payor's $.01 par value Series C Preferred Stock (the "Preferred
Stock"), valued at Twenty-Five Cents ($0.25) per share of Common Stock. Subject
to the approval of the Payor's stockholders, each share of the Preferred Stock
may become convertible into 40,000 shares of Common Stock. This Note may not be
modified without the written consent of the parties hereto.
(a) DEFAULT. At the option of the Holder hereof, this Note shall be
immediately convertible without notice or demand, upon the occurrence at any
time of any of the following events:
1. Assignment for the Benefit of Creditors. An assignment for the benefit
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of creditors by any party liable hereon, whether as maker, endorser, guarantor,
surety or otherwise;
2. Bankruptcy. The commencement of proceedings in bankruptcy, or for the
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reorganization of any party liable hereon, whether as maker, endorser,
guarantor, surety or otherwise, or for the readjustment of any of the debts of
any of the foregoing parties, under the Federal Bankruptcy Code, as amended, or
any part thereof, or under any other laws, whether state or federal, for the
relief of debtors, now or hereafter existing, by any of the foregoing parties,
or against any of the foregoing parties, which shall not be discharged within
thirty (30) days of their commencement;
3. Appointment of Receiver. The appointment of a receiver, trustee or
-----------------------
custodian for any party liable hereon, whether as maker, endorser, guarantor,
surety or otherwise, or for any substantial part of the assets of any of the
foregoing parties, or the institution of proceedings for the dissolution or the
full or partial liquidation of any of the foregoing parties, and such receiver
or
<PAGE>
trustee shall not be discharged within thirty (30) days of his or its
appointment, or such proceedings shall not be discharged within thirty (30) days
of their commencement, or the discontinuance of the business or the material
change in the nature of the business of any of the foregoing parties; or
4. Dissolution. The dissolution of Payor.
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(b) PREPAYMENTS. Payor may, at any time and from time to time, without
penalty, make prepayments which will be applied to the final payment of
principal under this Note in the order or inverse order of maturity, all as the
Holder may determine.
(c) CONVERSION OF NOTE. If this Note is not paid when due, whether at
maturity or by acceleration, the sole remedy of Holder shall be conversion of
the Note. The principal balance of the Note and any accrued interest shall upon
conversion be paid in shares of Preferred Stock as follows: the conversion
shall be at $.25 per share of Common Stock.
Holder shall have no right to convert unless there is a Default as defined
in paragraph (a) above or if the Note is not paid when due. The right to
convert may be exercised by presentation and surrender of this Note to Payor at
its principal office, with the Election to Convert annexed hereto duly executed.
Upon receipt by Payor at its office of this Note and the annexed Purchase Form
in proper form for conversion as heretofore provided, the Holder shall be deemed
to be the Holder of record of the Shares issuable upon such conversion,
notwithstanding that the stock transfer books of Payor shall then be closed or
that certificates representing such Shares shall not then be actually delivered
to the Holder. If this Note is converted, the certificate or certificates
representing the Shares to be issued upon conversion of the Note shall (except
as provided herein) be imprinted with the following legend:
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNDER SAID
ACT, WITHOUT REGISTRATION OR UPON RECEIPT BY THE CORPORATION OF AN OPINION
OF LEGAL COUNSEL OR A COPY OF A LETTER FROM THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION, IN EITHER CASE SATISFACTORY TO THE CORPORATION THAT
SUCH NOTE OR THE SHARES MAY LEGALLY BE SOLD OR TRANSFERRED WITHOUT SUCH
REGISTRATION.
If Payor fails to fulfill its conversion obligations hereunder, Payor
promises to pay Holder's costs of enforcement, which costs shall include, but
shall not be limited to, reasonable attorneys' fees and court costs incurred by
the Holder hereof on account of such collection.
(d) RESERVATION OF SHARES. Payor hereby agrees that at all times there
shall be authorized and reserved for issuance and/or delivery upon conversion of
this Note such number of shares of Preferred Stock as shall be required for
issuance and delivery upon conversion of this Note.
2
<PAGE>
(e) RIGHTS OF THE HOLDER. Until such time, if any, as this Note is
converted into Shares, the Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in Payor, either at law or equity, and the rights of
the Holder are limited to those expressed in this Note and are not enforceable
against Payor except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The number of securities to be delivered to
Holder upon the conversion of this Note (the "Conversion Ratio") shall be
subject to adjustment from time to time upon the happening of certain events as
follows. In case Payor shall, without receipt of consideration, (i) pay a
dividend or make a distribution on its shares of Common Stock in shares of its
own Common Stock, (ii) subdivide or reclassify its outstanding Common Stock in
shares of Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding Common Stock into a smaller number of shares, the
Conversion Ratio in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder of this
Note converted after such date shall be entitled to receive the aggregate number
and kind of shares which, if this Note had been converted immediately prior to
such date, Holder would have owned upon such conversion and been entitled to
receive upon such dividend, subdivision, combination or reclassification.
(g) WAIVER. No single or partial exercise of any power hereunder shall
preclude the other or further exercise thereof or the exercise of any other
power. No delay or omission on the part of the Holder hereof in exercising any
right hereunder shall operate as a waiver of such right or of any other right
under this Note.
(h) CHOICE OF LAW. This Note shall be governed by the law of the State of
Pennsylvania.
CHOICES ENTERTAINMENT CORPORATION
By:__________________________________
DO NOT DESTROY THIS ORIGINAL NOTE: When paid, said original Note must be
surrendered to Payor for cancellation and retention.
3
<PAGE>
ELECTION TO CONVERT
Dated: ___________, 19__
To Choices Entertainment Corporation, Inc. ("CEC")
The undersigned owner of this Note hereby irrevocably elects to
convert the within Note to the extent of purchasing _________________ shares of
Series C Preferred Stock of CEC and hereby acknowledges that, as a result of
such conversion, the entire outstanding principal balance of the Note shall be
deemed paid in full.
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Dated Signature
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
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(Please typewrite or print in block letters)
Address
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--------------------------------------------------------
Tax Identification Number
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4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Choices Entertainment Corporation and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 123,809
<SECURITIES> 0
<RECEIVABLES> 597
<ALLOWANCES> 0
<INVENTORY> 201,443
<CURRENT-ASSETS> 375,883
<PP&E> 5,366,035
<DEPRECIATION> 4,306,848
<TOTAL-ASSETS> 1,700,450
<CURRENT-LIABILITIES> 1,520,993
<BONDS> 0
<COMMON> 219,644
0
0
<OTHER-SE> (720,187)
<TOTAL-LIABILITY-AND-EQUITY> 1,700,450
<SALES> 3,569,931
<TOTAL-REVENUES> 3,569,931
<CGS> 615,113
<TOTAL-COSTS> 615,113
<OTHER-EXPENSES> 4,401,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,510
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,885,203)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
