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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(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 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 0-17001
CHOICES ENTERTAINMENT CORPORATION
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 52-1529536
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
220 CONTINENTAL DRIVE, SUITE 102, NEWARK, DELAWARE 19713
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (302) 366-8684
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: NONE
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE.
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(TITLE OF CLASS)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
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Check if there is no disclosure of delinquent filers in response 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. [ ]
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Aggregate market value of the voting stock held by non-affiliates of
the registrant based upon a price of $0.11 per share, the average of the inside
bid and ask prices of the registrant's Common Stock at March 25, 1996:
$2,399,399. For purposes of this calculation, all directors and officers of the
registrant have been considered affiliates.
Number of outstanding shares of the registrant's Common Stock at
March 25, 1996: 22,004,365 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Items 9, 10, 11 and 12 of Part III hereof
is incorporated by reference from registrant's definitive Proxy Statement,
involving the election of directors, to be filed pursuant to Regulation 14A.
Transitional Small Business Disclosure Format (check one):
Yes No x
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(ii)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL DESCRIPTION
The Company currently operates a chain of ten retail video home
entertainment stores, principally under the tradename CHOICES(R) - MOVIES AND
MUSIC, which rent and sell videocassette tapes, video games and other video
home entertainment products. The Company's home entertainment stores, of
which nine are superstores, are located in Delaware, New Jersey and
Pennsylvania.
The Company is currently operating in a severely distressed financial
condition, and is funding its business on a day-to-day basis from revenues
generated from its ten-store operations. However, as the revenues from the
Company's existing ten-stores are insufficient to cover all its cash needs,
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.
The Company's capital needs in 1995, which included certain of the
costs associated with its previously reported but now discontinued acquisition
program, were met by a combination of revenues generated from its ten-store
operations, net proceeds of approximately $396,000 received in January 1995,
derived from a private offering of Common Stock, net proceeds of approximately
$898,000 received in August 1995, derived from a private offering of Preferred
Stock, notes and warrants to purchase Preferred Stock, net proceeds of
approximately $906,000 from the exercise of previously existing stock options,
and proceeds of $30,000 from the issuance of a promissory note. However, the
Company is presently in default on three 10% promissory notes totalling
$150,000 plus accrued interest, and is also delinquent and presently unable to
satisfy various other liabilities.
The Company's viability for the foreseeable future is and will continue
to be dependent upon its ability to secure needed capital or to extend the due
dates of liabilities, or to otherwise conclude or settle existing liabilities
and claims on a satisfactory basis. No assurance can be given that the
Company will be successful in that regard. In the event the Company is not
successful, the Company may be forced to seek protection under Chapter XI of
the Federal Bankruptcy Laws. In such an event, the Company's ability to
conduct its business could be severely hampered. Moreover, the value of the
Company's equity would likely be greatly diminished, if not eliminated. See
Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition, Liquidity and Capital Resources.
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
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have expired, and those executive officers who joined the Company, in
connection with its previously reported acquisition program, have subsequently
resigned. Although the Company is no longer pursuing an acquisition program,
management believes that the Company will need to acquire or establish
additional superstores in the future, if the Company is to achieve the
economies of scale necessary for it to become profitable. In that regard, and
because of its severely distressed financial condition, 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 that connection.
In the event the Company is not successful in pursuing a potential
merger, it is likely that it will continue to operate through the ten 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.
HISTORICAL BACKGROUND
Until 1989, the Company focused its efforts on entering the
videocassette rental business through the establishment of a network of
videocassette vending machines ("VDMs"), which the Company sought to place in
retail stores, office buildings and other high-traffic locations. However,
management determined that a significant capital outlay for a sustained high
level of marketing and promotional activity over an extended period of time
would be required to generate sufficient consumer use to permit the proposed
VDM network to operate profitably. Accordingly, in the summer of 1989,
management redirected the Company's efforts to the establishment of home
entertainment superstores which, in the opinion of management, offered the
Company a better opportunity for long-term growth and profitability.
The Company opened its first two superstores in New Hampshire in
October and December of 1989. In March 1990, the Company purchased
substantially all of the assets of Gascoe Ltd., a privately held Pennsylvania
concern which operated a chain of eight video stores operating in the
metropolitan Philadelphia/Trenton area of Pennsylvania and New Jersey under
the "American Home Theaters" ("AHT") tradename (four of which the Company
closed in July 1991, December 1993, November 1995 and December 1995). During
December 1995, the Company opened a new superstore utilizing the assets from
the two smaller stores closed in November and December 1995.
In fiscal 1992, in order to address its severely distressed financial
condition, the Company adopted a plan to enable it to continue to operate as a
viable enterprise. This plan was
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intended to meet the on-going cash requirements of the Company's business, as
well as establish a cash reserve to address potential decreases in liquidity
that could be created by the Company's existing creditors and vendors. The
plan involved the (i) reduction of outstanding debt to the Company's vendors
through the conversion of such debt into equity through the issuance of shares
of Common Stock, (ii) closing or selling of unprofitable stores, (iii)
reduction of advertising and marketing expenses, and (iv) reduction of the
number of employees.
The Company anticipated that this strategy would permit cash flow from
its existing chain of retail stores to fund its costs of operations, with the
remainder to be used to pay down past due liabilities. Such downsizing has
reduced the Company's aggregate liabilities and losses from operations, but
the revenues from the Company's then remaining 11 stores remained insufficient
to achieve profitability.
The Company continued to operate through 11 stores while seeking
additional growth opportunities until late 1994, when John Maioriello, in
connection with the JD Merger, presented a business plan to the Company's
management. The Company's revised business plan sought to expand the Company
significantly through acquisitions of existing retail video chains, and such
new business plan involved the addition of a new management team and a change
in the Company's operating structure. As previously reported, the Company is
no longer pursuing an acquisition program and those executive officers, who
joined the Company in connection with the acquisition program, have
subsequently resigned.
The Company was incorporated in Maryland in July 1985 under the name
PPV Enterprises, Inc. and was reincorporated in Delaware under the name
DataVend, Inc. in August 1987. In March 1990, the Company changed its name to
"Choices Entertainment Corporation". During 1995, the Company's executive
offices were moved to 220 Continental Drive, Suite 102, Newark, Delaware
19713; its telephone number is (302) 366-8684.
THE HOME VIDEO INDUSTRY
General. The home video industry has experienced substantial growth
since 1980. This growth has occurred largely as a result of the increase in
the number of videocassette recorders in use, which have improved
significantly in dependability, price, picture quality and portability.
According to video industry analyst Paul Kagan Associates, Inc., Carmel, CA
("Kagan"), the videocassette rental and sales industry has grown from $0.7
billion in revenue in 1982 to $14.8 billion in 1995 and is expected to reach
$19.1 billion in 2000, a growth rate of approximately 4-6%.
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There are few barriers to entry into the video retail industry, and as
a result, the industry is highly fragmented. Kagan estimates that in 1994
there were approximately 27,400 retail video stores in the United States, down
from approximately 30,000 in 1989. However, the size of the average store has
increased during this period. The Company believes that the retail video
store industry is consolidating with regional and national chains. The
Company also believes that an increase in the number of well-capitalized
chains, which offer greater title selection, increased availability of new
releases and increased advertising, will lead consumers to rent more
videocassettes, thereby contributing to industry growth. The Company believes
that the principal competitive factors in the video retail industry are store
location and visibility, title selection, the number of copies of each new
release available, customer service and, to a lesser extent, pricing.
Although the domestic video retail industry includes both rentals and
sales, the consumer market for prerecorded videocassettes has been primarily
comprised of rentals. By setting the wholesale prices, movie studios
influence the relative levels of videocassette rentals versus sales.
Videocassettes released at a relatively high price, typically $10 to $20, are
purchased by retail video stores and are generally promoted primarily as
rental titles. Videocassettes released at a relatively low price, typically
$10 to $20, are purchased by retail video stores and are generally promoted as
both rental and sales titles. In general, movie studios attempt to maximize
total revenue from videocassette releases by maintaining prices at a
relatively high level during the first six months to one year after a new
release, during which time sales will be made primarily to retail video stores
for rental, and then re-releasing the videocassette at a lower price to
promote sales.
Studio Dependence on Video Rental Industry. According to Paul Kagan,
total U.S. consumer spending on movies has increased from less than $3 billion
in 1980 to approximately $27 billion in 1995. This analyst further believes
that the video retail industry is the largest single source of domestic
revenue to movie studios, representing approximately $4.6 billion, or 49%, of
the $9.4 billion of studio revenue in 1994. Of the many movies produced by
major studios and released in the United States each year, relatively few are
profitable for the studios based on box office revenue alone. In addition to
purchasing box office hits, retail video stores, including those operated by
the Company, purchase movies on videocassette that were not successful at the
box office, thus providing the movie studios with a reliable source of revenue
for almost all of their movies. The studios and the Company believe that the
consumer is more likely to view non-box office hits on a rented videocassette
than on any other medium because retail video stores provide an inviting
opportunity to browse and make an impulse choice among a
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very broad selection of movie titles. In addition, the Company believes the
relatively low cost of video rentals encourages consumers to rent films they
might not pay to view at a theater, especially "B" movies which the consumer
would not choose to view during such movies' theatrical release.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. These distribution channels include, in usual
release date order, movie theaters, retail video stores, pay-per-view, pay
television, network and syndicated television and, finally, basic cable
television. The Company believes that this method of sequential release has
allowed movie studios to increase their total revenue with relatively little
adverse effect on the revenue derived from previously established channels,
and that movie studios will continue the practice of sequential release as new
distribution channels become available. According to Paul Kagan, most movie
studios release hit movie videocassettes to the home video market from 30 days
to 80 days (extending up to 120 days for certain titles priced for sale rather
than rental) prior to the pay-per-view release date.
Home Entertainment Store Operations
Products. Approximately 82% of the Company's revenues are derived
from the rental of videocassettes and video games, with the balance of
revenues being derived from the sale of videocassettes and video games, the
rental of video recorders, the sale of video accessories, such as blank
cassettes and cleaning equipment, and the sale of confectionery items. Each
of the Company's superstores offers from 8,000 to 12,000 videocassettes (from
5,000 to 10,000 titles) and from 500 to 2,000 video games (from 400 to 1,500
titles) for rental and sale, depending upon each store's location. Movies are
displayed alphabetically by category, such as "New Releases", "Top Hits",
"Comedy," "Action/Adventure", "Drama" and "Children's". Each store has an
entire department devoted to games. A typical store's inventory is made up of
8,000 catalog selections, with the balance representing new release titles and
older titles which continue to be in strong demand. Each store features
special interest titles such as history, travel, exercise or community service
as selected by management to appeal to the customer base in such store's
market area.
Management believes that a typical store's revenues are most affected
by its new release title selection and the number of copies of each new
release available for rental as compared to the competition. Although the
Company is committed to offering as many copies of new releases as necessary
to be competitive, its ability to do so is dependent on its ability to
continue to
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finance its short-term working capital needs. Videocassettes offered for sale
are both previously-viewed movies as well as major box office hit titles that
are promoted by the studios at a reduced price to encourage direct consumer
purchases (such as "Ace Ventura", "Pocahontas", or "Babe"). The Company also
rents and sells video games, which are licensed primarily by Nintendo(R) and
Sega Genesis(R).
Store Format and Options. The Company utilizes a self-service, user-
friendly format at each store, all of which are leased facilities. Each store
is well lighted, with easy check-out and check-in systems. All stores have a
convenient interior drop-off counter and after-hours exterior return
capabilities.
Most stores are staffed with one manager and one assistant manager, and
approximately seven sales assistants who will usually be part-time employees.
The Company's store hours are from 10 a.m. to 10 p.m., except on Fridays and
Saturday, when the closing time is 11 p.m.
Customers; Nature of Business. The business of the Company is not
dependent upon a single, or a few customers, the loss of which would have a
material adverse effect. Management believes that the home entertainment
products and services business is seasonal in nature to the extent that
rentals generally increase during periods of inclement or harsh weather and
sales generally increase during the holiday season when consumers
traditionally increase their purchases.
Management Information System ("MIS"). The Company's MIS utilizes a
point-of-sale ("POS") computer located at each store which records all rental
and sale information upon customer checkout, using scanned bar code
information, which is updated when the videocassettes and video games are
returned. This POS system is tied to a computerized information system at the
corporate offices. Each night the POS system transmits store data into the
central MIS. Under the MIS, all data is processed by computer, and reports
are generated, which allow management to monitor store operations and
inventory more effectively, as well as to review rental history by title and
location and to assist in making purchasing decisions with respect to new
releases. The MIS also enables the Company to perform its physical
inventories using bar code recognition rather than a manual count.
Inventory Management. The Company's inventory (videocassettes and
games) consists of its catalog titles (those in release for more than one
year) and new release titles. All of the Company's videocassette and video
game rental inventory is purchased from suppliers. In each of its stores, the
Company maintains a selection of new releases that balances customer demand
and rental trends with maximization of store profitability. Buying decisions
are made centrally based on box office results, industry newsletters,
management's knowledge of the popularity of
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certain types of movies in its markets and input from store
managers.
Suppliers. The Company purchases substantially all of its
videocassettes and video games for rental and sale from a single supplier,
Star Entertainment LP. ("Star"). Star has a security interest in the
Company's inventory, which secures the Company's ongoing account payable to
Star. The Company also currently seeks marketing funds from Star based upon a
percentage of purchases. The prices paid are a function of the wholesale
prices set by the movie studios, which depend upon whether a videocassette is
initially priced to encourage rental or sale. The Company has in the past had
a pay-per-transaction arrangement with a prior supplier, and may seek to do so
in the future, although no assurances may be given. In the event that the
Company's relationship with its current supplier was terminated, the Company
believes that it could obtain its required inventory of videocassettes and
video games from alternative suppliers at prices and on terms comparable to
those available from its current suppliers. However, the Company's results of
operations could be adversely affected until its debt with its current
supplier is fully satisfied and until a suitable replacement was found.
Marketing and Advertising. With advertising credits and market
development funds that it receives from its primary video supplier, the
Company uses in store advertising, discount coupons and promotional materials
to promote new releases, its video specialty stores and its tradename.
Expenditures for advertising above the amount of the Company's advertising
credits from its primary supplier has been minimal. The Company also benefits
from the advertising and marketing by studios and theaters in connection with
their efforts to promote films and increase box office revenues.
Employees. The Company currently has 91 employees, of which 31 are
full time. Besides store personnel, the Company has two employees in
operations, three employees in accounting and two employees in administration.
Tradename. The Company currently operates under the tradename
Choices(R) - Movies and Music, for which it has obtained federal and state
tradename protection.
Competition and Technological Obsolescence
The video retail industry is highly competitive. The Company competes
with other retail video stores, including stores operated by regional and
national chains, as well as other businesses offering videocassettes and video
games such as supermarkets, convenience stores, bookstores, mass merchants,
mail order operations and other retailers. In addition, the
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Company competes with movie theaters, network and cable television, live
theater, sporting events and family entertainment centers. Several of the
Company's stores compete with Blockbuster stores, the dominant video specialty
retailer in the United States. Some of the Company's competitors have
significantly greater financial and marketing resources, market share and name
recognition than the Company. Additionally, while advances in technology such
as video-on-demand have proven expensive and have not adversely affected the
retail video market to date, such technologies could in the future have a
materially adverse impact on the Company's operations.
According to industry sources, although significant consolidation is
occurring in the videocassette rental and sale industry, the retail video
marketplace is populated largely by individually-owned and operated outlets
with limited selections and inventory, which results in limited title
availability and high out-of-stock positions, especially for popular titles.
The Company believes that the video superstore concept has gained considerable
consumer acceptance because it affords a greater number and variety of titles,
a pleasant shopping ambience and the convenience of an automated rental and
return system and that consolidation of the number of retailers will continue
for the foreseeable future. The Company's continuing ability to stock the
number and variety of video cassettes needed is dependent on its ability to
continue to finance its short-term working capital needs. While the Company
anticipates that, as is the case with most existing superstores, the majority
of its revenues will be derived from the rental of videocassettes, the Company
intends to give effect to the growing trend in the industry towards increased
sales of videocassettes and other home entertainment products. By offering
products such as video games, the Company believes that it will be positioned
to satisfy more fully a broader spectrum of consumers' home entertainment
needs.
The Company also competes with Pay-Per-View cable television systems,
in which subscribers pay a fee to see a movie selected by the subscriber.
Existing Pay-Per-View services offer a limited number of channels and movies
and are generally available only to households with a converter to unscramble
incoming signals. Recently developed technologies, however, permit certain
cable companies, direct broadcast satellite companies, telephone companies and
other telecommunications companies to transmit a much greater number of movies
to homes throughout the United States at more frequent intervals (often as
frequently as every five minutes) throughout the day, referred to as "Near-
Video-on-Demand ("NVOD"). NVOD does not offer full interactivity or VCR
functionality such as allowing consumers to control the playing of the movies,
starting, stopping and rewinding. Ultimately, further improvements in these
technologies could lead to the availability of a broad selection of movies to
the consumer on demand referred as Video-on-Demand ("VOD"), at a
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price which may be competitive with the price of videocassette rentals and
with the functionality of VCRs. Certain cable and other telecommunications
companies have tested and are continuing to test limited versions of NVOD and
VOD in various markets throughout the United States and Europe.
The Company believes movie studios have a significant interest in
maintaining a viable movie rental business because the sale of videocassettes
to video retail stores currently represents the studios largest source of
revenue. As a result, the Company anticipates that movie studios will
continue to make movie titles available to Pay-Per-View (including NVOD and
VOD), cable television or other distribution channels only after revenues have
been derived from the sale of videocassettes to video stores. In addition,
the Company believes that for Pay-Per-View television to match the low price,
viewing convenience and selection available through video rental, substantial
capital expenditures and further technological advances will be necessary to
implement VOD systems. Although the Company does not believe NVOD or VOD
represent a near-term competitive threat to its business, technological
advances and broad consumer availability of NVOD and VOD or changes in the
manner in which movies are marketed, including the earlier release of movie
titles to cable television or other distribution channels, could have a
materially adverse effect on the business of the Company.
In addition, the Company anticipates that movies recorded on compact
discs, the same size as audio compact discs, will be introduced in 1996. At
that time, playback machines which will play both audio and video compact
discs will be introduced. The cost to produce a video compact disc and a tape
cassette are expected to be similar, and because of the durability of compact
discs, it is anticipated that eventually compact discs may largely replace
cassettes. The Company expects to offer video compact discs for rental and
sale once they are introduced commercially.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases from non-affiliated parties 600 square
feet for executive offices, located at 220 Continental Drive, Suite 102,
Newark, Delaware, and 1,050 square feet for operational offices, located at
836 W. Trenton Avenue, Morrisville, Pennsylvania. Each lease provides for
monthly rental payments of approximately $800. The lease for the executive
offices in Newark, Delaware expires October, 1996 and the lease for the
operational offices in Morrisville, Pennsylvania expires July, 1996.
Thereafter, both leases will continue on a month-to-month basis.
Each of the Company's ten home entertainment stores is leased from a
non-affiliated party. The lease agreements covering six
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of the stores were entered into directly between the Company and the relevant
landlord, while lease agreements covering the four operating AHT (see
Historical Background) stores were assigned to the Company in connection with
the AHT acquisition.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded in the over-the-counter
market on the OTC-Bulletin Board. The following table sets forth the high and
low inside bid prices as reported by the OTC-Bulletin Board.
<TABLE>
<CAPTION>
Common Stock
(CECSC)
-------------
<S> <C> <C>
1994 High Low
- - - ---- ---- -----
First quarter.................... $ .40 $ .20
Second quarter................... .41 .25
Third quarter.................... .75 .32
Fourth quarter................... 1.46 .68
1995
- - - ----
First quarter.................... 1.84 1.25
Second quarter................... 1.28 .91
Third quarter.................... 1.22 .13
Fourth quarter................... .22 .16
</TABLE>
The quotations set forth above reflect inter-dealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
Effective November 19, 1992, the Company's securities were deleted from the
Nasdaq Small-Cap Market due to the Company's failure to comply with the
Nasdaq's capital, surplus and minimum bid requirements necessary for continued
listing. Although the Company's securities will continue to be traded in the
over-the-counter market and despite the adoption by Nasdaq of a screen-based
electronic bulletin board for companies unable to meet the new Nasdaq
thresholds, the Nasdaq delisting has adversely affected the maintenance of a
sustained trading market in such securities and the ability of the Company to
raise additional capital.
On March 25, 1996, the average of the inside bid and ask prices for the
Company's Common Stock was $0.11, as reported by the OTC-Bulletin Board.
(a) Holders. As of March 25, 1996, the outstanding shares of Company
Common Stock were held by approximately 1,476 holders (includes non-objecting
beneficial owners). Such information does not include those persons holding
securities in brokerages
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using street names, the addition of which would increase the number of
beneficial owners of the Company's securities.
(b) Dividends. The Company has neither declared nor paid any dividends on
its Common Stock since its inception, and the Board of Directors does not
contemplate the payment of dividends in the foreseeable future, given the lack
of earnings to date and since the current policy of the Board of Directors is
to retain future earnings, if any, to fund the growth of the Company. Any
decision as to the future payment of dividends will depend on the earnings and
financial position of the Company and such other factors as the Board of
Directors deems relevant.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's financial condition,
changes in financial condition, and results of operations. The discussion
also includes the Company's liquidity and capital resources at December 31,
1995, and later dated information, where practicable.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company is currently operating in a severely distressed financial
condition. As of December 31, 1995, the Company had a net working capital
deficiency of approximately $1,306,000. The Company is currently funding
its business on a day-to-day basis from revenues generated from its ten
store operations. However, as the revenues from the Company's existing ten
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. The Company's capital needs in 1995, which included certain
of the costs associated with its previously reported but now discontinued
acquisition program, were met by a combination of revenues generated from
its ten store operations, net proceeds of approximately $396,000 received
in January 1995, derived from a private offering of Common Stock, net
proceeds of approximately $898,000 received in August 1995, derived from a
private offering (the "Preferred Stock Offering") of Preferred Stock, notes
and warrants to purchase Preferred Stock (see Note 8 to the Financial
Statements), net proceeds of approximately $906,000 from the exercise of
previously existing stock options, and proceeds of $30,000 from the
issuance of a promissory note. Substantially all of the net proceeds
derived from the above described Preferred Stock Offering were used to fund
the Company's previously reported acquisition program.
The Company, however, is presently in default on three 10% promissory
notes totalling $150,000 plus accrued interest. The principal amounts
owing by the Company on said promissory notes was reduced to $150,000 from
$180,000, as a result of a $30,000 payment made by the Company in November,
1995, to the holder of two of such notes, in the then total principal
amount of $150,000. This payment was made following the filing of a
lawsuit by the holder of said two notes seeking a judgment in the principal
amount of $150,000 plus accrued interest of $15,548. The lawsuit was
withdrawn following said $30,000 payment without prejudice to its being
reinstated if the balance owing on said notes was not paid in full prior to
March 15, 1996. No additional amounts have been paid by the Company to the
holder, who has continued to demand payment. The Company is presently
unable to satisfy the balance owing and there is no assurance
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that the Company will be able to satisfy a judgment in such amount if the
lawsuit is reinstated and a judgment is entered against the Company. The
entry and enforcement of such a judgment against the Company's assets would
materially and adversely affect the Company's business.
The Company is also delinquent and presently unable to satisfy various
other liabilities, including amounts owing to vendors and landlords, as
well as substantial professional fees owing in connection with its
previously reported acquisition program.
In addition, the Company has been threatened with litigation in
connection with certain prior purchases of the Company's Common Stock. The
Company does not believe that there is any merit to the claim, which is in
excess of $325,000, exclusive of attorneys' fees. However, if legal
proceedings were instituted and the Company was unsuccessful in defending
such a lawsuit, the Company would not presently be able to satisfy an award
of damages in the amount claimed, which judgment would, if enforced,
materially and adversely affect the Company's business. Furthermore, even
if the Company was successful in defending such a lawsuit, the cost alone
in professional fees to defend such a lawsuit could materially and
adversely affect the Company's business.
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 113,000 shares of the
Company's common stock, thereby resulting in a net gain of approximately
$396,000 to the Company. However, the Company's viability for the
foreseeable future is and will continue to be dependent upon its ability to
secure needed capital or extend the due dates of liabilities, or to
otherwise conclude or settle existing liabilities and claims on a
satisfactory basis. No assurance can be given that the Company will be
successful in that regard. In the event the Company is not successful, the
Company may be forced to seek protection under Chapter XI of the Federal
Bankruptcy Laws. In such an event, the Company's ability to conduct its
business could be severely hampered. Moreover, the value of the Company's
equity would likely be greatly diminished, if not eliminated.
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 its acquisition
candidates have expired, and those executive officers who joined the
Company, in connection with its previously reported acquisition program,
have subsequently resigned. Although the Company is no longer pursuing an
acquisition program, management believes that the
15
<PAGE>
Company will need to acquire or establish additional superstores in the
future, if the Company is to achieve the economies of scale necessary for
it to become profitable. In that regard, and because of its severely
distressed financial condition, 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 that connection.
In the event the Company is not successful in pursuing a potential
merger, it is likely that it will continue to operate through the ten
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
The Company's capital expenditures were approximately $1,455,000
during the year ended December 31, 1995 compared to $1,241,000 during 1994.
Approximately $109,000 of the increase was primarily due to an increase in
video cassette rental film purchases, and $105,000 of the increase was
directly related to the purchase of fixtures for use in its existing video
stores, as well as for use in the Company's new superstore opened in 1995.
MATERIAL CHANGES IN FINANCIAL CONDITION
The following material changes in financial condition reflect changes
occurring during the two-year period from December 31, 1993, through
December 31, 1995.
As of December 31, 1995 and 1994:
---------------------------------
Current assets decreased by approximately $316,000 between December
31, 1994 and December 31, 1995, due primarily to both the decrease in
merchandise inventories of $287,000 and to the decrease in cash used to
fund operations of the Company's stores. The decrease in merchandise
inventories resulted from the sale and return of music inventories
following the discontinuance of the sale of music product in the Company's
stores.
Equipment and videocassette rental inventory decreased by
approximately $223,000, due primarily to the excess of depreciation over
purchases of fixed assets in the normal course of business.
The decrease in intangible assets of approximately $17,000 was due to
the amortization of goodwill. The decrease in other deferred costs of
approximately $169,000 was due primarily to the expensing of those costs
which were associated with the Company's
16
<PAGE>
acquisition program implemented during 1994, which program the Company is
no longer pursuing.
Liabilities:
Current liabilities decreased by approximately $814,000 between
December 31, 1994 and December 31, 1995. Accounts payable decreased
approximately $357,000 primarily as a result of the discounted cash
settlement of approximately $235,000 of debt and to the payment of accounts
payable in the normal course of business. Notes payable decreased by
approximately $295,000 due to the conversion of approximately $148,000 of
notes payable to equity and to repayment of notes payable. Accrued merger
and acquisition costs increased approximately $469,000 primarily due to the
Company's previously reported acquisition program. (See Item 1. Business:
General Description). Accrued professional fees decreased approximately
$583,000 due primarily to the conversion of approximately $283,000 of debt
to equity and to the payment of these obligations in the normal course of
business. Accrued expenses increased approximately $48,000 due primarily
to timing differences with respect to payment of these obligations. The
accrual for lease cancellation and litigation reserves decreased
approximately $90,000 due primarily to both payment of these costs and to
the utilization of reserves established for the closing of two of the
companies stores.
Notes payable due after one year increased $680,000 primarily due to
issuance of promissory notes payable in conjunction with the private
issuance of preferred stock. (See Note 8 to the Financial Statements).
Other accrued expenses decreased approximately $139,000 primarily due to
expending the costs associated with the issuance of common stock to a
consulting firm (See Note 7 to the Financial Statements). Other
liabilities decreased $200,000 due primarily to the recognition of a non-
refundable deposit received in conjunction with the Company's previously
disclosed acquisition program.
Stockholders' Deficit:
Between December 31, 1994 and December 31, 1995, there was a net
increase in stockholders' deficit of approximately $252,000, which was due
primarily to the net effect of the loss of approximately $2,139,000, to the
issuance of approximately 2,449,461 shares of the Company's Common Stock
from the exercise of stock options, warrants and the conversion of debt,
the issuance of 34 shares of Preferred Stock in connection with a private
offering of Preferred Stock (See Note 8 to the Financial Statements), and
to the issuance of approximately 900,000 shares of the Company's Common
Stock in connection with a private offering of Common Stock.
17
<PAGE>
As of December 31, 1994 and 1993:
---------------------------------
Assets:
Current assets decreased by approximately $303,000 between December
31, 1993 and December 31, 1994, due primarily to both the decrease in
merchandise inventories and to the decrease in cash used to fund operations
of the Company's stores. The decrease in merchandise inventories resulted
from the sale and non-replenishment of music inventory and to a reserve
established for music inventories based on a decision to discontinue the
sale of music product in the Company's stores.
Equipment decreased by approximately $446,000, due primarily to the
depreciation and amortization of fixed assets in the normal course of
business and to the disposal of assets in conjunction with closing one of
the Company's stores during 1994.
The decrease in intangible assets of approximately $17,000 was due to
the amortization of goodwill. The decrease in other assets of
approximately $23,000 was due to the write-off of security deposits
relating to the cancellation of a lease in conjunction with closing one
store in 1994.
Other deferred costs of $238,750 are related to a consulting agreement
with a firm that will provide consulting services to the Company and a non-
refundable deposit made by the Company in December 1994 upon signing a
letter of intent to purchase a chain of video stores.
Liabilities:
Current liabilities decreased by approximately $32,000 between
December 31, 1993 and December 31, 1994. Accounts payable decreased
approximately $234,000 primarily as a result of the conversion of
approximately $180,000 of accounts payable to a note payable and to the
conversion of approximately $65,000 of accounts payable due to JD, a
related party, to equity during 1994. The accrual for lease cancellation
and litigation reserves decreased approximately $254,000 due to settlement
of certain lease agreements. Accrued salaries decreased approximately
$25,000, due primarily to timing differences with respect to payment of
these obligations. Accrued professional fees increased approximately
$265,000 due primarily to costs associated with anticipated mergers and
acquisitions. Other accrued expenses decreased approximately $157,000 due
primarily to the reversal of costs associated with previous warrant
exercises. Additionally, notes payable increased by approximately $373,000
due to the conversion of approximately $180,000 of accounts payable as
mentioned above, and to the
18
<PAGE>
issuance of promissory notes payable to two investors totalling $180,000
during 1994.
Other liabilities increased by approximately $146,000 during 1994,
principally as a result of the Company recording as a liability a $200,000
payment from JD upon the signing of a Letter of Intent to merge with JD,
pending the outcome of the transaction. Other accrued expenses (classified
as a non-current liability) increased approximately $139,000 in conjunction
with a consulting agreement entered into by the Company in December 1994.
Stockholders' Deficit:
Between December 31, 1993 and December 31, 1994, the net increase in
stockholders' deficit of approximately $776,000 is due primarily to the net
effect of the loss of approximately $988,000, to the issuance of the
approximately 176,000 shares of the Company's Common Stock for debt, and to
the reversal of previously accrued costs relating to prior years warrant
exercises.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The following material changes in results of operations occurred
during the three-year period from January 1, 1993 through December 31,
1995.
Years Ended December 31, 1995 and 1994:
---------------------------------------
During 1995 the Company incurred a net loss of approximately
$2,139,000 primarily due to merger and acquisition expenses associated with
contemplated mergers of the Company with other organizations, selling and
administrative expenses and operating expenses associated with operating
the Company's retail stores.
Revenues decreased by approximately $1,132,000 during 1995 when
compared to 1994 primarily due to the decrease in merchandise sales of
approximately $861,000 as a result of the elimination of the sale of music
products in the Company's stores. The remaining decrease is primarily due
to the closing of one of the Company's stores in March 1994, weather
factors, increased industry competition and fewer highly-rented titles
released during 1995 when compared to 1994.
Costs of goods sold decreased approximately $771,000, but increased
approximately 4% as a percentage of merchandise sales during 1995 primarily
due to the sale of previously viewed rental films at less than carrying
value to provide additional cash flow for operations. Cost of movie
rentals decreased approximately $106,000, or 93%, during 1995 primarily due
to the elimination of
19
<PAGE>
a pay per transaction arrangement with a supplier of videocassette rental
films.
Store payroll expenses decreased approximately $75,000 or 7%,
primarily as a result of closing one store in March of 1994 and to
continuing efforts to reduce operating costs. Rents and other store
operating expenses remained relatively constant when compared to 1994.
Selling and administrative expenses increased approximately $84,000 or
11% during 1995, primarily due to the write-off of certain obligations in
conjunction with discounted cash settlements during 1994.
Professional fee and consulting expenses decreased approximately
$128,000 or 36% during 1995, primarily due to adjustments to accruals.
Merger and acquisition expenses increased approximately $1,535,000
during 1995, primarily due to professional, consulting, and employee
expenses directly related to the Company's previously reported acquisition
program. (See Item 1. Business).
Loss on disposal of videocassette rental inventory increased
approximately $34,000 during 1995, primarily due to re-merchandising the
Company's stores and to the sale of rental inventory at less than carrying
value to provide additional cash flow for operations.
Store opening, closing and lease termination provisions increased
approximately $7,000 or 25% during 1995 when compared to 1994, primarily
due to the opening of one and the closing of two stores during 1995.
Depreciation and amortization expenses decreased approximately
$173,000 or 14% during 1995, primarily due to most of the stores' assets
only requiring one-half year of depreciation during 1995, as those assets
reached full depreciation during 1995.
Net interest expense decreased approximately $12,000 or 33% during
1995, primarily due to interest income in connection with funds held in
escrow from the private offering of Preferred Stock. (See Note 8 of the
Financial Statements).
Years Ended December 31, 1994 and 1993:
---------------------------------------
During 1994, the Company incurred a net loss of approximately $988,000
primarily due to selling and administrative expenses, operating expenses
associated with
20
<PAGE>
operating the Company's retail stores, costs associated with contemplated
mergers of the Company with other organizations, and to reserves
established against merchandise inventories in conjunction with the
elimination of the sale of music products in the Company's stores.
Revenues decreased by approximately $1,241,000 during 1994 when
compared to 1993.
The net decrease was primarily comprised of:
Decrease in same-store revenue ($295,121)
Increase in one store opened in 1994 334,651
Decreases from two stores closed in 1993 (984,392)
Decrease from one store closed in 1994 (295,695)
----------
($1,240,557)
============
Same store revenues for the 11 stores in operation during the
comparative periods decreased approximately 5% as a percentage of same-
store revenue primarily attributable to weather factors, increased industry
competition and the limited use of a pay-per-transaction arrangement which
resulted in limited availability of certain rental product.
Cost of goods sold as a percentage of merchandise sales increased
approximately 14% during 1994 when compared to the same periods in 1993,
primarily due to merchandise inventory reserves established for music
inventories during 1994 in anticipation of discontinuing the sale of music
product in the Company's stores and to the sale of music product during
1994 at lower margins in order to obtain needed working capital. Cost of
movie rentals of $114,000 and $723,000 in 1994 and 1993, respectively,
relates to the pay per transaction arrangement with a supplier of
videocassette rental films. The decrease between the 1994 and 1993 periods
is primarily due to fewer videocassette rental films obtained during 1994
under the pay per transaction arrangement. Videocassette rental films
obtained through the pay-per-transaction arrangement have an average
revenue sharing period of two years.
Store payroll, store rents and other store operating expenses
decreased approximately $136,000 or 11%, $105,000 or 10%, and $143,000 or
24%, respectively, when compared to 1993 primarily due to closing one store
during 1994.
Selling and administrative expenses decreased by approximately
$272,000 or 27% during 1994, when compared with 1993 primarily due to the
Company's continued efforts to reduce overhead costs.
Professional fee and consulting expenses increased approximately
$201,000 or 81% during 1994 when compared to 1993
21
<PAGE>
primarily due to costs associated with anticipated mergers and
acquisitions. The Company expects to continue to increase its professional
fee and consulting expenses until the completion of the Acquisition
Program.
Store closing, lease termination and litigation provisions decreased
approximately $102,000 or 79% during 1994 when compared to 1993 primarily
due to fewer store closings and lease cancellations during 1994.
Depreciation and amortization expenses decreased approximately
$126,000 or 9% during 1994 primarily due to fewer videocassette rental
films depreciated during 1994 in conjunction with closing one store during
1994.
Interest expense decreased approximately $131,000 or 78% due primarily
to the conversion of a Senior Convertible Bond in June 1993.
22
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
The Company's Financial Statements and Notes thereto are filed
together with this report commencing at Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------
None.
23
<PAGE>
PART III
ITEMS 9, 10, 11 and 12 are incorporated in this report by
reference to the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days of the close of the Company's fiscal
year.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
--------------------------------------
(a) Exhibits: The exhibits listed in the Index to Exhibits
appearing on Page E-1.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1995, the Company filed two
reports on Form 8-K, dated December 4, 1995, and December 29,
1995, both with respect to Item 5. thereof.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHOICES ENTERTAINMENT CORPORATION
By: /s/ Ronald W. Martignoni
----------------------------
Ronald W. Martignoni
Chief Executive Officer
March 29, 1996
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ John A. Boylan March 29, 1996
----------------------------------
John A. Boylan
Chairman of the Board of Directors
/s/ Ronald W. Martignoni March 29, 1996
----------------------------------
Ronald W. Martignoni
Chief Executive Officer, President
and Director
/s/ Fred E. Portner March 29, 1996
----------------------------------
Fred E. Portner
Director
/s/ Lorraine E. Cannon March 29, 1996
----------------------------------
Lorraine E. Cannon
Chief Financial Officer
(Principal Accounting Officer)
25
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1995
CHOICES ENTERTAINMENT CORPORATION
FINANCIAL STATEMENTS
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report......................... F-3
Balance sheets as of December 31, 1995 and 1994...... F-4
Statements of loss for the years ended December 31,
1995, 1994 and 1993.................................. F-5
Statements of stockholders' equity (deficit) for the
years ended December 31, 1995, 1994 and 1993......... F-6
Statements of cash flows for the years ended
December 31, 1995, 1994 and 1993...................... F-7 - F-8
Notes to financial statements......................... F-9 - F-24
</TABLE>
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Choices Entertainment Corporation:
We have audited the financial statements of Choices Entertainment Corporation as
listed in the accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Choices Entertainment
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Choices
Entertainment Corporation will continue as a going concern. As discussed in
Note 3 to the financial statements, the Company has suffered recurring losses
from operations, is in default on certain obligations and has a net working
capital deficiency. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/S/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 25, 1996.
F-3
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................ $ 86,391 $ 129,389
Accounts receivable......................... 11,098 1,439
Merchandise inventories..................... 138,149 425,357
Prepaid expenses............................ 28,236 24,112
----------- -----------
Total current assets...................... 263,874 580,297
Videocassette rental inventory,
net (Note 5).............................. 778,728 841,966
Equipment, net (Note 5)....................... 186,990 346,956
Intangible assets, net of amortization
of $96,826 in 1995 and $79,987
in 1994................................... 189,443 206,282
Other deferred costs (Note 7)................ 69,621 238,750
Other assets.................................. 68,254 68,227
----------- -----------
$ 1,556,910 $ 2,282,478
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 6)...................... $ 184,691 $ 480,362
Accounts payable............................ 422,582 779,659
Accrued merger and acquisition expenses..... 563,901 95,319
Accrued professional fees................... 186,243 769,109
Accrual for lease cancellation and
litigation reserves (Note 4).............. 13,750 103,486
Accrued salaries............................ 52,603 58,670
Accrued expenses............................ 147,007 98,920
----------- -----------
Total current liabilities................. 1,570,077 2,385,525
Notes payable (Notes 6 and 8)................. 680,000
Other liabilities............................. 200,000
Other accrued expenses........................ 138,750
----------- -----------
Total liabilities......................... 2,250,777 2,724,275
----------- -----------
Commitments and Contingencies (Notes 3,
4, 6 and 14)
Stockholders' deficit (Notes 8, 9, 10, 11
and 12):
Preferred stock, par value $.01 per share:
authorized 5,000 shares; 34 shares
issued and outstanding in 1995; no
shares issued or outstanding in 1994......
Common stock, par value $.01 per share:
authorized 50,000,000 shares; issued
and outstanding 22,004,395 shares in
1995; 18,654,934 shares in 1994........... 220,044 186,549
Additional paid-in capital.................. 20,485,203 18,631,441
Accumulated deficit......................... (21,399,114) (19,259,787)
----------- ------------
Total stockholders' deficit................... ( 693,867) ( 441,797)
----------- ------------
$ 1,556,910 $ 2,282,478
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Movie rentals............................... $ 3,882,969 $4,154,693 $5,206,537
Merchandise sales........................... 877,715 1,738,181 1,926,894
---------- ---------- ---------
4,760,684 5,892,874 7,133,431
---------- ---------- ---------
Operating costs and expenses:
Cost of goods sold.......................... 864,226 1,634,983 1,545,696
Cost of movie rentals....................... 8,476 114,265 723,541
Store payroll............................... 1,054,643 1,129,516 1,265,588
Store rents................................. 944,260 925,903 1,030,449
Other store operating
expenses.................................. 452,235 451,520 595,819
Selling and administrative
expenses.................................. 819,169 734,954 1,006,525
Merger and acquisition
expenses.................................. 1,630,192 95,319
Professional and consulting
expenses.................................. 225,694 353,361 247,960
Loss on disposal of video-
cassette rental inventory................. 165,877 131,908 130,551
Store opening, closing, lease
termination and litigation
provisions (Note 4)....................... 33,060 26,424 127,973
Depreciation and
amortization.............................. 1,073,116 1,246,237 1,372,030
---------- ---------- ---------
7,270,948 6,844,390 8,046,132
---------- ---------- ---------
Other income (expenses):
Gain on settlement of debt (Note 3)......... 395,640
Gain on settlement of
litigation (Note 4)....................... 393,593
Interest expense, net....................... ( 24,703) ( 36,623) ( 167,215)
---------- ---------- ---------
370,937 ( 36,623) 226,378
---------- ---------- ---------
Net loss...................................... $(2,139,327) $( 988,139) $(686,323)
=========== ========== =========
Net loss per share of common
stock (Note 12).............................. $ (.10) $ (.05) $ (.04)
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Preferred Common Stock Additional
Stock --------------------------- Paid-In Accumulated
Shares Shares Amount Capital Deficit Total
------------ ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 16,158,934 $ 161,589 $ 15,806,403 $(17,585,325) $ (1,617,333)
Issuance of Common Stock in
conjunction with the
conversion of a senior
convertible bond and
accrued interest 1,400,000 14,000 2,401,273 2,415,273
Issuance of Common Stock to
satisfy debt obligations 920,000 9,200 213,300 222,500
Net Loss for the year ended
December 31, 1993 (686,323) (686,323)
------------ ------------ ------------ ------------ -----------
Balance at December 31, 1993 18,478,934 184,789 18,420,976 (18,271,648) 334,117
Issuance of Common Stock to
satisfy debt obligations 166,000 1,660 63,687 65,347
Issuance of Common Stock for
cash from employee exercise
of stock options 10,000 100 2,200 2,300
Reversal of costs associated
with previous warrant exercises 144,578 144,578
Net Loss for the year ended
December 31, 1994 (988,139) (988,139)
------------ ------------ ------------ ------------ -----------
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 2,186,000 21,860 883,895 905,755
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 8) 34 299,200 299,200
Net Loss for the year ended
December 31, 1995 ( 2,139,327) (2,139,327)
----------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 1995 34 22,004,395 $ 220,044 $ 20,485,203 $(21,399,114) $(693,867)
=========== =========== ============ ============ ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss......................................... $(2,139,327) $ (988,139) $ (686,323)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,073,116 1,246,237 1,372,030
(Gain) loss on disposal of equipment........... (7,384)
Gain on settlement of litigation............... (393,593)
Gain on settlement of debt..................... (395,640)
Loss on disposal of videocassette rental
inventory..................................... 165,877 131,908 130,551
Videocassette and inventory reserves........... 45,169 203,378 26,379
Cost of rental film sales...................... 335,230 243,961 234,459
Write-off of deferred costs, net............... (49,271)
Change in assets and liabilities:
[Increase] decrease in accounts receivable.... (9,659) 14,786 26,149
[Increase] decrease in merchandise inventories 287,208 73,112 (35,831)
[Increase] decrease in prepaid expenses....... (4,124) 9,708 59,925
[Increase] decrease in other assets........... (27) 23,286 23,219
Increase in accounts payable.................. 25,999 11,544 471
Increase in accrued merger and acquisition
expenses.................................... 468,582
Increase [decrease] in accrued professional
fees........................................ (582,866) 265,399 (30,189)
Increase [decrease] in accrued salaries....... (6,067) (25,338) 21,993
Increase [decrease] in other accrued expenses. 60,696 (11,984) 209,926
[Decrease] in accrual for lease
cancellation and other litigation reserves.. (13,750) (253,770) (31,933)
----------- ---------- ----------
Total adjustments................................. 1,400,473 1,932,227 1,606,168
----------- ---------- ----------
Net cash provided by (used in) operating
activities...................................... (738,899) 944,088 919,845
------------ ----------- ----------
Cash flows from nvesting activities:
(Increase) decrease in deferred acquisition
costs....................................... 100,000 (100,000)
Proceeds from gain on settlement of
litigation.................................. 393,593
Purchases of videocassette rental inventory,
net......................................... (1,349,871) (1,240,594) (1,148,125)
Purchases of equipment........................ (105,457)
Proceeds from sale of fixed assets............ 172,976
------------ ----------- ----------
Net cash used in investing activities............. (1,355,328) (1,340,594) (581,556)
------------ ----------- ----------
Cash flows from financing activities:
Proceeds from notes payable................... 710,000 180,000
Proceeds from private offering of common
stock....................................... 396,000
Proceeds from issuance of preferred stock,
net......................................... 217,600
Proceeds from other liabilities............... 200,000
Repayment of notes payable.................... (178,171) (41,530) (335,923)
Proceeds from issuance of common stock net.... 905,755 2,300
------------ ----------- ----------
Net cash provided by (used in) financing
activities...................................... 2,051,229 340,770 (335,923)
------------ ----------- ----------
Net increase (decrease) in cash................... (42,998) (55,736) 2,366
Cash at beginning of the year..................... 129,389 185,125 182,759
------------ ----------- ----------
Cash at end of the year........................... $ 86,391 $ 129,389 $ 185,125
============ =========== ==========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest........ $ 1,316 $ -0- $ 14,799
============ =========== ==========
</TABLE>
F-7
<PAGE>
STATEMENTS OF CASH FLOWS (Continued)
During 1995, the Company converted approximately $148,000 of notes payable
into 113,461 shares of the Company's common stock. Additionally, during 1995 the
Company negotiated discounted cash settlements to certain vendors which
eliminated approximately $859,000 of accounts payable for cash of $463,000 and
resulted in a net gain to the Company of approximately $396,000.
During 1994, the Company converted approximately $180,000 of accounts
payable into a note payable and approximately $65,000 of accounts payable into
166,000 shares of the Company's common stock, and approximately $144,000 of
previously accrued warrant exercise costs were reversed.
During 1993, the Company converted approximately $160,000 of accounts
payable into a note payable, converted a $2,000,000 convertible bond and
approximately $396,000 of related accrued interest into 1,400,000 shares of
Common Stock and converted approximately $223,000 of notes payable and other
accrued expenses into 920,000 shares of the Company's Common Stock.
See accompanying notes to financial statements.
F-8
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) INCORPORATION AND OTHER MATTERS
The Company was incorporated under the laws of the State of Maryland on July
11, 1985, as "PPV Enterprises, Inc." On August 18, 1987, the Company changed
its name to "DataVend, Inc." and reincorporated under the laws of the State of
Delaware.
On March 14, 1990, the Company changed its name to Choices Entertainment
Corporation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Merchandise Inventories: Merchandise inventories are stated at the lower of
cost or market. Cost is determined by the average cost method, which
approximates the first-in first-out method.
Videocassette Rental Inventory: Videocassettes are recorded at cost and
amortized over their estimated economic life to a $4 residual value.
Videocassettes are amortized over two years on an accelerated basis.
Equipment: Equipment is stated at cost. Depreciation of equipment is
provided under the straight-line method over the estimated useful lives of the
respective assets.
Intangible Assets: Intangible assets, consisting solely of goodwill, have a
net book value of approximately $189,000. Goodwill, which represents the excess
of purchase price over fair value of net assets acquired, is amortized on a
straight-line basis over the expected periods to be benefited, approximately 17
years. The Company assesses the recoverability of this intangible asset by
determining whether the goodwill can be recovered through undiscounted future
operating cash flows.
Income Taxes: Effective January 1, 1993, the Company adopted Statement 109.
The change in the method of accounting for income taxes had no effect on the
1993, 1994 and 1995 Financial Statements.
Reclassification: Reclassification of the 1994 financial statements has been
made to conform with the presentation of the 1995 financial statements.
F-9
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(3) 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 in each year of its existence, aggregating $21,399,114 from
inception through December 31, 1995, including a net loss of $2,139,327 from the
year ended December 31, 1995.
The Company is currently operating in a severely distressed financial
condition. As of December 31, 1995, the Company had a net working capital
deficiency of approximately $1,306,000. The Company is currently funding its
business on a day-to-day basis from revenues generated from its ten store
operations. However, as the revenues from the Company's existing ten 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. The
Company's capital needs in 1995 which included certain of the costs associated
with its previously reported but now discontinued acquisition program were met
by a combination of revenues generated from its ten-store operations, net
proceeds of approximately $396,000 received in January 1995 derived from a
private offering of Common Stock, net proceeds of approximately $898,000
received in August 1995 derived from a private offering of Preferred Stock,
notes and warrants to purchase Preferred Stock (see Note 8 to the Financial
Statements), net proceeds of approximately $906,000 from the exercise of
previously existing stock options, and proceeds of $30,000 from the issuance of
a promissory note. Substantially, all of the net proceeds derived from the
above-described Preferred Stock Offering were used to fund the Company's
previously reported acquisition program.
The Company, however, is presently in default on three 10% promissory notes
totalling $150,000 plus accrued interest. The principal amounts owing by the
Company on said promissory notes were reduced to $150,000 from $180,000 as a
result of a $30,000 payment made by the Company in November 1995, to the holder
of two of such notes in the then total principal amount of $150,000. This
payment was made following the filing of a lawsuit by the holder of said two
notes seeking a judgment in the principal amount of $150,000 plus accrued
interest of $15,548. The lawsuit was withdrawn following said $30,000 payment
without prejudice to its being reinstated if the balance owing on said notes was
not paid in full prior to March 15, 1996. No additional amounts have been paid
by the Company to the holder, who has continued to demand payment. The Company
is presently unable to satisfy the balance owing and there is no assurance that
the Company will be able to satisfy a judgment in such amount if the lawsuit is
reinstated and a judgment is entered against the Company. The entry and
enforcement of such a judgment against the Company's assets would materially and
adversely affect the Company's business.
F-10
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(3) LIQUIDITY (CONTINUED)
The Company is also delinquent and presently unable to satisfy various other
liabilities, including amounts owing to vendors and landlords, as well as
substantial professional fees owing in connection with its previously reported
acquisition program.
In addition, the Company has been threatened with litigation in connection
with certain prior purchases of the Company's Common Stock. The Company does
not believe that there is any merit to the claim, which is in excess of
$325,000, exclusive of attorneys' fees. However, if legal proceedings were
instituted and the Company was unsuccessful in defending such a lawsuit, the
Company would not presently be able to satisfy an award of damages in the amount
claimed, which judgment would, if enforced, materially and adversely affect the
Company's business. Furthermore, even if the Company was successful in
defending such a lawsuit, the cost alone in professional fees to defend such a
lawsuit could materially and adversely affect the Company's business.
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 113,000 shares of the Company's common stock,
thereby resulting in a net gain of approximately $396,000 to the Company.
However, the Company's viability for the foreseeable future is and will continue
to be dependent upon its ability to secure needed capital, or extend the due
dates of liabilities, or to otherwise conclude or settle existing liabilities
and claims on a satisfactory basis. No assurance can be given that the Company
will be successful in that regard. In the event the Company is not successful,
the Company may be forced to seek protection under Chapter XI of the Federal
Bankruptcy Laws. In such an event, the Company's ability to conduct its
business could be severely hampered. Moreover, the value of the Company's
equity would likely be greatly diminished, if not eliminated.
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 its acquisition candidates have expired, and
those executive officers who joined the Company in connection with its
previously-reported acquisition program have subsequently resigned. Although
the Company is no longer pursuing an acquisition program, management believes
that the Company will need to acquire or establish additional superstores in the
future if the Company is to achieve the economies of scale necessary for it to
become profitable. In that regard and because of its severely distressed
financial condition, 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 that connection.
F-11
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(3) LIQUIDITY (CONTINUED)
In the event the Company is not successful in pursuing a potential merger, it
is likely that it will continue to operate through the ten 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.
(4) STORE CLOSING, LEASE TERMINATION AND LITIGATION PROVISIONS
During 1990, in connection with the Company's plans for expansion, the Company
entered into eight leases for future superstore sites. As a result of its
working capital shortages, the Company decided not to open seven of these stores
and commenced negotiations with each of the landlords for these locations to
reach agreement on extended payment terms or to arrive at settlements for lease
cancellation agreements. Additionally, the Company closed a total of eight of
its superstores, two during 1991, two during 1992, one in 1993, one in 1994 and
two in 1995, and sold one store in 1993. The store that was closed in 1993 was
relocated and re-opened in 1994. The inventory and fixtures from the two stores
closed in 1995 were used to relocate and open one new store in December 1995.
In connection with its lease negotiations and planned store closings, the
Company has expensed approximately $2,600, $26,000 and $128,000 in expected
costs during 1995, 1994 and 1993, respectively, which reflects management's
estimate of expected losses, relating to lease settlements and payment costs for
non-operating superstores.
Settlements have been reached with all of the lessors for proposed superstores
which the Company was not able to open due to its working capital shortages, and
with certain other creditors. Such settlements generally involved the payment
by the Company of a lump sum and the issuance of Common Stock, in exchange for a
termination of the lease and a release of the Company from any liability
thereunder. At December 31, 1995, the Company had accrued approximately $13,750
in connection with a judgment obtained by a creditor that has not yet been
satisfied.
Pursuant to its previous plans to expand, the Company had entered into an
agreement in July, 1991 to purchase a privately-held chain of seventeen existing
video stores operating in Florida, Alabama and
Tennessee under the name "Cobb Prime Time Video, Inc. ("Cobb")." The purchase
price was to be $5,000,000 in cash and a $2,250,000 convertible debenture. The
Company made deposits of $450,000 against the purchase price. However, in
November, 1991, the Company learned that the operating results of Cobb had
severely declined relative to Cobb's projections during the third quarter of
1991 and compared to prior year results. The Company thereupon wrote Cobb
seeking
F-12
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(4) STORE CLOSING, LEASE TERMINATION AND LITIGATION PROVISIONS (CONTINUED)
clarification of these operating results and also terminated the agreement to
purchase Cobb (the "Purchase Agreement") on the existing terms on the basis that
Cobb had breached covenants contained in the acquisition agreement, in
particular, a warranty that there would not be a material adverse change in the
business of Cobb between the date the Purchase Agreement was signed and the date
the acquisition was consummated. Cobb refused to return the deposit of $450,000,
and instituted suit against the Company in Federal District Court in Alabama for
breach of contract. The Company counter-sued for the return of the $450,000
deposit and other costs previously incurred by the Company under the Purchase
Agreement and a determination that no monies were owed by it to Cobb. The trial
was completed on November 18, 1992. However, pending the issuance of a final
judgment on March 30, 1993, Cobb and the Company entered into a final settlement
of the judgement and related matters on terms favorable to the Company,
resulting in a net gain of $393,593 during 1993.
(5) EQUIPMENT AND VIDEOCASSETTE RENTAL INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- ESTIMATED
1995 1994 USEFUL LIVES
------------ ------------- -------------
<S> <C> <C> <C>
Equipment $ 366,313 $ 340,764 5 years
Furniture and fixtures 380,986 444,180 5 years
Leasehold improvements 1,013,471 1,143,830 Life of Lease
Computers and peripherals 428,345 416,574 5 years
----------- -----------
2,189,115 2,345,348
Less: accumulated deprecia-
tion and amortization (2,002,125) (1,998,392)
----------- -----------
$ 186,990 $ 346,956
=========== ===========
Videocassette rental
inventory $ 2,936,280 $ 2,999,792 2 years
Less: accumulated
depreciation (2,157,552) (2,157,826)
----------- -----------
$ 778,728 $ 841,966
=========== ===========
</TABLE>
F-13
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(6) NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS, AND OTHER LIABILITIES
The following table sets forth the Company's Notes Payable and Capital Lease
Obligations:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
--------- ----------
<S> <C> <C>
5% Unsecured Promissory Notes
due September 1997 (see Note 8) $ 680,000
Capital lease obligation payable
monthly through August 1, 1995
(interest rate 14.5%) 4,691 $ 6,891
10% Promissory Note Payable to
vendor due May 1999 293,471
(See Note 9)
10% Promissory Note Payable to
investor in 8 equal monthly
installments due April 1995,
extended to March 15, 1996 20,000 50,000
10% Promissory Note Payable to
investor in 8 equal monthly
installments due August 1, 1995,
extended to March 15, 1996 100,000 100,000
10% Promissory Note Payable to
investor in 8 equal monthly
installments due May 1995 30,000 30,000
10% Promissory Note Payable to
investor due October 1, 1996 30,000
--------- ---------
864,691 480,362
Less portion of notes payable due
within one year (184,691) (480,362)
--------- ---------
Notes payable due after one year $ 680,000 $ -0-
========= =========
</TABLE>
F-14
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(7) OTHER DEFERRED COSTS
In December 1994, the Company entered into a letter of intent to purchase a
chain of 12 video stores. In conjunction with signing the letter of intent and
as a representation of its good faith and in consideration of a no shopping
agreement, the Company paid the chain a $100,000 non-refundable deposit. In
connection with the termination of the letter of intent, the Company recorded
the non-refundable deposit as an expense in 1995.
In December 1994, the Company entered into a consulting agreement with a
firm that was to provide consulting services to the Company. In conjunction
with the agreement, the Company issued 150,000 shares of its common stock to the
firm in March 1995. The deferred costs of approximately $139,000, the estimated
fair value of the restricted stock awarded to the consulting firm, was expensed
during 1995 in connection with the termination of the Company's acquisition
program (See Item 1. Business).
As of December 31, 1995 deferred costs consist of certain debt placement
fees net of amortization of $11,979 (See Note 8).
(8) PREFERRED STOCK AND PRIVATE PLACEMENT TRANSACTION
The Company is authorized to issue 5,000 shares of preferred stock, par
value $.01 per share. The Board of Directors of the Company has the authority,
without further action by stockholders, to issue the preferred stock in one or
more series, and to fix, for any series the dividend rate, redemption price,
liquidation or dissolution preferences, conversion rights, voting rights and
other preferences and privileges.
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.
F-15
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(8) PREFERRED STOCK AND PRIVATE PLACEMENT TRANSACTION (CONTINUED)
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.
A portion of these issuance costs was capitalized as a debt placement fee and is
being amortized over the term of the related debt.
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 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.
(9) COMMON STOCK
During June and July 1988, the Company sold 828,000 units of its securities
at a price of $5.00 per unit (each unit consisted of three shares of common
stock and three Class A redeemable common stock purchase warrants) pursuant to a
public offering and an over-allotment option exercised by the underwriter. The
redeemable Class A Warrants were immediately exercisable and separately
transferable from the common stock. The redeemable Class A Warrants entitled
holders to purchase 1.2 shares of common stock and one redeemable Class B common
stock purchase warrant for $2.25. Each redeemable Class B Warrant entitled
holders to purchase 1.2 shares of common stock for $3.25. In addition, for
every two Class B Warrants exercised during the period from February 12, 1990
through April 30, 1991, the holder thereof was entitled to receive one Class C
Warrant without payment of additional consideration therefor. Each Class C
Warrant entitled the holder thereof to purchase one share of common stock at an
exercise price of $1.875 per share at any time through August 31, 1991. The
Class B Warrants were exercisable for five years from June 8, 1988, the
effective date of the registration statement covering the public
F-16
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(9) COMMON STOCK (CONTINUED)
offering and were redeemable for $.05 per warrant under certain conditions.
Effective February 28, 1991, the Company reduced the exercise price of its Class
B Warrants from $3.25 per Class B Warrant to $.75 per Class B Warrant. On
December 4, 1992, the Company further reduced the exercise price of its Class B
Warrants to $.625 per Class B Warrant or $.50 per share.
Through December 31, 1992, 2,481,350 Class A Warrants (99% of the issued
amount), 1,999,350 Class B Warrants (80.5% of the issued amount), and 787,825
Class C Warrants (78.8%) were exercised resulting in the issuance of 2,977,620,
2,399,220 and 787,825 shares of common stock, respectively. Of the remaining
2,650 Class A Warrants outstanding, 1,600 Class A Warrants were redeemed by the
Company at $.05 per warrant. The remaining 1,050 Class A Warrants and 482,000
Class B Warrants expired in accordance with their terms on June 8, 1993. The
remaining 211,850 outstanding Class C Warrants expired in accordance with their
terms on August 31, 1991.
On February 22, 1992, in conjunction with the terms of a convertible
promissory note, the Company issued 100,000 shares of its Common Stock to the
holder of the convertible promissory note. On February 27, 1992, the Company
issued to a landlord 200,000 shares of its common stock as part of a lease
cancellation agreement.
Between March 1, 1992 and December 31, 1993, the Company issued, through a
private placement, 1,208,369 shares of its Common Stock to various creditors in
exchange for the forgiveness of approximately $733,000 of debt and lease
obligations.
On September 30, 1992, the Company issued 1,000,000 shares of its Common
Stock to a consultant as part of an agreement entered into between the
consultant and the Company dated August 25, 1992 (the "Advisory Agreement"), and
further agreed to pay the consultants' reasonable out-of-pocket expenses
incurred by it in the performance of its duties under the Advisory Agreement,
which included the negotiation of the proposed acquisition of a privately-held
transportation concern. The Advisory Agreement also required the Company to
register the 1,000,000 shares of Company Common Stock delivered thereunder so as
to permit their immediate resale by the consultant, which registration was
completed on October 14, 1992.
On June 2, 1993, the Company issued 1,400,000 shares of its Common Stock to
a group of private investors in conjunction with the conversion of a $2,000,000
convertible bond.
On July 30, 1993, the Company issued 920,000 shares of its Common Stock to a
landlord in connection with the dismissal of an action which the landlord had
filed in 1991 against the Company.
F-17
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(9) COMMON STOCK (CONTINUED)
In March 1994, the Company reversed approximately $144,000 of accrued costs
relating to prior years B Warrant exercises upon determining that it no longer
had an obligation to pay such costs. Such costs representing underwriting
commissions, were initially recorded as a charge to additional paid in capital.
In September 1994, the Company issued 5,000 shares of its common stock to
an employee upon exercise of a stock option at $.23 per share.
During December 1994, a related party accepted 166,000 shares of the
Company's common stock in full settlement of approximately $65,000 of debt.
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.
Additionally, during 1995, 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 1,990,000 shares, a warrant
holder exercised its option to purchase 150,000 shares, and certain employees of
the Company exercised stock options to purchase 46,000 shares of common stock.
(10) NON-EMPLOYEE STOCK OPTIONS AND WARRANTS
OPTIONS
The following table sets forth certain information regarding non-employee
and non-management stock options granted by the Company, which were outstanding
at December 31, 1995:
<TABLE>
<CAPTION>
Shares of Common
Number of Stock Subject Exercise Price Registration
Date of Grant Holders to Option Per Share Expiration Date Rights
- - - ------------------- ------- ------------- -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
December 13, 1988 2 12,500 $1.88 October 18,1999 None
November 14,1989 2 65,000 $1.38 November 14, 1999 None
December 14,1989 1 25,000 $2.00 December 14, 1999 None
January 11, 1990 2 16,875 $2.00 January 10, 1999 None
June 1, 1990 1 291,667 $1.25 June 1, 1999 None
January 31, 1991 2 510,000 $0.43 January 31, 2001 Registered
April 8, 1991 2 45,000 $0.59 April 8, 1996 None
May 23, 1991 1 30,000 $0.85 May 23, 1996 None
July 30, 1991 1 25,000 $0.69 July 30, 1996 Piggyback
August 22, 1991 1 100,000 $0.63 August 21, 1996 Piggyback
November 3, 1994 2 400,000 $0.69 November 3, 1999 Piggyback
December 1, 1994 1 1,000,000 $0.91 December 1, 1999 Piggyback
---------
TOTAL: 2,521,042
=========
</TABLE>
F-18
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(10) NON-EMPLOYEE STOCK OPTIONS AND WARRANTS (Continued)
BRIDGE NOTE WARRANTS
The Company has outstanding Bridge Note Warrants to purchase an aggregate
of 180,000 shares of Common Stock at an exercise price of $.75 per share due to
expire on July 7, 1996, which were issued in connection with certain Bridge
Financings which occurred between August 1989 and July 1991. No value was
assigned to the warrants.
PLACEMENT AGENT WARRANTS
In connection with a 1989 private placement, the Company issued to the
placement agent warrants to purchase an aggregate of 300,000 shares of Common
Stock initially exercisable for a five-year period commencing August 1989, which
expiration date has been extended through various dates, from August 1996 to
October 1996, at an original exercise price of $0.75 per share. The Placement
Agent's Warrants contain anti-dilution rights, and at December 31, 1995, these
warrants, as adjusted, may purchase approximately 1,031,000 shares at an
exercise price of $0.22 per share.
In October 1989, the Company also granted to the Placement Agent for
services rendered in connection with the restructuring of the Company's
business, five-year warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.50 per share, which expiration date has been extended
through August 1996.
(11) EMPLOYEE AND MANAGEMENT STOCK OPTIONS
STOCK OPTION AND APPRECIATION RIGHTS PLAN
The Company has reserved an aggregate of 1,694,000 shares of its Common Stock
for purchase under its 1987 Stock Option and Appreciation Rights Plan (the
"Plan"). Pursuant to the Plan, the Company may grant either incentive stock
options, intended to comply with the requirements of Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock
options, as well as stock appreciation rights.
All matters relating to the Plan are administered by a committee selected by
the Company's Board of Directors, including selection of participants, allotment
of shares, determination of price and other conditions of purchase. The exercise
price of incentive stock options granted under the Plan may not be less than the
fair market value of the Common Stock on the date of grant and the term of the
option may not exceed ten years from the date of grant. In the case of incentive
options granted to individuals who own more than 10% of the outstanding Common
Stock of the Company, the exercise price may not be less than 110% of the fair
market value of the Common Stock on the date of grant and the term of the option
may not exceed five years
F-19
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(11) EMPLOYEE AND MANAGEMENT STOCK OPTIONS (CONTINUED)
STOCK OPTION AND APPRECIATION RIGHTS PLAN (CONTINUED)
from the date of grant. All options and stock appreciation rights granted under
the Plan are non-transferable other than by will or by the laws of descent and
distribution.
The following table sets forth information with respect to incentive stock
options under the Plan for the three years ended December 31, 1995:
<TABLE>
<CAPTION>
Number of
Shares Under Price
Option (1) Per Share
------------- ------------
<S> <C> <C>
Outstanding at January 1, 1993 527,000 $.59 - $.75
(364,665 shares under exercisable
options)
Cancelled (182,000) .59 - .75
--------
Outstanding at December 31, 1993 345,000 .59 - .75
(279,000 shares under exercisable
options)
Cancelled ( 44,000) .23
Exercised ( 10,000) .23
--------
Outstanding at December 31, 1994 291,000 .23
(291,000 shares under exercisable options)
Granted 657,000 .19
Cancelled (338,500) .23
Exercised ( 46,000) .23
--------
Outstanding at December 31, 1995
(119,000 shares under exercisable options) 563,500
========
</TABLE>
- - - ----------
(1) Gives effect to the expiration of options
due to termination of employment
All incentive options issued are exercisable in installments of one-third of
the total award on each of the first three anniversary dates and ending ten
years from the initial date of grant. All grants of options are conditioned on
the continued employment of the optionee. No stock appreciation rights have
been granted.
F-20
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
NON-QUALIFIED MANAGEMENT INCENTIVE STOCK OPTIONS
In connection with the employment agreements entered into by the Company's
executive officers in May 1989, the Company granted Long-Term Management
Incentive Options to four executive officers to purchase up to 4,275,000 shares
of Common Stock, all at an exercise price of $1.25 per share, which was the bid
price for the Common Stock on the date of grant as reported by NASDAQ. The Long-
Term Management Incentive Options expire on June 1, 1999. Options to purchase
708,333 shares were forfeited upon the resignation of one of the officers in
June of 1990. In August of 1990, the Company awarded additional Long-Term
Management Incentive Options to the three officers originally receiving the
options and one other officer in an amount equal to 558,333 shares of the
forfeited options, all at an exercise price of $2.97 per share. In December of
1991, all of the August 1990 Long-Term Management Incentive Options and
2,616,666 of the 1989 Long-Term Management Incentive Options held by Company
officers were surrendered and cancelled. Accordingly, one officer holds
currently vested and exercisable options covering 291,667 shares and one officer
holds a vested and exercisable option covering a total of 366,667 shares.
On January 31, 1991, the Board of Directors approved the grant of 4,750,000
1991 Management Options to four executive officers of the Company. One officer
has subsequently retired and a second officer has left the Company. One officer
exercised his options in full and the other officer exercised 540,000 options
leaving 510,000 options outstanding. All of the 1991 Management Options were
issued at an exercise price of $.4325 per share, which represented the bid price
for the Company's Common Stock on the date of the grant of such options. The
1991 Management Options vested fully as of August 2, 1991, and expire on January
31, 2001.
Non-qualified stock options have been issued to a director of the Company.
These options allow the purchase of up to 60,000 shares of Common Stock at an
average price of $0.5625 per share, exercisable in full until August 14, 1996.
On February 9, 1994, the Board of Directors approved the grant of 915,000 1994
Management Options to three officers and one director of the Company at an
exercise price of $.23 per share, which represented the bid price for the
Company's Common Stock on the date of the grant of such options. The 1994
Management Options vested fully as of April 7, 1994, and expire on January 31,
2001.
Holders of the Long-Term Management Incentive Options, 1991 Management Options
and the 1994 Management Options are afforded certain anti-dilution and piggy-
back registration rights under the 1933 Act with respect to the shares of Common
Stock issuable upon exercise of said options.
F-21
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
NON-QUALIFIED MANAGEMENT INCENTIVE STOCK OPTIONS (CONTINUED)
Registration statements under the 1933 Act have been filed by the Company with
respect to the 8,425,001 shares underlying the 1987 Stock Option and
Appreciation Rights Plan (the "1987 SOP"), the outstanding Long-Term Management
Incentive Options, the 1991 Management Options, and the 1994 Management Options,
and an option held by a director. Of these options, 2,397,667 have either been
cancelled, exercised or have expired, and 1,130,500 options remain unissued, and
444,500 have yet to vest under the 1987 SOP. Generally, such registration
permits the immediate sale of the 4,452,334 vested shares upon exercise, subject
to the volume limitations imposed by Rule 144.
Holders of these options are afforded certain anti-dilution and piggy-back
registration rights under the 1933 Act with respect to the shares of common
stock issuable upon exercise of said options.
In December 1994, the Board of Directors approved the grant of 1,500,000
options and two 1,000,000 options, to one director and two executive officers in
connection with their appointments on November 29, 1994 and November 30, 1994,
respectively. The options to the director were issued at an exercise price of
$.75 per share and the options to the two executive officers were issued at an
exercise price of $.84375 per share. The exercise price in each case represents
the market price of the Company's stock as of the effective date of the grant.
The foregoing two 1,000,000 options expired by their terms upon the resignation
of both executive officers. Additionally, 2,000,000 options that were granted to
two officers of the Company in 1995, expired by their terms upon the
resignation of the two officers during September 1995.
On September 27, 1995, the Company granted a five-year non-qualified stock
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.
(12) NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of Common Stock for each period is based on the net loss
divided by the weighted average number of common shares outstanding during the
period. No effect was given to Common Stock equivalents or the conversion of
preferred shares as the effect would be anti-dilutive.
The approximate number of shares used in the computation of loss per share
amounts are as follows:
Number of shares used
Year ended December 31, in calculation
----------------------- ---------------------
1995 21,652,000
1994 18,491,000
1993 17,360,000
F-22
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(13) INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31, 1995 consist primarily of net
operating loss carry-forwards as well as differences related to fixed asset
depreciation, videocassette amortization, and certain accruals for book and tax
purposes. The Company is in a net deferred tax asset position at December 31,
1995 (before consideration of a valuation allowance) due to the significant net
operating loss carry-forwards described below. However, due to the uncertainty
of the Company realizing this carry-forward benefit through future taxable
income, the net deferred tax asset is fully reserved and no benefit has been
recognized in the statements of loss.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carry-forwards is limited following a greater than fifty percent
change in ownership. As a result of various capital transactions, the Company
appears to have experienced such an ownership change. Accordingly, its
utilization of loss carry-forwards incurred may be subject to an annual
limitation generally determined by multiplying the market value of the Company
on the date of the ownership change by the federal long-term tax-exempt rate.
As of December 31, 1995, the Company had approximately $16,324,000 of net
operating loss carry-forwards for tax purposes which may be available to offset
future federal taxable income, if any, through 2009. The amount ultimately
available, if any in future years, is dependent on the limitation discussed
above. Should the Company operate profitably in 1996 or future years, it may be
subject to current tax expense in certain states for which no net operating loss
carry-forwards are available.
(14) COMMITMENTS
The Company leases certain retail store facilities under non-cancelable long-
term operating leases which expire periodically through 2000. The Company's
commitments under these leases (excluding increases to base maintenance and
repairs, insurance and real estate taxes, which also are payable by the Company)
are as follows:
<TABLE>
<CAPTION>
Year Ending Total Annual
December 31, Rentals
------------ ------------
<S> <C>
1996 898,658
1997 880,617
1998 899,189
1999-2001 1,316,512
-----------
$3,994,976
===========
</TABLE>
Rent expense for 1995, 1994 and 1993 was $980,510, $962,824 and $1,088,926,
respectively.
F-23
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements--(Continued)
(14) COMMITMENTS (CONTINUED)
In April 1992, the Company entered into severance agreements with three
officers, which provide, under certain circumstances, that the Company will pay
these individuals upon their severance an amount equal to one full year's base
salary in the event that their affiliation with the Company ceases within either
one or two years (depending upon the circumstances) following a "change in
control" of the Corporation, as that term is defined in the Company's Stock
Option and Appreciation Rights Plan of 1987, as amended. In November 1993, the
Board of Directors adopted amendments to the severance agreements for two of
these officers, who are also directors of the Company, after considering a
possible conflict of interest should they be required to vote on a business
merger or combination that may result in their removal as officers and directors
of the Company. The amendments principally increase the amount to be paid on
severance from one full year's base salary to two full year's base salary.
As previously reported, during September 1995, the merger agreement between
the Company and JD Store Equipment, Inc. was terminated. However, in connection
with the Letter of Intent entered into with regard to said proposed merger, the
Company and JD also reached an agreement in the event the merger was not
consummated, for the payment of finder's fees with respect to any completed
merger or acquisition which the Company's then Chairman was responsible for
having introduced to the Company from the date of the Letter of Intent (November
4, 1994) until such time as it was publicly announced that the JD Merger was not
consummated (September 11, 1995). Such finder's fees are to consist of warrants
for the purchase of shares of the Company's Common Stock in an amount based upon
10% of the consideration issued or paid by the Company in said merger or
acquisition. The exercise price of the warrants is to be at a 20% discount to
the bid price of the Company's Common Stock, generally calculated on the date of
the letter of intent for said merger or acquisition. The warrants are to have a
five-year term and are to include certain piggy-back rights. JD also agreed, in
the event the merger was not consummated, to pay all legal fees billed to
Choices by its then principal outside law firm.
F-24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
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)
10(a) Stock Option and Appreciation Rights
Plan of 1987(4)
(b) Non-Employee Director Stock Option Agreements
between Registrant and Fred E. Portner (5)
(c) Form of Long-Term Management Incentive
Stock Option Agreement (6)
(d) Form of 1991 Management Option Agreement (6)
(e) Severance Benefits Agreement, as amended,
between Registrant and John A. Boylan (5)
(f) Severance Benefits Agreement, as amended,
between Registrant and Ronald W. Martignoni (5)
(g) Severance Benefits Agreement, as amended,
between Registrant and Lorraine E. Cannon (5)
(h) Form of 1994 Management Option Agreement (5)
(i) Finder's Fee Agreement dated December 19, 1994, between
Registrant, JD Store Equipment, Inc. and John E. Maioriello (7)
(j) Bonus Plan for 1996 (8)
11 Computation of loss per share (8)
21 List of Subsidiaries (8)
23 Consent of KPMG Peat Marwick LLP (8)
27 Financial Data Schedule (8)
- - - -----------------
(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 as an Exhibit to Registrant's Quarterly Report on Form 10-QSB,
for the quarter ended September 30, 1995, and incorporated herein by
reference.
(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.
(5) Filed as an Exhibit to Registrant's 1993 Annual Report on Form 10-K
and incorporated herein by reference.
(6) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 1 to
Form S-1 Registration Statement (File No.: 33-32396) and incorporated
herein by reference.
(7) Filed as an Exhibit to Registrant's 1994 Annual Report on Form 10-K
and incorporated herein by reference.
(8) Filed herewith.
</TABLE>
E-1
<PAGE>
EXHIBIT 10(j)
-------------
CHOICES ENTERTAINMENT CORPORATION
BONUS PLAN FOR FISCAL YEAR ENDING DECEMBER 31, 1996
Choices Entertainment Corporation (the "Corporation") has adopted a
Bonus Plan (the "Plan") with regard to certain key employees for the fiscal
year ending December 31, 1996, as an inducement and incentive to their serving
with increased efforts during the year then ending, upon and subject to the
following terms and conditions:
1. Participants. Participation in the Plan shall be limited to the
------------
following key employees (the "Participants") of the Corporation: Ronald W.
Martignoni, Lorraine E. Cannon, Brian Roach and Mark Wiltshire, and shall be
in addition to any other compensation to which they may otherwise be entitled.
The right of any Participant to receive a bonus under the Plan is subject to
such Participant's continued employment by the Corporation through December
31, 1996, provided, however, that any Participant terminated without cause
prior to December 31, 1996, shall be entitled to receive a pro rata portion of
any bonus such Participant would otherwise have received had such Participant
remained employed by the Corporation through December 31, 1996.
Notwithstanding the foregoing, nothing in this Plan shall grant to any
Participant any right to continued employment by the Corporation, or create
any employment obligation on behalf of the Corporation.
2. Bonus Pool. A bonus pool for distribution to Participants under
----------
the Plan shall consist of 50% of the positive Operating Cash Flow for the
fiscal year ending December 31, 1996, plus those costs incurred during the
fiscal year then ending in connection with the opening of new stores, if any,
provided, however, that the bonus pool under Plan shall in no circumstances
exceed $50,000.00 in the aggregate. For purposes of the Plan, Operating Cash
Flow for the fiscal year ending December 31, 1996, shall mean operating income
for such fiscal year, as determined in accordance with generally accepted
accounting principles, plus non-cash expenses, such as film amortization, used
film cost of goods sold, depreciation and interest not paid (which, by the
terms of the obligation to which it relates, may be capitalized), less net
film purchases.
3. Distributions. The Bonus Pool shall be equally divided among the
-------------
Participants then employed by the Corporation on December 31, 1996, subject to
any pro rata payments pursuant to Paragraph 1, and shall be paid, along with
any pro rata payments, in accordance with Paragraph 4 hereof.
4. Payment. Distributions, if any, under the Plan shall be paid
-------
following the completion of the Corporation's audit for the fiscal year ending
December 31, 1996, but in no event later than April 30, 1997, provided,
however, that such distributions, if any, may be paid, in the discretion of
the Corporation, in two equal payments, on April 15, 1997, and June 15, 1997.
<PAGE>
EXHIBIT 11
----------
CHOICES ENTERTAINMENT CORPORATION
LOSS PER SHARE
1995 1994 1993
---- ---- ----
Net loss $(2,139,327) $ (988,139) $ (686,323)
=========== =========== ===========
Weighted Average
Number of Shares
Outstanding 21,652,000 18,491,000 17,360,000
=========== =========== ===========
Net loss per share $(0.10) $(0.05) $(0.04)
====== ====== ======
<PAGE>
EXHIBIT 21
----------
List of Subsidiaries
--------------------
The Company has the following two wholly-owned subsidiaries, which
were incorporated for purposes of acquisitions in 1995 in connection with the
Company's now discontinued acquisition program. Both of these subsidiaries
are inactive and neither has conducted any business nor holds any assets.
Subsidiary State of Incorporation
---------- ----------------------
VJ Merger Corp. Delaware
JD Merger Corp. California
<PAGE>
EXHIBIT 23
----------
CONSENT OF INDEPENDENT AUDITORS
--------------------------------
The Board of Directors
Choices Entertainment Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
33-44343 and 33-87016) on Form S-8, of Choices Entertainment Corporation of
our report dated March 25, 1996, relating to the balance sheets of Choices
Entertainment Corporation as of December 31, 1995 and 1994, and the related
statements of loss, stockholders' equity (deficit) and cash flows for each of
the years in the three-year period ended December 31, 1995, which report
appears in the December 31, 1995 annual report on Form 10-KSB of Choices
Entertainment Corporation.
Our report dated March 25, 1996 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations, is in default
on certain obligations and has a net working capital deficiency, which raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/S/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 25, 1996
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 86,391
<SECURITIES> 0
<RECEIVABLES> 11,098
<ALLOWANCES> 0
<INVENTORY> 138,149
<CURRENT-ASSETS> 263,874
<PP&E> 5,125,395
<DEPRECIATION> 4,159,677
<TOTAL-ASSETS> 1,556,910
<CURRENT-LIABILITIES> 1,570,077
<BONDS> 0
220,044
0
<COMMON> 0
<OTHER-SE> (913,911)
<TOTAL-LIABILITY-AND-EQUITY> 1,556,910
<SALES> 4,760,684
<TOTAL-REVENUES> 4,760,684
<CGS> 864,226
<TOTAL-COSTS> 864,226
<OTHER-EXPENSES> 6,011,082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,703
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,139,327)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
