<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
-------------
Transition report under Section 13 or 15 (d) of the Exchange
Act
For the transition period from to
------------- -------------
Commission file number 0-17001
--------
Choices Entertainment Corporation
- - - --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1529536
- - - -------------------------------- ---------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
220 Continental Drive, Suite 102, Newark, Delaware 19713
- - - --------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip code)
Issuer's Telephone Number, Including Area Code (302) 366-8684
--------------
- - - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of the issuer's Common Stock, as of
August 12, 1996: 22,004,365
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
<PAGE>
Part I: FINANCIAL INFORMATION
- - - ------------------------------
Item 1. Financial Statements
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- ------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- - - ------
Current assets:
Cash $ 84,370 $ 86,391
Accounts receivable 15,563 11,098
Merchandise inventories 156,322 138,149
Prepaid expenses 56,132 28,236
--------------- ---------------
Total current assets 312,387 263,874
Videocassette rental inventory, net 783,078 778,728
Equipment, net (Note 2) 125,668 186,990
Intangible assets, net 181,023 189,443
Other deferred costs 50,037 69,621
Other assets 68,253 68,254
--------------- ---------------
$ 1,520,446 $ 1,556,910
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- - - ----------------------------------------
Current liabilities:
Notes payable $ 179,161 $ 184,691
Accounts payable 630,554 422,582
Accrued merger and acquisition expenses 540,567 563,901
Accrued professional fees 201,152 186,243
Accrual for lease cancellation and
litigation reserves 6,250 13,750
Accrued salaries 44,192 52,603
Other accrued expenses 214,263 147,007
--------------- ---------------
Total current liabilities 1,816,139 1,570,077
Notes payable 680,000 680,000
--------------- ---------------
Total Liabilities 2,496,139 2,250,777
--------------- ---------------
Stockholders' deficit:
Preferred stock, par value $.01 per share:
Authorized 5,000 shares: 34 shares issued
and outstanding in 1996 and 1995
Common stock, par value $.01 per share:
Authorized 50,000,000 shares: issued and
outstanding 22,004,395 shares in 1996 and 1995 220,044 220,044
Additional paid-in-capital 20,485,203 20,485,203
Accumulated deficit (21,680,940) (21,399,114)
--------------- ---------------
Total stockholders' deficit (975,693) (693,867)
--------------- ---------------
$ 1,520,446 $ 1,556,910
=============== ===============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
Revenues: 1996 1995 1996 1995
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Movie rentals $ 969,720 $ 903,381 $2,077,201 $ 1,925,333
Merchandise sales 243,790 181,327 495,414 441,830
---------- ---------- ----------- ------------
1,213,510 1,084,708 2,572,615 2,367,163
---------- ---------- ----------- ------------
Operating costs and expenses:
Cost of goods sold 228,768 168,767 453,563 430,049
Cost of movie rentals 1,110 7,712
Store payroll 241,895 256,904 494,749 538,009
Store rents 239,107 241,450 467,960 486,413
Other store operating expenses 124,121 98,604 235,219 221,444
Selling and administrative expenses 163,420 240,195 300,933 450,220
Professional and consulting expenses 111,907 61,741 152,107 114,290
Loss on disposal of videocassette
rental inventory 67,147 43,721 119,704 79,712
Merger and acquisition expenses 640,910 1,378,814
Depreciation and amortization 304,343 309,585 602,500 608,111
---------- ---------- ----------- ------------
1,480,708 2,062,987 2,826,735 4,314,774
---------- ---------- ----------- ------------
Other income (expenses):
Gain on settlement of debt 395,640
Interest expense, net (13,427) (3,205) (27,706) (6,103)
---------- ---------- ----------- ------------
(13,427) (3,205) (27,706) 389,537
---------- ---------- ----------- ------------
Net loss $ (280,625) $ (981,484) $ (281,826) $(1,558,074)
========== ========== =========== ============
Net loss per share of common stock
(Note 3) $ (0.01) $ (0.04) $ (0.01) $ (0.07)
========== ========== =========== ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Six Months Ended June 30, 1996
(Unaudited)
<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, 1995 34 22,004,395 $220,044 $20,485,203 $(21,399,114) $(693,867)
Net loss for the six months
ended June 30, 1996 (281,826) (281,826)
-------- ------------ ---------- --------------- -------------- -----------
34 22,004,395 $220,044 $20,485,203 $(21,680,940) $(975,693)
======== ============ ========== =============== ============== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,1996
------------
1996 1995
-------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (281,826) $(1,558,074)
-------------- ----------------
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activities:
Depreciation and amortization 602,500 573,423
Gain on settlement of debt (395,640)
Cost of rental films sold 215,087 128,730
Loss on disposal of rental films 119,704 79,712
Videocassette and inventory reserves 11,982 34,688
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (4,465) 513
(Increase) Decrease in merchandise inventories (18,173) 229,939
(Increase) in prepaid expenses (27,896) (42,449)
Increase in other deferred costs (33,000)
Increase (decrease) in accounts payable 207,972 (115,143)
Increase (decrease) in accrued merger and
acquisition expenses (23,334) 885,794
Increase (decrease) in accrued professional fees 14,909 (254,524)
Increase in accrued salaries (8,411) (10,279)
Decrease in accrual for lease cancellation and
litigation reserves (7,500) (7,500)
Increase (decrease) in other accrued expenses 67,256 (27,638)
-------------- ----------------
Total adjustments 1,149,631 1,046,626
-------------- ----------------
Net cash provided by (used in) operating activities 867,805 (511,448)
-------------- ----------------
Cash flows from investing activities:
Purchase of equipment, net (5,821) (74,329)
Purchase of videocassette rental films (858,477) (651,104)
-------------- ----------------
Net cash used in investing activities (864,298) (725,433)
-------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,291,635
Repayment of notes payable (5,530) (150,101)
-------------- ----------------
Net cash provided by financing activities (5,530) 1,141,534
-------------- ----------------
Net increase (decrease) in cash (2,021) (95,347)
Cash at beginning of period 86,391 129,389
-------------- ----------------
Cash at end of period $ 84,370 $ 34,042
============== ================
Supplementary disclosure of cash flow information:
Cash paid during the year for interest $ 7,842 $ -0-
============== ================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation And Significant Accounting Policies
- - - ------------------------------------------------------------------
The financial information included herein for the six-month periods
ended June 30, 1996 and 1995 and as of June 30,1996 are unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles because certain note information has
been omitted; however, such information reflects all adjustments which are, in
the opinion of management, necessary for a fair statement of the results of the
interim periods and such adjustments are of a normal recurring nature. The
results of operations for the six-month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Equipment
- - - ------------------
Equipment at June 30, 1996 is primarily comprised of furnishings,
leaseholds, and computers related to the Company's retail stores.
Note 3 - Loss Per Common Share
- - - ------------------------------
Loss per common share for the six-month period ended June 30, 1996 and
1995 was computed by dividing the net loss by the weighted average number of
common shares outstanding during the period.
Six Months Ended
June 30
------------
1996 1995
------------ ------------
Number of shares used in calculations 22,004,000 20,803,000
Note 4 - Liquidity
- - - ------------------
The financial statements have been presented on the basis that the
Company is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses, aggregating $ 21,680,940 from inception through June 30,
1996, including a net loss of $281,826 for the six months ended June 30, 1996.
The Company is currently operating in a severely distressed financial
condition. As of June 30, 1996, the Company had a net working capital deficiency
of approximately $ 1,503,752. The Company is currently funding its business on a
day-to-day basis from revenues generated from its ten store operations. Because
of the timing of the payment of certain obligations and an increase in the
amount of credit extended by its primary supplier of videocassettes, the Company
has reported positive cash flow from operations for the six-month period ended
June 30, 1996. However, as the revenues from the Company's existing ten stores
are insufficient to insure timely payment of its obligations, the Company is in
immediate need of financing to fund its short-term working capital needs.
As previously reported, the Company is presently in default on three
10% promissory notes totaling $150,000 plus accrued interest. These notes are
held by Carl Shaifer and Max Scheuerer, two of the director nominees of the
Shareholder Group ( See Part II Item 1. Legal Proceedings). The aggregate
principal amount 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 Max Scheuerer, the holder of two such notes in the then total
principal amount of $150,000. This payment was made following the filing of a
lawsuit against the Company by Max Scheuerer, in which a judgment was sought 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
6
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Liquidity (Continued)
- - - ------------------------------
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 Max Scheuerer, 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.
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 now discontinued
acquisition program, as well as ongoing litigation.
As previously reported, on April 9, 1996 a lawsuit was filed against
the Company by certain individuals who allegedly purchased or purchased and sold
securities of the Company. Also named as defendants in the lawsuit are the
members of the Board of Directors, a former director and certain others. On July
12, 1996, Demurers to the Complaint filed on behalf of the Company and the other
defendants were sustained. On July 29, 1996, a Second Amended Complaint was
filed, in which plaintiffs seek monetary damages against the Company and the
other defendants in the amount of $303,470, plus attorney's fees, costs of suit
and such other relief as the court deems just. The plaintiffs are principally
the same individuals who filed the prior Complaint, which contains substantially
the same allegations as now set forth in the Second Amended Complaint. The
Company does not believe that there is any merit to the lawsuit filed against it
and intends to contest it vigorously. However, if the Company is unsuccessful in
defending the 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 is successful in defending the lawsuit, the cost alone in professional
fees associated with this law suit, as well as other litigation ( See Part II
Item 1, Legal Proceedings), could materially and adversely affect the Company's
business.
The Company's viability for the foreseeable future is and will continue
to be dependent upon its ability to secure needed capital, to extend the due
dates of liabilities, or to otherwise conclude or settle existing liabilities
and claims on a satisfactory basis, and to successfully conclude the existing
litigation. 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.
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. However, because of its severely
distressed financial condition, the Company does not have the financial
resources which would enable it to expand. As a consequence, the Company is
exploring a possible merger. 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 possible
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.
Note 5 - Subsequent Events
- - - --------------------------
As previously reported on Form 8-K, dated July 31, 1996, the Company
filed a lawsuit on July 26, 1996, in the United States District Court for the
District of Columbia, entitled Choices Entertainment Corporation v. Carl Shaifer
-------------------------------------------------
et al., seeking declaratory and injunctive relief against a group of
- - - -----
shareholders of the Company (the
7
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 5 -Subsequent Events (Continued)
- - - --------------------------------------
"Shareholder Group") for alleged violations of the federal securities laws. The
Shareholder Group filed a Solicitation Statement ( the "Solicitation Statement")
with the Securities and Exchange Commission on June 28, 1996, in connection with
the Shareholder Group's solicitation of written consents from other shareholders
for the purpose of removing and replacing the Board of Directors of the Company
without the holding of a meeting. The Company believes that the Solicitation
Statement contains material misleading statements and omissions of material
facts, including the failure to disclose serious conflicts of interests of the
Shareholder Group and of their director nominees to the Board, that the
Shareholder Group has failed to file a Schedule 13D in accordance with the
requirements of the federal securities laws, and that any consents obtained by
the Shareholder Group will have been obtained in violation of such laws and are
invalid.
On July 29, 1996, the Shareholder Group delivered written consents to
the Company, which the Shareholder Group asserted were sufficient to remove and
replace the Company's present Board of Directors with the nominees of the
Shareholder Group, and such nominees have attempted to assert control and to
terminate the employment of existing management. The Company has concluded that
the Shareholder Group has not delivered sufficient consents to remove and
replace the Company's present Board and, in any event, that such consents are
otherwise invalid as having been obtained in violation of the federal securities
laws. Therefore, the Company has not recognized the actions purported to have
been taken by the Shareholder Group. The Company has determined to hold an
annual meeting of shareholders on December 20, 1996, for the election of
directors and for action upon such other matters as shall be determined.
On August 2, 1996, a lawsuit was filed in the Court of Common Pleas of
Bucks County, Pennsylvania against the existing Directors of the Company by the
director nominees to the Board of the Shareholder Group, Carl Shaifer, Joseph
DeSaye and Max Scheuerer, as well as on behalf of the Company, entitled Choices
-------
Entertainment Corporation et al., v. Ronald W. Martignoni et al., The lawsuit
- - - -----------------------------------------------------------------
requested that the Court grant a preliminary injunction requiring that the
defendants cease acting as corporate officers or directors and otherwise
relinquish control of the Company. On August 9, 1996, the lawsuit was
discontinued by plaintiffs.
As previously reported on Form 8-K, dated April 17, 1996, a lawsuit was
filed against the Company on April 9, 1996, in the Superior Court of California,
entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., by
---------------------------------------------------------------
certain individuals who allegedly purchased or purchased and sold securities of
the Company. Also named as defendants in the lawsuit were the members of the
Board of Directors, a former director and certain others. On July 12, 1996,
Demurers to the Complaint filed on behalf of the Company and the other
defendants were sustained. On July 29, 1996, a Second Amended Complaint was
filed, in which plaintiffs seek monetary damages against the Company and the
other defendants in the amount of $303,470, plus attorney's fees, costs of suit
and such other relief as the Court deems just. The plaintiffs are principally
the same individuals who filed the prior Complaint, which contains substantially
the same allegations as now set forth in the Second Amended Complaint. The
Company does not believe that there is any merit to the lawsuit filed against it
and intends to contest it vigorously.
8
<PAGE>
Item 2. 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 June 30, 1996 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 June 30, 1996, the Company had a net working capital
deficiency of approximately $1,504,000. The Company is currently funding its
business on a day-to-day basis from revenues generated from its ten store
operations. Because of the timing of the payment of certain obligations and an
increase in the amount of credit extended by its primary supplier of
videocassettes, the Company has reported positive cash flow from operations for
the three and six-month periods ended June 30, 1996. However, as the revenues
from the Company's existing ten stores are insufficient to insure timely payment
of its obligations, the Company is in immediate need of financing to fund its
short-term working capital needs.
As a result of its severely distressed financial condition, the Company
has elected to issue 3.4 shares of its Series C Preferred Stock to the holders
of its 5% unsecured promissory notes, in payment of $34,000 of accrued interest
otherwise due such noteholders in August 1996, in accordance with the terms of
such notes.
As previously reported, the Company is presently in default on three
10% promissory notes totaling $150,000 plus accrued interest. These notes are
held by Carl Shaifer and Max Scheuerer, two of the director nominees of the
Shareholder Group (See Part II Item 1, Legal Proceedings). The aggregate
principal amount 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 Max Scheuerer, the holder of two such notes in the then total
principal amount of $150,000. This payment was made following the filing of a
lawsuit against the Company by Max Scheuerer in which a judgment was sought 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 Max
Scheuerer, 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.
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 now discontinued
acquisition program, as well as on going litigation.
As previously reported, on April 9, 1996, a lawsuit was filed against
the Company in the Superior Court of California, by certain individuals who
allegedly purchased or purchased and sold securities of the Company. Also named
as defendants in the lawsuit were the members of the Board of Directors, a
former director and certain others. On July 12, 1996, Demurers to the Complaint
filed on behalf of the Company and the other defendants were sustained. On July
29, 1996, a Second Amended Complaint was filed, in which plaintiffs seek
monetary damages against the Company and the other defendants in the amount of
$303,470, plus attorney's fees, costs of suit and such other relief as the court
deems just. The plaintiffs are principally the same individuals who filed the
prior Complaint, which contains substantially the same allegations as now set
forth in the Second Amended Complaint. The Company does not believe that there
is any merit to the lawsuit filed against it and intends to contest it
vigorously. However, if the Company is unsuccessful in defending the 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 is successful in
9
<PAGE>
defending the lawsuit, the cost in professional fees associated with this
lawsuit, as well as other litigation (See Part II Item 1, Legal Proceedings),
could materially and adversely affect the Company's business.
The Company's viability for the foreseeable future is and will continue
to be dependent upon its ability to secure needed capital, to extend the due
dates of liabilities, or to otherwise conclude or settle existing liabilities
and claims on a satisfactory basis, and to successfully conclude existing
litigation. 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.
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. However, because of its severely
distressed financial condition, the Company does not have the financial
resources which would enable it to expand. As a consequence, the Company is
exploring a possible merger. 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
During the six-month period ended June 30, 1996, the Company's capital
expenditures, relating to the purchase of videocassette rental films and
furniture and fixtures, were approximately $858,000 and $5,800, respectively,
compared to $651,000 and $74,000, during the same period in 1995. The Company
does not anticipate a significant increase in capital expenditures for the
remainder of the current year other than the replenishment of videocassette
rental films during the normal course of business.
Material Changes in Financial Condition
Assets:
Total assets decreased by approximately $36,000 between December 31,
1995 and June 30, 1996, primarily due to the amortization of intangible assets
and other deferred costs which more than offset the increases in assets, such as
inventory and prepaid expenses.
Liabilities:
Total liabilities increased by approximately $245,000 between December
31, 1995 and June 30, 1996, primarily due to the increase in accounts payable in
connection with obtaining a higher credit line with the Company's major
videocassette supplier and to the timing of payment of certain obligations.
Stockholders' Deficit:
Between December 31, 1995 and June 30, 1996, the increase in
stockholders' deficit was due to the loss of approximately $282,000 for the six-
month period ended June 30, 1996.
Material Changes in Results of Operations
Rental revenues increased approximately $66,000 and $152,000, or 7% and
8%, during the comparative three-month and six-month periods ended June 30,
1996, respectively. The increases are primarily related to higher availability
of rental product, due to increased purchases of videocassette rental films, and
to more favorable rental-weather conditions during the 1996 periods.
10
<PAGE>
Merchandise sales increased approximately $62,000 and $54,000, or 34%
and 12%, during the comparative three-month and six-month periods ended June 30,
1996, respectively. The increases are primarily related to increased purchases
of merchandise movies for sale, and to the sale of previously viewed movies and
candy. Included in merchandise sales during the three-month and six-month
periods ended June 30, 1995 were approximately $18,000 and $89,000 in revenue
from music products no longer sold in 1996.
Additionally, there were only 10 stores in operation during the periods
ended June 30, 1996, compared with 11 stores in operation during the 1995
periods.
Cost of goods sold increased approximately $60,000, but remained
relatively constant as percentage of merchandise revenue during the three-month
comparative period, and increased approximately $24,000, but decreased by
approximately 5% as a percentage of merchandise revenue, during the six-month
comparative period.
Store payroll and store rents decreased approximately $15,000 and
$2,000, respectively during the three-month comparative period and decreased
approximately $43,000 and $18,000, respectively during the six-month comparative
period. The decreases are primarily related to the Company's continuing efforts
to reduce operating costs in its superstores. Other store operating expenses
increased approximately $26,000 and $14,000, respectively during the three-month
and six-month comparative periods, but remained relatively constant as a
percentage of revenue during both periods.
Selling and administrative expenses decreased approximately $77,000, or
32% and $149,000, or 33% during the 1996 comparative periods primarily due to
the Company's continuing efforts to reduce overhead costs.
Professional and consulting fee expenses increased approximately
$50,000 and $38,000 during the 1996 comparative periods primarily due to costs
associated with certain litigation (See Financial Condition, Liquidity and
Capital Resources above).
Merger and acquisition expenses decreased approximately $641,000 and
$1,379,000 during the 1996 comparative periods due primarily to the termination
of the Company's previously reported acquisition program during September 1995.
Loss on disposal of videocassette rental inventory increased
approximately $23,000 and $40,000, or approximately 1% of revenue during the
1996 comparative periods primarily due to the increase in the number of
videocassette rental films sold at less than carrying value during 1996 to
provide additional cash flow for operations.
The gain on settlement of debt of approximately $396,000 during the
six-month comparative period ended 1995 was primarily attributable to the
discounted cash settlement of approximately $1,006,00 of debt.
Interest expense increased approximately $10,000 and $22,000 during the
1996 comparative periods primarily due to the interest expense relating to the
increase in notes payable outstanding at June 30, 1996 when compared to the
same period in 1995.
As a result of the foregoing, the Company incurred a net loss of
approximately $281,000 and $282,000 during the three-month and six-month periods
ended June 30, 1996, respectively.
11
<PAGE>
PART II - OTHER INFORMATION
- - - ---------------------------
Item 1. Legal Proceedings
As previously reported on Form 8-K, dated July 31, 1996, the Company
filed a lawsuit on July 26, 1996, in the United States District Court for the
District of Columbia, entitled Choices Entertainment Corporation v. Carl
------------------------------------------
Shaifer et al., seeking declaratory and injunctive relief against a group of
- - - -------------
shareholders of the Company (the "Shareholder Group") for alleged violations of
the federal securities laws. The Shareholder Group filed a Solicitation
Statement ( the "Solicitation Statement") with the Securities and Exchange
Commission on June 28, 1996, in connection with the Shareholder Group's
solicitation of written consents from other shareholders for the purpose of
removing and replacing the Board of Directors of the Company without the holding
of a meeting. The Company believes that the Solicitation Statement contains
material misleading statements and omissions of material facts, including the
failure to disclose serious conflicts of interests of the Shareholder Group and
of their director nominees to the Board, that the Shareholder Group has failed
to file a Schedule 13D in accordance with the requirements of the federal
securities laws, and that any consents obtained by the Shareholder Group will
have been obtained in violation of such laws and are invalid.
On July 29, 1996, the Shareholder Group delivered written consents to
the Company, which the Shareholder Group asserted were sufficient to remove and
replace the Company's present Board of Directors with the nominees of the
Shareholder Group, and such nominees have attempted to assert control and to
terminate the employment of existing management. The Company has concluded that
the Shareholder Group has not delivered sufficient consents to remove and
replace the Company's present Board and, in any event, that such consents are
otherwise invalid as having been obtained in violation of the federal securities
laws. Therefore, the Company has not recognized the actions purported to have
been taken by the Shareholder Group. The Company has determined to hold an
annual meeting of shareholders on December 20, 1996, for the election of
directors and for action upon such other matters as shall be determined.
On August 2, 1996, a lawsuit was filed in the Court of Common Pleas of
Bucks County, Pennsylvania, against the existing Directors of the Company by the
director nominees to the Board of the Shareholder Group, Carl Shaifer, Joseph
DeSaye and Max Scheuerer, as well as on behalf of the Company, entitled Choices
-------
Entertainment Corporation et al., v. Ronald W. Martignoni et al., No. 96005737-
- - - ------------------------------------------------------------------
18-5. The lawsuit requested that the Court grant a preliminary injunction
requiring that the defendants cease acting as corporate officers or directors
and otherwise relinquish control of the Company. On August 9, 1996, the lawsuit
was discontinued by plaintiffs.
As previously reported on Form 8-K, dated April 17, 1996, a lawsuit was
filed against the Company on April 9, 1996 in the Superior Court of California,
entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., by
----------------------------------------------------------------
certain individuals who allegedly purchased or purchased and sold securities of
the Company. Also named as defendants in the lawsuit were the members of the
Board of Directors, a former director and certain others. On July 12, 1996,
Demurers to the Complaint filed on behalf of the Company and the other
defendants were sustained. On July 29, 1996, a Second Amended Complaint was
filed, in which plaintiffs seek monetary damages against the Company and the
other defendants in the amount of $303,470, plus attorney's fees, costs of suit
and such other relief as the court deems just. The plaintiffs are principally
the same individuals who filed the prior Complaint, which contains substantially
the same allegations as now set forth in the Second Amended Complaint. The
Company does not believe that there is any merit to the lawsuit filed against it
and intends to contest it vigorously.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The exhibits listed in the Index to Exhibits appearing on Page E-1 are
included as part of this report.
(a) Reports on Form 8-K
-------------------
The Company filed a Form 8-K dated April 17, 1996. Such report included
disclosure under Item 5 of a lawsuit filed against the Company, the members of
the Board of Directors of the Company, a former director of the Company, and
certain other defendants, by certain individuals who allegedly purchased or
purchased sold securities of the Company.
13
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHOICES ENTERTAINMENT CORPORATION
Date: August 14, 1996 By: /s/ Ronald W. Martignoni
-----------------------------
Ronald W. Martignoni
Chief Executive Officer
Date: August 14, 1996 By: /s/ Lorraine E. Cannon
-----------------------------
Lorraine E. Cannon
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
No. Description of Exhibit
- - - ------- ----------------------
3 (a) Certificate of Incorporation, as amended (1)
(b) Certificate of Designations of Series C Preferred Stock, as amended
(2)
(c) By-Laws, as amended (3)
4 (a) Form of Certificate Evidencing Shares of Common Stock (4)
(b) Form of 5% Promissory Note (2)
27(a) Financial Data Schedule (5)
- - - --------------------------------------------------------------------------------
(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 herewith.
E-1
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 84,370
<SECURITIES> 0
<RECEIVABLES> 15,563
<ALLOWANCES> 0
<INVENTORY> 156,322
<CURRENT-ASSETS> 312,387
<PP&E> 5,205,305
<DEPRECIATION> 4,296,559
<TOTAL-ASSETS> 1,520,446
<CURRENT-LIABILITIES> 1,816,139
<BONDS> 0
0
0
<COMMON> 220,044
<OTHER-SE> (1,195,737)
<TOTAL-LIABILITY-AND-EQUITY> 1,520,446
<SALES> 2,572,615
<TOTAL-REVENUES> 2,572,615
<CGS> 453,563
<TOTAL-COSTS> 453,563
<OTHER-EXPENSES> 2,373,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,706
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (281,826)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
