<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 March 31, 1996
-----------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________
Commission file number 0-17001
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Choices Entertainment Corporation
- - - --------------------------------------------------------------------------------
(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
May 10, 1996: 22,004,365
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
-1-
<PAGE>
PART I: FINANCIAL INFORMATION
- - - ------------------------------
Item 1. Financial Statements
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited) (Audited)
ASSETS
- - - ------
<S> <C> <C>
Current assets:
Cash................................ $ 130,631 $ 86,391
Accounts receivable................. 9,013 11,098
Merchandise inventories............. 137,141 138,149
Prepaid expenses.................... 18,301 28,236
------------ ------------
Total current assets............... 295,086 263,874
Videocassette rental inventory, net.. 778,605 778,728
Equipment, net (Note 2).............. 155,360 186,990
Intangible assets, net............... 185,233 189,443
Other deferred costs................. 59,829 69,621
Other assets......................... 68,254 68,254
------------ ------------
$ 1,542,367 $ 1,556,910
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- - - -------------------------------------
Current liabilities:
Notes payable....................... $ 184,691 $ 184,691
Accounts payable.................... 426,231 422,582
Accrued merger and acquisition......
expenses........................... 558,780 563,901
Accrued professional fees........... 150,918 186,243
Accrual for lease cancellation and
litigation reserves................ 10,000 13,750
Accrued salaries.................... 69,075 52,603
Other accrued expenses.............. 157,740 147,007
------------ ------------
Total current liabilities.......... 1,557,435 1,570,077
Notes payable........................ 680,000 680,000
------------ ------------
Total liabilities.................. 2,237,435 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................. (21,400,315) (21,399,114)
------------ ------------
Total stockholders' deficit........ (695,068) (693,867)
------------ ------------
$ 1,542,367 $ 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
Ended March 31,
--------------------------
Revenues: 1996 1995
------------ ------------
<S> <C> <C>
Movie rentals......................... $1,107,481 $1,021,952
Merchandise sales..................... 251,624 260,503
---------- ----------
1,359,105 1,282,455
---------- ----------
Operating costs and expenses:
Cost of goods sold.................... 224,795 261,282
Cost of movie rentals................. 6,602
Store payroll......................... 252,854 281,105
Store rents........................... 228,853 244,962
Other store operating expenses........ 111,098 122,840
Selling and administrative expenses... 137,513 210,025
Professional and consulting expenses.. 40,200 52,550
Loss on disposal of videocassette
rental inventory.................... 52,557 35,992
Merger and acquisition expenses....... 737,903
Depreciation and amortization......... 298,157 298,526
---------- ----------
1,346,027 2,251,787
---------- ----------
Other income (expenses):
Gain on settlement of debt............ 395,640
Interest expense, net................. (14,279) (2,898)
---------- ----------
(14,279) 392,742
---------- ----------
Net loss................................ $ (1,201) $ (576,590)
========== ==========
Net loss per share of common stock
(Note 3).............................. $(0.00) $(0.03)
========== ==========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1995 and 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, 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 1,797,000 17,970 728,453 746,423
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 consult-
ing services 150,000 1,500 137,250 138,750
Net Loss for the three
months ended March 31, 1995 (576,590) (576,590)
----------- ----------- ----------- ------------ -----------
Balance at March 31, 1995 21,615,395 $ 216,154 $20,030,561 $(19,836,377) $ 410,338
=========== =========== =========== ============ ===========
Balance at December 31, 1995 34 22,004,395 $ 220,044 $20,485,203 $(21,399,114) $ (693,867)
Net Loss for the three
months ended March 31, 1996 (1,201) (1,201)
-- ----------- ----------- ----------- ------------ -----------
Balance at March 31, 1996 34 22,004,395 $ 220,044 $20,485,203 $(21,400,315) $ (695,068)
== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------
<S> <C> <C>
1996 1995
------ ------
Cash flows from operating activities:
Net loss............................................ $ (1,201) $ (576,590)
--------- ----------
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization.................... 288,365 298,526
Gain on settlement of debt....................... (395,640)
Cost of rental films sold........................... 100,005 53,951
Loss on disposal of rental films.................... 52,557 35,992
Videocassette and inventory reserves................ 5,847
Amortization of other deferred costs................ 9,792 17,344
Change in assets and liabilities:
Decrease in accounts receivable................ 2 085 853
Decrease in merchandise inventories............ 1,008 173,334
Decrease in prepaid expenses................... 9,935 6,949
Increase in other deferred costs............... (11,000)
Increase (decrease) in accounts payable........ 3,649 (31,237)
Increase (decrease) in accrued merger and
acquisition expenses......................... (5,121) 398,317
Decrease in accrued professional fees........ (35,325) (304,473)
Increase in accrued salaries................... 16,472 14,339
Decrease in accrual for lease cancellation
and litigation reserves...................... (3,750) (2,500)
Increase (decrease) in other accrued
expenses..................................... 10,734 (30,350)
--------- ----------
Total adjustments................................... 456,253 224,405
--------- ----------
Net cash provided by (used in) operating
activities....................................... 455,052 (352,186)
--------- ----------
Cash flows from investing activities:
Purchase of equipment, net........................ (2,206) (67,639)
Purchase of videocassette rental films............ (408,606) (356,686)
--------- ----------
Net cash used in investing activities............... (410,812) (424,325)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 1,142,423
Repayment of notes payable....................... (147,500)
--------- ----------
Net cash provided by financing activities........... -0- 994,923
--------- ----------
Net increase in cash................................ 44,240 218,412
Cash at beginning of period......................... 86,391 129,389
--------- ----------
Cash at end of period............................... $ 130,631 $ 347,801
========= ==========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest........... $ 2,833 $ -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 three-month periods ended
March 31, 1996 and 1995 and as of March 31, 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 three-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Equipment
- - - ------------------
Equipment at March 31, 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 three-month period ended
March 31, 1996 and 1995 was computed by dividing the net loss by the weighted
average number of common shares outstanding during the period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Number of shares
used in calculations 22,004,000 20,803,000
</TABLE>
Note 4 - Liquidity
- - - ------------------
The financial statements have been presented on the basis that the Company is
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses, aggregating $21,400,315 from inception through March 31,
1996, including a net loss of $1,201 for the three months ended March 31, 1996.
-6-
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4 - Liquidity (Continued)
- - - ------------------------------
The Company is currently operating in a severely distressed financial
condition. As of March 31, 1996, the Company had a net working capital
deficiency of approximately $1,262,000. 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, the
Company has reported positive cashflow from operations for the three-month
period ended March 31, 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 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.
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 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 complaint are the
members of the Board of Directors, a former director and certain others.
Plaintiffs
-7-
<PAGE>
Note 4 - Liquidity (Continued)
- - - ------------------------------
are seeking monetary damages in an amount to be determined, but exceeding
$25,000, plus attorney's fees, costs of suit and such other relief as the court
deems just. The plaintiffs are primarily the same individuals who, as previously
reported, had made a claim in excess of $325,000, exclusive of attorneys' fees,
against the Company with regard to substantially the same allegations as now set
forth in the 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 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. 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. 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
-8-
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4 - Liquidity (Continued)
- - - ------------------------------
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 April 9, 1996 a lawsuit was filed against the
Company. (See Note 4.)
-9-
<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 March 31, 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 March 31, 1996, the Company had a net working capital
deficiency of approximately $1,262,000. 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, the
Company has reported positive cashflow from operations for the three-month
period ended March 31, 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 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.
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.
-10-
<PAGE>
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 complaint are the
members of the Board of Directors, a former director and certain others.
Plaintiffs are seeking monetary damages in an amount to be determined, but
exceeding $25,000, plus attorney's fees, costs of suit and such other relief as
the court deems just. The plaintiffs are primarily the same individuals who, as
previously reported, had made a claim in excess of $325,000, exclusive of
attorneys' fees, against the Company with regard to substantially the same
allegations as now set forth in the 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 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. 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. 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.
-11-
<PAGE>
Capital Expenditures
During the three-month period ended March 31, 1996, the Company's capital
expenditures, relating to the purchase of videocassette rental films and
furniture and fixtures, were, respectively, approximately $409,000 and $2,000
compared to $357,000 and $67,000, during the same period in 1995. The Company
does not anticipate significant increases 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 $15,000 between December 31, 1995 and
March 31, 1996, primarily due to the effect of the amortization of assets in the
normal course of business, which more than offset an increase in cash provided
from store operations during the three-month period ended March 31, 1996.
Liabilities:
Total liabilities decreased approximately $13,000 between December 31, 1995
and March 31, 1996, primarily due to the payment of obligations in the normal
course of business.
Stockholders' Deficit:
Between December 31, 1995 and March 31, 1996, the increase in stockholders'
deficit was due to the loss of approximately $1,200 for the three-month period
ended March 31, 1996.
Material Changes in Results of Operations
Rental revenues increased approximately $86,000, or 8%, during the comparative
period ended March 31, 1996, when compared to the same period in 1995. The
increase is primarily related to increased purchases of videocassette rental
films and more favorable rental-weather conditions during the 1996 period.
Merchandise sales decreased approximately $9,000, or 3%, during the
comparative period ended March 31, 1996. The decrease is made up of (1) the
loss of approximately $71,000 in revenue from music products no longer sold in
1996, and (2) from an increase in other merchandise sales of approximately
$62,000, or 34%, from an increase in the sale of videocassette films during the
1996 period.
-12-
<PAGE>
Additionally, there were only 10 stores in operation during the comparative
period ended March 31, 1996, compared with 11 stores in operation during the
same period of 1995.
Cost of goods sold decreased approximately $36,000 or 11% as a percentage of
merchandise sales during the comparative periods due primarily to lower
merchandise inventory reserves during 1996. The Company completed the
discontinuance of music product sales in its superstores during the three-month
period ended March 31, 1995.
Store payroll, store rents and other store operating expenses decreased
approximately $28,000, $16,000 and $12,000, or 10%, 7% and 10%, respectively,
during 1996 primarily related to the Company's continuing efforts to reduce
operating costs in its superstores.
Selling and administrative expenses decreased approximately $73,000 or 35%
during the 1996 comparative period primarily due to the Company's continuing
efforts to reduce overhead costs.
Professional and consulting fee expenses decreased approximately $12,000 or
24% during the 1996 comparative period primarily due to lower legal fee costs.
Merger and acquisition expenses decreased approximately $738,000 during the
period ended March 31, 1996 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
$17,000 or 46% due primarily to the increase in the number of videocassette
rental films sold at less than carrying value during the comparative period
ended 1996 to provide additional cash flow for operations.
The gain on settlement of debt of approximately $396,000 during the
comparative period ended 1995 was primarily attributable to the discounted cash
settlement of approximately $1,006,000 of debt.
Interest expense increased approximately $11,000 during the comparative period
ended 1996 primarily due to the interest expense relating to the increase in
notes payable outstanding at March 31, 1996 when compared to March 31, 1995.
As a result of the foregoing, the Company incurred a net loss of approximately
$1,200 during the period ended March 31, 1996.
-13-
<PAGE>
PART II - OTHER INFORMATION
- - - ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The exhibits listed in the Index to Exhibits appearing on Page E-1.
(b) Reports on Form 8-K
-------------------
None.
-14-
<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: May 10, 1996 By: /s/ Ronald W. Martignoni
---------------------------------
Ronald W. Martignoni
Chief Executive Officer
Date: May 10, 1996 By: /s/ Lorraine E. Cannon
-------------------------------
Lorraine E. Cannon
Chief Financial Officer
-15-
<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)
10(a) Non-Employee Director Stock Option Agreement between
Registrant and Fred E. Portner (5)
(b) Bonus Plan for 1996, as amended (5)
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
<PAGE>
Exhibit 10(a)
THIS OPTION HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY BE
TRANSFERRED ONLY IN COMPLIANCE WITH BOTH THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND THE RESTRICTIONS CONTAINED HEREIN. THIS
OPTION HAS NOT BEEN REGISTERED UNDER THE ACT.
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT (hereinafter the "Agreement"), is entered into
under seal as of this 27th day of September, 1995 by and between CHOICES
ENTERTAINMENT CORPORATION, a Delaware Corporation (hereinafter the
"Corporation"), and Fred E. Portner, a resident of the Commonwealth of Virginia
(hereinafter the "Optionee").
R E C I T A L S
- - - - - - - -
WHEREAS, the Corporation now desires to provide for the grant to the
Optionee of an option to purchase certain shares of the Common Stock of the
Corporation, upon certain stated terms and conditions.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration both the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereby specifically agree under seal as follows:
1. Grant of Option. In exchange for good and valuable consideration and
---------------
Ten Dollars ($10.00) paid in hand by the Optionee to the Corporation, the
Corporation hereby grants to the Optionee, subject to the provisions hereof, the
right, privilege and option to purchase up to, but not exceeding, one hundred-
thousand (100,000) shares of the Common Stock of the Corporation, par value One
Cent ($.01) per share (hereinafter the "Option"), at a per share exercise price
of $0.17.
2. Manner of Exercise. The Option granted pursuant to this Agreement may
------------------
be exercised by the Optionee at any time during the period of time commencing on
the date one (1) year from the date of this Agreement and terminating at 5:00
p.m., prevailing New York time, on September 27, 2000 (hereinafter the
"Expiration Date"). Said Option may be exercised from time to time prior to
said Expiration Date, but in no instance for less than Two Thousand Five Hundred
(2,500) shares of the Common Stock of the Corporation at any one (1) time
(unless lesser number of shares then be the maximum number subject to exercise
at that time and, if such is the case, the Optionee must exercise in toto, and
-- ----
not in part, all such
<PAGE>
shares subject to exercise at that time). It is expressly understood that any
and all Options not exercised prior to the Expiration Date shall expire
immediately and automatically thereon and become null and void without any
further act or deed whatsoever at that time.
3. Exercise of Option. The Option granted by this Agreement, to the
------------------
extent the same is exercisable in accordance with the provisions set forth in
Section 2 hereof, may be exercised only by delivering to the Secretary of the
Corporation written notice of exercise in the form of the Notice of Exercise,
attached hereto as Exhibit A and incorporated by reference herein, together with
payment in the form of cash, check, bank draft or money order payable to the
Order of Corporation in an amount equal to the total exercise price as set forth
in Section 1 hereof (hereinafter the "Exercise Price") for that number of shares
purchased pursuant to said Notice of Exercise and a written statement that the
shares are being purchased for the Optionee's own account, for investment only,
and not with a view to distribution. This statement will not be required in the
event that the offering of the securities pursuant to this Agreement is then
registered under the federal Securities Act of 1933, as amended (hereinafter the
"Act"), and any and all applicable similar state securities laws (hereinafter
the "State Acts"). Within thirty (30) days after delivery of any Notice of
Exercise as set forth hereinabove, the Corporation shall cause certificates for
the number of shares of the Common Stock of the Corporation with respect to
which such Option is exercised to be issued in the name of the Optionee.
4. Option Stock. Any shares issued upon the exercise of the Option
------------
granted hereby shall be either authorized but unissued or reacquired shares of
the Corporation's common stock, par value One Cent ($.01) per share (any such
shares issued pursuant to such exercise, hereinafter the "Option Stock").
5. Option Transfer Restrictions. The Option granted pursuant to this
----------------------------
Agreement may not be transferred, assigned, pledged, sold, donated, hypothecated
or otherwise disposed of in any way whatsoever, shall not be subject to
attachment or similar process, and may be exercised, subject to the restrictions
contained herein, only by the Optionee. Upon any attempt to transfer the Option
granted pursuant thereto, or to assign, pledge, hypothecate, sell, donate or
otherwise dispose of the same in any manner whatsoever, not in strict accordance
with the provisions hereof, or upon the levy of any execution, attachment, or
similar process upon such option, the Option shall immediately and automatically
become null and void and without any force or effect whatsoever.
6. Optionee Not a Stockholder. The Optionee shall not be deemed for any
--------------------------
purpose to be a stockholder of the Corporation with respect to any shares as to
which the Option granted hereunder has not been exercised in strict accordance
hereof, with payment of the Exercise Price and issuance of certificates made as
provided
<PAGE>
herein.
7. Optionee's Representations & Warranties; Acknowledgement of Certain
-------------------------------------------------------------------
Facts.
- - - -----
(a) The Optionee acknowledges that any and all securities to be
acquired pursuant to this Agreement have not been registered under either the
Act or the State Acts. Accordingly, the Optionee represents and warrants that
the Option granted hereby and any Option Stock acquired pursuant hereto will be
acquired for its own account and without a view to, the offer, offer for sale,
or any sale in connection with, the distribution of either such Option or the
Option Stock represented by such Option. The Optionee further represents and
warrants that it will hold such Option Stock indefinitely unless subsequently
registered under the Act and the State Acts or unless exemption from such
registration is available and an opinion of counsel for the Corporation, in form
and substance satisfactory to the Corporation, is obtained to that effect.
Consequently, all certificates representing shares of Option Stock issued upon
the exercise of the Option, or part thereof, shall bear a conspicuous legend in
substantially the following form:
"The securities represented by this certificate have not been
registered under the Federal Securities Act of 1933 (the "Act") or
applicable state securities laws (the "State Acts") and shall not be sold,
pledged, hypothecated, donated, or otherwise transferred (whether or not
for consideration) by the holder except upon the issuance to the
Corporation of a favorable opinion of its counsel and/or the submission to
the Corporation of such other evidence as may be satisfactory to counsel
for the Corporation, to the effect that any such transfer shall not be in
violation of the Act and the State Acts."
(b) The Optionee recognizes that the securities to be acquired
pursuant to this Agreement are highly speculative and involve a high degree of
risk. The Optionee further recognizes that the Option granted hereby is not
transferable except as specifically set forth herein and that the
transferability of shares of the Option Stock is significantly restricted. The
Optionee acknowledges that it has sufficient financial means to be able to
sustain the loss of the amount necessary to exercise the Option or part thereof,
should it choose to do so. The Optionee expressly recognizes and specifically
acknowledges that the percentage of the Corporation's equity represented by this
Option is subject to substantial dilution in any one of a variety of means,
including, but not limited to, by way of a future issuance of stock, stock
split, reverse stock split, stock dividend or other distribution,
reclassification of outstanding shares, recapitalization or otherwise.
(c) The parties agree that if the Corporation shall be advised by its
legal counsel that the issuance of securities or
<PAGE>
transfer of the Option pursuant to this Agreement is not permitted under the Act
or the State Acts, the Corporation may, in its discretion, defer either the
delivery of any Option Stock to the Optionee or the transfer of the Option until
such time as the same would be permitted by the Act and the state Acts,
including by effecting registration of the same. The Optionee shall have no
right to demand or force the Corporation to effect such registration.
(d) The Optionee hereby acknowledges that the Corporation has
provided it with the most recent financial statements of the Corporation, all
prepared by the independent certified public accountant engaged by the
Corporation, and further acknowledges that the Corporation has provided it with
an opportunity to ask questions of and to receive answers from a person
authorized to act on behalf of the Corporation concerning any aspect of the
Corporation's present or future financial or business status and prospects. At
reasonable times prior to the exercise of the Option, or part thereof, the
Optionee may request and the Corporation shall thereafter again provide the
Optionee with a balance sheet, a profit and loss statement, and a statement of
changes in capital of the Corporation for the preceding year, all prepared by
the independent certified public accountant then engaged by the Corporation, and
furthermore, shall again provide the Optionee with an opportunity to ask
questions of and to receive answers from any person authorized to act on behalf
of the Corporation concerning any aspect of the Corporation's present and future
financial or business status.
(e) The Optionee represents and warrants that it is knowledgeable in
business affairs and is a sophisticated investor with significant investment
experience and has had the opportunity to discuss the suitability of both the
purchase of this Option and the acquisition of the shares of the Option Stock
with both its legal counsel and financial accountant.
8. Further Assurances. The parties hereto hereby agree to do such
------------------
further acts and things, and to execute and deliver such additional conveyances,
assignments, agreements and instruments, as either may at any time reasonably
request in order to better assure and confirm unto each party their respective
rights, powers and remedies conferred hereunder.
9. Specific Performance. The parties hereto hereby expressly recognize
--------------------
and acknowledge that extensive and irreparable damage would result in the event
that this Agreement is not specifically enforced. Therefore, their respective
rights and obligations hereunder shall be enforceable in a court of equity by a
decree of specific performance and appropriate injunctive relief may be applied
for and granted in connection therewith. Such remedies and any and all other
remedies provided for in this Agreement shall, however, be cumulative and not
exclusive and shall be in addition to any other remedies which any party may
have under this Agreement or otherwise.
<PAGE>
10. Notices. Any notice, payment, demand or any other communication
-------
required or permitted to be given hereunder shall be either in writing and
mailed, telegraphed or delivered by hand to the applicable party or parties at
the address(es) indicated below:
If to the Corporation:
Choices Entertainment Corporation
220 Continental Drive, Suite 102
Newark, DE 19713
Attn: Ronald W. Martignoni, President
If to the Optionee:
Fred E. Portner
121 Montgomery Place
Alexandria, VA 22314
or, as to each party at such other address(es) as may be designated from time to
time by such party or parties by like notice to the other parties, complying
with this section. All such notices, payments, demands or other communications
shall be deemed validly given and legally effective when: (a) deposited in the
United States postal system, by either certified or registered mail, postage
prepaid thereon and return receipt requested (in the case of notice via mail);
---
(b) handed over, delivered, or otherwise deposited with the telegraph company
for transmission (in the case of telegraphic notice); or (c) placed in the hands
of a competent adult authorized to accept the same (in the case of notice via
---
hand delivery).
11. Severability. If any term or provision of this Agreement is held or
------------
deemed to be invalid or unenforceable, in whole or in part, by a court of
competent jurisdiction, this Agreement shall be ineffective only to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement.
12. Entire Agreement; Amendment. This Agreement constitutes the entire
---------------------------
agreement of the parties with regard to the specific subject matter hereof and
supersedes all prior written and/or oral understandings between the parties. As
the final written expression of all of the agreements and understandings among
the parties hereto, this Agreement is an exhaustive and complete expression of
the parties' intent and therefore may be modified only by a writing signed by
all of the parties.
13. Waiver. Any waiver by either party of a breach of any provision of
------
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term
of this Agreement on one or more occasions shall neither be considered a waiver
nor
<PAGE>
deprive that Party of any right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing
and signed by the Party to be charged therewith.
14. Binding Effect. This Agreement shall be binding upon, and inure to
--------------
the benefit of, the heirs, personal representatives, legal successors and
assigns of the respective parties hereto. Neither party shall assign this
Agreement without the written consent of the others and any attempted assignment
without said consent shall be null, void and without any effect whatsoever ab
--
initio.
- - - ------
15. Construction. This Agreement shall be governed, enforced, performed
------------
and construed in accordance with the laws of the State of Delaware (excepting
those conflicts of laws provisions which would serve to defeat application of
Delaware law).
16. Counterparts. Provided that all parties hereto execute a copy of this
------------
Agreement, this Agreement may be executed in counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same instrument.
17. Headings. The headings contained herein are included solely for ease
--------
of reference and in no way shall limit, expand or otherwise affect either the
substance or construction of the terms and conditions of this Agreement or the
intent of the Parties hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
under seal as of the day and year first above written.
WITNESS/ATTEST: CORPORATION:
CHOICES ENTERTAINMENT CORPORATION
By: /s/ Lorraine E. Cannon By: /s/ Ronald W. Martignoni
---------------------------- ------------------------------
Lorraine E. Cannon Ronald W. Martignoni
Secretary Chief Executive Officer
OPTIONEE:
/s/ Ronald W. Martignoni /s/ Fred E. Portner (SEAL)
------------------------------- ---------------------------
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
TO: Secretary
Choices Entertainment Corporation
___________________, 19___
RE: Exercise of Stock Option.
------------------------
The undersigned, pursuant to the provisions set forth in that certain
_________________, 19___ Stock Option Agreement (hereinafter the "Agreement"),
hereby exercises his option under said Agreement and subscribes for and
purchases _________________________________ (___________) shares of the Common
Stock, par value One Cent ($.01) per share, of Choices Entertainment Corporation
(hereinafter the "Corporation"), and makes payment herewith in full therefore by
the present delivery of its check, drawn in the amount of _____________
__________________________________ Dollars and ____________ Cents
($____________), representing the aggregate exercise price for the shares hereby
purchased, as provided for in the Agreement.
1. In connection herewith, the undersigned hereby expressly represents,
warrants and covenants under seal as follows:
(i) That the shares of Common Stock obtained by the undersigned
pursuant to this Notice of Exercise (hereinafter collectively the
"Shares") are being acquired by the undersigned for his own
account with the present intention of holding such Shares for
purposes of investment, and that he has no intention of selling
such securities in a public distribution or otherwise in
violation of either the Federal securities laws or any applicable
State securities laws.
(ii) That the Shares will be held by the undersigned indefinitely
unless subsequently registered under the Federal Securities Act
of 1933, as amended (hereinafter the "Act"), and any and all
applicable similar state securities acts (hereinafter the "State
Acts"), or unless an exemption from such registration is
available and an opinion of counsel which (to the Corporation's
reasonable satisfaction) is knowledgeable in securities law
matters is obtained to that effect and delivered to the
Corporation.
<PAGE>
(iii) That the undersigned has made such investigations of the
Corporation and has received all information and data that the
undersigned has requested which he considers necessary in order
to reach an informed decision as to the advisability of
purchasing the Shares.
(iv) That the undersigned is knowledgeable in business affairs and is
a sophisticated investor with significant investment experience
and has had the opportunity to discuss the suitability of the
acquisition of the shares with both his legal counsel and
financial accountant.
2. Also in connection herewith, the undersigned specifically acknowledges
under seal as follows:
(i) That the Corporation has provided the undersigned with the most
recent Financial Statements of the Corporation, including but not
limited to, a balance sheet, a profit and loss statement and a
statement of changes in financial condition, all as at the end of
the most recent fiscal year and prepared by the independent
Certified Public Accountant engaged by the Corporation.
(ii) That the Corporation has provided the undersigned with an
opportunity to ask questions of and to receive answers from a
person authorized to act on behalf of the Corporation concerning
any aspect of the Corporation's financial or business status.
(iii) That, if the Shares have not been registered under either the Act
or the State Acts, the Shares cannot be resold unless
subsequently registered under the Act and the State Acts unless
an exemption from such registration is available and an opinion
of counsel which (to the Corporation's reasonable satisfaction)
is knowledgeable in securities law matters is obtained to that
effect and delivered to the Corporation.
(iv) That, the Shares issued, directly or indirectly, pursuant to this
Notice of Exercise have not been registered under the Act and the
State Acts, and the stock certificates of the Corporation that
will evidence such Shares will be imprinted with a conspicuous
legend in substantially the following form:
The securities represented by this certificate have not been
registered under the federal Securities Act of 1933, as
amended (the "Act"), or
<PAGE>
applicable state securities laws (the "State Acts"), and
shall not be sold, pledged, hypothecated, donated or
otherwise transferred (whether or not for consideration)
unless subsequently registered under the Act and all
applicable State Acts, or unless an exemption from such
registration is available and an opinion of counsel, such
counsel to be satisfactory to the Corporation, is provided
to that effect.
IN WITNESS WHEREOF, the undersigned has executed, sealed and delivered this
Notice of Exercise this ____ day of ___________, 19__.
WITNESS:
______________________________ ______________________________
<PAGE>
Exhibit 10(b)
CHOICES ENTERTAINMENT CORPORATION
BONUS PLAN FOR FISCAL YEAR ENDING DECEMBER 31, 1996, AS AMENDED
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, if any, incurred during the
fiscal year then ending in connection with the opening of new stores and in
connection with any litigation, 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
<PAGE>
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.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 130,631
<SECURITIES> 0
<RECEIVABLES> 9,013
<ALLOWANCES> 0
<INVENTORY> 137,141
<CURRENT-ASSETS> 295,086
<PP&E> 5,216,515
<DEPRECIATION> 4,282,550
<TOTAL-ASSETS> 1,542,367
<CURRENT-LIABILITIES> 1,557,435
<BONDS> 0
0
0
<COMMON> 220,044
<OTHER-SE> (915,112)
<TOTAL-LIABILITY-AND-EQUITY> 1,542,367
<SALES> 1,359,105
<TOTAL-REVENUES> 1,359,105
<CGS> 224,795
<TOTAL-COSTS> 224,795
<OTHER-EXPENSES> 1,121,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,279
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,201)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
