<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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)
836 W. Trenton Avenue, Morrisville, Pennsylvania 19067
- - - ------------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip code)
Issuer's Telephone Number, Including Area Code (215) 428-1000
---------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since last Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No ____
State the number of shares outstanding of the issuer's Common Stock, as
of November 8, 1996: 22,004,395
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>
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash $66,942 $86,391
Accounts receivable 33,021 11,098
Merchandise inventories 168,907 138,149
Prepaid expenses 60,323 28,236
----------- ------------
Total current assets 329,193 263,874
Videocassette rental inventory, net 742,110 778,728
Equipment, net (Note 2) 110,260 186,990
Intangible assets, net 176,813 189,443
Other deferred costs 40,245 69,621
Other assets 68,458 68,254
----------- -------------
$1,467,079 $1,556,910
=========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $176,161 $184,691
Accounts payable 688,392 422,582
Accrued merger and acquisition expenses 481,576 563,901
Accrued professional fees 211,711 186,243
Deferred revenue 34,387
Accrual for lease cancellation and litigation
reserves 2,500 13,750
Accrued salaries 71,259 52,603
Other accrued expenses 258,350 147,007
----------- -------------
Total current liabilities 1,924,336 1,570,077
Notes payable 680,000 680,000
----------- -------------
Total Liabilities 2,604,336 2,250,777
----------- -------------
Stockholders' deficit:
Preferred stock, par value
$.01 per share:
Authorized 5,000 shares: 37.4
shares issued and outstanding in
1996 and 34 shares issued and
outstanding in 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 20,519,203 20,485,203
Accumulated deficit (21,876,504) (21,399,114)
----------- -------------
Total stockholders' deficit (1,137,257) (693,867)
----------- -------------
$1,467,079 $1,556,910
=========== =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Movie rentals $1,065,576 $1,030,926 $3,142,777 $2,956,259
Merchandise sales 239,058 171,842 734,472 613,672
---------- ---------- ---------- ----------
1,304,634 1,202,768 3,877,249 3,569,931
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of goods sold 206,973 185,063 660,536 615,113
Cost of movie rentals 59,701 605 59,701 8,315
Store payroll 250,179 261,719 744,928 799,728
Store rents 232,617 226,730 700,577 713,142
Other store operating expenses 121,047 122,320 356,266 343,765
Selling and administrative expenses 187,843 209,185 488,776 659,405
Professional and consulting expenses 78,150 55,175 230,257 169,465
Loss on disposal of videocassette
rental inventory 73,441 28,466 193,145 108,178
Merger and acquisition expenses 270,180 1,648,995
Depreciation and amortization 280,656 134,047 883,156 742,158
---------- ---------- ---------- -----------
1,490,607 1,493,490 4,317,342 5,808,264
---------- ---------- ---------- -----------
Other income (expenses):
Gain on settlement of debt 395,640
Interest expense, net (9,591) (6,407) (37,297) (12,510)
---------- ---------- ---------- -----------
(9,591) (6,407) (37,297) 383,130
---------- ---------- ---------- -----------
Net loss $(195,564) $(297,129) $(477,390) $(1,855,203)
========== ========== ========== ===========
Net loss per share of common stock (Note 3) $(0.01) $(0.01) $(0.02) $(0.09)
========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTOF STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 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 34.0 22,004,395 $220,044 $20,485,203 $(21,399,114) $(693,867)
Issuance of preferred stock
to preferred stock note
holders in lieu of cash
payment for interest due
on notes (Note 4) 3.4 34,000 34,000
Net loss for the
nine months ended
September 30, 1996 (477,390) (477,390)
---- ------------ --------- ----------- ------------ -----------
37.4 22,004,395 $220,044 $20,519,203 $(21,876,504) $(1,137,257)
==== ============ ========= =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(477,390) $(1,855,203)
--------- -----------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 883,156 742,158
Gain on settlement of debt (395,640)
Cost of rental films sold 326,222 237,068
Loss on disposal of rental films 193,145 108,178
Videocassette and inventory reserves 17,320 39,733
Amortization and write-off of other
deferred costs, net 38,750
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (21,923) 842
(Increase) Decrease in merchandise inventories (30,758) 223,914
(Increase) in prepaid expenses (32,087) (25,922)
Increase in other assets (204) (3,507)
Increase (decrease) in accounts payable 265,810 (272,931)
Increase in deferred revenue 34,387
Increase (decrease) in accrued merger
and acquisition expenses (82,325) 570,560
Increase (decrease) in accrued
professional fees 25,468 (374,497)
Increase in accrued salaries 18,656 12,940
Decrease in accrual for lease
cancellation and litigation reserves (11,250) (10,000)
Increase (decrease) in other accrued expenses 145,344 (18,659)
----------- -----------
Total adjustments 1,730,961 872,987
----------- -----------
Net cash provided by (used in)
operating activities 1,253,571 (982,216)
----------- -----------
Cash flows from investing activities:
Purchase of equipment, net (13,433) (76,662)
Purchase of videocassette rental films (1,251,057) (984,108)
----------- -----------
Net cash used in investing activities (1,264,490) (1,060,770)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,292,607
Proceeds from private offering of
preferred stock, net 897,600
Repayment of notes payable (8,530) (152,801)
----------- -----------
Net cash provided by (used in)
financing activities (8,530) 2,037,406
----------- -----------
Net decrease in cash (19,449) (5,580)
Cash at beginning of period 86,391 129,389
----------- ----------
Cash at end of period $66,942 $123,809
=========== ==========
Supplementary disclosure of cash
flow information:
Cash paid during the year for interest $10,055 $-0-
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<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 nine-month periods
ended September 30, 1996 and 1995 and as of September 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 nine-month period
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
Note 2 - Equipment
Equipment at September 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 nine-month period ended September 30, 1996
and 1995 was computed by dividing the net loss by the weighted average number
of common shares outstanding during the period.
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
Number of shares used in calculations 22,004,000 21,542,000
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 $ 21,876,504 from inception
through September 30, 1996, including a net loss of $477,390 for the nine
months ended September 30, 1996.
The Company is currently operating in a severely distressed financial
condition. As of September 30, 1996, the Company had a net working capital
deficiency of approximately $ 1,595,000. The Company is currently funding
its business on a day-to-day basis from revenues generated from its nine
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 nine-month period ended September 30, 1996. However, as the revenues
from the Company's existing nine 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
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 due such noteholders in August 1996, in accordance with the terms of
such notes.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Liquidity (Continued)
The Company is in default under the terms of three 10% promissory notes
in the aggregate principal amount of $150,000 plus accrued interest. These
notes are held by Carl Shaifer and Max Scheuerer, two members of the
Shareholder Committee ( See Part II Item 1. Legal Proceedings). The aggregate
principal amount owing by the Company on said promissory notes was reduced to
$144,000 from $180,000 as a result of a $30,000 payment made by the Company,
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. Mr. Scheuerer filed a new lawsuit on September 18, 1996 ( see
Part II Item 1. Legal Proceedings), seeking a judgment in the amount of
$146,298, representing principal and interest owing to Mr. Scheuerer by the
Company on said notes (plus future interest, costs and any other appropriate
damages). Since that time, the Company has made payments to Mr. Scheuerer
totaling $6,988.74. The Company has asserted that it has reached a settlement
with Mr. Scheuerer extending payment over time of the amounts owed; however,
if it is determined that no settlement has been reached, 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 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.
Additionally, the Company is in default under the terms of a 10%
promissory note in the principal amount of $30,000, which note is held by
Harold E. Hamburg, a member of the Shareholder Committee. The Company has
paid all interest due to date on said note.
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 and with respect to ongoing litigation.
. As previously reported, 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. On August
28, 1996, the Company filed an answer to the complaint, denying plaintiffs
allegations with regard to all claims. On October 22, 1996, the Company also
filed for summary judgment. Discovery is proceeding. 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
aforementioned lawsuits, the cost alone in professional fees associated with
these lawsuits, 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
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Liquidity (Continued)
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.
The Company is also exploring the possibility of selling its video stores
although no assurance can be given that it would be successful in that
regard. In the event the Company is not successful in pursuing a possible
merger or selling its video stores, it is likely that it will continue to
operate through the nine stores currently owned which have historically
provided insufficient revenues to enable the Company to operate profitably.
Note 5 - Subsequent Events
During October 1996, the Company expanded one of its superstores. Also
during October, 1996 the Company closed two non-performing stores and opened
one new superstore in November 1996.
On November 8, 1996, the Company signed a non-binding letter of intent
with West Coast Entertainment Corporation ("West Coast"), setting forth the
basic terms of a possible sale by the Company of substantially all of its
assets to West Coast for a combination of cash and common stock of West
Coast. Consummation of a sale is contingent upon a number of conditions, the
satisfaction of which cannot be assured. Such conditions include, among
others, negotiation and execution of a definitive agreement, satisfactory due
diligence by West Coast, obtaining all necessary consents and approval of the
sale by the Company's stockholders. West Coast is one of the country's
largest video specialty retailers.
<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 September 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 September 30, 1996, the Company had a net working capital
deficiency of approximately $1,595,000. The Company is currently funding its
business on a day-to-day basis from revenues generated from its nine 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 nine-month periods ended September 30, 1996. However, as
the revenues from the Company's existing nine 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
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.
The Company is in default under the terms of three 10% promissory
notes in the aggregate principal amount of $150,000 plus accrued interest.
These notes are held by Carl Shaifer and Max Scheuerer, two members of the
Shareholder Committee ( See Part II Item 1. Legal Proceedings). The aggregate
principal amount owing by the Company on said promissory notes was reduced to
$144,000 from $180,000 as a result of a $30,000 payment made by the Company,
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. Mr. Scheuerer filed a new lawsuit on September 18, 1996 ( see
Part II Item 1. Legal Proceedings), seeking a judgment in the amount of
$146,298, representing principal and interest owing to Mr. Scheuerer by the
Company on said notes (plus future interest, costs and any other appropriate
damages). Since that time, the Company has made payments to Mr. Scheuerer
totaling $6,988.74. The Company has asserted that it has reached a
settlement with Mr. Scheuerer, extending payment over time of the amount owed;
however, if it is determined that no settlement has been reached, 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 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.
Additionally, the Company is in default under the terms of a 10%
promissory note in the principal amount of $30,000, which note is held by
Harold E. Hamburg, a member of the Shareholder Committee. The Company has
paid all interest due to date on said note.
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 and with respect to on-going litigation (see
Part II Item 1. Legal Proceedings).
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. On August
28, 1996, the Company filed an answer to the complaint, denying plaintiffs
allegations with regard to all claims. On October 22, 1996, the Company also
filed for summary judgment. Discovery is proceeding.
<PAGE>
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 lawsuits,
the cost alone in professional fees associated with these lawsuits, 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.
The Company is also exploring the possibility of selling its video stores
although no assurance can be given that it would be successful in that
regard. In the event the Company is not successful in pursuing a potential
merger or selling its video stores, it is likely that it will continue to
operate through the nine stores currently owned which have historically
provided insufficient revenues to enable the Company to operate profitably.
On November 8, 1996, the Company signed a non-binding letter of intent
with West Coast Entertainment Corporation ("West Coast"), setting forth the
basic terms of a possible sale by the Company of substantially all of its
assets to West Coast for a combination of cash and common stock of West
Coast. Consummation of a sale is contingent upon a number of conditions, the
satisfaction of which cannot be assured. Such conditions include, among
others, negotiation and excecution of a definitive agreement, satisfactory
due diligence by West Coast, obtaining all necessary consents and approval of
the sale by the Company's stockholders. West Coast is one of the country's
largest video specialty retailers.
The statements contained in this Quarterly Report on Form 10-QSB which
are not historical facts contain forward looking information with respect to
plans, future events or future performance of the Company, the occurrence of
which involve certain risks and uncertainties that could cause the Company's
actual results to differ materially from those expected by the Company,
including but not limited to the risk of adverse litigation, the inability
to make timely payment to vendors, landlords and other creditors, the risk of
being unable to finance videocassette inventory acquisitions due to its
severely distressed financial condition, and uncertainties detailed in the
Company's filings with the Securities and Exchange Commission.
CAPITAL EXPENDITURES
During the nine-month period ended September 30, 1996, the Company's
capital expenditures, relating to the purchase of videocassette rental films
and furniture and fixtures, were approximately $1,251,000 and $13,400,
respectively, compared to $928,000 for the purchase of videocassette rental
films and $77,000 for the purchase of furniture and fixtures 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 $90,000 between December 31, 1995
and September 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 $354,000 between December
31, 1995 and September 30, 1996, primarily due to the increases in accrued
expenses and accounts payable in connection with obtaining a
<PAGE>
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 September 30, 1996, the increase in
stockholders' deficit was due to the loss of approximately $477,000 for the
nine-month period ended September 30, 1996.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Rental revenues increased approximately $35,000 and $187,000, or 3% and
6%, during the comparative three-month and nine-month periods ended
September 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.
Merchandise sales increased approximately $67,000 and $121,000, or 39%
and 20%, during the comparative three-month and nine-month periods ended
September 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 other items. Included in merchandise sales
during the nine-month period ended September 30, 1995 was approximately
$89,000 in revenue from music products no longer sold in 1996.
Cost of goods sold increased approximately $22,000, but decreased
approximately 21% as percentage of merchandise revenue during the three-month
comparative period, and increased approximately $45,000, but decreased by
approximately 10% as a percentage of merchandise revenue, during the
nine-month comparative period. The percentage decreases during both periods
is primarily related to higher margins on rental films sold during 1996 when
compared to 1995. Also included in merchandise revenue during the nine-month
period ended 1996 is approximately $24,000 of customer membership revenue
which has no corresponding cost of sales.
Cost of movie rentals increased approximately $59,000 and $51,000,
respectively during the three-month and nine-month comparative periods
primarily due to the increased usage of a pay per transaction arrangement
with a supplier of videocassette rental films.
Store payroll decreased approximately $12,000 and $55,000, respectively
during the three-month and nine-month comparative period . The decreases are
primarily related to there being only 10 stores in operation during 1996
compared to 11 stores in operation during the 1995 comparative periods, and
to the Company's continuing efforts to reduce operating costs in its
superstores. Store rents increased approximately $6,000 and decreased
approximately $13,000,respectively during the three and nine-month
comparative periods. Other store operating expenses decreased approximately
$1,300 and increased approximately $13,000 during the three-month and
nine-month comparative periods, respectively. but remained relatively
constant as a percentage of revenue during both periods.
Selling and administrative expenses decreased approximately $21,000, or
10% and $171,000, or 26% during the 1996 comparative periods primarily due to
the Company's continuing efforts to reduce overhead costs.
Professional and consulting fee expenses increased approximately $23,000
and $61,000 during the 1996 comparative periods primarily due to costs
associated with certain litigation (See Part II Item 1. Legal Proceedings).
Merger and acquisition expenses decreased approximately $270,000 and
$1,649,000 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 $45,000 and $85,000, or approximately 2% of revenue during the
1996 comparative periods primarily due to the increase in the number of
<PAGE>
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
nine-month comparative period ended 1995 was primarily attributable to the
discounted cash settlement of approximately $1,006,000 of debt.
Interest expense increased approximately $3,000 and $25,000 during the
1996 comparative periods primarily due to the interest expense relating to
the increase in notes payable outstanding at September 30, 1996 when
compared to the same period in 1995.
As a result of the foregoing, the Company incurred a net loss of
approximately $196,000 and $477,000 during the three-month and nine-month
periods ended September 30, 1996, respectively.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported on Form 8-K, dated July 26, 1996, the Company
filed a lawsuit on that date, in the United States District Court for the
District of Columbia (the "Washington Proceedings"), entitled Choices
Entertainment Corporation v. Carl Shaifer et al., seeking declaratory and
injunctive relief against the following group of shareholders: Carl Shaifer,
Joseph DeSaye, Max Scheuerer, Maureen and Lawrence Feeney, William and Evelyn
Goatley, P.L. Anderson, Jr. , Harold E. Hamburg, David F. Beckman, Mark and
Barbara Raifman and Frank Harvey (collectively, the "Shareholder Committee")
for alleged violations of the federal securities laws. The Shareholder
Committee had previously filed a Solicitation Statement ( the "Solicitation
Statement") with the Securities and Exchange Commission on June 28, 1996, in
connection with the Shareholder Committee'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 Committee and of certain of
its director nominees to the Board, that the Shareholder Committee 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
Committee have been obtained in violation of such laws and are invalid.
Additionally, as previously reported, on July 29, 1996, the Shareholder
Committee delivered written consents to the Company, which the Shareholder
Committee asserted were sufficient to remove and replace the Company's
present Board of Directors with the nominees of the Shareholder Committee
without the holding of a meeting, and such nominees attempted to assert
control and to terminate the employment of existing management. The Company
did not recognize the action purported to have been taken by the Shareholder
Committee, having concluded that the Shareholder Committee had not delivered
sufficient consents to remove and replace the Company's present Board and, in
any event, that such consents were otherwise invalid as having been obtained
in violation of the federal securities laws.
As previously reported on Form 10-QSB for the quarter ended June 30,
1996, 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 Committee, 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 August 16, 1996, on that date,
the Shareholder Committee's nominees, Carl Shaifer, Joseph DeSaye and Max
Scheuerer, filed a lawsuit in the Delaware Court of Chancery for New Castle
County (the "Delaware Proceedings"), C.A. No. 15170, entitled Carl Shaifer,
et al. v. Ronald W. Martignoni, et al., against the Company and the existing
Board of Directors, seeking: (i) a declaration that the present Board had
been duly and validly removed and that plaintiffs were validly elected as the
Company's Board, (ii) an order directing the holding of an annual meeting of
shareholders on a date, to be fixed by the Court, not more than 30 days from
August 16, 1996 (the date of the filing of the complaint), (iii) costs and
expenses, including attorneys fees, and (iv) such other relief as the Court
deems just and proper.
Also as previously reported, on September 4, 1996, after two summary
hearings, and prior to the filing of an answer by defendants in the Delaware
Proceedings, the Delaware Court of Chancery, without ruling on the merits,
ordered, inter alia: (i) that the annual ,meeting of shareholders be held on
December 20, 1996, as previously announced by the Company, (ii) that the
present Board, consisting of Ronald W. Martignoni, John A. Boylan and Fred E.
Portner, shall constitute the Company's Board of Directors, until the earlier
of the election of directors at the meeting or the resolution of plaintiffs
claim in the lawsuit, and that Joseph DeSaye, except with respect to certain
matters, be permitted to attend Board meetings, and (iii) that, until the
earlier of the election of directors at the meeting or the resolution of
plaintiffs claim in the lawsuit, the Company will not issue any voting
securities in certain specified transactions except upon Court order and that
the Company will not, except upon five business days notice, take any "action
out of the ordinary course, " as defined in the order. The order also
provides that the restrictions contained therein may be waived by written
agreement of the parties and that the order may be
<PAGE>
modified by the Court. On September 6, 1996, defendants filed an answer to
the complaint in the Delaware Proceedings, denying plaintiffs allegations
with regard to all claims.
Additionally as previously reported, on September 12, 1996, counsel for
the Company and the Shareholder Committee notified the Court in the
Washington Proceedings that they were engaged in settlement discussions and
requested postponement of the hearing previously scheduled for September 13,
1996, which postponement was granted.
As previously reported on Form 8-K, dated September 18, 1996, on that
date a lawsuit was filed against the Company in the Court of Common Pleas of
Bucks County, Pennsylvania, captioned Max Scheuerer v. Choices Entertainment
Corporation, Civil Action No. 96006871, in which plaintiff, a member of the
Shareholder Committee, is seeking a judgment in the amount of $146,298 (plus
future interest, costs and any other appropriate damages), which amount
allegedly represents $120,000 of principal and $26,298.35 of interest owed by
the Company to plaintiff under two 10% promissory notes, on which plaintiff
has alleged that the Company is presently in default. The Company was served
with the complaint on September 27, 1996. The aforesaid principal amount was
reduced to $120,000 from $150,000 as a result of a $30,000 payment made by
the Company on November 30, 1995, in response to a previous lawsuit filed by
plaintiff seeking collection of said notes. In connection with such payment,
plaintiff discontinued the previous lawsuit without prejudice and agreed not
to reinstate it for any remaining balance owing on the notes prior to March
15, 1996. Since that time, the Company has made payments to plaintiffs
totaling $6,988.74. The Company has filed an answer asserting that it has
reached a settlement with plaintiff extending payment over time of the amount
owed.
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. On August 28, 1996, the Company filed an
answer to the complaint, denying plaintiffs allegations with regard to all
claims. On October 22, 1996 the Company also filed a motion for summary
judgment. Discovery is proceeding. The Company does not believe
that there is any merit to the lawsuit filed against it and intends
to contest it vigorously.
Item 3. Defaults Upon Senior Securities.
The Company is in default under the terms of three 10% promissory notes
in the aggregate principal amount of $150,000 plus accrued interest. These
notes are held by Carl Shaifer and Max Scheuerer, two members of the
Shareholder Committee ( See Part II Item 1. Legal Proceedings). The aggregate
principal amount owing by the Company on said promissory notes was reduced to
$144,000 from $180,000 as a result of a $30,000 payment made by the Company,
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. Mr. Scheuerer filed a new lawsuit on September 18, 1996 ( see
Part II Item 1. Legal Proceedings), seeking a judgment in the amount of
$146,298, representing principal and interest owing to Mr. Scheuerer by the
Company on said notes (plus future interest, costs and any other appropriate
damages). Since that time, the Company has made payments to Mr. Scheuerer
totaling $6,988.74.
Additionally, the Company is in default under the terms of a 10%
promissory note in the principal amount of $30,000, which note is held by
Harold E. Hamburg, a member of the Shareholder Committee. The Company has
paid all interest due to date on said note.
<PAGE>
Item 5. Other Information.
On November 8, 1996, the Company signed a non-binding letter of intent
with West Coast Entertainment Corporation ("West Coast"), setting forth the
basic terms of a possible sale by the Company of sub substantially all of
its assets to West Coast for a combination of cash and common stock of West
Coast. Consummation of a sale is contingent upon a number of conditions, the
satisfaction of which cannot be assured. Such conditions include, among
others, negotiation and execution of a definitive agreement, satisfactory due
diligence by West Coast, obtaining all necessary consents and approval of the
sale by the Company's stockholders. West Coast is one of the country's
largest video specialty retailers.
<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.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated August 16, 1996. Such report included
disclosure under Item 5 of a lawsuit filed against the Company and its Board
of Directors.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CHOICES ENTERTAINMENT CORPORATION
Date: November 12, 1996 By: /s/ Ronald W. Martignoni
---------------------------
Ronald W. Martignoni
Chief Executive Officer
Date: November 12, 1996 By: /s/ Lorraine E. Cannon
------------------------
Lorraine E. Cannon
Chief Financial Officer
<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) Severance Agreement between Registrant and John A. Boylan (5)
10(b) Consulting Agreement between Registrant and John A. Boylan (5)
27(a) Financial Data Schedule (5)
99(a) Letter of Intent between Registrant and West Coast Entertainment
Corporation (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)
SEVERANCE AGREEMENT
This Severance Agreement (this "Agreement"), effective August 15, 1996,
confirms and memorializes the agreement reached and entered into on that date
between John A. Boylan ("Boylan") and Choices Entertainment Corporation (the
"Corporation") (Boylan and the Corporation are sometimes collectively
referred to herein as the "Parties").
RECITALS
WHEREAS, Boylan is presently employed by the Corporation and is a
director and Chairman of the Board of the Corporation; and
WHEREAS, Boylan and the Corporation are parties to a letter agreement
dated March 31, 1992, as amended by letter agreement dated February 24, 1994
(together, the "Old Severance Agreement"), providing for the payment of
certain benefits to Boylan if Boylan's employment is terminated after a
change in control of the Corporation; and
WHEREAS, Boylan desires to resign voluntarily from all positions and
from employment with the Corporation and any of its affiliates and
subsidiaries, while remaining a director and Chairman of the Board until the
next meeting of shareholders at which directors are elected, and to settle
all claims arising out of his employment with the Corporation and/or its
related and subsidiary companies and the separation from that employment,
including releasing the Corporation from any claims or rights that he has or
may have under the Old Severance Agreement, which is intended to be
terminated hereby; and
WHEREAS, the Corporation desires that, following Boylan's aforesaid
resignation of employment, upon the terms and conditions herein set forth,
Boylan thereafter serve as a consultant to the Corporation and Boylan desires
to serve in that capacity, upon the terms and conditions of a consulting
agreement, as herein provided; and
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties agree as
follows:
1. CORPORATION. For and in consideration of the representations,
covenants, promises, agreements and acknowledgements made by Boylan contained
herein, and his performance thereof, the sufficiency of which is hereby
acknowledged:
<PAGE>
(a) For a period of eleven (11) months from the date first set
forth above, Boylan shall serve as a consultant to the Corporation, upon the
terms and conditions set forth in the consulting agreement attached hereto
(the "Consulting Agreement"), which has been entered into by the Parties
contemporaneously herewith.
(b) Except with respect to those options held by Boylan to purchase
291,667 shares of Choices common stock, at an exercise price of $1.25 per
share, which are cancelled and terminated hereby, all options held by Boylan
as of the date first set forth above to acquire shares of Choices common
stock shall remain in full force and effect, and the Corporation shall use
its best efforts to maintain the effective registration under the Securities
Act of 1933, as amended (the "Securities Act"), on Form S-8 (or on such other
form as may be appropriate), of all shares underlying such options, for so
long as such options are outstanding.
(c) The Corporation hereby accepts Boylan's voluntary resignation
(contained in Paragraph 2 below) from all positions and from employment with
the Corporation and any of its affiliates and subsidiaries, except that
Boylan shall remain a director and Chairman of the Board of the Corporation
until the next meeting of shareholders at which directors are elected.
2. BOYLAN COVENANTS. For and in consideration of the above-referenced
payments and the covenants, promises, agreements and acknowledgements of the
Corporation contained herein, and its performance thereof, the sufficiency of
which is hereby acknowledged:
(a) Boylan hereby voluntary resigns
from all positions and employment with the Corporation and any of its
affiliates and subsidiaries, effective as of the date first set forth above,
provided, however, that he shall continue as a director and Chairman of the
Board of the Corporation until the next meeting of shareholders at which
directors are elected.
(b) Boylan shall not file, pursue or prosecute any suit, charge,
complaint, action or claim of any nature whatsoever arising out of his
employment with the Corporation and/or its related and/or subsidiary
companies, or his separation from such employment. Boylan further, for
himself and his estate, agents, attorneys, successors, heirs, executors,
administrators, and assigns, irrevocably and unconditionally releases and
discharges the Corporation and its subsidiary corporations, and their
affiliates, directors, officers, employees, representatives, agents,
attorneys, predecessors, successors, and assigns (hereinafter collectively
referred to as the "Corporation Releasees") from any and all rights, demands,
actions, causes of actions, suits, debts, charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages and
expenses (including attorneys fees and costs actually incurred) of any nature
whatsoever, in law or
-2-
<PAGE>
equity, whether known or unknown, which he ever had, now has, or may have
had, against the Corporation Releasees since the beginning of time to the
date of execution of this Agreement, including, but not limited to, any and
all rights, claims, obligations or liabilities arising under the Old
Severance Agreement, and any and all tort or contract claims and any and all
claims arising under Federal, state or local statutes, ordinances,
resolutions, regulations or constitutional provisions prohibiting
discrimination on the basis of race, color, religion, sex, age, national
origin and/or physical or mental disability; provided, however, that such
release and discharge do not apply to (i) claims, demands or causes of action
for breach of the Consulting Agreement, (ii) any of the undertakings or other
provisions contained in the Consulting Agreement or in this Agreement, (iii)
any rights of indemnification under the Corporation's by-laws, including but
not limited to those rights of indemnification relating to the existing
litigation in the Los Angeles County Superior Court entitled Gary N. Gibbs,
et al. v. Choices Entertainment Corporation, et al.
Without limiting the foregoing, Boylan specifically waives and releases any
and all claims and rights which he has or may have against the Corporation
Releasees, or any of them, based upon or arising under Title VII of the Civil
Rights Act of 1964, the Americans With Disabilities Act, 42 U.S.C. Sections
1981 and 1983, and applicable state and local laws, each as amended. Boylan
hereby further agrees that if any such claim referenced herein is filed,
pursued or otherwise prosecuted by him, individually or collectively, or by
persons or entities acting by or through him, individually or collectively,
Boylan waives his rights to relief from such claim, including the right to
attorney's fees, costs and any and all other relief, whether legal or
equitable, sought in such claim, and agrees to indemnify and hold the
Corporation Releasees harmless from such claim, including attorney's fees and
costs.
(c) Boylan consents to the cancellation and termination, effective
immediately, of those options held by him on the date first set forth above
to purchase 291,667 shares of Choices common stock, at an exercise price of
$1.25 per share, which options are hereby rendered null and void.
(d) Boylan acknowledges that he shall have seven (7) days following his
execution of this Agreement in which to rescind or withdraw his waiver of
claims of age discrimination stated above and that, in the event he exercises
such right of rescission and/or withdrawal of waiver, this Agreement and the
Consulting Agreement shall become null and void and of no further effect.
3. REPRESENTATIONS. The Parties represent and certify that they have
carefully read and fully understand all of the provisions of this Agreement,
that they have had ample and adequate opportunity to discuss thoroughly all
aspects of this Agreement with legal counsel of their own choosing, that they
are voluntarily entering
-3-
<PAGE>
into this Agreement and that no representations have been made other than
those set forth explicitly herein. Boylan specifically acknowledges: (i)
that he has been provided a reasonable time up to and including twenty-one
(21) calendar days in which to consider the terms of this Agreement, even if
executed prior to the expiration of that period, and (ii) that the law firm
of Earp, Cohn, Leone & Pendery, A Professional Corporation, including any
attorney in that firm with whom he has communicated, has solely represented
the Corporation in connection with this Agreement and the Consulting
Agreement and has not jointly represented Boylan and the Corporation, and
that such law firm has advised Boylan he should obtain legal counsel in
connection with this Agreement and the Consulting Agreement.
4. INTERPRETATION. The Parties understand and agree that this
Agreement shall in all respects be interpreted, enforced and governed under
the laws of the State of Delaware, without regard to principles of conflicts
of laws, and that the language of this Agreement shall in all respects be
interpreted as a whole, according to its fair meaning, and not strictly for
or against either of the Parties, regardless of which is the drafter of this
Agreement.
5. ENTIRE AGREEMENT AND MODIFICATION. The Parties further agree that
this Agreement and the Consulting Agreement set forth the entire agreement
among the Parties with respect to the subject matter hereof and thereof and
fully supersede any and all prior agreements or understandings between them,
including, without limitation, the Old Severance Agreement, which is
terminated hereby and rendered null and void. This Agreement may be amended
or superseded only by a subsequent writing, executed by the Parties.
6. ASSIGNMENT. This Agreement shall not be assignable by Boylan, but
shall be binding on Boylan and his estate, agents, attorneys, successors,
heirs, executors, administrators, insurers and assigns, and shall be binding
on and inure to the benefit of the Corporation Releasees and their estates,
agents, attorneys, successors, heirs, executors, administrators, insurers and
assigns.
7. LITIGATION. Except as may otherwise be provided to the contrary
elsewhere in this Agreement, in the event of litigation arising under this
Agreement, the Parties agree that the prevailing Party shall be entitled to
recover from the non-prevailing Party
-4-
<PAGE>
its reasonable attorneys' fees and expenses incurred in connection with such
litigation at all levels.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Parties
have executed this Agreement on this 25th day of October, 1996, as of the
date first set forth above.
/s/ John A. Boylan
----------------------------------------
John A. Boylan
CHOICES ENTERTAINMENT CORPORATION
By /s/ Ronald W. Martignoni
-------------------------------------
Ronald W. Martignoni, Chief
Executive Officer
-5-
<PAGE>
Exhibit 10(b)
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement"), made and entered into as of
the 15th day of August, 1996, by and between Choices Entertainment
Corporation, a Delaware corporation (the "Company"), and John A. Boylan (the
"Consultant") (the Company and Boylan are sometimes collectively referred to
herein as the "Parties").
W I T N E S S E T H:
WHEREAS, while remaining a director and Chairman of the Board until the
next meeting of shareholders at which directors are elected, Consultant has
resigned from all other positions and from employment with the Corporation
and any of its affiliates and subsidiaries; and
WHEREAS, Consultant, prior to such resignation, performed valuable
services for the Company; and
WHEREAS, the Company desires to retain Consultant to consult with the
Company in the capacity of an independent contractor and Consultant desires
to consult with the Company in such capacity, all subject to and upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows:
1. For a period of eleven (11) months from the date hereof (the
"Consulting Period"), Consultant shall serve as a consultant to the Company,
subject to the terms and conditions herein set forth.
2. Consultant's services shall include consultation with, and
advice to, the Company concerning matters within his areas of knowledge and
expertise. In particular, Consultant shall focus his efforts on possible
mergers and acquisitions and in resolving claims on behalf of the Company.
Consultant shall render such written reports relating to his consulting
services as the Company may request.
3. During the Consulting Period, Consultant shall be subject to
the direction and supervision of the Chief Executive Officer. Consultant
agrees to perform his work with reasonable efficiency and to devote all of
his time, energy and ability, while he is performing consulting services, in
the best interests of the Company.
4. As compensation for the consulting services contemplated
hereby, the Company shall pay to Consultant twenty-two (22) bi-weekly
payments of $3,500 each, with the first such payment due on
<PAGE>
September 6, 1996. Consultant shall indemnify and hold the Company harmless
from any taxes or similar charges that the Company is required to pay on
account of any amounts paid to the Consultant hereunder.
5. Consultant shall be entitled to the following benefits:
(a) For a period of one year from the date hereof, the current
health insurance coverage provided to Consultant and his family shall remain
in effect, and shall be paid for by the Company.
(b) During the Consulting Period, the Consultant shall be
entitled to the continued use of the automobile currently provided to him.
Thereafter, Consultant shall return the automobile to the Company in the same
condition, subject to wear from normal usage. All additional costs to the
Company that are accrued after the date hereof as a result of such use by
Consultant, without regard to business or personal use, shall be paid by
Consultant or, in the sole discretion of the Company, paid by Company, in
which event such costs shall be reimbursed to the Company by Consultant. Any
such amounts paid by the Company may be offset against any consulting fees
due Consultant hereunder. All such additional costs incurred during the
Consulting Period, which are the sole responsibility of Consultant, include,
but are not limited to, repair and maintenance costs, premiums for insurance,
fuel and related charges, and lease payments for all additional mileage above
106,000 miles (being the agreed upon approximate mileage for said automobile
on the date hereof).
(c) The Company shall continue to pay for Consultant's legal
defense and to indemnify him with respect to the existing litigation in the
Los Angeles County Superior Court entitled Gary N. Gibbs, et al. v. Choices
Entertainment Corporation, et al.
6. It is expressly understood that Consultant is an independent
contractor and not an employee of the Company and, as such, Consultant shall
receive no compensation or benefits, except as set forth herein or which may
be mutually agreed upon, in writing, by the Parties hereto.
7. The Company has been induced to enter into this Agreement in
part by reason of the covenants hereinafter set forth in this Paragraph.
In view of the fact that Consultant's work as a consultant for the
Company will bring him into contact with many confidential affairs of the
Company, Consultant will not utilize, other than for Company business, any
such confidential information or material, or disclose such confidential
information or material to anyone outside the Company or to any unauthorized
person, whether or not
-2-
<PAGE>
employed by the Company, during the term of this Agreement or at any time
thereafter. All documents or other records regarding the Company's operation
or business, whether or not prepared by Consultant either solely or in
combination with others, will remain the sole property of the Company and
Consultant will deliver all such documents and records to the Company without
request upon termination of this Agreement.
In the event of the violation of any of the foregoing covenants, the
Company shall have the right to equitable relief by injunction or otherwise,
in addition to all rights and remedies afforded by law, including, among
other things, the right to recover damages sustained by reason of any such
violation.
8. This Agreement shall be binding upon and inure to the benefit
of the parties hereto, their respective legal representatives and any
successor to the Company, which successor shall be deemed substituted for the
Company under the terms of this Agreement. This Agreement may not be
assigned by Consultant.
9. The waiver by the Company of the breach of any provision of
this Agreement shall not operate or be construed as a waiver of any
subsequent breach by Consultant.
10. In the event that any provision of this Agreement or any application
thereof shall be judged by any court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of all other applications of that provision, and of all other
provisions and applications hereof, shall not in any way be affected, and
such invalid, illegal or unenforceable provision or application shall be
deemed not to be a part of this Agreement, and this Agreement shall then be
enforced to the maximum extent allowed by the applicable law.
11. Except as otherwise provided in the Severance Agreement (the
"Severance Agreement"), entered into between the Parties hereto and dated an
even date herewith, this Agreement sets forth all of the terms, conditions
and agreements of the parties relative to the subject matter hereof and
supersedes any and all such former agreements with respect thereto, and any
and all such former agreements are hereby declared terminated and of no
further force and effect upon execution and delivery hereof. There are no
terms, conditions or agreements with respect hereto, except as provided
herein and in the Severance Agreement, and no amendment of this Agreement
shall be effective unless reduced to writing and executed by the parties.
12. This Agreement shall be construed and enforced in accordance with
the laws of the State of Delaware, without regard to principles of conflicts
of laws.
-3-
<PAGE>
13. In the event of litigation arising under this Agreement, the parties
agree that the prevailing party shall be entitled to recover from the
non-prevailing party its reasonable attorneys' fees and expenses incurred in
connection with such litigation at all levels.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CHOICES ENTERTAINMENT CORPORATION
By:/s/ Ronald W. Martignoni
-------------------------------
Ronald W. Martignoni
Chief Executive Officer
/s/ John A. Boylan
----------------------------------
John A. Boylan
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHOICES ENTERTAINMENT CORPORATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 66,942
<SECURITIES> 0
<RECEIVABLES> 33,021
<ALLOWANCES> 0
<INVENTORY> 168,907
<CURRENT-ASSETS> 329,193
<PP&E> 5,224,350
<DEPRECIATION> 4,371,981
<TOTAL-ASSETS> 1,467,079
<CURRENT-LIABILITIES> 1,924,336
<BONDS> 0
0
0
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<INCOME-TAX> 0
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</TABLE>
<PAGE>
EXHIBIT 99(a)
[LETTERHEAD OF WEST COAST ENTERTAINMENT CORPORATION]
October 30, 1996
PRIVATE AND CONFIDENTIAL
Board of Directors
c/o Ronald Martignoni, President
Choices Entertainment Corporation
836 West Trenton Avenue
Morrisville, PA 19067
Re: NON-BINDING LETTER OF INTENT TO ACQUIRE ASSETS
Gentlemen:
We are delighted to attach the following Summary of Terms and
Conditions outlining the principal tenets of a definitive agreement with
Choices Entertainment Corporation (the "Seller"). The following terms and
conditions are what we discussed and sets forth the terms and conditions
under which we could extend an offer to acquire your stores.
PURCHASE OF ASSETS
SUMMARY TERMS AND CONDITIONS
Acquisition: Purchase of all of the assets of the
Seller for the retail video stores as
listed on attached Exhibit "A", a total
of nine (9) stores which are owned by Seller.
Purchase Price: Two Million Seven Hundred Thousand Dollars
($2,700,000) payable $1,200,000 in cash and
$1,500,000 in common stock. The purchase
price is based on Seller's net operating
cash flow for the period from October 1,
1995 through September 30, 1996. The base
purchase price shall be reduced if the net
operating cash flow for such period as
determined by the Buyer is less than
$700,000. Such reduction shall be in an
amount equal to:
$2,700,000 - ($2,700,000 x Cash Flow)
------------------------
$700,000
<PAGE>
Choices Entertainment Corporation
October 30, 1996
Page 2
Cash flow is defined as EBITDA (Earnings
Before Interest, Taxes, Depreciation and
Amortization) less actual rental
purchases. Purchase price is subject to
adjustment for quantity and quality of
rental inventory on hand, store
improvements, furniture and fixtures and
computer systems which do not meet current
standards of West Coast Entertainment
Corporation (the "Buyer"). The stock will
be priced based on the average of the
closing prices for the 15 trading days two
days prior to the date of settlement.
Prepaid Expenses: There shall be no apportionment or
adjustment for prepaid expenses or
deposits.
Description of Common Stock: Common Stock will be registered and that of
West Coast Entertainment Corporation (the
"Buyer"), subject to a 12 to 18 month
period lock-up as described below.
Restrictions on Trading
Common Stock: The Sellers have a restriction on selling
their shares as follows: 40% eligible to be
sold in the open market after 12 months;
100% eligible to be sold in the open
market after 18 months.
Exclusive Right to Purchase: Seller agrees that Buyer shall have the
exclusive right to purchase Seller's
stores upon execution of this letter. Such
exclusive rights shall extend until
January 31, 1997, unless mutually
extended. Both Seller and Buyer warrant and
agree that they will negotiate in good
faith and use their best efforts to sign a
definitive agreement evidencing the basic
terms outlined in this Letter of Intent by
November 15, 1996. This Exclusive Right
shall terminate if a definitive agreement
has not been reached by November 15, 1996.
Anticipated Closing Date: January 31, 1997.
Operating Cash Flow: Seller warrants that its cash flow equals
or exceeds $700,000 for the 12 months
ended September 30, 1996.
Break Up Fee: If the Seller's shareholders do not approve
the transaction contemplated herein, West
Coast Entertainment will receive a
break-up fee of $100,000, payable in cash,
which will be applied to the option
agreement described below.
<PAGE>
Choices Entertainment Corporation
October 30, 1996
Page 3
Warranties and Agreements: Sellers and principals agree to sign a five
year video and electronic game retailing
non-competition agreement with WCEC.
Sellers and the principals will enter into
an asset purchase agreement containing
customary representations, warranties,
indemnification provisions and covenants.
Short Term Advance: Upon execution of a definitive Asset
Purchase Agreement, West Coast
Entertainment Corporation will advance to
the Seller, against delivery of a secured
demand promissory note bearing simple
interest at the rate of 12% per annum, the
amount of $150,000. Demand will not be
made until after January 31, 1997.
Option to Purchase
Newtown Store: If the Seller's shareholders fail to
approve the transaction contemplated
hereby by January 31, 1997, West Coast
Entertainment shall have the option
(exercisable within 180 days after such
date) to purchase all of the Seller's
assets relating to its retail video store
located in Newtown, Pennsylvania, for a
price of $250,000 in cash. (Such price may
be paid by surrender of the breakup fee
described above, and forgiveness of
$150,000, of the demand note describe
above.) Such assets shall include all
security deposits, prepaid expenses and
other assets (exclusive of cash in bank
accounts, but inclusive of $600 of cash on
hand at the store). West Coast shall, in
connection with the exercise of any such
option, assume the Seller's lease with
respect thereto. If West Coast exercises
such option, West Coast and the Seller
shall enter into a definitive asset
purchase agreement substantially in the
form of the agreement negotiated with
respect to the transaction described in
this letter.
Seller Expenses: The Seller shall be responsible for all
expenses incurred by it in connection with
the transaction contemplated hereby,
including without limitation, all costs
incurred in connection with obtaining
shareholder approval of the transaction.
Purchase Contingencies: 1) Pre-closing audit and due diligence by
Buyer exposes no material discrepancies in
cash flow calculation or other material
issues;
2) Customary conditions to closing;
3) Execution of definitive mutually
acceptable documents; and
<PAGE>
Choices Entertainment Corporation
October 30, 1996
Page 4
4) Shareholder approval by Seller
Description of Assets: Assets to be purchased by Buyer are all of
the assets of Seller including but not
limited to leaseholds, improvements,
equipment, rental tapes and games and
rental equipment, security deposits,
goodwill, corporate names, all trademarks
and other intellectual property. The
purchase does not include cash on hand,
except for a total of $600 per store for
the stores' cash registers. Buyer will
assume no liabilities of Seller (other
than the store leases). Assets to be
delivered free and clear of any liens or
encumbrances.
THIS SUMMARY OF TERMS AND CONDITIONS IS NOT A BINDING COMMITMENT TO
PURCHASE THE ASSETS OF SELLER AND DOES NOT CREATE ANY OBLIGATION ON THE PART
OF WEST COAST ENTERTAINMENT CORPORATION. THIS OUTLINE IS ONLY A BRIEF
DESCRIPTION OF THE PRINCIPAL TERMS OF A DEFINITIVE AGREEMENT BETWEEN BUYER
AND SELLER AND IS INTENDED PRINCIPALLY FOR DISCUSSION PURPOSES. BUYER AND
SELLER WARRANT THAT THEY WILL USE THEIR BEST EFFORTS TO NEGOTIATE AND SIGN A
DEFINITIVE AGREEMENT PRIOR TO NOVEMBER 15, 1996.
This offer will be outstanding until Thursday, November 8, 1996 at 5:00
p.m., at which point it will be withdrawn.
/s/ RICHARD KELLY
- - - ------------------------------- ---------------------------------
T. Kyle Standley Richard Kelly
Chief Executive Officer Chief Financial Officer
/s/ JOHN A. BOYLAN /s/ RONALD W. MARTIGNONI
- - - ------------------------------- ---------------------------------
John A. Boylan Ronald W. Martignoni
Director President, Director
/s/ FRED E. PORTNER
- - - -------------------------------
Fred E. Portner
Director
<PAGE>
EXHIBIT "A"
CHOICES ENTERTAINMENT CORPORATION
LIST OF LOCATIONS
#1 Morrisville Shopping Center #9 Shoppes at Foxmoor
West Trenton & Pennsylvania Ave. 1027 Washington Blvd. & Rte 133
Morrisville, PA Robbinsville, NJ
215-295-9400 609-443-9400
#2 Winslow Shopping Plaza #10 Jamesway Plaza
542 Berlin Cross Keys Road Delsea Drive
Sicklersville, NJ Glassboro, NJ
609-875-3577 609-881-4730
#5 Lower Makefield Shopping Center #12 Fox Run Shopping Center
678-80 Stony Hill Road 200 Foxhunt Drive
Yardley, PA Bear, DE
215-493-4010 302-834-9120
#6 Village at Newtown #13 Choices Movies & Games
South Eagle Road 8799 Frankford Avenue
Newtown, PA Philadelphia, PA 19136
215-579-1960 215-708-3220
(To be opened 11/15/96)
#7 Town Center
406 Town Center
New Britain, PA
215-230-8880
