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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ____)
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Choices Entertainment Corporation
- - - ------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - - ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Not Applicable
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(2) Aggregate number of securities to which transaction applies:
Not Applicable
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was determined):
Maximum purchase price of $2,430,000 cash - Rule 0-11(c)(2)
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(4) Proposed maximum aggregate value of transaction:
$2,430,000
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(5) Total fee paid:
$486
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/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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CHOICES ENTERTAINMENT CORPORATION
836 W. Trenton Avenue, Morrisville, PA 19067
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 12, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Choices
Entertainment Corporation (the "Company") will be held on Wednesday, March 12,
1997, at 8:30 a.m., local time, at the Company's offices, at 836 W. Trenton
Avenue, Morrisville, Pennsylvania, for consideration of and action by the
holders of the Company's Common and Series C Preferred Stock upon the following
matters:
1. A proposal to approve the sale, transfer and assignment of
substantially all of the Company's assets and business to West Coast
Entertainment Corporation, a Delaware corporation ("West Coast"),
for cash, as more fully described in the accompanying Proxy
Statement, pursuant to an asset purchase agreement between the
Company and West Coast, dated December 16, 1996, as amended; and
2. The transaction of such other business as may properly come before
the Special Meeting and any adjournment thereof, and matters
incident to the conduct of the Special Meeting.
The Board of Directors has fixed the close of business on January 24,
1997, as the record date for the determination of holders of Common and Series C
Preferred Stock of the Company entitled to notice of, and to vote at, the
Special Meeting.
STOCKHOLDERS (WHETHER THEY OWN ONE OR MANY SHARES AND WHETHER THEY EXPECT
TO ATTEND THE SPECIAL MEETING OR NOT) ARE REQUESTED TO VOTE, SIGN, DATE AND
RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES.
By Order of the Board of Directors
February 11, 1997 Ronald W. Martignoni
Chief Executive Officer
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CHOICES ENTERTAINMENT CORPORATION
836 W. Trenton Avenue, Morrisville, PA 19067
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 12, 1997
This Proxy Statement is furnished and is first being mailed with the
accompanying proxy on approximately February 11, 1997, to the stockholders of
Choices Entertainment Corporation (the "Company") in connection with the
solicitation of proxies by the Board of Directors of the Company, to be voted at
a Special Meeting of Stockholders of the Company (the "Special Meeting") to be
held on Wednesday, March 12, 1997, at 8:30 a.m., local time, at the Company's
offices, at 836 W. Trenton Avenue, Morrisville, Pennsylvania, and at any
adjournment thereof, for the purposes specified in the accompanying Notice.
INTRODUCTION
This Proxy Statement relates to the proposed sale, transfer and assignment
of substantially all of the Company's assets and business to West Coast
Entertainment Corporation ("West Coast"), pursuant to an asset purchase
agreement (the "Purchase Agreement") between the Company and West Coast, dated
December 16, 1996, as amended (the "West Coast Transaction").
Under the terms of the Purchase Agreement, the Company is to be paid a
purchase price in cash of $2,430,000, subject to possible downward adjustment,
based upon net operating cash flow for 1996, as defined in the Purchase
Agreement. For a definition of net operating cash flow, see "PURCHASE
AGREEMENT--Purchase Price Adjustment." The purchase price was determined through
arm's-length negotiation between the Company and West Coast.
The Purchase Agreement provides that $243,000 of the purchase price shall
be held by West Coast as escrow agent in an interest-bearing escrow account for
a period of two years, to be used to satisfy certain indemnity obligations of
the Company, if any, to West Coast.
Consummation of the West Coast Transaction is contingent upon a number of
conditions, the satisfaction of which cannot be assured, including, among
others, obtaining of all necessary consents, West Coast obtaining financing in
an amount sufficient to enable it to consummate the West Coast Transaction and
certain additional acquisitions, and approval of the West Coast Transaction by
the Company's stockholders.
<PAGE>
The Company has also agreed to pay to West Coast a break-up fee of
$100,000 if the Company's stockholders for any reason fail to approve the sale
of the assets and business of the Company to West Coast, or the directors of the
Company, whether or not in the exercise of their fiduciary or other legal
duties, have failed to approve or recommend, or shall have withdrawn or
adversely modified or taken a public position materially inconsistent with its
approval or recommendation of, the Purchase Agreement.
If an event occurs which entitles West Coast to receive the break-up fee,
West Coast has been granted an option in the Purchase Agreement to purchase all
of the Company's assets relating to the Company's retail video store located in
Newtown, Pennsylvania (the "Newtown Store") for the purchase price of $250,000
payable in cash.
In connection with entering into of the Purchase Agreement, West Coast
also loaned the Company $150,000, evidenced by a 12% promissory note, which is
required to be paid at the closing of the West Coast Transaction or, if
applicable, at the closing of the sale of the assets of the Newtown Store or, in
any event, on demand at any time from and after April 30, 1997. The note is
secured by a security interest in all of the assets of the Newtown Store. The
proceeds of the note were used to pay certain operating costs previously
incurred.
For a more complete description of the terms of the West Coast
Transaction, see "THE WEST COAST TRANSACTION" and "PURCHASE AGREEMENT."
2
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TABLE OF CONTENTS
Page
INTRODUCTION......................................................... 1
THE SPECIAL MEETING.................................................. 5
Purpose of Special Meeting..................................... 5
Voting and Revocation of Proxies............................... 5
Solicitation of Proxies........................................ 6
Record Date; Shares Entitled to Vote........................... 6
Quorum; Votes Required; Effect of Abstentions and Non-
Votes.......................................................... 6
THE WEST COAST TRANSACTION........................................... 7
Background and Reasons for the West Coast Transaction.......... 7
General Description of the West Coast Transaction.............. 9
The Conduct of the Company Following Consummation of the
West Coast Transaction....................................... 11
Risks Associated With Consummation of the West Coast
Transaction.................................................. 13
Status of Company Should the West Coast Transaction Not
Be Approved.................................................... 17
Closing........................................................ 18
Accounting Treatment........................................... 18
Income Tax Consequences of the West Coast Transaction.......... 19
Regulatory Requirements........................................ 19
Appraisal Rights............................................... 19
Effect of the Approval of the West Coast Transaction on
the Company's Stockholders................................... 19
PURCHASE AGREEMENT................................................... 19
The Sale Transaction........................................... 20
Purchase Price Adjustment...................................... 20
The Escrow Agreement........................................... 21
Specified Liabilities Assumed by West Coast.................... 22
Representations and Warranties................................. 22
Certain Covenants.............................................. 23
Exclusivity.................................................... 24
Expenses, Break-Up Fee, Liquidated Damages..................... 25
Option to Purchase Newtown Store............................... 26
West Coast Loan................................................ 26
Indemnification Provisions..................................... 27
Post-Closing Agreements........................................ 28
Conditions to the Transaction.................................. 29
Financing Contingency of West Coast............................ 30
Termination of the Purchase Agreement.......................... 30
CERTAIN INFORMATION CONCERNING WEST COAST............................ 31
PRO FORMA FINANCIAL INFORMATION...................................... 31
3
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INFORMATION CONCERNING THE COMPANY................................... 36
Description of Business........................................ 36
Description of Property........................................ 39
Legal Proceedings.............................................. 39
MARKET FOR COMMON EQUITY STOCK AND RELATED STOCKHOLDER
MATTERS.............................................................. 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 43
Financial Condition, Liquidity and Capital Resources........... 44
Capital Expenditures, Material Changes in Financial
Condition and Material Changes in Results of
Operations:.................................................... 46
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................... 55
OTHER MATTERS........................................................ 58
STOCKHOLDER PROPOSALS................................................ 58
INDEX TO FINANCIAL STATEMENTS........................................F-1
EXHIBIT A - ASSET PURCHASE AGREEMENT (AS AMENDED)....................A-1
EXHIBIT B - FORM OF ESCROW AGREEMENT.................................B-1
EXHIBIT C - SECURED PROMISSORY NOTE..................................C-1
EXHIBIT D - SECURITY AGREEMENT.......................................D-1
4
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THE SPECIAL MEETING
Purpose of Special Meeting
At the Special Meeting, holders of record as of the close of business on
January 24, 1997 (the "Record Date") of the Company's Common and Series C
Preferred Stock ("Preferred Stock") will, to the extent and as described more
fully herein, consider and vote upon:
1. A proposal to approve the sale, transfer and assignment of
substantially all of the Company's assets and business to West Coast
Entertainment Corporation, a Delaware corporation, for cash, as more
fully described in the accompanying Proxy Statement, pursuant to an
asset purchase agreement between the Company and West Coast, dated
December 16, 1996, as amended; and
2. The transaction of such other business as may properly come before
the Special Meeting and any adjournment thereof, and matters
incident to the conduct of the Special Meeting.
Voting and Revocation of Proxies
Stockholders of record as of the Record Date are entitled to cast their
votes, in person or by properly executed proxy, at the Special Meeting. Any
person giving a proxy has the power to revoke it at any time before its exercise
by a later dated proxy, a written revocation sent to the Secretary of the
Company or attendance at the Special Meeting and voting in person. In the
absence of contrary instructions, properly executed proxies, received and
unrevoked, will be voted by the persons named in the proxy: (i) for the proposal
to approve the sale, transfer and assignment of substantially all of the
Company's assets and business to West Coast; and (ii) in their discretion, on
such other business as may properly come before the Special Meeting and any
adjournment thereof, and matters incident to the conduct of the Special Meeting.
The enclosed proxy confers discretionary authority to vote with respect to
any and all of the following matters that may come before the Special Meeting:
(i) matters which the Company does not know, a reasonable time before the proxy
solicitation, are to be presented at the Special Meeting; (ii) approval of the
minutes of a prior meeting of stockholders if such approval does not amount to
ratification of the action taken at that meeting; and (iii) matters incident to
the conduct of the Special Meeting. In connection with such matters, the persons
named on the enclosed proxy card will vote in accordance with their best
judgment.
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Solicitation of Proxies
As proxies for the Special Meeting are being solicited by and on behalf of
the Company's Board of Directors, the costs of preparing, assembling, printing,
mailing and soliciting proxies, and any additional material which the Company
may furnish stockholders in connection with the Special Meeting, will be borne
by the Company. In addition to the use of the mails, certain directors, officers
and employees of the Company may solicit proxies personally, by telephone or by
telecopier. Such directors, officers and employees will not be specifically
compensated for such services but may be reimbursed for out-of-pocket expenses
in connection with such solicitation. In addition, the Company has engaged
Shareholder Communications Corporation to assist in the solicitation of proxies
for the Special Meeting for a fee of $6,500 plus reimbursement of out-of-pocket
expenses, estimated to be $3,500. Arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to forward proxy
solicitation material to the beneficial owners of stock held of record by these
persons, and upon request therefor, the Company will reimburse them for their
reasonable forwarding expenses.
Record Date; Shares Entitled to Vote
The Board of Directors has fixed the close of business on January 24,
1997, as the Record Date for the determination of stockholders entitled to
receive notice and to vote at the Special Meeting. Only stockholders of record
as of the Record Date will be entitled to notice of, and to vote at, the Special
Meeting. On that date, the outstanding voting securities of the Company
consisted of 22,004,395 shares of Common Stock, and 37.4 shares of Preferred
Stock. Each share of Common Stock is entitled to one vote on all matters
presented to the Special Meeting. Each share of Preferred Stock is entitled to
vote on all matters submitted to a vote of the Company's stockholders together
with the Common Stock and not as a separate class, unless otherwise required by
law, with each share of Preferred Stock entitled to 40,000 votes. In voting
together with the Common Stock, the outstanding Preferred Stock has 1,496,000
votes. The combined number of votes attributable to the outstanding shares of
the Company's Common Stock and Preferred Stock, at January 24, 1997, was
23,500,395.
Quorum; Votes Required; Effect of Abstentions and Non-Votes
The presence in person or by proxy of the holders of a majority of the
votes entitled to be cast at the Special Meeting will constitute a quorum.
Broker non-votes (which occur when brokers holding shares as nominees for their
customers do not have authority to vote on a matter absent specific instructions
from the beneficial owners of the shares) and abstentions all count for the
purpose of determining a quorum. The affirmative vote of the holders of at least
a majority of the combined number of votes
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attributable to the outstanding shares of the Company's Common and Preferred
Stock entitled to vote thereon is required for the adoption of the proposal to
approve the sale, transfer and assignment of substantially all of the Company's
assets and business to West Coast. Abstentions and broker non-votes will be
included for purposes of determining whether the sale, transfer and assignment
of substantially all of the Company's assets and business to West Coast has been
approved and will have the effect of "no" votes.
THE WEST COAST TRANSACTION
The following is a brief summary of certain aspects of the West Coast
Transaction. This summary does not purport to be complete and is qualified in
its entirety by reference to the Purchase Agreement, and the form of escrow
agreement (the "Escrow Agreement") to be delivered thereunder, copies of which
are attached to this Proxy Statement as Exhibits A and B, respectively, and
incorporated herein by reference. See the "PURCHASE AGREEMENT."
Background and Reasons for the West Coast Transaction
The Company is and for years has been operating in a severely distressed
financial condition. The Company's Board of Directors has concluded since
approximately 1992 that the Company needed to acquire or establish additional
stores if it were to achieve the economies of scale necessary for it to be
profitable. However, because of its severely distressed financial condition, the
Company did not have sufficient revenues from operations to enable it to expand.
As a consequence, in 1992 the Company's Board of Directors adopted a plan to
reduce costs, to negotiate favorable settlements with vendors and creditors, and
to seek to expand through possible mergers or acquisitions. Thereafter, the
Company explored a possible merger with one or more companies, none of which
were successfully consummated. During this period it was generally known
throughout the industry and disclosed in the Company's public reports that the
Company was actively seeking to make acquisitions or effect a merger. Most
recently, this included an acquisition program in connection with a possible
merger (the "JD Merger") with JD Store Equipment, Inc. ("JD Store Equipment"),
which was terminated by JD Store Equipment in September, 1995.
The JD Merger was to involve the merger of a newly-formed subsidiary of
the Company with and into JD Store Equipment, with JD Store Equipment to be the
surviving corporation and, upon consummation of the JD Merger, a wholly-owned
subsidiary of the Company. Upon the merger, the shareholders of JD Store
Equipment were to have received convertible preferred stock of the Company,
expected to be convertible into a total of 25,873,906 shares of the Company's
Common Stock upon stockholder approval of an increase in the number of
authorized shares of Common Stock of the Company, and
7
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approximately $1,111,000 in cash. The closing was contingent, among other
things, on a concurrent acquisition of another company. In September, 1995, JD
Store Equipment advised the Company that it was terminating the JD Merger
agreement pursuant to the terms of that agreement because of its inability to
obtain shareholder approval of the JD Merger, as contemplated under the JD
Merger agreement. In connection with the termination of the JD Merger, no
amounts were paid to or stock issued to JD Store Equipment by the Company.
Throughout this period, the Company's financial condition continued to
deteriorate.
As a result of its inability successfully to conclude a merger, and
following conclusion of its acquisition program in connection with the
termination of the JD Merger in September, 1995, the Company also began to
explore the possibility of selling its video stores. This has involved
discussions with a number of video chains, including West Coast. Since
termination of the JD Merger, the Company's financial condition and its ability
to compete have continued to deteriorate, and as of September 30, 1996, the
Company had a net working capital deficiency of approximately $1,595,000. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION."
Other than its discussions with West Coast, since the summer of 1996, no
other company has expressed any interest in acquiring the Company's assets or
business. The Company believes this has been due in part to the litigation
associated with the attempt of the Shareholder's Committee to gain control of
the Company's Board of Directors. See "INFORMATION CONCERNING THE COMPANY--Legal
Proceedings."
The Company's Board of Directors concluded, as a result of the Company's
inability to raise capital or locate a merger candidate or purchaser of its
assets, that the Company's only alternatives were to sell its assets as part of
a transaction with West Coast or, if, as expected, the Company's financial
condition continues to deteriorate, ultimately be forced to seek protection
under the bankruptcy laws. Because the decision to file for bankruptcy is likely
to be based upon the actions of third parties, primarily the landlords for the
Company's stores and certain major creditors of the Company, it is not possible
to predict at what point the Company would be forced to do so. However, because
the Board of Directors expects that the Company's financial condition will
continue to deteriorate, the Board of Directors does not believe that a
transaction more favorable than the West Coast Transaction will be available to
the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION;" "INFORMATION CONCERNING THE COMPANY--Legal
Proceedings;" "THE WEST COAST TRANSACTION--Risk Associated with Consummation of
the West Coast Transaction, Certain Unsatisfied Debts and Liabilities." In the
event that the Company is forced to file for bankruptcy, the Company's ability
to conduct its business would likely be severely
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hampered and it is unlikely that the stockholders would receive any value. For
this reason, the Board of Directors believes that voluntarily seeking protection
under the bankruptcy laws is not as favorable to the Company's stockholders as
the West Coast Transaction.
The Board of Directors of the Company believes that the West Coast
Transaction is in the best interest of the Company and its stockholders.
General Description of the West Coast Transaction
In September, 1996, Ronald W. Martignoni, Chief Executive Officer of the
Company, contacted Richard Kelly, Chief Financial Officer of West Coast,
concerning a possible sale of the Company's assets and business to West Coast.
Pursuant to negotiations between Mr. Martignoni and Mr. Kelly, a non-binding
letter of intent was signed on November 8, 1996, providing for the purchase by
West Coast of the assets and business of the Company for an aggregate purchase
price of $2.7 million, subject to possible downward adjustment, based upon net
operating cash flow for 1996. The purchase price was to consist of $1.2 million
in cash and $1.5 million in common stock of West Coast, of which stock 40% could
not be resold for one year and the remaining 60% could not be resold for
eighteen months. Any downward adjustment in the purchase price was to be applied
against the cash portion of the purchase price. On November 17, 1996, the terms
of the letter of intent were approved by the Company's Board of Directors which
authorized Mr. Martignoni to proceed with negotiation of the terms of a
definitive purchase agreement.
During negotiations of a definitive purchase agreement, it was determined
to restructure the transaction as an all cash deal, with a 10% reduction in the
purchase price from $2.7 million to $2.43 million. On December 13, 1996, the
Board of Directors approved the restructuring of the transaction as an all cash
deal. On December 16, 1996, the Board of Directors approved the terms and
conditions of the Purchase Agreement which then was signed on that date. On
December 27, 1996, the Company's current Board of Directors ratified the West
Coast Transaction. No appraisals of the Company's properties have been made and
no fairness opinion has been received in connection with the West Coast
Transaction.
The Purchase Agreement provides that as consideration for the sale of
substantially all of the Company's assets and business, West Coast shall pay the
Company $2,430,000 in cash, subject to a downward adjustment if net operating
cash flow for the year ended December 31, 1996, is less than $700,000, and
assume the Company's future obligations arising after closing under its store
leases and certain related minor service agreements. The purchase price was
determined through arm's-length negotiation between the Company and West Coast.
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The Board of Directors does not intend to notify the stockholders or to
re-solicit approval of the West Coast Transaction by the stockholders in the
event of a downward adjustment in the purchase price. The Company does not
expect that its audited financial statements for 1996 will be available prior to
the date of the Special Meeting. However, the Company does not anticipate that a
downward adjustment, if any, would exceed $150,000, although no assurance can be
given that a downward adjustment would not exceed that amount.
The Purchase Agreement also provides for $243,000 of the purchase price to
be delivered into an interest-bearing escrow account as security for certain
indemnity obligations of the Company and disbursed to the Company two years
following the Closing Date, to the extent no claim is made by West Coast against
such funds pursuant to an escrow agreement to be executed at closing.
Consummation of the West Coast Transaction is contingent upon a number of
conditions, the satisfaction of which cannot be assured, including, among
others, obtaining of all necessary consents, West Coast obtaining financing in
an amount sufficient to enable it to consummate the West Coast Transaction and
certain additional acquisitions, and approval of the West Coast Transaction by
the Company's stockholders.
The Company has also agreed to pay to West Coast a break-up fee of
$100,000 if the Company's stockholders for any reason fail to approve the sale
of the assets and business of the Company to West Coast, or the directors of the
Company, whether or not in the exercise of their fiduciary or other legal
duties, have failed to approve or recommend, or shall have withdrawn or
adversely modified or taken a public position materially inconsistent with its
approval or recommendation of, the Purchase Agreement.
If an event occurs which entitles West Coast to receive the break-up fee,
West Coast has been granted an option in the Purchase Agreement to purchase all
of the Company's assets relating to the Company's Newtown Store for the purchase
price of $250,000 payable in cash.
The Company is not entitled to receive any break-up fee or liquidated
damages if West Coast is unable to obtain the financing necessary to consummate
the West Coast Transaction.
In connection with entering into of the Purchase Agreement, West Coast
also loaned the Company $150,000, evidenced by a 12% promissory note, which is
required to be paid at the closing of the West Coast Transaction or, if
applicable, at the closing of the sale of the assets of the Newtown Store or, in
any event, on demand at any time from and after April 30, 1997. The note is
secured by a security interest in all of the assets of the Newtown Store. The
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proceeds of the note were used to pay certain operating costs previously
incurred.
For a more complete description of the terms of the West Coast
Transaction, see "PURCHASE AGREEMENT." For a description of the status of the
Company should the West Coast Transaction not be successfully consummated, see
"THE WEST COAST TRANSACTION--Status of Company Should the West Coast Transaction
Not Be Approved."
The Conduct of the Company Following Consummation of the West Coast
Transaction
If the West Coast Transaction is approved by the stockholders and is
successfully consummated, as to which no assurance can be given, the Company
will use a portion of the proceeds from the sale to pay certain (but not all)
existing debts of approximately $1.4 million, as of September 30, 1996 (which
are presently estimated to be approximately $1.47 million, which amount includes
the $150,000 12% promissory note issued to West Coast (see "PURCHASE
AGREEMENT--West Coast Loan")). However, this amount does not include certain
liabilities of the Company, which if paid, and certain claims against the
Company which, if successfully asserted, could result in there being no cash
proceeds with which to seek further business opportunities or to make any cash
distribution to stockholders of the Company. For a more complete description of
the liabilities and claims referred to above, see "THE WEST COAST
TRANSACTION--Risks Associated With Consummation of the West Coast Transaction."
Additionally, the Company will also be required to pay related transaction
expenses and taxes associated with the West Coast Transaction, estimated to be
$70,000, and should the Company's financial condition continue to deteriorate,
further working capital requirements for the use of cash may arise. For a
discussion of anticipated cash proceeds available to the Company following
consummation of the West Coast Transaction, see "THE WEST COAST
TRANSACTION--Accounting Treatment." Also see "PRO FORMA FINANCIAL INFORMATION;"
"INFORMATION CONCERNING THE COMPANY--Legal Proceedings;" "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THE FOLLOWING DISCUSSION ASSUMES THAT SUFFICIENT CASH PROCEEDS ARE AVAILABLE
FROM THE WEST COAST TRANSACTION.
Assuming that sufficient cash proceeds remain following the closing of the
West Coast Transaction, as to which no assurance can be given, the Company's
Board of Directors will consider various alternatives including (without
limitation) seeking and considering other business opportunities that may be
presented to the Company or making a partial distribution of the net cash
proceeds to the Company's stockholders.
Upon closing of the West Coast Transaction, the Company will invest
available net cash proceeds (after payment of certain
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existing debts) in certificates of deposit, short-term obligations of the United
States government, or other suitable short-term investments. At the present time
the Company does not intend to become an investment company under the Investment
Company Act of 1940 and, therefore, may be limited in the temporary investments
that it can make with the net proceeds from the West Coast Transaction.
THE BOARD HAS MADE NO DETERMINATION WHETHER TO PURSUE ANY OR A COMBINATION OF
THE FOREGOING POSSIBLE COURSES. THE COMPANY AND ITS BOARD OF DIRECTORS HAVE
CONCENTRATED ON COMPLETING THE WEST COAST TRANSACTION, AND WILL CONSIDER FUTURE
ALTERNATIVES FOLLOWING THE COMPLETION OF THE WEST COAST TRANSACTION (IF
CONSUMMATED). TO THE EXTENT ANY MATTER MUST BE SUBMITTED TO STOCKHOLDERS FOR
APPROVAL IN CONNECTION WITH ANY FUTURE ACTION, IT WILL BE SUBMITTED TO THE
STOCKHOLDERS AT ANOTHER MEETING, AND NOT AT THIS SPECIAL MEETING.
Following the completion of the West Coast Transaction, as to which no
assurance can be given, the Company will be a public company with certain liquid
assets. See "PRO FORMA FINANCIAL INFORMATION." The Board of Directors believes
that the Company may be attractive to businesses that may be in need of a public
stockholder base or additional capital, or both. Such a transaction would
possibly give the stockholders of the Company an interest in a related or new
line of business and the opportunity to grow with the business combination,
however, there is no assurance that such a transaction will take place.
The Company anticipates that the selection of a business opportunity will
be a complex process and will involve a number of risks. The Company anticipates
that business opportunities will be brought to its attention from various
sources, including its officers and directors, its stockholders, professional
advisors such as attorneys and accountants, securities broker-dealers, venture
capitalists, members of the financial community, and others who may present
unsolicited proposals.
The Company's Board of Directors has the authority to effect certain
business combinations without submitting the proposal to the stockholders for
their consideration. In some instances, however, a proposed participation in a
business opportunity will be required by law to be submitted to the stockholders
for their consideration. In that event, a stockholder vote will be solicited in
accordance with the applicable rules and regulations of the Securities and
Exchange Commission and state law.
THE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE WEST COAST
TRANSACTION AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE WEST COAST TRANSACTION
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Risks Associated With Consummation of the West Coast Transaction
Stockholders of the Company should consider the following risk factors in
determining whether to vote for approval of the West Coast Transaction.
No Remaining Business Operations. Upon consummation of the West Coast
Transaction, the Company will be left with no business operations. The Company's
future will be totally dependent upon the Company's ability to locate and
acquire another business opportunity. There is no assurance that the Company
will be able to do so, or if successful, that any newly-acquired business will
operate profitably.
Possible Loss of All or Part of Escrowed Funds. The Company may lose part
or all of the $243,000 portion of the purchase price to be escrowed at Closing
if West Coast makes claims against the escrowed funds within two years after the
Closing Date. See "PURCHASE AGREEMENT--The Escrow Agreement."
Downward Adjustment of Purchase Price. The amount of cash to be received
from West Coast will not be certain until after the completion of the Company's
audited financial statements for the fiscal year ended December 31, 1996, which
are not expected to be completed until on or shortly before March 31, 1997,
following the holding of the Special Meeting. The actual amount of cash to be
obtained in the West Coast Transaction is not certain because the purchase price
is subject to possible downward adjustment depending upon the level of net
operating cash flow for the fiscal year ended December 31, 1996. See "PURCHASE
AGREEMENT--Purchase Price Adjustment." To the extent the Company receives less
cash than the $2.43 million contemplated by the Purchase Agreement, it will have
less money available, after the satisfaction of certain debt, with which to seek
further business opportunities or to make a distribution to stockholders. For a
discussion of the possible adjustment to the purchase price, see "THE WEST COAST
TRANSACTION--General Description of the West Coast Transaction."
Limitation on Net Operating Loss Carry-Forward. The Company expects that
its net operating loss carry-forward at Closing will exceed the amount of, and
be available to offset, the pre-tax gain on the West Coast Transaction. However,
the Company's ability to utilize its net operating loss carry-forward could be
limited by Section 382 of the Internal Revenue Code. See "THE WEST COAST
TRANSACTION--Income Tax Consequences of the West Coast Transaction."
Certain Unsatisfied Debts and Liabilities. The Company intends to use a
substantial portion of the cash proceeds of the West Coast Transaction to reduce
a portion of its total debt of approximately $1.4 million, as of September 30,
1996 (which is presently estimated to be approximately $1.47 million), exclusive
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of $680,000 (plus accrued interest) owing on its 5% promissory notes (see
discussion below), and indebtedness of $353,000 for professional fees billed in
connection with its now discontinued acquisition program (see discussion below).
See also "PRO FORMA FINANCIAL INFORMATION" and "THE WEST COAST
TRANSACTION--Accounting Treatment." Since September 30, 1996, the Company has
incurred and continues to incur additional costs in the operation of its
business, in defending litigation and in connection with the West Coast
Transaction.
5% Promissory Notes. The Company's 5% promissory notes in the principal
amount of $680,000, provide, by their terms, that the sole remedy of the holders
thereof upon default is to convert the principal and all accrued interest owing
on such notes into shares of Preferred Stock (valued at $.25 per share of Common
Stock). The 5% promissory notes are not presently in default in the payment of
principal or interest. However, the Board of Directors does not presently intend
to make any payment on such notes, leaving the holders thereof with the sole
remedy of converting such notes into Preferred Stock. In such event, at
maturity, in August, 1997, such notes (with accrued interest) will become
convertible into approximately 71.4 shares of Preferred Stock, which, in turn,
would be convertible into approximately 2,856,000 shares of Common Stock. The 5%
promissory notes are not presently convertible.
Professional Fees. The Company incurred substantial professional fees for
legal and accounting services in connection with its now discontinued
acquisition program. Approximately $353,000 remains billed but unpaid in that
connection by a law firm, retained in connection with the Company's acquisition
program. Previously, on December 6, 1994, JD Store Equipment agreed that, in the
event the JD Merger was not consummated, JD Store Equipment would pay to the
Company legal fees billed to the Company by the above law firm. That law firm
resigned as counsel to the Company shortly after JD Store Equipment notified the
Company that it was terminating the JD Merger. Subsequently, the Company has
made a demand for payment upon JD Store Equipment for all fees and disbursements
in the amount of $793,281 billed to it by the law firm, of which $439,482 has to
date been paid by the Company. To avoid the uncertainties associated with
litigation and with collecting any judgment that may be obtained, the Company is
attempting to reach a settlement with JD Store Equipment, pursuant to which,
among other things, JD Store Equipment will assume any obligation of the Company
for the above professional fees which have been billed but not paid to such firm
and will reimburse the Company for certain related fees paid by the Company to
its auditors, and the Company will release JD Store Equipment from any
obligation to pay the $793,281 of legal fees billed to the Company. As part of
such settlement, the Company would be released by the law firm. There is no
assurance that any such settlement will be concluded. In the event that such a
settlement is not concluded, the Company may be required to utilize a
substantial portion of the
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proceeds of the West Coast Transaction for settling any obligation it may have
for these professional fees, and may not have sufficient funds to seek a new
business opportunity or to make any distribution to stockholders. Furthermore,
should litigation ensue concerning these professional fees, and should the
Company make a claim against JD Store Equipment, the Company's ability to seek
further business opportunities may be severely impacted even though the Company
may ultimately prevail.
Certain Litigation. The Company is involved in certain litigation which
could reduce or eliminate available cash proceeds from the West Coast
Transaction and could severely impact or foreclose the Company's ability to seek
further business opportunities or to make a distribution to stockholders, even
though the Company may ultimately prevail.
Shareholder Litigation. The Company has recently been involved in certain
legal proceedings brought by certain stockholders of the Company (the
"Shareholder Committee") concerning control of the Company's Board of Directors.
See "INFORMATION CONCERNING THE COMPANY--Legal Proceedings." The claims involved
in these proceedings resulted in the entering of an order by the Delaware Court
of Chancery concerning the holding of an annual meeting and imposing
restrictions on certain corporate activities pending the holding of the annual
meeting. The annual meeting was held, in accordance with the order, on December
20, 1996, at which a new Board of Directors was elected consisting of: Joseph
DeSaye, Ronald W. Martignoni and Fred E. Portner. Mr. Portner was nominated at
the annual meeting upon the withdrawal, without prior notice, on the day of the
meeting, of Ralph V. Esposito, one of the Company's nominees. The new Board has
unanimously ratified the West Coast Transaction. Following the holding of the
annual meeting on December 20, 1996, certain stockholders, including certain
members of the Shareholder Committee, dissatisfied with the results of the
election, have continued discussions with the Company concerning the composition
of the Board. One member of the Shareholder Committee, Carl Shaifer, has
threatened to commence a new proxy fight and file certain lawsuits, regarding
certain prior investments, if either Mr. Martignoni or Mr. Portner does not
resign as director and a director acceptable to him is not appointed to the
Board. Should such a proxy fight or litigation be instituted, the Company's
ability to close the West Coast Transaction could be severely impacted.
Moreover, Mr. Shaifer holds $230,000 of the $680,000 principal amount of the
Company's 5% promissory notes discussed above, which the Board of Directors does
not presently intend to repay, and together with certain members of the
Shareholder Committee holds $610,000 of the $680,000 principal amount of such
notes. If a new Board of Directors were to determine to repay such notes, it is
unlikely that the Company would have sufficient funds to seek a new business
opportunity and the Company's ability to
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make a distribution to stockholders would be severely impacted. See Certain
Unsatisfied Debts and Liabilities above.
Gibbs Litigation. The Company is the subject of a lawsuit filed in the
Superior Court of California by certain individuals who allegedly purchased or
purchased and sold securities of the Company, entitled Gary N. Gibbs et al. v.
Choices Entertainment Corporation et al., seeking monetary damages in the amount
of $303,470, plus attorneys fees and other relief. See "INFORMATION CONCERNING
THE COMPANY--Legal Proceedings." The Company intends to contest the lawsuit
vigorously. However, there is no assurance that it will prevail or reach a
satisfactory settlement, in which event the Company's ability to seek further
business opportunities or make a distribution to its stockholders could be
severely impacted. Moreover, the costs of legal fees in contesting this claim
may be substantial even if the Company prevails.
Safe Harbor Disclosure: Forward-Looking Statements and Associated Risks.
This Proxy Statement contains forward-looking statements with respect to, among
other things, plans, future events and future performance of the Company. The
factors identified under "THE WEST COAST TRANSACTION--Risks Associated with
Consummation of the West Coast Transaction," are important factors (but not
necessarily all important factors) that could cause actual results or future
events to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are made in good faith, assumed facts or
bases almost always vary from actual results, and the differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the Company expresses an
expectation or belief as to plans or future results or events, such expectation
or belief is expressed in good faith and believed to have a reasonable basis,
but there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished. The words "believe," "expect" and
"anticipate" and similar expressions identify forward-looking statements. The
portions of this Proxy Statement which contain forward-looking statements
generally include cross-references to "THE WEST COAST TRANSACTION--Risks
Associated with Consummation of the West Coast Transaction." See also the
information contained under the captions "THE WEST COAST TRANSACTION," "PRO
FORMA FINANCIAL INFORMATION," "INFORMATION CONCERNING THE COMPANY" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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Status of Company Should the West Coast Transaction Not Be Approved
If the West Coast Transaction is not approved by the Company's
stockholders, and if, as expected, the Company's financial condition continues
to deteriorate, the Company's Board of Directors believes that the Company will
ultimately be forced to seek protection under the bankruptcy laws, due to its
severely distressed financial condition. Because the decision to file for
bankruptcy is likely to be based upon the actions of third parties, primarily
the landlords for the Company's stores and certain major creditors of the
Company, it is not possible to predict at what point the Company would be forced
to do so. Moreover, because the Company's Board of Directors expects that the
Company's financial condition will continue to deteriorate, the Company's Board
of Directors does not believe that a transaction more favorable than the West
Coast Transaction will be available to the Company. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION;" "INFORMATION
CONCERNING THE COMPANY--Legal Proceedings;" "THE WEST COAST TRANSACTION--Risk
Associated with Consummation of the West Coast Transaction, Certain Unsatisfied
Debts and Liabilities." In the event the Company is forced to file for
bankruptcy, the Company's ability to conduct its business would likely be
severely hampered and it is unlikely that the stockholders would receive any
value.
Furthermore, in the event the Company's stockholders fail to approve the
West Coast Transaction, the Purchase Agreement also provides as follows:
The Company has agreed to pay to West Coast the sum of $100,000 if the
Company's stockholders for any reason fail to approve the West Coast Transaction
on or before the Closing Date (as defined below), or the directors of the
Company, whether or not in the exercise of their fiduciary or other legal
duties, on or before the Closing Date have failed to approve or recommend, or
shall have withdrawn or adversely modified or taken a public position materially
inconsistent with its approval or recommendation of, the Purchase Agreement or
the terms thereof.
If an event occurs which entitles West Coast to receive the break-up fee,
West Coast has been granted an option in the Purchase Agreement to purchase the
Company's Newtown Store for a purchase price of $250,000 payable in cash. West
Coast has the further option to pay the purchase price for the Newtown Store by
(i) cancellation of the outstanding amount of the Buyer Loan (described below),
and (ii) cancellation of the Company's obligation to pay the break-up fee.
The Newtown Store is the Company's most profitable and valuable store and
it is expected that West Coast will exercise the option to acquire the Newtown
Store if the option becomes exercisable. The Company has been unable to operate
profitably
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with the Newtown Store as part of its business and does not expect that it would
be able to continue operations for very long if West Coast were to exercise its
option to acquire the Newtown Store, which would not result in any cash proceeds
to the Company.
In connection with entering into the Purchase Agreement, West Coast loaned
the Company $150,000 (the "Buyer Loan"). The Buyer Loan is evidenced by a 12%
promissory note (the "Note"), which is required to be paid at closing of the
West Coast Transaction or, if applicable, at the closing of the sale of the
Newtown Store. The Note is in any event payable on demand at any time from and
after the April 30, 1997. The Note is secured by a security interest in all of
the assets of the Newtown Store. The proceeds of the Note were used to pay
certain operating costs previously incurred.
Closing
The closing (the "Closing") of the transactions contemplated by the
Purchase Agreement will take place on a date (the "Closing Date") to be
specified by West Coast, which shall be on or after March 12, 1997, but no later
than the earlier to occur of thirty days after the closing of the West Coast
Offering (as defined below under "PURCHASE AGREEMENT--Financing Contingency")
and April 30, 1997, or at such other time as the Company and West Coast agree.
The transfer of the assets and business of the Company to West Coast shall be
deemed to occur at 9:00 a.m., E.S.T., on the date of Closing.
Accounting Treatment
The sale of the assets included in the West Coast Transaction will be
accounted for as a sale of certain assets. Assuming a cash purchase price of
$2.43 million, the Company expects to recognize a gain on the sale of
approximately $1.04 million, which represents the difference between the
anticipated cash proceeds of $2.43 million (assuming no downward adjustment) and
the book value of the assets being sold to West Coast. However, the amount of
cash estimated to be available to the Company would be approximately $910,000,
after the payment of certain (but not all) liabilities of the Company of
approximately $1.47 million, and the payment of related transaction expenses and
taxes, estimated to be $70,000. The amount available could also be reduced by
certain other liabilities and claims (see "APPROVAL OF THE WEST COAST
TRANSACTION--Risks Associated With Consummation of the West Coast Transaction,
Certain Unsatisfied Debts and Liabilities and Certain Litigation"), as well as
by possible working capital needs should the Company's financial condition
continue to deteriorate. Of the $910,000, the amount of $243,000 will be
escrowed pursuant to the terms of the Purchase Agreement, leaving approximately
$667,000 of cash immediately available following closing, and $243,000 deposited
in an interest-bearing escrow account.
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The Company expects that representatives of its independent public
accountants, KPMG Peat Marwick LLP, will be present at the Special Meeting, will
have the opportunity to make a statement regarding the matters described in this
Proxy Statement if they desire to do so and will be available to respond to
reasonable and appropriate questions.
Income Tax Consequences of the West Coast Transaction
The West Coast Transaction will be a taxable transaction for federal and
state income tax purposes. It is expected that the Company's federal and state
net operating loss carry-forward at Closing will exceed the approximate pre-tax
gain of $1.04 million, but the Company's ability to utilize its net operating
loss carry-forward could be limited by Section 382 of the Internal Revenue Code
("IRC"). For a description of IRC Section 382, see Note 12 to the Notes to the
Company's Financial Statements for the year ended December 31, 1995. However,
the Company does not expect that the West Coast Transaction will result in any
taxable gain other than alternative minimum taxation. The Company's use of net
operating losses for alternative minimum taxation purposes is limited to 90% of
any alternative minimum taxable income in the year in which the transaction
occurs.
Regulatory Requirements
No federal or state regulatory requirements must be complied with or
approval must be obtained in connection with the West Coast Transaction.
Appraisal Rights
Under Delaware law, stockholders of the Company will not be entitled to
rights of appraisal in connection with the West Coast Transaction.
Effect of the Approval of the West Coast Transaction on the Company's
Stockholders
If the West Coast Transaction is consummated, the stockholders of the
Company will retain their equity interest in the Company. The consummation of
the West Coast Transaction will not result in any changes in the rights of the
Company's stockholders.
PURCHASE AGREEMENT
The following is a brief summary of certain provisions of the Purchase
Agreement. This summary does not purport to be complete and is qualified in its
entirety by reference to the Purchase Agreement and Escrow Agreement, attached
to this Proxy Statement as Exhibits A and B, respectively.
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The Sale Transaction
Subject to the terms and conditions of the Purchase Agreement, West Coast
agreed to purchase from the Company substantially all of its assets and
business. The business of the Company consists of the operation of a chain of
nine retail video home entertainment stores located in Pennsylvania, New Jersey
and Delaware.
The Purchase Agreement provides that as consideration for the sale of the
assets and business of the Company, West Coast shall pay the Company $2,430,000
(the "Base Purchase Price"), subject to possible downward adjustment, and shall
assume certain specified obligations of the Company related to on-going
operations. The Base Purchase Price was determined through arm's-length
negotiation between West Coast and the Company.
The Purchase Agreement also provides that $243,000 of the Base Purchase
Price (the "Escrowed Funds") shall be held by West Coast as escrow agent in an
interest-bearing escrow account pursuant to the terms of the Escrow Agreement.
See "PURCHASE AGREEMENT--The Escrow Agreement." The Escrowed Funds are to be
used to satisfy certain indemnity obligations of the Company, if any, to West
Coast. The balance of the Escrowed Funds remaining two years following the
Closing Date with respect to which no claim for indemnity has been made shall be
released to the Company.
Purchase Price Adjustment
The Purchase Agreement provides for a downward adjustment of the Base
Purchase Price in the event that the Company's net operating cash flow for the
year ended December 31, 1996, based upon the Company's 1996 audited financial
statements (the "Audited Cash Flow"), is less than $700,000. For this purpose,
"net operating cash flow" is equal to store net income, plus film amortization,
plus used tape cost of goods (to the extent included in the game or rental tape
purchase amount described below), plus depreciation, less game and rental tape
purchases. For purposes of calculating the Company's net operating cash flow,
the Company's expenses directly related to its recently opened Frankfort Avenue,
Philadelphia store, and all revenues from such store, shall be excluded.
In the event the Audited Cash Flow is less than $700,000, the Base
Purchase Price shall be reduced by an amount (the "Cash Flow Adjustment") to be
determined by the Company as follows:
Cash Flow Adjustment = Base Purchase Price Minus
Base Purchase Price x Audited Cash Flow
---------------------------------------
$700,000
West Coast has the right to dispute the Company's audited statements for
the fiscal year ended December 31, 1996 (the "1996
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Audited Statements"), or the calculation of the Cash Flow Adjustment by giving
written notice to the Company of the amount, nature and basis of the dispute
within ten calendar days after delivery of the 1996 Audited Statements. West
Coast and the Company are required first to use their best efforts to resolve a
dispute between themselves. If they are unable to resolve the dispute within ten
calendar days after delivery of the 1996 Audited Statements, the dispute is to
be submitted to the Company's independent public accountants and Price
Waterhouse LLP, independent accountants for West Coast, for resolution. If the
accountants are unable to resolve the dispute within ten days after submission
of the dispute to them, the dispute shall be submitted for arbitration in
accordance with the terms of the Purchase Agreement.
For a discussion of a possible downward adjustment see, "THE WEST COAST
TRANSACTION--General Description of the West Coast
Transaction."
The Escrow Agreement
The Purchase Agreement provides for the escrow of $243,000 of the cash
proceeds to be delivered into an interest-bearing escrow account as security for
certain indemnity obligations of the Company to West Coast for a period of two
years following the Closing Date (the "Escrow Period"). See, "PURCHASE
AGREEMENT--Indemnification Provisions," for a discussion of the Company's
indemnification obligations. At any time during the Escrow Period, West Coast
has the right to give the Company written notice (the "Claim Notice") of certain
claims, damages, losses, liabilities, costs and expenses which the Company has
agreed (in Section 9 of the Purchase Agreement) to indemnify and hold harmless
West Coast from and against (the "Damages").
In the event West Coast makes a Claim Notice to the Company within the
Escrow Period, the Company has twenty (20) days after delivery of the Claim
Notice within which to provide West Coast with a written response agreeing that
(1) a portion of the Escrowed Funds equal to the full Damages may be released to
West Coast, (2) agreeing that Escrowed Funds equal to a portion, but not all, of
the Damages claimed may be released to West Coast, or (3) contesting any release
of the Escrowed Funds to West Coast. If the Company contests a release of
Escrowed Funds equal to all or part of the Damages claimed, the matter is to be
settled by binding arbitration in accordance with the provisions of the Purchase
Agreement.
Promptly following expiration of the Escrow Period, West Coast is required
to distribute to the Company the balance of the Escrowed Funds then remaining,
including any interest thereon, to the extent that no claim has been made by
West Coast against such
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Escrowed Funds in accordance with the terms of the Escrow Agreement.
West Coast, in its capacity as escrow agent, is only liable for actions
taken or omitted to be taken if such action taken or omitted to be taken
constitutes gross negligence or willful misconduct. In no event is West Coast,
as escrow agent, liable for indirect, punitive, special or consequential
damages.
Specified Liabilities Assumed by West Coast
Under the terms of the Purchase Agreement, West Coast is not assuming any
liabilities of the Company of whatever kind or nature except for those
specifically assumed (the "Assumed Liabilities"). The Assumed Liabilities
consist solely of: (i) obligations of the Company relating to periods after the
Closing under its store leases which become due and payable after the Closing
Date; and (ii) certain security, lighting and other agreements related to
ongoing operation of the Company's business.
Except for the Assumed Liabilities, West Coast is not assuming any other
obligations of the Company, including without limitation (i) any existing debt
obligations of the Company, including any notes, (ii) the professional fees
related to the JD Merger, or (iii) any liabilities arising from the
Shareholder's Committee litigation and Gibbs litigation.
Representations and Warranties
The Purchase Agreement contains various representations and warranties by
the Company relating to, among other things, (i) the Company's organization and
similar corporate matters, (ii) the capitalization of the Company, (iii)
authorization, execution, delivery, performance and enforceability of the
Purchase Agreement and related matters, (iv) the existence of good title to the
assets, free of all encumbrances, except for certain permitted encumbrances,
upon transfer of the assets at Closing, (v) the completeness and accuracy of the
Company's financial statements, (vi) absence of undisclosed liabilities, (vii)
disclosure of litigation, investigations and proceedings, (viii) insurance
coverage, (ix) a description of and a statement as to the valuation and
condition of the inventory of the Company, (x) a description of and a statement
as to the value and condition of the fixed assets of the Company, (xi)
compliance with the real property leases of the Company, (xii) absence of
material adverse changes to the Company's business, properties, assets,
condition (financial or otherwise) or prospects, (xiii) taxes, (xiv)
collectability of accounts receivable, (xv) accuracy of books and records of the
Company, (xvi) enforceability of and compliance with material contracts and
agreements of the Company, (xvii) licenses, permits, authorization and
compliance with laws, (xviii) compliance with employment laws and statement
regarding employee representation by
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labor unions or employee involvement in any other organizational activity, (xix)
absence of certain material events, changes or effects, (xx) suppliers, (xxi)
prepayments and deposits, (xxii) authority to use trade names and other
intangible property, (xxiii) retirements and other employee plans and matters
relating to the Employment Retirement Income Security Act of 1974, as amended
("ERISA"), (xxiv) regulatory consents, approvals and authorizations, (xxv)
indebtedness to and from officers, directors and shareholders, (xxvi) powers of
attorney and suretyships, and (xxvii) absence of misrepresentations.
The Purchase Agreement contains various representations and warranties by
West Coast relating to, among other things, (i) West Coast's organization, (ii)
the capitalization of West Coast, (iii) authorization, execution, delivery,
performance and enforceability of the Purchase Agreement and related matters,
(iv) regulatory consents, approvals and authorizations, and (v) absence of
misrepresentations.
Certain Covenants
Pursuant to the Purchase Agreement, (i) during the period from the date of
execution of the Purchase Agreement until the Closing Date, the Company and West
Coast have agreed that West Coast shall have access to the management,
properties and records of the Company to make such investigations as West Coast
shall desire except with respect to certain information relating to certain
litigation which the Company believes is subject to attorney-client privilege,
(ii) West Coast and the Company have each agreed to maintain the confidentiality
of all information of the other not previously disclosed to the public or
generally known to persons engaged in the respective businesses of West Coast or
the Company, (iii) the Company has agreed to carry on its business diligently
and substantially in the same manner as previously conducted, and (iv) without
the prior written consent of West Coast (which consent shall not be unreasonably
withheld), the Company has agreed not to: (a) take any action to amend its
Charter or Bylaws (other than as described in the Company's Proxy Statement
dated November 20, 1996), (b) issue any securities (except under certain limited
circumstances), (c) incur obligations other than in the ordinary course of
business, (d) declare or make payment or distribution to its stockholders or
purchase or redeem any shares of capital stock, (e) permit any lien or
encumbrance against its assets, (f) sell any assets, other than inventory sold
in the ordinary course of business, (g) cancel any debt or claims, other than in
the ordinary course of business (except under certain limited circumstances),
(h) merge or consolidate, (i) increase compensation payable or make, accrue or
become liable for any bonus, profit sharing or incentive payment, except for
accruals under existing plans, (j) make or revoke any tax elections or
compromise or settle any claim for past or present tax due, (k) modify or
terminate any executory contracts of material value or which are material in
amount, (l)
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materially breach or default under any contract or agreement, (m) fail to
preserve and maintain the assets, business, employee relationships, and goodwill
of the Company, (n) fail to operate its business or maintain its books, accounts
or records in a customary manner and in the ordinary or regular course of
business and maintain in good repair the Company's business premises and assets,
(o) enter into any contracts or agreements other than those entered into in the
ordinary course of business calling for payments which in the aggregate do not
exceed $5,000 for each such contract or agreement, (p) hire any employee for a
salary in excess of $10,000 (other than to replace an existing employee at a
salary not in excess of the existing employee's then current salary), (q)
materially alter any terms, status or funding condition of any employee plan,
(r) make any loans, or (s) commit or agree to do any of the foregoing.
In addition, the Company has agreed, among other things, that it will: (i)
pay all taxes due in a timely manner, (ii) provide West Coast with internally
prepared monthly financial statements and combined comparative statements of
operations and retained earnings and statement of cash flows for the years ended
December 31, 1996, and December 31, 1995, and provide West Coast with certain
payroll information for the Company's employees, (iii) comply with all laws and
regulations applicable to it and perform and comply with all contracts,
commitments and obligations, (iv) not take any actions which would result in any
of the representations or warranties in the Purchase Agreement by the Company
being untrue, and (v) provide West Coast with supplemental information
concerning events subsequent to the date of the Purchase Agreement which would
render any statement, representation or warranty in the Purchase Agreement or
any information provided in connection with this transaction inaccurate or
incomplete in any material respect. The Company has also agreed that subject to
applicable laws, the Company shall not make any public announcement with respect
to the Purchase Agreement or the transactions contemplated thereby without the
express prior written consent of West Coast. The Company has further agreed to
promptly prepare and submit this Proxy Statement to its stockholders and,
subject to the exercise of the directors' fiduciary duty, to recommend to the
Company's stockholders that they approve the sale of substantially all of the
Company's assets and business to West Coast, pursuant to the terms of the
Purchase Agreement.
Exclusivity
Pursuant to the Purchase Agreement, the Company shall not directly or
indirectly (i) solicit, initiate or encourage submission of proposals or offers
for a purchase of all or any material portion of the assets of or any equity
investment in the Company, or merge or consolidate with any other business, or
(ii) subject to the exercise of the Company's directors' fiduciary duties (as
advised in writing by counsel) participate in any
24
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discussions or negotiations or furnish any information with respect to any
attempt or effort by any other person to do or seek any of the foregoing.
Expenses, Break-Up Fee, Liquidated Damages
Pursuant to the Purchase Agreement, the Company and West Coast have each
agreed to pay their own expenses in connection with the Purchase Agreement and
the transactions contemplated thereby, unless otherwise expressly provided in
the Purchase Agreement.
West Coast has agreed to pay the cost and expenses of any audit conducted
by it or at its request, and to reimburse the Company for reasonable travel and
related expenses incurred in connection with the attendance by the Company at
meetings requested by West Coast, if approved in advance.
The Company has also agreed to pay all sales, use and transfer taxes and
governmental charges, if any, upon the sale or transfer of any of the assets
being acquired by West Coast.
The Company has also agreed to pay to West Coast the sum of $100,000 if
the Company's stockholders for any reason fail to approve the sale of the assets
and business of the Company to West Coast on or before the Closing Date, or the
directors of the Company, whether or not in the exercise of their fiduciary or
other legal duties, on or before the Closing Date have failed to approve or
recommend, or shall have withdrawn or adversely modified or taken a public
position materially inconsistent with its approval or recommendation of, the
Purchase Agreement or the terms thereof. The Company and West Coast have agreed
that the sum of $100,000 (the "break-up fee") is equal to the reasonable fees
and expenses incurred by West Coast in connection with the consummation of the
sale of the assets of the Company to West Coast pursuant to the terms of the
Purchase Agreement.
If the Company (i) willfully or intentionally breaches any representation,
warranty or covenant of the Purchase Agreement, willfully or intentionally fails
to perform any condition or obligation required to be performed by it under the
Purchase Agreement, or willfully or intentionally fails to disclose a material
fact pertaining to the assets or the transactions contemplated by the Purchase
Agreement, or (ii) either elects not to sell the assets and business of the
Company to West Coast pursuant to the terms of the Purchase Agreement, sells or
otherwise transfers the assets and business of the Company or enters into an
agreement with any other person or entity to sell any of the shares of capital
stock of the Company, to merge with or into, or to consolidate with any other
person, to sell more than ten percent (10%) of the assets of the Company to any
other person or to effect any other transaction with any other person that would
preclude or otherwise frustrate the transfer of the assets and business of the
25
<PAGE>
Company to West Coast, the Company has agreed to pay to West Coast the sum of
$100,000 as liquidated damages, excluding lost opportunity costs, and the
further sum of $100,000 as liquidated damages for lost opportunity costs
(collectively, the "Liquidated Damages"). The Liquidated Damages are available
to West Coast only in the event that the transactions contemplated by the
Purchase Agreement are not consummated on or before the Closing Date.
West Coast is not entitled to any Liquidated Damages in the event that the
Company pays the break-up fee.
Option to Purchase Newtown Store
If an event occurs which entitles West Coast to receive the break-up fee
(See, "PURCHASE AGREEMENT--Expenses, Break-Up Fee, Liquidated Damages"), West
Coast has been granted an option in the Purchase Agreement to purchase all of
the Company's assets relating to the Company's Newtown Store for a purchase
price of $250,000 payable in cash at closing. West Coast has the further option
to pay the purchase price for the Newtown Store by (i) cancellation of the
outstanding amount of the Buyer Loan (described below), and (ii) cancellation of
the Company's obligation to pay the break-up fee. If West Coast exercises its
option to acquire the assets relating to the Newtown Store, West Coast is
required to assume the Company's lease for the space occupied by the Newtown
Store, but shall assume no other liabilities of the Company. The Company is
required to deliver the assets relating to the Newtown Store free and clear and
to obtain all required governmental and third party consents to the transfer.
West Coast and the Company have also agreed to enter into an asset purchase
agreement, in form and on terms substantially similar to the Purchase Agreement,
with such conforming changes as shall be necessary or appropriate to reflect
that the Company will continue to conduct its retail video store business.
The option to purchase the Newtown Store may be exercised at any time
within the sixty (60) day period following the date on which the option first
becomes exercisable, by delivery of written notice to the Company.
West Coast Loan
In connection with the entering into of the Purchase Agreement, West Coast
loaned the Company $150,000 (the "Buyer Loan"). The Buyer Loan is evidenced by a
promissory note (the "Note") a copy of which is attached hereto as Exhibit C and
incorporated herein by reference. The Note is required to be paid at Closing or,
if applicable, at the closing of the sale of the Newtown Store assets, or, in
any event, on demand at any time from and after April 30, 1997, and provides for
simple interest at the rate of 12% per annum, due at maturity. The Note is
secured by a security interest in all of the assets of the Newtown Store, which
26
<PAGE>
security interest has priority over all other liens on such assets, except for
certain liens specifically agreed to, pursuant to a security agreement, a copy
of which attached hereto as Exhibit D and incorporated herein by reference.
Indemnification Provisions
West Coast and the Company have each agreed to indemnify and hold the
other harmless against all claims, damages, losses, liabilities, costs and
expenses (including settlement costs and any legal, accounting or other expenses
for investigating or defending any actions or threatened claims) reasonably
incurred by the other in connection with any of the following: (i) any breach by
it of any representation or warranty in the Purchase Agreement, (ii) any breach
by it of any covenant, agreement or obligation contained in the Purchase
Agreement or any other agreement, instrument or document contemplated by the
Purchase Agreement, and (iii) any misrepresentation contained in any statement,
certificate or schedule furnished to the other party pursuant to the Purchase
Agreement or in connection with the transactions contemplated by the Purchase
Agreement.
West Coast is not entitled to indemnification for any of the foregoing,
except with respect to claims by third parties, if West Coast is paid the
break-up fee or Liquidated Damages and, in either case, Closing does not occur.
The Company has further agreed to indemnify and hold harmless West Coast
from any and all claims, damages, losses, liabilities, costs and expenses
(including settlement costs and any legal, accounting or other expenses for
investigating or defending any actions or threatened claims) reasonably incurred
by West Coast in connection with any of the following: (i) any claims or
liabilities or obligations of the Company relating to periods prior to the
Closing Date or, if relating to periods after the Closing Date, not specifically
assumed by West Coast, (ii) failure to comply with applicable bulk sales laws,
(iii) a violation of or any failure to comply with any laws, rules, orders,
decrees, regulations or zoning, environmental or permit requirements, whether or
not any such violation or failure has been disclosed to West Coast, including
costs incurred by West Coast to comply with environmental laws as a consequence
of noncompliance with such laws on the Closing Date or in connection with the
transfer of the assets of the Company to West Coast, (iv) any warranty claim or
product liability claim relating to periods prior to the Closing Date, (v) any
tax liability or obligation of the Company, (vi) any claims against or
liabilities or obligations of the Company under the Company's employee plans,
and (vii) certain specified litigation matters.
27
<PAGE>
Post-Closing Agreements
Pursuant to the Purchase Agreement, the Company has agreed (i) from and
after the Closing Date to maintain the confidentiality of information of a
secret or confidential nature with respect to the business of the Company and
not to disclose, publish or make use of any such information without the consent
of West Coast, (ii) except as provided by law, for a period of five years after
the Closing Date, not to solicit any person who was an employee of the Company
on the Closing Date to terminate his employment with West Coast or to become an
employee of the Company or to hire any person who was an employee of the Company
on December 16, 1996, or on the Closing Date, (iii) for a period of five years
after the Closing Date, not to market, rent or sell any product which has the
same or substantially the same form, function or primary application as any
existing or proposed product marketed, rented or sold by the Company on or prior
to the Closing Date or to engage in any business competitive with the business
of the Company as conducted on December 16, 1996, or the Closing Date in any
location which is within a three-mile radius of any retail video store owned,
operated or franchised by West Coast during such five-year period within the
United States or any other country in which West Coast conducted its business
during the two years prior to the Closing Date, (iv) that the Company has the
right for a period of three years following the Closing Date of reasonable
access to the books, records and accounts transferred to West Coast pursuant to
the terms of the Purchase Agreement for certain limited purposes specified in
the Purchase Agreement and that West Coast will have the right for a period of
three years following the Closing Date to have reasonable access to the books,
records and accounts retained by the Company pursuant to the terms of the
Purchase Agreement for certain limited purposes specified in the Purchase
Agreement, and (v) without the prior written consent of West Coast, not to use
the name "Choices Entertainment," "Choices" or any derivation thereof after the
Closing Date in connection with any business related to, competitive with or
growing out of the business conducted by the Company on December 16, 1996.
Each member of the Company's Board of Directors at the time that the
Purchase Agreement was entered into, Ronald W. Martignoni, John A. Boylan, and
Fred E. Portner, has agreed to be bound by the restrictions described in clauses
(ii), (iii) and (v), above.
Each party to the Purchase Agreement has further agreed to cooperate fully
with each other party to the Purchase Agreement in the defense or prosecution of
any litigation or proceeding already instituted or which is instituted after
December 16, 1996, against or by such party relating to or arising out of the
conduct of the business of the Company prior to or after the Closing Date. Any
party requesting such cooperation is required to pay the out-of-pocket expenses
(including reasonable legal fees and disbursements)
28
<PAGE>
of the party providing the cooperation as are reasonably incurred in connection
with providing the cooperation.
Conditions to the Transaction
The respective obligations of the Company and West Coast under the
Purchase Agreement are subject to the satisfaction at or prior to Closing of a
number of conditions, including among others: (i) all representations and
warranties of the other shall be true on and as of the Closing Date as if such
representations and warranties were made on and as of such date, except for any
changes permitted by the terms of the Purchase Agreement or consented to in
writing by the other, (ii) the other shall have performed and complied with all
terms, conditions, covenants, obligations, agreements and restrictions required
by the Purchase Agreement to be performed or complied with by it prior to or at
the Closing Date, (iii) with respect to West Coast, the transaction shall have
been approved by the requisite number of stockholders of the Company, (iv) all
corporate and other proceedings required to be taken by the other to authorize
and carry out the terms of the Purchase Agreement shall have been taken, (v) all
governmental consents, authorizations or approvals necessary for the
consummation by the other of the transactions contemplated by the Purchase
Agreement, and, with respect to West Coast, necessary for the operation of the
Company's business by West Coast, shall have been obtained, (vi) the other party
shall have received all requisite consents and approvals of lenders, lessors and
other third parties in order for the other party to consummate the transaction,
(vii) no action or proceeding shall have been instituted or threatened which
shall seek to restrain, prohibit or invalidate the transactions contemplated by
the Purchase Agreement or which might affect the right of the Company to
transfer the assets, in the case of the Company, or which affect West Coast's
right to own or use the assets purchased after the Closing, in the case of West
Coast, (viii) West Coast shall have received the opinion of counsel to the
Company, and the Company shall have received the opinion of counsel to West
Coast, and (ix) each party, respectively, shall have received at or prior to
Closing all of the documents it is entitled to receive under the Purchase
Agreement including, with respect to the Company, an instrument of assumption of
liabilities for the Company's store leases.
The obligations of West Coast under the Purchase Agreement are further
subject to the satisfaction at or prior to the Closing of the following
conditions: (i) except for certain permitted encumbrances, West Coast shall
receive good, clear, record and marketable title to the assets, (ii) the Company
shall have provided West Coast with true, correct and complete list and amount,
as of the Closing Date, of the Company's inventory, fixed assets, accounts
receivable, trade accounts payable and Assumed Liabilities, (iii) on the Closing
Date, each store of the Company shall have cash on hand in the amount of $600,
which shall be
29
<PAGE>
transferred to West Coast, (iv) on the Closing Date, the Company shall have used
its best efforts to satisfy all obligations to suppliers and vendors of goods
and services and other trade creditors which are past due and to cause the
Company to have no such obligations outstanding for more than 60 days as of the
Closing (any such obligations which remain unsatisfied at Closing may be
satisfied by West Coast out of the Base Purchase Price without the Company's
approval), and (v) on or prior to the Closing Date, the Company shall have
obtained tax lien waivers for all jurisdictions in which its assets are located,
if such tax lien waivers are provided.
Financing Contingency of West Coast
The obligations of West Coast under the Purchase Agreement are further
subject to the closing of a public offering or private placement of West Coast's
debt or equity securities to third parties resulting in gross proceeds to West
Coast in an amount sufficient to enable it to consummate the transactions
contemplated in the Purchase Agreement and certain additional acquisitions (the
"West Coast Offering"). The Company has been told by West Coast that it is
proceeding with the West Coast Offering and that West Coast currently believes
that the West Coast Offering will be consummated sometime during the latter part
of March, 1997.
Termination of the Purchase Agreement
Unless extended by the written consent of all of the parties to the
Purchase Agreement, if the transactions contemplated by the Purchase Agreement
have not been consummated by 5:00 p.m., E.S.T., on the earlier to occur of April
30, 1997, or the date which is 30 days after the date of the closing of the West
Coast Offering, the Purchase Agreement shall terminate as of such date and time.
The Purchase Agreement may also be terminated by (i) the mutual written consent
of the parties to the Agreement, (ii) the Company if, at any time prior to
Closing, there is a material breach of any representation, warranty or covenant
of West Coast or failure by West Coast to perform any condition or obligation
under the Purchase Agreement, and (iii) West Coast if, at any time prior to the
Closing, there is a material breach of any representation, warranty or covenant
of the Company or failure of the Company to perform any condition or obligation
under the Purchase Agreement. The obligations of the parties to maintain the
confidentiality of information survives any termination of the Purchase
Agreement. In the event of a termination by mutual written agreement, the
obligations of the Company with respect to the Buyer Loan and the obligations of
the Company to pay the break-up fee and Liquidated Damages, as provided in the
Purchase Agreement, if applicable, shall survive termination of the Purchase
Agreement. Otherwise, in the event of termination of the Purchase Agreement by
mutual written consent, there will be no liability or obligation on the part of
either West Coast or the Company.
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<PAGE>
CERTAIN INFORMATION CONCERNING WEST COAST
West Coast is one of the country's largest video specialty retailers. West
Coast's revenues were $42.4 million for the nine months ended October 31, 1996,
with net income of $1.6 million. The principal executive offices of West Coast
are located at One Summit Square, Suite 200, Route 413 and Doublewoods Road,
Newtown, PA 19047, and its telephone number is (215) 968-4318.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed balance sheet of the Company
as of September 30, 1996, and the unaudited pro forma condensed statements of
loss of the Company for the year ended December 31, 1995, and for the nine
months ended September 30, 1996, have been prepared to reflect the pro forma
effect of the probable West Coast Transaction. The pro forma condensed balance
sheet was prepared assuming the transaction occurred on September 30, 1996, and
the pro forma condensed statements of loss reflect the West Coast Transaction as
if it took place on the first day of the year ended December 31, 1995 and the
first day of the nine-month period ended September 30, 1996.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that the Company believes are reasonable. These pro
forma financial statements should be read in conjunction with the Company's
historical financial statements and related notes appearing in this Proxy
Statement, beginning on page F-1 hereof. The unaudited pro forma condensed
balance sheet as of September 30, 1996, is not necessarily indicative of the
Company's financial position had the transaction been effective at September 30,
1996. The unaudited pro forma condensed statements of loss are not necessarily
indicative of either the Company's results of operations that would have
occurred had the transaction been effective at the beginning of the periods
indicated, or of the future results of the operations of the Company.
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<PAGE>
PRO FORMA CONDENSED STATEMENT OF LOSS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
(audited) (unaudited) (unaudited)
------------ ----------- ------------
Revenues:
<S> <C> <C> <C>
Movie rentals $ 3,882,969 $(3,882,969)(a) $ --
Merchandise sales 877,715 (877,715)(a) --
------------ ----------- ------------
4,760,684 (4,760,684)(a) --
------------ ----------- ------------
Operating costs and expenses:
Cost of goods sold 864,226 (864,226)(a) --
Cost of movie rentals 8,476 (8,476)(a) --
Store payroll 1,054,643 (1,054,643)(a) --
Store rents 944,260 (944,260)(a) --
Other store operating expenses 452,235 (452,235)(a) --
Selling and administrative expenses 819,169 (560,526)(a) 258,643(c)
Merger and acquisition expenses 1,630,192 (1,630,192)(b) --
Professional and consulting expenses 225,694 (101,694)(a) 124,000(c)
Loss on disposal of videocassette
rental inventory 165,877 (165,877)(a) --
Store closing, lease termination and
litigation provisions 33,060 (33,060)(a) --
Depreciation and amortization 1,073,116 (1,070,000)(a) 3,116(c)
------------ ----------- ------------
7,270,948 (6,885,189)(a) 385,759
------------ ----------- ------------
Other income (expense):
Gain on settlement of debt 395,640 395,640(b)
Interest expense, net (24,703) 18,000 (6,703)(d)
------------ ----------- ------------
370,937 18,000 (6,703)
------------ ----------- ------------
Net loss $ (2,139,327) $ 1,746,865 $ (392,462)
============ =========== ============
Net loss per share of common stock $ (.10) $ (.02)
============ ============
Weighted average shares outstanding 21,652,000 21,652,000
============ ============
</TABLE>
Notes to Unaudited Pro Forma Condensed Statement of Loss:
(a) Reflects the operations of the Company deemed not to have occurred had the
West Coast Transaction been consummated on January 1, 1995.
(b) This is a non-recurring item.
(c) Reflects expenses necessary to maintain the Company without the operations
of the video business.
(d) Reflects interest expense on convertible notes.
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<PAGE>
PRO FORMA CONDENSED STATEMENT OF LOSS
For the Nine Months Ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS (a) PRO FORMA
---------- --------------- ---------
Revenues:
<S> <C> <C> <C>
Movie rentals $ 3,142,777 $(3,142,777) $ --
Merchandise sales 734,472 (734,472) --
------------ ----------- ------------
3,877,249 (3,877,249) --
------------ ----------- ------------
Operating costs and expenses:
Cost of goods sold 660,536 (660,536) --
Cost of movie rentals 59,701 (59,701) --
Store payroll 744,928 (744,928) --
Store rents 700,577 (700,577) --
Other store operating expenses 356,266 (356,266) --
Selling and administrative expenses 488,776 (316,786) 171,990(b)
Professional and consulting expenses 230,257 (134,757) 95,500(b)
Loss on disposal of videocassette
rental inventory 193,145 (193,145) --
Depreciation and amortization 883,156 (881,191) 1,965(b)
------------ ----------- ------------
4,317,342 (4,047,887) 269,455
------------ ----------- ------------
Other income (expense):
Interest expense, net (37,297) 13,500 (23,797)(c)
------------ ----------- ------------
Net loss $ (477,390) $ 184,138 $ (293,252)
============ =========== ============
Net loss per share of common stock $ (.02) $ (.01)
============ ============
Weighted average shares outstanding 22,004,000 22,004,000
============ ============
</TABLE>
Notes to Unaudited Pro Forma Condensed Statement of Loss:
(a) Reflects the operations of the Company deemed not to have occurred had the
West Coast Transaction been consummated on January 1, 1996.
(b) Reflects expenses necessary to maintain the Company without the operations
of the video business.
(c) Reflects interest expense on convertible notes.
33
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
at September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 66,942 $ 2,187,000 (a) $ 780,320
(1,473,622) (b) -
-
Accounts receivable 33,021 (33,021) (d) -
Merchandise inventories 168,907 (168,907) (d) -
Prepaid expenses 60,323 (60,323) (d) -
----------- ----------- -----------
Total current assets 329,193 451,127 780,320
Videocassette rental inventory, net 742,110 (742,110) (d) -
Equipment, net 110,260 (105,260) (d) 5,000
Intangible assets, net 176,813 (176,813) (d) -
Cash held in escrow 243,000 (a) 243,000
Other deferred costs 40,245 40,245
Other assets 68,458 (68,458) (d) -
----------- ----------- -----------
$1,467,079 $ (398,514) $ 1,068,565
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 176,161 $ (176,161) (b) -
Accounts payable 688,392 (688,392) (b) -
Accrued merger and acquisition
expenses 481,576(c) $ 481,576
Accrued professional fees 211,711 (211,711) (b) -
Deferred revenue 34,387 (34,387) (d) -
Accrual for lease cancellation and
litigation reserves 2,500 (2,500) (b) -
Accrued salaries 71,259 (71,259) (b) -
Other accrued expenses 258,350 (253,599) (b) 4,751
----------- ----------- -----------
Total current liabilities 1,924,336 (1,438,009) 486,327
Notes payable 680,000 680,000
----------- ----------- -----------
Total liabilities 2,604,336 (1,438,009) 1,166,327
----------- ----------- -----------
Stockholders' deficit:
Preferred stock
Common stock 220,044 220,044
Additional paid in capital 20,519,203 20,519,203
Accumulated deficit (21,876,504) 1,039,495 (e) (20,907,009)
----------- ----------- -----------
Total stockholders' deficit (1,137,257) 1,039,495 (97,762)
----------- ----------- -----------
$1,467,079 $ (398,514) $ 1,068,565
=========== =========== ===========
</TABLE>
Notes to Unaudited Pro Forma Condensed Balance Sheet:
(a) Represents the proceeds from the West Coast Transaction, which may be
subject to adjustment (of which $243,000 is to be deposited in an escrow
fund.) The Company has not made any adjustment herein to give effect to a
downward purchase price adjustment because the Company does not presently
expect that there will be a downward adjustment. However, if a downward
purchase price adjustment should occur, the Company does not believe that
it is likely to exceed $150,000 based upon preliminary results for the
year ended December 31, 1996.
(b) Represents the use of cash proceeds from the West Coast Transaction to pay
notes and accounts payable, accrued expenses, accrued salaries, accrued
professional fees and costs of the transaction, including estimated taxes
of the Company.
(c) Includes $473,000 of professional fees incurred in connection with the
Company's discontinued acquisition program, of which approximately
$100,000 has been satisfied subsequent to September 30, 1996.
(d) Reflects the elimination of assets and liabilities in connection with the
West Coast Transaction.
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<PAGE>
(e) Represents the estimated gain realized on the West Coast Transaction net
of the costs of the transaction, including estimated taxes, assuming full
utilization of net operating loss carry-forwards.
35
<PAGE>
INFORMATION CONCERNING THE COMPANY
Description of Business
General Description
The Company currently operates a chain of nine retail video home
entertainment stores, principally under the trade name CHOICES(R) - MOVIES AND
GAMES, which rent and sell videocassette tapes, video games and other video home
entertainment products. The Company's home entertainment stores, all of which
are superstores, are located in Delaware, New Jersey and Pennsylvania.
The Company was incorporated in Maryland in July, 1985, under the name PPV
Enterprises, Inc. and was reincorporated in Delaware under the name DataVend,
Inc. in August, 1987. In March, 1990, the Company changed its name to "Choices
Entertainment Corporation." The Company's executive offices are located at 836
W. Trenton Avenue, Morrisville, Pennsylvania 19067; its telephone number is
(215) 428-1000.
The Home Video Industry
General. The Company believes that the retail video store industry is
consolidating into regional and national chains. The Company believes that the
principal competitive factors in the video retail industry are store location
and visibility, title selection, the number of copies of each new release
available, customer service and, to a lesser extent, pricing.
Studio Dependence on Video Rental Industry. Of the many movies produced by
major studios and released in the United States each year, relatively few are
profitable for the studios based on box office revenue alone. In addition to
purchasing box office hits, retail video stores, including those operated by the
Company, purchase movies on videocassette that were not successful at the box
office, thus providing the movie studios with a reliable source of revenue for
almost all of their movies.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. These distribution channels include, in usual
release date order, movie theaters, retail video stores, pay-per-view, pay
television, network and syndicated television and, finally, basic cable
television. The Company believes that this method of sequential release has
allowed movie studios to increase their total revenue with relatively little
adverse effect on the revenue derived from previously established channels, and
that movie studios will continue the practice of sequential release as new
distribution channels become available.
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<PAGE>
Home Entertainment Store Operations
Products. Approximately 82% of the Company's revenues are derived from the
rental of videocassettes and video games, with the balance of revenues being
derived from the sale of videocassettes and video games, the rental of video
recorders, the sale of video accessories, such as blank cassettes and cleaning
equipment, and the sale of confectionery items. Each of the Company's
superstores offers from 8,000 to 12,000 videocassettes (from 5,000 to 10,000
titles) and from 500 to 2,000 video games (from 400 to 1,500 titles) for rental
and sale, depending upon each store's location.
Management believes that a typical store's revenues are most affected by
its new release title selection and the number of copies of each new release
available for rental as compared to the competition. Although the Company is
committed to offering as many copies of new releases as necessary to be
competitive, its ability to do so is dependent on its ability to continue to
finance its short-term working capital needs. Videocassettes offered for sale
are both previously-viewed movies as well as major box office hit titles that
are promoted by the studios at a reduced price to encourage direct consumer
purchases. The Company also rents and sells video games, which are licensed
primarily by Nintendo(R) and Sega Genesis(R).
Customers; Nature of Business. The business of the Company is not
dependent upon a single, or a few customers, the loss of which would have a
material adverse effect.
Inventory Management. The Company's inventory (videocassettes and games)
consists of its catalog titles (those in release for more than one year) and new
release titles. All of the Company's videocassette and video game rental
inventory is purchased from suppliers. In each of its stores, the Company
maintains a selection of new releases that balances customer demand and rental
trends with maximization of store profitability. Buying decisions are made
centrally based on box office results, industry newsletters, management's
knowledge of the popularity of certain types of movies in its markets and input
from store managers.
Suppliers. The Company purchases substantially all of its videocassettes
and video games for rental and sale from a single supplier, Star Entertainment
LP. ("Star"). Star has a security interest in the Company's inventory (except
with respect to the Company's Newtown Store), which secures the Company's
ongoing account payable to Star. The Company also currently seeks marketing
funds from Star based upon a percentage of purchases. The Company also has a
pay-per-transaction arrangement with a different supplier. In the event that the
Company's relationship with Star was terminated, the Company believes that it
could obtain its required inventory of videocassettes and video games from
alternative suppliers at prices and on terms comparable to those
37
<PAGE>
available from Star. However, the Company's results of operations could be
adversely affected until its debt with Star is fully satisfied and a suitable
replacement is found. At September 30, 1996, the Company owed Star approximately
$325,000.
Marketing and Advertising. With advertising credits and market development
funds that it receives from its primary video supplier, the Company uses
in-store advertising, discount coupons and promotional materials to promote new
releases, its video specialty stores and its trade name. Expenditures for
advertising above the amount of the Company's advertising credits from its
primary supplier have been minimal. The Company also benefits from the
advertising and marketing by studios and theaters in connection with their
efforts to promote films and increase box office revenues.
Employees. The Company currently has 91 employees, of which 29 are full
time. Besides store personnel, the Company has two employees in operations,
three employees in accounting and one employee in administration.
Trade Name. The Company currently operates under the trade name Choices(R)
- - - - Movies and Games, for which it has obtained federal and state trade name
protection.
Competition and Technological Obsolescence
The video retail industry is highly competitive. The Company competes with
other retail video stores, including stores operated by regional and national
chains, as well as other businesses offering videocassettes and video games such
as supermarkets, convenience stores, bookstores, mass merchants, mail order
operations and other retailers. In addition, the Company competes with movie
theaters, network and cable television, live theater, sporting events and family
entertainment centers. Several of the Company's stores compete with
Blockbuster(R) stores, the dominant video specialty retailer in the United
States. Many of the Company's competitors have significantly greater financial
and marketing resources, market share and name recognition than the Company.
Additionally, while advances in technology such as video-on-demand have proven
expensive and have not adversely affected the retail video market to date, such
technologies could in the future have a materially adverse impact on the
Company's operations.
The Company also competes with Pay-Per-View cable television systems, in
which subscribers pay a fee to see a movie selected by the subscriber. Existing
Pay-Per-View services offer a limited number of channels and movies and are
generally available only to households with a converter to unscramble incoming
signals. Recently developed technologies, however, permit certain cable
companies, direct broadcast satellite companies, telephone companies and other
telecommunications companies to transmit a much
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greater number of movies to homes throughout the United States at more frequent
intervals (often as frequently as every five minutes) throughout the day,
referred to as "Near-Video-on-Demand ("NVOD"). NVOD does not offer full
interactivity or VCR functionality such as allowing consumers to control the
playing of the movies, starting, stopping and rewinding. Ultimately, further
improvements in these technologies could lead to the availability of a broad
selection of movies to the consumer on demand referred as Video-on-Demand
("VOD"), at a price which may be competitive with the price of videocassette
rentals and with the functionality of VCRs. Certain cable and other
telecommunications companies have tested and are continuing to test limited
versions of NVOD and VOD in various markets throughout the United States and
Europe.
Description of Property
The Company currently leases its corporate offices, located at 836 W.
Trenton Avenue, Morrisville, Pennsylvania, from a non-affiliated party. The
lease provides for monthly rental payments of $875, and expires July, 1997.
Thereafter, the lease will continue on a month-to-month basis.
Each of the Company's nine home entertainment stores is in good condition
and is leased from a non-affiliated party. The lease agreements covering six of
the stores were entered into directly between the Company and the respective
landlord, while the lease agreements covering the remaining three stores were
assigned to the Company in connection with a prior acquisition. As of January
1997, the total monthly rent relating to the Company's nine stores is
approximately $76,000.
Legal Proceedings
The Company has recently been involved in certain legal proceedings
concerning control of the Company's Board of Directors. The following is a
description of these proceedings and certain other material legal proceedings,
which are pending, including any legal proceedings to which any director,
officer or owner of more than five percent of the Company's Common and Preferred
Stock (voting together) is a party adverse to the Company or has a material
interest adverse to the Company.
Shareholder Committee Litigation. On July 26, 1996, the Company filed a
lawsuit in the United States District Court for the District of Columbia (the
"Washington Proceedings"), entitled Choices Entertainment Corporation v. Carl
Shaifer et al., Civil Action No. 1:96-CV-01753, seeking declaratory and
injunctive relief against the following group of stockholders: 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
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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 stockholders 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 contained
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 had failed to file a Schedule 13D in accordance with the requirements
of the Securities Exchange Act of 1934, and that any consents obtained by the
Shareholder Committee had been obtained in violation of the federal securities
laws and were invalid.
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 then 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 then 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 Board and, in any event, that such consents were otherwise invalid as
having been obtained in violation of the federal securities laws.
On August 2, 1996, a lawsuit was filed in the Court of Common Pleas of
Bucks County, Pennsylvania, against the then 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.
On August 16, 1996, 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 then existing Board of Directors, seeking: (i) a declaration
that the 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 stockholders 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,
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including attorneys fees, and (iv) such other relief as the Court deemed just
and proper.
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 stockholders be held on December 20, 1996, as previously announced by
the Company, (ii) that the then present Board, consisting of Ronald W.
Martignoni, John A. Boylan and Fred E. Portner, constituted the Company's board
of directors, until the earlier of the election of directors at the annual
meeting or the resolution of plaintiffs' claims 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
annual meeting or the resolution of plaintiffs' claims in the lawsuit, the
Company could not issue any voting securities in certain specified transactions
except upon Court order and that the Company could not, except upon five
business days notice, take any "action out of the ordinary course," as defined
in the order. The order also provided that the restrictions contained therein
could be waived by written agreement of the parties and that the order could be
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.
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.
The annual meeting was held, in accordance with the Chancery Court order,
on December 20, 1996, at which a new Board of Directors was elected consisting
of: Joseph DeSaye, Ronald W. Martignoni, and Fred E. Portner. Mr. Portner was
nominated at the annual meeting upon the withdrawal, without prior notice, on
the day of the meeting, of Ralph V. Esposito, one of the Company's nominees.
On February 6, 1997, counsel for the Company and the Shareholder Committee
agreed to a stipulation of dismissal without prejudice as to both the Washington
and Delaware Proceedings.
Scheuerer Litigation. On September 18, 1996, 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, Max Scheuerer, 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 of interest owed by
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the Company to Mr. Scheuerer under two 10% promissory notes. The Company has
entered into a settlement agreement with Mr. Scheuerer, providing for $3,000
monthly payments to Mr. Scheuerer with the unpaid balance to be paid at closing
of the West Coast Transaction. Notwithstanding the settlement agreement, Mr.
Scheuerer is proceeding with the litigation. For further information, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Gibbs Litigation. On April 9, 1996, a lawsuit was filed against the
Company in the Superior Court of California, entitled Gary N. Gibbs et al. v.
Choices Entertainment Corporation et al., No. BC147815, 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. It is alleged that the Company made false
and misleading statements and omitted to state certain material facts in public
communications and in reports filed with the Securities and Exchange Commission
with regard to the JD Merger and the Company's related acquisition program. (See
"THE WEST COAST TRANSACTION--Background and Reasons for the West Coast
Transactions.") On July 12, 1996, Demurrers 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 Second
Amended Complaint, denying plaintiffs' allegations with regard to all claims. On
October 22, 1996, the Company filed a Motion for Summary Judgment, which was
denied on November 26, 1996. Discovery is proceeding. The Company intends to
contest the lawsuit vigorously.
MARKET FOR COMMON EQUITY STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded in the over-the-counter
market on the OTC-Bulletin Board. The following table sets forth the high and
low inside bid prices as reported by the OTC-Bulletin Board.
Common Stock
(CECSC)
1994 High Low
- - - ---- ---- ---
First quarter .......................... $ .40 $ .20
Second quarter ......................... .41 .25
Third quarter .......................... .75 .32
Fourth quarter ......................... 1.46 .68
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1995
- - - ----
First quarter .......................... 1.84 1.25
Second quarter ......................... 1.28 .91
Third quarter .......................... 1.22 .13
Fourth quarter ......................... .22 .16
1996
- - - ----
First quarter .......................... .20 .09
Second quarter ......................... .14 .04
Third quarter .......................... .28 .10
Fourth quarter ......................... .16 .05
The quotations set forth above reflect inter-dealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
On October 29, 1996, the trading date immediately preceding public
announcement of negotiations between the Company and West Coast, the high and
low inside bid prices for the Company's Common Stock were both $0.09, as
reported by the OTC-Bulletin Board, and on December 13, 1996, the trading date
immediately preceding public announcement of the signing of the Purchase
Agreement, the high and low inside bid prices for the Company's Common Stock
were both $0.07, as reported by the OTC-Bulletin Board.
Holders. As of January 7, 1997, the outstanding shares of the Company's
Common Stock were held by approximately 561 holders of record.
Dividends. The Company has neither declared nor paid any dividends on its
Common Stock since its inception, and the Board of Directors does not
contemplate the payment of dividends in the foreseeable future, given the lack
of earnings to date and the current policy of the Board of Directors which is to
retain future earnings, if any, to fund the growth of the Company. Any decision
as to the future payment of dividends will depend on the earnings, if any, and
financial position of the Company and such other factors as the Board of
Directors deems relevant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of the Company's
financial condition, liquidity and capital resources, and of certain significant
factors which have affected the Company's capital expenditures, changes in
financial condition, and results of operations, and should be read in
conjunction with the Company's Financial Statements and the Notes thereto
beginning on page F-1 of this Proxy Statement. This discussion includes
forward-looking statements and should be read in connection with Safe Harbor
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Disclosure: Forward-Looking Statements and Associated Risks contained in "THE
WEST COAST TRANSACTIONS--Risk Factors Associated With Consummation of the West
Coast Transaction."
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 ensure
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.
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 "INFORMATION CONCERNING THE COMPANY--Legal Proceedings"). The
aggregate principal amount owing by the Company on said promissory notes was
reduced to $150,000 from $180,000 as a result of a $30,000 payment made by the
Company to Mr. 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 Mr. 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
"INFORMATION CONCERNING THE COMPANY--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 $6,989. The Company has entered into a settlement
agreement with Mr. Scheuerer, providing for $3,000 monthly payments to him with
the unpaid balance to be paid at closing of the West Coast Transaction.
Notwithstanding the settlement agreement, Mr. Scheuerer is proceeding with the
litigation. If the West Coast
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Transaction is not consummated, the Company would be unable to satisfy the
balance owing.
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 (See "INFORMATION
CONCERNING THE COMPANY--Legal Proceedings").
On April 9, 1996, a lawsuit was filed against the Company and certain
others, including the members of the then Board of Directors, in the Superior
Court of California, by certain individuals who allegedly purchased or purchased
and sold securities of the Company, entitled Gary N. Gibbs et al. v. Choices
Entertainment Corporation et al., in which plaintiffs seek monetary damages
against the Company and other defendants in the amount of $303,470, plus
attorney's fees, costs of suit and such other relief as the Court deems just.
(See "INFORMATION CONCERNING THE COMPANY--Legal Proceedings"). The Company
intends to contest the lawsuit vigorously. However, if the Company is
unsuccessful in defending the lawsuit, the Company would not be able to satisfy
an award of damages in the amount claimed. Furthermore, even if the Company is
successful in defending this lawsuit, the cost alone in professional fees will
be substantial.
Absent consummation of the West Coast Transaction, the Company's viability
for the foreseeable future is doubtful, given its inability to secure needed
capital, to extend further the due dates of liabilities, or to otherwise
conclude or settle existing liabilities and claims on a satisfactory basis, and,
possibly, to conclude successfully existing litigation. In the event the Company
is not successful in consummating the West Coast Transaction, the Company's
Board of Directors believes that, due to the Company's severely distressed
financial condition, the Company will be ultimately forced to seek protection
under the bankruptcy laws. Because the decision to file for bankruptcy is likely
to be based upon the actions of third parties, primarily the landlords for the
Company's stores and certain major creditors of the Company, it is not possible
to predict at what point the Company would be forced to do so. Moreover, because
the Company's Board of Directors expects that the Company's financial condition
will continue to deteriorate, the Company's Board of Directors does not believe
that a transaction more favorable than the West Coast Transaction will be
available to the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
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OPERATION;" "INFORMATION CONCERNING THE COMPANY--Legal Proceedings;" "THE WEST
COAST TRANSACTION--Risk Associated with Consummation of the West Coast
Transaction, Certain Unsatisfied Debts and Liabilities." In the event the
Company is forced to file for bankruptcy, the Company's ability to conduct its
business would likely be severely hampered and it is unlikely that the
stockholders would receive any value.
Capital Expenditures, Material Changes in Financial Condition and Material
Changes in Results of Operations:
As of September 30, 1996 and for the Nine-Month and Three-Month Periods Ended
September 30, 1996
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.
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.
In the event that the West Coast Transaction is not consummated and a
change to a liquidation basis of accounting becomes appropriate, the most likely
effect on the recorded value of the Company's assets would be to reduce
materially the valuation of the videocassette rental inventory to an amount that
approximates liquidation value. In addition, the Company would not be able to
recover from future cash flows the recorded value of goodwill listed under the
caption "Intangible Assets," and would, therefore, write off this amount of
approximately $177,000. The Company would also be likely to incur certain other
costs, including, without limitation, appraisal and related costs.
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 higher credit line with the
Company's major
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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. The Company had previously used the same
arrangement with the same supplier in 1994, but discontinued this practice in
1995 under the direction of the Company's then new management team. The Company
reinstituted this practice in 1996 to provide more rental product to its stores
than it could have provided had the same rental product been purchased. This
practice also creates a higher rental expense since the Company shares a higher
percentage of the related revenue stream with the pay per transaction supplier
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through rental expense than it would through depreciation expense and loss on
disposal related to purchased product. The Company intends to rent selected pay
per transaction titles where it believes it can be used to help satisfy customer
demand and improve competitiveness.
Store payroll decreased approximately $12,000 and $55,000, respectively,
during the three-month and nine-month comparative periods. 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.
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 videocassette rental
films sold at less than carrying value during 1996 to provide additional cash
flow for operations.
The decrease in videocassette and inventory reserves of approximately
$22,000 between the nine-month comparative periods relates to additional
reserves being required in the 1995 period to provide for discontinued music
inventories.
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.
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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.
As of December 31, 1995 and 1994 and for the Three Year Period Ended December
31, 1995
Capital Expenditures
The Company's capital expenditures were approximately $1,455,000 during
the year ended December 31, 1995 compared to $1,241,000 during 1994.
Approximately $109,000 of the increase was primarily due to an increase in
videocassette rental film purchases, and $105,000 of the increase was directly
related to the purchase of fixtures for use in its existing video stores, as
well as for use in the Company's new superstore opened in 1995.
Material Changes in Financial Condition
The following material changes in financial condition reflect changes
occurring during the two-year period from December 31, 1993, through December
31, 1995.
As of December 31, 1995 and 1994:
Current assets decreased by approximately $316,000 between December 31,
1994 and December 31, 1995, due primarily to both the decrease in merchandise
inventories of $287,000 and to the decrease in cash used to fund operations of
the Company's stores. The decrease in merchandise inventories resulted from the
sale and return of music inventories following the discontinuance of the sale of
music product in the Company's stores.
Equipment and videocassette rental inventory decreased by approximately
$223,000, due primarily to the excess of depreciation over purchases of fixed
assets in the normal course of business.
The decrease in intangible assets of approximately $17,000 was due to the
amortization of goodwill. The decrease in other deferred costs of approximately
$169,000 was due primarily to the expensing of those costs which were associated
with the Company's acquisition program implemented during 1994, which program
has been discontinued.
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Liabilities:
Current liabilities decreased by approximately $814,000 between December
31, 1994 and December 31, 1995. Accounts payable decreased approximately
$357,000 primarily as a result of the discounted cash settlement of
approximately $235,000 of debt and to the payment of accounts payable in the
normal course of business. Notes payable decreased by approximately $295,000 due
to the conversion of approximately $148,000 of notes payable to equity and to
repayment of notes payable. Accrued merger and acquisition costs increased
approximately $469,000 primarily due to the Company's discontinued acquisition
program. Accrued professional fees decreased approximately $583,000 due
primarily to the conversion of approximately $283,000 of debt to equity and to
the payment of these obligations in the normal course of business. Accrued
expenses increased approximately $48,000 due primarily to timing differences
with respect to payment of these obligations. The accrual for lease cancellation
and litigation reserves decreased approximately $90,000 due primarily to both
payment of these costs and to the utilization of reserves established for the
closing of two of the companies stores.
Notes payable due after one year increased $680,000 primarily due to
issuance of promissory notes payable in conjunction with the private issuance of
preferred stock. (See Note 8 of Notes to Financial Statements). Other accrued
expenses decreased approximately $139,000 primarily due to expending the costs
associated with the issuance of common stock to a consulting firm (See Note 7 of
Notes to Financial Statements). Other liabilities decreased $200,000 due
primarily to the recognition of a non-refundable deposit received in conjunction
with the Company's previously discontinued acquisition program.
Stockholders' Deficit:
Between December 31, 1994 and December 31, 1995, there was a net increase
in stockholders' deficit of approximately $252,000, which was due primarily to
the net effect of the loss of approximately $2,139,000, to the issuance of
approximately 2,449,461 shares of the Company's Common Stock from the exercise
of stock options, warrants and the conversion of debt, the issuance of 34 shares
of Preferred Stock in connection with a private offering of Preferred Stock (See
Note 8 of Notes to Financial Statements), and to the issuance of approximately
900,000 shares of the Company's Common Stock in connection with a private
offering of Common Stock.
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As of December 31, 1994 and 1993:
Assets:
Current assets decreased by approximately $303,000 between December 31,
1993 and December 31, 1994, due primarily to both the decrease in merchandise
inventories and to the decrease in cash used to fund operations of the Company's
stores. The decrease in merchandise inventories resulted from the sale and
non-replenishment of music inventory and to a reserve established for music
inventories based on a decision to discontinue the sale of music product in the
Company's stores.
Equipment decreased by approximately $446,000, due primarily to the
depreciation and amortization of fixed assets in the normal course of business
and to the disposal of assets in conjunction with closing one of the Company's
stores during 1994.
The decrease in intangible assets of approximately $17,000 was due to the
amortization of goodwill. The decrease in other assets of approximately $23,000
was due to the write-off of security deposits relating to the cancellation of a
lease in conjunction with closing one store in 1994.
Other deferred costs of $238,750 are related to a consulting agreement
with a firm that was to provide consulting services to the Company and a
non-refundable deposit made by the Company in December 1994 upon signing a
letter of intent to purchase a chain of video stores.
Liabilities:
Current liabilities decreased by approximately $32,000 between December
31, 1993 and December 31, 1994. Accounts payable decreased approximately
$234,000 primarily as a result of the conversion of approximately $180,000 of
accounts payable to a note payable and to the conversion of approximately
$65,000 of accounts payable due to JD, a related party, to equity during 1994.
The accrual for lease cancellation and litigation reserves decreased
approximately $254,000 due to settlement of certain lease agreements. Accrued
salaries decreased approximately $25,000, due primarily to timing differences
with respect to payment of these obligations. Accrued professional fees
increased approximately $265,000 due primarily to costs associated with then
anticipated mergers and acquisitions. Other accrued expenses decreased
approximately $157,000 due primarily to the reversal of costs associated with
previous warrant exercises. Additionally, notes payable increased by
approximately $373,000 due to the conversion of approximately $180,000 of
accounts payable as mentioned above, and to the issuance of promissory notes
payable to two investors totalling $180,000 during 1994.
51
<PAGE>
Other liabilities increased by approximately $146,000 during 1994,
principally as a result of the Company recording as a liability a $200,000
payment from JD Store Equipment upon the signing of a letter of intent to merge
with JD Store Equipment, pending the outcome of that transaction. Other accrued
expenses (classified as a non-current liability) increased approximately
$139,000 in conjunction with a consulting agreement entered into by the Company
in December 1994.
Stockholders' Deficit:
Between December 31, 1993 and December 31, 1994, the net increase in
stockholders' deficit of approximately $776,000 is due primarily to the net
effect of the loss of approximately $988,000, to the issuance of the
approximately 176,000 shares of the Company's Common Stock for debt, and to the
reversal of previously accrued costs relating to prior years warrant exercises.
Material Changes in Results of Operations
The following material changes in results of operations occurred during
the three-year period from January 1, 1993 through December 31, 1995.
Years Ended December 31, 1995 and 1994:
During 1995 the Company incurred a net loss of approximately $2,139,000
primarily due to merger and acquisition expenses associated with contemplated
mergers of the Company with other organizations, selling and administrative
expenses and operating expenses associated with operating the Company's retail
stores.
Revenues decreased by approximately $1,132,000 during 1995 when compared
to 1994 primarily due to the decrease in merchandise sales of approximately
$861,000 as a result of the elimination of the sale of music products in the
Company's stores. The remaining decrease was primarily due to the closing of one
of the Company's stores in March 1994, weather factors, increased industry
competition and fewer highly-rented titles released during 1995 when compared to
1994.
Costs of goods sold decreased approximately $771,000, but increased
approximately 4% as a percentage of merchandise sales during 1995 primarily due
to the sale of previously viewed rental films at less than carrying value to
provide additional cash flow for operations. Cost of movie rentals decreased
approximately $106,000, or 93%, during 1995 primarily due to the elimination of
a pay per transaction arrangement with a supplier of videocassette rental films.
Store payroll expenses decreased approximately $75,000 or 7%, primarily as
a result of closing one store in March of 1994 and to
52
<PAGE>
continuing efforts to reduce operating costs. Rents and other store operating
expenses remained relatively constant when compared to 1994.
Selling and administrative expenses increased approximately $84,000 or 11%
during 1995, primarily due to the write-off of certain obligations in
conjunction with discounted cash settlements during 1994.
Professional fee and consulting expenses decreased approximately $128,000
or 36% during 1995, primarily due to adjustments to accruals.
Merger and acquisition expenses increased approximately $1,535,000 during
1995, primarily due to professional, consulting, and employee expenses directly
related to the Company's discontinued acquisition program.
Loss on disposal of videocassette rental inventory increased approximately
$34,000 during 1995, primarily due to re-merchandising the Company's stores and
to the sale of rental inventory at less than carrying value to provide
additional cash flow for operations.
Videocassette and inventory reserves decreased approximately $158,000
during 1995, due to the elimination of reserves taken in 1994. These reserves
were established for music inventories that were to be sold off, based on a
decision to discontinue the sale of music product in the Company's stores.
Store opening, closing and lease termination provisions increased
approximately $7,000 or 25% during 1995 when compared to 1994, primarily due to
the opening of one and the closing of two stores during 1995.
Depreciation and amortization expenses decreased approximately $173,000 or
14% during 1995, primarily due to most of the stores' assets only requiring
one-half year of depreciation during 1995, as those assets reached full
depreciation during 1995.
Net interest expense decreased approximately $12,000 or 33% during 1995,
primarily due to interest income in connection with funds held in escrow from a
private offering of Preferred Stock. (See Note 8 of Notes to Financial
Statements).
Years Ended December 31, 1994 and 1993:
During 1994, the Company incurred a net loss of approximately $988,000
primarily due to selling and administrative expenses, operating expenses
associated with operating the Company's retail stores, costs associated with
contemplated mergers of the Company with other organizations, and to reserves
established against
53
<PAGE>
merchandise inventories in conjunction with the elimination of the sale of music
products in the Company's stores.
Revenues decreased by approximately $1,241,000 during 1994 when compared
to 1993.
The net decrease was primarily comprised of:
Decrease in same-store revenue ($ 295,121)
Increase in one store opened in 1994 334,651
Decreases from two stores closed in 1993 (984,392)
Decrease from one store closed in 1994 (295,695)
-----------
($1,240,557)
===========
Same store revenues for the 11 stores in operation during the comparative
periods decreased approximately 5% as a percentage of same-store revenue
primarily attributable to weather factors, increased industry competition and
the limited use of a pay-per-transaction arrangement which resulted in limited
availability of certain rental product.
Cost of goods sold as a percentage of merchandise sales increased
approximately 14% during 1994 when compared to the same periods in 1993,
primarily due to merchandise inventory reserves established for music
inventories during 1994 in anticipation of discontinuing the sale of music
product in the Company's stores and to the sale of music product during 1994 at
lower margins in order to obtain needed working capital. Cost of movie rentals
of $114,000 and $723,000 in 1994 and 1993, respectively, relate to the pay per
transaction arrangement with a supplier of videocassette rental films. The
decrease between the 1994 and 1993 periods was primarily due to fewer
videocassette rental films obtained during 1994 under the pay per transaction
arrangement. Videocassette rental films obtained through the pay-per-transaction
arrangement had an average revenue sharing period of two years.
Store payroll, store rents and other store operating expenses decreased
approximately $136,000 or 11%, $105,000 or 10%, and $143,000 or 24%,
respectively, when compared to 1993 primarily due to closing one store during
1994.
Selling and administrative expenses decreased by approximately $272,000 or
27% during 1994, when compared with 1993 primarily due to the Company's
continued efforts to reduce overhead costs.
Professional fee and consulting expenses increased approximately $201,000
or 81% during 1994 when compared to 1993 primarily due to costs associated with
anticipated mergers and acquisitions.
Store closing, lease termination and litigation provisions decreased
approximately $102,000 or 79% during 1994 when compared
54
<PAGE>
to 1993 primarily due to fewer store closings and lease cancellations during
1994.
Depreciation and amortization expenses decreased approximately $126,000 or
9% during 1994 primarily due to fewer videocassette rental films depreciated
during 1994 in conjunction with closing one store during 1994.
Interest expense decreased approximately $131,000 or 78% due primarily to
the conversion of a Senior Convertible Bond in June 1993.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
the Company's Common Stock and Preferred Stock, as of January 7, 1997, by: (i)
each person who is known by the Company to own beneficially more than five
percent of the combined number of votes attributable to all shares of Common and
Preferred Stock outstanding on that date, (ii) each director (Messrs. DeSaye,
Martignoni and Portner), (iii) the Chief Executive Officer (Ronald W.
Martignoni) and (iv) all executive officers and Directors as a group.
<TABLE>
<CAPTION>
No. of Votes Attributable to
No. of Shares of Common Stock No. of Shares of Preferred Common Stock and Preferred Stock
Name and Address Beneficially Owned, including Beneficially Owned, including Beneficially Owned,
of Beneficial Owner Percentage Owned(1) Percentage Owned(1) including Percentage(1)
- - - ------------------- --------------------------------- ----------------------------- -----------------------------------
<S> <C> <C> <C>
Attel & Cie, S.A. 2,601,112 (11.8%) -- 2,601,112 (11.1%)
Via Nassa 58
6901 Lugano, Switzerland
John Maioriello 1,826,000 (7.8%)(2) -- 1,826,000 (7.3%)
3416 The Strand
Manhattan Beach, CA 90266
John A. Boylan 1,442,000 (6.2%)(3) -- 1,442,000 (5.8%)
509 Kinsale Road
Timonium, MD 21093
Ronald W. Martignoni 1,425,000 (6.1%)(4) -- 1,425,000 (5.7%)
6 Chadwick Court
Voorhees, NJ 08043
Joseph DeSaye 26,000 * -- 26,000 *
800 Federal Boulevard
Carteret, NJ 07008
Fred E. Portner 190,000 *(5) -- 190,000 *
121 Montgomery Place
Alexandria, VA 22314
Shareholder Committee 4,334,700 (18.3%)(6) 37.4 (90.7%)(6)(8) 4,334,700 (18.3%)(6)(7)
All executive officers and 1,916,000 (8.0%)(9) -- 1,916,000 (7.6%)
as a Group (four persons)
</TABLE>
55
<PAGE>
- - - ----------
* Less than 1%.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment power
with respect to securities. Shares of Common Stock or Preferred Stock subject to
options or warrants currently exercisable or exercisable within 60 days are
deemed outstanding for purposes of computing the percentage ownership of the
person holding such option or warrant but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Except as
may be indicated otherwise, and subject to community property laws where
applicable, the persons named in the table above have sole voting and investment
power with respect to all shares of Common and Preferred Stock shown as
beneficially owned by them.
(2) Includes 1,500,000 shares of Common Stock issuable upon exercise of
fully-vested nonqualified stock options.
(3) Includes 1,000,000 shares of Common Stock issuable upon exercise of
fully-vested 1991 Management Options and 375,000 shares of Common Stock issuable
upon exercise of fully-vested 1994 Management Options.
(4) Includes 1,050,000 shares of Common Stock issuable upon exercise of
fully-vested 1991 Management Options and 375,000 shares of Common Stock issuable
upon exercise of fully-vested 1994 Management Options.
(5) Represents 100,000 shares of Common Stock issuable upon exercise of
fully-vested nonqualified stock options and 90,000 shares of Common Stock
issuable upon exercise of fully-vested 1994 Management Options.
(6) The Shareholder Committee may be deemed to constitute a group under
the rules of the Securities and Exchange Commission. The following table sets
forth the number of shares of the Company's Common and Preferred Stock owned
beneficially by the members of the Shareholder Committee, as well as the
56
<PAGE>
percentage of outstanding Preferred Stock owned by each, and together as a
group, on January 7, 1997:
Name Common Stock+ Preferred Stock++
Carl Shaifer
8515 Seminole Avenue
Philadelphia, PA 19118 1,128,500 14.1 (36.3%)
Joseph DeSaye
26,000 --
Max Scheuerer
47 Knollwood Drive
Livingston, NJ 07039 312,000 --
Maureen and Lawrence Feeney
160 Milton Street
Dorchester, MA 02124 200,000 --
William and Evelyn Goatley
5925 Oakland Valley Drive
Rochester, MI 48306 502,100 9.2 (24.0%)
P.L. Anderson, Jr.
115 Watson Street
Danville, VA 24543 674,500 1.8 (4.9%)
Harold E. Hamburg
4122 Shelbyville Road
Louisville, KY 40207 217,000 3.7 (9.7%)
David F. Beckman
35 Webster Avenue
Beverly, MA 01915 272,600 --
Mark and Barbara Raifman
862 Woodmere Place
Woodmere, NY 11598 759,000 6.1 (16.1%)
Frank Harvey
619 Hallie Drive
Houston, TX 77024 243,000 2.5 (6.5%)
--------- ----
Total 4,334,700 37.4 (90.7%)
========= ====
+ This column includes a total of 1,494,500 shares of Common Stock obtainable
upon conversion of 37.4 shares of Preferred Stock, including 3.8 shares of
Preferred Stock obtainable upon exercise of warrants.
++ This column includes 3.8 shares of Preferred Stock obtainable upon exercise
of warrants, as follows: Carl Shaifer, 1.4 shares; William and Evelyn Goatley,
0.9 shares; P.L. Anderson, Jr., 0.3 shares; Harold Hamburg, 0.4 shares; Mark and
Barbara Raifman, 0.6 shares; and Frank Harvey, 0.3 shares. In addition, on
October 30, 1996, Gail A. Ramey, 115 Watson Street, Danville, VA 24543, owned
beneficially 2.5 shares of Preferred Stock, which includes 0.3 shares obtainable
upon exercise of warrants, or 6.5% of the Preferred Stock outstanding on that
date. Ms. Ramey, together with the holders of Preferred Stock set forth in the
foregoing table, represent all persons known to the Company who own beneficially
more than five percent of the Preferred Stock on January 7, 1997.
(7) Includes 3.8 shares of Preferred Stock obtainable upon exercise of
warrants.
57
<PAGE>
(8) Includes 1,200,000 shares of Common Stock issuable upon exercise of
fully-vested 1991 Management Options, 100,000 shares of Common Stock issuable
upon exercise of fully-vested nonqualified options, and 540,000 shares of Common
Stock issuable upon exercise of fully-vested 1994 Management Options.
OTHER MATTERS
No other matters requiring a vote of the stockholders are expected to come
before the Special Meeting. However, if other matters should properly come
before the Special Meeting, it is the intention of the persons named in the
enclosed proxy to vote in accordance with their best judgment on such matters.
STOCKHOLDER PROPOSALS
Proposals by stockholders intended to be presented at the next Annual
Meeting of Stockholders of the Company must be received by the Company at its
executive offices at 836 W. Trenton Avenue, Morrisville, PA 19067, on or before
July 23, 1997, to be included in the Company's proxy statement and form of proxy
for the 1997 Annual Meeting.
By Order of the Board of Directors
February 11, 1997 Ronald W. Martignoni
Chief Executive Officer
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1995 and 1994.......................... F-3
Statements of Loss for the Years Ended December 31, 1995,
1994 and 1993...................................................... F-4
Statements of Stockholders Equity (Deficit) for the Years
Ended December 31, 1995, 1994 and 1993............................. F-5
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 .................................. F-6
Notes to Financial Statements............................................ F-8
Unaudited Balance Sheet as of September 30, 1996......................... F-26
Unaudited Statements of Loss for the Three-Month and Nine-
Month Periods ended September 30, 1996 and 1995.................... F-27
Unaudited Statements of Cash Flows for the Nine-Month
Periods ended September 30, 1996 and 1995.......................... F-28
Unaudited Notes to Financial Statements.................................. F-29
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Choices Entertainment Corporation:
We have audited the financial statements of Choices Entertainment Corporation as
listed in the accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Choices Entertainment
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Choices
Entertainment Corporation will continue as a going concern. As discussed in Note
3 to the financial statements, the Company has suffered recurring losses from
operations, is in default on certain obligations and has a net working capital
deficiency. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 25, 1996
F-2
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEETS
December 31,
1995 1994
ASSETS
Current assets:
Cash...................................... $ 86,391 $ 129,389
Accounts receivable....................... 11,098 1,439
Merchandise inventories................... 138,149 425,357
Prepaid expenses.......................... 28,236 24,112
---------- ----------
Total current assets.................... 263,874 580,297
Videocassette rental inventory,
net (Note 5)............................ 778,728 841,966
Equipment, net (Note 5)..................... 186,990 346,956
Intangible assets, net of amortization
of $96,826 in 1995 and $79,987
in 1994................................. 189,443 206,282
Other deferred costs (Note 7).............. 69,621 238,750
Other assets................................ 68,254 68,227
---------- ----------
$1,556,910 $2,282,478
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 6).................... $ 184,691 $ 480,362
Accounts payable.......................... 422,582 779,659
Accrued merger and acquisition expenses... 563,901 95,319
Accrued professional fees................. 186,243 769,109
Accrual for lease cancellation and
litigation reserves (Note 4)............ 13,750 103,486
Accrued salaries.......................... 52,603 58,670
Accrued expenses.......................... 147,007 98,920
---------- ----------
Total current liabilities............... 1,570,077 2,385,525
Notes payable (Notes 6 and 8)............... 680,000
Other liabilities .......................... 200,000
Other accrued expenses ..................... 138,750
---------- ----------
Total liabilities....................... 2,250,777 2,724,275
---------- ----------
Commitments and Contingencies (Notes 3,
4, 6 and 15)
Stockholders' deficit (Notes 8, 9, 10,
11 and 12):
Preferred stock, par value $.01 per
share: authorized 5,000 shares; 34
shares ssued and outstanding in 1995;
no shares issued or outstanding in 1994 ...
Common stock, par value $.01 per share:
authorized 50,000,000 shares; issued
and outstanding 22,004,395 shares in
1995; 18,654,934 shares in 1994 ........ 220,044 186,549
Additional paid-in capital................ 20,485,203 18,631,441
Accumulated deficit....................... (21,399,114) (19,259,787)
---------- ----------
Total stockholders' deficit................. ( 693,867) ( 441,797)
---------- ----------
$ 1,556,910 $ 2,282,478
========== ==========
See accompanying notes to financial statements.
F-3
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF LOSS
Year ended December 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Movie rentals................ $ 3,882,969 $ 4,154,693 $ 5,206,537
Merchandise sales............ 877,715 1,738,181 1,926,894
------------ ------------ ------------
4,760,684 5,892,874 7,133,431
------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold........... 864,226 1,634,983 1,545,696
Cost of movie rentals........ 8,476 114,265 723,541
Store payroll................ 1,054,643 1,129,516 1,265,588
Store rents.................. 944,260 925,903 1,030,449
Other store operating
expenses................... 452,235 451,520 595,819
Selling and administrative
expenses................... 819,169 734,954 1,006,525
Merger and acquisition
expenses................... 1,630,192 95,319
Professional and consulting
expenses................... 225,694 353,361 247,960
Loss on disposal of video-
cassette rental inventory.. 165,877 131,908 130,551
Store opening, closing, lease
termination and litigation
provisions (Note 4)........ 33,060 26,424 127,973
Depreciation and
amortization............... 1,073,116 1,246,237 1,372,030
------------ ------------ ------------
7,270,948 6,844,390 8,046,132
------------ ------------ ------------
Other income (expenses):
Gain on settlement of debt
(Note 3)................... 395,640
Gain on settlement of
litigation (Note 4)........ 393,593
Interest expense, net........ ( 24,703) ( 36,623) ( 167,215)
------------ ------------ ------------
370,937 ( 36,623) 226,378
------------ ------------ ------------
Net loss....................... $(2,139,327) $ ( 988,139) $( 686,323)
============ ============ ============
Net loss per share of common
stock (Note 12)................ $ (.10) $ (.05) $ (.04)
============ ============ ============
See accompanying notes to financial statements.
F-4
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Preferred Additional
Stock Common Stock Paid-In Accumulated
Shares Shares Amount Capital Deficit Total
--------- --------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 16,158,934 $ 161,589 $15,806,403 $(17,585,325) $(1,617,333)
Issuance of Common Stock in
conjunction with the
conversion of a senior
convertible bond and
accrued interest 1,400,000 14,000 2,401,273 2,415,273
Issuance of Common Stock to
satisfy debt obligations 920,000 9,200 213,300 222,500
Net Loss for the year ended
December 31, 1993 (686,323) (686,323)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1993 18,478,934 184,789 18,420,976 (18,271,648) 334,117
Issuance of Common Stock to
satisfy debt obligations 166,000 1,660 63,687 65,347
Issuance of Common Stock for
cash from employee exercise
of stock options 10,000 100 2,200 2,300
Reversal of costs associated
with previous warrant exercises 144,578 144,578
Net Loss for the year ended
December 31, 1994 (988,139) (988,139)
----------- --------- ------------ ------------- -----------
Balance at December 31, 1994 18,654,934 186,549 18,631,441 (19,259,787) (441,797)
Issuance of Common Stock for
cash from exercise of stock
options and warrants 2,186,000 21,860 883,895 905,755
Issuance of Common Stock for
cash to two private foreign
investors, net of related costs 900,000 9,000 387,000 396,000
Issuance of Common Stock to
satisfy debt obligations 113,461 1,135 146,417 147,552
Issuance of Common Stock in
conjunction with consulting
services 150,000 1,500 137,250 138,750
Issuance of Preferred Stock to
private investors, net of
related costs (Note 8) 34 299,200 299,200
Net Loss for the year ended
December 31, 1995 ( 2,139,327) (2,139,327)
-- ---------- -------- ----------- ------------- ------------
Balance at December 31, 1995 34 22,004,395 $220,044 $20,485,203 $(21,399,114) $ (693,867)
== ========== ======== =========== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(2,139,327) $ (988,139) $ (686,323)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 1,073,116 1,246,237 1,372,030
(Gain) loss on disposal of equipment......... (7,384)
Gain on settlement of litigation............. (393,593)
Gain on settlement of debt................... (395,640)
Loss on disposal of videocassette rental
inventory................................ 165,877 131,908 130,551
Videocassette and inventory reserves......... 45,169 203,378 26,379
Cost of rental film sales.................... 335,230 243,961 234,459
Write-off of deferred costs, net............. (49,271)
Change in assets and liabilities:
(Increase) decrease in accounts
receivable............................... (9,659) 14,786 26,149
(Increase) decrease in merchandise
inventories.............................. 287,208 73,112 (35,831)
(Increase) decrease in prepaid expenses.... (4,124) 9,708 59,925
(Increase) decrease in other assets........ (27) 23,286 23,215
Increase in accounts payable............... 25,999 11,544 471
Increase in accrued merger and acquisition
expenses................................. 468,582
Increase (decrease) in accrued professional
fees..................................... (582,866) 265,399 (30,189)
Increase (decrease) in accrued salaries.... (6,067) (25,338) 21,993
Increase (decrease) in other accrued expenses 60,696 (11,984) 209,926
(Decrease) in accrual for lease cancellation
and other litigation reserves............ (13,750) (253,770) (31,933)
----------- ----------- -----------
Total adjustments.............................. 1,400,473 1,932,227 1,606,168
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................... (738,899) 944,088 919,845
----------- ----------- -----------
Cash flows from investing activities:
(Increase) decrease in deferred acquisition
costs.................................... 100,000 (100,000)
Proceeds from gain on settlement of
litigation.............................. 393,593
Purchases of videocassette rental inventory,
net...................................... (1,349,871) (1,240,594) (1,148,125)
Purchases of equipment...................... (105,457)
Proceeds from sale of fixed assets.......... 172,976
----------- ----------- -----------
Net cash used in investing activities.......... (1,355,328) (1,340,594) (581,556)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable................. 710,000 180,000
Proceeds from private offering of common stock 396,000
Proceeds from issuance of preferred stock, net 217,600
Proceeds from other liabilities............. 200,000
Repayment of notes payable.................. (178,171) (41,530) (335,923)
Proceeds from issuance of common stock net.. 905,755 2,300
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................... 2,051,229 340,770 (335,923)
----------- ----------- -----------
Net increase (decrease) in cash................ (42,998) (55,736) 2,366
Cash at beginning of the year.................. 129,389 185,125 182,759
----------- ----------- -----------
Cash at end of the year........................ $ 86,391 $ 129,389 $ 185,125
========== ========== ==========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest...... $ 1,316 $ -0- $ 14,799
========== ========== ==========
</TABLE>
F-6
<PAGE>
Statements of Cash Flows (Continued)
During 1995, the Company converted approximately $148,000 of notes payable
into 113,461 shares of the Company's common stock. Additionally, during 1995 the
Company negotiated discounted cash settlements to certain vendors which
eliminated approximately $859,000 of accounts payable for cash of $463,000 and
resulted in a net gain to the Company of approximately $396,000.
During 1994, the Company converted approximately $180,000 of accounts
payable into a note payable and approximately $65,000 of accounts payable into
166,000 shares of the Company's common stock, and approximately $144,000 of
previously accrued warrant exercise costs were reversed.
During 1993, the Company converted approximately $160,000 of accounts
payable into a note payable, converted a $2,000,000 convertible bond and
approximately $396,000 of related accrued interest into 1,400,000 shares of
Common Stock and converted approximately $223,000 of notes payable and other
accrued expenses into 920,000 shares of the Company's Common Stock.
See accompanying notes to financial statements.
F-7
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(1) Incorporation and Other Matters
The Company was incorporated under the laws of the State of Maryland on
July 11, 1985, as "PPV Enterprises, Inc." On August 18, 1987, the Company
changed its name to "DataVend, Inc." and reincorporated under the laws of the
State of Delaware.
On March 14, 1990, the Company changed its name to Choices Entertainment
Corporation.
(2) Summary of Significant Accounting Policies
Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Merchandise Inventories: Merchandise inventories are stated at the lower
of cost or market. Cost is determined by the average cost method, which
approximates the first-in first-out method.
Videocassette Rental Inventory: Videocassettes are recorded at cost and
amortized over their estimated economic life to a $4 residual value.
Videocassettes are amortized over two years on an accelerated basis.
Equipment: Equipment is stated at cost. Depreciation of equipment is
provided under the straight-line method over the estimated useful lives of the
respective assets.
Intangible Assets: Intangible assets, consisting solely of goodwill, have
a net book value of approximately $189,000. Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is amortized on
a straight-line basis over the expected periods to be benefited, approximately
17 years. The Company assesses the recoverability of this intangible asset by
determining whether the goodwill can be recovered through undiscounted future
operating cash flows.
Income Taxes: Effective January 1, 1993, the Company adopted Statement
109. The change in the method of accounting for income taxes had no effect on
the 1993, 1994 and 1995 Financial Statements.
Reclassification: Reclassification of the 1994 financial statements has
been made to conform with the presentation of the 1995 financial statements.
F-8
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(3) Liquidity
The financial statements have been presented on the basis that the Company
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses in each year of its existence, aggregating $21,399,114 from
inception through December 31, 1995, including a net loss of $2,139,327 from the
year ended December 31, 1995.
The Company is currently operating in a severely distressed financial
condition. As of December 31, 1995, the Company had a net working capital
deficiency of approximately $1,306,000. The Company is currently funding its
business on a day-to-day basis from revenues generated from its ten store
operations. However, as the revenues from the Company's existing ten stores are
insufficient, the Company is operating on a negative cash flow basis and is in
immediate need of financing to fund its short-term working capital needs. The
Company's capital needs in 1995 which included certain of the costs associated
with its previously reported but now discontinued acquisition program were met
by a combination of revenues generated from its ten-store operations, net
proceeds of approximately $396,000 received in January 1995 derived from a
private offering of Common Stock, net proceeds of approximately $898,000
received in August 1995 derived from a private offering of Preferred Stock,
notes and warrants to purchase Preferred Stock (see Note 8 to the Financial
Statements), net proceeds of approximately $906,000 from the exercise of
previously existing stock options, and proceeds of $30,000 from the issuance of
a promissory note. Substantially, all of the net proceeds derived from the
above-described Preferred Stock Offering were used to fund the Company's
previously reported acquisition program.
The Company, however, is presently in default on three 10% promissory
notes totalling $150,000 plus accrued interest. The principal amounts owing by
the Company on said promissory notes were reduced to $150,000 from $180,000 as a
result of a $30,000 payment made by the Company in November 1995, to the holder
of two of such notes in the then total principal amount of $150,000. This
payment was made following the filing of a lawsuit by the holder of said two
notes seeking a judgment in the principal amount of $150,000 plus accrued
interest of $15,548. The lawsuit was withdrawn following said $30,000 payment
without prejudice to its being reinstated if the balance owing on said notes was
not paid in full prior to March 15, 1996. No additional amounts have been paid
by the Company to the holder, who has continued to demand payment. The Company
is presently unable to satisfy the balance owing and there is no assurance that
the Company will be able to satisfy a judgment in such amount if the lawsuit is
reinstated and a judgment is entered against the Company. The entry and
enforcement of such a judgment against the Company's assets would materially and
adversely affect the Company's business.
F-9
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(3) Liquidity (Continued)
The Company is also delinquent and presently unable to satisfy various
other liabilities, including amounts owing to vendors and landlords, as well as
substantial professional fees owing in connection with its previously reported
acquisition program.
In addition, the Company has been threatened with litigation in connection
with certain prior purchases of the Company's Common Stock. The Company does not
believe that there is any merit to the claim, which is in excess of $325,000,
exclusive of attorneys' fees. However, if legal proceedings were instituted and
the Company was unsuccessful in defending such a lawsuit, the Company would not
presently be able to satisfy an award of damages in the amount claimed, which
judgment would, if enforced, materially and adversely affect the Company's
business. Furthermore, even if the Company was successful in defending such a
lawsuit, the cost alone in professional fees to defend such a lawsuit could
materially and adversely affect the Company's business.
The Company has negotiated equity and discounted cash settlements during
the year with several creditors which eliminated approximately $1,006,000 of
debt for approximately $463,000 and 113,000 shares of the Company's common
stock, thereby resulting in a net gain of approximately $396,000 to the Company.
However, the Company's viability for the foreseeable future is and will continue
to be dependent upon its ability to secure needed capital, or extend the due
dates of liabilities, or to otherwise conclude or settle existing liabilities
and claims on a satisfactory basis. No assurance can be given that the Company
will be successful in that regard. In the event the Company is not successful,
the Company may be forced to seek protection under Chapter XI of the Federal
Bankruptcy Laws. In such an event, the Company's ability to conduct its business
could be severely hampered. Moreover, the value of the Company's equity would
likely be greatly diminished, if not eliminated.
As previously reported, during September 1995, the merger agreements
between the Company and JD Store Equipment, Inc., VA Entertainment Corp., d/b/a
Video Junction, and Palmer Corporation were terminated. In addition, all
previously announced letters of intent with its acquisition candidates have
expired, and those executive officers who joined the Company in connection with
its previously-reported acquisition program have subsequently resigned. Although
the Company is no longer pursuing an acquisition program, management believes
that the Company will need to acquire or establish additional superstores in the
future if the Company is to achieve the economies of scale necessary for it to
become profitable. In that regard and because of its severely distressed
financial condition, the Company is exploring a possible merger with one or more
companies. However, there is no assurance the Company's efforts will be
successful in that connection.
F-10
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(3) Liquidity (Continued)
In the event the Company is not successful in pursuing a potential merger,
it is likely that it will continue to operate through the ten stores currently
owned which have historically provided insufficient revenues to enable the
Company to operate profitably. The Company may also explore the possibility of
selling its video stores although no assurance can be given that it would be
successful in that regard.
(4) Store Closing, Lease Termination and Litigation Provisions
During 1990, in connection with the Company's plans for expansion, the
Company entered into eight leases for future superstore sites. As a result of
its working capital shortages, the Company decided not to open seven of these
stores and commenced negotiations with each of the landlords for these locations
to reach agreement on extended payment terms or to arrive at settlements for
lease cancellation agreements. Additionally, the Company closed a total of eight
of its superstores, two during 1991, two during 1992, one in 1993, one in 1994
and two in 1995, and sold one store in 1993. The store that was closed in 1993
was relocated and re-opened in 1994. The inventory and fixtures from the two
stores closed in 1995 were used to relocate and open one new store in December
1995. In connection with its lease negotiations and planned store closings, the
Company has expensed approximately $2,600, $26,000 and $128,000 in expected
costs during 1995, 1994 and 1993, respectively, which reflects management's
estimate of expected losses, relating to lease settlements and payment costs for
non-operating superstores.
Settlements have been reached with all of the lessors for proposed
superstores which the Company was not able to open due to its working capital
shortages, and with certain other creditors. Such settlements generally involved
the payment by the Company of a lump sum and the issuance of Common Stock, in
exchange for a termination of the lease and a release of the Company from any
liability thereunder. At December 31, 1995, the Company had accrued
approximately $13,750 in connection with a judgment obtained by a creditor that
has not yet been satisfied.
Pursuant to its previous plans to expand, the Company had entered into an
agreement in July, 1991 to purchase a privately-held chain of seventeen existing
video stores operating in Florida, Alabama and Tennessee under the name "Cobb
Prime Time Video, Inc. ("Cobb")." The purchase price was to be $5,000,000 in
cash and a $2,250,000 convertible debenture. The Company made deposits of
$450,000 against the purchase price. However, in November, 1991, the Company
learned that the operating results of Cobb had severely declined relative to
Cobb's projections during the third quarter of 1991 and compared to prior year
results. The Company thereupon wrote Cobb seeking
F-11
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(4) Store Closing, Lease Termination and Litigation Provisions (Continued)
clarification of these operating results and also terminated the agreement to
purchase Cobb (the "Purchase Agreement") on the existing terms on the basis that
Cobb had breached covenants contained in the acquisition agreement, in
particular, a warranty that there would not be a material adverse change in the
business of Cobb between the date the Purchase Agreement was signed and the date
the acquisition was consummated. Cobb refused to return the deposit of $450,000,
and instituted suit against the Company in Federal District Court in Alabama for
breach of contract. The Company counter-sued for the return of the $450,000
deposit and other costs previously incurred by the Company under the Purchase
Agreement and a determination that no monies were owed by it to Cobb. The trial
was completed on November 18, 1992. However, pending the issuance of a final
judgment on March 30, 1993, Cobb and the Company entered into a final settlement
of the judgement and related matters on terms favorable to the Company,
resulting in a net gain of $393,593 during 1993.
(5) Equipment and Videocassette Rental Inventory
December 31,
-------------------------- Estimated
1995 1994 useful lives
---------- ---------- ------------
Equipment $ 366,313 $ 340,764 5 years
Furniture and fixtures 380,986 444,180 5 years
Leasehold improvements 1,013,471 1,143,830 Life of Lease
Computers and peripherals 428,345 416,574 5 years
---------- ----------
2,189,115 2,345,348
Less: accumulated deprecia-
tion and amortization (2,002,125) (1,998,392)
---------- ----------
$ 186,990 $ 346,956
========== ==========
Videocassette rental
inventory $2,936,280 $2,999,792 2 years
Less: accumulated
depreciation (2,157,552) (2,157,826)
---------- ----------
$ 778,728 $ 841,966
========== ==========
F-12
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(6) Notes Payable, Capital Lease Obligations, and Other Liabilities
The following table sets forth the Company's Notes Payable and Capital
Lease Obligations:
December 31,
------------------------------
1995 1994
---------- ----------
5% Unsecured Promissory Notes
due September 1997 (see Note 8) $ 680,000
Capital lease obligation payable
monthly through August 1, 1995
(interest rate 14.5%) 4,691 $ 6,891
10% Promissory Note Payable to
vendor due May 1999 293,471
(See Note 9)
10% Promissory Note Payable to
investor in 8 equal monthly
installments due April 1995,
extended to March 15, 1996 20,000 50,000
10% Promissory Note Payable to
investor in 8 equal monthly
installments due August 1, 1995,
extended to March 15, 1996 100,000 100,000
10% Promissory Note Payable to
investor in 8 equal monthly
installments due May 1995 30,000 30,000
10% Promissory Note Payable to
investor due October 1, 1996 30,000
---------- ----------
864,691 480,362
Less portion of notes payable due
within one year (184,691) (480,362)
---------- ----------
Notes payable due after one year $ 680,000 $ -0-
========== ==========
F-13
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(7) Other Deferred Costs
In December 1994, the Company entered into a letter of intent to purchase a
chain of 12 video stores. In conjunction with signing the letter of intent and
as a representation of its good faith and in consideration of a no shopping
agreement, the Company paid the chain a $100,000 non-refundable deposit. In
connection with the termination of the letter of intent, the Company recorded
the non-refundable deposit as an expense in 1995.
In December 1994, the Company entered into a consulting agreement with a
firm that was to provide consulting services to the Company. In conjunction with
the agreement, the Company issued 150,000 shares of its common stock to the firm
in March 1995. The deferred costs of approximately $139,000, the estimated fair
value of the restricted stock awarded to the consulting firm, was expensed
during 1995 in connection with the termination of the Company's acquisition
program.
As of December 31, 1995 deferred costs consist of certain debt placement
fees net of amortization of $11,979 (See Note 8).
(8) Preferred Stock and Private Placement Transaction
The Company is authorized to issue 5,000 shares of preferred stock, par
value $.01 per share. The Board of Directors of the Company has the authority,
without further action by stockholders, to issue the preferred stock in one or
more series, and to fix, for any series the dividend rate, redemption price,
liquidation or dissolution preferences, conversion rights, voting rights and
other preferences and privileges.
The Company, in connection with a private offering of units of preferred
stock, promissory notes and warrants to purchase preferred stock, which
terminated in September 1995, issued a total of: (i) 34 shares of the Company's
Series C Convertible Preferred Stock ("Preferred Stock"), convertible (subject
to shareholder approval as provided below) into 1,360,000 shares of common
stock, (ii) 5% unsecured promissory notes in the aggregate principal amount of
$680,000 due in September 1997, with interest payable annually in cash or, at
the election of the Company, in shares of Preferred Stock (valued at $.25 per
share), and with principal and any accrued but unpaid interest convertible into
Preferred Stock (valued at $.25 per share) as the sole option of the holder in
the event the Company defaults in the payment of principal or is otherwise in
default, and (iii) three-year warrants to purchase 10.2 shares of Preferred
Stock at an exercise price of $10,000 per share, convertible (subject to
shareholder approval as provided below) into a total of 408,000 shares of common
stock.
F-14
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(8) Preferred Stock and Private Placement Transaction (Continued)
Additionally, the Company paid a placement fee consisting of $122,400 and
five-year warrants to purchase 5.1 shares of Preferred Stock at an exercise
price of $10,000 per share and a finder's fee consisting of five-year warrants
to purchase 8.5 shares of Preferred Stock at an exercise price of $37,500 per
share, all of which Preferred Stock being convertible (subject to shareholder
approval as provided below) into an aggregate of 544,000 shares of common stock.
A portion of these issuance costs was capitalized as a debt placement fee and is
being amortized over the term of the related debt.
Each share of Preferred Stock will become convertible, at the option of the
holder thereof, into 40,000 shares of the Company's common stock, subject to
adjustment, only after receipt of approval by the Company's stockholders of an
amendment to the Company's Certificate of Incorporation increasing the number of
authorized shares of the Company's common stock (as provided by the terms of the
Preferred Stock); however, as the conversion of the Preferred Stock is
contingent upon stockholder approval of the increase in authorized common stock,
no assurances can be given that the Preferred Stock will become convertible.
Holders of the Preferred Stock will be entitled to vote on this and any other
matter submitted to a vote of the Company's stockholders, with each share of
Preferred Stock entitled to 40,000 votes. Holders of Preferred Stock have no
liquidation or other preferences upon the liquidation, dissolution, or winding
up of the Company, and are entitled to certain piggyback and demand registration
rights for the shares of common stock into which the Preferred Stock may be
converted.
(9) Common Stock
During June and July 1988, the Company sold 828,000 units of its securities
at a price of $5.00 per unit (each unit consisted of three shares of common
stock and three Class A redeemable common stock purchase warrants) pursuant to a
public offering and an over-allotment option exercised by the underwriter. The
redeemable Class A Warrants were immediately exercisable and separately
transferable from the common stock. The redeemable Class A Warrants entitled
holders to purchase 1.2 shares of common stock and one redeemable Class B common
stock purchase warrant for $2.25. Each redeemable Class B Warrant entitled
holders to purchase 1.2 shares of common stock for $3.25. In addition, for every
two Class B Warrants exercised during the period from February 12, 1990 through
April 30, 1991, the holder thereof was entitled to receive one Class C Warrant
without payment of additional consideration therefor. Each Class C Warrant
entitled the holder thereof to purchase one share of common stock at an exercise
price of $1.875 per share at any time through August 31, 1991. The Class B
Warrants were exercisable for five years from June 8, 1988, the effective date
of the registration statement covering the public
F-15
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(9) Common Stock (Continued)
offering and were redeemable for $.05 per warrant under certain conditions.
Effective February 28, 1991, the Company reduced the exercise price of its Class
B Warrants from $3.25 per Class B Warrant to $.75 per Class B Warrant. On
December 4, 1992, the Company further reduced the exercise price of its Class B
Warrants to $.625 per Class B Warrant or $.50 per share.
Through December 31, 1992, 2,481,350 Class A Warrants (99% of the issued
amount), 1,999,350 Class B Warrants (80.5% of the issued amount), and 787,825
Class C Warrants (78.8%) were exercised resulting in the issuance of 2,977,620,
2,399,220 and 787,825 shares of common stock, respectively. Of the remaining
2,650 Class A Warrants outstanding, 1,600 Class A Warrants were redeemed by the
Company at $.05 per warrant. The remaining 1,050 Class A Warrants and 482,000
Class B Warrants expired in accordance with their terms on June 8, 1993. The
remaining 211,850 outstanding Class C Warrants expired in accordance with their
terms on August 31, 1991.
On February 22, 1992, in conjunction with the terms of a convertible
promissory note, the Company issued 100,000 shares of its Common Stock to the
holder of the convertible promissory note. On February 27, 1992, the Company
issued to a landlord 200,000 shares of its common stock as part of a lease
cancellation agreement.
Between March 1, 1992 and December 31, 1993, the Company issued, through a
private placement, 1,208,369 shares of its Common Stock to various creditors in
exchange for the forgiveness of approximately $733,000 of debt and lease
obligations.
On September 30, 1992, the Company issued 1,000,000 shares of its Common
Stock to a consultant as part of an agreement entered into between the
consultant and the Company dated August 25, 1992 (the "Advisory Agreement"), and
further agreed to pay the consultants' reasonable out-of-pocket expenses
incurred by it in the performance of its duties under the Advisory Agreement,
which included the negotiation of the proposed acquisition of a privately-held
transportation concern. The Advisory Agreement also required the Company to
register the 1,000,000 shares of Company Common Stock delivered thereunder so as
to permit their immediate resale by the consultant, which registration was
completed on October 14, 1992.
On June 2, 1993, the Company issued 1,400,000 shares of its Common Stock to
a group of private investors in conjunction with the conversion of a $2,000,000
convertible bond.
On July 30, 1993, the Company issued 920,000 shares of its Common Stock to
a landlord in connection with the dismissal of an action which the landlord had
filed in 1991 against the Company.
F-16
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(9) Common Stock (Continued)
In March 1994, the Company reversed approximately $144,000 of accrued costs
relating to prior years B Warrant exercises upon determining that it no longer
had an obligation to pay such costs. Such costs representing underwriting
commissions, were initially recorded as a charge to additional paid in capital.
In September 1994, the Company issued 5,000 shares of its common stock to
an employee upon exercise of a stock option at $.23 per share.
During December 1994, a related party accepted 166,000 shares of the
Company's common stock in full settlement of approximately $65,000 of debt.
In January 1995, the Company completed a private placement of stock for
900,000 shares of the Company's common stock to two private foreign investors.
Additionally, during 1995, the Company issued 113,461 shares of common stock to
a vendor in settlement of a debt, and 150,000 shares of common stock to a firm
in connection with a consulting agreement. Additionally, former employees of the
Company exercised stock options to purchase 1,990,000 shares, a warrant holder
exercised its option to purchase 150,000 shares, and certain employees of the
Company exercised stock options to purchase 46,000 shares of common stock.
(10) Non-Employee Stock Options and Warrants
Options
The following table sets forth certain information regarding non-employee
and non-management stock options granted by the Company, which were outstanding
at December 31, 1995:
<TABLE>
<CAPTION>
Shares of Common
Number of Stock Subject Exercise Price Registration
Date of Grant Holders to Option Per Share Expiration Date Rights
------------- --------- ---------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
December 13, 1988 2 12,500 $1.88 October 18,1999 None
November 14,1989 2 65,000 $1.38 November 14, 1999 None
December 14,1989 1 25,000 $2.00 December 14, 1999 None
January 11, 1990 2 16,875 $2.00 January 10, 1999 None
June 1, 1990 1 291,667 $1.25 June 1, 1999 None
January 31, 1991 2 510,000 $0.43 January 31, 2001 Registered
April 8, 1991 2 45,000 $0.59 April 8, 1996 None
May 23, 1991 1 30,000 $0.85 May 23, 1996 None
July 30, 1991 1 25,000 $0.69 July 30, 1996 Piggyback
August 22, 1991 1 100,000 $0.63 August 21, 1996 Piggyback
November 3, 1994 2 400,000 $0.69 November 3, 1999 Piggyback
December 1, 1994 1 1,000,000 $0.91 December 1, 1999 Piggyback
---------
TOTAL: 2,521,042
=========
</TABLE>
F-17
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(10) Non-Employee Stock Options and Warrants
Bridge Note Warrants
The Company has outstanding Bridge Note Warrants to purchase an aggregate
of 180,000 shares of Common Stock at an exercise price of $.75 per share due to
expire on July 7, 1996, which were issued in connection with certain Bridge
Financings which occurred between August 1989 and July 1991. No value was
assigned to the warrants.
Placement Agent Warrants
In connection with a 1989 private placement, the Company issued to the
placement agent warrants to purchase an aggregate of 300,000 shares of Common
Stock initially exercisable for a five-year period commencing August 1989, which
expiration date has been extended through various dates, from August 1996 to
October 1996, at an original exercise price of $0.75 per share. The Placement
Agent's Warrants contain anti-dilution rights, and at December 31, 1995, these
warrants, as adjusted, may purchase approximately 1,031,000 shares at an
exercise price of $0.22 per share.
In October 1989, the Company also granted to the Placement Agent for
services rendered in connection with the restructuring of the Company's
business, five-year warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.50 per share, which expiration date has been extended
through August 1996.
(11) Employee and Management Stock Options
Stock Option and Appreciation Rights Plan
The Company has reserved an aggregate of 1,694,000 shares of its Common
Stock for purchase under its 1987 Stock Option and Appreciation Rights Plan (the
"Plan"). Pursuant to the Plan, the Company may grant either incentive stock
options, intended to comply with the requirements of Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock
options, as well as stock appreciation rights.
All matters relating to the Plan are administered by a committee selected
by the Company's Board of Directors, including selection of participants,
allotment of shares, determination of price and other conditions of purchase.
The exercise price of incentive stock options granted under the Plan may not be
less than the fair market value of the Common Stock on the date of grant and the
term of the option may not exceed ten years from the date of grant. In the case
of incentive options granted to individuals who own more than 10% of the
outstanding Common Stock of the Company, the exercise price may not be less than
110% of the fair market value of the Common Stock on the date of grant and the
term of the option may not exceed five years
F-18
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(11) Employee and Management Stock Options (Continued)
Stock Option and Appreciation Rights Plan (Continued)
from the date of grant. All options and stock appreciation rights granted under
the Plan are non-transferable other than by will or by the laws of descent and
distribution.
The following table sets forth information with respect to incentive stock
options under the Plan for the three years ended December 31, 1995:
Number of
Shares Under Price
Option(1) Per Share
------------ -------------
Outstanding at January 1, 1993 527,000 $.59 - $.75
(364,665 shares under exercisable
options)
Cancelled (182,000) .59 - .75
--------
Outstanding at December 31, 1993 345,000 .59 - .75
(279,000 shares under exercisable
options)
Cancelled (44,000) .23
Exercised (10,000) .23
--------
Outstanding at December 31, 1994 291,000 .23
(291,000 shares under exercisable options)
Granted 657,000 .19
Cancelled (338,500) .23
Exercised (46,000) .23
--------
Outstanding at December 31, 1995 563,500 .19 - .23
========
(119,000 shares under exercisable options)
- - - ----------
(1) Gives effect to the expiration of options due to termination of employment
All incentive options issued are exercisable in installments of one-third
of the total award on each of the first three anniversary dates and ending ten
years from the initial date of grant. All grants of options are conditioned on
the continued employment of the optionee. No stock appreciation rights have been
granted.
F-19
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(11) Employee and Management Stock Options (Continued)
Non-Qualified Management Incentive Stock Options
In connection with the employment agreements entered into by the Company's
executive officers in May 1989, the Company granted Long-Term Management
Incentive Options to four executive officers to purchase up to 4,275,000 shares
of Common Stock, all at an exercise price of $1.25 per share, which was the bid
price for the Common Stock on the date of grant as reported by NASDAQ. The
Long-Term Management Incentive Options expire on June 1, 1999. Options to
purchase 708,333 shares were forfeited upon the resignation of one of the
officers in June of 1990. In August of 1990, the Company awarded additional
Long-Term Management Incentive Options to the three officers originally
receiving the options and one other officer in an amount equal to 558,333 shares
of the forfeited options, all at an exercise price of $2.97 per share. In
December of 1991, all of the August 1990 Long-Term Management Incentive Options
and 2,616,666 of the 1989 Long-Term Management Incentive Options held by Company
officers were surrendered and cancelled. Accordingly, one officer holds
currently vested and exercisable options covering 291,667 shares and one officer
holds a vested and exercisable option covering a total of 366,667 shares.
On January 31, 1991, the Board of Directors approved the grant of 4,750,000
1991 Management Options to four executive officers of the Company. One officer
has subsequently retired and a second officer has left the Company. One officer
exercised his options in full and the other officer exercised 540,000 options
leaving 510,000 options outstanding. All of the 1991 Management Options were
issued at an exercise price of $.4325 per share, which represented the bid price
for the Company's Common Stock on the date of the grant of such options. The
1991 Management Options vested fully as of August 2, 1991, and expire on January
31, 2001.
Non-qualified stock options have been issued to a director of the Company.
These options allow the purchase of up to 60,000 shares of Common Stock at an
average price of $0.5625 per share, exercisable in full until August 14, 1996.
On February 9, 1994, the Board of Directors approved the grant of 915,000
1994 Management Options to three officers and one director of the Company at an
exercise price of $.23 per share, which represented the bid price for the
Company's Common Stock on the date of the grant of such options. The 1994
Management Options vested fully as of April 7, 1994, and expire on January 31,
2001.
Holders of the Long-Term Management Incentive Options, 1991 Management
Options and the 1994 Management Options are afforded certain anti-dilution and
piggy-back registration rights under the 1933 Act with respect to the shares of
Common Stock issuable upon exercise of said options.
F-20
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(11) Non-Qualified Management Incentive Stock Options (Continued)
Registration statements under the 1933 Act have been filed by the Company
with respect to the 8,425,001 shares underlying the 1987 Stock Option and
Appreciation Rights Plan (the "1987 SOP"), the outstanding Long-Term Management
Incentive Options, the 1991 Management Options, and the 1994 Management Options,
and an option held by a director. Of these options, 2,397,667 have either been
cancelled, exercised or have expired, and 1,130,500 options remain unissued, and
444,500 have yet to vest under the 1987 SOP. Generally, such registration
permits the immediate sale of the 4,452,334 vested shares upon exercise, subject
to the volume limitations imposed by Rule 144.
Holders of these options are afforded certain anti-dilution and piggy-back
registration rights under the 1933 Act with respect to the shares of common
stock issuable upon exercise of said options.
In December 1994, the Board of Directors approved the grant of 1,500,000
options and two 1,000,000 options, to one director and two executive officers in
connection with their appointments on November 29, 1994 and November 30, 1994,
respectively. The options to the director were issued at an exercise price of
$.75 per share and the options to the two executive officers were issued at an
exercise price of $.84375 per share. The exercise price in each case represents
the market price of the Company's stock as of the effective date of the grant.
The foregoing two 1,000,000 options expired by their terms upon the resignation
of both executive officers. Additionally, 2,000,000 options that were granted to
two officers of the Company in 1995 expired by their terms upon the resignation
of the two officers during September 1995. On September 27, 1995, the Company
granted a five-year non-qualified stock option to purchase 100,000 shares of the
Company's common stock to a director of the Company at an exercise price of $.19
per share, the average fair market value on that date.
(12) Net Loss Per Share of Common Stock
Net loss per share of Common Stock for each period is based on the net loss
divided by the weighted average number of common shares outstanding during the
period. No effect was given to Common Stock equivalents or the conversion of
preferred shares as the effect would be anti-dilutive.
The approximate number of shares used in the computation of loss per share
amounts are as follows:
Number of shares used
Year ended December 31, in calculation
----------------------- ---------------------
1995 21,652,000
1994 18,491,000
1993 17,360,000
F-21
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(13) Income Taxes
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 consist primarily of
net operating loss carry-forwards as well as differences related to fixed asset
depreciation, videocassette amortization, and certain accruals for book and tax
purposes. The Company is in a net deferred tax asset position at December 31,
1995 (before consideration of a valuation allowance) due to the significant net
operating loss carry-forwards described below. However, due to the uncertainty
of the Company realizing this carry-forward benefit through future taxable
income, the net deferred tax asset is fully reserved and no benefit has been
recognized in the statements of loss.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carry-forwards is limited following a greater than fifty percent
change in ownership. As a result of various capital transactions, the Company
appears to have experienced such an ownership change. Accordingly, its
utilization of loss carry-forwards incurred may be subject to an annual
limitation generally determined by multiplying the market value of the Company
on the date of the ownership change by the federal long-term tax-exempt rate.
As of December 31, 1995, the Company had approximately $16,324,000 of net
operating loss carry-forwards for tax purposes which may be available to offset
future federal taxable income, if any, through 2009. The amount ultimately
available, if any in future years, is dependent on the limitation discussed
above. Should the Company operate profitably in 1996 or future years, it may be
subject to current tax expense in certain states for which no net operating loss
carry-forwards are available.
(14) Commitments
The Company leases certain retail store facilities under non-cancelable
long-term operating leases which expire periodically through 2000. The Company's
commitments under these leases (excluding increases to base maintenance and
repairs, insurance and real estate taxes, which also are payable by the Company)
are as follows:
Year Ending Total Annual
December 31, Rentals
----------- ------------
1996 898,658
1997 880,617
1998 899,189
1999-2001 1,316,512
----------
$3,994,976
==========
Rent expense for 1995, 1994 and 1993 was $980,510, $962,824 and $1,088,926,
respectively.
F-22
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(14) Commitments (Continued)
In April 1992, the Company entered into severance agreements with three
officers, which provide, under certain circumstances, that the Company will pay
these individuals upon their severance an amount equal to one full year's base
salary in the event that their affiliation with the Company ceases within either
one or two years (depending upon the circumstances) following a "change in
control" of the Corporation, as that term is defined in the Company's Stock
Option and Appreciation Rights Plan of 1987, as amended. In November 1993, the
Board of Directors adopted amendments to the severance agreements for two of
these officers, who are also directors of the Company, after considering a
possible conflict of interest should they be required to vote on a business
merger or combination that may result in their removal as officers and directors
of the Company. The amendments principally increase the amount to be paid on
severance from one full year's base salary to two full year's base salary.
As previously reported, during September 1995, the merger agreement between
the Company and JD Store Equipment, Inc. was terminated. However, in connection
with the Letter of Intent entered into with regard to said proposed merger, the
Company and JD also reached an agreement in the event the merger was not
consummated, for the payment of finder's fees with respect to any completed
merger or acquisition which the Company's then Chairman was responsible for
having introduced to the Company from the date of the Letter of Intent (November
4, 1994) until such time as it was publicly announced that the JD Merger was not
consummated (September 11, 1995). Such finder's fees are to consist of warrants
for the purchase of shares of the Company's Common Stock in an amount based upon
10% of the consideration issued or paid by the Company in said merger or
acquisition. The exercise price of the warrants is to be at a 20% discount to
the bid price of the Company's Common Stock, generally calculated on the date of
the letter of intent for said merger or acquisition. The warrants are to have a
five-year term and are to include certain piggy-back rights. JD also agreed, in
the event the merger was not consummated, to pay legal fees billed to Choices by
its then principal outside law firm.
F-23
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
Notes to Financial Statements - (Continued)
(15) Subsequent Events (Unaudited)
Litigation. As previously reported, on April 9, 1996, a lawsuit was filed
against the Company in the Superior Court of California, by certain individuals
who allegedly purchased or purchased and sold securities of the Company. Also
named as defendants in the lawsuit were the members of the Board of Directors, a
former director and certain others. On July 12, 1996, Demurrers 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 Second Amended Complaint, denying plaintiffs' allegations with
regard to all claims. On October 22, 1996, the Company also filed for summary
judgment, which was denied on November 26, 1996. Discovery is proceeding. The
Company intends to contest the lawsuit vigorously. However, if the Company is
unsuccessful in defending the lawsuit, the Company would not be able to satisfy
an award of damages in the amount claimed.
Furthermore, even if the Company is successful in defending the lawsuit,
the cost alone in professional fees associated with this lawsuit will be
substantial.
West Coast Transaction. On December 16, 1996, the Company entered into an
Asset Purchase Agreement (the "Agreement") with West Coast Entertainment
Corporation, a Delaware corporation ("West Coast"), providing for the sale of
substantially all of the Company's assets to West Coast.
Under the terms of the Agreement, the Company is to be paid a purchase
price in cash of $2,430,000, subject to possible downward adjustment, based upon
cash flow from operations for 1996, as defined in the Agreement. The Agreement
also provides that 10% of the purchase price is to be escrowed with West Coast
for two years. Consummation of the sale is contingent upon a number of
conditions, the satisfaction of which cannot be assured. Such conditions
include, among others, obtaining of all necessary consents, West Coast obtaining
financing in an amount sufficient to enable it to consummate the asset
acquisition from the Company and certain additional acquisitions, and approval
of the sale by the Company's stockholders.
Should the sale not be approved by the Company's stockholders, or if its
board of directors withdraws its approval, the Company will be required to pay a
breakup fee to West Coast, which shall also, under such circumstances, have the
option to purchase a selected Company
F-24
<PAGE>
(15) Subsequent Events (Unaudited) (Continued)
store. West Coast may also be entitled to liquidated damages under certain
circumstances.
At the time of the signing of the Agreement, and in anticipation of the
sale of assets, West Coast loaned the Company $150,000, which loan is secured by
a pledge of assets of the selected Company store.
Liquidity. 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.
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 Shareholders Committee. The Company has paid all
interest due to date on said note.
Amendment of Certificate of Incorporation. On December 20, 1996, the
Company's stockholders approved an amendment to the Company's Certificate of
Incorporation to permit conversion of the Company's Series C Preferred Stock
without any increase in the number of authorized shares of the Company's common
stock.
F-25
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEET
September 30, 1996
------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 66,942
Accounts receivable 33,021
Merchandise inventories 168,907
Prepaid expenses 60,323
------------
Total current assets 329,193
Videocassette rental inventory, net 742,110
Equipment, net (Note 2) 110,260
Intangible assets, net 176,813
Other deferred costs 40,245
Other assets 68,458
------------
$ 1,467,079
============
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Notes payable $ 176,161
Accounts payable 688,392
Accrued merger and acquisition expenses 481,576
Accrued professional fees 211,711
Deferred revenue 34,387
Accrual for lease cancellation and litigation 2,500
reserves
Accrued salaries 71,259
Other accrued expenses 258,350
------------
Total current liabilities 1,924,336
Notes payable 680,000
------------
Total Liabilities 2,604,336
------------
Stockholders' deficit:
Preferred stock, par value $.01 per share:
Authorized 5,000 shares: 37.4 shares issued
and outstanding
Common stock, par value $.01 per share:
Authorized 50,000,000 shares: issued and
outstanding 22,004,395 shares 220,044
Additional paid-in-capital 20,519,203
Accumulated deficit (21,876,504)
------------
Total stockholders' deficit (1,137,257)
------------
$ 1,467,079
============
See accompanying notes to financial statements.
F-26
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
Revenues: 1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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.
F-27
<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.
F-28
<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.
F-29
<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. The aggregate principal amount owing by the Company on said
promissory notes was reduced to $150,000 from $180,000 as a result of a $30,000
payment made by the Company, to Mr. 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 Mr. 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,
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 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, Demurrers 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 Second Amended 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, 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,
F-30
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Liquidity (Continued)
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 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.
West Coast Transaction. On December 16, 1996, the Company entered into an
Asset Purchase Agreement (the "Agreement") with West Coast Entertainment
Corporation, a Delaware corporation ("West Coast"), providing for the sale of
substantially all of the Company's assets to West Coast.
Under the terms of the Agreement, the Company is to be paid a purchase
price in cash of $2,430,000, subject to possible downward adjustment, based upon
cash flow from operations for 1996, as defined in the Agreement. The Agreement
also provides that 10% of the purchase price is to be escrowed with West Coast
for two years. Consummation of the sale is contingent upon a number of
conditions, the satisfaction of which cannot be assured. Such conditions
include, among others, obtaining of all necessary consents, West Coast obtaining
financing in an amount sufficient to enable it to consummate the asset
acquisition from the Company and certain additional acquisitions, and approval
of the sale by the Company's stockholders.
Should the sale not be approved by the Company's stockholders, or if its
board of directors withdraws its approval, the Company will be required to pay a
breakup fee to West Coast, which shall also, under such circumstances, have the
option to purchase a selected Company store. West Coast may also be entitled to
liquidated damages under certain circumstances.
At the time of the signing of the Agreement, and in anticipation of the
sale of assets, West Coast loaned the Company $150,000, which loan is secured by
a pledge of assets of the selected Company store.
F-31
<PAGE>
EXHIBIT A
ASSET PURCHASE AGREEMENT
By and Among
West Coast Entertainment Corporation
and
Choices Entertainment Corporation
<PAGE>
TABLE OF CONTENTS
Section Page
- - - ------- ----
1. Sale and Delivery of the Assets................................. A-6
1.1 Delivery of the Assets.................................. A-6
1.2 Further Assurances ..................................... A-8
1.3 Base Purchase Price..................................... A-8
1.4 Assumption of Liabilities; Etc.......................... A-8
1.5 Allocation of Base Purchase Price and
Assumed Liabilities..................................... A-9
1.6 The Closing............................................. A-9
1.7 Apportionment........................................... A-9
1.8 Purchase Price Adjustments.............................. A-9
1.9 Option to Purchase Newtown Store........................ A-11
1.10 Buyer Loan.............................................. A-12
2. Representations of the Seller................................... A-12
2.1 Organization............................................ A-12
2.2 Capitalization of the Seller and the
Subsidiaries............................................ A-13
2.3 Authorization........................................... A-13
2.4 Ownership of the Assets................................. A-13
2.5 Financial Statements.................................... A-14
2.6 Absence of Undisclosed Liabilities...................... A-15
2.7 Litigation.............................................. A-15
2.8 Insurance............................................... A-16
2.9 Inventory............................................... A-16
2.10 Fixed Assets............................................ A-16
2.11 Leases.................................................. A-17
2.12 Change in Financial Condition and Assets................ A-17
2.13 Tax Matters............................................. A-17
2.14 Accounts Receivable..................................... A-18
2.15 Books and Records....................................... A-18
2.16 Contracts and Commitments............................... A-19
2.17 Compliance with Agreements and Laws..................... A-20
2.18 Employee Relations...................................... A-21
2.19 Absence of Certain Changes or Events.................... A-22
2.20 Suppliers............................................... A-22
2.21 Prepayments and Deposits................................ A-22
2.22 Trade Names and Other Intangible Property............... A-23
2.23 Employee Benefit Plans.................................. A-23
2.24 Regulatory Approvals.................................... A-24
2.25 Indebtedness to and from Officers,
Directors and Shareholders.............................. A-24
2.26 Powers of Attorney and Suretyships...................... A-24
2.27 Disclosure.............................................. A-24
3. Representations of the Buyer.................................... A-24
3.1 Organization and Authority.............................. A-24
3.2 Capitalization of the Buyer............................. A-25
3.3 Authorization........................................... A-25
3.4 Regulatory Approvals.................................... A-25
3.5 Disclosure.............................................. A-25
A-2
<PAGE>
4. Access to Information; Public Announcements..................... A-26
4.1 Access to Management, Properties and Records............ A-26
4.2 Confidentiality......................................... A-27
4.3 Public Announcements.................................... A-27
5. Pre-Closing Covenants of the Seller............................. A-27
5.1 Conduct of Business..................................... A-27
5.2 Absence of Material Changes............................. A-28
5.3 Taxes................................................... A-29
5.4 Delivery of Financial Statements
and Payroll Information ............................... A-29
5.5 Compliance with Laws.................................... A-30
5.6 Continued Truth of Representations
and Warranties of the Seller............................ A-30
5.7 Continuing Obligation to Inform......................... A-30
5.8 Exclusive Dealing....................................... A-30
5.9 No Publicity............................................ A-31
5.10 Approval of Shareholders................................ A-31
5.11 Breakup Fee............................................. A-31
6. Satisfaction of Conditions; Liquidated Damages.................. A-31
6.1 Satisfaction of Conditions.............................. A-32
6.2 Liquidated Damages...................................... A-32
7. Conditions to Obligations of the Buyer.......................... A-32
7.1 Continued Truth of Representations
and Warranties of the Seller; Compliance with
Covenants and Obligations .............................. A-32
7.2 Corporate Proceedings................................... A-33
7.3 Governmental Approvals.................................. A-33
7.4 Consents of Lenders, Lessors and Other
Third Parties........................................... A-33
7.5 Adverse Proceedings..................................... A-33
7.6 Opinion of Counsel...................................... A-33
7.7 Board of Directors and Shareholder Approval............. A-33
7.8 The Assets.............................................. A-33
7.9 Update.................................................. A-33
7.10 Cash on Hand at Stores.................................. A-34
7.11 Payables................................................ A-34
7.12 Tax Lien Waivers........................................ A-34
7.13 Closing of Offering..................................... A-34
7.14 Closing Deliveries...................................... A-34
8. Conditions to Obligations of the Seller......................... A-35
8.1 Continued Truth of Representations and
Warranties of the Buyer; Compliance
with Covenants and Obligations.......................... A-35
8.2 Corporate Proceedings................................... A-35
8.3 Governmental Approvals.................................. A-36
8.4 Consents of Lenders, Lessors and Other
Third Parties........................................... A-36
8.5 Adverse Proceedings..................................... A-36
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8.6 Opinion of Counsel...................................... A-36
8.7 Closing Deliveries...................................... A-36
9. Indemnification................................................. A-37
9.1 By the Buyer and the Seller............................. A-37
9.2 By the Seller........................................... A-37
9.3 Claims for Indemnification.............................. A-38
9.4 Defense by Indemnifying Party........................... A-38
9.5 Payment of Indemnification Obligation................... A-39
9.6 Survival of Representations; Claims for
Indemnification......................................... A-39
10. Post-Closing Agreements......................................... A-39
10.1 Proprietary Information................................. A-39
10.2 No Solicitation or Hiring of Former Employees........... A-39
10.3 Non-Competition Agreement............................... A-40
10.4 Sharing of Data......................................... A-40
10.5 Use of Name............................................. A-41
10.6 Cooperation in Litigation............................... A-41
11. Termination of Agreement........................................ A-41
11.1 Termination by Lapse of Time............................ A-41
11.2 Termination by Agreement of the Parties................. A-42
11.3 Termination by Reason of Breach......................... A-42
11.4 Survival of Certain Obligations......................... A-42
12. Transfer and Sales Tax.......................................... A-42
13. Brokers ........................................................ A-42
13.1 For the Seller.......................................... A-42
13.2 For the Buyer........................................... A-42
14. Notices ........................................................ A-43
15. Arbitration..................................................... A-43
16. Successors and Assigns.......................................... A-44
17. Entire Agreement; Amendments; Attachments....................... A-44
18. Expenses........................................................ A-44
19. Legal Fees...................................................... A-45
20. Governing Law................................................... A-45
21. Section Headings................................................ A-45
22. Severability.................................................... A-45
23. Counterparts.................................................... A-45
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Exhibits
A - Form of Escrow Agreement
B - Instrument of Assumption of Liabilities
C - Substance of Opinion of Seller's Counsel
D - Bill of Sale
E - Substance of Opinion of Hale and Dorr
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<PAGE>
ASSET PURCHASE AGREEMENT
Agreement made as of December 16, 1996 between West Coast Entertainment
Corporation, a Delaware corporation with its principal office at 9990 Global
Road, Philadelphia, Pennsylvania 19115 (the "Buyer"), and Choices Entertainment
Corporation, a Delaware corporation with its principal office at 836 West
Trenton Avenue, Morrisville, Pennsylvania 19067 (the "Seller").
Preliminary Statement
The Buyer desires to purchase, and the Seller desires to sell,
substantially all of the assets and business of the Seller, for the
consideration set forth below and the assumption of certain of the Seller's
liabilities set forth below, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. Sale and Delivery of the Assets
1.1 Delivery of the Assets.
(a) Subject to and upon the terms and conditions of this
Agreement, at the closing of the transactions contemplated by this Agreement
(the "Closing"), the Seller shall sell, transfer, convey, assign and deliver to
the Buyer, and the Buyer shall purchase from the Seller, the following
properties, assets and other claims, rights and interests, all of which relate
to the nine retail video stores owned and operated by Seller as listed on
Schedule A attached hereto (collectively, the "Stores" and individually, a
"Store"):
(i) all inventories, videotapes, finished goods, office
supplies, maintenance supplies, packaging materials, spare parts and similar
items of the Seller (collectively, the "Inventory") which exist on the Closing
Date (as defined below);
(ii) all accounts, accounts receivable, notes and notes
receivable existing on the Closing Date which are payable to the Seller,
including any security held by the Seller for the payment thereof (the "Accounts
Receivable");
(iii) all prepaid expenses, security and other deposits,
bank accounts and other similar assets of the Seller existing on the Closing
Date, including the cash represented by such assets;
(iv) all rights of the Seller under the contracts,
agreements, leases, licenses and other instruments set forth on Schedule 2.16
attached hereto other than such rights under contracts, agreements, leases,
licenses and other
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instruments included on Schedule 1.1(ii) (collectively, the "Contract Rights");
(v) all books, records and accounts, correspondence,
manuals, customer lists, employment records, studies, reports or summaries
incident to the Seller's retail store operations;
(vi) all rights of the Seller under express or implied
warranties from the suppliers of the Seller;
(vii) the motor vehicles and other rolling stock owned by
the Seller on the Closing Date;
(viii) all of the machinery, equipment, furniture, leasehold
improvements and construction in progress owned by the Seller on the Closing
Date whether or not reflected as capital assets in the accounting records of the
Seller (collectively, the "Fixed Assets");
(ix) all of the Seller's right, title and interest in and to
all intangible property rights, including but not limited to inventions,
discoveries, trade secrets, processes, formulas, know-how, United States and
foreign patents, patent applications, trade names, or any derivation thereof,
trademarks, trademark registrations, applications for trademark registrations,
copyrights, copyright registrations, owned or, where not owned, used by the
Seller in its business and all licenses and other agreements to which the Seller
is a party (as licensor or licensee) or by which the Seller is bound relating to
any of the foregoing kinds of property or rights to any "know-how" or disclosure
or use of ideas (collectively, the "Intangible Property"); provided, however,
that the Intangible Property shall not include the name "Choices Entertainment"
(and provided, further, that the Seller shall grant to Buyer a perpetual,
nonexclusive license to use the name "Choices Entertainment" as provided in
Section 10.5 below); and
(x) except as specifically provided in Subsection 1.1(b)
hereof, all other assets, properties, claims, rights and interests of the Seller
which exist on the Closing Date, of every kind and nature and description,
whether tangible or intangible, real, personal or mixed.
(b) Notwithstanding the provisions of paragraph (a) above, the
assets to be transferred to the Buyer under this Agreement shall not include (i)
Seller's cash in bank accounts or at the Stores (except for the $600 per Store
required to be left at the Stores on the Closing Date, as required by Section
7.10 below); (ii) the outstanding shares of capital stock of the subsidiaries of
the Seller set forth on Schedule 1.1(i) attached hereto (collectively, the
"Subsidiaries"); and (iii) those assets listed on Schedule 1.1(ii) attached
hereto (the "Excluded Assets").
(c) The Inventory, Accounts Receivable, Contract Rights, Fixed
Assets, Intangible Property and other properties,
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assets and business of the Seller described in paragraph (a) above, other than
the Excluded Assets, shall be referred to collectively as the "Assets."
1.2 Further Assurances. At any time and from time to time after the
Closing, at the Buyer's request and without further consideration, the Seller
promptly shall execute and deliver such instruments of sale, transfer,
conveyance, assignment and confirmation, and take such other action, as the
Buyer may reasonably request to more effectively transfer, convey and assign to
the Buyer, and to confirm the Buyer's title to, all of the Assets, to put the
Buyer in actual possession and operating control thereof, to assist the Buyer in
exercising all rights with respect thereto and to carry out the purpose and
intent of this Agreement.
1.3 Base Purchase Price.
(a) In addition to the Buyer's assumption of liabilities as
provided in Section 1.4 below, the purchase price for the assets shall be
$2,430,000 (the "Base Purchase Price") subject to the adjustments provided in
Subsection 1.8 hereof.
(b) At the Closing, the Buyer shall deliver to the Seller 90% of
the Base Purchase Price in cash, by cashiers or certified check or by wire
transfer of immediately available funds to an account designated by the Seller.
The outstanding amount of principal and interest due under the Buyer Loan (as
defined in Section 1.10 below) shall be credited towards the portion of the Base
Purchase Price payable at the Closing.
(c) At the Closing, an amount of cash equal to 10% of the Base
Purchase Price shall be held by the Buyer as escrow agent (the "Escrow Agent")
in an escrow account in accordance with the Escrow Agreement attached hereto as
Exhibit A.
1.4 Assumption of Liabilities; Etc.
(a) At the Closing, the Buyer shall execute and deliver an
Instrument of Assumption of Liabilities (the "Instrument of Assumption")
substantially in the form attached hereto as Exhibit B, pursuant to which it
shall assume and agree to perform, pay and discharge the following liabilities,
obligations and commitments of the Seller (the "Assumed Liabilities"):
(i) The obligations of the Seller relating to periods after
the Closing under the Leases specified on Schedule 1.4 which become due and
payable after the Closing Date;
(ii) The other liabilities and obligations of the Seller
specifically set forth in Schedule 1.4 attached hereto.
(b) The Buyer shall not at the Closing assume or agree to
perform, pay or discharge, and the Seller shall remain
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<PAGE>
unconditionally liable for, all obligations, liabilities and commitments, fixed
or contingent, of the Seller other than the Assumed Liabilities.
(c) If the Buyer, in its sole and absolute discretion, agrees
(after provision of reasonable notice to and consultation with the Seller), to
perform, pay or discharge any obligations, liabilities or commitments (fixed or
contingent) of the Seller, the dollar amount of all such obligations,
liabilities and commitments shall reduce, on a dollar for dollar basis, the
Purchase Price.
1.5 Allocation of Base Purchase Price and Assumed Liabilities. The
aggregate amount of the Base Purchase Price and the Assumed Liabilities shall be
allocated among the Assets as set forth on Schedule 1.5 attached hereto. Such
allocation shall be subject to adjustment to the extent that the Base Purchase
Price is adjusted pursuant to Subsections 1.8 hereof in the manner specified in
such Subsection.
1.6 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hale and Dorr, 60
State Street, Boston, Massachusetts 02109, on a date specified by the Buyer to
the Seller on not less than two business days notice (which may be given
orally), which date shall be on or after February 28, 1997, but before the
Termination Date (as hereinafter defined) or on such later date as may be
mutually agreeable to the Buyer and the Seller (the "Closing Date"). The
transfer of the Assets by the Seller to the Buyer shall be deemed to occur at
9:00 a.m., Boston time, on the date of the Closing (the "Closing Date"). As used
herein, "Termination Date" shall mean the earlier to occur of (x) the date which
is 30 days after the date of closing of a public offering or private placement
of Buyer's debt or equity securities to third parties, resulting in gross
proceeds to the Buyer in an amount sufficient to enable the Buyer to consummate
the transactions contemplated hereby and certain additional acquisitions (the
"Offering"), and (y) April 30, 1997. The Buyer hereby covenants and agrees to
use commercially reasonable efforts to consummate the Offering on or before
March 31, 1997.
1.7 Apportionment. The Purchase Price shall not be adjusted for
prepaid expenses of any type or kind, including without limitation, prepaid
premiums on insurance, water and sewer use charges, transfer taxes and recording
fees, if any, incurred in connection with the transfer of the Assets
contemplated hereby, or real property taxes for the then current tax period.
1.8 Purchase Price Adjustments. The Base Purchase Price set forth in
Subsection 1.3 hereof shall be subject to adjustment on or after the Closing
Date as follows:
(a) After the Closing Date, the Seller shall cause its
independent public accountants (the "Accountants"), to conduct an audit of the
books and records of the Seller as of December 31, 1996 (the "Audit Date"), and
the Accountants shall,
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<PAGE>
on or before March 31, 1997 deliver an audited balance sheet of the Seller as of
the Audit Date (the "1996 Audited Balance Sheet") and the related statement of
income for the twelve-month period then ended (the "Audit Period") to each of
the Buyer and the Seller. The 1996 Audited Balance Sheet and the related
statement of income (collectively, the "1996 Audited Statements") shall be
prepared in accordance with generally accepted accounting principles ("GAAP")
applied consistently with the Seller's past practice, and shall be certified
without qualification by the Accountants (except for a "going concern"
qualification substantially similar to that contained in Seller's audited
financial statements for Seller's 1995 fiscal year, copies of which have been
provided to the Buyer (the "Going Concern Qualification")).
(b) The 1996 Audited Statements delivered pursuant to paragraph
(a) above shall be accompanied by a statement prepared by the Seller, setting
forth the Cash Flow Adjustment (as defined in Section 1.8(g) below), if any,
together with the calculation showing the basis for the determination thereof.
(c) In the event that the Buyer or the Seller dispute the 1996
Audited Statements or the calculation of the Cash Flow Adjustment, the disputing
party shall notify the other parties hereto in writing (the "Dispute Notice") of
the amount, nature and basis of such dispute, within 10 calendar days after
delivery of the Adjustment Statements. In the event of such a dispute, the
parties hereto shall first use their best efforts to resolve such dispute among
themselves. If the parties are unable to resolve the dispute within 10 calendar
days after delivery of the Adjustment Statements, the dispute shall be submitted
to the Accountants and Price Waterhouse LLP, independent accountants for the
Buyer (the "Buyer's Accountants"), for resolution. The Accountants and Buyer's
Accountants shall use their best efforts to resolve the dispute within 10 days
after submission. If they are unable to agree upon a resolution of the dispute
within such 10-day period, the dispute shall be submitted for arbitration in
accordance with Section 15.
(d) The fees and expenses of the Accountants in connection with
the preparation of 1996 Audited Balance Sheet and the resolution of disputes
pursuant to paragraph (c) above shall be borne by the Seller and the fees and
expenses of the Buyer's Accountants in connection with the resolution of
disputes pursuant to paragraph (c) above shall be borne by the Buyer.
(e) Immediately upon the expiration of the 10-day period for
giving the Dispute Notice, if no Dispute Notice is given, or immediately upon
the resolution of disputes, if any, pursuant to paragraph (c) above, the Base
Purchase Price shall be adjusted by the Cash Flow Adjustment (as so adjusted,
the "Adjusted Base Purchase Price").
(f) For purposes of this Subsection 1.8, "net operating cash
flow" shall be equal to Store net income, plus film amortization, plus used tape
cost of goods (to the extent
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<PAGE>
included in the game or rental tape purchase amount described below), plus
depreciation, less game and rental tape purchases. For purposes of calculating
Seller's net operating cash flow pursuant to Section 1.8(g) below, there shall
be excluded all of Seller's expenses directly related to Store #13 (as indicated
on Schedule A), and all revenues from Store #13.
(g) A Cash Flow Adjustment shall occur only if the net operating
cash flow for the Audit Period, as determined by the Accountants (the "Audited
Cash Flow") is less than $700,000. A Cash Flow Adjustment shall be a reduction
in the Base Purchase Price by an amount determined as follows:
Base Purchase Price - Base Purchase Price x Audited Cash Flow
---------------------------------------
$700,000
Any such reduction shall reduce the cash portion of the Purchase Price.
1.9 Option to Purchase Newtown Store.
(a) If the event specified in Section 5.11(a) or (b) shall occur,
the Buyer shall have the option (the "Option") to purchase all of the Seller's
assets relating to Seller's retail video store located at Village at Newtown,
South Eagle Road, Newtown, Pennsylvania (the "Newtown Store") for a price of
$250,000 payable in cash at closing. The purchase price may, at Buyer's option,
be paid by (i) cancellation of the outstanding amount of the Buyer Loan
(described in Section 1.10 below), and (ii) cancellation of the Seller's
obligation to pay to Buyer the fee described in Section 5.11 below.
(b) The assets shall be of the same type and kind as the Assets,
but shall include only those Assets relating to or used in the conduct of the
business of the Newtown Store, and shall exclude all of Seller's cash in bank
accounts, but $600 in cash shall be left at the Newton Store on the closing date
(the "Newtown Store Assets").
(c) In connection with the purchase of assets upon exercise of
the Option, (i) the Buyer shall assume the Seller's lease for the space occupied
by the Newtown Store, but shall assume no other liabilities of the Seller, (ii)
the Seller shall deliver the assets free and clear of all liens, security
interests or encumbrances and shall obtain all required governmental and third
party consents, and (iii) the Buyer and the Seller shall enter into an Asset
Purchase Agreement, in form and on terms substantially similar to this
Agreement, with such conforming changes as may be necessary or appropriate to
reflect that Seller will continue to conduct its retail video store business.
(d) The Option may be exercised by Buyer at any time within the
60-day period following the date on which the Option first becomes exercisable,
by delivery of written notice of exercise by the Buyer to the Seller. If the
Buyer fails to timely exercise the Option, the Buyer shall be deemed to have
A-11
<PAGE>
elected not to exercise the Option, and the Option shall thereafter expire and
be of no force and effect.
(e) The closing of the acquisition by the Buyer of the assets
relating to the Newtown store (the "Option Closing") shall take place within two
days following the date of delivery of the notice from the Buyer, or as soon as
practicable thereafter, at the offices of Hale and Dorr, 60 State Street,
Boston, Massachusetts, or at such other time and date as may be mutually agreed
upon in writing by the parties hereto.
1.10 Buyer Loan. On or about the date hereof, the Buyer shall loan to
the Seller the sum of $150,000 in cash (the "Buyer Loan"). Such loan shall be
evidenced by a promissory note and secured loan agreement, in form and substance
acceptable to the parties, which shall provide for (i) payment of the loan at
the Closing (or, if applicable, at the Option Closing), (ii) payment on demand
at any time from and after April 30, 1997, and (iii) interest (due at maturity,
but not before) at the rate of 12% per annum (simple interest). The Buyer Loan
shall be secured by a security interest in all of the Newtown Store Assets
(including inventory or accounts receivable), which shall have priority over any
other liens on such assets, except for the liens specifically identified on
Schedule 1.10.
2. Representations of the Seller
The Seller represents and warrants to the Buyer as follows:
2.1 Organization. The Seller is a corporation duly organized, validly
existing, and in good standing under the laws of the state of its incorporation,
and has all requisite power and authority (corporate and other) to own its
properties, to carry on its business as now being conducted, to execute and
deliver this Agreement and the agreements contemplated herein, and to consummate
the transactions contemplated hereby. Schedule 1.1(i) attached hereto
constitutes a true, correct and complete list of all corporate, partnership,
joint venture and other entities in which the Seller holds, directly or
indirectly, a 50% or greater interest. Each of the Subsidiaries is a corporation
or other entity duly organized and validly existing, and at the Closing will be
in good standing, under the laws of the state of its incorporation or
organization and has all requisite power and authority to own its properties and
to carry on its business as now being conducted. The Seller and the Subsidiaries
are each duly qualified to do business, and at the Closing will be in good
standing, in all jurisdictions in which their ownership of property or the
character of their business requires such qualification. Certified copies of the
charter, bylaws and other governing instruments of each of the Seller and the
Subsidiaries, each as amended to date, have been previously delivered to the
Buyer, are complete and correct, and no amendments have been made thereto or
have been authorized since the date thereof. Except as set forth on Schedule
2.1, the Seller does not own any capital stock of or other equity interest in
any corporation, partnership or other entity, other than the Subsidiaries.
Schedule A sets forth a list of each retail video
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<PAGE>
rental store (including the location of each such store (and the name and
address of all owners (if not Seller) of each such store)) owned, operated or
licensed directly or indirectly by the Seller. The Stores constitute all of the
retail video rental stores operated by the Seller, or in which Seller has a
direct or indirect interest.
2.2 Capitalization of the Seller and the Subsidiaries. The Seller's
authorized capital stock consists of 50,000,000 shares of Common Stock, $.01 par
value, of which 22,004,395 shares are issued and outstanding, and 5,000 shares
of Series C Preferred Stock, $.01 par value, 37.4 of which are issued and
outstanding, and such outstanding shares of Common Stock and Preferred Stock are
held of record and beneficially by the stockholders listed on Schedule 2.2
attached hereto. All of such shares have been duly and validly issued and are
fully paid and nonassessable. The authorized capital stock of the Subsidiaries
is as set forth on Schedule 2.2 attached hereto. All of such shares have been
duly and validly issued, are fully paid and nonassessable and held of record by
the Seller.
2.3 Authorization. The execution and delivery of this Agreement by the
Seller, and the agreements provided for herein, and the consummation by the
Seller of all transactions contemplated hereby, have been duly authorized by all
requisite corporate action, except that the Seller's shareholders have not yet
approved such transactions. This Agreement and all such other agreements and
obligations entered into and undertaken in connection with the transactions
contemplated hereby to which the Seller is a party constitute the valid and
legally binding obligations of the Seller, enforceable against the Seller in
accordance with their respective terms. The execution, delivery and performance
by the Seller of this Agreement and the agreements provided for herein, and the
consummation by the Seller of the transactions contemplated hereby and thereby,
will not, with or without the giving of notice or the passage of time or both,
(a) violate the provisions of any law, rule or regulation applicable to the
Seller; (b) violate the provisions of the charter or bylaws of the Seller; (c)
violate any judgment, decree, order or award of any court, governmental body or
arbitrator; or (d) except with respect to the Leases (as to which the consent of
the respective landlords is required), conflict with or result in the breach or
termination of any term or provision of, or constitute a default under, or cause
any acceleration under, or cause the creation of any lien, charge or encumbrance
upon the properties or assets of the Seller pursuant to, any indenture,
mortgage, deed of trust or other instrument or agreement to which the Seller is
a party or by which the Seller or any of its properties is or may be bound.
Schedule 2.3 attached hereto sets forth a true, correct and complete list of all
consents and approvals of third parties that are required in connection with the
consummation by the Seller of the transactions contemplated by this Agreement.
2.4 Ownership of the Assets. Schedule 2.4(i) attached hereto sets
forth a true, correct and complete list of all claims, liabilities, liens,
pledges, charges, encumbrances and
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equities of any kind affecting the Assets (collectively, the "Encumbrances").
The Seller is, and at the Closing will be, the true and lawful owner of the
Assets, and will have the right to sell and transfer to the Buyer good, clear,
record and marketable title to the Assets, free and clear of all Encumbrances of
any kind, except as set forth on Schedule 2.4(ii) attached hereto (the
"Permitted Encumbrances"). The delivery to the Buyer of the instruments of
transfer of ownership contemplated by this Agreement will vest good and
marketable title to the Assets in the Buyer, free and clear of all liens,
mortgages, pledges, security interests, restrictions, prior assignments,
encumbrances and claims of any kind or nature whatsoever, except for the
Permitted Encumbrances. The Encumbrances which are listed on Schedule 1.10
secure obligations of the Seller which have been discharged in full.
2.5 Financial Statements.
(a) The Seller has previously delivered to the Buyer its combined
audited balance sheets as of December 31, 1993, 1994 and 1995 (the "Audited
Balance Sheets") and the related statements of income, shareholders' equity,
retained earnings and statements of cash flow of the Seller for the fiscal years
ended December 31, 1993, 1994 and 1995 (collectively, including the Audited
Balance Sheet, the "Audited Financial Statements").
The Seller has also delivered its combined unaudited balance sheets as of
Seller's fiscal quarters ended March 31, 1996, June 30, 1996 and September 30,
1996 (the "Unaudited Balance Sheets") and the related statements of income,
shareholders' equity, retained earnings and statements of cash flow of the
Seller for the fiscal quarters then ended (collectively, including the Unaudited
Balance Sheets, the "Unaudited Financial Statements").
The Seller shall deliver to the Buyer, on or before March 31, 1997, with
(or as part of) the 1996 Audited Statements, its combined audited balance sheets
as of December 31, 1996 and December 31, 1995, and the combined comparative
statements of operations and retained earnings and statements of cash flows for
the years ended December 31, 1996 and December 31, 1995 (the "Comparative
Financial Statements").
The Seller has delivered to the Buyer its internal statements for each
whole monthly period commencing after September 30, 1996 and ending prior to the
date hereof and shall deliver to the Buyer as promptly as possible following the
last day of each month prior to the Closing, commencing with November 1996, and
in any event within 45 days after the end of each such month, its balance sheet
and related statements of income, shareholders' equity, retained earnings and
changes in financial condition for the one-month period then ended, all
certified by the Accountants or Seller's chief financial officer (collectively,
the "Internal Financial Statements").
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The Audited Financial Statements and the Comparative Financial Statements
have been (or will be) prepared in accordance with GAAP applied consistently
with past practice, and are (or will be) certified without qualification (except
for the Going Concern Qualification) by the Seller's independent certified
public accountants. The Unaudited Financial Statements and the Internal
Financial Statements have been or will be certified by the Seller's chief
financial officer to have been prepared in accordance with GAAP, consistent with
past practice.
The Audited Financial Statements and the Unaudited Financial Statements are
hereinafter referred to collectively as the "Financial Statements." The Seller's
Balance Sheet dated September 30, 1996 is sometimes hereinafter referred to as
its "Current Balance Sheet."
(b) The Financial Statements, the Internal Financial Statements
and the Comparative Financial Statements fairly present (or will fairly
present), as of their respective dates, the financial condition, retained
earnings, assets and liabilities of the Seller and the results of operations of
the Seller's business for the periods indicated; with respect to the contracts
and commitments for the sale of goods or the provision of services by the
Seller, the Financial Statements, the Internal Financial Statements and the
Comparative Financial Statements contain and reflect (or will contain and
reflect) adequate reserves, which are consistent with previous reserves taken,
for all reasonably anticipated material losses and costs and expenses; and the
amounts shown as accrued for current and deferred income and other taxes in the
Financial Statements, the Internal Financial Statements and the Comparative
Financial Statements are (or will be) sufficient for the payment of all unpaid
federal, state and local income taxes, interest, penalties, assessments or
deficiencies applicable to the Seller, whether disputed or not, for the
applicable period then ended and periods prior thereto.
The results of Seller's operations for the 12-month period ended December
31, 1996, as reflected in the 1996 Audited Financial Statements will not be
materially different from the results of Seller's operations for such period as
reflected in the Unaudited Financial Statements, the Internal Financial
Statements and the Comparative Financial Statements.
2.6 Absence of Undisclosed Liabilities. Except as and to the extent
(a) reflected and reserved against in the Current Balance Sheet, (b) set forth
on Schedule 2.6 attached hereto or (c) incurred in the ordinary course of
business after the date of the Current Balance Sheet and not material in amount,
either individually or in the aggregate, the Seller does not have any liability
or obligation, secured or unsecured, whether accrued, absolute, contingent,
unasserted or otherwise, affecting the Assets. For purposes of this Subsection
2.6, "material" means any amount in excess of $10,000.
2.7 Litigation. Except as set forth on Schedule 2.7 attached hereto,
the Seller is not a party to, or to the Seller's
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knowledge threatened with, and none of the Assets are subject to, any
litigation, suit, action, investigation, proceeding or controversy before any
court, administrative agency or other governmental authority relating to or
affecting the Assets or the business or condition (financial or otherwise) of
the Seller. The Seller is not in violation of or in default with respect to any
judgment, order, writ, injunction, decree or rule of any court, administrative
agency or governmental authority or any regulation of any administrative agency
or governmental authority.
2.8 Insurance. Schedule 2.8 attached hereto sets forth a true, correct
and complete list of all fire, theft, casualty, general liability, workers
compensation, business interruption, environmental impairment, product
liability, automobile and other insurance policies insuring the Assets or
business of the Seller and of all life insurance policies maintained for any of
its employees, specifying the type of coverage, the amount of coverage, the
premium, the insurer and the expiration date of each such policy (collectively,
the "Insurance Policies") and all claims made under such Insurance Policies
since January 1, 1991. True, correct and complete copies of all of the Insurance
Policies have been previously delivered by the Seller to the Buyer. The
Insurance Policies are in full force and effect and are in amounts and of a
nature which are adequate and customary for the Seller's business. All premiums
due on the Insurance Policies or renewals thereof have been paid and there is no
default under any of the Insurance Policies.
2.9 Inventory. Schedule 2.9 attached hereto sets forth a true, correct
and complete list of the Inventory as of September 30, 1996, including a
description and the book value thereof. Schedule 2.9, as updated pursuant to
Subsection 7.9 hereof, shall set forth a true, correct and complete list of the
Inventory as of the Closing Date, including a description and valuation thereof.
Such Inventory consists of items of a quality and quantity which are usable or
saleable without discount in the ordinary course of the business conducted by
the Seller. The value of all items of obsolete materials and of materials of
below standard quality has been written down to realizable market value, and the
values at which such Inventory is carried reflect the normal inventory valuation
policy of the Seller of stating the Inventory at the lower of cost or market
value in accordance with generally accepted accounting principles.
2.10 Fixed Assets. Schedule 2.10 attached hereto sets forth a true,
correct and complete list of all Fixed Assets as of September 30, 1996,
including a description and the book value thereof. Schedule 2.10, as updated
pursuant to Subsection 7.9 hereof, shall set forth a true, correct and complete
list of all Fixed Assets as of the Closing Date, including a description and
valuation thereof. All of the Fixed Assets are in good operating condition and
repair, normal wear and tear excepted, are currently used by the Seller in the
ordinary course of business and in the production of products of the Seller and
normal
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maintenance has been consistently performed with respect to such Fixed Assets.
2.11 Leases. Schedule 2.11 attached hereto sets forth a true, correct
and complete list as of the date hereof of all leases of real property,
identifying separately each ground lease, to which the Seller is a party (the
"Leases"). True, correct and complete copies of the Leases, and all amendments,
modifications and supplemental agreements thereto, have previously been
delivered by the Seller to the Buyer. The Leases are in full force and effect,
are binding and enforceable against each of the parties thereto in accordance
with their respective terms and, except as set forth on Schedule 2.11, have not
been modified or amended since the date of delivery to the Buyer. Except as set
forth on Schedule 2.11, no party to any Lease has sent written notice to the
other claiming that such party is in default thereunder, which remains uncured.
Except as set forth on Schedule 2.11 attached hereto, there has not occurred any
event which would constitute a breach of or default in the performance of any
material covenant, agreement or condition contained in any Lease, nor has there
occurred any event which with the passage of time or the giving of notice or
both would constitute such a breach or material default. The Seller is not
obligated to pay any leasing or brokerage commission relating to any Lease and,
except as set forth on Schedule 2.11 attached hereto, will not have any
enforceable obligation to pay any leasing or brokerage commission upon the
renewal of any Lease. No material construction, alteration or other leasehold
improvement work with respect to any of the Leases remains to be paid for or to
be performed by the Seller. The Financial Statements contain adequate reserves
to provide for the restoration of the properties subject to the Leases at the
end of the respective Lease terms, to the extent required by the Leases.
2.12 Change in Financial Condition and Assets. Except as set forth on
Schedule 2.12 attached hereto, since September 30, 1996, there has been no
change which materially and adversely affects the business, properties, assets,
condition (financial or otherwise) or prospects of the Seller. Except as set
forth on Schedule 2.12, the Seller has no knowledge of any existing or
threatened occurrence, event or development which, as far as can be reasonably
foreseen, could have a material adverse effect on the Seller or its business,
properties, assets, condition (financial or otherwise) or prospects.
2.13 Tax Matters.
(a) Except as set forth on Schedule 2.13 to this Agreement:
(i) Within the times and in the manner prescribed by law,
the Seller has filed all Returns which are required to be filed;
(ii) With respect to all amounts in respect of Taxes imposed
upon the Seller for which it could be liable, whether to Taxing Authorities (as,
for example, under law) or to
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other persons or entities (as, for example, under Tax allocation agreements),
with respect to all taxable periods or portions of taxable periods ending on or
before the Closing Date, all applicable tax laws and agreements have been fully
complied with, and all such amounts required to be paid by the Seller to Taxing
Authorities or others on or before the date hereof have been paid.
(iii) All Returns filed by the Seller constitute complete
and accurate representations of the respective Tax liabilities of, or
attributable to, the Seller for such years;
(iv) No examination of the Returns of the Seller is
currently in progress nor, to the knowledge of the Seller, threatened and no
unresolved deficiencies have been asserted or assessed against the Seller as a
result of any audit by any Taxing Authority and no such deficiency has been
proposed or threatened;
(v) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Seller;
(vi) The Seller is not a person other than a United States
person within the meaning of the Code;
(b) For purposes of this Section 2.13: "Return" means any return,
declaration, report, statement or other document required to be filed in respect
of any Tax. "Tax" or "Taxes" means any federal, state, local, foreign and other
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property, windfall
profits, customs duty or other tax, fee, assessment or charge of any kind
whatever, together with interest and any penalty, addition to tax or additional
amount with respect thereto. "Taxing Authority" means any governmental authority
responsible for the imposition of Taxes.
2.14 Accounts Receivable. Schedule 2.14 attached hereto sets forth a
true, correct and complete list of all Accounts Receivable, including an aging
thereof as of September 30, 1996. Schedule 2.14, as updated pursuant to
Subsection 7.9 hereof, shall set forth a true, correct and complete list of the
Accounts Receivable as of the Closing Date, including an aging thereof. All
Accounts Receivable arose out of the sales or rentals of inventory or services
in the ordinary course of business and are collectible in the face value thereof
within 90 days of the date of invoice, using normal collection procedures, net
of the reserve for doubtful accounts as set forth thereon, which reserve is
adequate and was calculated in accordance with generally accepted accounting
principles consistently applied.
2.15 Books and Records. The general ledgers and books of account of
the Seller, all federal, state and local income,
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franchise, property and other tax returns filed by the Seller, with respect to
the Assets, and all other books and records of the Seller are in all material
respects complete and correct and have been maintained in accordance with good
business practice and in accordance with all applicable procedures required by
laws and regulations.
2.16 Contracts and Commitments.
(a) Schedule 2.16 attached hereto contains a true, complete and
correct list and description of the following contracts and agreements, whether
written or oral (collectively, the "Contracts"):
(i) all loan agreements, indentures, mortgages and
guaranties to which the Seller is a party or by which the Seller or any of its
property is bound;
(ii) all pledges, conditional sale or title retention
agreements, security agreements, equipment obligations, personal property leases
and lease purchase agreements relating to any of the Assets to which the Seller
is a party or by which the Seller or any of its property is bound;
(iii) all contracts, agreements, commitments, purchase
orders or other understandings or arrangements to which the Seller is a party or
by which the Seller or any of its property is bound which (A) involve payments
or receipts by the Seller of more than $2,000 in the case of any single
contract, agreement, commitment, understanding or arrangement under which full
performance (including payment) has not been rendered by all parties thereto or
(B) which may materially adversely affect the condition (financial or otherwise)
or the properties, assets, business or prospects of the Seller;
(iv) all collective bargaining agreements, employment and
consulting agreements, executive compensation plans, bonus plans, deferred
compensation agreements, pension plans, retirement plans, employee stock option
or stock purchase plans and group life, health and accident insurance and other
employee benefit plans, agreements, arrangements or commitments to which the
Seller is a party or by which the Seller or any of its property is bound;
(v) all agency, distributor, sales representative and
similar agreements to which the Seller is a party;
(vi) all contracts, agreements or other understandings or
arrangements between the Seller any stockholder or affiliate (as that term is
defined in the Securities Exchange Act of 1934, as amended (an "Affiliate")) of
the Seller;
(vii) all leases, whether operating, capital or otherwise,
under which the Seller is lessor or lessee; and
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(viii) any other material agreement or contract entered into
by the Seller.
(b) Except as set forth on Schedule 2.16 attached hereto:
(i) each Contract is a valid and binding agreement of the
Seller, enforceable against the Seller in accordance with its terms, and the
Seller does not have any knowledge that any Contract is not a valid and binding
agreement of the other parties thereto;
(ii) the Seller has fulfilled all material obligations
required pursuant to the Contracts to have been performed by the Seller on its
part prior to the date hereof, and the Seller has no reason to believe that it
will not be able to fulfill, when due, all of its obligations under the
Contracts which remain to be performed after the date hereof;
(iii) the Seller is not in breach of or default under any
Contract, and no event has occurred which with the passage of time or giving of
notice or both would constitute such a default, result in a loss of rights or
result in the creation of any lien, charge or encumbrance, thereunder or
pursuant thereto;
(iv) to the knowledge of the Seller, there is no existing
breach or default by any other party to any Contract, and no event has occurred
which with the passage of time or giving of notice or both would constitute a
default by such other party, result in a loss of rights or result in the
creation of any lien, charge or encumbrance thereunder or pursuant thereto;
(v) the Seller is not restricted by any Contract from
carrying on its business anywhere in the world; and
(vi) the Seller has no written or oral Contracts to sell
products or perform services which are expected to be performed at, or to result
in, a loss.
(c) Except as set forth on Schedule 2.3 or Schedule 2.16, the
continuation, validity and effectiveness of each Contract will not be affected
by the transfer thereof to Buyer under this Agreement and all such Contracts are
assignable to Buyer without a consent.
(d) True, correct and complete copies of all Contracts have
previously been delivered by the Seller to the Buyer.
2.17 Compliance with Agreements and Laws. The Seller has all requisite
licenses, permits and certificates, including environmental, health and safety
permits, from federal, state and local authorities necessary to conduct its
business and own and operate its assets (collectively, the "Permits"). Schedule
2.17 attached hereto sets forth a true, correct and complete list of all such
Permits, copies of which have previously been delivered
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by the Seller to the Buyer. The Seller is not in violation of any law,
regulation or ordinance (including, without limitation, laws, regulations or
ordinances relating to building, zoning, environmental, disposal of hazardous
substances, land use or similar matters) relating to its properties, the
violation of which could have a material adverse effect on the Seller or its
properties. The business of the Seller does not violate, in any material
respect, any federal, state, local or foreign laws, regulations or orders
(including, but not limited to, any of the foregoing relating to employment
discrimination, occupational safety, environmental protection, hazardous waste
(as defined in the Resource Conservation and Recovery Act, as amended, and the
regulations adopted pursuant thereto), conservation, or corrupt practices, the
enforcement of which would have a material and adverse effect on the results of
operations, condition (financial or otherwise), assets, properties, business or
prospects of the Seller. Except as set forth on Schedule 2.17 attached hereto,
the Seller has not since January 1, 1993 received any notice or communication
from any federal, state or local governmental or regulatory authority or
otherwise of any such violation or noncompliance.
2.18 Employee Relations.
(a) The Seller is in compliance with all federal, state and
municipal laws respecting employment and employment practices, terms and
conditions of employment, and wages and hours, and is not engaged in any unfair
labor practice, and there are no arrears in the payment of wages or social
security taxes.
(b) Except as set forth on Schedule 2.18 attached hereto:
(i) none of the employees of the Seller is represented by
any labor union;
(ii) there is no unfair labor practice complaint against the
Seller pending before the National Labor Relations Board or any state or local
agency;
(iii) there is no pending labor strike or other material
labor trouble affecting the Seller (including, without limitation, any
organizational drive);
(iv) there is no material labor grievance pending against
the Seller;
(v) there is no pending representation question respecting
the employees of the Seller; and
(vi) there are no pending arbitration proceedings arising
out of or under any collective bargaining agreement to which the Seller is a
party, or to the knowledge of the Seller, any basis for which a claim may be
made under any collective bargaining agreement to which the Seller is a party.
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(c) For purposes of this Subsection 2.18, the term "employee"
shall be construed to include sales agents and other independent contractors who
spend a majority of their working time on the Seller's business.
2.19 Absence of Certain Changes or Events. Except as set forth on
Schedule 2.19 attached hereto, since September 30, 1996, the Seller has not
entered into any transaction which is not in the usual and ordinary course of
business, and, without limiting the generality of the foregoing, the Seller has
not:
(a) Incurred any material obligation or liability for borrowed
money;
(b) Discharged or satisfied any lien or encumbrance or paid any
obligation or liability other than current liabilities reflected in the Current
Balance Sheet;
(c) Mortgaged, pledged or subjected to lien, charge or other
encumbrance any of the Assets;
(d) Sold or purchased, assigned or transferred any of its
tangible assets or cancelled any debts or claims, except for inventory sold and
raw materials purchased in the ordinary course of business;
(e) Made any material amendment to or termination of any Contract
or done any act or omitted to do any act which would cause the breach of any
Contract;
(f) Suffered any losses, whether insured or uninsured, and
whether or not in the control of the Seller, in excess of $5,000 in the
aggregate, or waived any rights of any value;
(g) Made any changes in compensation of its officers, directors
or employees;
(h) Received notice of any litigation, warranty claim or products
liability claims; or
(i) Made any material change in the terms, status or funding
condition of any Employee Plan, as defined in Subsection 2.23 hereof.
2.20 Suppliers. Schedule 2.20 attached hereto sets forth a true,
correct and complete list of the names and addresses of the ten suppliers of the
Seller which accounted for the largest dollar volume of purchases by the Company
for the fiscal year ending December 31, 1995. None of such suppliers has
notified the Seller that it intends to discontinue its relationship with the
Seller.
2.21 Prepayments and Deposits. Schedule 2.21 attached hereto sets
forth all prepayments or deposits from customers for products to be shipped, or
services to be performed, after the
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Closing Date which have been received by the Seller as of the date hereof.
2.22 Trade Names and Other Intangible Property.
(a) Schedule 2.22 attached hereto sets forth a true, correct and
complete list and, where appropriate, a description of, all Intangible Property.
True, correct and complete copies of all licenses and other agreements relating
to the Intangible Property have been previously delivered by the Seller to the
Buyer.
(b) Except as otherwise disclosed in Schedule 2.22 attached
hereto, the Seller is the sole and exclusive owner of all Intangible Property
and all designs, permits, labels and packages used on or in connection
therewith. The Intangible Property owned by the Seller is sufficient to conduct
the Seller's business as presently conducted and, when transferred to the Buyer
pursuant to this Agreement, will be sufficient to permit the Buyer to conduct
the business of the Seller as presently conducted by the Seller. The Seller has
received no notice of, and has no knowledge of any basis for, a claim against it
that any of its operations, activities, products or publications infringes on
any patent, trademark, trade name, copyright or other property right of a third
party, or that it is illegally or otherwise using the trade secrets, formulae or
any property rights of others. The Seller has no disputes with or claims against
any third party for infringement by such third party of any trade name or other
Intangible Property of the Seller. The Seller has taken all steps reasonably
necessary to protect its right, title and interest in and to the Intangible
Property.
2.23 Employee Benefit Plans.
(a) The Seller does not now have or otherwise contribute to or
participate in, and has not in the past had or otherwise contributed to, any
employee benefit plan subject to the reporting requirements of the Employee
Retirement Income Security Act of 1974.
(b) The Buyer assumes no liabilities with respect to any employee
benefit plan which liability relates to any period prior to the Closing Date,
including, without limitation, any taxes, accrued vacation or sick pay (whether
or not vested), accrued vacation, sick and personal leaves, employee policies,
employee benefit claims or liability to the Pension Benefit Guaranty
Corporation.
(c) Schedule 2.23 attached hereto contains a true, correct and
complete list of all pension, benefit, profit sharing, retirement, deferred
compensation, welfare, insurance, disability, bonus, vacation pay, severance pay
and other similar plans, programs and agreements, whether reduced to writing or
not, relating to the Seller's employees, or maintained at any time since January
1, 1991 by the Seller or by any other member of any controlled group of
corporations, group of trades or
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businesses under common control, or affiliated service group (as defined for
purposes of Section 414(b), (c) and (m), respectively, of the Internal Revenue
Code of 1986, as amended (the "Code")) (the "Employee Plans") and, except as set
forth on Schedule 2.23 attached hereto, the Seller has no obligations,
contingent or otherwise, past or present, under applicable law or the terms of
any Employee Plan.
2.24 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Seller and which are necessary for the execution
and delivery by the Seller of this Agreement and the documents to be executed
and delivered by the Seller in connection herewith are set forth on Schedule
2.24 attached hereto and have been, or will be prior to the Closing Date,
obtained and satisfied.
2.25 Indebtedness to and from Officers, Directors and Shareholders.
Except as set forth on Schedule 2.25 attached hereto, the Seller is not
indebted, directly or indirectly, to any person who is an officer, director or
shareholder of the Seller or any affiliate of any such person in any amount
whatsoever other than for salaries for services rendered or reimbursable
business expenses, all of which have been reflected on the Current Balance
Sheet, and no such officer, director, shareholder or affiliate is indebted to
the Seller, except for advances made to employees of the Seller in the ordinary
course of business to meet reimbursable business expenses anticipated to be
incurred by such obligor.
2.26 Powers of Attorney and Suretyships. Except as set forth on
Schedule 2.26 attached hereto, the Seller has no general or special powers of
attorney outstanding (whether as grantor or grantee thereof) and has no
obligation or liability (whether actual, accrued, accruing, contingent or
otherwise) as guarantor, surety, co-signor, endorser, co-maker, indemnitor or
otherwise in respect of the obligation of any person, corporation, partnership,
joint venture, association, organization or other entity, except as endorser or
maker of checks or letters of credit, respectively, endorsed or made in the
ordinary course of business.
2.27 Disclosure. No representation or warranty by the Seller in this
Agreement or in any Exhibit hereto, or in any list, statement, document or
information set forth in or attached to any Schedule delivered or to be
delivered pursuant to this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements contained therein not misleading. The Seller has
disclosed to the Buyer all material facts pertaining to the transactions
contemplated by this Agreement.
3. Representations of the Buyer. The Buyer represents and warrants to the
Seller as follows:
3.1 Organization and Authority. The Buyer is a corporation duly
organized, validly existing and in good
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standing under the laws of the state of Delaware, and has requisite corporate
power and authority to own its properties and to carry on its business as now
being conducted. The Buyer has full power to execute and deliver this Agreement
and the Instrument of Assumption of Liabilities and to consummate the
transactions contemplated hereby and thereby. Copies of the Certificate of
Incorporation and the Bylaws of the Buyer, as amended to date, have been
previously delivered to the Seller, are complete and correct, and no amendments
have been made thereto or have been authorized since the date thereof. The Buyer
is qualified to transact business, and in good standing, in the State of New
Jersey and the Commonwealth of Pennsylvania.
3.2 Capitalization of the Buyer. On the date hereof, the Buyer's
authorized capital stock consists of 35,000,000 shares of Common Stock, $.01 par
value ("Common Stock"), and 2,000,000 shares of Preferred Stock, $.01 par value
per share, none of which shares of Preferred Stock are issued or outstanding.
All of the outstanding shares of capital stock of the Buyer have been and on the
Closing Date will be duly and validly issued and are, or will be, fully paid and
nonassessable.
3.3 Authorization. The execution and delivery of this Agreement by the
Buyer, and the agreements provided for herein, and the consummation by the Buyer
of all transactions contemplated hereby, have been duly authorized by all
requisite corporate action. This Agreement and all such other agreements and
written obligations entered into and undertaken in connection with the
transactions contemplated hereby constitute the valid and legally binding
obligations of the Buyer, enforceable against the Buyer in accordance with their
respective terms. The execution, delivery and performance of this Agreement and
the agreements provided for herein, and the consummation by the Buyer of the
transactions contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (a) violate the provisions of
any law, rule or regulation applicable to the Buyer; (b) violate the provisions
of the Buyer's Certificate of Incorporation or Bylaws; (c) violate any judgment,
decree, order or award of any court, governmental body or arbitrator; or (d)
conflict with or result in the breach or termination of any term or provision
of, or constitute a default under, or cause any acceleration under, or cause the
creation of any lien, charge or encumbrance upon the properties or assets of the
Buyer pursuant to, any indenture, mortgage, deed of trust or other agreement or
instrument to which it or its properties is a party or by which the Buyer is or
may be bound.
3.4 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Buyer and which are necessary for the consummation
of the transactions contemplated by this Agreement have been, or will be prior
to the Closing Date, obtained and satisfied.
3.5 Disclosure. No representation or warranty by the Buyer in this
Agreement or in any Exhibit hereto, or in any list, statement, document or
information set forth in or attached to
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any Schedule delivered or to be delivered pursuant hereto, contains or will
contain any untrue statement of a material fact or omits or will omit any
material fact necessary in order to make the statements contained therein not
misleading.
4. Access to Information; Public Announcements
4.1 Access to Management, Properties and Records.
(a) Except to the extent prohibited by law, from the date of this
Agreement until the Closing Date, the Seller shall afford the officers,
attorneys, accountants and other authorized representatives of the Buyer free
and full access upon reasonable notice and during normal business hours to all
management personnel, offices, properties, books and records of the Seller, so
that the Buyer may have full opportunity to make such investigation as it shall
desire to make of the management, business, properties and affairs of the
Seller, and the Buyer shall be permitted to make abstracts from, or copies of,
all such books and records, including without limitation, correspondence,
manuals, customer lists, employment records, studies, reports or summaries
relating to or arising out of the business of the Seller. Except to the extent
prohibited by law, the Seller shall furnish to the Buyer such financial and
operating data and other information as to the Assets and the business of the
Seller as the Buyer shall reasonably request.
Notwithstanding the foregoing, the Seller is engaged in certain litigation
matters, all of which are described in Seller's Annual Report on Form 10-K for
its fiscal year ended December 31, 1995 and its Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (copies of which reports have been
provided to the Buyer, and are hereinafter referred to as the "Applicable Public
Reports"). The Seller believes, in good faith, that much of its information (and
associated documentation relating thereto) relating to such litigation is
attorney-client privileged. Buyer agrees that it need not be provided with
access to such privileged information, which agreement is based on Seller's (i)
representation and warranty to Buyer that such litigation matters are reasonably
completely and accurately described in the Applicable Public Reports, (ii)
representation to Buyer that access to such information by Buyer would
jeopardize Seller's attorney-client privilege with respect to such information,
and (iii) agreement to indemnify and hold harmless Buyer in respect of any
damages, costs, claims or liability arising from such litigation.
(b) If the Buyer, at its option and expense, prior to the Closing
Date, elects to have a report or reports prepared by an engineer or other
professional selected by the Buyer, certifying that the real property associated
with the Assets (i) complies with all applicable federal, state and local
environmental and wetlands laws, rules and regulations and that there is not
now, and never has been, manufacture, storage, or disposal of hazardous wastes
at the real estate in violation of said laws, rules and regulations, (ii)
complies with all applicable building, health and fire codes, and subdivision
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control laws, rules and regulations, the Seller shall cooperate with such
engineer or professional to the extent necessary to prepare such reports,
including, without limitation, providing such engineer or professional access to
such real property and necessary records, and arranging interviews with
employees of the Seller.
(c) If reasonably requested by the Buyer, the Seller shall
authorize the release to the Buyer of all files pertaining to the Seller, the
Assets or the business or operations of the Seller held by any federal, state,
county or local authorities, agencies or instrumentalities.
4.2 Confidentiality. All information not previously disclosed to the
public or generally known to persons engaged in the respective businesses of the
Seller or the Buyer which shall have been furnished by the Buyer or the Seller
to the other party in connection with the transactions contemplated hereby or as
provided pursuant to this Section 4 shall not be disclosed to any person other
than their respective employees, directors, attorneys, accountants or financial
advisors or other than as contemplated herein. In the event that the
transactions contemplated by this Agreement shall not be consummated, all such
information which shall be in writing shall be returned to the party furnishing
the same, including, to the extent reasonably practicable, all copies or
reproductions thereof which may have been prepared, and neither party shall at
any time thereafter disclose to third parties, or use, directly or indirectly,
for its own benefit, any such information, written or oral, about the business
of the other party hereto. Notwithstanding the above, (a) the Buyer may include
in any Registration Statement or periodic report filed by it with the Securities
and Exchange Commission or any state securities commission or any stock market
and (b) otherwise disclose, to the extent reasonably advised to do so by
counsel, any information regarding the Seller, the business of the Seller, the
financial condition of the Seller and/or the terms of this Agreement.
4.3 Public Announcements. The Seller agrees that prior to the Closing
Date, except as otherwise required by law, any and all public announcements or
other public communications concerning this Agreement and the purchase of the
Assets by the Buyer shall be subject to the approval of the Buyer, which
approval Buyer agrees shall not be unreasonably withheld.
5. Pre-Closing Covenants of the Seller
From and after the date hereof and until the Closing Date:
5.1 Conduct of Business. The Seller shall carry on its business
diligently and substantially in the same manner as heretofore and shall not make
or institute any unusual or new methods of purchase, sale, shipment or delivery,
lease, management, accounting or operation, except as agreed to in writing by
the Buyer. All of the property of the Seller shall be
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used, operated, repaired and maintained in a normal business manner consistent
with past practice.
5.2 Absence of Material Changes. Without the prior written consent of
the Buyer (which consent shall not be unreasonably withheld), the Seller shall
not:
(a) Except to the extent described in Seller's Proxy Statement
dated November 20, 1996 (with respect to Seller's annual meeting of shareholders
(the "November Proxy Statement")), take any action to amend its charter or
Bylaws;
(b) Issue any stock, bonds or other corporate securities or grant
any option or issue any warrant to purchase or subscribe to any of such
securities or issue any securities convertible into such securities, except (1)
upon exercise of currently outstanding options or warrants or other rights to
acquire stock in the Seller; (2) upon conversion of currently outstanding
convertible securities; or (3) for issuance of options to purchase 400,000
shares of Seller's Common Stock to persons who are elected to Seller's Board of
Directors, as described in the November Proxy Statement;
(c) Incur any obligation or liability (absolute or contingent),
except current liabilities incurred and obligations under contracts entered into
in the ordinary course of business;
(d) Declare or make any payment or distribution to its
shareholders with respect to their stock or purchase or redeem any shares of its
capital stock;
(e) Mortgage, pledge, or subject to any lien, charge or any other
encumbrance any of the Assets;
(f) Sell, assign, or transfer any of the Assets, except for
inventory sold in the ordinary course of business, at a normal profit margin,
and for not less than replacement cost;
(g) Except as described in Schedule 5.2(g), cancel any debts or
claims, except in the ordinary course of business;
(h) Merge or consolidate with or into any corporation or other
entity;
(i) Make, accrue or become liable for any bonus, profit sharing
or incentive payment, except for accruals under existing plans, if any, or
increase the rate of compensation payable or to become payable by it to any of
its officers, directors or employees;
(j) Make any election or give any consent under the Code or the
tax statutes of any state or other jurisdiction or make any termination,
revocation or cancellation of any such election or any consent or compromise or
settle any claim for past or present tax due;
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(k) Modify, amend, alter or terminate any of its executory
contracts of a material value or which are material in amount;
(l) Take or permit any act or omission constituting a material
breach or default under any contract, indenture or agreement by which it or its
properties are bound;
(m) Fail to (i) preserve the possession and control of its assets
and business, (ii) keep in faithful service its present officers and key
employees, (iii) preserve the goodwill of its customers, suppliers, agents,
brokers and others having business relations with it, and (iv) keep and preserve
its business existing on the date hereof until after the Closing Date;
(n) Fail to operate its business and maintain its books, accounts
and records in the customary manner and in the ordinary or regular course of
business and maintain in good repair its business premises, fixtures, furniture
and equipment;
(o) Enter into any leases, contracts, agreements or
understandings other than those entered into in the ordinary course of business
calling for payments which in the aggregate do not exceed $5,000 for each such
lease, contract, agreement or understanding;
(p) Engage any employee for a salary in excess of $10,000 per
annum (except to replace an existing employee at a salary not in excess of such
existing employee's then current salary);
(q) Materially alter the terms, status or funding condition of
any Employee Plan;
(r) Make any loans to any person or entity; or
(s) Commit or agree to do any of the foregoing in the future
prior to the Closing Date (provided any such commitment with respect to periods
after the Closing Date may not prohibit or contradict performance by the Seller
of its obligations under this Agreement, or otherwise impair or impede the
Seller's ability to perform any of its obligations hereunder).
5.3 Taxes. The Seller will, on a timely basis, file all tax returns
for and pay any and all taxes which shall become due or shall have accrued (a)
on account of the operation of the business of the Seller or the ownership of
the Assets on or prior to the Closing Date or (b) on account of the sale of the
Assets (including a pro-rata portion of all personal property and excise taxes
payable with respect to the Assets by the Seller).
5.4 Delivery of Financial Statements and Payroll Information. The
Seller will deliver the Internal Financial Statements and the Comparative
Financial Statements, at the times and in accordance with the provisions of
Section 2.5. On or
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before December 31, 1996, Seller shall provide to the Buyer, the Seller's W-2
payroll information for all of Seller's employees, for the 12-month period
ending on December 31, 1995, and such information shall be true, complete and
correct in all material respects. On or before January 31, 1997, Seller shall
provide to the Buyer, on computer diskette, the Seller's W-2 payroll information
for all of Seller's employees, for the 12-month period ending on December 31,
1996, and the information contained thereon shall be true, complete and correct
in all material respects.
5.5 Compliance with Laws. The Seller will comply with all laws and
regulations which are applicable to it, its ownership of the Assets or to the
conduct of its business and will perform and comply with all contracts,
commitments and obligations by which it is bound.
5.6 Continued Truth of Representations and Warranties of the Seller.
The Seller will not take any actions which would result in any of the
representations or warranties set forth in Section 2 hereof being untrue.
5.7 Continuing Obligation to Inform. From time to time prior to the
Closing, the Seller will deliver or cause to be delivered to the Buyer
supplemental information concerning events subsequent to the date hereof which
would render any statement, representation or warranty in this Agreement or any
information contained in any Schedule inaccurate or incomplete in any material
respect at any time after the date hereof until the Closing Date.
5.8 Exclusive Dealing. The Seller will not, directly or indirectly,
through any officer, director, agent or otherwise, (a) solicit, initiate or
encourage submission of proposals or offers from any person relating to any
acquisition or purchase of all or a material portion of the Assets, or any
equity interest in, the Seller or any equity investment, merger, consolidation
or business combination with the Seller, or (b) subject to the exercise by the
Seller's Directors' of their fiduciary duties (as advised in writing by counsel)
participate in any discussions or negotiations regarding, or furnish to any
other person, any non-public information with respect to, or otherwise cooperate
in any way with, or assist or participate in, facilitate or encourage, any
effort or attempt by any other person to do or seek any of the foregoing. The
Seller shall promptly notify the Buyer if any such proposal or offer, or any
inquiry or contact with any person with respect thereto, is made.
Nothing herein shall prohibit or prevent the Seller from soliciting,
initiating or encouraging proposals with respect to transactions to be
consummated after the Closing of the transactions contemplated by this
Agreement, provided that (1) none of such proposals or transactions may relate
to the Assets, the Seller's retail video business or the transactions
contemplated by this Agreement and (2) none or such proposals or transactions
with respect to periods after the Closing may prohibit or contradict performance
by the Seller of its
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obligations under this Agreement, or otherwise impair or impede the Seller's
ability to perform any of its obligations hereunder.
5.9 No Publicity. Except as required by applicable laws, the Seller
shall make no public announcement with respect to this Agreement or the
transactions contemplated hereby without the express prior written consent of
the Buyer. The Seller shall hold in confidence, and use its best efforts to have
all of its officers, directors and personnel hold in confidence, the terms of
this Agreement and the transactions contemplated hereby. If the Seller believes
that disclosure is required by applicable laws, it shall promptly so notify the
Buyer, which notice shall include a draft of the proposed disclosure, and the
Seller shall work in good faith with Buyer to agree upon the disclosure to be
made by Seller.
5.10 Approval of Shareholders. Seller shall promptly prepare (and
submit to its shareholders) a Proxy Statement and such other documentation as
may be necessary to submit, on or before the Closing Date, the approval of the
transactions contemplated hereby to Seller's shareholders, which Proxy Statement
shall be in form and substance reasonably acceptable to the Buyer. Without
limiting the foregoing, Seller shall recommend that its shareholders approve the
transaction contemplated hereby (subject to the last paragraph of Section 5.11
below) and otherwise use its best efforts to obtain the approval of the Seller's
shareholders of the transactions contemplated hereby.
5.11 Breakup Fee. The Seller shall pay to the Buyer the sum of
$100,000, which the parties agree to be equal to the reasonable fees and
expenses incurred by the Buyer in connection with the consummation of the
transactions contemplated hereby:
(a) If Seller's shareholders for any reason fail to approve the
consummation of the transactions contemplated hereby on or before the
Closing Date; or
(b) the Seller's Directors, whether or not in the exercise of their
fiduciary or other legal duties, on or before the Closing Date, shall have
failed to approve or recommend, or shall have withdrawn or adversely
modified or taken a public position materially inconsistent with its
approval or recommendation of, this Agreement or the terms hereof.
Nothing contained in this Section 5.11 shall relieve the Seller of its
obligation (subject to the exercise by the Seller's Directors' of their
fiduciary duties, as advised in writing by counsel) to recommend that the
Seller's stockholders accept and approve the transactions contemplated by this
Agreement. The provisions contained in this Section 5.11 shall survive any
termination of this Agreement.
6. Satisfaction of Conditions; Liquidated Damages.
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6.1 Satisfaction of Conditions. The Seller and the Buyer covenant and
agree to use their commercially reasonable efforts to obtain the satisfaction of
the conditions specified in this Agreement.
6.2 Liquidated Damages.
(a) The parties hereto agree that the harm suffered by the Buyer
as a result of a breach of this Agreement by the Seller and the failure by the
Seller to consummate the transactions contemplated hereby is difficult to
accurately estimate. The parties agree, based on all present circumstances, that
$100,000 represents a reasonable estimate of the damages, excluding lost
opportunity costs, which would be suffered by the Buyer upon a failure to close
due to a breach of the Seller.
(b) If Seller (i) willfully or intentionally breaches any
representation, warranty or covenant under this Agreement, willfully or
intentionally fails to perform any condition or obligation required to be
performed hereunder, or willfully or intentionally fails to disclose a material
fact pertaining to the Assets or the transactions contemplated by this Agreement
to the Buyer; or (ii) either elects not to sell the Assets to the Buyer pursuant
to the terms of this Agreement, sells or otherwise transfers the Assets or
enters into an agreement (in principle or otherwise) with any other person or
entity to sell any shares of the capital stock of Seller, to merge with or into,
or consolidate Seller with any person or entity other than the Buyer, to sell
more than 10% of the Assets to any other person or entity or to effect any other
transaction with any other person or entity that would preclude or otherwise
frustrate the transfer of the Assets to the Buyer (a "Willful Breach"), the
Seller will pay to the Buyer the sum of $100,000, as liquidated damages, and
Seller will pay the Buyer the additional sum of $100,000, which the parties
agree would be a reasonable estimate of Buyer's lost opportunity cost. The
remedy set forth in this paragraph (b) shall be available to the Buyer only in
the event that the transactions contemplated hereby are not consummated on or
before the Closing Date.
The provisions of this Section 6.2 shall not be applicable (and the Seller
shall not be obligated to pay any amount under this Section 6.2 to Buyer) in the
event that the Seller pays to the Buyer the break-up fee described in Section
5.11.
7. Conditions to Obligations of the Buyer
The obligations of the Buyer under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing in the sole discretion of the Buyer:
7.1 Continued Truth of Representations and Warranties of the Seller;
Compliance with Covenants and Obligations. The representations and warranties of
the Seller shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except for any
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changes permitted by the terms hereof or consented to in writing by the Buyer.
The Seller shall have performed and complied with all terms, conditions,
covenants, obligations, agreements and restrictions required by this Agreement
to be performed or complied with by it prior to or at the Closing Date.
7.2 Corporate Proceedings. All corporate and other proceedings
required to be taken on the part of the Seller to authorize or carry out this
Agreement and to convey, assign, transfer and deliver the Assets shall have been
taken. Without limiting the foregoing, the Seller's shareholders shall have
approved the transactions contemplated by this Agreement.
7.3 Governmental Approvals. All governmental agencies, departments,
bureaus, commissions and similar bodies, the consent, authorization or approval
of which is necessary under any applicable law, rule, order or regulation for
the consummation by the Seller of the transactions contemplated by this
Agreement and the operation of the Seller's business by the Buyer shall have
consented to, authorized, permitted or approved such transactions.
7.4 Consents of Lenders, Lessors and Other Third Parties. The Seller
shall have received all requisite consents and approvals of all lenders, lessors
and other third parties whose consent or approval is required in order for the
Seller to consummate the transactions contemplated by this Agreement, including,
without limitation, those set forth on Schedule 2.3 attached hereto.
7.5 Adverse Proceedings. No action or proceeding by or before any
court or other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever which shall seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which might affect
the right of the Buyer to own or use the Assets after the Closing.
7.6 Opinion of Counsel. The Buyer shall have received an opinion of
Earp, Cohn & Pendery, counsel to the Seller, dated as of the Closing Date, in
substantially the form attached hereto as Exhibit C. Such opinion may rely on
legal opinions of other counsel, including Semmes, Bowen & Semmes.
7.7 Board of Directors and Shareholder Approval. The Board of
Directors and shareholders of the Seller shall have duly authorized the
transactions contemplated by this Agreement.
7.8 The Assets. Except for the Permitted Encumbrances, at the Closing
the Buyer shall receive good, clear, record and marketable title to the Assets,
free and clear of all liens, liabilities, security interests and encumbrances of
any nature whatsoever.
7.9 Update. The Seller shall have provided the Buyer with a true,
correct and complete list and amount, as of the Closing Date, of:
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(a) the Inventory;
(b) the Fixed Assets;
(c) the Accounts Receivable, including an aging thereof; and
(d) the trade accounts payable and accrued liabilities assumed
pursuant to Subsection 1.4(a)(i) and (ii) hereof.
7.10 Cash on Hand at Stores. On the Closing Date, the Seller will have
cash on hand, at each Store, of $600, which cash will be transferred to the
Buyer pursuant to the terms of this Agreement.
7.11 Payables. On the Closing Date, the Seller will have used its best
efforts to satisfy all obligations to suppliers and vendors of goods and
services and other trade creditors which are past due in accordance with their
terms and to cause the Seller to have no such obligations to suppliers, vendors
and trade creditors outstanding for more than 60 days as of the Closing. In the
event that the Seller is unable to satisfy all such obligations to suppliers,
vendors and trade creditors as contemplated by the preceding sentence, the Buyer
shall be permitted, without Seller's approval, to apply all or any of the Base
Purchase Price to any and all of the liabilities of Seller to the extent
necessary to enable Seller to satisfy all such obligations to suppliers, vendors
and trade creditors.
7.12 Tax Lien Waivers. On or prior to the Closing Date, the Seller
shall have obtained and delivered to the Buyer tax lien waivers from all
jurisdictions in which Assets are located and which provide such tax lien
waivers.
7.13 Closing of Offering. The Buyer shall have consummated the
Offering.
7.14 Closing Deliveries. The Buyer shall have received at or prior to
the Closing each of the following documents:
(a) a bill of sale substantially in the form attached hereto as
Exhibit D;
(b) such instruments of conveyance, assignment and transfer, in
form and substance satisfactory to the Buyer, as shall be appropriate to convey,
transfer and assign to, and to vest in, the Buyer, good, clear, record and
marketable title to the Assets;
(c) such contracts, files and other data and documents pertaining
to the Assets or the Seller's business as the Buyer may reasonably request;
(d) copies of the general ledgers and books of account of the
Seller, and all federal, state and local income,
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franchise, property and other tax returns filed by the Seller with respect to
the Assets since January 1, 1990;
(e) such certificates of the Seller's officers and such other
documents evidencing satisfaction of the conditions specified in Section 7 as
the Buyer shall reasonably request;
(f) a certificate of the Secretary of State of the State of
Delaware as to the legal existence and good standing (including tax) of the
Seller in Delaware and a certificate of the Secretary of State of each other
state or jurisdiction in which the Assets are located, as to Seller's
qualification to do business in such jurisdiction;
(g) certificates of the Chairman of the Board of Directors of the
Seller attesting to the incumbency of the Seller's officers, respectively, the
authenticity of the resolutions authorizing the transactions contemplated by the
Agreement, and the authenticity and continuing validity of the charter documents
delivered pursuant to Subsection 2.1;
(h) estoppel certificates from each lessor from whom the Seller
leases real or personal property consenting to the assumption of such lease by
the Buyer and representing that there are no outstanding claims against the
Seller under any such lease;
(i) the schedules listed in Subsection 7.9;
(j) the Escrow Agreement; and
(k) such other documents, instruments or certificates as the
Buyer may reasonably request.
8. Conditions to Obligations of the Seller
The obligations of the Seller under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing at the sole discretion of the Seller:
8.1 Continued Truth of Representations and Warranties of the Buyer;
Compliance with Covenants and Obligations. The representations and warranties of
the Buyer in this Agreement shall be true on and as of the Closing Date as
though such representations and warranties were made on and as of such date,
except for any changes consented to in writing by the Seller. The Buyer shall
have performed and complied with all terms, conditions, obligations, agreements
and restrictions required by this Agreement to be performed or complied with by
it prior to or at the Closing Date.
8.2 Corporate Proceedings. All corporate and other proceedings
required to be taken on the part of the Buyer to authorize or carry out this
Agreement shall have been taken.
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8.3 Governmental Approvals. All governmental agencies, departments,
bureaus, commissions and similar bodies, the consent, authorization or approval
of which is necessary under any applicable law, rule, order or regulation for
the consummation by the Buyer of the transactions contemplated by this Agreement
shall have consented to, authorized, permitted or approved such transactions.
8.4 Consents of Lenders, Lessors and Other Third Parties. The Buyer
shall have received all requisite consents and approvals of all lenders, lessors
and other third parties whose consent or approval is required in order for the
Buyer to consummate the transactions contemplated by this Agreement.
8.5 Adverse Proceedings. No action or proceeding by or before any
court or other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever which shall seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which might affect
the right of the Seller to transfer the Assets.
8.6 Opinion of Counsel. The Seller shall have received an opinion of
Hale and Dorr, counsel to the Buyer, dated as of the Closing Date, in
substantially the form attached hereto as Exhibit E, and as to such other
matters as may be reasonably requested by the Seller or its counsel.
8.7 Closing Deliveries. The Seller shall have received at or prior to
the Closing each of the following documents:
(a) such certificates of the Buyer's officers and such other
documents evidencing satisfaction of the conditions specified in this Section 8
as the Seller shall reasonably request;
(b) a certificate of the Secretary of State of the State of
Delaware as to the legal existence and good standing (including tax) of the
Buyer in Delaware;
(c) a certificate of the Secretary of the Buyer attesting to the
incumbency of the Buyer's officers, the authenticity of the resolutions
authorizing the transactions contemplated by this Agreement, and the
authenticity and continuing validity of the charter documents delivered pursuant
to Subsection 3.1;
(d) Instrument of Assumption of Liabilities executed by the Buyer
and accepted by the Seller;
(e) payment of the Base Purchase Price;
(f) the Escrow Agreement; and
(g) such other documents, instruments or certificates as the
Seller may reasonably request.
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9. Indemnification
9.1 By the Buyer and the Seller. The Buyer on the one hand and the
Seller, on the other hand, each hereby indemnifies and holds harmless the other
against all claims, damages, losses, liabilities, costs and expenses (including,
without limitation, settlement costs and any legal, accounting or other expenses
for investigating or defending any actions or threatened actions) reasonably
incurred by the Buyer or the Seller in connection with each and all of the
following:
(a) Any breach by the indemnifying party of any representation or
warranty in this Agreement;
(b) Any breach of any covenant, agreement or obligation of the
indemnifying party contained in this Agreement or any other agreement,
instrument or document contemplated by this Agreement; and
(c) Any misrepresentation contained in any statement, certificate
or schedule furnished by the indemnifying party pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement;
provided that, the Buyer shall not be entitled to any indemnification in
connection with any of the foregoing, except with respect to claims by third
parties, if the Buyer receives the breakup fee pursuant to Section 5.11 or if
Buyer receives liquidated damages pursuant to Section 6, and in either of such
cases, the Closing does not occur.
9.2 By the Seller. The Seller further agrees to indemnify and hold
harmless the Buyer from any and all claims, damages, losses, liabilities, costs
and expenses (including, without limitation, settlement costs and any legal,
accounting or other expenses for investigating or defending any actions or
threatened actions) reasonably incurred by the Buyer, in connection with each
and all of the following:
(a) Any claims against, or liabilities or obligations of, the
Seller or against the Assets (x) relating to periods prior to the Closing Date
(y) or, if relating to periods after the Closing Date, not specifically assumed
by the Buyer pursuant this Agreement;
(b) The failure of the Buyer to obtain the protections afforded
by compliance with the notification and other requirements of the bulk sales
laws in force in the jurisdictions in which such laws may be applicable to
either the Seller or the transactions contemplated by this Agreement;
(c) Any violation by the Seller of, or any failure by the Seller
to comply with, any law, ruling, order, decree, regulation or zoning,
environmental or permit requirement applicable to the Seller, the Assets or its
business, whether or not any such violation or failure to comply has been
disclosed to the Buyer, including any costs incurred by the Buyer (i) in order
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to bring the Assets into compliance with environmental laws as a consequence of
noncompliance with such laws on the Closing Date or (ii) in connection with the
transfer of the Assets;
(d) Any warranty claim or product liability claim relating to the
Seller's business or operations prior to the Closing Date;
(e) Any tax liabilities or obligations of the Seller;
(f) Any claims against, or liabilities or obligations of, the
Seller with respect to obligations under Seller's Employee Plans; and
(g) The litigation matters referenced in Section 4.1(a) of this
Agreement.
9.3 Claims for Indemnification. Whenever any claim shall arise for
indemnification hereunder the party seeking indemnification (the "Indemnified
Party"), shall promptly notify the party from whom indemnification is sought
(the "Indemnifying Party") of the claim and, when known, the facts constituting
the basis for such claim. In the event of any such claim for indemnification
hereunder resulting from or in connection with any claim or legal proceedings by
a third-party, the notice to the Indemnifying Party shall specify, if known, the
amount or an estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a third party for
which it is entitled to indemnification hereunder without the prior written
consent of the Indemnifying Party, which shall not be unreasonably withheld,
unless suit shall have been instituted against it and the Indemnifying Party
shall not have taken control of such suit after notification thereof as provided
in Subsection 9.4 of this Agreement.
9.4 Defense by Indemnifying Party. In connection with any claim giving
rise to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnifying
Party at its sole cost and expense may, upon written notice to the Indemnified
Party, assume the defense of any such claim or legal proceeding if it
acknowledges to the Indemnified Party in writing its obligations to indemnify
the Indemnified Party with respect to all elements of such claim. The
Indemnified Party shall be entitled to participate in (but not control) the
defense of any such action, with its counsel and at its own expense. If the
Indemnifying Party does not assume the defense of any such claim or litigation
resulting therefrom within 30 days after the date such claim is made, (a) the
Indemnified Party may defend against such claim or litigation, in such manner as
it may deem appropriate, including, but not limited to, settling such claim or
litigation, after giving notice of the same to the Indemnifying Party, on such
terms as the Indemnified Party may deem appropriate, and (b) the Indemnifying
Party shall be entitled to participate in (but not control) the defense of such
action, with its counsel and at its own expense. The
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Indemnifying Party may not thereafter question the manner in which the
Indemnified Party defended such third party claim or the amount or nature of any
such settlement.
9.5 Payment of Indemnification Obligation. All indemnification by the
Buyer or the Seller hereunder shall be effected by payment of cash or delivery
of a cashier's or certified check in the amount of the indemnification
liability.
9.6 Survival of Representations; Claims for Indemnification. All
representations and warranties made by the parties herein or in any instrument
or document furnished in connection herewith shall survive the Closing and any
investigation at any time made by or on behalf of the parties hereto. All such
representations and warranties shall expire on the second anniversary of the
Closing Date, except for claims, if any, asserted in writing prior to such
second anniversary, which shall survive until finally resolved and satisfied in
full. All claims and actions for indemnity pursuant to this Section 9 for breach
of any representation or warranty shall be asserted or maintained in writing by
a party hereto on or prior to the expiration of such two-year period.
Notwithstanding the above, claims resulting from the failure by the Seller to
pay any tax when due shall expire one year after any applicable statute of
limitations.
10. Post-Closing Agreements
The Seller agrees that from and after the Closing Date:
10.1 Proprietary Information.
(a) Except as required by law, the Seller shall hold in
confidence, and use its best efforts to have all of its officers, directors and
personnel hold in confidence, all knowledge and information of a secret or
confidential nature with respect to the business of the Seller and shall not
disclose, publish or make use of the same without the consent of the Buyer,
except to the extent that such information shall have become public knowledge
other than by breach of this Agreement by the Seller. The covenant contained in
this Section 10.1(a) shall not apply to any business of the Seller unrelated to
the Assets, as such unrelated business may be conducted after the consummation
of the transactions contemplated by this Agreement.
(b) The Seller agrees that the remedy at law for any breach of
this Subsection 10.1 would be inadequate and that the Buyer shall be entitled to
injunctive relief in addition to any other remedy it may have upon breach of any
provision of this Subsection 10.1.
10.2 No Solicitation or Hiring of Former Employees. Except as provided
by law, for a period of five years after the Closing Date, neither the Seller
nor any of Ronald W. Martignoni, John A. Boylan or Fred E. Portner
(individually, a "Principal" and collectively, the "Principals") shall solicit
any person who was an employee of the Seller on the Closing Date to terminate
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his employment with the Buyer or to become an employee of the Seller or hire any
person who was such an employee on the date hereof or on the Closing Date.
10.3 Non-Competition Agreement.
(a) For a period of five years after the Closing Date, neither
the Seller nor any Principal shall, in any location which is within a three-mile
radius of any retail video store owned, operated or franchised by the Buyer
during such five-year period (including the Stores): (i) market, rent or sell
any product which has the same or substantially the same form, function and
primary application as any existing or proposed product marketed, rented or sold
by the Seller on or prior to the Closing Date or (ii) engage in any business
competitive with the business of the Seller as conducted on the date hereof or
on the Closing Date, in the United States or any other country in which the
Buyer conducted its business during the two years prior to the Closing Date.
(b) The parties hereto agree that the duration and geographic
scope of the non-competition provision set forth in this Subsection 10.3 are
reasonable. In the event that any court determines that the duration or the
geographic scope, or both, are unreasonable and that such provision is to that
extent unenforceable, the parties hereto agree that the provision shall remain
in full force and effect for the greatest time period and in the greatest area
that would not render it unenforceable. The parties intend that this
non-competition provision shall be deemed to be a series of separate covenants,
one for each and every county of each and every state of the United States of
America and each and every political subdivision of each and every country
outside the United States of America where this provision is intended to be
effective. The Seller agrees that damages are an inadequate remedy for any
breach of this provision and that the Buyer shall, whether or not it is pursuing
any potential remedies at law, be entitled to equitable relief in the form of
preliminary and permanent injunctions without bond or other security upon any
actual or threatened breach of this non-competition provision.
10.4 Sharing of Data.
(a) The Seller shall have the right for a period of three years
following the Closing Date to have reasonable access to such books, records and
accounts, including financial and tax information, correspondence, production
records, employment records and other similar information as are transferred to
the Buyer pursuant to the terms of this Agreement for the limited purposes of
concluding its involvement in the business of the Seller prior to the Closing
Date and in connection with any litigation matters unrelated to the transactions
contemplated by this Agreement to which the Seller is a party (including without
limitation, the litigation matters referenced in Section 4.1(a)), and for
complying with its obligations under applicable securities, tax, environmental,
employment or other laws and regulations. The Buyer shall have
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the right for a period of three years following the Closing Date to have
reasonable access to those books, records and accounts, including financial and
tax information, correspondence, employment records and other records which are
retained by the Seller pursuant to the terms of this Agreement to the extent
that any of the foregoing relates to the business of the Seller transferred to
the Buyer hereunder or is otherwise needed by the Buyer in order to comply with
its obligations under applicable securities, tax, environmental, employment or
other laws and regulations.
(b) The Seller and the Buyer agree that from and after the
Closing Date they shall cooperate fully with each other to facilitate the
transfer of the Assets from the Seller to the Buyer and the operation thereof by
the Buyer.
10.5 Use of Name. Without Buyer's prior written consent, the Seller
and each of the Principals agrees not to use the name "Choices Entertainment",
"Choices" or any derivation thereof after the Closing Date in connection with
any business related to, competitive with, or an outgrowth of, the business
conducted by the Seller on the date hereof. The Seller hereby grants to the
Buyer, effective upon the Closing Date, a fully-paid, nonexclusive, perpetual
license to use the names "Choices" and "Choices Entertainment" and any
derivation thereof (and to use any associated trademarks (including Seller's
registered trademark "Choices"), logos, images or names used by Seller in the
conduct of its retail video business on or before the Closing Date).
10.6 Cooperation in Litigation. Each party hereto will fully
cooperate with the other in the defense or prosecution of any litigation or
proceeding already instituted or which may be instituted hereafter against or by
such party relating to or arising out of the conduct of the business of the
Seller prior to or after the Closing Date (other than litigation arising out the
transactions contemplated by this Agreement). The party requesting such
cooperation shall pay the out-of-pocket expenses (including reasonable legal
fees and disbursements) of the party providing such cooperation and of its
officers, directors, employees and agents reasonably incurred in connection with
providing such cooperation, but shall not be responsible to reimburse the party
providing such cooperation for such party's time spent in such cooperation or
the salaries or costs of fringe benefits or similar expenses paid by the party
providing such cooperation to its officers, directors, employees and agents
while assisting in the defense or prosecution of any such litigation or
proceeding.
11. Termination of Agreement
11.1 Termination by Lapse of Time. This Agreement shall terminate at
5:00 p.m., Boston time, on the Termination Date, if the transactions
contemplated hereby have not been consummated, unless such date is extended by
the written consent of all of the parties hereto.
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11.2 Termination by Agreement of the Parties. This Agreement may be
terminated by the mutual written agreement of the parties hereto. Except as
provided in Section 1.10, Section 5.11 or Section 6.2, if applicable, in the
event of such termination by agreement, the Buyer shall have no further
obligation or liability to the Seller under this Agreement, and the Seller shall
have no further obligation or liability to the Buyer under this Agreement.
11.3 Termination by Reason of Breach. This Agreement may be terminated
by the Seller, if at any time prior to the Closing there shall occur a material
breach of any of the representations, warranties or covenants of the Buyer or
the failure by the Buyer to perform any condition or obligation hereunder, and
may be terminated by the Buyer, if at any time prior to the Closing there shall
occur a material breach of any of the representations, warranties or covenants
of the Seller or the failure of the Seller to perform any condition or
obligation hereunder.
11.4 Survival of Certain Obligations. The provisions of Section 4.2 of
this Agreement shall survive any termination of this Agreement pursuant to this
Section 11.
12. Transfer and Sales Tax
Notwithstanding any provisions of law imposing the burden of such
taxes on the Seller or the Buyer, as the case may be, the Seller shall be
responsible for and shall pay (a) all sales, use and transfer taxes, and (b) all
governmental charges, if any, upon the sale or transfer of any of the Assets
hereunder. If the Seller shall fail to pay such amounts on a timely basis, the
Buyer may pay such amounts to the appropriate governmental authority or
authorities, and the Seller shall promptly reimburse the Buyer for any amounts
so paid by the Buyer.
13. Brokers
13.1 For the Seller. The Seller represents and warrants that it has
not engaged any broker or finder or incurred any liability for brokerage fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement. The Seller agrees to indemnify and hold harmless the Buyer
against any claims or liabilities asserted against it by any person acting or
claiming to act as a broker or finder on behalf of the Seller.
13.2 For the Buyer. The Buyer agrees to pay all fees, expenses and
compensation owed to any person, firm or corporation who has acted in the
capacity of broker or finder on its behalf in connection with the transactions
contemplated by this Agreement. The Buyer agrees to indemnify and hold harmless
the Seller against any claims or liabilities asserted against it by any person
acting or claiming to act as a broker or finder on behalf of the Buyer.
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14. Notices
Any notices or other communications required or permitted hereunder
shall be sufficiently given if delivered personally or sent by receipt confirmed
telecopy, federal express or other reputable overnight courier, registered or
certified mail, postage prepaid, addressed as follows or to such other address
of which the parties may have given notice:
To the Seller: Ronald W. Martignoni
Choices Entertainment Corporation
836 West Trenton Avenue
Morrisville, Pennsylvania 19067
With a copy to: Earp, Cohn & Pendery
1515 Market Street
Suite 1600
Philadelphia, Pennsylvania 19102
Attention: Steven R. Kanes, Esq.
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attention: Chief Financial Officer
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attention: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other communications shall be
deemed received (a) on the date delivered, if delivered personally; or (b) one
business day after delivery to an overnight courier or after the date of
confirmation of a telecopy; or (c) three business days after being sent, if sent
by registered or certified mail; or (d) on the date of actual receipt, if sent
by any other method.
15. Arbitration
(a) Any dispute, controversy or claim between the parties arising out
of or relating to this Agreement, a breach hereof or the transactions
contemplated hereby, shall be settled by arbitration in accordance with the
provisions of this Section 15. Any arbitration pursuant to this Section 15 shall
be conducted by a single arbitrator appointed by the Philadelphia, Pennsylvania
office of the American Arbitration Association upon the request of either party.
The arbitrator shall have a minimum of five years of experience in the area of
business relevant to the particular dispute. Each party shall be permitted to
submit only one proposal to the arbitrator, and the arbitrator shall be required
to choose one of such two proposals as the resolution of the dispute. The
arbitrator may proceed to a resolution notwithstanding the failure of a party to
participate in the proceedings. Each of the parties shall pay its own costs and
expenses in connection with any such arbitration, and the parties shall share
equally in the fees and expenses of the arbitrator.
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(b) The parties agree that any such arbitration will occur in
Philadelphia, Pennsylvania, any such arbitration award shall be final and
binding upon the parties, may be entered in any court having jurisdiction and
shall not be appealable by either party in any court.
16. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that the
Buyer and the Seller may not assign their respective obligations hereunder
without the prior written consent of the other party; provided, however, that
the Buyer may assign this Agreement, and its rights and obligations hereunder,
to a subsidiary or affiliate. Any assignment in contravention of this provision
shall be void. No assignment shall release the Buyer from any obligation or
liability under this Agreement.
17. Entire Agreement; Amendments; Attachments
(a) This Agreement, all Schedules and Exhibits hereto, and all
agreements and instruments to be delivered by the parties pursuant hereto
represent the entire understanding and agreement between the parties hereto with
respect to the subject matter hereof and supersede all prior oral and written
and all contemporaneous oral negotiations, commitments and understandings
between such parties. The Buyer and the Seller (and to the limited extent they
are joining in this Agreement below, the Principals) may amend or modify this
Agreement, in such manner as may be agreed upon, by a written instrument
executed by the Buyer and the Seller (and, to the extent related to the
provisions to which they are parties, the Principals).
(b) If the provisions of any Schedule or Exhibit to this Agreement are
inconsistent with the provisions of this Agreement, the provision of the
Agreement shall prevail. The Exhibits and Schedules attached hereto or to be
attached hereafter are hereby incorporated as integral parts of this Agreement.
18. Expenses
Except as otherwise expressly provided herein, the Buyer and the
Seller shall each pay their own expenses in connection with this Agreement and
the transactions contemplated hereby. Buyer shall pay the costs and expenses of
any audit conducted by, or at the request of, the Buyer, and Seller shall pay
the costs and expenses of any accounting services provided to the Seller in
connection with the transactions contemplated hereby. Notwithstanding the above,
the Buyer shall reimburse Seller for reasonable travel and related expenses
(approved by the Buyer in advance) which are incurred in connection with
attendance by Seller at meetings requested by the Buyer.
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19. Legal Fees
In the event that legal proceedings are commenced by the Buyer against
the Seller, or by the Seller against the Buyer, in connection with this
Agreement or the transactions contemplated hereby, the party or parties which do
not prevail in such proceedings shall pay the reasonable attorneys' fees and
other costs and expenses, including investigation costs, incurred by the
prevailing party in such proceedings.
20. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
21. Section Headings
The section headings are for the convenience of the parties and in no
way alter, modify, amend, limit, or restrict the contractual obligations of the
parties.
22. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
23. Counterparts
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which shall be one and the
same document.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of and on the date first above written.
CHOICES ENTERTAINMENT CORPORATION
ATTEST:
/s/ Mark D. Wiltshire By:/s/ Ronald W. Martignoni
- - - --------------------- ---------------------------
Ronald W. Martignoni
Title: President
PRINCIPALS:
The Principals are hereby executing and
delivering this Agreement for the limited
purpose of reflecting their agreement to the
matters contained in Sections 10.2, 10.3 and
10.5 (and Section 17). They are not parties
hereto for any other purposes.
/s/ Ronald W. Martignoni
------------------------
Ronald W. Martignoni
/s/ John A. Boylan
------------------------
John A. Boylan
/s/ Fred E. Portner
------------------------
Fred E. Portner
WEST COAST ENTERTAINMENT
CORPORATION
ATTEST:
By:/s/ Richard Kelly
--------------------
/s/ Sarah Rothermel Title: CFO
- - - -------------------
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Schedule A
Stores
Store #1
Morrisville Shopping Center
West Trenton & Pennsylvania Avenues
Morrisville, PA 19067
Store #2
Winslow Shopping Plaza
542 Berlin Cross Keys Road
Sicklersville, NJ 08081
Store #5
Lower Makefield Shopping Center
78-80 Stony Hill Road
Yardley, PA 19067
Store #6
Village at Newtown
South Eagle Road
Newtown, PA 18940
Store #7
Town Center
406 Town Center
New Britain, PA 18901
Store #9
Shoppes at Foxmoor
1027 Washington Boulevard & Route 133
Robbinsville, NJ 08691
Store #10
Jamesway Plaza
Delsea Drive
Glassboro, NJ 08028
Store #12
Fox Run Shopping Center
200 Foxhunt Drive
Bear, DE 19701
Store #13
Choices Movies & Games
8799 Frankford Avenue
Philadelphia, PA 19136
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FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
First Amendment dated January 24, 1997 to Agreement made as of December 16,
1996 (the "Agreement") between West Coast Entertainment Corporation, a Delaware
corporation with its principal office at One Summit Square, Suite 200, Route 413
& Doublewoods Road, Newtown, PA 19047-2313 (the "Buyer"), and Choices
Entertainment Corporation, a Delaware corporation with its principal office at
836 West Trenton Avenue, Morrisville, Pennsylvania 19067 (the "Seller").
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Seller and the Buyer hereby agree to amend the
Agreement as follows:
1. The first sentence of Section 1.6 of the Agreement is hereby
amended to read in its entirety as follows:
"The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Hale and Dorr, 60 State
Street, Boston, Massachusetts 02109, on a date specified by the Buyer to
the Seller on not less than two business days notice (which may be given
orally), which date shall be on or after March 12, 1997, but before the
Termination Date (as hereinafter defined) or on such later date as may be
mutually agreeable to the Buyer and the Seller (the "Closing Date")."
2. All reference in the Agreement to the Buyer's address (including
without limitation the references in the Recital to the Agreement and in Section
14 of the Agreement, are hereby changed from 9990 Global Road, Philadelphia, PA
19115, to: One Summit Square, Suite 200, Route 413 & Doublewoods Road, Newtown,
PA 19047-2313.
3. In all other respects, the Agreement is hereby ratified and
confirmed.
IN WITNESS WHEREOF, this Amendment is hereby executed as of the date set
forth above.
CHOICES ENTERTAINMENT CORPORATION
By: /s/ Ronald W. Martignoni
------------------------
Title: President
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ Richard Kelly
-----------------
Title: CFO
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EXHIBIT B
FORM OF ESCROW AGREEMENT
This Escrow Agreement is entered into as of __________, 1997, between West
Coast Entertainment Corporation, a Delaware corporation (the "Buyer"), and
Choices Entertainment Corporation, a Delaware corporation (the "Seller").
WHEREAS, the Buyer has acquired, as of the date hereof, certain assets of
the Seller pursuant to an Asset Purchase Agreement dated __________, 1996 (the
"Purchase Agreement") by and among the Buyer and the Seller.
WHEREAS, the Purchase Agreement provides that an escrow account will be
established to secure the Seller's indemnification obligations to the Buyer
under the Purchase Agreement on the terms and conditions set forth herein, and
that the Buyer will act as Escrow Agent.
WHEREAS, the parties hereto desire to establish the terms and conditions
pursuant to which such escrow account will be established and maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the respective meanings ascribed to them in the
Purchase Agreement.
2. Escrow and Indemnification.
(a) Escrow Fund. The Buyer shall hold as Escrow Agent $243,000 in
cash (such amount, together with any interest earned thereon, as provided
herein, the "Escrow Fund"). The Escrow Fund shall be held as a trust fund and
shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto. The Buyer agrees to accept
delivery of the Escrow Fund as Escrow Agent and to hold the Escrow Fund in an
escrow account (the "Escrow Account"), subject to the terms and conditions of
this Agreement. The Buyer shall not be entitled to any fee or compensation in
respect of its serving as the Escrow Agent.
(b) Indemnification. The Seller has agreed in Section 9 of the
Purchase Agreement to indemnify and hold harmless the Buyer from and against
certain claims, damages, losses, liabilities, costs and expenses ("Damages").
The Escrow Fund shall be security for such indemnity obligations of the Seller,
subject to the limitations, and in the manner provided, in this Agreement.
(c) Investment of Escrow Fund. The Escrow Fund shall
be invested in a separate bank, money market or other similar
interest-bearing account which in any event shall be mutually
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acceptable to the Buyer and the Seller. All amounts earned on the Escrow Fund
shall be retained in (and become part of) the Escrow Fund and available to
satisfy indemnity claims of the Buyer in accordance with the Purchase Agreement.
(d) Transferability. The interest of the Seller in the Escrow Fund
shall not be assignable or transferable, other than by operation of law or
pursuant to the terms of this Agreement. Notice of any such assignment or
transfer by operation of law shall be given to the Buyer, on its own behalf and
as Escrow Agent, and no such assignment or transfer shall be valid until such
notice is given.
3. Administration of Escrow Account. The Buyer, as Escrow Agent, shall
administer the Escrow Account as follows:
(a) If the Buyer has incurred or suffered Damages for which it is
entitled to indemnification under Section 9 of the Purchase Agreement, the Buyer
shall, prior to the date which is two years following of the Closing Date under
the Purchase Agreement (the "Termination Date"), give written notice of such
claim (a "Claim Notice") to the Seller. Each Claim Notice shall state the amount
of claimed Damages (the "Claimed Amount") and the basis for such claim.
(b) Within 20 days after delivery of a Claim Notice the Seller shall
provide to the Buyer, on its own behalf and as Escrow Agent, a written response
(the "Response Notice") in which the Seller shall: (i) agree that a portion of
the Escrow Fund equal to the full Claimed Amount may be released from the Escrow
Account to the Buyer, (ii) agree that a portion, but not all, of the Claimed
Amount (the "Agreed Amount") may be released from the Escrow Account to the
Buyer or (iii) contest that any of the Escrow Fund may be released from the
Escrow Account to the Buyer. The Seller may contest the release of all or a
portion of the Escrow Fund only based upon a good faith belief that all or such
portion of the Claimed Amount does not constitute Damages for which the Buyer is
entitled to indemnification under Section 9 of the Purchase Agreement. If no
Response Notice is delivered by the Seller within such 20-day period, the Seller
shall be deemed to have agreed that a portion of the Escrow Fund equal to all of
the Claimed Amount may be released to the Buyer from the Escrow Account.
(c) If the Seller in the Response Notice agrees (or is deemed to
have agreed) that a portion of the Escrow Fund equal to all of the Claimed
Amount may be released from the Escrow Account to the Buyer, the Buyer may
transfer and deliver to itself such portion of the Escrow Fund (or if the Escrow
Fund is less than the amount to be so released, all of the Escrow Fund).
(d) If the Seller in the Response Notice agrees that part, but not
all, of the Claimed Amount may be released from the Escrow Fund to the Buyer,
the Buyer may transfer and deliver to itself for its own account a portion of
the Escrow Fund equal to such part of the Claimed Amount (or if the Escrow Fund
is less than the amount to be so released, all of the Escrow Fund).
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(e) If the Seller in the Response Notice contests the release of all
or part of the Claimed Amount (the "Contested Amount"), the matter shall be
settled by binding arbitration in accordance with the provisions of Section 15
of the Purchase Agreement. The final decision of the arbitrator shall be
furnished to the Seller and the Buyer, on its own behalf and as Escrow Agent, in
writing and shall constitute a conclusive determination of the issue in
question, binding upon the Seller and the Buyer, on its own behalf and as Escrow
Agent, and shall not be contested by any of them. Such decision may be used in a
court of law only for the purpose of seeking enforcement of the arbitrator's
award. After delivery of a Response Notice that the Claimed Amount is contested
by the Seller, the Buyer, as Escrow Agent, shall continue to hold in the Escrow
Account a portion of the Escrow Fund sufficient to cover the Contested Amount,
notwithstanding the occurrence of the Termination Date, until (i) delivery of a
copy of a settlement agreement executed by the Buyer and the Seller setting
forth instructions to the Buyer, as Escrow Agent, as to the release of the
portion of the Escrow Fund, if any, that shall be made with respect to the
Contested Amount or (ii) delivery of a copy of the final award of the arbitrator
setting forth instructions to the Buyer, as Escrow Agent, as to the release of
the portion of the Escrow Fund, if any, that shall be made with respect to the
Contested Amount. The Buyer, as Escrow Agent, shall thereupon release a portion
of the Escrow Fund from the Escrow Account in accordance with such agreement or
instructions.
4. Release of Escrow Fund.
(a) Promptly after the Termination Date, the Buyer, as Escrow Agent,
shall distribute to the Seller all of the Escrow Fund then held in escrow.
Notwithstanding the foregoing, if the Buyer has previously given a Claim Notice
which has not then been resolved in accordance with Section 3, the Buyer, as
Escrow Agent, shall retain in the Escrow Account after the Termination Date a
portion of the Escrow Fund equal to the Claimed Amount which has not then been
resolved.
(b) Any distribution of all or a portion of the Escrow Fund to the
Seller shall be made by delivery of a bank or certified check, or wire transfer
of immediately available funds, at the address set forth in Section 7 (or such
other address as may be provided in writing to the Buyer, as Escrow Agent by the
Seller).
5. Limitation of Escrow Agent's Liability.
(a) The Buyer, in its capacity as Escrow Agent, shall be obligated
only for the performance of such duties as are specifically set forth in this
Agreement and shall incur no liability with respect to any action taken or
suffered by it in reliance upon any notice, direction, instruction, consent,
statement or other documents believed by it to be genuine and duly authorized,
nor for other action or inaction except its own willful misconduct or gross
negligence. In all questions arising under the Escrow Agreement, the Buyer, as
Escrow Agent, may rely
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<PAGE>
on the advice of counsel, and for anything done, omitted or suffered in good
faith by the Buyer, as Escrow Agent, based on such advice the Buyer, as Escrow
Agent, shall not be liable to anyone. The Buyer, as Escrow Agent, shall not be
required to take any action hereunder involving any expense unless the payment
of such expense is made or provided for in a manner reasonably satisfactory to
it.
(b) Neither the Buyer, as Escrow Agent, nor any of its directors,
officers, employees or agents shall be liable to anyone for any action taken or
omitted to be taken by it in good faith by it or any of its directors, officers,
employees or agents hereunder, except in the case of gross negligence or willful
misconduct. In no event shall the Buyer, as Escrow Agent, be liable for
indirect, punitive, special or consequential damages.
6. Termination. This Agreement shall terminate upon the later of the
Termination Date or the release by the Buyer, as Escrow Agent, of all of the
Escrow Fund in accordance with this Agreement; provided that the provisions of
Section 5 shall survive such termination or the resignation or removal of the
Buyer as Escrow Agent.
7. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
If to the Buyer, on its own behalf and as Escrow Agent:
West Coast Entertainment Corporation
9990 Global Road
Philadelphia, PA 19115
Attn: Chief Operating Officer
If to the Seller:
Choices Entertainment Corporation
836 West Trenton Avenue
Morrisville, Pennsylvania 19067
Attention: Chief Executive Officer
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery, telecopy
or ordinary mail), but no such notice, instruction or communication shall be
deemed to have been delivered unless and until it is actually received by the
party to whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered
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<PAGE>
by giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 7.
8. Successor Escrow Agent. In the event the Buyer becomes unavailable
or unwilling to continue in its capacity as Escrow Agent, the Buyer may resign
as Escrow Agent and be discharged from its duties or obligations hereunder by
delivering a resignation to the Seller not less than 30 days' prior to the date
when such resignation shall take effect. The Buyer may appoint a successor
Escrow Agent without the consent of the Seller so long as such successor is a
bank with assets of at least $50 million, and may appoint any other successor
Escrow Agent with the consent of the Seller, which shall not be unreasonably
withheld. The Buyer shall be solely responsible for payment of any fee or
compensation due to any successor Escrow Agent.
9. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except as set forth in the Purchase Agreement,
this Agreement constitutes the entire understanding and agreement of the parties
with respect to the subject matter of this Agreement and supersedes all prior
agreements or understandings, written or oral, between the parties with respect
to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of
any breach of any provision of this Escrow Agreement shall be effective unless
in writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only
with the written consent of the Buyer, on its own behalf and as
Escrow Agent, and the Seller.
(f) Force Majeure. None of the parties hereto shall be responsible
for delays or failures in performance resulting from acts beyond its control.
Such acts shall include but not be limited to acts of God, strikes, lockouts,
riots, acts of war, epidemics, governmental regulations superimposed after the
fact, fire, communication line failures, computer viruses (provided that the
parties hereto will maintain reasonable measures to
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<PAGE>
protect against any such viruses), power failures, earthquakes or other such
disasters.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
The Buyer, on its own behalf and as
Escrow Agent:
WEST COAST ENTERTAINMENT CORPORATION
By:_________________________________
_________________________________
(print name and title)
The Seller:
CHOICES ENTERTAINMENT CORPORATION
By________________________________
________________________________
(print name and title)
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EXHIBIT C
SECURED PROMISSORY NOTE
$150,000.00 December 16, 1996
Philadelphia, Pennsylvania
FOR VALUE RECEIVED, Choices Entertainment Corporation ("Choices") hereby
promises to pay to West Coast Entertainment Corporation ("West Coast"), the sum
of One Hundred Fifty Thousand Dollars ($150,000.00), with interest on the unpaid
balance thereof accruing at the rate of twelve percent (12%) per annum, such
principal and interest to be payable as follows:
The principal amount of this Note shall be payable in full, together with
all interest accrued thereon on the earliest to occur of the following:
(i) Upon demand made by West Coast, at any time on or after April 30,
1997;
(ii) the date of the closing of the transactions contemplated by that
certain Asset Purchase Agreement dated on or about the date hereof between
Choices and West Coast (the "Asset Purchase Agreement"); and
(iii) the date of the closing of the purchase by West Coast of the assets
related to and/or located at Choices' store located at Village at Newtown, South
Eagle Road, Newtown, PA 18940 (the "Newtown Store"), in connection with the
exercise by West Coast of its option to purchase such assets, as more fully
described in Section 1.9 of the Asset Purchase Agreement.
This Note is secured by and entitled to the benefits of a Security
Agreement, of even date herewith, between Choices and West Coast (the "Security
Agreement").
At the option of the holder, this Note shall become immediately due and
payable without notice or demand upon the occurrence at any time of any of the
following events of default (each, an "Event of Default"): (1) default in the
payment or performance of this or any other liability or obligation of the maker
to the holder; (2) the occurrence of an event of default under the Security
Agreement; (3) the liquidation, termination, dissolution of or the appointment
of a receiver for the maker or its property; or (4) the institution by or
against the maker of any proceedings under the United States Bankruptcy Code or
any other federal or state law in which the maker is alleged to be insolvent or
unable to pay its debts as they mature or the making by the maker of an
assignment or trust mortgage for the benefit of creditors. Upon the occurrence
of an Event of Default hereunder, the holder shall have then, or at any time
thereafter, all of the rights and remedies afforded by the Uniform Commercial
Code as from time to time in effect in the Commonwealth of
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<PAGE>
Pennsylvania or afforded by other applicable law. From and after the occurrence
of an Event of Default hereunder, the unpaid balance of this Note shall bear
interest at the rate of sixteen percent (16%) per annum.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
maker of this Note waives presentment, demand, protest and notices of every kind
and assents to any extension or postponement of the time of payment or any other
indulgence, to any substitution, exchange or release of collateral, and to the
addition or release of any other party or person primarily or secondarily
liable.
The maker agrees to pay on demand all cost and expense (including legal
costs and reasonable attorneys' fees) incurred or paid by the holder in
enforcing this Note.
None of the terms or provisions of this Note may be excluded, modified, or
amended except by a written instrument duly executed on behalf of the holder
expressly referring hereto and setting forth the provision so excluded, modified
or amended.
This Note may be prepaid, in whole or in part, at any time and from time to
time, without the consent of the holder hereof, and without payment of any
premium or penalty.
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Pennsylvania, and this Note shall be deemed to be under seal.
(CORPORATE SEAL)
CHOICES ENTERTAINMENT CORPORATION
WITNESS:
/s/ Mark D. Wiltshire By: /s/ Ronald W. Martignoni
- - - --------------------- ------------------------
Ronald W. Martignoni
Its President
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<PAGE>
EXHIBIT D
SECURITY AGREEMENT
This is a Security Agreement made this 16th day of December, 1996 (the
"Agreement") between Choices Entertainment Corporation, a corporation having its
principal place of business at 836 West Trenton Avenue, Morrisville,
Pennsylvania ("Debtor"), and West Coast Entertainment Corporation, a corporation
having its principal place of business at 9990 Global Road, Philadelphia,
Pennsylvania ("Secured Party").
1.0 SECURITY INTEREST Debtor, for valuable consideration, receipt of which
is acknowledged, hereby grants to Secured Party a security interest in the
following types of Debtor's property: (a) inventory, to the extent now located
or hereafter located at Debtor's store which is located at Village at Newtown,
South Eagle Road, Newtown, Pennsylvania 18940 (the "Newtown Store"); (b)
accounts (excluding bank accounts), contract rights, chattel paper, documents
and instruments relating to or used in the conduct of the business of the Newton
Store; (c) goodwill, records, computer programs and rights in premises relating
to or used in the conduct of the business of the Newton Store; (d) equipment,
machinery, tools, furniture and fixtures, to the extent now located or hereafter
located at the Newtown Store; (e) other personal property of every kind relating
to or used in the conduct of the business of the Newtown Store, including
interests in and claims under policies of insurance (but excluding cash in
excess of $600 located at the Newtown Store); and all products and proceeds of
the above (collectively, the "Collateral").
2.0 OBLIGATIONS SECURED The security interest granted hereby secures
payment and performance of all debts, loans, liabilities and agreements of
Debtor to Secured Party of every kind and description, whether now existing or
hereafter arising, including, without limitation, the obligations of the Debtor
under a certain Secured Promissory Note (the "Note"), of even date herewith,
payable to the Secured Party in the original principal amount of $150,000
(collectively, the "Obligations").
3.0 DEBTOR'S REPRESENTATIONS AND WARRANTIES Debtor represents and warrants
that:
3.1 It has no place of business other than that shown on Schedule A
attached hereto and that Debtor keeps its inventory and records concerning
accounts, contract rights and other property at 836 West Trenton Avenue,
Morrisville, Pennsylvania which is its chief executive office. Debtor will
promptly notify Secured Party in writing of any change in the location of its
chief executive office or the establishment of any new place of business where
its inventory or records are kept.
3.2 Except as set forth on Schedule B hereto, Debtor is a corporation duly
organized, validly existing and in good standing
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<PAGE>
under the laws of the state of its incorporation and is duly qualified to do
business under the laws of each state where the nature of the business done or
property owned requires such qualification. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
corporate action. The execution, delivery and performance of the Note and this
Agreement, the borrowing under the Note and the use of proceeds thereof will not
violate the terms of any agreement, instrument, note, indenture, debenture or
other document by which the Debtor or its property is bound or result in or
require the creation of any lien, security interest or mortgage on the property
of Debtor, except in favor of Secured Party.
3.3 Debtor will at all times keep in a manner satisfactory to the Secured
Party accurate and complete records of Debtor's inventory and accounts, will
maintain the Collateral in good repair and working order and will keep the
Collateral insured, naming the Secured Party as a loss payee. Debtor will
operate its business in accordance with its usual and customary practice, and
shall not remove any of the Collateral from the Newtown Store except in the
ordinary course of its business and in accordance with its usual and customary
practices.
4.0 FINANCING STATEMENTS Debtor hereby agrees to execute, deliver and pay
the cost of filing any financing statement, or other notices appropriate under
applicable law, in respect of any security interest created pursuant to this
Agreement which may at any time be required or which, in the opinion of Secured
Party, may at any time be desirable. In the event that any re-recording or
refiling thereof (or the filing of any statements of continuation or assignment
of any financing statement) is required to protect and preserve such lien or
security interest, Debtor shall, at its cost and expense, cause the same to be
rerecorded and/or refiled at the time and in the manner requested by Secured
Party. Debtor hereby irrevocably designates Secured Party, its agents,
representatives and designees as agents and attorneys-in-fact for Debtor to sign
such financing statements on behalf of Debtor.
5.0 DEBTOR'S RIGHTS UNTIL DEFAULT In the absence of any default hereunder,
Debtor shall have the right to possess the Collateral, manage its property and
sell and lease its inventory in the ordinary course of business.
6.0 DEFAULT Debtor shall be in default under this Agreement upon the
happening of any of the following events or conditions, without demand or notice
from Secured Party:
6.1 Failure to observe or perform any of its agreements or covenants in
this Agreement or any other agreement with the Secured Party;
6.2 Failure to pay the Note when and as due;
6.3 Failure to pay when due any other obligation to the Secured Party,
whether by maturity, acceleration or otherwise;
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<PAGE>
6.4 Any representation or warranty made by the Debtor in this Agreement or
any other agreement between the Debtor and the Secured Party shall prove to have
been materially incorrect or misleading on or as of the date made or deemed
made;
6.5 Dissolution, termination of existence, insolvency, business failure,
appointment of a receiver or custodian of any part of Debtor's property,
assignment or trust mortgage for the benefit of creditors by Debtor, the
recording or existence of any lien for unpaid taxes, the commencement of any
proceeding under any bankruptcy or insolvency laws of any state or of the United
States by or against Debtor, or service upon Secured Party of any writ, summons,
or process designed to affect any of Debtor's accounts or other property.
7.0 SECURED PARTY'S RIGHTS UPON DEFAULT Upon default and at any time
thereafter, Secured Party, without presentment, demand, notice, protest or
advertisement of any kind, may:
7.1 Notify account debtors that the Collateral has been assigned to Secured
Party and that payments shall be made directly to Secured Party and upon request
of Secured Party, Debtor will so notify such account debtors that their accounts
must be paid to Secured Party. After notification, Debtor shall immediately upon
receipt of all checks, drafts, cash and other remittances deliver the same in
kind to the Secured Party. Secured Party shall have full power to collect,
compromise, endorse, sell or otherwise deal with the Collateral or proceeds
thereof in its own name or in the name of Debtor and Debtor hereby irrevocably
appoints the Secured Party its attorney-in-fact for this purpose.
7.2 Make all Obligations immediately due and payable, without presentment,
demand, protest, hearing or notice of any kind and exercise the remedies of a
Secured Party afforded by the Pennsylvania Uniform Commercial Code and other
applicable law or by the terms of any agreement between Debtor and Secured
Party.
7.3 Notify Debtor to assemble the Collateral at a place designated by
Secured Party.
7.4 Take possession of the Collateral and the premises at which any
Collateral is located and sell all or part of the Collateral at a public or
private sale.
7.5 In the case of any sale of disposition of the Collateral, or the
realization of funds therefrom, the proceeds thereof shall first be applied to
the payment of the expenses of such sale, commissions, reasonable attorneys fees
and all charges paid or incurred by Secured Party pertaining to said sale or
this Agreement, including any taxes or other charges imposed by law upon the
Collateral and/or the owning, holding or transferring thereof; secondly, to pay,
satisfy and discharge the Obligations secured hereby; and, thirdly, to pay the
surplus, if any, to Debtor, provided that the time of any application of the
proceeds shall be at the sole and absolute discretion of Secured Party. To the
extent such proceeds do not satisfy the foregoing items,
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<PAGE>
Debtor hereby promises and agrees to pay any deficiency. Except for Collateral
that is perishable or is a type customarily sold in a recognized market, Secured
Party will give Debtor at least ten (10) days' written notice of the time and
place of any sale of the Collateral.
8.0 MISCELLANEOUS (a) Neither this Agreement nor any part thereof can be
changed, waived, or amended except by an instrument in writing signed by Secured
Party; and waiver on one occasion shall not operate as a waiver on any occasion.
(b) Any notice required or permitted hereunder shall be in writing and shall be
duly given to any party if hand delivered or if mailed first class postage
prepaid to the address set forth above or to such other address as may be
specified by notice in writing. (c) The Uniform Commercial Code and other laws
of Pennsylvania shall govern the construction of this Agreement.
EXECUTED as an instrument under seal by the duly authorized officers of the
parties as of the date first above written.
DEBTOR: SECURED PARTY:
CHOICES ENTERTAINMENT CORPORATION WEST COAST ENTERTAINMENT
CORPORATION
By: /s/ Ronald W. Martignoni By: /s/ Richard Kelly
------------------------ -------------------------
Title President Ronald W. Martignoni Title CFO
Attest: /s/ Mark D. Wiltshire
---------------------
D-4
<PAGE>
Schedule A
Places of Business
Morrisville Shopping Center
West Trenton & Pennsylvania Avenues
Morrisville, PA 19067
Winslow Shopping Plaza
542 Berlin Cross Keys Road
Sicklersville, NJ 08081
Lower Makefield Shopping Center
78-80 Stony Hill Road
Yardley, PA 19067
Village at Newtown
South Eagle Road
Newtown, PA 18940
Town Center
406 Town Center
New Britain, PA 18901
Shoppes at Foxmoor
1027 Washington Boulevard & Route 133
Robbinsville, NJ 08691
Jamesway Plaza
Delsea Drive
Glassboro, NJ 08028
Fox Run Shopping Center
200 Foxhunt Drive
Bear, DE 19701
Choices Movies & Games
8799 Frankford Avenue
Philadelphia, PA 19136
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<PAGE>
Schedule B
Exceptions to Representations
D-6
<PAGE>
(Front Side of Proxy Card)
CHOICES ENTERTAINMENT CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
Special Meeting of Stockholders - March 12, 1997
The undersigned stockholder of CHOICES ENTERTAINMENT CORPORATION (the
"Company"), revoking all previous proxies, hereby appoints Lorraine E. Cannon
and Bonnie J. Neil, and each of them acting individually, as the attorney and
proxy of the undersigned, with full power of substitution, to vote all shares of
stock of the Company which the undersigned would be entitled to vote if
personally present at the Special Meeting of Stockholders of the Company, to be
held at the Company's offices, at 836 W. Trenton Avenue, Morrisville,
Pennsylvania on March 12, 1997, at 8:30 a.m., and at any adjournment thereof;
provided that said proxies are authorized and directed to vote as indicated with
respect to the following matters:
(Continued and to be signed on reverse side)
<PAGE>
(Back Side of Proxy Card)
[X] Please mark your
vote as in this
example
1. THE PROPOSAL TO APPROVE THE SALE, TRANSFER AND ASSIGNMENT OF SUBSTANTIALLY
ALL OF THE COMPANY'S ASSETS AND BUSINESS TO WEST COAST ENTERTAINMENT
CORPORATION.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. OTHER MATTERS.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any adjournment
thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. UNLESS OTHERWISE
SPECIFIED, THE SHARES REPRESENTED HEREBY WILL BE VOTED "FOR" THE PROPOSAL TO
APPROVE THE SALE, TRANSFER AND ASSIGNMENT OF SUBSTANTIALLY ALL OF THE COMPANY'S
ASSETS AND BUSINESS TO WEST COAST ENTERTAINMENT CORPORATION. THIS PROXY ALSO
DELEGATES DISCRETIONARY AUTHORITY TO THE PROXY HOLDERS NAMED WITH RESPECT TO ANY
OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT
THEREOF.
- - - ----------------------------------------------------------- --------------------
SIGNATURE OF STOCKHOLDER DATE
- - - ----------------------------------------------------------- --------------------
SIGNATURE OF STOCKHOLDER DATE
NOTE: PLEASE SIGN THIS PROXY EXACTLY AS NAME(S) APPEAR ON YOUR STOCK
CERTIFICATE. WHEN SIGNING AS ATTORNEY-IN-FACT, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE ADD YOUR TITLE AS SUCH, AND IF SIGNER IS A CORPORATION,
PLEASE SIGN WITH FULL CORPORATE NAME BY A DULY AUTHORIZED OFFICER OR OFFICERS
AND AFFIX THE CORPORATE SEAL. WHERE STOCK IS ISSUED IN THE NAME OF TWO (2) OR
MORE PERSONS, ALL SUCH PERSONS SHOULD SIGN.
