<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1997
/ / Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from _____________ to _____________
Commission file number 0-17001
Choices Entertainment Corporation
________________________________________________________________________________
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1529536
_______________________________ _______________________________________
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1930 E. Marlton Pike, Cherry Hill, New Jersey 08003
_____________________________________________ _________
(Address of Principal Executive Offices) (Zip code)
Issuer's Telephone Number, Including Area Code (609) 751-4148
______________
836 W. Trenton Avenue, Morrisville, Pennsylvania 19067
________________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
_____ _____
State the number of shares outstanding of the issuer's Common Stock, as of
November 12, 1997: 22,004,395
Transitional Small Business Disclosure Format (check one):
Yes ____ No __X__
<PAGE>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
CHOICES ENTERTAINMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
(UNAUDITED) (AUDITED)
-----------------
ASSETS
Current assets:
Cash..................................................................... $ 203,073 $ 66,739
Cash held in escrow (Notes 3 and 4)...................................... 162,000
Accounts receivable...................................................... 16,858
Prepaid expenses......................................................... 17,630 20,842
Other deferred costs..................................................... 1,077 30,453
------------------ -----------------
Total current assets................................................... 400,638 118,034
Cash held in escrow (Notes 3 and 4)........................................ 81,000
Equipment, net............................................................. 3,873
Other assets............................................................... 675 7,400
Net assets of discontinued business (Note 4)............................... 1,054,425
------------------ -----------------
$ 486,186 $ 1,179,859
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS DEFICIT
Current liabilities:
Notes payable............................................................ $ 854,000
Accounts payable......................................................... $ 47,927 61,558
Accrued merger and acquisition expenses.................................. 353,799 425,299
Accrued professional fees................................................ 227,996 168,199
Accrual for lease cancellation and litigation reserves................... 1,250
Accrued salaries......................................................... 11,960 7,500
Other accrued expenses................................................... 10,800 80,307
Net liabilities of discontinued business (Note 4)........................ 908,293
------------------ -----------------
Total current liabilities.............................................. 652,482 2,506,406
------------------ -----------------
Stockholders deficit:
Preferred stock, par value $.01 per share: Authorized 5,000 shares: 109
shares issued and outstanding in 1997 and 37.4 shares issued and
outstanding in 1996.................................................... 1
Common stock, par value $.01 per share: Authorized 50,000,000 shares:
issued and outstanding 22,004,395 shares in 1997 and 1996.............. 220,044 220,044
Additional paid-in-capital............................................... 21,236,035 20,519,203
Accumulated deficit...................................................... (21,622,376) (22,065,794)
------------------ -----------------
Total stockholders deficit............................................. (166,296) (1,326,547)
------------------ -----------------
$ 486,186 $ 1,179,859
------------------ -----------------
------------------ -----------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -----------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ----------- ---------- -----------
Operating costs and expenses:
Selling and administrative expenses......................... $ 71,205 $ 46,960 $ 157,451 $ 122,194
Professional and consulting expenses........................ 214,332 57,050 340,773 156,575
Depreciation and amortization............................... 9,953 9,792 29,537 19,584
----------- ----------- ---------- -----------
295,490 113,802 527,761 298,353
----------- ----------- ---------- -----------
Other expenses:
Interest expense, net....................................... 2,591 9,591 37,081 37,297
----------- ----------- ---------- -----------
Loss from continuing operations............................... (298,081) (123,393) (564,842) (335,650)
----------- ----------- ---------- -----------
Discontinued operations--Note 4
Loss from discontinued operations........................... (72,171) (303,785) (141,740)
Gain on sale of discontinued operations, net of tax of
$13,092................................................... 1,312,045
----------- ----------- ---------- -----------
Gain (loss) from discontinued operations...................... (72,171) 1,008,260 (141,740)
----------- ----------- ---------- -----------
Net income (loss)............................................. $ (298,081) $ (195,564) $ 443,418 $ (477,390)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net income (loss) per share of common stock--Note 2:
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Primary income (loss) per share:
Continuing operations....................................... $ (0.01) $ (0.01) $ (0.03) $ (0.02)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Discontinued operations..................................... $ 0.00 $ (0.01) $ 0.05 $ (0.01)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Fully diluted income (loss) per share:
Continuing operations....................................... $ (0.01) $ (0.01) $ (0.02) $ (0.02)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Discontinued operations..................................... $ 0.00 $ (0.01) $ 0.04 $ (0.01)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENT OF STOCKHOLDERS DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT Total
------- ------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................... 37 22,004,395 $ 220,044 $20,519,203 ($22,065,794) $(1,326,547)
Issuance of preferred stock to preferred stock
note holders in lieu of cash payment for
interest due on notes and to the conversion
of 5% promissory notes into preferred stock 72 $1 716,832 716,833
Net income for the nine months ended September
30, 1997..................................... 443,418 443,418
--- -------- ---------- --------- ----------- ------------- -----------
109 $1 22,004,395 $ 220,044 $21,236,035 ($21,622,376) $ (166,296)
--- -------- ---------- --------- ----------- ------------- -----------
--- -------- ---------- --------- ----------- ------------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................... $ 443,418 $ (477,390)
----------- -----------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization...................................................... 489,968 883,156
Gain on sale of assets, net of tax (Note 4)........................................ (1,312,045)
Cost of rental films sold.......................................................... 121,342 326,222
Loss on disposal of rental films................................................... 83,621 193,145
Videocassette and inventory reserves............................................... 7,667 17,320
Change in assets and liabilities:
Increase in cash held in escrow.................................................... (243,000)
Increase in accounts receivable.................................................... (4,068) (21,923)
(Increase) decrease in merchandise inventories..................................... 62,584 (30,758)
(Increase) decrease in prepaid expenses............................................ 24,053 (32,087)
Increase in other deferred costs................................................... 8,487 (204)
Increase (decrease) in accounts payable............................................ (651,911) 265,810
Decrease in accrued merger and acquisition expenses................................ (50,550) (82,325)
Increase (decrease) in accrued professional fees................................... (40,203) 25,468
Increase (decrease) in deferred revenue............................................ (27,797) 34,387
Increase (decrease) in accrued salaries............................................ (43,774) 18,656
Decrease in accrual for lease cancellation and litigation reserves................. (1,250) (11,250)
Increase (decrease) in other accrued expenses...................................... (165,909) 145,344
----------- -----------
Total adjustments.................................................................... (1,742,785) 1,730,961
----------- -----------
Net cash provided by (used in) operating activities.................................. (1,299,367) 1,253,571
----------- -----------
Cash flows from investing activities:
Purchase of equipment, net......................................................... (10,049) (13,433)
Purchase of videocassette rental films............................................. (620,807) (1,251,057)
Net proceeds from sale of assets (Note 4).......................................... 2,411,507
----------- -----------
Net cash provided by (used in) investing activities.................................. 1,780,651 (1,264,490)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable........................................................ 49,000
Repayment of notes payable......................................................... (393,950) (8,530)
----------- -----------
Net cash used in financing activities................................................ (344,950) (8,530)
----------- -----------
Net increase (decrease) in cash...................................................... 136,334 (19,449)
Cash at beginning of period.......................................................... 66,739 86,391
----------- -----------
Cash at end of period................................................................ $ 203,073 $ 66,942
----------- -----------
----------- -----------
Supplementary disclosure of cash flow information:
Cash paid during the year for interest............................................. $ 19,601 $ 10,055
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation And Significant Accounting Policies
The financial information included herein for the three- month and
nine-month periods ended September 30, 1997 and 1996 and as of September
30,1997 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, 1997 are not necessarily indicative
of the results to be expected for the full year.
Reclassification of the 1996 financial statements has been made to
conform with the presentation of the 1997 financial statements.
Note 2 - Net Income (Loss) Per Common Share
Primary income per share for the nine-month period ended September
30, 1997 was computed by dividing the net income by the weighted average
number of common shares outstanding during the periods.
Primary and fully diluted loss per share for the three-month and
nine-month periods ended September 30, 1996 and for the three-month period
ended September 30, 1997 was computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. No
consideration was given to the conversion of preferred stock since the result
of that calculation would be anti-dilutive.
Fully diluted income per share for the nine-month period ended
September 30, 1997, was computed by dividing the net income by the weighted
average number of common shares outstanding during the periods, as well as
the number of common shares that would be outstanding as a result of the
conversion of the Company's preferred stock.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Number of shares used in calculation
Primary dilution 22,004,000 22,004,000 22,004,000 22,004,000
Full dilution 22,004,000 22,004,000 23,700,000 22,004,000
</TABLE>
Note 3 - Liquidity
As previously reported, on June 16, 1997, the Company sold
substantially all of its assets and business to West Coast Entertainment
Corporation, ("West Coast"). Notwithstanding the sale of its operating
business, the Company's financial statements included herein 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 $21,622,376 from inception through September 30, 1997, including
a net loss of $868,627 for the nine months ended September 30, 1997, before a
net gain of $1,312,045 from the sale of substantially all of the Company's
assets to West Coast ( the "West Coast Transaction") (see Note 4 ). As of
September 30, 1997, the Company had a net working capital deficiency of
approximately $252,000.
The West Coast Transaction provided $2,430,000 in cash, of which
$243,000 remains in escrow with West Coast, and $203,000 remained available
to the Company at September 30, 1997, after the payment of liabilities and
other expenses. The cash available at time of closing the West Coast
Transaction was less than anticipated because of delays in the closing of the
West Coast Transaction during which time the Company continued to operate at
a loss.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (continued)
(Unaudited)
Note 3 - Liquidity - (continued)
Since September 30, 1997 and through the date of this report, the Company has
used approximately $55,000 in cash to (i) satisfy certain liabilities, (ii)
pay professional fees, which include those associated with existing
litigation, (iii) maintain administrative functions (at present the Company
only employs one person in finance and has entered into a consulting
agreement with one other person (see below)) and (iv) identify and consider
various alternative business opportunities. The Company expects it will
continue in this manner for the foreseeable future. Furthermore, certain
liabilities remain which, if paid, and certain claims against the Company
exist which, if successfully asserted, could result in there being no cash
remaining with which to seek alternative business opportunities. These claims
and liabilities include but are not limited to:
Professional Fees. In connection with its now discontinued acquisition
program, the Company incurred substantial professional fees. Of the amount
billed, $353,799 remains unpaid to law firm retained in that connection .
Previously, in 1994, JD Store Equipment, Inc. ("JD Store Equipment") agreed
that, in the event its merger with the Company (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 in September 1995. Subsequently, the Company 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
attempted to reach a settlement with JD Store Equipment. However, there are
no ongoing discussions at present regarding a settlement and there is no
assurance that any settlement will be concluded.
Shareholder Litigation. As previously reported, 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. The Company is presently
involved in settlement negotiations with the plaintiffs. Unless the Company
is able to conclude a settlement, as to which no assurance can be given, the
Company intends to continue to contest the lawsuit vigorously.(See Part II
Item 1. Legal Proceedings). Even if the Company is successful in defending
this lawsuit or in concluding a settlement, the cost alone in professional
fees will be substantial and material in amount. In addition, the continuing
uncertainty associated with this lawsuit has made it difficult for the
Company to find other business opportunities.
The Company's 5% unsecured promissory notes (the "Notes"), in the
principal amount of $680,000, matured on September 11, 1997, leaving the
holders thereof with the sole remedy of converting such notes into shares of
the Company's Series C Preferred Stock (valued at $.25 per share of Common
Stock). The holders of $670,000 in Notes have, in accordance with the terms
of the Notes, converted such Notes into 67 shares of the Company's Series C
Preferred Stock. In addition, the Company elected to issue 3.6833 shares of
its Series C Preferred Stock to the holders of the Notes, in payment of
$36,833 of accrued interest due such noteholders in September 1997, in
accordance with the terms of such Notes.
Ronald W. Martignoni, the Company's President and Chief Executive
Officer, has taken a position with an unrelated company, effective October 6,
1997. Mr. Martignoni continues as the Company's Chairman, President and Chief
Executive Officer, under a consulting agreement. His compensation has been
reduced accordingly.
The Company's viability for the foreseeable future is and will
continue to be dependent upon its ability to successfully conclude existing
litigation, to find other business opportunities and to secure needed
capital. No assurance can be given that the Company will be successful in
that regard. In the event the Company is not successful, it is unlikely that
there would be any amounts available for distribution to the Company's
stockholders.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (continued)
(Unaudited)
Note 4 - West Coast Transaction and Discontinued Operations
As previously reported, the Company consummated the previously
announced sale of substantially all of its assets to West Coast on June 16,
1997. The consideration for the assets sold consisted entirely of cash in the
amount of $2,430,000. A substantial portion of the proceeds was used to
reduce a portion of the Company's liabilities at closing. In addition,
$243,000 of the proceeds was escrowed with West Coast pursuant to the terms
of the Asset Purchase Agreement between the Company and West Coast. The
escrowed funds will be released to the Company in three installments of
$81,000 (plus interest) every six months over a period of eighteen months,
subject to amounts withheld pursuant to any claims made by West Coast under
the terms of the Escrow Agreement between the Company and West Coast.
The Company recognized a net gain on the sale of its assets of
approximately $1,312,000, which has been reported in discontinued operations
on the Statements of Income (Loss) for the nine-month period ended September
30, 1997. Revenues for the discontinued business for the nine-month period
ended September 30, 1997, was $2,116,000, compared to revenues for the
discontinued business for the three-month and nine-month periods ended
September 30, 1996, of $1,305,000 and $3,877,000, respectively.
The assets sold in the West Coast Transaction, net of applicable
liabilities, have been reclassified as noncurrent assets and current
liabilities of the discontinued business on the 1996 Balance Sheet. At
December 31, 1996, approximately $1,054,000 related to net noncurrent assets,
and approximately $908,000 related to net current liabilities of the
discontinued business.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's financial condition,
changes in financial condition, and results of operations. The discussion also
includes the Company's liquidity and capital resources at September 30, 1997 and
later dated information, where practicable.
Financial Condition, Liquidity and Capital Resources
As previously reported, on June 16, 1997, the Company sold
substantially all of its assets and business to West Coast Entertainment
Corporation, ("West Coast"). Notwithstanding the sale of its operating
business, the Company's financial statements included herein 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 $21,622,376 from inception through September 30, 1997, including
a net loss of $868,627 for the nine months ended September 30, 1997, before
a net gain of $1,312,045 from the sale of substantially all of the Company's
assets to West Coast ( the "West Coast Transaction") (see Note 4 ). As of
September 30, 1997, the Company had a net working capital deficiency of
approximately $252,000.
The West Coast Transaction provided $2,430,000 in cash, of which
$243,000 remains in escrow with West Coast, and $203,000 remained available
to the Company at September 30, 1997, after the payment of liabilities and
other expenses. The cash available at time of closing the West Coast
Transaction was less than anticipated because of delays in the closing of the
West Coast Transaction during which time the Company continued to operate at
a loss. Since September 30, 1997 and through the date of this report, the
Company has used approximately $55,000 in cash to (i) satisfy certain
liabilities, (ii) pay professional fees, which include those associated with
existing litigation, (iii) maintain administrative functions (at present the
Company only employs one person, in finance and has entered into a consulting
agreement with one other person (See below)), and (iv) identify and consider
various alternative business opportunities. The Company expects it will
continue in this manner for the foreseeable future. Furthermore, certain
liabilities remain which, if paid, and certain claims against the Company
exist which, if successfully asserted, could result in there being no cash
remaining with which to seek alternative business opportunities. These claims
and liabilities include but are not limited to:
Professional Fees. In connection with its now discontinued acquisition
program, the Company incurred substantial professional fees. Of the amount
billed, $353,799 remains unpaid to law firm retained in that connection .
Previously, in 1994, JD Store Equipment, Inc. ("JD Store Equipment") agreed
that, in the event its merger with the Company (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 in September 1995. Subsequently, the Company 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
attempted to reach a settlement with JD Store Equipment. However, there are
no ongoing discussions at present regarding a settlement and there is no
assurance that any settlement will be concluded.
Shareholder Litigation. As previously reported, 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. The Company is presently
involved in settlement negotiations with the plaintiffs. Unless the Company
is able to conclude a settlement, as to which no assurance can be given, the
Company intends to continue to contest the lawsuit vigorously.(See Part II
Item 1. Legal Proceedings). Even if the Company is successful in defending
this lawsuit or in concluding a settlement, the cost alone in professional
fees will be substantial and material in amount. In addition, the continuing
uncertainty associated with this lawsuit has made it difficult for the
Company to find other business opportunities.
<PAGE>
The Company's 5% unsecured promissory notes (the "Notes"), in the
principal amount of $680,000, matured on September 11, 1997, leaving the
holders thereof with the sole remedy of converting such notes into shares of
the Company's Series C Preferred Stock (valued at $.25 per share of Common
Stock). The holders of $670,000 in Notes have, in accordance with the terms
of the Notes, converted such Notes into 67 shares of the Company's Series C
Preferred Stock. In addition, the Company elected to issue 3.6833 shares of
its Series C Preferred Stock to the holders of the Notes, in payment of
$36,833 of accrued interest due such noteholders in September 1997, in
accordance with the terms of such Notes.
Ronald W. Martignoni, the Company's President and Chief Executive
Officer, has taken a position with an unrelated company, effective October 6,
1997. Mr. Martignoni continues as the Company's Chairman, President and Chief
Executive Officer, under a consulting agreement. His compensation has been
reduced accordingly.
The Company's viability for the foreseeable future is and will
continue to be dependent upon its ability to successfully conclude existing
litigation, to find other business opportunities and to secure needed
capital. No assurance can be given that the Company will be successful in
that regard. In the event the Company is not successful, it is unlikely that
there would be any amounts available for distribution to the Company's
stockholders.
This Quarterly Report on Form 10-QSB contains forward looking
information with respect to, among other things, plans, future events or
future performance of the Company, the occurrence of which involve certain
risks and uncertainties that could cause actual results or future events to
differ materially from those expressed in any forward looking statements.
These risks and uncertainties include, but are not limited to, the risks and
uncertainties associated with adverse litigation, the ability to identify and
conclude alternative business opportunities, and those risks and
uncertainties detailed in the Company's filings with the Securities and
Exchange Commission. Where any forward looking statement includes a statement
of the assumptions or bases 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.
Capital Expenditures
During the nine-month period ended September 30, 1997, the Company's
capital expenditures, relating to the purchase of videocassette rental films
and furniture and fixtures, were approximately $621,000 and $10,000,
respectively, compared to $1,251,000 and $13,000, during the same period in
1996. The Company does not anticipate any capital expenditures for the
remainder of the current year.
Material Changes in Financial Condition
Assets:
Total assets decreased by approximately $694,000 between December
31, 1996 and September 30, 1997, as the result of: (1) an increase in assets
from the sale of substantially all of the Company's assets to West Coast (see
Note 4 to the Financial Statements), (2) a decrease in assets consumed by the
operating loss for the period, and (3) a decrease in assets due to payment of
a substantial portion of the Company' liabilities from a substantial portion
of the proceeds received from the West Coast Transaction.
Liabilities:
Total liabilities decreased by approximately $1,854,000 between
December 31, 1996 and September 30, 1997, primarily due to the payment of a
substantial portion of the Company's liabilities from a substantial portion
of the proceeds received from the West Coast Transaction and to the
conversion of $670,000 of the Company's 5% unsecured promissory notes payable
along with accrued interest thereon into approximately 72 shares of the
Company's Series C Preferred Stock.
<PAGE>
Stockholders' Deficit:
Between December 31, 1996 and September 30, 1997, the decrease in
stockholders' deficit was due to the net income of approximately $443,000 for
the nine-month period ended June 30, 1997 and to the issuance of
approximately 72 shares of the Company's Series C Preferred Stock (see
Liabilities: above). Included in net income was a net gain of approximately
$1,312,000 which related to the sale of substantially all of the Company's
assets to West Coast (See Note 4 to the Financial Statements).
Material Changes in Results of Operations
Continuing Operations:
Losses from continuing operations were approximately $298,000 and
$564,000 during the three-month and nine-month periods ended September 30,
1997, compared to losses of approximately $123,000 and $336,000 during the
comparative periods in 1996. The increases of approximately $175,000 and
$228,000 during the three-months and nine-months periods ended September 30,
1997, respectively were primarily related to the continuing professional fees
and costs associated with existing litigation.(See Part II Item 1.), to
increased selling and administrative expenses primarily related to the
expense associated with officers and directors liability insurance in effect
during the 1997 period, and to increases in penalty and late charges incurred
as a result of the Company's severely distressed financial condition, which
were incurred prior to the sale of substantially all of the Company's assets
to West Coast.
Discontinued Operations:
The loss from discontinued operations, before the gain of
approximately $1,312,000 from the sale of substantially all of the Company's
assets to West Coast, was approximately $305,000 for the nine-month period
ended June 30, 1997, compared to losses of approximately $72,000 and $142,000
for the three-month and nine-month periods in 1996. The increased losses
during the nine-month comparative periods are primarily related to less
favorable rental-weather conditions, the adverse affect of the lack of
strong rental titles, and, to a lesser extent, competition during the 1997
periods. In addition, during the nine-month 1997 comparative period, cost of
movie rentals resulting from a pay per transaction arrangement with a
supplier of videocassette rental films were approximately $188,000.(The
Company had no such arrangement with this supplier during the 1996
comparative period). Additionally, the Company had ten stores in operation
during the 1996 periods compared with nine stores in operation during 1997.
Net Loss:
As a result of the foregoing, the Company incurred a net loss of
approximately $298,000 and $869,000 during the three-month and nine-month
periods ended September 30, 1997, respectively, before a gain of
approximately $1,312,000, net of tax, for the nine-month period, on the sale
of substantially all of the Company's assets to West Coast (See Note 4 to the
Financial Statements) .
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The following is a description of material pending legal proceedings
to which the Company is a party or of which any of its property is the
subject:
Gibbs Litigation. As previously reported, 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
then 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 a possible merger with JD
Store Equipment, Inc. ("JD Store"), which was terminated by JD Store in
September 1995, and with regard to the Company's related acquisition program.
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 Complaint, denying plaintiffs allegations with regard to all
claims. On October 22, 1996, the Company also filed a motion for summary
judgment, which was denied on November 26, 1996, and on May 27, 1997, the
plaintiffs filed a motion for summary judgment, which was denied on June 27,
1997.
Following discovery, the Company filed a new motion for summary
judgment on August 25, 1997, and on August 27, 1997, the plaintiffs also
filed a new motion for summary judgment. On October 6, 1997, all motions for
summary judgment were denied, except that one count against one former
director was dismissed. The Company is presently involved in settlement
negotiations with the plaintiffs. Unless the Company is able to conclude a
settlement, as to which no assurance can be given, the Company intends to
continue to contest the lawsuit vigorously. No firm date for trial has been
scheduled.
Syrstad Litigation. On September 8, 1997, a lawsuit was filed by the Company
against R. Mark Syrstad, a former officer, in the Superior Court of California,
entitled Choices Entertainment Corporation v. R. Mark Syrstad, No. BC 177446, in
which the Company is seeking repayment of a loan of $62,000 made by the Company
to Mr. Syrstad in 1995, together with interest.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the Index to Exhibits appearing on Page E-1 are
included as part of this report.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHOICES ENTERTAINMENT CORPORATION
Date: November 12, 1997 By: /s/ Ronald W. Martignoni
____________________________
Ronald W. Martignoni
Chief Executive Officer
Date: November 12, 1997 By: /s/ Lorraine E. Cannon
____________________________
Lorraine E. Cannon
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
_______ ______________________
3 (a) Certificate of Incorporation, as amended (1)
(b) Certificate of Designations of Series C Preferred Stock,
as amended (2)
(c) By-Laws, as amended (3)
4 (a) Form of Certificate Evidencing Shares of Common Stock (4)
(b) Form of 5% Promissory Note (5)
10(a) Consulting Agreement between Registrant and Ronald W.
Martignoni(6)
27(a) Financial Data Schedule (6)
________________________________________________________________________________
(1) Filed as an Exhibit to Registrant's Registration Statement
on Form S-8 (File No. 33-87016) and incorporated herein by
reference.
(2) Filed as an Exhibit to Registrant's Annual Report on Form
10-KSB, for the year ended December 31,1996 and incorporated
herein by reference.
(3) Filed as an Exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 and incorporated
herein by reference.
(4) Filed as an Exhibit to Registrant's Registration Statement
on Form S-1, inclusive of Post-Effective Amendment No.1
thereto (File No.: 33-198983) and incorporated herein by
reference.
(5) Filed as an Exhibit to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1995 and
incorporated herein by reference.
(6) Filed herewith.
E-1
<PAGE>
Exhibit 10(a)
CONSULTING AGREEMENT
This Consulting Agreement is made as of the 6th day of October, 1997,
between Ronald Martignoni ("Martignoni") and Choices Entertainment Corporation
("Choices").
WHEREAS, Martignoni has accepted employment with an unrelated company.
NOW, THEREFORE, in consideration of their mutual rights and
obligations, and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Services To Be Provided By Consultant.
Martignoni hereby agrees to continue to serve as Chairman of
Choices' Board of Directors and as its President and Chief Executive Officer
and to act as Choices' client representative in all pending litigation, to
assist in locating and evaluating possible business opportunities for
Choices, and to perform such other duties as may be delegated to him by the
Choices Board of Directors.
2. Compensation.
Martignoni is to receive Five Thousand Dollars ($5,000) per month for
his services as a consultant pursuant to this Consulting Agreement.
3. Term.
This Consulting Agreement shall expire by its own terms and without
further notice on April 30, 1998, unless extended by Choices. Choices may
otherwise terminate this agreement upon written notice to Martignoni in the sole
discretion of Choices. Upon thirty (30) days written notice, Martignoni may also
terminate this Consulting Agreement. Upon termination of this agreement,
Martignoni shall receive his pro rata compensation up to the date of such
termination.
<PAGE>
4. Independent Contractor Acknowledgement.
Martignoni hereby acknowledges that he is an independent contractor
and not an employee of Choices under this Consulting Agreement. Martignoni is
solely responsible for the payment of all income taxes, social security
payments, and any other taxes or fees that arise out of any compensation he
receives pursuant to this Consulting Agreement.
5. Release of Prior Claims.
Except for his rights under and pursuant to existing stock options,
including their continued registration, and his rights, if any, to be
indemnified under Choices by laws, including with respect to any pending
litigation, Martignoni hereby releases Choices from any and all obligations it
may have to him other than as provided for under this Consulting Agreement.
Without limiting the generality of the foregoing, Martignoni specifically
releases Choices from any and all claims he may have against it pursuant to his
Severance Agreement dated on or about March 31, 1992, as modified.
WHEREFORE, the parties have put their hands and seals this 11th_ day
of November, 1997.
CHOICES ENTERTAINMENT CORPORATION
By /s/ Fred Portner
_________________________________
Fred Portner, Director
(SEAL)
/s/ Ronald Martignoni
_________________________________(SEAL)
RONALD MARTIGNONI
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the financial statements of Choices Entertainment Corporation and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 203,073
<SECURITIES> 0
<RECEIVABLES> 16,858
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 400,638
<PP&E> 4,034
<DEPRECIATION> 161
<TOTAL-ASSETS> 486,186
<CURRENT-LIABILITIES> 652,482
<BONDS> 0
0
1
<COMMON> 220,044
<OTHER-SE> (386,341)
<TOTAL-LIABILITY-AND-EQUITY> 486,186
<SALES> 2,115,622
<TOTAL-REVENUES> 2,115,622
<CGS> 320,120
<TOTAL-COSTS> 320,120
<OTHER-EXPENSES> 2,627,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,081
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (564,842)
<DISCONTINUED> (303,785)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 443,418
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
