<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 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)
836 W. Trenton Avenue, Morrisville, Pennsylvania 19067
- - - ------------------------------------------------ -----
(Address of Principal Executive Offices) (Zip code)
Issuer's Telephone Number, Including Area Code (215) 428-1000
---------------
- - - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of the issuer's Common Stock, as of
August 14, 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>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
- - - ------
Current assets:
Cash........................................................................... $ 515,556 $ 66,739
Cash held in escrow (Notes 3 and 4)............................................ 81,000
Accounts receivable............................................................ 8,664
Prepaid expenses............................................................... 25,500 20,842
Other deferred costs........................................................... 10,869 30,453
------------ ------------
Total current assets......................................................... 641,589 118,034
Cash held in escrow (Notes 3 and 4)............................................. 162,000
Other assets.................................................................... 7,400 7,400
Net assets of discontinued business (Note 4).................................... 1,054,425
------------ ------------
------------ ------------
$ 810,989 $ 1,179,859
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable.................................................................. $ 680,000 $ 854,000
Accounts payable............................................................... 111,031 61,558
Accrued merger and acquisition expenses........................................ 353,799 425,299
Accrued professional fees...................................................... 164,085 168,199
Accrual for lease cancellation and litigation reserves......................... 1,250
Accrued salaries............................................................... 18,099 7,500
Other accrued expenses......................................................... 54,894 80,307
Net liabilities of discontinued business (Note 4).............................. 908,293
------------ ------------
Total current liabilities.................................................... 1,381,908 2,506,406
------------- -----------------
Stockholders' deficit:
Preferred stock, par value $.01 per share:
Authorized 5,000 shares: 37.4 shares issued and outstanding in 1997 and 1996
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..................................................... 20,519,203 20,519,203
Accumulated deficit............................................................ (21,310,166) (22,065,794)
------------ ------------
Total stockholders' deficit.................................................. (570,919) (1,326,547)
------------ ------------
$ 810,989 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Selling and administrative expenses......................... $ 43,598 $ 40,855 $ 72,117 $ 75,233
Professional and consulting expenses........................ 61,210 81,656 126,441 103,433
Depreciation and amortization............................... 9,792 9,792 19,584 19,584
---------- ----------- ------------ -----------
114,600 132,203 218,142 198,250
---------- ----------- ------------ -----------
Other expenses:
Interest expense, net....................................... 17,429 13,427 34,490 27,706
---------- ----------- ------------ -----------
Loss from continuing operations.............................. (132,029) (145,730) (252,632) (225,956)
---------- ----------- ------------ -----------
Discontinued operations--Note 4
Loss from discontinued operations.......................... (256,161) (134,895) (303,785) (55,870)
Gain on sale of discontinued operations, net of tax of
$13,092................................................... 1,312,045 1,312,045
---------- ----------- ------------ -----------
Gain (loss) from discontinued operations................... 1,055,884 (134,895) 1,008,260 (55,870)
---------- ----------- ------------ -----------
Net income (loss)............................................ $ 923,855 $ (280,625) $ 755,628 $ (281,826)
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
Net income (loss) per share of common stock--Note 2:
Primary income (loss) per share:..........................
Continuing operations..................................... $ (0.01) $ (0.01) $ (0.01) $ (0.01)
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
Discontinued operations................................... $ 0.05 $ (0.01) $ 0.05 $ (0.01)
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
Fully diluted income (loss) per share:
Continuing operations..................................... $ (0.01) $ (0.01) $ (0.01) $ (0.01)
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
Discontinued operations................................... $ 0.04 $ (0.01) $ 0.04 $ (0.01)
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTOF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL
STOCK ------------------------ PAID-IN ACCUMULATED
SHARES SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......... 37.4 22,004,395 $ 220,044 $ 20,519,203 $ (22,065,794) $ (1,326,547)
Net income for the six months ended
June 30, 1997....................... 755,628 755,628
--- ------------ ---------- ------------- -------------- -------------
37.4 22,004,395 $ 220,044 $ 20,519,203 $ (21,310,166) $ (570,919)
--- ------------ ---------- ------------- -------------- -------------
--- ------------ ---------- ------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
------------ -----------
Cash flows from operating activities:
Net income (loss).......................... $755,628 $ (281,826)
---------- ----------
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 480,015 602,500
Gain on sale of assets, net of tax (Note (1,312,045)
4).....................................
Cost of rental films sold................ 121,342 215,087
Loss on disposal of rental films......... 82,125 119,704
Videocassette and inventory reserves..... 7,667 11,982
Change in assets and liabilities:
Increase in cash held in escrow.......... (243,000)
(Increase) decrease in accounts 4,126
receivable............................. (4,465)
(Increase) decrease in merchandise 62,584
inventories.............................. (18,173)
(Increase) decrease in prepaid expenses.. 16,183 (27,896)
Increase in other deferred costs......... 1,762
Increase (decrease) in accounts payable.. (588,807) 207,972
Decrease in accrued merger and acquisition (50,550)
expenses............................... (23,334)
Increase (decrease) in accrued professional (104,114)
fees................................... 14,909
Decrease in deferred revenue............. (27,797)
Decrease in accrued salaries............. (37,635) (8,411)
Decrease in accrual for lease cancellation (1,250)
and litigation reserves................ (7,500)
Increase (decrease) in other accrued (158,648)
expenses............................... 67,256
--------- ----------
Total adjustments.......................... (1,748,042) 1,149,631
---------- ----------
Net cash provided by (used in) operating
activities............................... (992,414) 867,805
---------- ----------
Cash flows from investing activities:
Purchase of equipment, net............... (6,015) (5,821)
Purchase of videocassette rental films... (619,311) (858,477)
Net proceeds from sale of assets (Note 4) 2,411,507
---------- ----------
Net cash provided by (used in) investing
activities............................... 1,786,181 (864,298)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable.............. 49,000
Repayment of notes payable............... (393,950) (5,530)
---------- ----------
Net cash used in financing activities...... (344,950) (5,530)
---------- ----------
Net increase (decrease) in cash............ 448,817 (2,021)
Cash at beginning of period................ 66,739 86,391
---------- ----------
Cash at end of period...................... $515,556 $ 84,370
---------- ----------
---------- ----------
Supplementary disclosure of cash flow
information:
Cash paid during the year for interest... $19,601 $ 7,842
---------- ----------
---------- ----------
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 six-month
periods ended June 30, 1997 and 1996 and as of June 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 six-month period ended June 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 three-month and six-month periods ended
June 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 six-month
periods ended June 30, 1996 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 three-month and six-month periods
ended June 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>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ ------------ ------------ ------------
Number of shares used in calculation
Primary dilution......................................... 22,004,000 22,004,000 22,004,000 22,004,000
Full dilution............................................ 23,500,000 22,004,000 23,500,000 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 $21,310,166 from inception through June 30,
1997, including a net loss of $556,417 for the six months ended June 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 June 30, 1997, the Company had a net working capital deficiency of
approximately $740,000.
The West Coast Transaction provided $2,430,000 in cash, of which $243,000
remains in escrow with West Coast, and $515,000 remained available to the
Company at June 30, 1997, after the payment of liabilities and other expenses.
The $515,000 of cash available at June 30, 1997 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 June 30, 1997 and through the date of this report, the Company has
used approximately $150,000 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
three persons, all in finance and administration), 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:
5% UNSECURED PROMISSORY NOTES. The Company's 5% unsecured 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 thereon, into shares of Series C Preferred Stock
(valued at $.25 per share of Common Stock). The notes are not presently in
default in the payment of principal and interest. However, the Board of
Directors does not intend to make any payment on such notes upon their
maturity in September 1997, leaving the holders thereof with the sole remedy
of converting such notes into Series C Preferred Stock. The notes are not
presently convertible.
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. Discovery is proceeding and the
Company intends to contest the lawsuit vigorously.(See Part II Item 1. Legal
Proceedings). However, even if the Company is successful in defending this
lawsuit, the cost alone in professional fees will be substantial and material in
amount.
The Company's viability for the foreseeable future is and will continue to
be dependent upon its ability to find other business opportunities, to secure
needed capital and to successfully conclude existing litigation. No assurance
can be given that the Company will be successful in that regard. In the event
the Company is not successful, 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 three-month and six-month periods ended June 30, 1997.
Revenues for the discontinued business for the three- month and six-month
periods ended June 30, 1997, were $859,399 and $2,115,622, respectively,
compared to revenues for the discontinued business for the three-month and
six-month period ended June 30, 1996, of $1,213,510 and $2,572,615,
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 June 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 $21,310,166 from
inception through June 30, 1997, including a net loss of $556,417 for the six
months ended June 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 to the Financial Statements). As of June 30, 1997,
the Company had a net working capital deficiency of approximately $740,000.
The West Coast Transaction provided $2,430,000 in cash, of which $243,000
remains in escrow with West Coast, and $515,000 remained available to the
Company at June 30, 1997, after the payment of liabilities and other expenses.
The $515,000 of cash available at June 30, 1997 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 June 30, 1997 and through the
date of this report, the Company has used approximately $150,000 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 three persons, all in finance and
administration), 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:
5% UNSECURED PROMISSORY NOTES. The Company's 5% unsecured 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 thereon, into shares of Series C Preferred Stock
(valued at $.25 per share of Common Stock). The notes are not presently in
default in the payment of principal and interest. However, the Board of
Directors does not intend to make any payment on such notes upon their
maturity in September 1997, leaving the holders thereof with the sole remedy
of converting such notes into Series C Preferred Stock. The notes are not
presently convertible.
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.
<PAGE>
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. Discovery is proceeding and the
Company intends to contest the lawsuit vigorously.(See Part II Item 1. Legal
Proceedings). However, even if the Company is successful in defending this
lawsuit, the cost alone in professional fees will be substantial and material in
amount.
The Company's viability for the foreseeable future is and will continue to
be dependent upon its ability to find other business opportunities, to secure
needed capital and to successfully conclude existing litigation. No assurance
can be given that the Company will be successful in that regard. In the event
the Company is not successful, 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 six-month period ended June 30, 1997, the Company's capital
expenditures, relating to the purchase of videocassette rental films and
furniture and fixtures, were approximately $619,000 and $6,000, respectively,
compared to $858,000 and $5,800, 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 $369,000 between December 31, 1996
and June 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 $1,124,000 between
December 31, 1996 and June 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.
Stockholders' Deficit:
Between December 31, 1996 and June 30, 1997, the decrease in stockholders'
deficit was due to the net income of approximately $756,000 for the six-month
period ended June 30, 1997. 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).
<PAGE>
MATERIAL CHANGES IN RESULTS OF OPERATIONS
CONTINUING OPERATIONS:
Losses from continuing operations were approximately $132,000 and $253,000
during the three-month and six-month periods ended June 30, 1997, compared to
losses of approximately $146,000 and $226,000 during the comparative periods in
1996. The decrease of approximately $14,000 during the three months ended June
30, 1997 was primarily related to lower professional fee costs during the three-
month period ended June 30, 1997, when compared to 1996. The increase of
approximately $27,000 for the six -month period ended June 30, 1997 was
primarily related to the continuing professional fees and costs associated with
existing litigation, the substantial portion of which was incurred during the
first three months of 1997(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.
DISCONTINUED OPERATIONS:
Losses 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, were approximately $256,000 and $304,000 for the three-month and
six-month periods ended June 30, 1997, compared to losses of approximately
$135,000 and $56,000 for the comparative periods in 1996. The increased losses
during both 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 1997 comparative periods, cost of movie rentals resulting
from a pay per transaction arrangement with a supplier of videocassette rental
films were approximately $82,000 and $188,000.(The Company had no such
arrangement with this supplier during the 1996 comparative periods).
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 $388,000 and $556,000 during the three-month and six-month periods
ended June 30, 1997, respectively, before a gain of approximately $1,312,000,
net of tax, 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:
SCHEUERER LITIGATION. As previously reported, 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 the plaintiff, Max Scheuerer,
sought to obtain a judgment against the Company for amounts owing under two
promissory notes. This lawsuit was dismissed with prejudice on June 25, 1997,
upon the payment by the Company to plaintiff of $145,230, in full settlement of
all amounts owing to plaintiff.
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. Discovery is proceeding. The Company intends to contest
the lawsuit vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the Index to Exhibits appearing on Page E-1 are
included as part of this report.
(b) Reports on Form 8-K
The Company filed Forms 8-K dated April 23, 1997 and May 29, 1997, both of
which included disclosure under Item 5. thereof. Additionally, the Company filed
a Form 8-K dated June 16, 1997, which report included disclosure under Item 2
and Item 7 thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHOICES ENTERTAINMENT CORPORATION
Date: August 14, 1997 By: /s/ Ronald W. Martignoni
-------------------------
Ronald W. Martignoni
Chief Executive Officer
Date: August 14, 1997 By: /s/ Lorraine E. Cannon
-------------------------
Lorraine E. Cannon
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- - - ----------- -------------------------------
<C> <S>
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)
27 (a) Financial Data Schedule (6)
</TABLE>
------------------------
(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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Choices Entertainment Corporation and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 515,556
<SECURITIES> 0
<RECEIVABLES> 8,664
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 641,589
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 810,989
<CURRENT-LIABILITIES> 1,318,908
<BONDS> 0
0
0
<COMMON> 220,044
<OTHER-SE> (790,963)
<TOTAL-LIABILITY-AND-EQUITY> 810,989
<SALES> 2,115,622
<TOTAL-REVENUES> 2,115,622
<CGS> 320,435
<TOTAL-COSTS> 320,435
<OTHER-EXPENSES> 2,331,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,490
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (252,632)
<DISCONTINUED> (303,785)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 755,628
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
</TABLE>
