<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17001
Choices Entertainment Corporation
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(Name of small business issuer in its charter)
Delaware 52-1529536
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(State or other jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
10770 Wiles Road, Coral Springs, Florida 33076-2009
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (954) 752-4289
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Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share.
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(Title of class)
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Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 No X
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the year ended December 31, 1998: $49,508
Aggregate market value of the voting stock held by non-affiliates of
the registrant based upon a price of $ .013 per share, the average of the
inside bid and ask prices of the registrant's Common Stock at April 15, 1999:
$246,672.
For purposes of this calculation, all directors and officers of the
registrant have been considered affiliates.
Number of outstanding shares of Common Stock at April 15, 1999: 22,004,395
shares.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
None.
--FORWARD LOOKING STATEMENTS--
This Annual Report on Form 10-KSB contains forward looking statements 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 the
Company's lack of business operations and its severely limited resources, the
risk of adverse litigation associated with, among other things, various claims
and liabilities, the uncertainties resulting from recent attempts by certain
stockholders to gain control of the Company, and the difficulty of identifying
and concluding new business opportunities, as well as those risks and
uncertainties identified under the caption "Management's Discussion and Analysis
or Plan of Operation." Where any 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
<PAGE>
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 can be achieved.
The words "believe," "expect" and "anticipate" and similar expressions
identify forward looking statements.
--------------------------------------------
PART I
ITEM 1. DESCRIPTION OF BUSINESS
On June 16, 1997, the Company sold substantially all of its assets and
business to West Coast Entertainment Corporation ("West Coast"). Prior to the
sale to West Coast (the "West Coast Transaction"), the Company operated a chain
of retail video home entertainment stores, principally under the trade name
CHOICES(R) MOVIES AND GAMES, which rented and sold videocassette tapes, video
games and other video home entertainment products. The Company's home
entertainment stores were located in Delaware, New Jersey and Pennsylvania.
Under the terms of the West Coast Transaction, the purchase price of
$2,430,000 was paid to the Company in cash on June 16, 1997, less $243,000 that
was held by West Coast in escrow, pursuant to the terms of an escrow agreement
between the Company and West Coast, to satisfy certain indemnity obligations of
the Company, if any, to West Coast, and which was, subject to amounts withheld
pursuant to any claims made by West Coast, to be released to the Company over a
period of eighteen months. On December 22, 1997, the Company negotiated a
compromise and full release of the escrow upon the payment by West Coast to the
Company of $211,000 on that date. The release of the escrow did not affect in
any manner the Company's indemnity obligations to West Coast pursuant to the
terms of the asset purchase agreement between the Company and West Coast.
From the closing of the West Coast Transaction, on June 16, 1997, to
June 2, 1998, and according to prior management of the Company as described in
previously filed disclosure documents, the Company principally: (i) satisfied
and compromised various claims and liabilities; (ii) defended and settled
litigation, and paid professional fees, including substantial professional fees
associated with such litigation; (iii) maintained administrative functions; and,
(iv) attempted to identify and consider various new business opportunities.
On November 25, 1997, a group of stockholders demanded that they be
given control of the Company and on December 10, 1997, this group filed
preliminary solicitation material with the Securities and Exchange Commission,
seeking to remove and replace two of three members of the Company's Board of
Directors. On February 11, 1998 and April 17, 1998, revised preliminary
solicitation material was filed by an expanded group of stockholders (the
"Shareholder Committee") in connection with the solicitation of written
consents, also to remove and replace two directors. As previously disclosed, Mr.
Renna and Mr. Pursglove were the co-chairmen of the Shareholders Committee. On
June 5, 1998, the Shareholder Committee formally withdrew its preliminary proxy
material and the Shareholder Committee has ceased to exist.
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<PAGE>
On June 2, 1998 John Boylan and Fred Portner resigned as directors of
the Company, and Lorraine Cannon resigned as Chief Financial Officer. The
resignations of these persons were effective upon the agreement by James Sink,
to enter into a separation agreement ( the "Separation Agreement") prepared and
tendered by the resigning directors and officer. Pursuant to the terms of the
Separation Agreement effective June 2, 1998, the Company and each of Messrs.
Boylan, Portner and Ms. Cannon agreed to a mutual release from any damage,
action, cause of action or claim whatsoever, known or unknown, liquidated or
unliquidated, and whether otherwise enforceable, up to and including the date of
the Separation Agreement. The Separation Agreement also provides for the
indemnification of Messrs. Boylan, Portner and Ms. Cannon from and against any
loss, damage, liability, judgment or claim (and related expenses including
attorneys fees) based on the fact that such persons were directors or an officer
of the Company. Additionally, the Separation Agreement contained an affirmation
of the validity of certain stock options granted to Messrs. Boylan, Martignoni,
Portner, and Ms. Cannon.
Also on June 2, 1998 the sole remaining director, Mr. James Sink, was
appointed Chairman of the Board by the outgoing directors and he in turn
appointed Mr. Thomas Renna and Mr. George Pursglove to the Board of Directors.
The new Board of Directors passed a resolution indemnifying and holding harmless
James Sink from any liability resulting from signing the Separation Agreement.
From June 2, 1998 to present, current directors of the Company have:
(i) satisfied and compromised various claims and liabilities; (ii) defended and
settled litigation, and paid professional fees, including substantial
professional fees associated with such litigation; (iii) maintained
administrative functions (at present the Company has no employees); (iv)
marshaled the books, documents and records of the Company and transferred them
to the Company's offices in Coral Springs, Florida: (iv) retained new
independent public auditors to replace the Company's prior independent public
auditors, who resigned; (v) actively engaged in discussions with various persons
for the acquisition of a new business or business opportunity for the Company;
and, (vi) attempted to continue the status of the Company as a reporting
registrant under the Securities Exchange Act of 1934 and a publicly traded
company.
To date, the Company has been unsuccessful in concluding any new
business opportunities or in securing needed capital. As a consequence, the
Company's financial condition has continued to deteriorate and the Company
presently has very limited cash remaining with which to seek or conclude any new
business opportunities. Moreover, certain liabilities may remain and certain
claims against the Company may exist which, if successfully asserted, could
result in there being no cash remaining. The uncertainty regarding the existence
of these claims and liabilities has hampered the Company in its efforts to
conclude new business opportunities or to secure needed capital.(See
"Management's Discussion and Analysis or Plan of Operation"). As a result, the
Company's viability is seriously in question.
In the event the Company is not successful in finding and concluding
new business opportunities or in securing needed capital in the very near term,
as to which no assurance can be given, the Company does not believe that there
will be any amounts available for distribution to the Company's stockholders.
(See "Management's Discussion and Analysis or Plan of Operation").
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<PAGE>
GENERAL DESCRIPTION
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 10770 Wiles Road, Coral Springs, Florida 33076-2009; its telephone number is
(954) 752-4289.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices, are located at 10770 Wiles Road, Coral Springs,
Florida 33076-2009 and are provided rent free by Mr. George Pursglove, the
Company's Interim Chief Financial Officer.
ITEM 3. LEGAL PROCEEDINGS
The following is a description of material pending legal proceedings not
previously reported to which the Company is a party or of which any of its
property is the subject:
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. 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 under the symbol CESC. The following table sets
forth the high and low inside bid prices as reported by the OTC-Bulletin Board.
Common Stock
(CESC)
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<TABLE>
<CAPTION>
1997 High Low
- ---- ---- ----
<S> <C> <C>
First quarter................................ .05 .04
Second quarter............................... .04 .02
Third quarter................................ .02 .02
Fourth quarter............................... .06 .01
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1998
- ----
First quarter................................. .04 .02
Second quarter................................ .02 .02
Third quarter................................. .02 .02
Fourth quarter................................ .01 .002
</TABLE>
On April 15, 1999, the high and low inside bid prices for the Company's
Common Stock were $.01 and $.016 respectively, as reported by the OTC-Bulletin
Board.
The quotations set forth above reflect inter-dealer prices, without
retail markup, markdown or commission and may not necessarily represent actual
transactions.
Holders. As of April 15, 1999, the outstanding shares of the Company's
Common Stock were held by approximately 538 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
Company's severely distressed financial condition.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. It also includes a
discussion of the Company's liquidity and capital resources at December 31,
1998, and later dated information, where practicable. This discussion should be
read together with the Company's Consolidated Financial Statements and the Notes
thereto beginning on page F-1.
This schedule contains summary unaudited financial information
extracted from the financial statements of Choices Entertainment Corporation and
is qualified in its entirety by reference to such financial statements.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales $ - $ - $ - $ 4,760,684 $ 5,892,874
Cost of Sales - - - 3,323,740 4,256,187
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Gross Profit - - - 1,436,944 1,636,687
Operating Expenses 117,736 716,369 655,059 3,947,208 2,588,203
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Income (Loss) From Operations (117,736) (716,369) (655,059) (2,510,264) (951,516)
Other Income (Expense) 353,307 (37,081) (51,830) 370,937 (36,623)
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Income (Loss) from Continuing Operations $ 235,571 $ (753,450) $ (706,889) $ (2,139,327) $ (988,139)
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PER SHARE DATA:
Continuing Operations $ 0.01 $ (0.03) $ (0.03) $ (0.10) $ (0.05)
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Weighted Average Shares Outstanding 22,004,395 24,372,000 22,004,000 21,652,000 18,491,000
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CONSOLIDATED BALANCE SHEETS:
Total Assets 2,220 201,996 1,179,859 1,556,910 2,282,478
Total Debt 92,254 524,938 2,506,406 2,250,777 2,724,275
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Stockholders' Equity (90,034) (322,942) (1,326,547) (693,867) (441,797)
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</TABLE>
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 in each year of its existence, with the
exception of the years ended December 31, 1997 and December 31, 1998,
aggregating $21,546,114 from its inception through December 31, 1998, including
a net loss of $999,432 for the year ended December 31, 1997, before a net gain
of $1,286,204 from the sale of substantially all of the Company's assets and
business to West Coast ( the "West Coast Transaction") and a net loss of $2,663
for the year ended December 31, 1998, before extraordinary income of $303,799
relating to the effects of the West Coast Transaction (see below). As of
December 31, 1998, the Company had a net working capital deficiency of
approximately $90,000.
Under the terms of the West Coast Transaction, the purchase price of
$2,430,000 was paid to the Company in cash on June 16, 1997, less $243,000 that
was held by West Coast in escrow, pursuant to the terms of a escrow agreement
between the Company and West Coast, to satisfy certain indemnity obligations of
the Company, if any, to West Coast, and which was, subject to amounts withheld
pursuant to any claims made by West Coast, to be released to the Company over a
period of eighteen months. On December 22, 1997, the Company negotiated a
compromise and full release of the escrow upon the payment by West Coast to the
Company of $211,000 on that date. The release of the escrow did not affect in
any manner the Company's indemnity obligations to West Coast pursuant to the
terms of the asset purchase agreement between the Company and West Coast.
From June 2, 1998 to present, current directors of the Company have:
(i) satisfied and
-5-
<PAGE>
compromised various claims and liabilities; (ii) defended and settled
litigation, and paid professional fees, including substantial professional
fees associated with such litigation; (iii) maintained administrative
functions (at present the Company has no employs); (iv) marshaled the books,
documents and records of the Company and transferred them to the Company's
offices in Coral Springs, Florida: (iv) retained new independent public
auditors to replace the Company's prior independent public auditors, who
resigned; (v) actively engaged in discussions with various persons for the
acquisition of a new business or business opportunity for the Company; and,
(vi) attempted to continue the status of the Company as a reporting registrant
under the Securities Exchange Act of 1934 and a publicly traded company.
To date, the Company has been unsuccessful in concluding any new
business opportunities or in securing needed capital. As a consequence, the
Company's financial condition has continued to deteriorate and the Company
presently has very limited cash remaining with which to seek or conclude any new
business opportunities. As of the date of this report, the Company has
approximately $35,000 in cash remaining. Moreover, certain liabilities may
remain and certain claims against the Company may exist which, if successfully
asserted, could result in there being no cash remaining. The uncertainty
regarding the existence of these claims and liabilities has hampered the Company
in its efforts to conclude new business opportunities or to secure needed
capital. As a result, the Company's viability is seriously in question.
The Company has compromised and settled many claims and liabilities
including, but not limited to, professional fees billed in connection with the
Company's discontinued acquisition program as previously reported to be in the
amount of $353,799 owing to a law firm retained in that connection. This claim
was settled for a cash payment of $50,000 on or before March 31, 1999. (See Note
L to the Financial Statements)
The Company's current directors serve the Company without compensation.
From January 1, 1998 until April 16, 1998, the Company's former President and
Chief Executive Officer, served the Company under a consulting agreement which
terminated April 30, 1998, pursuant to which his compensation was reduced.
In the event the Company is not successful in finding and concluding
new business opportunities or in securing needed capital in the very near term,
as to which no assurance can be given, the Company does not believe that there
will be any amounts available for distribution to the Company's stockholders.
CAPITAL EXPENDITURES
The Company's capital expenditures were approximately $0 during the
year ended December 31, 1998, compared to $631,000 during 1997. The decrease
during 1998 was primarily due to the sale of substantially all of the Company's
assets and business to West Coast on June 16, 1997.
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<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION
The following material changes in financial condition reflect changes
occurring during the two-year period from December 31, 1996 through December 31,
1998.
As of December 31, 1998 and 1997:
- --------------------------------
Assets:
Total assets decreased by approximately $199,776 between December 31,
1997 and December 31, 1998, as the result of a decrease in assets consumed by
the operating loss for the period, and a decrease in assets due to payment of a
substantial portion of the Company's liabilities from a substantial portion of
the proceeds received from the West Coast Transaction, which more than off-set
an increase in assets from the sale of substantially all of the Company's assets
to West Coast. (See Note C to the Financial Statements)
Liabilities:
Total liabilities decreased by approximately $432,684 between December
31, 1997 and December 31, 1998, 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, 1997 and December 31, 1998, the decrease in
stockholders' deficit was due to net income of approximately $232,908 for the
year ended December 31, 1998. Included in net income was extraordinary income of
approximately $303,709 which related to the sale of substantially all of the
Company's assets to West Coast. (See Note C to the Financial Statements)
As of December 31, 1997 and 1996:
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Assets:
Total assets decreased by approximately $978,000 between December 31,
1996 and December 31, 1997, as the result of a decrease in assets consumed by
the operating loss for the period, and a decrease in assets due to payment of a
substantial portion of the Company's liabilities from a substantial portion of
the proceeds received from the West Coast Transaction, which more than off-set
an increase in assets from the sale of substantially all of the Company's assets
to West Coast (see Note C to the Financial Statements).
-7-
<PAGE>
Liabilities:
Total liabilities decreased by approximately $1,981,000 between
December 31, 1996 and December 31, 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
$680,000 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.
Stockholders' Deficit:
Between December 31, 1996 and December 31, 1997, the decrease in
stockholders' deficit was due to net income of approximately $287,000 for the
year ended December 31, 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 $1,286,000 which related to the sale of
substantially all of the Company's assets to West Coast. (See Note C to the
Financial Statements)
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The following material changes in results of operations occurred during
the two-year period from January 1, 1997 through December 31, 1998.
Continuing Operations:
- ---------------------
Losses from continuing operations were approximately $68,000 during
1998, compared to losses of approximately $753,000 during 1997. The decrease of
approximately $685,000 primarily related to a reduction in the expenses related
to operating the company as a result of the West Coast Transaction.
Discontinued Operations:
- -----------------------
There was a loss from discontinued operations of approximately $2,663
before extraordinary income of approximately $303,799, from the sale of
substantially all of the Company's assets to West Coast during 1997, compared to
income from discontinued operations of approximately $1,040,000 during 1997. The
Company had nine stores in operation during 1997 and none operating in 1998.
Net Loss:
- ----------
As a result of the foregoing, the Company generated net income of
approximately $232,908
-8-
<PAGE>
during 1998, which included extraordinary income of $303,799 compared to net
income of approximately $286,772 in 1997, which included a net gain of
approximately $1,286,000 from the sale of substantially all of its assets to
West Coast. (See Note C to the Financial Statements)
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements and Notes thereto are
filed together with this report commencing at Page F-1. The Consolidated
Financial Statements and Notes for the period ending December 31, 1998 are
audited by Miller and Co. and are included herein based on their auditor's
report dated April 2, 1999. The consolidated Financial Statements for prior
periods, as presented, are audited by the previous auditor. (See Item 8. below)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 8, 1998, KPMG Peat Marwick LLP ("KPMG") advised Choices
Entertainment Corporation (the "Company") that KPMG was terminating the
client-auditor relationship with the Company. During the Company's two (2) most
recent fiscal years and any subsequent interim period preceding such
termination, there were no disagreements between KPMG and the Company on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedures, which disagreement(s), if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to the subject
matter of the disagreement(s) in connection with its report. KPMG's accountant's
report on the financial statements for the two (2) years ended December 31,
1997, contained no adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles,
except as follows:
KPMG's auditors' report on the financial statements of the Company and its
subsidiaries as of and for the years ended December 31, 1997 and December 31,
1996, contained a separate explanatory paragraph stating that the Company had
suffered recurring losses from operations, was in default on certain obligations
and had a net working capital deficiency which raise substantial doubts about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
The Company has not been advised by KPMG that (i) internal controls
necessary for the Company to develop reliable financial statements do not
exist; (ii) information has come to KPMG's attention that has led it to no
longer be able to rely on management's representations, or that has made them
unwilling to be associated with the financial statements prepared by
management; (iii) KPMG needs to significantly expand the scope of its audit
during such time period; and (iv) information has come to KPMG's attention
that it has concluded materially impacts the fairness or reliability of either
(a) a previously issued audit report or the underlying financial statements;
or (b) the financial statements issued or to be issued covering the fiscal
period(s) subsequent to the date of the most recent financial statements
covered by an audit report.
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A copy of the Company's Report on Form 8-K was furnished to KPMG
pursuant to Item 304(a)(3) of Regulation S-K under the General Rules and
Regulations of the Securities Act of 1933, as amended. The Company has received
from KPMG a letter addressed to the Securities and Exchange Commission stating
that KPMG agrees with the statements made by the Company on Form 8-K. The letter
was timely filed by the Company by Amendment to the Form 8-K Report.
Effective March 1, 1999, the Company engaged Miller and Co., Certified
Public Accountants with offices in Santa Monica, California to serve as the
Company's independent public auditors for the year ended December 31, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Year First
Year First Became an
Became a Executive
Name Age Position Director Officer
----- --- -------- ---------- ---------
<S> <C> <C> <C> <C>
James D. Sink 48 Chairman, President 1997 1998
Thomas Renna 34 Director, Treasurer 1998 1999
George Pursglove 48 Director, Secretary 1998 1999
John Boylan *
Fred E. Portner *
Ronald Martignoni *
Lorraine Cannon *
</TABLE>
*On or about June 2, 1998 Mr. Boylan, Mr. Portner and Ms. Cannon resigned from
the Company. Mr. Martignoni's consulting agreement terminated April 30, 1998 and
was not renewed. Certain biographical information regarding these individuals
has been intentionally omitted.
JAMES D. SINK, M.D., has served as a director since February 1997 and
became Chairman of the Board in June 1998. Since March 1996, Dr. Sink has been
affiliated with Allegheny University Hospitals in Philadelphia, Pennsylvania,
where he is Professor of Cardiothoracic Surgery. Prior to joining Allegheny
University Hospitals, Dr. Sink was, for more than five years, affiliated with
Presbyterian Medical Center, in Philadelphia, Pennsylvania, where he was Chief
of Cardiothoracic Surgery at the Philadelphia Heart Institute of Presbyterian
Medical Center.
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<PAGE>
THOMAS RENNA, is employed by Commonwealth Associates, an NASD
broker/dealer as an Investment Executive and has held that position since
October, 1998. Prior to that he was employed by Consolidated Merchandising
Services, Inc. ("CMSI") (now known as USA Services, Inc.) as a Vice President of
Sales and occupied that position from February 1, 1998 to October, 1998. Mr.
Renna's responsibilities in that position included initiating sales calls to
secure new accounts for CMSI as well as advising CMSI as to its capital raising
activities. CMSI is a company which provides "in-store" merchandising and
product assembly and sales services primarily on behalf of branded product
manufacturers or retail companies. CMSI is a company controlled by George D.
Pursglove. Prior to that, Mr. Renna was Vice President of Sales of SSNN, Inc.,
("SSNN") and held that position since October 28, 1997. SSNN, is a start-up
company providing an Internet website which offers company and stock information
on small and micro-cap companies. Mr. Renna's responsibilities included securing
new subscribers for the SSNN service and advising SSNN as to its capital raising
activities. Mr. Renna was employed as a Vice President, Investments at Texas
Capital Securities from February 1995 to October 1997. From February 1992 to
January 1995, Mr. Renna was a Vice President of Investments at Berkeley
Securities. In his positions with Texas Capital Securities and Berkeley
Securities Mr. Renna was a stockbroker serving the investment needs of his
customers including the buying and selling of securities.
GEORGE PURSGLOVE, has served as the Chairman, President and Chief
Executive Officer of USA Services, Inc. (formerly Consolidated Merchandising
Services, Inc. or"CMSI") since the Company's incorporation in January 1997.
Prior to that, Mr. Pursglove was President of Consolidated Business Group, Inc.,
a business management company offering consulting services for closely held
consumer product companies. From March 1993 through November of 1995, Mr.
Pursglove served in the position of Director of Merchandising for Office Depot's
contract/commercial division and as Senior Divisional Merchandise Manager. From
April of 1992 through March of 1993, Mr. Pursglove held the position of
Divisional Merchandise Manager for the Price Company. From August of 1991
through April of 1992, Mr. Pursglove was a business consultant functioning in
the role of merchandising/marketing liaison reporting directly to the
Presidents/CEO or owner. From August of 1988 through August of 1991, Mr.
Pursglove was Senior Vice President General Merchandise Manager and co-founder
of HQ Office Supply Warehouse, Inc. From August of 1983 through August of 1988,
Mr. Pursglove held the position of merchandise manager and was one of the
original group of key management personnel who were instrumental in the start-up
of Home Club (now called Home Base), a chain of home improvement warehouse
stores. Prior to 1983, Mr. Pursglove held various positions of increasing
responsibilities with NAVRESO, FedMart and the Two Guys organizations.
Directors of the Company hold their offices until the next annual
meeting of the Company's stockholders, until their successors have been duly
elected and qualified or until their earlier resignation, removal from office or
death.
Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's
-11-
<PAGE>
stockholders and until their successors have been chosen and qualified or until
their earlier resignation, removal from office or death.
There are no family relationships among the present executive officers
and directors of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information relating to the
compensation awarded to, earned by or paid to the former Chief Executive
Officer (the "Named Executive Officer") for services in all capacities during
1998, 1997 and 1996 (there being no other executive officer of the Company
whose total annual salary and bonus exceeded $100,000 during 1998.)
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
-------------------------- --------------
Securities
Underlying All Other
Name and Principal Options Compensation
Position Year Salary($) (#) ($)(2)
- ---------------------- ---- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Ronald W. Martignoni 1998 $15,000 (1) -0-
1997 $92,884 (1) -0- $ 353
Chairman, Chief 1996 $98,557 -0- 529
Executive Officer
and President
</TABLE>
- --------------
(1) Includes $15,000 received under the terms of a consulting agreement.(See
below).
(2) Includes term life insurance premiums paid by the Company.
Mr. Martignoni resigned as Chairman of the Board, Chief Executive
Officer and President of the Company on April 16, 1998, after the appointment of
Mr. Boylan to the Board of Directors of the Company on that same day. (See ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT)
As previously reported, Mr. Martignoni took a position with an
unrelated company, effective October 6, 1997, and continued as the Company's
Chairman, President and Chief Executive Officer, under a consulting agreement
pursuant to which his compensation had been
-12-
<PAGE>
reduced accordingly. Under the consulting agreement, Mr. Martignoni released the
Company from all obligations and liabilities, including any obligations under
the severance agreement between him and the Company referred to below. The
consulting agreement provided for a monthly consulting fee of $5,000 per month,
which was payable through April 1998,unless extended by the Company, in exchange
for services provided. Mr. Martignoni received payments through March 1998 under
this agreement; however he has continued to provide services to the Company
without compensation.
In April 1992, the Company entered into a severance agreement with Mr.
Martignoni which provided, under certain circumstances, that the Company would
pay him upon his severance an amount equal to one full year's base salary in the
event that his affiliation with the Company ceased within either one or two
years (depending upon the circumstances) following a "change in control" of the
Corporation, as that term is defined under the Company's Stock Option and
Appreciation Rights Plan of 1987. In November 1993, the Board of Directors
adopted an amendment to the severance agreement for Mr. Martignoni, which
principally increased the amount to be paid on severance from one full year's
base salary to two full years' base salary, as well as contained certain other
provisions, including a provision for the continued registration of option stock
following termination of his affiliation with the Company.
Stock Options Held At Fiscal Year-End
The following table sets forth the aggregate options to purchase shares
of Common Stock of the Company held by the Named Executive Officer at December
31, 1997. No options were exercised during the year ended December 31, 1998 by
the Named Executive Officer, and there were no in-the-money unexercised options
held by the Named Executive Officer at December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
Options Held at
December 31, 1998(#)
--------------------------
Name Exercisable Unexercisable
---- ----------- -------------
<S> <C> <C>
Ronald W. Martignoni 1,425,000 -0-
</TABLE>
Compensation of Directors
The Company currently has no standard arrangements pursuant to which
non-employee directors are compensated for services provided as directors.
On February 13, 1997, three non-employee directors, Messrs. James D.
Sink, Joseph DeSaye and Fred E. Portner, were granted, respectively,
nonqualified options to purchase 200,000,
-13-
<PAGE>
200,000 and 50,000 shares of the Company's Common Stock, exercisable on or after
August 13, 1997, at an exercise price of $.05 per share, the price of the
Company's Common Stock on the date of grant, which options expire on February
13, 2002. Mr. DeSaye has since resigned as a director, and no options have been
exercised. The Company believes and has reason to believe that Messrs. Sink and
DeSaye have repudiated or otherwise rejected the grant of options described in
this paragraph.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership
of the Company's Common Stock and Series C Preferred Stock (the "Preferred
Stock"), as of April 15, 1999, by: (i) each person who is known by the Company
to own beneficially shares of Common Stock and/or Preferred Stock to which are
attributable 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
former director (Messrs. Boylan, Portner and Sink), (iii) the Named Executive
Officer (Ronald W. Martignoni) and (iv) each current director and officer, and
(v) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
Votes Attributable to
Shares of Common Shares of Common and
Beneficially Owned, Preferred Preferred
Name and Address including % Beneficially Owned, Beneficially Owned,
of Beneficial Owner Owned (1) including % (1) including % (1) (2)
- ------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C>
Attel & Cie, S.A.
Via Nassa 58
6901 Lugano,
Switzerland 2,601,112 (11.8%) -- 2,601,112 (11.1%)
John Maioriello
3416 The Strand
Manhattan Beach,
CA 90266 1,826,000 (7.8%)(3) -- 1,826,000 (7.3%)
John A. Boylan
509 Kinsale Road
Timonium,
MD 21093 1,442,000 (6.2%)(4) -- 1,442,000 (5.8%)
-14-
<PAGE>
Ronald W. Martignoni
6 Chadwick Court
Voorhees,
NJ 08043 1,425,000 (6.1%)(5) -- 1,425,000 (5.7%)
James D. Sink
220 Curwen Road
Rosemont,
PA 19010 1,041,650 (4.7%) -- 1,041,650 (4.4%)
Thomas Renna 165,500 * 165,000 *
C/o (8)
George Pursglove -0- -0-
C/o (8)
Fred E. Portner
121 Montgomery Place
Alexandria,
VA 22314 190,000 *(6) -- 190,000 *
Shareholder
Committee 13,861,119 (51.6%)(7) 107.4 (98.4%)(7) 13,861,119 (51.6%)
All executive officers
and directors as a Group
(three persons) 2,673,650 (12.3%) -- 2,673,650 (11.5%)
</TABLE>
- ------------------
* 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. A person is also deemed to be the beneficial owner
of securities if that person has the right to acquire beneficial ownership of
such securities, such as Common or Preferred Stock, through the exercise of
options or warrants that are currently exercisable or exercisable within 60
days. Any securities not outstanding, which are subject to such options or
warrants, shall be deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but shall not be
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.
-15-
<PAGE>
(2) 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.
(3) Includes 1,500,000 shares of Common Stock issuable upon exercise of
fully-vested nonqualified stock options.
(4) 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.
(5) 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.
(6) 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.
(7) The Shareholder Committee may be deemed to constitute a group under the
rules of the Securities and Exchange Commission. The Shareholder Committee
ceased to exist on or before June 5, 1998. (See ITEM 12. Certain Relationships
and Related Transactions)
(8) The address for Messrs. Renna and Pursglove is C/O Choices Entertainment
Corporation, 10770 Wiles Road, Coral Springs, Florida 33076-2009
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 25, 1997, a group of stockholders demanded that they be given
control of the Company and on December 10, 1997, this group filed preliminary
solicitation material with the Securities and Exchange Commission, seeking to
remove and replace two of three members of the Company's Board of Directors. On
February 11, 1998 and April 17, 1998, revised preliminary solicitation material
was filed by an expanded group of stockholders (the "Shareholder Committee") in
connection with the solicitation of written consents, also to remove and replace
two directors. As previously disclosed, Mr. Renna and Mr. Pursglove were the
co-chairmen of the Shareholders Committee. On June 5, 1998, the Shareholder
Committee formally withdrew its preliminary proxy material and the Shareholder
Committee has ceased to exist.
John E. Maioriello, a former Chairman of the Board and a principal
stockholder of JD Store Equipment, Inc. ("JD"), is deemed under rules of the
Securities and Exchange Commission to be the beneficial owner of more than five
percent of the Company's Common and Preferred Stock voting together. See
Securities Ownership of Certain Beneficial Owners and Management.
On November 4, 1994, the Company and JD entered into a letter of intent
(the "JD Letter of Intent"), providing for a merger of the Company and JD (the
"JD Merger"). In connection with
-16-
<PAGE>
the JD Letter of Intent, JD arranged for the issuance on its credit of a
$100,000 letter of credit to a vendor of the Company, which letter of credit
expired in accordance with its terms on April 15, 1995. Upon expiration of the
letter of credit, Mr. Maioriello personally guaranteed a line of credit provided
by said vendor to the Company in an amount of approximately $250,000.
In accordance with the JD Letter of Intent and in contemplation of the JD
Merger, John Maioriello was appointed Chairman of the Board of the Company. Also
in contemplation of the JD Merger, the Company and JD incurred certain costs in
connection with the Company's plans to acquire certain retail video store
chains.
In connection with the JD Letter of Intent, the Company and JD also reached
an agreement for the payment of finder's fees, in the event the JD Merger was
not consummated, with respect to any completed merger or acquisition which Mr.
Maioriello was responsible for having introduced to the Company from the date of
the JD Letter of Intent until such time as it was publicly announced that the JD
Merger would not be consummated (September 11, 1995). Any finder's fees paid are
to consist of warrants to purchase 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 piggy-back registration rights.
The Company and JD entered into an Agreement and Plan of Reorganization and
Merger (the "Merger Agreement"), dated as of July 19, 1995, as amended, which
provided, inter alia, for the JD Merger, through the merger of a newly formed
California corporation, formed as a wholly-owned subsidiary of the Company, with
and into JD, as a result of which, JD, as the surviving corporation in the
merger, would become a wholly-owned subsidiary of the Company. On September 8,
1995, JD notified the Company that it was terminating the Merger Agreement in
accordance with its terms and, in connection therewith, Mr. Maioriello resigned
as Chairman of the Board of the Company.
Previously, on December 6, 1994, JD agreed that in the event that the then
contemplated merger between JD Store Equipment and 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. JD Store Equipment has responded with a suggestion of
a counter claim in an unspecified amount for losses allegedly incurred in
connection with the acquisition program. To avoid the uncertainties associated
with litigation and with collecting any judgment that may be obtained, the
Company has attempted to reach a settlement with JD Store Equipment and the law
firm, pursuant to which JD Store Equipment would pay unpaid fees to the law
firm, the Company would release JD Store Equipment from any obligation to pay
the $793,281 of legal fees billed to the Company and the Company would be
released by JD Store Equipment and the law firm. A settlement with the law firm
has been concluded.
-17-
<PAGE>
Mr. Maioriello has also requested indemnification for legal fees and
expenses incurred in the defense of the previously concluded stockholder
litigation in California, which are substantial and material in amount. The
Company has denied the former director's request as it does not believe that it
has any obligation for indemnification of such legal fees and expenses. However,
it is contemplated that any settlement reached with JD Store Equipment, as
described above, would include a release by the former director of any
indemnification claims that he may have against the Company. There is no
assurance, however, that any such settlement will be concluded or, if concluded,
as to what would be the terms of such a settlement.
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 such Notes have, in accordance with the terms of the Notes, converted such
Notes into 68 shares of the Company's Series C Preferred Stock. In addition,
because of its severely distressed financial condition, 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. Certain members of the
Shareholder Committee are the holders of such Preferred Stock. (See Securities
Ownership of Certain Beneficial Owners and Management)
John A. Boylan, a former officer and director, is deemed under the rules of
the Securities and Exchange Commission to be the beneficial owner of more than
five percent of the Company's Common and Preferred Stock voting together. (See
Securities Ownership of Certain Beneficial Owners and Management ) As previously
reported, on August 15, 1996, the Company entered into an eleven-month
consulting agreement with Mr. Boylan, under which he received $3,500 on a
bi-weekly basis, had use of a car, already under lease by the Company, and
received health insurance benefits for a period of one year. The Company entered
into this agreement as part of a severance agreement with Mr. Boylan, pursuant
to which he resigned from employment and from all positions with the Company,
released the Company from all obligations and liabilities, including any
obligations under an existing severance agreement between him and the Company,
and agreed to the cancellation of certain fully-vested options to purchase
291,667 shares of Common Stock. Mr. Boylan was re-appointed to the Company's
Board of Directors and named President and Chief Executive Officer of the
Company on April 16, 1998.
On July 12, 1994, Max Scheuerer, a member of the Shareholder Committee,
loaned the Company $50,000, and on December 7, 1994, loaned the Company
$100,000, which loans are evidenced by two 10% promissory notes. The aggregate
principal amount owing on the promissory notes was reduced to $120,000 from
$150,000 as a result of a $30,000 payment by the Company on November 30, 1995,
following the filing of a lawsuit against the Company by Mr. Scheuerer seeking
collection of said notes. The lawsuit was withdrawn following said $30,000
payment without prejudice to its being reinstated if the balance owing on the
notes was not paid in full prior to March 15, 1996.
As previously reported, on September 18, 1996, a lawsuit was filed against
the Company
-18-
<PAGE>
in which Mr. Scheuerer sought to obtain a judgment against the Company for
amounts owing under the two aforementioned promissory notes. The lawsuit was
dismissed with prejudice on June 25, 1997, upon the payment by the Company to
Mr. Scheuerer of $145,230, in full settlement of all amounts owed to Mr.
Scheuerer.
In his capacity as a stockbroker and while employed by Texas Capital
Securities, Mr. Renna had some customers who were involved in a contested
election for control of the Company in 1996. Mr. Renna had no involvement in
this contested election other than as performing the usual and customary duties
associated with being a stockbroker and advising his clients as to the various
implications to them of the contested election. Prior to late 1997, Mr. Renna
was not acquainted with Mr. Pursglove and had not worked with him.
On October 29, 1997 Mr. Renna purchased 45,000 shares of Common Stock for
$2,688. On December 11, 1997 Mr. Renna purchased 45,000 shares of Common Stock
for $3,151. Each of these purchases was made in the open market.
Mr. Pursglove has had no past involvement with any of the efforts to change
control of the Company. Prior to late 1997, Mr. Pursglove was not acquainted
with Mr. Renna and had not worked with him.
Mr. Kenneth Hiniker, a member of the Shareholder Committee, has advanced
$25,000 to the Shareholder Committee to pay legal fees. The loan is to be repaid
when, as, and if the Shareholder Committee has funds sufficient for that
purpose.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
---------------
(a) Exhibits: The exhibits are listed in the Index to Exhibits appearing
on Page E-1.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, the Company filed no reports on Form
8-K.
-19-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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: ___________________ By: /s/ James D. Sink
-----------------------------------
James D. Sink
Interim Chief Executive Officer
By: /s/ George Pursglove
-----------------------------------
George Pursglove
Interim Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ James D. Sink July 12,1999
- --------------------------------------
James D. Sink
Chairman of the Board of Directors
/s/ George Pursglove July 12, 1999
- --------------------------------------
George Pursglove
Director
/s/ Thomas Renna
- -------------------------------------- July 12,1999
Thomas Renna
Director
-20-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
CHOICES ENTERTAINMENT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent auditors' report...............................................................F-2
Consolidated balance sheets as of December 31, 1998 and 1997...............................F-3
Consolidated Statements of loss for the years ended
December 31, 1998, 1997 and 1996...........................................................F-4
Consolidated statements of stockholders' deficit for the years ended
December 31, 1998, 1997 and 1996...........................................................F-5
Consolidated statements of cash flows for the years ended December 31,
1998, 1997 and 1996 .......................................................................F-6
Notes to consolidated financial statements.................................................F-7
</TABLE>
F-1
<PAGE>
To the shareholders
Choices Entertainment Corporation
Coral Springs, Florida
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Choices Entertainment
Corporation as of December 31, 1998, and the related statements of income and
accumulated deficit, and cash flows for the year then ended. 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 audit. The financial statements of Choices Entertainment Corporation as of
December 31, 1997 and 1996, were audited by other auditors whose report dated
March 6, 1998, included an explanatory paragraph that described recurring losses
from operations, was in default on certain obligations and working capital
deficiency raising substantial doubt about the Company's ability to continue as
a going concern, as discussed in Note 3 to the 1997 and 1996 financial
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Choices Entertainment
Corporation, as of December 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company suffered recurring losses from operations, was
in default on certain obligations and had a working capital deficiency at
December 31, 1998. As a result, the Company's viability in securing new business
opportunities or raising needed capital has been hampered. Those conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are also described in Note B. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Miller and Co.
Certified Public Accountants
Santa Monica, California
April 2, 1999
F-2
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,074 $ 197,117
Accounts receivable - 1,123
------------ ------------
TOTAL CURRENT ASSETS 2,074 198,240
PROPERTY AND EQUIPMENT
Equipment, net - 3,631
OTHER ASSETS 146 125
------------ ------------
$ 2,220 $ 201,996
------------ ------------
------------ ------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 11,851 $ 33,104
Accrued merger and acquisition expenses 50,000 353,799
Accrued professional fees 30,403 129,758
Accrued salaries - 2,859
Accrued expenses - 5,419
------------ ------------
TOTAL CURRENT LIABILITIES 92,254 524,938
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $ .01 per share, authorized 5,000 shares,
109.1 shares issued and outstanding in 1998
and 1997 1 1
Common stock, par value $ .01 per share, authorized 50,000,000 shares,
issued and outstanding 22,004,395 shares in 1998 and 1997 220,044 220,044
Additional paid-in capital 21,236,035 21,236,035
Accumulated deficit (21,546,114) (21,779,022)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (90,034) (322,942)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,220 $ 201,996
------------ ------------
------------ ------------
</TABLE>
See accompanying independent auditors' report.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
EXPENSES:
Selling and administrative expenses $ 65,587 $ 252,059 $ 285,433
Professional and consulting expenses 51,181 425,142 278,843
Store closing and lease termination expenses - - 51,615
Depreciation and amortization - 39,168 39,168
----------- ----------- -----------
TOTAL EXPENSES 117,736 716,369 655,059
OTHER INCOME AND EXPENSES:
Interest expense - 37,081 51,830
Other income 1,035 - -
Interest income 48,473 - -
Reduction of accrued legal fees 303,799 - -
----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES 353,307 37,081 51,830
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 235,571 (753,450) (706,889)
----------- ----------- -----------
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations (2,663) (245,982) 40,209
Gain on sale of discontinued operations - 1,286,204 -
----------- ----------- -----------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (2,663) 1,040,222 40,209
----------- ----------- -----------
NET INCOME (LOSS) $ 232,908 $ 286,772 $ (666,680)
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
BASIC INCOME (LOSS) PER SHARE:
CONTINUING OPERATIONS $ 0.01 $ (0.03) $ (0.03)
----------- ----------- -----------
----------- ----------- -----------
DISCONTINUED OPERATIONS $ - $ 0.05 $ -
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) $ 0.01 $ 0.02 $ (0.03)
----------- ----------- -----------
----------- ----------- -----------
DILUTED INCOME (LOSS) PER SHARE:
CONTINUING OPERATIONS $ 0.01 $ (0.03) $ (0.03)
----------- ----------- -----------
----------- ----------- -----------
DISCONTINUED OPERATIONS $ - $ 0.04 $ -
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) $ - $ 0.01 $ (0.03)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying independent auditors' report.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Common Stock Additional
Stock ---------------------------- Paid-in Accumulated
Shares Shares Amount Capital Deficit Total
--------- ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 34.0 22,004,395 $220,044 $20,485,203 $(21,399,114) $ (693,867)
Issuance of preferred stock in
lieu of cash to investors 3.4 34,000 34,000
Net loss for the year ended
December 31, 1996 (666,680) (666,680)
--------- ------------ ------------ ------------ ------------ --------------
Balance at December 31, 1996 37.4 22,004,395 $220,044 $20,519,203 $(22,065,794) $(1,326,547)
Issuance of preferred stock in
lieu of cash to investors 71.7 - - 716,832 - 716,832
Net income for the year ended
December 31, 1997 - - - - 286,772 286,772
--------- ------------ ------------ ------------ ------------ --------------
Balance at December 31, 1997 109.1 22,004,395 220,044 21,236,035 (21,779,022) (322,943)
Net income for the year ended
December 31, 1998 - - - - 232,908 232,908
--------- ------------ ------------ ------------ ------------ --------------
Balance at December 31, 1998 109.1 22,004,395 $220,044 $21,236,035 $(21,546,114) $ (90,035)
--------- ------------ ------------ ------------ ------------ --------------
--------- ------------ ------------ ------------ ------------ --------------
</TABLE>
See accompanying independent auditors' report.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 232,908 $ 286,772 $ (666,680)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 968 452,414 1,086,433
Gain on sale of assets - (1,286,204) -
Loss on retirement of assets 2,663 - -
Loss on disposal of videocassette rental inventory - 83,621 238,874
Videocassette and inventory reserve - 7,667 22,686
Cost of rental film sales - 121,342 410,399
Amortize goodwill and deferred costs - 38,873 56,007
Change in assets and liabilities:
(Increase) decrease in accounts receivable 1,123 4,734 (1,692)
(Increase) decrease in merchandise inventories - 62,584 (43,131)
(Increase) decrease in prepaid expenses - 41,683 (13,447)
(Increase) decrease in other assets (21) 9,037 (5,949)
Increase (decrease) in accounts payable (21,253) (653,645) 277,256
Decrease in accrued merger and acquisition expenses (303,799) (50,550) (138,602)
Increase (decrease) in deferred revenue - (27,797) 27,797
Increase (decrease) in accrued professional fees (99,355) (138,441) 81,956
Increase (decrease) in accrued salaries (2,859) (52,875) 3,131
Increase (decrease) in other accrued expenses (5,418) (171,290) 126,194
Decrease in accrual for lease cancellation and other
litigation reserves - (1,250) (12,500)
----------- ----------- -----------
TOTAL ADJUSTMENTS (427,951) (1,560,095) 2,115,412
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (195,043) (1,273,323) 1,448,732
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette rental inventory, net - (620,807) (1,573,140)
Purchases of equipment, net - (10,049) (43,982)
Proceeds from sale of assets - 2,379,507 9,429
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVTIES - 1,748,651 (1,607,693)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 49,000 150,000
Repayment of notes payable - (393,950) (10,691)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - (344,950) 139,309
NET INCREASE (DECREASE) IN CASH (195,043) 130,378 (19,652)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 197,117 66,739 86,391
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,074 $ 197,117 $ 66,739
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ - $ 19,601 $ 14,556
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-6
<PAGE>
CHOICES ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Note A - SUMMARY OF ACCOUNTING POLICIES
BUSINESS ACTIVITY
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 Corporation. On
June 16, 1997, the Company sold substantially all of its assets and
business to West Coast Entertainment Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include financial statements of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
ACCOUNTING ESTIMATES
The preparation of consolidated 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 consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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.
REVENUE RECOGNITION
The Company recognized revenue when products were rented or sold with
the exception of certain promotional membership fees, which were
amortized over 12 months.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statements of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Adoption of this Statement did not
have a material impact on the Company's financial position, results of
operations, or liquidity.
The Company has adopted the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation on January 1, 1996. SFAS 123 defines a fair
value based method of accounting for stock based compensation plans,
however it allows the continued use of the intrinsic value method under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. The Company has elected to continue to use the intrinsic
value method with pro forma disclosures of net income as if the fair
value method had been applied. Pro forma compensation costs (and
related pro forma net loss) for the Company's stock based compensation
plan determined in accordance with SFAS 123 have not been separately
presented since such amounts are not materially different from the
basic financial statements.
The Company has adopted the provisions of SFAS 128, Earnings per Share,
which specifies the computation, presentation, and disclosure
requirements for earnings per share. This statement simplifies the
standards for computing earnings per share and makes them comparable to
international earnings per share standards. It replaces the
presentation of primary earnings per share with a
F-7
<PAGE>
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
presentation of basic earnings per share and requires dual presentation
of basic and diluted earnings per share on the face of the income
statement. Restatement of earnings per share data for previous periods
is also required. Basic earnings (loss) per share is computed by
dividing net earnings or loss by the weighted average number of common
shares outstanding during the period. Diluted earnings per share gives
effect to all dilutive potential common shares that were outstanding
during the period. Potential common shares are not included in the
calculation of the dilutive net earnings (loss) per share, since their
inclusion would be anti-dilutive. At December 31, 1998 and 1997, the
Company had outstanding stock options and warrants which could
potentially dilute basic earnings per share in the future.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued in June 1997,
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for reporting comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that the Company
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. The Company is not required to present a statement of
comprehensive income because it does not have other comprehensive
income.
RECLASSIFICATION
In order to facilitate comparison of financial information, certain
amounts reported in the prior year comparative totals have been
reclassified to conform with the current year presentation.
Note B - 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 consolidated 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 an accumulated deficit in the aggregate of $21,546,114 and
$21,779,022 and approximately a working capital deficit of $90,000 and
$327,000 for the years ended December 31, 1998 and 1997, respectively.
Although the Company posted net losses in each year since its
existence, subsequent the sale of substantially all of the Company's
assets and business to West Coast (the "West Coast Transaction"), the
Company was able to show income in the amounts of $232,908 and $286,772
for the years ended December 31, 1998 and 1997, respectively. (See
below).
Under the terms of the West Coast Transaction, the purchase price of
$2,430,000 was paid to the Company in cash on June 16, 1997, less
$243,000 that was held by West Coast in escrow, pursuant to the terms
of a escrow agreement between the Company and West Coast, to satisfy
certain indemnity obligations of the Company, if any, to West Coast,
and which was, subject to amounts withheld pursuant to any claims made
by West Coast, to be released to the Company over a period of eighteen
months. On December 22, 1997, the Company negotiated a compromise and
full release of the escrow upon the payment by West Coast to the
Company of $211,000 on that date. The release of the escrow did not
affect in any manner the Company's indemnity obligations to West Coast
pursuant to the terms of the asset purchase agreement between the
Company and West Coast.
F-8
<PAGE>
Note B - LIQUIDITY (CONTINUED)
From the closing of the West Coast Transaction on June 16, 1997, to the
present, the Company has principally (i) satisfied and compromised
various claims and liabilities; (ii) defended and settled litigation,
and paid professional fees, including substantial fees associated with
such litigation; (iii) maintained administrative functions (at present
the Company has no employees (but see below and Note K); and (iv)
attempted to identify and consider new business opportunities.
In 1997, the Company was unsuccessful in concluding any new business
opportunities or in securing needed capital, in part due to the
uncertainties and costs associated with continuing stockholder
litigation in California, which, as previously reported, was settled in
the amount of $87,000, excluding professional fees, on November 20,
1997. As a consequence, the Company's financial condition has continued
to deteriorate and the Company presently has very limited cash
remaining with which to seek or conclude any new business
opportunities. Moreover, certain claims and liabilities against the
Company existed which, if were successfully asserted, would have
further hampered the Company in its efforts to conclude new business
opportunities or to secure needed capital. As of the date of this
report, the Company has reached a settlement agreement regarding these
claims and liabilities and the Company has approximately $27,912 in
cash remaining. The Company's viability in securing any new business
opportunities or raising needed capital is seriously in question.
As of December 31, 1997, these claims and liabilities included but were
not limited to professional fees billed in connection with the
Company's discontinued acquisition program in the amount of $353,799,
which were unpaid to a law firm retained in that connection.
Previously, in 1994, JD Store Equipment, Inc. ("JD Store Equipment")
agreed that, in the event the then contemplated merger between JD Store
Equipment and 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. JD Store
Equipment has responded with a suggestion of a counter claim in an
unspecified amount for losses allegedly incurred in connection with the
acquisition program. To avoid the uncertainties associated with
litigation and with collecting any judgment that may be obtained, the
Company has attempted to reach a settlement with JD Store Equipment and
the law firm, pursuant to which JD Store Equipment would pay unpaid
fees to the law firm, the Company would release JD Store Equipment from
any obligation to pay the $793,281 of legal fees billed to the Company
and the Company would be released by JD Store Equipment and the law
firm. As of December 31, 1998, these claims and liabilities for the
professional fees in the amount of $353,799 were reduced to $50,000 due
to a lawsuit filed against the Company by the law firm. On February 9,
1999, the Company entered into a settlement agreement in the amount of
$50,000 to be paid to the law firm by March 31, 1999.
On September 8, 1997, a lawsuit was filed by the Company against a
former officer, in the Superior Court of California, in which the
Company sought repayment of a loan made by the Company to the former
officer in 1995. A settlement of this lawsuit was concluded on February
25, 1998, pursuant to which the former officer agreed to pay
F-9
<PAGE>
Note B - LIQUIDITY (CONTINUED)
the Company $40,000 in monthly installments beginning March 1, 1998
through September 1, 1998, which were paid on a timely basis.
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 such Notes have, in accordance
with the terms of the Notes, converted such Notes into 68 shares of the
Company's Series C Preferred Stock. In addition, because of its
severely distressed financial condition, 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.
The Company's former President and Chief Executive Officer, has taken a
position with an unrelated company, effective October 6, 1997, and
continued as the Company's Chairman, President and Chief Executive
Office, under a consulting agreement pursuant to which his compensation
has been reduced accordingly. The consulting agreement expired in
accordance with its terms on April 30,1998.
In the event the Company is not successful in finding and concluding
new business opportunities or in securing needed capital in the very
near term, as to which no assurance can be given, the Company does not
believe that there will any amounts available for distribution to the
Company's stockholders.
Note C - 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. Under the terms of the West Coast Transaction, the purchase
price of $2,430,000 was paid to the Company in cash on June 16, 1997,
less $243,000 that was held by West Coast in escrow, pursuant to the
terms of a escrow agreement between the Company and West Coast, to
satisfy certain indemnity obligations of the Company, if any, to West
Coast, and which was, subject to amounts withheld pursuant to any
claims made by West Coast, to be released to the Company over a period
of eighteen months. On December 22, 1997, the Company negotiated a
compromise and full release of the escrow upon payment by West Coast to
the Company of $211,000 on that date. The release of the escrow did not
affect in any manner the Company's indemnity obligations to West Coast
pursuant to the terms of the asset purchase agreement between the
Company and West Coast.
The Company recognized a net loss on the retirement of its assets of
approximately $2,663, which has been reported in discontinued
operations on the Consolidated Statements of Income (Loss) for the year
ended December 31, 1998. Revenues for the discontinued business for the
year ended December 31, 1998, was $ 0, compared to revenues for the
discontinued business for year ended December 31, 1997, of $2,116,000.
The assets sold in the West Coast Transaction, net of applicable
liabilities, have been reclassified as non-current assets and current
liabilities of the discontinued business on the 1996 Consolidated
Balance Sheet. At December 31, 1996 approximately $1,054,000 related to
net non-current assets, and approximately $908,000 related to net
current liabilities of the discontinued business.
F-10
<PAGE>
Note D - EQUIPMENT
<TABLE>
<CAPTION>
Estimated
1998 1997 Useful Life
----------- ----------- -----------
<S> <C> <C> <C>
Equipment $ - $ 4,034 5 years
----------- -----------
- 4,034
Less: Accumulated depreciation
and amortization - (403)
----------- -----------
$ - $ 3,631
----------- -----------
----------- -----------
</TABLE>
Note E - NOTES PAYABLE
As of December 31, 1998 and 1997, the Company had no Notes Payable
outstanding. The Company's 5% unsecured promissory 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 such notes have, in accordance
with the terms of the notes, converted such notes into 68 shares of the
Company's Series C Preferred Stock. All other notes outstanding at
December 31, 1996, were paid, to the holders of such notes, with the
proceeds from the West Coast Transaction.
Note F - DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
The Financial Accounting Standards Board issued in February 1997, SFAS
no. 129 "Disclosure of Information about Capital Structure". SFAS 129
requires disclosure of descriptive information about securities, e.g.
rights and privileges of the various securities outstanding, the number
of shares issued upon conversion, exercise, or satisfaction or required
conditions are the liquidation preference of preferred stock.
1. PREFERRED STOCK:
<TABLE>
<CAPTION>
Issued
Authorized and Preferred
Shares Outstanding Stock
---------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1995 5,000 34.0 $0.34
Issuance of preferred stock in
lieu of cash to investors - 3.4 0.03
---------- ----------- ---------
Balance at December 31, 1996 5,000 37.4 0.37
Issuance of preferred stock in
lieu of cash to investors - 71.7 0.72
---------- ----------- ---------
Balance at December 31, 1997 5,000 109.1 1.09
Issuance of preferred stock in
lieu of cash to investors - - -
---------- ----------- ---------
Balance at December 31, 1998 $ 5,000 $109.1 $1.09
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
F-11
<PAGE>
Note F - DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE (CONTINUED)
During 1996, the Company issued 3.4 shares of 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.
During 1997, 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 such Notes have, in
accordance with the terms of the Notes, converted such Notes into 68
shares of the Company's Series C Preferred Stock. In addition, because
of its severely distressed financial condition, 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.
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.
2. COMMON STOCK:
<TABLE>
<CAPTION>
Issued
Authorized and Preferred
Shares Outstanding Stock
----------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1995 50,000,000 22,004,395 $ 220,044
Issuance - - -
----------- ----------- ---------
Balance at December 31, 1996 50,000,000 22,004,395 220,044
Issuance - - -
----------- ----------- ---------
Balance at December 31, 1997 50,000,000 22,004,395 220,044
Issuance - - -
----------- ----------- ---------
Balance at December 31, 1998 $50,000,000 $22,004,395 $ 220,044
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The Company's common stock is currently traded in the
over-the-counter market on the OTC-Bulletin Board. On April 15,
1999, the average of the high and low insider bid prices for the
Company's common stock was both $.013 as reported by the
OTC-Bulletin Board. The quotation reflects inter dealer price,
without retail mark up, mark down or commission and may not
necessarily represent actual transactions.
The Company has neither declared nor paid any dividends on its
preferred or common stock since its inception, and the Board of
Directors does not contemplate the payment of dividends in the
foreseeable future, given the Company's severely distressed financial
condition.
F-12
<PAGE>
Note G - NON-EMPLOYEE STOCK OPTIONS
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, 1998:
<TABLE>
<CAPTION>
Shares of Exercise
Number Common Stock Price Expiration Registration
Date of Grant of Holders Subject to Option Per Share Date Rights
- ---------------------- ---------- ----------------- --------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
December 13, 1988 2 12,500 $1.00 October 18, 1999 None
November 14, 1989 2 65,000 1.30 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 0.43 January 31, 2001 Registered
August 22, 1991 1 100,000 0.63 August 21, 1999 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 2,421,042
-----------------
-----------------
</TABLE>
Note H - 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 "1987 Plan"). Pursuant to the 1987 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 1987 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 1987 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 the
1987 Plan grant and the term of the option may not exceed five years
from the date of grant. All options and stock appreciation rights
granted under the 1987 Plan are non-transferable other than by will or
by the laws of descent and distribution.
F-13
<PAGE>
Note H - EMPLOYEE AND MANAGEMENT STOCK OPTIONS (CONTINUED)
STOCK OPTION AND APPRECIATION RIGHTS PLAN
The following table sets forth information with respect to incentive
stock options under the Plan for the two years ended December 31, 1998:
<TABLE>
<CAPTION>
Number of
Shares under Price Per
Option (1) Share
------------ -----------
<S> <C> <C>
Outstanding at December 31, 1996 535,500 0.19 - 0.23
(252,500 shares under exercisable options)
Cancelled 535,500 0.19 - 0.23
------------ -----------
Outstanding at December 31, 1997 - -
------------ -----------
Outstanding at December 31, 1998 - -
------------ -----------
------------ -----------
</TABLE>
(1) Gives effect to the expiration of options due to termination
of employment
All incentive options issued were 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 were conditioned on the continued employment of the
optionee. No stock appreciation rights have been granted.
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 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 Options
and 2,616,666 of the 1989 Long-Term Management Incentive Options held
by Company officers were surrendered and cancelled. In 1996, two
officers of the Company surrendered the then remaining outstanding
Long-term Management Incentive Options. Only 291,667 of the 1989
Long-Term Management Incentive Options remain outstanding.
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 two other officers
have left the Company. One ex-officer exercised his options in full,
one ex-officer exercised 540,000 options leaving 510,000 options
outstanding, and 1,000,000 options held by the second
F-14
<PAGE>
Note H - EMPLOYEE AND MANAGEMENT STOCK OPTIONS (CONTINUED)
officer who has left the Company remains 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 January 31, 2001.
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 grant of
such options. The 1994 Management Options vested fully as of April 7,
1994, and expire on January 31, 2001.
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 Plan"), 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, 3,591,501 have either been cancelled, exercised or have
expired and 1,694,500 options remained unissued under the 1987 SOP.
Generally, such registration permits the immediate sale of the
3,139,500 vested shares upon exercise, subject to the volume
limitations imposed by Rule 144.
Holders of these options are afforded certain anti-dilution and
piggyback rights under the 1933 Act with respect to the shares of
common stock issuable upon exercise of said options.
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.
On February 13, 1997, the Board of Directors of the Company authorized
the grant of non-qualified stock options to purchase 450,000 shares of
the Company's common stock at $.05 per share, the fair market value of
the common stock on that date, to three directors of the Company. The
options became fully vested after six months from the date of grant.
Note I - NET LOSS PER SHARE OF COMMON STOCK
Basic income per share for the year ended December 31, 1998, was
computed by dividing the net income by the weighted average number of
common shares outstanding during the periods.
Diluted income per share for the year ended December 31, 1998, was
computed by dividing the net income by the weighted average number of
common shares outstanding during the period, as well as, the number of
common shares that would be outstanding as a result of the conversion
of the Company's preferred stock.
Basic and diluted loss per share for the year ended December 31, 1997
was computed by dividing the net income by the weighted average number
of common shares outstanding during the period, as well as the number
of common shares that would be outstanding as a result of the
conversion of the company's preferred stock.
F-15
<PAGE>
Note I - NET LOSS PER SHARE OF COMMON STOCK (CONTINUED)
The approximate number of shares used in the computation of income
(loss) per share amounts are as follows:
<TABLE>
<CAPTION>
Year ended Number of shares
December 31, used in calculation
------------ -------------------
<S> <C> <C>
1998 Basic 22,004,000
Diluted 26,364,395
1997 Basic 22,004,000
Diluted 24,372,000
1996 Basic 22,004,000
Diluted 22,004,000
</TABLE>
Note J - INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the liability method
of accounting for deferred income taxes. Deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured by
applying enacted tax rates for the taxable years in which those
differences are expected to reverse. Recognition of deferred tax assets
is subject to a valuation allowance if it is more likely than not that
some or all of a deferred tax asset will not be realized.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1997 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, 1997 (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
50 percent change is 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, 1998 the Company had approximately $19,000,000 of
net operating loss carry-forwards for tax purposes which may be
available to offset future federal income, if any, through 2010. The
amount ultimately available, if any in future years, is dependent on
the limitation discussed above. Should the Company operate profitably
in future years, it may be subject to current tax expense in certain
states for which no net operating loss carry-forwards are available.
F-16
<PAGE>
Note K - COMMITMENTS
The Company currently has no lease commitments. The Company's executive
office is provided rent-free by the Company's interim Chief Financial
Officer.
Rent expense for 1998 and 1997, was $ 0 and $439,423, respectively.
As previously reported, during September 1995, a merger agreement
between the Company and JD Store Equipment Inc. was terminated.
However, in connection with a letter of intent entered into with regard
to said then proposed merger, the Company and JD also reached an
agreement in the event a 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 piggyback rights. JD also agreed, in
the event the merger was not consummated, to pay legal fees billed to
the Company by its then principal outside law firm.
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 were also directors of the Company (and of which
one who has subsequently resigned as mentioned above) 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 increased the amount to be paid on severance
from one full year's base salary to two full year's base salary.
Note L - SUBSEQUENT EVENTS
On February 9, 1999, a lawsuit was filed against the Company by a law
firm, seeking payment of professional fees of $353,799. The Company
entered into a settlement agreement in the amount of $50,000 which was
paid on March 31, 1999.
F-17
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
No. ----------------------
<S> <C>
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 Form of certificate evidencing shares of
Common Stock (4)
10(a) Stock Option and Appreciation Rights
Plan of 1987(4)
(b) Form of Long-Term Management Incentive
Stock Option Agreement (5)
(c) Form of 1991 Management Option Agreement (5)
(d) Consulting Agreement between Registrant and Ronald
W.Martignoni(6)
(e) Severance Benefits Agreement, as amended,
between Registrant and Lorraine E. Cannon (7)
(f) Form of 1994 Management Option Agreement (7)
(g) Non-Employee Director Stock Option Agreement
between Registrant and Fred E. Portner (8)
(h) Non-Employee Director Stock Option Agreement
between Registrant and Fred E. Portner (9)
(i) Non-Employee Director Stock Option Agreement
between Registrant and James D. Sink (9)
(j) Asset Purchase Agreement, dated December 16, 1996, as
amended, between West Coast Entertainment Corporation
and Registrant (10)
23 Consent of Miller and Co. (11)
27 Financial Data Schedule (11)
</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 1996 Annual Report on Form 10-KSB,
and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's 1992 Annual Report on Form 10-K and
incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Registration Statement on Form S-1,
inclusive of Post-Effective Amendment No. 1 thereto (File No.:
33-198983) and incorporated herein by reference.
E-1
<PAGE>
(5) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 1 to
Form S-1 Registration Statement (File No.: 33-32396), and incorporated
herein by reference.
(6) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB,
for the quarter ended September 30, 1997, and incorporated herein by
reference.
(7) Filed as an Exhibit to Registrant's 1993 Annual Report on Form 10-K,
and incorporated herein by reference.
(8) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB,
for the quarter ended March 31, 1996, and incorporated herein by
reference.
(9) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB,
for the quarter ended March 31, 1997, and incorporated herein by
reference.
(10) Filed as an Exhibit to Registrant's definitive Proxy Statement, dated
February 11, 1997, with regard to a Special Meeting of Stockholders
held on March 12, 1997, as further amended by Second and Third
Amendments thereto filed as Exhibits to Registrant's Forms 8-K, dated
April 28, 1997, and May 29, 1997, all of which Exhibits are
incorporated herein by reference.
(11) Filed herewith.
E-2
<PAGE>
[LETTERHEAD]
The Board of Directors
Choices Entertainment Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
33-44343 and 33-87016) on Form S-8, of Choices Entertainment Corporation of
our report dated April 2, 1999 relating to the consolidated balance sheet of
Choices Entertainment Corporation as of December 31, 1998, and the related
consolidated statements of income, accumulated deficit, and cash flows for the
year ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-KSB of Choices Entertainment Corporation.
Our report contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations, was in default on certain
obligations, and has a net working capital deficiency, which factors raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Miller and Co.
Certified Public Accountants
Santa Monica, California
July 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,074
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,074
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,220
<CURRENT-LIABILITIES> 92,254
<BONDS> 0
0
1
<COMMON> 220,044
<OTHER-SE> 21,236,035
<TOTAL-LIABILITY-AND-EQUITY> 2,220
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 117,736
<OTHER-EXPENSES> (353,307)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 235,511
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (2,663)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232,908
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
